Don't Buy Fannie Mae Stock, Buy Pizza

On March 14, Fannie Mae stock was floundering around 50 cents per share. On March 15, the fuse was lit on shares of FNMA as housing legislation rumors swirled around the digisphere. By March 16, the stock jumped 20 percent, and by the end of the next day it hit 75 cents per share -- a 50 percent spike in a week on pure rumors. Not bad.

A week later, Fannie Mae stock tripled, then lost all of the value it gained in the same day. Does anybody else see a serious problem with this? I do. Originally, I wanted to buy Fannie Mae stock, thinking it sounded like a lucrative idea. The line of thought went something like: The better the housing market does, the better the stock will do, right?

Wrong.

Nobody knows what the United States government is going to do with the profits Fannie and Freddie make from the housing market. For all we know, the government might keep Fannie and Freddie’s profits and give nothing to shareholders. This stock is not a REIT. It is not a homebuilder. It is a producer of mortgage-backed securities that’s under government control. It is its own unique entity with a different set of rules from everybody else.

Unfortunately, that hasn’t stopped institutional investors from trading the news, jacking up the stock, and dumping it the next day. The gambling has not stopped since March.

Take the price action in the stock on Wednesday. The price gushed all the way up to $5 on one month’s worth of good Case-Shiller housing data. On Thursday, the stock slumped back down to under $2. If you bought Fannie Mae stock on Wednesday and held it overnight, your son is no longer going to college.

This stock shouldn’t be trading like this. People will get hurt. People will lose money. The stock hangs on every word uttered by financial media about housing. One bad month, and the stock might plunge back into $1 territory. It’s not worth the risk, and housing data does not share a pure one-to-one relationship with profits for Fannie and Freddie. There are simply too many unknowns at this point.

What investors are doing is trading on half-news, news about housing that is sort of good for Fannie Mae stock but could also be completely meaningless. As I type this rant, the stock has sunk to $1.80, and could be headed for $1. My advice is, if Fannie dips down to $1, forget about it. You’re better off buying a slice of pizza with that dollar.