The Lynch of Lynch’s Favorite Stock: How to Profit Off the Delisting of Two Failed Icons

Andrew Packer (June 18, 2010)

Fannie Mae and Freddic Mac hold over $6 trillion dollars of American mortgages.

Stop and think about that for a second.

That’s half a year of America’s GDP!

And yet between the two of them, they didn’t have enough money to keep their share prices high enough to stay on the NYSE. A delisting announcement was made yesterday, June 16th, causing shares in each to plummet over 40%.

I’m not surprised. I’ve been asked frequently by subscribers of Credit Crunch Short Report about the prospects for these two companies (and whether or not I should short them). As I wrote to my subscribers a mere month ago (May 12th):

“I’m not shorting Fannie… or Freddie. Despite a stock price above zero, there’s no equity worthwhile to short. They’re penny stocks, and even that’s overvalued. But at that price they’re far too vulnerable to wild swings.”

We found out yesterday— half of the ‘value’ in those two companies was merely the fact that they were NYSE listed! The shares are worthless—even if you could get them in two-ply. And the problem with shorting these stocks is the fact that, at any price above zero, its’ too speculative. And even at $1.00 a share, speculators could have driven shares to $2, $5, or even $10. Without the delisting, it could have happened.

Fannie and Freddie have been proverbial “dead men walking” for over a year. How the mighty have fallen! I remember when this was a darling stock of Warren Buffett and Peter Lynch’s largest position for years.

In fact, Lynch practically writes a love letter when describing his Fannie investment in his book, Beating the Street. He bought shares for the Magellan Fund starting in 1977 and accumulated more through his departure in 1989. He called it “…a stock that I touted for six straight years.”

But the mighty have fallen! And as short candidates… Fannie and Freddie remain far too risky. There are better and more compelling shorts out there— the banks. They’re the next dominos to fall. They have to. There’s no choice.

You see, while Fannie and Freddie were being delisted, the first post-tax-credit housing numbers came in. They weren’t pretty, even if you Photoshopped some supermodels in the margins. Lumber futures—a leading indicator of housing activity—have fallen 40% since April.

And with Fannie and Freddie out of the way, banks are next in line. They’ll have to foreclose on properties and finally recognize losses. They’ll have to deal with earnings hits. They don’t have the Fed to buy up their toxic debt anymore. It won’t be pretty.

My advice is to spread yourself around a few different bank accounts—and look for banks with low ratios of defaults.

If you really want to protect yourself, consider anti-banking currencies like physical gold and silver.

And if you want to thrive… take a look at shorting some of these banks with the worst financial ratios. I am.

Sincerely,

Andrew T. Packer
Editor
Credit Crunch Short Report

P.S. If you’d like to take a look at my Credit Crunch Short Report risk-free, to gain big from losers like Fannie and Freddie, click here for all the details.

Tags: globalinvesting