Why Are These 4 Stocks Exploding?

Fannie Mae (NYSE: FNM  ) shares limped into August with a $0.58 share price. You would have needed to sell two shares just to order something off McDonald's dollar menu. The shares closed Tuesday at $1.86, for a massive 221% jump in less than a month.

As eye-popping as Fannie's gains are, what's even more interesting is the massive volume that blogger Karl Denninger first pointed out. As of this writing, trading in Fannie Mae, Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and Freddie Mac (NYSE: FRE  ) -- four of the most troubled and government-subsidized institutions out there -- made up 33% of the volume on NYSE Euronext's (NYSE: NYX  ) NYSE exchange.

Let me put that another way: One out of every three shares traded on the NYSE was Fannie, Freddie, Citi, or B of A.

So what gives? Have these institutions that are subsisting on government cheese suddenly turned the corner? To me, it looks like frenzy -- like coyotes descending on a carcass to try and get any remaining morsels. I've hung onto my shares of B of A, but I'm being careful to watch this spasmodic trading from a safe distance.

But what do you think? Is there good reason to join the rabid buying of these stocks, or will the crazed investors end up getting bitten for their enthusiastic buying? Scroll down to the comments section and share your thoughts.

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Fool contributor Matt Koppenheffer owns shares of Bank of America and McDonald's, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Motley Fool's on Twitter, too. The Fool's disclosure policy knows it's just a jump to the left, then a step to the right.


Read/Post Comments (21) | Recommend This Article (56)

Comments from our Foolish Readers

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  • Report this Comment On August 26, 2009, at 3:25 PM, jbodwing wrote:

    Pure speculation. The assumption is C and the others are going to ween themselves out of the public trough and turn profitable. Maybe. However the stats say the 1 in 8 mortgages are either behind or in default. That's a lot of bad debt to be written off. A positive P/E is probably at least a couple years away. Any plays on C have to be pure speculative/volume driven. Good luck with any short term fundamentals.

    jbodwing

  • Report this Comment On August 26, 2009, at 4:14 PM, livedlong wrote:

    FNM and FRE are political plays. They were made insolvent by GOP because they were run by Democrats and they were powerful...( I am a Republican, for clarification). The current arrangements will be changed for them to survive. The employees own ~25% of the common stock and they represent the biggest voting block in the state of Virginia. GOP does not realize that. The Democrats , who knows what in their heads???

    Anyway, I foresee $50 price.

  • Report this Comment On August 26, 2009, at 4:26 PM, Squares7 wrote:

    Citigroup (C) is making a run because (1) the uncertainty of the preferred share conversion is over, (2) index and mutual funds are buying C because they have to due to the change in outstanding common shares, (3) the market perceives C as having put the worst of its problems behind it, and the latest earnings report showed operating losses (excluding the one time gain from the Smith Barney sale) to be less than estimated by analysts, (4) C's capital ratios are now healthy and sentiment has swung from C is a dog to C is healing and it's problems, though not over, are on the mend, (5) C has not participated in the market rally this year and is playing catch up, (6) the technical are very attractive, because after C breached the $4.34 level, there is no resistance up to $6.15, and we're near the "golden cross" where the 50 day crosses the 200 day average; (7) there is a perception among many that the proposed reverse split is not going to occur, since the decision to seek authorization for a reverse split was made in February when C was a penny stock and its survival was in question, whereas now survival is not really in doubt because it has the U.S. government backing; (8) post conversion book value for the shares is $4.50, but tangible book is more like $6 because the conversion retired C’s onerous preferred dividend obligation, so on a valuation basis C looks cheap compared to (for example) Bank of America, which trades at 1.4 times book; and (9) C is the rare bank with its balance sheet at fair value, which makes its balance sheet more reliable than the other majors banks that report assets at a substantial premium to fair value (pointed out in a Bloomberg article published on August 13th).

  • Report this Comment On August 26, 2009, at 4:28 PM, waz7 wrote:

    I foresee atleast BAC and C climbing back to a respectable level in near future. Too big of banks historically to lay low for too long. They will make adjustments and will be back.

  • Report this Comment On August 26, 2009, at 5:29 PM, adutt1 wrote:

    Investors probably think Feds. will sell its holding in Citi once the price stabilises above $6.00 sometimes in June ' 2010. If that happens citi management probably retire all the common shares Feds owned resulting in immediate upward pressure on citi's price to nearly $12.00 by end of 2010. Mutual fund managers are also likely to rush in to buy citi shares, is a bonus to investors.

    Its all speculative and I am banking on my analysis for a handsome profit.

    by end of 2010 or early 2011.

  • Report this Comment On August 26, 2009, at 7:31 PM, OlderPro wrote:

    I can appreciate all the input on these companies, but just stop and think for a minute.

    All of these companies have been taken over by the government in one way or another, run into the ground to where they were worth almost nothing, and now they are making a huge comeback. This is a set-up, pure and simple. And the Chicago run Mafia that is controlling the White House is behind it. Remember Goldman Sachs at $70? Well, this is exactly the same game. Buy now while they are "dirt' cheap - or forever hold your peace.

  • Report this Comment On August 26, 2009, at 9:49 PM, moneymog wrote:

    Your Fools suggestion of CERUS (CERS) over 4 years ago is making me a fortune. Thank you, thank you, thank you.

    My fellow local Fools are jumping in on the AABS news.

  • Report this Comment On August 27, 2009, at 6:27 AM, Demobane1 wrote:

    FNM, FRE and every other lender out there was FORCED

    (by law) to lend 40+% risky loans because "everybody" has to have a house. Banks didn't WANT to load up on bad debt. They were told not to worry, FNM and FRE will buy all this crap from you, and they did and that's how they got so deeply in trouble. I understand that some lending rules have been changed and I hope that's one of them. They are historicly both $55 - $60 stocks, pay dividends and will be propped-up until they are again.

  • Report this Comment On August 27, 2009, at 9:22 AM, aalpha29 wrote:

    Prices are low, prices will go up, these companies won't be allowed to fail, buy now or regret it.

  • Report this Comment On August 27, 2009, at 9:30 AM, aalpha29 wrote:

    Scratch your own backism:

    http://articles.moneycentral.msn.com/Investing/Extra/citis-1...

    "Citi CEO Vikram Pandit, of all people, should know that committing huge sums of shareholders' capital to retain the services of a hot trader doesn't always pay off. In the spring of 2007, Citi spent close to $800 million to acquire the hedge fund Old Lane. Essentially, Citi was paying for the privilege of employing its founders, who had racked up impressive results. A year later, after the fund suffered losses, Citi basically folded it.

    One of the co-founders of the hedge fund was Vikram Pandit."

  • Report this Comment On August 27, 2009, at 11:00 AM, 1goldsmith wrote:

    While I do think that FNM, FRE, C, AND and BAC are long term bargains I should also include AIG in that statement. I also think that the recent increases in price are due to technical traders/speculation rather than any real changes. Yes housing may be getting better in many areas, but just how much of this is due to Government handouts? When these programs end will housing drop like a rock? Watch automotive sales in the next month or two for a possible forecast (the now ended CARS program did stimulate automotive sales, but just how bad will they be with in now ended? How much of the potential future demand was sold early because of the CARS program?)

    WMS

  • Report this Comment On August 27, 2009, at 11:06 AM, TMFHousel wrote:

    "C has not participated in the market rally this year and is playing catch up"

    Really? The S&P is up 47% since March. Citigroup is up 400%. I'd say that's a pretty healthy participation.

  • Report this Comment On August 27, 2009, at 11:59 AM, Squares7 wrote:

    No, up until a month ago Citigroup had not participated in the market. Citigroup is still down for the year, having started in the $6's. The S&P is back up to levels of the Fall of 2008.

    The stock was and still is oversold for the reasons that I discussed. It's that simple. Paulson recognized this after I did, which is why he's been accumulating shares the last few weeks.

  • Report this Comment On August 28, 2009, at 10:01 AM, noxgear wrote:

    Hey moneymog,

    What are you talking about with CERUS? Their current stock price is close to the lowest it has been and is well below the prices of 4 and more years ago! If you invested in CERUS back then, you are either underwater or even.

  • Report this Comment On August 28, 2009, at 7:17 PM, sluggo32 wrote:

    My take on C is that it is the last great bank that is still single digit, say at $5. Where do you get such great potential other than at a bank where the sun never sets. The government money propping up C is a huge factor and the trough is always open until they reslove their toxic assest, which are getting better as the housing market recovers. Face it, a great time to be a bank..."where the money's for nothing and the chicks for free" (Dire Straits)

  • Report this Comment On August 28, 2009, at 9:10 PM, aaa1212 wrote:

    Fannie Mae, Freddie Mac and the Federal Home Loan Banks provided 90% of the financing for new mortgages at the end of 2007, according to the Office of Federal Housing Enterprise Oversight. Fannie and Freddie are government sponsored entities (GSE's). These represent some of the greatest innovations of capitalism. These entities have served America so well and by no means they are not going to go away. Unfortnately something went very very very wrong.

    THE PROBLEM

    Between 2005-2007, few of the mortgages acquired were conventional fixed-interest loans with 20% down. Fannie Mae's loan acquisitions were:

    •62% negative amortization

    •84% interest only

    •58% subprime

    •62% required less than 10% downpayment.

    Freddie Mac's loans were even more risky, consisting of:

    •72% negative amortization

    •97% interest only

    •67% subprime

    •68% required less than 10% downpayment.

    The regulations have mow been tightened. You will not see this mess again. These companies are not going away. The government will not allow them to go under.

    Take note: FRE and FNM in the next few years will be trading at 55 and 75.

    Forget about their books. How much is United States worth with trillions and trillions of Dollar in the red? The volumes of trading on these stocks should tell you something. Do not be left out of the greatest Momentum trading stocks in the history of capitalism.

  • Report this Comment On August 29, 2009, at 11:53 AM, MONEYBILL66 wrote:

    c= is going to go i think, they have 342,000 employees if you can keep that many people going, the stock has to follow, just a matter of time, think about it.

  • Report this Comment On September 01, 2009, at 10:03 AM, rdcubby wrote:

    How can any of these financial stocks truely be worth what there share prices exhibit, it's only the same folly that led to the near meltdown in the first place, greed, fast money and nobody watching from outside.

  • Report this Comment On September 02, 2009, at 6:24 PM, jeeeeee wrote:

    live the fast life...yup

  • Report this Comment On September 03, 2009, at 12:26 PM, AriAmerica wrote:

    Citi will come back. This happened with bad mortgages in the late 80's early 90's. Price dropped to around $10. I bought at $30 in 1993 and sold for $188 in May 1997. They did it before and they will do it again. Yes, it's risky right now....but oh how sweet when it turns around!!!

  • Report this Comment On September 03, 2009, at 1:45 PM, frankwweiwuw wrote:

    Calm down! The sky is not falling. We should never be afraid of the end of the world when investing in stocks because if that day really comes, what purpose you keep money for? And we should know that the more banks collapse the better position AIG, FNM and FRE will be in.

    Usually people don’t buy penny stocks because they may go bankrupt. But penny stocks like AIG, FRE, FNM are quite a different story because they are backed by government with billions of taxpayers’ money. So government won't allow them to go bankrupt and taxpayers don’t want them to go bankrupt.

    Regarding real price of stocks, that’s a gimmick. Stock prices never really mirror their true value because nobody knows what their true value is. They all depend on your imagination. And stock markets are a place where people like to imagine. BTW, stock markets have always been cyclical as the world is itself cyclical which is because human beings’ emotion is always cyclical.

    In addition, stock markets are always forward looking. You won’t understand why those penny financial stocks surged in August until sometime next year. But for two things i am sure why they have been up so much. The fundamental one is there have been now 6.8 billion people in the world and population is increasing at historically astronomical levels, so houses are one of the hardest best assets you can rely on. They should be worth more than Google at $445/share, because you don’t have to have google but you have to live in a house. The other technical one is that they have been beaten up and shorted so badly. Buying these stocks now will guarantee your money back a lot more than $2 per share.

    Lastly, will you ever believe in so-called financial or stock experts? Are they ever right? Very rare. If you look back history you will find this. They either pretend to know a lot or they are just liars, either way, they are always trying to put your money in their own pockets. They want you to dump them so they pick them up because they have missed out on the rally since March. A simple math will tell you that even taxpayers own 80% of AIG, FRE and FNM, 20% of them is still worth $300/share, $15/share and $15/share, respectively. I believe those buy AIG, FRE and FNM now will see a flood of money toward them in the coming 24-48 months.

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