Fannie Freddie Preferred Rally Takes a Breather

NEW YORK ( TheStreet) -- Fannie Mae ( FNMA) and Freddie Mac ( FMCC) preferred shares opened a tad lower Tuesday, despite fresh reports of hedge funds involved in the trade.

The Freddie Mac "Z" shares (FMCKJ), one of the more widely traded preferred issues, were down 2.46% to $4.75 in early trading Tuesday, close to 20% of their $25 issue price. While the chance to quintuple one's investment if these securities are paid in full is still nothing to sneeze at, the shares' rally has been accompanied by relatively little in the way of new developments, and this investment remains a long way from a sure bet.

Freddie Mac "Z"s are up about 1700% since 2010 -- no, that's not a typo -- and they have rallied more than 50% vs. a 24% loss for Freddie Mac common shares, since my colleague Phil van Doorn and I debunked the common stock rally by pointing out in a pair of March 21 stories that the preferred shares represented a far better investment.

In fact, this has always been fairly obvious to me ever since I first started reporting on hedge fund involvement in the investment in January 2011. It was so obvious to me, in fact, that I never bothered to argue the point, until the nutty common stock rally got everyone's attention.

Fannie and Freddie preferred shares remain an intriguing play, and there are some good arguments as to why they may pay off even if the GSEs aren't privatized.

Tuesday morning's downtick in the shares came even after Bloomberg News reported that hedge funds Paulson & Co, Claren Road Asset Management and Perry Capital own preferred shares and are lobbying to privatize the Government Sponsored Enterprises (GSEs).

However, I broke the news of the lobbying activity three weeks ago, and the mere fact that big hedge funds own preferred shares and are lobbying for a particular outcome doesn't mean it will happen. Indeed, Paulson had been rumored to own GSE preferred shares for as long as two years, a thesis that always seemed plausible since Robert Lacoursiere, one of his former analysts who now runs his own hedge fund, has long followed the companies.

The only certainty when it comes to Fannie and Freddie preferred shares is their ultimate value is likely to hinge on either Congress or the courts. In other words, investors holding out for $25 a share won't get there without a very long wait.

-- Written by Dan Freed in New York.

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