What a difference a day makes!
That was one hell of a bad one, showing us how skittish the markets still are and how easily investors can be chased out of the financials. I misjudged investors in the morning, thinking surely they can’t possibly fall for the same old rumors about FRE and FNM for the second time in 30 days but I was wrong, FRE was chased back to the July 11th low of $4.39. That was the day investors were also stampeded out of LEH, who hit a low of $12.40 that Monday and is still hovering around $15.
FRE had a choppy few days, then shot up to $11 on July 23rd after getting some verbal support from Paulson and Bernanke, which sparked the huge financial recovery but, in the great world of "what have you done for me lately" no news has become bad news as the hyenas who were driven off last time are coming back to poke at their prey.
I want to take you back, back in time… All the way back to July 11th, whenFRE had fallen from $25 to $4.39 in 30 days as GS, Cramer and they usual pack of hyenas went on the attack and stoked fear of holding the GSEs. That day, Piper Jaffray came out with a note that said: "There has not been one significant piece of macroeconomic or company-specific news on either company to drive the decline," in Piper’s view. "They believe FNM will likely not need new capital unless credit losses rise to over 40 bps, which would be about triple current levels."
The drop in June began on a bullish competitor’s speculative note on capital and proposed FASB accounting changes (dispelled by the regulator). FNM/FRE’s regulator, OFHEO, put out a press release last night saying "they are adequately capitalized with capital well in excess of OFHEO-directed requirements, have large liquidity virtual portfolios, access to the debt market and over $1.5 trillion of unpledged assets." Piper also warns that this is irrelevant as market fear is so high fundamentals don’t matter..
I bought 5,000 shares of FRE in the Stocks Virtual Portfolio at 10:11 and sold $5 puts for 1.05 but had to capitulate and take .90 for the $5 longs as it looked not quite as bouncy as I had hoped. If forced into buying more FRE at the expiration, our basis will be $4.46 so I have no desire to DD at this low price but I don’t see anything that has changed since July 11th and, according to the WSJ: "Representatives of Fannie and Freddie reiterated that their capital remains at levels above the minimum required by their regulator." The knock on this is that "many analysts consider that minimum level too low to withstand the potential credit losses ahead."
If you believe housing is worthless and will never regain value in the next 10 years, then yes, FRE and FNM need more capital. If you believe we are near a bottom, then they are fine. FRE said they will raise $5.5Bn in capital but they do not need it immediately and they are waiting for market conditions to improve. That is why GS and Co., the same people who will be giving them the $5.5Bn have gone on the attack – to send a message to FRE that they’d better accept the funding at this valuation ($3Bn vs. $15Bn they were worth in June) and like it or the "analysts" can make their life a living hell.
It’s a scam and nothing more. Even if you don’t have faith in FNM and FRE, it’s a great opportunity to pick up other financials as the sector got trashed in their wake. I still like C, BAC, WM, HCBK and the XLF long-term but be warned that July 11th was not the bottom, we bottomed the market out 2 trading days later, on July 15th, when the Dow finished at 10,900 so watching where we hold the line on this scare will be critical.
Don’t forget, we already have a solution for the morrgage crisis and the hyenas are taking advantage of this break in Congress to shake people out of their positions. Things are not the same as they were in July, oil is down $35 since then, putting $700M per day back in US consumers’ pockets. The scary housing figures we are hearing is based on data that measured the exact point at which food and energy inflation spiked up beyond unbearable levels and crushed the consumers. Food and fuel costs caused delayed mortgage payments and led to record delinquencies. The problem is we won’t see the turn in data until October at best since that’s when we get most of our August reports so I’m buying on faith and not much more…
