http://seekingalpha.com/article/974...a-light-at-the-end-of-the-tunnel?source=yahoo Fannie Mae (FNM) and Freddie Mac (FRE) shares saw extreme volatility and heavy call volume Thursday. Shares of Freddie traded between $1.30 to $2.95 before settling the day down 3 cents to $1.86. In the options market, 115,000 calls and 21,000 puts traded on Freddie Thursday. Meanwhile, FNM traded between $1.09 and $2.76 before closing the day up 20 cents to $1.94. 131,000 FNM calls and 25,000 puts have traded on Fannie Mae. At Thursdayâs closing prices, FRE is up 238 percent on the week. FNM is up 181 percent. The heavy call volume and big gains come as a surprise because the two companies were seized by the government and placed into a conservatorship earlier this month. There are a few possible explanations for the bullish trading in both Freddie and Fannie. First, buying is being fueled by heavy short covering in both names after the exercise of puts at expiration resulted in many failure to delivers and many buy ins. The problems arose during the September options expiration due to the Securities and Exchange Commission ban on short selling, announced Friday morning before the options expiration, which resulted in a lack of stock to sell short to handle the assignment at options expiration. Hopes for more government intervention seem to be playing a role as well. Senator Barney Frank said Wednesday that a government bailout of the two banks could hurt smaller banks by devaluing preferred FNM and FRE, perhaps raising hopes the government will take steps to protect their shareholders. Fannie Mae shares also rose Wednesday afternoon after it said it did not request money from the Treasurys borrowing facility. Thursday, shares seemed to get a lift after Dow Jones Newswires reported that that the two GSEs might be included in the governmentâs toxic debt removal program. Finally, some investors seem to be betting that the two companies could eventually move out of conservatorship and, if so, common shareholder rights will be fully restored sooner than expected if the early results from the bailout plan prove to be working as policymakers hope. ************************* http://blogs.wsj.com/marketbeat/200...fannie-freddie-options-activity/?mod=yahoo_hs News of the agreement for a $700 billion bailout pact for major financial institutions spurred a lot of jostling in options of the government-sponsored (or government-held) enterprises, Fannie Mae and Freddie Mac. The pact, hammered out by lawmakers, had shares of the GSEs â already slated to be put in a conservatorship by the U.S. government â all over the map, as both companies traded in wide ranges throughout the session. As this happens, âeverybody begins to reevaluate the cost of these things, what the equity of these things are truly worth,â says Chris Rich, Newedge Group senior options strategist. The volatility provided an opportunity for those engaging in certain options strategies to get active in the market. As stocks with low share prices, Fannie and Freddie are optimal for individual investors who want to engage in covered-call writing, a strategy that helps limit the downside for investors. âIndividuals love these low-priced stocks,â says William Lefkowitz, chief options strategist at vFinance Investments. âIndividuals like to buy 5,000 or 10,000 shares of low-priced stocks â you canât buy 10,000 shares of Mastercard, Apple, or Google.â For instance, shares of Fannie Mae were trading around $2. More than 31,000 October call options at the $2.50 strike changed hands, recently bid at about 60 cents each. So an investor can buy the shares at $2, write (that is, sell) the calls at 60 cents. As the investor collects that 60-cent price on the call, they reduce their cost â and potential loss â to $1.40. If the stock goes up, and the option gets called, forcing that investor to sell their shares at $2.50, theyâve still made 60 cents on the call option and an additional 50 cents on the stock â thatâs a $1.10 return on a cost of $1.40. Furthermore, even if the shares donât move, the investor has still made money on the call option written. Similar action was evident in Freddie Mac options, where heavy trading was seen in October options at a $3 strike price. Mr. Rich says some investors, in situations like this, will hold a $2 stock for several months while writing calls each successive month, eventually making back the cost of the stock through call-writing. âSome people spin it that way â theyâre getting a dividend and still own the stock,â he says. Again, the greatest risk comes from the possibility of the stocks going to zero. But since the Treasury is not eliminating the common stock, that seems to be a low probability. In any case, that downside has been effectively mitigated. ************************* Then you add: * buyins * lack of shorting to keep a lid on these prices * momentum * general delusion that the common is worth more than $1
Some thoughts on the ideas discussed in the articles listed above. 1. "Senator Barney Frank said Wednesday that a government bailout of the two banks could hurt smaller banks by devaluing preferred FNM and FRE, perhaps raising hopes the government will take steps to protect their shareholders." Comment: Any such 'shareholder protection' would probably only assist preferred shareholders. Regardless, the FRE/FNM bailout was finalised a few weeks ago, and I find it extremely unlikely that they would revisit the package and now decide to give away taxpayer money to shareholders, particularly given that there is a $700b fish to fry right now. 2. "Fannie Mae shares also rose Wednesday afternoon after it said it did not request money from the Treasurys borrowing facility." Comment: I'm not sure how to interpret this, however I note that FRE (the sicklier of the two) is trading up by roughly the same amount over the last week. So this suggests that the reason for the share price increases are GSE-related and not company specific. 3. "Thursday, shares seemed to get a lift after Dow Jones Newswires reported that that the two GSEs might be included in the governmentâs toxic debt removal program" Comment: I find this hard to believe. GSE debt is almost equivalent to Treasury debt, given the government guarantee. The $700b bailout is more about bailing out banks rather than GSEs. 4. "Finally, some investors seem to be betting that the two companies could eventually move out of conservatorship and, if so, common shareholder rights will be fully restored sooner than expected if the early results from the bailout plan prove to be working as policymakers hope." Comment: The bailout plan is about removing toxic waste from bank balance sheets, in order to make it easier for them to lend. I don't think this has an effect on the GSEs, because they borrow at interest rates close to Treasuries. FRE and FNM are probably going up because of technical reasons more than anything else: (1) No new shorting to cap share prices (2) Forced buy-ins (3a) Existing shorts being squeezed by price increases (3b) Momentum If anyone has any thoughts on FRE/FNM I'd be interested. Disclosure: Long FRE puts, Long FNM puts.
Hi m22au, I think the reasons for your FNM and FRE stock price forecast are valid. And I hope your long puts positions on FNM FRE will soon to make profit. It seems when the bailout plan is announced, people may "sell on the news" and push the price of FNM FRE down. But this is of course still a speculation, let's see if it turns out to be true. On the other hand, I believe the call-writing (mentioned in your last post) for the low-priced and high time premium options like FNM FRE is also a profitable strategy under this situation. The recent FNM FRE volatilities have created very high time premiums for these two stock options. And the time factor generally works in the options writers' favor while it works against the options buyers. That makes the call-writing attractive to some traders. just my 2 cents.
Seems like a positive: Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets By Dawn Kopecki Oct. 11 (Bloomberg) -- Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan. Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program. The Federal Housing Finance Agency, which placed the two companies in conservatorship on Sept. 7, directed them last month to start increasing their purchases of loans and mortgage-backed securities as the Treasury seeks to absorb underperforming and illiquid assets from financial companies. ``For now, they're under conservatorship and they have to be used to keep the flow of capital going to the housing market,'' former Treasury Secretary Lawrence Summers said in an interview on Bloomberg Television's ``Conversations with Judy Woodruff.'' ``They're important to maintaining the flow of government finance'' and need to be used actively, he said. Adding underperforming assets to Fannie and Freddie's combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury's relief program, their regulator said Oct. 5. A spokesman for Washington-based Fannie, Brian Faith, and Doug Duvall at McLean, Virginia-based Freddie wouldn't comment. Overall Goal Neither Fannie nor Freddie has turned a profit in the past year, accumulating $14.9 billion in combined quarterly losses, largely related to bad subprime and Alt-A mortgage assets. FHFA spokeswoman Stefanie Mullin declined to comment on the details of the program. Treasury spokeswoman Jennifer Zuccarelli wasn't immediately available to comment. ``The overall goal of the program will be to contribute greater stability and liquidity in the mortgage market, which should enhance consumers' access to mortgage financing and ultimately result in reduced mortgage interest rates,'' FHFA Director James Lockhart said in a Sept. 19 statement. Subprime loans were given to borrowers with poor or limited credit records or high debt burdens. Alt-A loans were made to borrowers who wanted atypical terms such as proof-of-income waivers, without sufficient compensating attributes. About 35 percent of subprime loans in non-agency mortgage securities are at least 60 days late, while 15 percent of Alt-A loans are, according to a Sept. 9 report by FTN Financial Capital Markets. Growth Non-agency, or private-label, bonds are issued by banks and don't carry guarantees by Fannie, Freddie or government-agency Ginnie Mae. Freddie held about $207 billion in non-agency debt in its $760.9 billion portfolio as of August, according to its latest monthly volume summary. Fannie had about $104 billion of such securities in its $759.9 billion portfolio in August. Regulators initially restricted Fannie and Freddie's growth when they seized control of the government-sponsored enterprises Sept. 7. To ``promote stability'' and lower mortgage costs to borrowers, Treasury Secretary Henry Paulson said the two would be allowed to ``modestly increase'' their mortgage portfolios to as much as $1.7 trillion through the end of next year and said they would no longer be run ``to maximize shareholder returns.'' Less than two weeks later, Fannie and Freddie were told to ramp up their mortgage bond purchases as the financial crisis deepened and credit activity came to near standstill. Fannie and Freddie which own or guarantee almost half of the $12 trillion U.S. home loan market, were given access to $200 billion in emergency Treasury financing as part of their rescue package. The companies may also be able to sell their bad debt to the Treasury through its $700 billion financial-rescue program signed into law Oct. 3. FHFA has said the companies plan to release third-quarter results next month as scheduled. Analysts surveyed by Bloomberg project losses for both Fannie and Freddie at least through 2009.
Ask yourself these questions.... book value - where does it trade.... debt - hmmmm yeild - not for miles beta - ya right. sounds like a great investment to me.... B
This website is called Elite "Trader"..... Not Elite "Investor" speaking about Trading....and this is JMHO. This is above and beyong the $700bil rescue and Housing Bill signed 2-3 months ago. Sounds like a possible great TRADING opportunity to me.
and it may not be a bad investment......someone please correct my thoughts if at all wrong here: http://www.treas.gov//press/releases/reports/fhfa_consrv_faq_090708hp1128.pdf
Let's see what tomorrow brings ...not just with Freddie and Fannie.....but the overall market. Comment from another board: "Fannie and Freddie which own or guarantee almost half of the $12 trillion U.S. home loan market, were given access to $200 billion in emergency Treasury financing as part of their rescue package. The companies may also be able to sell their bad debt to the Treasury through its $700 billion financial-rescue program signed into law Oct. 3." They have $200 billion government dollars with which to continue their business, which is to purchase mortgage loans. The government has instructed them to do so, and will be buying back those loans as they go along. The $200 billion should give FRE and FNM about 6 months worth of purchasing power and that should be enough time for the Treasury to have bought enough of these loans back to enable FRE and FNM to buy more with that money. The main objective here is to lift the weight of the "toxic debt" from banks across the nation. What better instruments for this than FRE and FNM. These companies are already set up to do this. They will simply perform their daily business with the government's money. Regarding shareholder value, these stock are not trading on any fundamentals whatsoever and are simply swept up in the mass panic that is characterizing the plummeting stock prices of many companies in many sectors across the globe. When things settle down and credit begins to flow, these companies will value more correctly. I don't pretend to know what that is. All I know is that $1.00 a share is a far cry from $60, and that much damage to the FRE and FNM operations/assets has not occurred. Patience is key here. Just hold tight. The GSE's are in conservatorship and thus must do as the government says with their money. What did you think was going to happen? That FRE and FNM would be able to do whatever they wanted with the $200 billion? I do not believe that the Treasury would set these companies up to self destruct. Their health is crucial to the whole financial system they are trying to revive. If the plan to clean up the mess works, FRE and FNM will be able to move forward independently and will be the stronger for it. Just my two cents. This will all take time to sort out but these companies are here to stay. FASB rule all toxic paper to be mark to market. In case of L3 assets, its either 'fire sale' price or NPV discounted at 22% rate. For loans of any maturity close to 10 years, the NPV is practically 0. As for fire sale, LEH auctioned theirs at 9 cents to the dollar. Not much different from NPV discounted at 22%. If GSEs pay 180 million for 20 billion face value assets, it would not hurt short term. Long term, as the assets recover, they stand to gain, and there is a possibility of gaining big. In most fire sale situation, its the seller that lose, not the buyer.