Fear Begetting Fear Among Fannie/Freddie Investors; Selloff is Overdone

7/11 - "The recent pressure on the shares of FRE (FRE.N; US$8.00; 1H) and FNM (FNM.N; US$13.20; 1H) reflect market concerns/confusion surrounding potential future dilutive capital raises. While the question of capital adequacy has surrounded the GSEs (government-sponsored enterprises) for a while, given their relatively high leverage versus banks, the timing of recent "noise" has been particularly challenging given the recent 2Q-end and the company quiet period ahead of 2Q reporting. Note: OFHEO has publicly stated that both GSEs currently have adequate amounts of capital."

"We believe the main market fear is in the risk of the GSEs being forced to raise large amounts of capital. We spoke with FRE management this morning and they indicated that there has been no significant change in their financial condition during 2Q beyond prior guidance, and that they remain o...