Seeking Alpha
About this author:

Almost everyone has been paying close attention to the extreme pessimism surrounding shares of Fannie Mae (FNM) and Freddie Mac (FRE).  The wild swings in these stocks on Friday proved just how intense the short interest is in these companies.  The news during market hours was one thing, but the news coming after the market was another.  Fannie Mae stated that the company has never been better capitalized in its history. 

Obviously they have reached this point because they understand the future risks that potentially could hurt their balance sheet, and probably will.  The proactive managers running Fannie Mae have made conscious decisions to build cash in advance of these potential pitfalls.  That's a very positive sign and a security blanket of sorts as far as I'm concerned.

With this added news in our back pocket, I feel that the recent declines in shares of Fannie Mae and Freddie Mac are overdone.  As much as a 100% gain is likely from current levels if a recovery begins, and I think it will.  However, this is an aggressive move, and it is NOT suitable for anyone other than aggressive accounts. 

My focus here is on Fannie Mae.

If Fannie Mae pulls back to $9.60 on Monday I advise taking a small position within your aggressive account.  Be prepared to add to that position once more if needed.  Use this strategy:  Allocate some of your aggressive account to this idea, then divide the money you allocate in half.  Use that ½ position for this $9.60 buy, and be prepared to step in again if the stock dips to near $8. 

I consider this call very similar to our UltraShort Oil & Gas ProShares ETF (DUG) and Bear Stearns (BSC) trades made recently.  They are aggressive, and not for the faint at heart.  However, the upside potential is significant and a compelling risk-reward scenario presents itself in my opinion.

My upside target, for now, is $20.  I am not willing to chase FNM.

Print this article with comments

This article has 3 comments:

  •  
    $9.60? $8? You mean you think FNM is going DOWN? I don't think so, pal. Didn't you read the news? The fix is in!

    Sheesh. You might as well say that we might want to buy Apple if it touches 150 on Monday.
    2008 Jul 14 03:36 AM | Link | Reply
  •  
    Damn, I hate being wrong. It hit 9.29 this morning. I'm fairly shocked by the middling market response to the weekend's events; looks like the IMB failure is a heavier weight than I thought it would be. Honestly, who didn't see that coming?
    2008 Jul 14 10:49 AM | Link | Reply
  •  
    I am actually surprised that seeking alpha posted this because it is purely technical. Seeking alpha wants everything to be fundamental, and fundamental traders are ancient in today's market. Maybe seeking alpha is coming around. If you listen to th call, like my clints did, you haven't done too bad thus far. Don't chase it. If you want more info visit my website. I do not provide specifics like this for free, just genera comments. THK.
    2008 Jul 14 02:39 PM | Link | Reply