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Fannie Exposed
The Oxford Short Alert
Wednesday, February 25, 2004
By: Alexander Green, Investment Director
Email – #193
** Fannie Exposed
It’s not often that Alan Greenspan hands us an ideal short
sale. But that’s exactly what’s happened in the last 24
hours.
Federal National Mortgage (NYSE: FNM), better known as
Fannie Mae, operates under a federal charter to provide
liquidity to the mortgage market for the benefit of low-
to middle-income Americans. The company does not lend
money directly to borrowers but instead is a source of
funds for mortgage lenders.
Shareholders of Fannie Mae have benefited greatly from
this cozy relationship with government. In essence,
Fannie Mae issues debt at below-market rates and then
turns around and invests the money at higher rates,
pocketing the difference.
Fannie Mae has been able to do this because investors have
acted as though Fannie Mae is a public institution, not a
private company. Investors are wrong.
And Fed Chairman Alan Greenspan made that perfectly clear
to the Senate Banking Committee yesterday. In his
testimony, he pointed out that the mortgage portfolios of
Fannie Mae – and sibling Freddie Mac – have grown so large
they now pose “very serious” risks to the U.S. financial
system, especially if interest rates begin to rise. And
he urged Congress to curb their growth “sooner rather than
later.”
These are unusually blunt words for the Fed Chairman. He
means business. And you can safely bet that Congress will
quickly act to reign in these two public companies.
That means future growth expectations are about to get a
cold shower. And the share price of Fannie Mae should
wilt accordingly.
On the news yesterday, shares of Fannie Mae dropped $2.65
or 3.4%. But this is just the beginning. Hundreds of
major institutions own these shares. And many of them are
now in the process of unwinding their positions, a
maneuver that will take several weeks.
All that selling pressure creates a wonderful short
opportunity for us.
***ACTION TO TAKE***
Sell short Fannie Mae (NYSE: FNM) at market. And place a
buy stop at $85 for protection. Speculators may want to
take a look at the June $70 puts (symbol: FNM- RN). But
don’t pay more than $70.
If you have any questions, feel free to call one of our
VIP Trading Services representatives at 1.888.570.9830
(toll free) or 410.223.2679, or contact Pillar One Partner
Greg Galloway at 1.800.438.3040 or 407.667.4729.
———————————————————
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