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Fannie Mae (FNM) and Freddie Mac (FRE): What to expect on Monday

Posted September 8, 2008

Troubled mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) are being placed in a government conservatorship. What does that mean for traders on Monday?

***Update: As the markets opened this morning, FNM and FRE dropped far more than my projected range. Even better: Both stocks are now trading for a buck apiece. I just placed my buy orders for both stocks. You should, too!

*** Update 2: The drop is reversing. Just in the last five minutes, FRE and FNM have gained over 40%. Move fast to lock up any price below $2 at this point!

by J. Christoph Amberger

Baltimore — (TFN): The U.S. government announced that it would seize troubled mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), backing up the ailing behemoths with as much as $200 billion in taxpayer money. Both institutions are being placed in a government conservatorship.

Since the U.S. government is now explicitly guaranteeing mortgage debt, Uncle Sam has become the nation’s mortgage lender.

Futures on all major stock indexes are up around 2 percent in electronic trading as I am writing this. But what will this do to FNM and FRE stock prices tomorrow and in the short term? Pundits have been warning that the government bail-out would occur on the backs of common stock investors. And indeed, after-market trading indicates that both stocks will plunge close to 30% on Monday morning.

The question is: What investors will be suffering? Certainly those who bought FNM and FRE at $68 or $65 are standing a snowball’s chance in heck seeing their investment bounce back from Friday’s close of $7.04 or $5.10 any time soon. But those who bought in the past couple of weeks may lose only 20-40 cents a share, respectively. And that only temporarily.

Death, where is your sting?

You can bet that there will be record volume tomorrow. But the those who bought recently purchased shares into which the probability of a loan default — and a share price of $0 — and dilution had been factored into the stock price already. That risk is now off the table.

Both FNM and FRE are now investments that that are explicitly backed by the United States government, with the goal is to return the company to profitability.

My recommedation: Buy FNM at or below $6 and FRD at or below $4.50. Depending on how low prices go — remember, FRE was trading as low as $2.80 just 2 weeks ago! — you could double your money on these most pedestrian of all stocks in less than 3 weeks.

We’ll be updating this recommendation in our free e-letter, the TFN e-News. Make sure you sign up for your timely buy and sell alert! And while you’re at it, please take a minute to listen to Investors Daily Edge guru Andrew Gordon explain what to expect for the entire banking industry!

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Posted by J. Christoph Amberger · Filed Under US Stocks and Markets 

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