Fannie Mae, Freddie Mac Shares Rise As Financial Sector Rallies

By Greg Morcroft

Shares of Freddie Mac and Fannie Mae rose sharply Monday, headlining another rally in financial shares but puzzling at least one analyst, who says the firms are insolvent and maintains a zero price target on their shares.

Fannie Mae (FNM) shares rose 45% Monday, and Freddie Mac (FRE) rose almost 30%.

"When buying Freddie and Fannie, people are speculating the government will leave the companies in their current form long enough so they can earn their way out of these losses," Morningstar analyst Matthew Warren said on Monday. "I wouldn't view this activity in Freddie and Fannie as investing. I would call it high-risk speculation."

Both Fannie and Freddie shares have been rising sharply in recent weeks as buyers are betting that the government won't close or dismantle them. The rationale, Warren said, is similar to what has happened with stocks like Citigroup Inc. (C) and American International Group Inc. (AIG), which have also had to be rescued by the government.

"We [Morningstar] have a zero fair value on the common equity of Freddie Mac and Fannie Mae," Warren said. "That could change if the government leaves them alone and lets them earn their way back to solvency, but that seems like a long shot."

However, it's apparently a bet that some seem to be taking in size.

According to research last week from Joe Saluzzi of market followers and strategists Themis Trading, Freddie and Fannie shares made up an unusually high portion of trading on Friday. Along with Citigroup and Bank of America (BAC), Fannie and Freddie traded 2.04 billion shares. Overall volume in the U.S equity market was only 10 billion shares.

"Is this a sign of a healthy, growing market when four companies that have been heavily supported by the U.S. government represent 20% of the overall volume?" Saluzzi queried in a note to clients.

Elsewhere in the financial sector Monday, the broad gauge of performance, the Financial Select Sector SPDR (XLF), which tracks the financial stocks in the S&P 500, added 1.5%.

-Greg Morcroft; 415-439-6400; [e-mail]