The corporate “federal agency” debt obligations and mortgage-backed securities guaranteed by the companies also plummeted relative to government debt as investors thinned positions, analysts said.

Today's collapse holds a special place in my heart. My first post on the Market Rubbernecker actually dealt with FNM and FRE and the issue of their capital adequacy. In that post, I took issue with the sharp rebound that the shares experienced in mid-March (see chart above) following the announcement that their capital requirements were actually being reduced which would allow them to expand their portfolios in the midst of a housing bust.

Those concerns about capital adequacy have clearly been weighing on investors after that mid-March climb as shares have lost about 50% since then, with another 20% getting lopped off today. As I stated back in March, there is a very good chance that the equity holders of FNM and FRE will be wiped out, and I still believe that may happen. Despite that, Aspera's clients have had a very nice gain from the FRE short, and I usually prefer to exit a position a little early and leave a little something for the next guy (FRE was sold today in the $11.30-11.40 range).

I still have a short position in Wachovia, but I've now covered most of the financial shorts. I also reduced exposure to TWM intraday for clients that were overweight the position (double inverse Russell 2000 ETF) as it was up another 5% over the past few days.

We need to remember that bear markets are always punctuated by strong short-term rallies like we experienced this past spring. It would not be at all surprising, from a contrarian stance, to see another rally in the near future given the increasingly pervasive bearishness in the market. Regardless of which way the market moves in the near-term, I suspect that the increased level of volatility will result in further outstanding investment opportunities, both long and short.