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Stock Market Trends: Fannie/Freddie Musical Chairs |
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| Aug 18, 2008 04:03 PM UTC |
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Analyst
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Via The Correct Call:
We have been saying to steer clear of the Fannie/Freddie duo for quite some time now. It’s good to see that Barrons seconds our thoughts as they put out a pretty hard-hitting piece in their weekly issue over the weekend. A bounce in those stocks was inevitable, but it appears that it was short-lived and it’s finished.
This little blurb from Barrons says it all and underscores our bearish views on the companies: The balance sheets of both companies have been destroyed. On a fair-value basis, in which the value of assets and liabilities is marked to immediate-liquidation value, Freddie would have had a negative net worth of $5.6 billion as of June 30, while Fannie’s equity eroded to $12.5 billion from a fair value of $36 billion at the end of last year. That $12.5 billion isn’t much of a cushion for a $2.8 trillion book of owned or guaranteed mortgage assets. Playing with these stocks now is akin to musical chairs. You might get a rally here and there if you are extremely nimble, but when the music stops and you are without a chair, you will be in huge trouble and your whole investment will vanish. Why risk it? 
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