Insanity Invades the Stock Market - Fannie Mae Stock Run-Up Defies Logic

Thank you Washington Post for doing a piece today on the puzzling phenomena of Fannie Mae and Freddie Mac shares trading up almost 50 percent yesterday. I am not an expert on the stock market, far from it. But I don’t trust a market where a company is losing money so fast the Hoover dam couldn’t withhold the red ink and yet their stocks are being bought like it was water in the desert.

In addition home builder stocks and airline stocks were hot trades. Massive losses. Such an upside down market is not for me. Something is wrong.

On Monday, Fannie Mae jumped 41.7 percent, to $1.70 per share, with nearly 824 million shares bought or sold during regular trading hours. Freddie Mac rose 18.5 percent, to $2.05 per share, with almost 384 million shares trading hands. Activity in the two companies' stocks accounted for nearly a fifth of trading on the New York Stock Exchange on Monday, when 6.3 billion shares were bought and sold.

Now for a spot of perspective, Fannie and Freddie owe the government nearly $100 billion, “must pay massive dividends each year to the U.S. Treasury” and are looking at a future which, at least in my lifetime, doesn’t have a chance to turn a profit.

There was no news involving either company that could have explained the moves.

The government took a nearly 80 percent stake in each company, but left the stock outstanding. The shares of each settled below $1, and the New York Stock Exchange warned the firms that they'd be removed from the exchange if their stock did not rise above that threshold.

Still, most analysts say that because the companies owe the government far more than they are able to generate in profits, the real value of the shares is zero. Analysts said much of the trading volume has come from retail investors and day traders.

"This is a bullish market mode, and people are scouring big-time stocks that are trading at very low levels," he said.

The trading in Fannie Mae and Freddie Mac was reminiscent of unusual shifts in the stocks of other companies that have received government bailouts. American International Group jumped 63 percent on one day this month despite the fact that it is being sold in pieces to pay back the government. Shares of the old General Motors continue to be heavily traded since the automaker's bankruptcy filing in June, even though the stock represents the debt and old factories left after GM's restructuring and not the reorganized company, which has yet to issue new stock.Washington Post

Insanity. But what do I know. I thought you needed profits to make money. I guess AIG proved that wrong.