Fannie and Freddie Shareholders Run for the Exit

Barron's is portraying a "curtain call" in store for shares of Fannie Mae (FNM) and Freddie Mac (FRE), which fell over 20% each Monday on concerns of insolvency.  Barron's suggested that the government would be likely to bail out the two government sponsored entities [GSEs], wiping out its equity holders, preferred, common and even subordinated debt holders.  Both of these stocks are near multi-decade lows and have dropped over 90% since 2007.

There is a concern over Fannie Mae's ability to withstand further losses in their sub-prime, Alt-A, and interest only loans.   

From my perspective as a technical analyst, here are my thoughts.  I have seen a handful of stocks over the past 10 years exhibit the strength and speed of deterioration that has been seen in Freddie Mac and Fannie Mae.  Most of them are now at zero.  There has been relentless selling pressure, coupled with volume all the way down from 80 to 6 (in the case of FNM).  There have been short squeezes along the way, which have clearly allowed larger traders to unload their shares.

These stocks are both going to zero in my honest opinion.  Forget about what you hear fundamentally on these companies.  The market is telling us that they do not see a future in these stocks.  We have seen countless 20% down days in these stocks now, all with huge volume.  In a way, Fannie and Freddie are selling off like Enron, Worldcom, and Global Crossings did a few years back.  It is not controlled - it is a 'run, not walk, to the exits' type of move. 

Notice the volume in FNM's chart below.  There is a strong increase in price every time it makes a spike lower.  These spikes are on massive volume.

click to enlarge

Disclosure: None

Comments

[bbzz24:]

technical analysis would not be the appropriate tool to analyze deadbeats...

2008 Aug 19 08:10 AM

[Gerry Sullivan:]

The common stocks of Fannie and Freddie are the "canaries in the coal mine" for a very large US Treasury problem. As long as the canaries are alive the Treasury can keep $5 trillion of these companies debt off the Treasury balance sheet.

So, the two may be kept alive on life support just to perform that function. The next step will be some kind of equity infusion.

Ambac and MBIA had similar charts and fell to even lower lows than Fannie and Freddie. Both stocks have tripled since reaching their lows.

Time will tell.

2008 Aug 19 09:08 AM

[helplessobs...:]

The sharp break in FNM stock price early on proves the old adage "a stock chart is worth a thousand earnings forecasts". Investors hanging on when the markets says otherwise deserve what they get, "killed".

2008 Aug 19 09:14 AM

[whisperonth...:]

Just a thought... if analysts hadn't said that investors would lose everything they had in FNM and FRE, would those investors have sold the stock? I think perhaps the drop - if there would have been one - would have been much less dramatic. The analysts wanted those two stocks to drop, and therefore used scare tactics. It worked. And why not? After all, isn't their goal to have the government come in and bail us out again? If we don't get off this government bailout addiction, how will we ever be able to get out of the rut?

2008 Aug 19 09:30 AM

[montyman:]

Whisper On The Wind:
Is it possible that analysts said that FNM/FRE would go to zero because that is what they actually believed will happen and it is their job to report their findings? Just a thought...

2008 Aug 19 09:47 AM

[Carousel:]

"Forget about what you hear fundamentally on these companies" -- this is a typical for tech analysts. You can never forget about fundamentals. Both the market and the fundamentals drive the price, not just the charts, there are real people trading this company.

Although the sentiment is bad, whatever tommorow's news could negate your chart and triple it -- why, because of fundamentals. :)

2008 Aug 19 09:56 AM

[pokernut:]

The fundamentals for FNM and FRE are terrible.

2008 Aug 19 10:41 AM

[mkttrdr:]

Print money Ben. Bail me out too. Fundamentally our country is broke and run by crooks-value my a$$. Pokernut and I see reality. We are all going to be toast. Dig a shelter and clean the guns.

2008 Aug 19 12:43 PM

[User 201843:]

"kept alive on life support".... to be bailed out by You and Me. Tax payer Money
What a hoax !

2008 Aug 19 04:48 PM

[ohreally:]

Corning went from $80+ to under $2 in months. It recovered.
Nextel went from $30s/40s to under $3 in no time. It recovered
Etrade plunged from $60 to $2 fast. It recovered.
AES went from $70 to $2. It recovered.
Healthsouth went from $30 to 9 cents. It recovered.

MBI and ABK were left for dead, they are the first to start recering in this cycle. BTW the shorts that raided those 2 have now moved on the FRE and FNM.

Whats going on with the GSEs is simple fearmongering in a time of uncertainty. It works everytime.

2008 Aug 20 10:23 PM

[ohreally:]

Someone wrote "Whisper On The Wind:
Is it possible that analysts said that FNM/FRE would go to zero because that is what they actually believed will happen and it is their job to report their findings? Just a thought... "

It is not their job to simply report findings. It is there job to move the price of stocks and to intensify periods of euphoria and despair. Time and again I have seen analyst consensus produce insanely optimistic predictions at the top ($200brl oil, dow 35k) and hopeless despair at the bottom (paraphrase: Increase in CA home sales will not save you,"No recovery seen out to the far horizon, etc).

Where the analysts are at their absolute worst (or best depending on how you see their job function) is in their invariable counter trend friction after a top or bottom has been put in. Here we see commodities analysts lining people up to buy oil and corn contracts when the commodities bull has been slain. And we will surely see them talking down the beginnings of the inveitable recovery in financials.

2008 Aug 20 10:38 PM

[ETF Wanderer_:]

usually magazines like Barron are contrary indicators. but, the news is really dire on FNM and FRE. for all you know it might resemble enron, rather than corning or nextel etc.

2008 Aug 21 10:42 AM

[WEBISKING:]

If you listened to Buffett on Friday heae it clear these 2 companies will not be backed by private equity and have no actual value. Nuff said

2008 Aug 24 09:32 PM

[Jason Rines...:]

I have some tech help to offer you and a couple of your overwhelmed friends on the side project. I can help streamline some simple things that would help without cheesy pitch. I'll spend a dime. The phone has never scared me whether someone is the Pope or Head of the Janitors club. If one has a value proposition, do share. Not ready for a few more days, working on launching Raging Debate.com just now, you are not alone! We all must do what we do best.

Please continue with the educational polish here. The new format is not my favorite either but some people at SA dropped me a note, could possibly help them and this site/service is very important. Some of us young bucks being passed the torch really need the education, times are going to get rocky for a good bit.

2008 Aug 26 02:36 AM

[Kinabalu:]

I don't see any restructuring happening in the near term at the GSEs. Fannie presently has a capital ratio of 4.7% (Equity of $41 billion at June 30 divided by assets of $886 billion). That's a decent ratio for a company with its mission. Politically, the Treasury couldn't wipe out the common shareholders until that ratio got a lot lower. I think you would need losses of $20-30 billion, not the paltry $2 billion in the last quarter ($4 billion YTD).

All the noise about $5 trillion in mortgages ignores the massive difference between guarantees and liabilities. Fannie and Freddie actually have recourse to a number of remedies on those guarantees.

Sindicat - I like your allusion to "canaries in the coal mine" but the problem is broader than Freddie and Fannie. The real question is: Is the ratchet up in GSE interest rates going to extend to the Treasury securities next? With respect to Freddie and Fannie - I don't see how the Treasury would end up with $5 trillion on its balance sheet if it's not even on the GSEs balance sheets. The actual exposure to the Treasury would be a fraction of what is actually on the GSEs balance sheets.

2008 Aug 28 07:06 PM