Why These Stocks Are Too Risky [Federal National Mortgage Assctn Fnni Me, Federal Home Loan Mortgage Corp]

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July 20, 2015 1:57pm ETF BASIC NEWS

riskaheadBrad Hoppmann:  He’s one of the most well-known activist investors around, and he’s still in love with his Fannie.

I’m referring here to Pershing Square Management CEO Bill Ackman. He reiterated his support for nationalized mortgage lenders Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC) during an appearance Wednesday at the Delivering Alpha conference.

Ackman has been a bull on the two government-sponsored agency lenders for some time. But ever since his May 2015 presentation with the clever title, “It’s Time to Get Off Our Fannie,” there’s been a less-than-stellar reception for this trade on Wall Street.

In fact, the values of both FNMA and FMCC have plummeted since his May 5 presentation to the Ira Sohn Conference. Each stock crumbled some 16.5% in just over two months.

In his presentation, Ackman argued in favor of both Fannie and Freddie, saying that their respective potential returns could be tenfold (or some 1,000%).

(You may recall that Ackman made headlines this year for his prescient short of nutritional supplement seller Herbalife Ltd. (HLF) shares.)

While Ackman’s comments today did send both FNMA and FMCC shares spiking nearly 8% in early Wednesday trade, I’m not convinced that betting on these two mortgage giants is a good move for individual investors.

Image Credit: CNBC

Why has he remained so bullish on Fannie and Freddie?

Ackman offered a somewhat casino-like assessment of these stocks to the Delivering Alpha Conference audience today, saying that this investment offers “the most upside and probably has the most downside.”

Basically, Ackman is saying that Fannie and Freddie are very, very risky assets.


Now, as someone who took the opposite position on Fannie and Freddie pre-financial crisis — and enjoyed big gains by shorting the sector in the run-up to the 2008 crash — I find it hard to get my head around these two plays at this time.

After all, let’s not forget the massive bailouts these two quasi-governmental agencies needed from the U.S. taxpayer just to keep from expiring during the financial crisis.

And, of course, both were subsequently taken over by the government.


Yet as a big shareholder of FNMA and FMCC, Ackman thinks the government will eventually concede that the market needs a less-regulated Fannie and Freddie.

Of course, his comments today did come with the caveat that there is a “lot of risk” in the trade.

Interestingly, Ackman’s main argument in favor of Fannie and Freddie is essentially that they are the only game in town when it comes to mortgage guarantors.

In an interview with Bloomberg Television in May, Ackman said, “There is no viable alternative,” to the lenders.

“Preserving the 30-year pre-payable fixed-rate mortgage — it’s like the bedrock of the housing system — is critical. We think the only way to do it is by preserving Fannie and Freddie.”

Although Fannie and Freddie have managed themselves back into profitability, the rub here is that they are still remitting bailout payments to the government.

Still, hedge fund players like Ackman and others are betting that, ultimately, the profits will go back to shareholders. They also suggest that the government will leave Ackman’s Fannie alone, and in its original, quasi-independent state.

That bet, to me, is a bit too risky to take on here if you’re an individual investor.

Sure, if you are a $15 billion hedge fund like the one Ackman runs, you can weather the short-term storms.

Unfortunately, most of us don’t have a $15 billion umbrella to cover our Fannies.

This article is brought to you courtesy of Brad Hoppmann.

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