The broad indices all ended with solid gains after the Federal Reserve said industrial production in the United States had increased by 0.6% during February, following a decline of 0.2% in January. The increase for February came in well ahead of consensus estimate of 0.2%, among economists polled by Thomson Reuters. The February increase was the largest since August, and manufacturing during the month was up 2.8% from a year earlier.
Also on Monday, the Empire State manufacturing index for March came in at 5.6, up from 4.5 in February. An index reading above zero indicates expansion.
Economic news was mixed, however, with the National Association of Home Builders/Wells Fargo Housing Market Index for March rising one point from February to 47. An index reading below 50 indicates the majority of builders see market conditions as poor.
The KBW Bank Index (I:BKX) rose 1.2% to 70.40, with all 24 component stocks ending with gains.
Investors seemed to take the weekend vote in Crimea to secede from Ukraine and join the Russian Federation in stride, as the U.S. the European union placed sanctions on selected individuals from Russia and Ukraine, including advisors to Russian President Vladimir Putin and former Ukrainian president Viktor Yanukovych, who was ousted last month and now is in Russia.
The expected annexation of Crimea may not signal the end of uncertainty in Eastern Europe, especially when considering the ethnic Russian populations in other former Soviet republics. Protecting Russian speakers from "threats" was Putin's main pretext for Russia's move into Crimea.
"Renewed ethnic clashes could be a catalyst for Russian military intervention beyond Crimea, while the revival of negotiations for an EU Association Agreement could also inflame Russian concerns," Citigroup analyst Tina Fordham wrote in a note to clients on Friday.
"A key positive signpost would be a shift in stance from Moscow, which has thus far declined to negotiate with the new government in Kiev," Fordham wrote.
Fannie and Freddie
Also on Monday, shares of government-sponsored mortgage enterprises (GSEs) Fannie Mae (FNMA) and Freddie Mac (FMCC) showed great volatility after Senate Banking Committee Chairman Tim Johnson (D., S.D.) and ranking committee member Sen. Mike Crapo (R., Idaho) over the weekend proposed the Housing Finance Reform and Taxpayer Protection Act of 2014, which would wind-down the two companies.
Fannie and Freddie were taken under government conservatorship at the height of the credit crises in September 2008. The GSEs' common and preferred stocks remained publicly traded, but values plunged because dividends to non-government shareholders were suspended, and because it appeared highly unlikely at the time at the GSEs would eventually return to being highly profitable.
Under their original bailout agreements, Fannie and Freddie were required to pay the U.S. Treasury 10% annual dividends on the government-held senior preferred shares. However, in August 2012, after the GSEs had returned to profitability and after they had stopped increasing their borrowings from the government, the bailout agreement was changed so that all GSE profits since then have been swept paid to the government, in excess of minimal capital cushions.
Following their March dividend payments, Fannie and Freddie will have paid total dividends of $199 billion on $189.4 billion in senior preferred shares held by the Treasury. Factoring in warrants that were handed to the government to acquire up to 79.9% of the GSEs common shares, Rafferty Capital Markets analyst Richard Bove last recently estimated the government's return on its investment in Fannie and Freddie was $238 billion.
But there's no mechanism in place that allows Fannie or Freddie to repurchase any of the senior preferred shares held by the government, and the dividend sweep also keeps the GSEs from building up capital that could eventually enable them to restore dividends to junior preferred shareholders.
And the Johnson-Crapo bill makes no mention of Fannie or Freddie's common or junior preferred shareholders in its 442 pages.
Congress is leaving it to the courts to decide whether non-government shareholders of the GSEs will get a seat at the table, as the future of U.S. home financing is eventually decided.