Sell Fannie Mae And Freddie Mac Now!

| September 4, 2009 | 0 Comments

Earlier this week, I was on my way to the office.  I stopped at Circle K, a local convenience store, for a cup of coffee.  Stepping into line to pay, I was unlucky enough to be stuck behind a lottery junkie.  Unfortunately, this wasn’t the first time this has happened.

You know the type.  Their retirement plan is to win the jackpot.

I’m not talking about someone who plays a few lucky numbers when the jackpot gets big.  The lottery junkie plays $20, $50, or $100 every time they walk into the store.

I spent the next few minutes watching the clerk scan ticket after ticket to find a few meager winners.  The junkie always rolls the winnings into the next round.  Often time adding a few more bucks to make sure they’ve got a “good” chance to win the next drawing.

Now, I can’t be sure but I think the lotto ticket junkies have all opened trading accounts.  How else can you explain the market action in Fannie Mae (FNM) and Freddie Mac (FRE).

Fannie and Freddie have almost quadrupled in just the past month!

These two stocks are worse than buying lottery tickets.  Mark my words, these two companies (and I use the term loosely) are done.  The stock is worth zero, zip, nothing, nadda…

If you’re planning on buying one of these stocks looking for a big payday… you’re in for a rude awakening.  The day will come when you open your brokerage statement to see the stock is worthless.

When will the final reckoning come for Fannie and Freddie?

A report from Moody’s points to the company’s demise.  They concluded the government would need to keep funding the companies for more than a decade.  Only then would they be able stand on their own again.  I think this estimate’s too generous.

The two companies together are nearing $1 trillion in total government assistance.

There’s no way they’ll be able to reimburse that much money.  Even in the best of times.  But right now it’s the worst of times for mortgage lenders.  Loans are going bad at an unprecedented rate.

Take a look at these numbers…

The number of loans behind on their payments rose to 9.4% in Q2.  And, the number of homes in foreclosure rose to 4.3%.  The picture isn’t getting any prettier either.  The number of loans on the verge of going into foreclosure is now almost 8%.  Every single one of these numbers is at an all time high.

Clearly this problem is going to get worse before it gets better.

I don’t see Congressional support for these companies lasting a decade. If (or should I say when) the companies are dismantled, the debts will exceed the assets.  The stock will be worth nothing.

If you own FNM or FRE, the only thing going in your favor is time.  The debate on how to restructure the housing-finance system is just getting warmed up.  I’m sure everyone with a stake in the mortgage or banking business will have a plan for fixing the system.  The battle in Congress is sure to be partisan, ugly, and lengthy.

This gives you a chance to get out.

If you own stock in either of these companies, use this time to sell.  Get what you can.  And if you ever have the urge to gamble on either of these stocks, go buy a lottery ticket.  At least then you’ll have a chance…

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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