Lehman, Fannie, Freddie: This Must Be Groundhog Day

Funny how the more things change, the more they stay the same. I thought about writing a piece about the state of things but then I remembered, I wrote the exact same piece I wanted to post today 5 weeks ago: Whose Bottom Will this Be? Lehman Brothers or Fannie/Freddie?

Once again I reiterate what I've been saying over and over - I'd be short Freddie Mac (FRE) (and up 40% in 2 days) if I could be. I'm on the opposite side of this trade from Bill Miller, who I truly wonder will be forced to resign after this move. I'm not sure how he is sleeping at night after adding 30M shares of this disaster on top of the 50M shares he already owned. Frightful.

There are some incredible profit opportunities on the short side - frustrating not to be able to use them to add to the portfolio. 40% gains don't come too easily on the long side. I'm not sure if by the time we are up and running for real, that we'll ever have such "easy" opportunities as are being presented right now. A lot of regional banks are going to be kaput too in under 6 months.

But this one (FRE) is like a softball - I don't think it will ever get back over $5 again (below $5 a stock is not shortable). I do expect some crazy gyrations as it turns into one of these nonsense stocks that can pop up and down 20% a day, but the roadmap of an eventual landing spot is clear. As for Lehman (LEH), if it breaks that July 15th low the hedge fund computers will pile in on the short side even further purely on a technical basis. Hanging by a thread. That one could go either way - as I wrote last month I think the Federal Reserve now wants to show it will actually allow someone to fail and since it cannot be Freddie or Fannie it might be Lehman as the sacrificial lamb OR some foreign company might swoop in and buy Lehman for $5 or something like that.

The fact our market is even near to being "flat" when we are on the trail to losing a GSE (or as I believe both) is beyond amusing. People are obviously numb and in denial of just how bad things are. Err.. I'm sorry "it's all priced in." If you said this would be the outcome a year ago people would call you crazy. Now it's becoming "priced in" - hah. What a mess we've allowed.

So again, whose bottom will this be? Lehman or Fannie/Freddie?

Disclosure: Long Freddie Mac puts in personal account

Comments

[ozcutty2:]

Barclays Bank in UK are interested in Lehman I believe, so I expect they would make a move if they kept falling.
Yes Fannie and Freddie going to zero is now priced in. The market has moved on. Same thing happened with Mbia and Ambac, remember the market gyrated widely earlier in the year over these 2, now it doesn't care anymore. Its a funny thing the market, it has a very short attention span.
The ironic thing is, if the governement take over fre and fnm, the market will probably rally strongly as it removes the uncertainty.

2008 Aug 20 08:05 PM

[Fighting Yoda:]

Yes, it is surprising Fannie/Freddie etc are still alive, and the market is where it is. Can't imagine who the buyers could be- are pros simply taking the gullible for a ride - leave them high and dry. Feels like that - with all the volatility +/- 20% moves on daily basis in mid caps etc.

Brad Miller - he is a lost cause - probably caught in some kind of time warp - denial.

At this point there is no uncertainity - it is ceratin the accident has happened - it is the dmage assessment phase -statring with denial.

2008 Aug 21 01:24 AM

[needtoknow:]

Yesterday LEH was dead judging by most of the comments. Today they are off to the races. Any other insights?

2008 Aug 22 11:05 AM

[gobbleknoll:]

"The fact our market is even near to being "flat" when we are on the trail to losing a GSE (or as I believe both) is beyond amusing. People are obviously numb and in denial of just how bad things are."

Excellent observation-- and why this market is such a bargain for the shorts (SKF, etc.) right now. People simply do not want to believe that 2 Pillars of Society like FRE and FNM can fail, when in fact they have already failed and the only question now is: dilution or receivership?

2008 Aug 23 11:16 AM