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Fannie & Freddie: Cute Names, Still a Risky Investment

July 31st, 2009 Comments off

11.04.2010 symbol update/ link repair

Fannie & Freddie: Cute Names, Still a Risky Investment

original article written by Net Advisor™

I am still getting questions about Fannie Mae (FNMA) & Freddie Mac (FMCC). I thought I had covered this in the past, but I thought I’d make it easier for people to read it all in one place. So here we go:

When someone asks me will some stock go up or down, I usually answer, “Yes.”

Stocks are fluid and move based on a tremendous amount of data, emotion (psychology) and forecasts, so they will go up and down. To what extent that movement and trend might be has to do with the current fundamentals of the company, the economy and various technical patterns of the charts.

I have written a number of articles on these two (zombie stocks) some time ago and my views have not changed.

The price trend of FNMA has been negative.

The price trend of FMCC has been about the same – negative.

The broad market (S&P, DOW, NASDAQ) had a major rebound based on technical factors, and better than expected earnings. Note FNM and FRE had not participated in that rally. Why? Like I said, they are zombie companies.

I think it will be many, many years, maybe even a decade or longer to stabilize these companies. I think eventually, they will stay government controlled entities as there one were “quasi government agencies.”

[wikichart align=”right” ticker=”PINK:FNMA” showannotations=”true” livequote=”true” startdate=”03-05-2010″ enddate=”03-11-2010″ width=”300″ height=”245″]

So what does this mean to investors?

We’ll what happened when the government took control over GM?

Even if the companies stabilize, that does not change the fact that their stocks are technically worthless. Eventually the companies are likely headed for a restructuring and the equity wiped out.

Keep in mint that when the government seized control over FNM and FRE back on Sept 7, 2008, the companies were placed in conservatorship.

I stated last year on or about the time of the FNM/FRE takeover:

“This by far is the biggest and in my view the most desperate move (Gov takeover of FNM/ FRE) I have ever seen in my life time, and from reading market history…I can’t imagine what could be next other than a bail out of a major US bank, which I am not seeking at the moment. But I still think WMU, LEH, MER, among others still have big problems that they are not or cannot deal with.”

— (Source: Net Advisor Post on Yahoo, Sept 2008)

If you are a professional trader and looking to trade for pennies and don’t mind high risk and understand that the odds are against you, there is a trade…I guess.

[wikichart align=”right” ticker=”O:FMCC” showannotations=”true” livequote=”true” startdate=”03-05-2010″ enddate=”03-11-2010″ width=”300″ height=”245″]

For me, I am not touching these things because I see the end game of these stocks – wiped out equity, and an eventual reissue new shares just like GM is experiencing. The big difference in FNM, and FRE is that their debt is several 1,000 fold greater than GM…and what happened to GM’s stock?


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Categories: Fannie & Freddie