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Sunday, September 7th, 2008
It’s official. It what was the worst kept secret on Wall Street Friday after the market closed, the government finally bailed out beleaguered mortgage giants Fannie Mae (FNM, $7.04, up $0.62) and Freddie Mac (FRE, $5.10, up $0.15) on Sunday in a move that came much sooner than anyone anticipated. The government’s seizure of Fannie and Freddie could cost U.S. taxpayers nothing or it could cost us $200 billion.
As far as the stock for both companies, the common and preferred shares will still trade but the dividends have been suspended. The shares for both Fannie and Freddie will still trade but both stocks are likely headed below $5. We can expect a ton of class action lawsuits but the move was done to help the U.S. housing market and stabilize the market.
Fannie and Freddie own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt and the news is great for would-be homebuyers and homeowners looking to refinance. Mortgage rates are expected to drop from 6.35% to under 5.5% or lower which should attract more potential buyers into the market and hopefully stabilize housing prices. There will be many if’s ,and’s or but’s from here on out and this doesn’t mean we are in for smooth sailing.
What it does mean for us though is that there won’t be anymore option trades on these two companies coming from this corner. I look for the market to have a pretty decent rally on Monday but it remains to be seen if it will be able to hold onto any gains that may come from them. “Relief” rallies are nice but they often fade quickly.
Fannie Mae was down 22%, or $1.54, to $5.50 in after-hours trading on Friday. Freddie Mac lost $1.06, or 21%, and ended at $4.04.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Fannie Mae, Freddie Mac government bailout
Posted in Mergers and Acquisitions | No Comments »
Friday, August 29th, 2008
The market has just opened and the financial stocks look like they will be trading lower. I’ve been mentioning four trades that we have going and how they should be closed today. If you still believe these stocks may go higher then you could sell half of your positions and hold onto the rest.
The four trades we looked at involved Citigroup (C, $18.86, down $0.22), Wachovia (WB, $15.67, down $0.32), Fannie Mae (FNM, $7.38, down $0.57) and Freddie Mac (FRE, $4.82, down $0.46)
The Citigroup January 20 calls (CAD, $1.95, down $0.10) were at $1.37 and had posted gains of 50% before this morning’s slight decline. The Wachovia January 15 calls (WBAC, $3.80, down $0.20) were recommended at $3.00 and should do well as Wachovia remains a buyout candidate.
The Fannie May January 5 calls (NJWAA, $4.00, down $0.10) were profiled at $2.40 and are have posted gains of 70%+. The Freddie Mac January 5 calls (FREAA, $1.85, down $0.15) were profiled at $1.20 and are showing a 50% gain.
Again, I’d close half of each position ahead of the holiday weekend. The market is closed on Monday so I’ll be back Tuesday with some fresh ideas.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Citigroup, Fannie Mae, Freddie Mac, Wachovia
Posted in Company Commentary, Hot Stocks | No Comments »
Wednesday, August 27th, 2008
Fannie Mae (FNM, $6.48, up $0.86) and Freddie Mac (FRE, $4.75, up $0.78) each gained 15% and 20%, respectively, on Wednesday. After the closing bell, Fannie Mae restructured its management team as traders continue to ride the massive price swings of both stocks. This week alone, Fannie shares are up 30% while Freddie’s stock has zoomed nearly 70%.
The catalyst today were the comments out of Merrill Lynch saying the companies may not need to raise additional capital to stay within levels mandated by regulators. The fact that Freddie was able to sell $2 billion in notes on Monday and Fannie was able to do the same on Wednesday was seen as a positive.
The girations these stocks are making is incredible and there are a lot of people making money from the volatility of both stocks. We’re one of them. The Fannie May January 5 calls (NJWAA, $3.30, up $0.55) were profiled at $2.40 and are up 38%. The Freddie Mac January 5 calls (FREAA, $1.70, up $0.35) were mentioned at $1.20 and are now up over 40% with yesterday’s 22% gain.
There’s also an interesting debate going around that maybe the two companies should merge. I’m not sure how feasable that would be but it doesn’t look the goverment is going to bail either of these companies out anytime soon. In the meantime, I still think we will have more opportunities to keep playing both stocks. Keep an eye on your exit points for the current trade and make sure you are out by Friday either way.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Fannie Mae, Freddie Mac merger, Government bailout
Posted in Company Commentary, Hot Stocks | No Comments »
Tuesday, August 26th, 2008
A week ago, we scaled into a few positions in the financial stocks hoping for a quick rebound. In the 8/20 blog I talked about how some of the mid to major financial stocks were getting at their 52-week lows and we could play a quick bounce to the upside.
The danger with trading some of these stocks is that if those 52-week lows are broken they could head even lower. However, we have a pretty good grasp of what’s going on out in the market place and we can now turn our attention to taking some more profits off of the table.
We already closed the Lehman Brothers (LEH, $13.78, up $0.35) trade for a 70% profit in two days and like a tide that lifts all ships, today’s rally has taken our other positions into positive territory as we head to lunch and halfway through the trading session. Fannie Mae (FNM, $5.82, up $0.63) and Freddie Mac (FRE, $4.01, up $0.72) are having another big day, up 11% and 20%, respectively. Here’s our bounce so let’s take advantage of it.
The Fannie May January 5 calls (NJWAA, $3.20, up $0.50) were profiled at $2.40 and are up 33%. The Freddie Mac January 5 calls (FREAA, $1.35, up $0.35) were spotted at $1.20 and are up a little over 10%.
The other two trades we looked at involved Citigroup (C, $17.90, up $0.29) and Wachovia (WB, $14.12, up $0.20).
The Citigroup January 20 calls (CAD, $1.60, up $0.10) were at $1.37 and are showing about a 20% gain. The Wachovia January 15 calls (WBAC, $3.00, up $0.10) are trading exactly where they were profiled at.
How you manage your profits from here is up to you but they should all be closed before Friday regardless of where they are trading at. If you continue to see gains, great. But don’t press your luck with the long holiday weekend coming. The market never dances with the same partner and the risks are too great to expect much more from these plays.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Citigroup, Fannie Mae, Freddie Mac, Lahman Brothers
Posted in Company Commentary, Hot Stocks, Market Analysis | No Comments »
Thursday, August 21st, 2008
Yesterday I mentioned that I couldn’t find a compelling reason to go long on Fannie Mae (FNM, $4.40, down $1.61) and Freddie Mac (FRE, $3.20, down $0.92) although the payoff could be huge. The problem was the risk. Even though the long call options were cheap, the fact that bankruptcy is now a much more realization than most people thought makes the trade impossible to go long right now.
An article over the weekend in Barron’s is what got the snowball rolling and it is quickly morphing into an avalanche for these two companies. Sure, there will be some crazy gyrations as any good news might breathe a little life into the shares, but the bankruptcy writing is on the wall.
The more we see this play out the more it looks as though the government will step in and bailout the two firms. The government could issue preferred stock which would wipe out the shareholders of common stock.
Some of you have written to me asking about buying puts for Fannie and Fannie. Sure, that strategy might payoff but both stocks are trading for under $5 so your gains are going to be limited if both go bankrupt. Others have written asking if a company goes bankrupt what would happen to the options? Don’t worry, you will still be able to close out your option positions before the stock is “delisted.” If a company declares bankruptcy, the stock will still trade on the exchanges, if it declares Chapter 11.
The Nasdaq and the New York Stock Exchange may “delist” a company that is in serious financial trouble and/or no longer meets their minimum listing requirements, but if the company is still doing business it can trade “over the counter.” However, if it’s a Chapter 7 bankruptcy, you time frame for getting rid of the stock or option will be much shorter.
Six months from now we will have a clearer picture for Fannie and Freddie but for now I think it’s best to take a “neutral” position on both companies and any trades up or down, calls or puts, should be played with limited time frames.
Rick Rouse
Rick@OptionsMentoring.com
Tags: bankrupt stocks, Fannie Mae, Freddie Mac
Posted in Company Commentary | No Comments »
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Opening Bell/ Closing Trades
Friday, August 29th, 2008
The market has just opened and the financial stocks look like they will be trading lower. I’ve been mentioning four trades that we have going and how they should be closed today. If you still believe these stocks may go higher then you could sell half of your positions and hold onto the rest.
The four trades we looked at involved Citigroup (C, $18.86, down $0.22), Wachovia (WB, $15.67, down $0.32), Fannie Mae (FNM, $7.38, down $0.57) and Freddie Mac (FRE, $4.82, down $0.46)
The Citigroup January 20 calls (CAD, $1.95, down $0.10) were at $1.37 and had posted gains of 50% before this morning’s slight decline. The Wachovia January 15 calls (WBAC, $3.80, down $0.20) were recommended at $3.00 and should do well as Wachovia remains a buyout candidate.
The Fannie May January 5 calls (NJWAA, $4.00, down $0.10) were profiled at $2.40 and are have posted gains of 70%+. The Freddie Mac January 5 calls (FREAA, $1.85, down $0.15) were profiled at $1.20 and are showing a 50% gain.
Again, I’d close half of each position ahead of the holiday weekend. The market is closed on Monday so I’ll be back Tuesday with some fresh ideas.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Citigroup, Fannie Mae, Freddie Mac, Wachovia
Posted in Company Commentary, Hot Stocks | No Comments »