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Strategies & Market Trends : Freddie Mac (FRE) pops the housing bubble

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From: mlkr7/8/2010 7:41:36 PM
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Freddie Mac’s Delisting – A Good Move As We Are In A Housing Double-Dip
By: iStockAnalyst Tuesday, June 22, 2010 1:43 PM

Freddie Mac (FRE: 0.34, -0.02) is now in the company of Fannie Mae (FNM) which has been languishing as a penny stock since May 18. Meredith Whitney, one of the star analysts and founder of New York-based Meredith Whitney Advisory Group, said on CNBC "You're going to see banks post additional reserves associated with this double-dip in housing, and that means weak performance going forward." She says that we have entered a double-dip for housing. Whether you agree with her thesis or not, clear signs of danger are emerging from Freddie Mac's share price dips. Stock markets generally announce positive news early and delay the announcement of negative news as late as they can.

Institutional Holdings (As on 3/31/2010)



Vanguard Group Inc



Kinetics Asset Management Inc



Barclays Global Investors UK Holdings Ltd



Capital Research Global Investors



Legal & General Group Plc



State Street Corp



Morgan Stanley



Geode Capital Management LLC



California Public Employees Retirement System



Northern Trust Corp



On June 15, I posted an article titled ‘Fannie Mae – Is There A Respite?' At that time, I was hoping good news will not let pairs trading convergence between Freddie Mac (which was then trading above $1) and Fannie Mae so that FRE wouldn't fall to penny stock status as it has had been languishing since June 16. If you look at the institutional shareholding pattern of FNM and FRE, you will then realize that my fears were well founded. In the above table, I have given the shares held by top 10 institutional holders in FRE and also their shareholding in FNM. Fir Tree Inc (4th largest shareholder in FNM), Susquehanna International Group, LLP (9th largest shareholder in FNM), and Schwab Charles Investment Management Inc (10th largest shareholder in FNM) were not listed in the above table as they don't feature among the top 10 holders of FRE shares. As on 31st March 2010, only State Street Corp had decreased its holdings in FRE while only Susquehanna International Group, LLP had decreased its holdings in FNM. I expect there significant changes in shareholdings (although major players will remain same) of top 10 shareholders in FRE and FNM.

FRE performance and outlook
FRE reported net loss of $6.7 billion in Q1-2010, compared to Q1-2009. Loss could have been higher but for the positive impact of changes in accounting standards adopted on January 1, 2010. Results were positively impacted by less significant increases in delinquencies and average severity rates in the first quarter of 2010 as compared to the first quarter of 2009. However, the company reported higher losses on derivatives and investment securities.

On June 16, FRE notified NYSE) that it is withdrawing its common stock and 20 classes of NYSE-listed preferred stock from listing on the NYSE. The decision was taken pursuant to a directive from the Federal Housing Finance Agency (FHFA), Freddie Mac's Conservator and regulator. Delisting from NYSE is in a way good move to preserve FRE's net worth. In the last few months, we have seen increasing levels of programmed trading on NYSE. FRE and FNM being two of the stocks most heavily program traded, continued listing on the bourses without any signs of returning to financial health would have caused substantial damage to these entities.

Relisting on NYSE
Though FRE will be delisted on NYSE, its shares will continue to be traded on OTC Bulletin Board (OTCBB), a centralized electronic quotation service for over-the-counter securities, under a ticker symbol that has yet to be assigned. FRE could reconsider relisting on NYSE at an opportune time when its financial performance and health could afford such a move. However, this is a distant dream as I share Whitney's views on double-dip in housing.

Double-dip in housing
There is no standard definition for ‘double-dip'. However, since recession is defined to be two consecutive quarters of GDP decline, we can have a working definition of double-dip in housing as two consecutive quarters of house price declines followed by a slight recovery and then again followed by two consecutive quarters of house price declines. According to economist Robert Shiller's S&P Case-Shiller Home Price Index, we are already in the midst of a double-dip in housing.

Existing home sales in April posted a sharp 7.6% jump to a 5.77 million annual rate. But, in a big disappointment, supply on the market jumped 11.5% to 8.4 months. But at least for April, prices did firm, up 2.1% to a median $173,100. Looking ahead, the settlement date for special tax credits has been extended to the end of June for contracts signed by the end of April. This extension will help support existing home sales (based on closing) but most of the action probably has already taken place and we may see sales slip in May and months in the near term. Based on purchase-only mortgage applications, which fell 27.1% for the month, sales are likely to drop in May. If double-dip in housing is true then we are likely to see drop in house prices May through October, unless Obama's administration revives housing sector.
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