Tuesday, September 23, 2008

The FRE and FNM pop

FRE and FNM, left for dead, popped nicely today, up 55% and 65% to 1.31. There was a couple of items that probably affected their trading. First we had the short selling restrictions. Secondly, institutions own over 111% of the outstanding shares in both of these numbers, indicating a significant naked short position in the shares. Considering that these stocks were favorites of the retail investors, if you add these shareholders into the mix than it's possible that a very significant naked short position clearly exist. Thus you could have significant upward demand pressure from the buy-ins from those shorting "fake" shares.

The $700 billion housing bail-out will affect the prices of homes, and the problems at FRE and FNM exist because of declining home prices. This bill will mitigate some of those problems.

You also had other speculation helping these stocks. Regional banks are asking for hand-outs from the Fed because of the decimated value of the preferred shares. If they get help, will other shareholders? And at these prices, you have a warrant on the upside value of the business, with the possibility of some good news.

You also had speculation on some websites that the financial position of FNM was superior to that of FRE, and that they shouldn't have been forced into this government bail-out.

"A little birdy at Fannie Mae told me the other day of some anger issues there. Apparently, when the federal government finished the audit of both companies’ financials, Fannie Mae was showing to be adequately capitalized while it was Freddie Mac that seemed to be in the deepest debt."

Despite what Wall Street seers will tell you; these stocks do not trade on the penciled value that some quant determines. The public only knows that there is a housing bail-out, and FNM and FRE are the bets that they will take to play it. After all, the government, doesn't yet have any shares. They just have an unexercised warrant.

So you get plenty of action, without much cost to play.

So they'll play them. And they'll probably go higher than what most people think that they should.

After all, wasn't AIG at $1.25 last week?

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