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Fannie Mae (FNM) and Freddie Mac (FRE)

Jul 03 2008

Fannie Mae (FNM) and Freddie Mac (FRE)

Both the quasi-government corporations at the center of the mortgage crisis have been performing poorly and neither looks to be in the process of bottoming at this time.

Financials and Raising Interest Rates

            With the European Union raising interest rates to cut into inflation, the dollar will continue to drop and oil will remain high. In addition, Banks will have a harder time making money as interest rates rise and the whole Financial Sector will struggle for the foreseeable future.

            Earnings Season will also take a toll on the Financials as banks will need to write-off additional bad loans, earnings will be bleak, and dividends will need to be cut. There could very easily be several bright spots with some banks releasing position news, but the overall tone should be bearish during earnings.

Congress Fails to Act

            President Bush made headlines recently blaming Congress for not acting on increasing the power of Fannie Mae or Freddie Mac to help distressed home owners. Senators stopped the bill hoping to add energy interest items to the mortgage bill. If the current bill does pass, both organizations (FRE and FNM) will be overhauled and a fund will be created to bail out homeowners struggling to make their payments.

The Trade

            You can continue to short both companies while watching for a technical bottom formation. Once there is a breakout to the upside of a normal bottom chart, take your profits and look for other areas to trade.

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