By Greg Morcroft
Shares of Freddie Mac and Fannie Mae rose sharply Monday,
headlining another rally in financial shares but puzzling at least
one analyst, who says the firms are insolvent and maintains a zero
price target on their shares.
Fannie Mae (FNM) shares rose 45% Monday, and Freddie Mac (FRE)
rose almost 30%.
"When buying Freddie and Fannie, people are speculating the
government will leave the companies in their current form long
enough so they can earn their way out of these losses," Morningstar
analyst Matthew Warren said on Monday. "I wouldn't view this
activity in Freddie and Fannie as investing. I would call it
high-risk speculation."
Both Fannie and Freddie shares have been rising sharply in
recent weeks as buyers are betting that the government won't close
or dismantle them. The rationale, Warren said, is similar to what
has happened with stocks like Citigroup Inc. (C) and American
International Group Inc. (AIG), which have also had to be rescued
by the government.
"We [Morningstar] have a zero fair value on the common equity of
Freddie Mac and Fannie Mae," Warren said. "That could change if the
government leaves them alone and lets them earn their way back to
solvency, but that seems like a long shot."
However, it's apparently a bet that some seem to be taking in
size.
According to research last week from Joe Saluzzi of market
followers and strategists Themis Trading, Freddie and Fannie shares
made up an unusually high portion of trading on Friday. Along with
Citigroup and Bank of America (BAC), Fannie and Freddie traded 2.04
billion shares. Overall volume in the U.S equity market was only 10
billion shares.
"Is this a sign of a healthy, growing market when four companies
that have been heavily supported by the U.S. government represent
20% of the overall volume?" Saluzzi queried in a note to
clients.
Elsewhere in the financial sector Monday, the broad gauge of
performance, the Financial Select Sector SPDR (XLF), which tracks
the financial stocks in the S&P 500, added 1.5%.
-Greg Morcroft; 415-439-6400; AskNewswires@dowjones.com