Home > Stock Analysis

Financial Bears For July 14

By Ayton MacEachern

Tickers in this Article: FNM, OSK, XL, LEH, HUN, FRE

With companies such as Bear Stearns, a bank that survived two world wars, and the Great Depression, going under this year; it is hard to look at the financial crisis we are experiencing as something that will just quickly blow over. It is equally hard, if not impossible, to find a firm in this sector that is not at 5, 10, 15, or even 20-year lows. Most of the firms that I have been writing about have lost over 50% of their value over the past year.

Get Free Stock Analysis By Email

But is there a bottom in sight? If so, investors would be able to get shares of these once "king of the hill" companies at prices their parents would have got! But how do we know if we are nearing an end? The answer, in short, is that we don't. Many investors have been trying to time bottoms in this sector for a while now, and all have been very unsuccessful, as this volatile market sees gains of more than 10% in the morning, and 20% drops later the afternoon. This tug-a-war of bulls and bears, though, has the big bears seemingly pit against the smaller, weaker bulls. (For further reading on the causes of these issues, be sure to check out Who Is To Blame For The Subprime Crisis?)

Company	One Month Loss*	Market Capitalization
Fannie Mae (NYSE:FNM)	58.6%	$9 billion
Oshkosh (NYSE:OSK)	52.3%	$1 billion
XL Capital (NYSE:XL)	46.9%	$3 billion
Lehman Brothers (NYSE:LEH)	44.1%	$8 billion
Huntsman (NYSE:HUN)	43.0%	$3 billion
Data as of market close July 11, 2008

Another Bailout In Sight?
Shares of Fannie Mae (NYSE:FNM) have fallen from 52 week high of $70.57 to close Friday at $10.25. Freddie Mac (NYSE:FRE) hasn't fared any better. It's gone from a 52-week high of $67.20 to close at $7.75 Friday. With declines such as these, a lot of market capitalization has disappeared over the past year. Fannie Mae, which has about 975 million shares outstanding, has lost $129 billion in market cap; Freddie Mac has lost about $39 billion. (To learn how these companies operate and the danger they could pose, read Fannie Mae And Freddie Mac, Boon Or Boom?)

It is interesting to see how many shoes keep dropping. I, myself, have tried to call a bottom of the financial sector many times - all unsuccessfully. I have personally vowed to steer clear of this sector until I see some serious changes in the financials, the most important being earnings. Once I see these companies starting to earn the way that they used to, I will start looking for the next winner. Until then, I am enjoying my seat on the sidelines.

The Fed Opens Credit Window
It seems that investors tried to time another bottom this morning, as shares in Fannie Mae and Freddie Mac traded up 35% and 34% respectively in pre-market, and early-market trading. These gains came on news that the Fed had opened its credit window to them; and that Treasury Secretary Henry Paulson had asked Congress for authority to lend to the beleaguered companies. This short lived "bottom," was soon blown out, as shares traded lower as the day progressed. At the time of writing, mid-day in the July 14 trading day, Fannie Mae was down 7% for the day, and Freddie Mac down 16%.

I don't think that anyone can be completely sure why share jumped so high, and dropped so fast on this news, but I can speculate that it is investor fear that they would be wiped out if the government bought out these two companies. Much like the bailout we saw with Bear Stearns, government intervention here could leave shareholders with little or nothing to show for their once golden shares. Although Treasury Secretary Paulson has assured that this will not happen, trust in these markets is hard to come by.

Considering these two companies hold or guarantee almost half of all the mortgages in the U.S., I am not comfortable jumping in on this one just yet. We hear on an almost daily basis how the real estate market is still in rough shape, and we have yet to realize the full extent of the subprime fallout, these two companies have a long way to go before they become a turnaround play in my mind. (For everything you need to know about the subprime crisis, check out our Subprime Mortgage Feature.)

Add Your Two Cents
What do you think will happen with Fannie Mae, and Freddie Mac going forward? Will the government be able to successfully bail them out and save the shareholders at the same time? Be sure to join me (aytonmm) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.

By Ayton MacEachern

Ayton MacEachern is the Senior Financial Editor at Investopedia.com. After receiving his bachelor's degree in financial services from Mount Royal College in Calgary, Alberta, MacEachern began his career at an international securities trading firm. Before joining Investopedia in 2008, MacEachern worked in a variety of roles in the financial industry, including workers' compensation insurance underwriting, financial planning, and equity, currency and options trading. MacEachern is also Co-Founder of theskipper.ca, a source for online outdoor education.

MORE STOCK ANALYSIS