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posted on 07/17/08
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FNM/FRE - I am 100% not short these stocks.
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FNM/FRE - The Fed has intervened and basically made it hard to stay short these things. While ultimately they will both be at zero, unless the Fed really gets socialistic on us and then they buy them out for a premium, now that would be cool! You'd see an awful lot of big shorts in the market bail and the stock market would rally like 2000 points in a DAY! Just have the Fed buy out FNM and FRE at $25 each, I promise you we will get the biggest one day gain in the history of the market BY FAR. Problem is, since when did the Fed start buying US securities on the open market? That's so nutty, but that's basically what's happened. FNM and FRE have the Fed acting as shareholder activists to drive the price higher, or at least stabilize it. A lot smarter people than me think the same way, these stocks are WORTHLESS. The Fed should let them fall to zero, while making sure the collateral they have is secure. There's simply no justification to bail out shareholders. I've lost money in a lot of things, the Fed should bail me out on them, its the same thing. The housing crisis, and it is a crisis, isn't going to be any better if the Fed buys stock in these companies. In fact, it will work against it and ultimately crush investors. Water does indeed find it's own level, and worthless stocks are worthless in the end. And, NO I am 100% not short these stocks. I covered all my shorts and actually have some longs! Will look to get back in short soon, though (I'm NOT naked short! I like my clothes to be on!).
Rule!
Michael "Waxie" Parness
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Comments (33)
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The is a huge unless and was a pretty obvious possibility a week ago and should have been factored into the original analysis
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This is a historical moment to go long on FNM and FRE. Please do yourself and other fellow short sellers a big favor ASAP in being a millionaire in the making by supporting and nurturing FNM,FRE back to the giants they once have been. Without FNM and FRE, mortgage rates will go up more than 2%, 3% instaneously just like the jumbo loans destroyed by the nasty MBS of no confidence. Jumbo loans these days have virtually no 2nd market. Jumbo rates are in 8,9, 10% which will BK most of the American home owners. Our home values will potentially reduce 50% further or more, because hardly any body can finance home loans without 2nd market. We will be heading towards depression. The whole world will hate us to their gut and hate investing in our debt. Hope you all get the pictures. Therefore, they must survive. Some of us have all their faith and belief in their soeedy recovery under sound guidelines. Housing recovery can not go without these 2 American giants. Please enjoy this special very short window of opportunity to do it right towards the housing and economic recovery of our country and the world. Do not wait and miss it. It makes lots of sense to support in the current levels instead of at a much much higher level or even lose huge amount of money potentially on the wrong side of it. Sincerely!
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Just because FNM and FRE must survive because they ARE critical to the US housing market doesn't mean their equity will survive. It won't. These GSE's need to raise billions of new equity capital and they just cannot do it without virtually wiping out the current holders. More likely is that the US GVT will bail them out. When I say Bail them out I am referring to guaranteeing their debt. If they do they will wipe out the equity. If you are long these equities I suggest that you don't under stand your investment.
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Please talk to any major lender account executives, higher level management or a trust worthy mortgage broker to confirm my belief and advice ASAP.
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Waxie wrong again... noticing quite a trend
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> These companies are important. Their stock isn't and the common and preferred stock will be wiped out
Maybe, maybe not. The current dilution of the common share to 20% of it's previous value has already been factored into the books, and presumably to some degree in the face value of the share, which is forbidden to pay a dividend until 2010, or thereabouts...
The fed has not sold any common stock to itself yet. Fannie was relatively healthy compared to Freddie at the end, the feds claim they had to take both...
They have a profitable business model. Once the hazy mortgage bonds that cannot be properly valued are cleared from the books, they will make money. $200 Billion in losses, and dilution, has already been factored in.
In addition, it appears Fannie will be aquiring mortgage bonds at a low price from the market. These bonds are probably going to pay off 90% of their original value when all is said and done in a scenario where 10% of folks default on their mortgages, and that is a bad scenario to come to pass... I think we will make money off of this move. Or, the taxpayer will.
The question really rides on 2 factors:
1) How bad will mortgage defaults get? The worse it gets, the more dilution for capitolization may be necessary.
2) What will the fed do with a healthy Fannie, once they are satisfied and done that the company has been stabilized and is healthy?
The second question occupies my thoughts quite a bit. Were we in Russia, or Venezuela, I would say kiss your property good bye for good. But, Paulson has stated clearly the government has an interest in returning some equity value to the former shareholders. They are going to be holding 80% of the company, refreshed, in their one preferred giant share. Do they simply return the company to the previous owners? Do they have a IPO of their share, dividing up their super share, to the general public? Will owners of older shares get dibs on the offering? Will they simply issue .1 or .2 share to all common stcok holders in fnm.ob, or whatever the new symbol might be?
There are many variables. The way I look at it, my downside is low and my upside is potentially considerable. Democrats are in power, and have an interest in seeing Fannie return to what it was in modified form. Worst case scenario, it is diluted to zero, the feds fail utterly in their goal to return some value to the equity holders... and, the fed will have to live with the fact they have undermined confidence in all equities, especially preferred equities. Best case scenario, the common share will retain 20% of it's original value and it's face value will vary as it did before, just at 20% of the previous price.
What is that, you say? Well, it was only paying 5 cents dividend at the end... that would give a face value of around $3.75 cents assuming a reasonable p/e ratio of 15 to 1. Which would make my share worth 75 cents, but this was at the very end after a lot of turmoil.
They paid 30 cents five times per year recently, before the liars loans polluted the mortgage market, so let's say a yearly dividend of $1.50 is reasonable to expect, once the feds sweep house. That would mean my share could still receive 30 cents per year dividend, in a good case scenario. That would make it worth about $4.50, in this scenario.
Assuming the feds redistribute the company to the former equity holders...
And, stocks are often trading well above their real value, and Fannie did at $68, so if you get real enthusiastic and bullish you could persuade your self the common share might return to $15 in five years. No, I do not believe that.
But, I think $2 to $4 of real value is quite reasonable to expect a possibility oif achieving. Since Fannie was relatively healthy, most people are going to pay their mortgages or refinance them avoiding default, the government knows it squashed equity holders and wishes to return some crumbs to them...
Lots of variables... thsi is a lottery ticket. You must be prepared to lose everything. Only bet what you can afford to lose, period. It could go to zero, it could go to $12 or more in a 3-4 year time window... Once the bad paper is timed out and washed out of the system (up to 2 yrs), we can see where Fannie stands on it's balance sheet. And just listen for commentary from the fed about what they intend to do with their 80% stake... I am betting, in America, they will return the company to it's proper owners. They do not have to, remember that.
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Just don't do it. Stocks are not worth less, they are worthless. Maybe when their balance sheet look good in a while but now... don't even think about it. It's capital suicide.
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hyrule222000 ,
First of all I want to state that my reply was before FRE, FNM were taken over. I predicted they would get wiped out. The bailout of FNM/FRE was about the debt not the equity. The equity was the big loser. My pick made 85% in 5 days. http://www.socialpicks.com/ideas/show/202864/It-is-all-over-but-the-crying-for-FRE-and-FNM
Today if you ask me if these stocks have potential value I would have to say it is possible but not likely. If you hold these stocks for 10-20 years they might get to the point where they could POSSIBLY earn a return. If you are speculating that they could actually return earnings to the equity / preferred anytime in the next 2-5 years I will tell you there is no way in heck that can happen. FNM and FRE have over 5 trillion in loans outstanding. The mess won't unwind anytime anytime soon. The stock represents a long term option but is it an option that is worth anything? Again I say not likely. If you want to speculate on an option pick something that doesn't need to earn back hundreds of billions before it is worth anything intrinsically.
Now if you are just saying I will buy it here and look to sell it up a quarter or a half because of speculative moves in the price I say go ahead. You will indeed get many chances to buy and sell for quick profits(or loss) but don't confuse that with value. AIG is far more likely to return to profitability than FRE/ FNM given their various highly profitable business lines. AIG only has to earn 85 billion+ to start returning value back for shareholders.
I wouldn't invest in any of them. FRE/FNM/AIG equities would go to less than zero if it was possible. If you want to buy them you are a brave man. I myself don't like to bet on a team that I have to spot 85++ billion points to.
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If you were to invest in Fannie or Freddie...which one over the other and why?
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Don't invest in either! This is not the time to be speculating in these companies. If you want to trade them I would be very very careful. You are much better off buying something that represents value today rather than something that is worthless today. If you want to discuss it further contact me and I will explain why the option value these stocks don't represent any fundamental value.
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