Freddie (FRE), Fannie (FNM) Crushed in Premarket

I believe in the era of lightning speed global transfer of capital, along with huge pools of capital (hedge funds) owning the vast majority of daily trading volume, along with the loss of the "up tick" rule (meaning you have to wait for the stock to trade up to layer on more short positions) - things are moving far faster than ever imagined. I can imagine a scenario, much like a wounded zebra in Africa, the scent of blood attracts the pack of lions (take the top 5-10 hedge funds) working in concert... err independently... to pummel these stocks into the ether. Financials are all about "confidence" since they are leveraged to the hilt - for every trillion these companies "guarantee" they have a few billion to cover the actual loans. That is essentially our entire financial system of the past 30 years. Once you lose confidence - you are done - as Bear Stearns (BSC) found out; and Lehman might be finding out soon - EVEN with the Federal Reserve literally being an open spigot for the investment banks, post Bear Stearns collapse. Interesting times indeed.

We spoke yesterday of Whose Bottom Will this Be? Quite potentially all 3 candidates we discussed might be blown out together.

• Shares of Freddie Mac dropped 35 percent and shares of Fannie Mae tumbled 27 percent in premarket trading Friday as Wall Street continued to worry about the health of the mortgage companies and the potential for a government takeover.
• "We should not be in a position that only two government-sponsored lenders are willing to make mortgage loans and, without them, our economy would collapse," Piper Jaffray analyst Robert P. Napoli said in a note to clients.
• There does not appear to be a change in fundamentals at either company, he said, just a change in sentiment.
• "In an instance where equity capital is not raised and investors see a meaningful change in debt spreads, it is clear to us that government action would be undertaken to ensure that the institutions would not fail," Parmentier said in a note to clients.
• So far this year, shares of Freddie are down 77 percent, and shares of Fannie are down 67 percent.

The NyTimes has a front page article on the same topics we discussed yesterday. Basically things become self fulfilling prophecies nowadays - and in lighting quick fashion as capital has no boundaries and it is concentrated in fewer and fewer hands, that dictate our fates.

• The word began spreading across Wall Street trading desks on Monday morning: Fannie Mae and Freddie Mac, the giant companies at the heart of the nation’s housing market, might be in trouble.
• The tumult, which continued on Thursday, started with a cautionary analyst’s report, one that might have caused few ripples in normal times. But these are not normal times. Within minutes, the price of the companies’ shares was plunging, sending shock waves through the financial markets, the economy and Washington.
• Fannie Mae and Freddie Mac are so big — they own or guarantee roughly half of the nation’s $12 trillion mortgage market — that the thought that they might falter once seemed unimaginable. But now a trickle of worries about the companies, which has been slowly building for years, has suddenly become a torrent.
• And investors around the world own $5.2 trillion of the debt securities backed by the companies.
• “There is a real panic about these companies on Wall Street right now, and sometimes a blaze like that grows almost without reason,” said Tom Lawler, an economist who worked at Fannie Mae for over two decades before leaving in 2006 to become a consultant. “There wasn’t really any new news to set off this crisis. The stocks just started falling, and didn’t stop.”

I still have never seen a reason the uptick rule was eliminated a few years back - never an explanation. Maybe the hedge funds have more lobbying power than I assume. Oh well. CNBC is already spinning this as a good thing because the US government can make money on this mortgage business. :) Being completely broke, they need any revenue stream they can get.

On the "plus side" this will be the cataclysmic event that can create a bottom; then we can rebound - until we get to the Merrill Lynch (MER) / Washington Mutual (WM) bottom next quarter ;)

Please note - charts below do not include this morning's carnage