This Buying in Fannie and Freddie May Be a Smart Play

Froth or smart-call buying? That's what I am struggling with about Fannie (FNM - commentary - Trade Now) and Freddie (FRE - commentary - Trade Now). I am struggling because of a really smart piece by Bronte Capital that makes a very solid case for the Fannie Mae and Freddie Mac preferreds that would, if the situation plays out, also possibly bail out the common or make it worth something.

I don't pretend to be able to do justice to the Bronte report -- and I don't have to, as he has graciously agreed to share his analysis directly with us. But I can tell you that the assumptions about how these two companies have more bookkeeping losses than actual losses is spot-on, and if the stabilization in housing does continue, then the losses will be lower. These companies can earn their way out of this jam and the housing stabilization is huge, Bronte says, if the politicians let them. The problems of these companies stem from the mortgage portfolios they held on to, not their core traditional guarantee business, which is profitable. The last Freddie report showed that losses for that portfolio of owned loans are not out of control.

Look, I don't know what the feds will do with Fannie and Freddie. They could turn them into the FHA if they wanted to. They can make it so they are never profitable, preferreds or common.

But the simple truth is that there is a case, a decent case, for the preferreds, and if there's a decent case to be made for them, in the vacuum of analysis the common stocks represent a decent spec, too. Plus, Bronte called early attention to the hazards of Conseco, so they can go both ways, positive and negative, and they're rigorous thinkers.

So if we are trying to gauge the "frothy" trading of these two companies, we need to recognize that these are not GM. The companies' political risks are high, but the financial risk isn't nearly as dangerous, according to Bronte, than many people think. If you agree with Bronte you might want to take a gander at the "FRE Z Pfd" on Bloomberg; on Yahoo! Finance it's "FRE-PZ." The most liquid preferred is a convertible one, "FNA," and next is "FNM S" on Bloomie and "FNM-PS" on Yahoo! Finance. Cusip on the FRE Z Pfd is 313400624. The FNA is 313586745 and the FNM S is 313586752 -- I don't want to steer you wrong.

As an aside, the guy I have followed extensively on Fannie and Freddie, my friend Peter Eavis from the Journal, was initially reported by Bronte to believe that the losses would be too enormous to hold out hope for the worth of any of these securities. It is interesting for those close watchers of Eavis that he replied to the Bronte report, and according to the report's correction, "Peter Eavis has replied in the comments to this blog suggesting that I am misrepresenting him. He does not necessarily think the losses will be enormous -- but he does think it unlikely that they will repay the government senior preferreds.

Random musings: No winners yet in the Kass call! ... One of our readers suggest what may be the best way to play swine flu:

Yes, the managed care players will get creamed with swine flu. However, Baxter (BAX - commentary - Trade Now) should really clean up with swine flu -- it's the biggest manufacturer of IV solutions and the like, and if memory serves, it's a good portion of the company. People with swine flu who get hospitalized are going to need tons of fluids, just tons.

At the time of publication, Cramer had no positions in the stocks mentioned.

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