Thursday, July 10, 2008

Fannie Mae, Freddie Mac's Pains-Jim Rogers' Gains

Led by Alcoa, U.S. stock indexes, recovered somewhat today. Two stocks that didn't recover where those of the quasi-governmental mortgage agencies Freddie Mac and Fannie Mae, who are down 88% and 80% respectively from their 52 week highs. The probability that these half-state/half-private hybrids will go bankrupt seems to be increasing. Of course, the government will never allow them to completely collapse. However, there is a risk that any bailout will mean that shareholder's equity will be wiped out, which is why it is rational for investors to stay away from the stocks.

One who is making big money from this is libertarian investment super star Jim Rogers. I told you last year how he was making big money from selling short Fannie Mae, which had fallen from roughly $60 per share to $30. Now Fannie Mae is trading at $13 per share. I don't know how big amounts he was selling short, but it seems likely he made sizeable profits from his, just as he did with his bets on rising commodity prices.

Here is an interesting interview where he discusses among other things, his emigration to Singapore, the future of Asia and America and the oil market. He also reveals a great gain in the personal area in the form of him and his wife having a second daughter. He also predicts the end of the Federal Reserve, an area where I am not as optimistic. Just because it causes disasters won't make it disappear. The Fed didn't disappear after the Depression, just as the Zimbabwean central bank hasn't disappeared. In order for that to happen, there must be widespread awareness of the role of the central bank in creating the problem, something which is not present now.

I also note that he is still waiting for the dollar sucker's rally that he has been waiting for since late last year for the purpose of getting rid of the rest of his U.S. dollar assets, a time during which the dollar has dropped significantly against most currencies. So even if there is another sucker's rally he is likely to lose from waiting. But that just illustrates his old self-admitted characteristic of being a terrible short-term trader (at one time he even said he was "the worst trader in the world"), even as his extraordinary skills in analyzing the fundamentals that create long-term trends make him one of the best investors in the world.

9 Comments:

Anonymous newson said...

the video link doesn't work.

i agree with your less sanguine view about the fed. we'll all be trading bed-pans before the sun sets on central banking.

6:38 AM  
Blogger Mr.Mortgage said...

When the Power Goes Out and Other Lessons.
http://thegreatloanblog.blogspot.com

Keep up the great work! Daily read for me.

8:10 AM  
Blogger stefankarlsson said...

Newson, the video link works for me without any problems. Perhaps it is something wrong with with your web browser?

12:44 PM  
Anonymous Larry said...

Stefan, I think Jim Rogers (I am a big fan of him since 2004) might be underestimating the inflation in the money supply in various Asian nations. Specifically, India and the whole subcontinent, Vietnam and China. We might see a boom and bust here that overshoots USA and Europe. What you think?

I am aware that the growth in these countries can handle higher supply, but money supply growth rate seems so out of whack. From M1, M2 and M3. Same goes for Russia, CIS and Ukraine.

I would love to hear your views.

12:04 PM  
Blogger stefankarlsson said...

Well, I think he is a little too complacent about the monetary policy of the People's Bank of China and the troubles it will create. But I think he like me focuses on the long term structural strengths of China with its 1.3 billion hard working, well educated and thrifty citizens. There is every reason to believe that China will eventually get similar per capita income levels as say Taiwan, Hong Kong and Singapore. And when that happens, China will become the by far biggest economy in the world.

1:22 PM  
Anonymous Larry said...

Ok thanks. He is saying that there will be major bumps on the way, just as it was for USA. I think this global inflation, followed by deflation (hopefully) will be that first major bump.

1:27 PM  
Anonymous Justin Rietz said...

As you know, I'm a fan of Rogers, too. I question, however, his claim that he is a terrible market timer. Obviously his Fannie Mae / Freddie Mac trades have been profitable, and those weren't long term positions (medium?). Nor was his recent short position on the financial sector (check out the ultrashort financial ETF "SKF"). I think he is a decent short term trader, but would prefer to avoid critics who unreasonably expect 100% accuracy, which is especially difficult in the short term.

He has had some misses in long term positions too, but I believe those were positions he didn't take that ended up doing well (the infamous Russian market saga being one). As always, capital preservation is priority number one.

7:49 AM  
Blogger stefankarlsson said...

Justin, I actually don't think he is the world's worst market timer. That is what he has said about himself-in several interviews. Here he clearly exaggerates his weakness in this respect.

In fact aside from an example of a short sale gone bad mentioned in "Hot Commodities" the only example of bad timing from his part that I know of is his long wait for a dollar sucker rally that have yet to appear.

I only mentioned it because I thought it was kind of funny that such a master investor as him would refer to himself like that and because I thought this example would perhaps be a second example of this.

9:00 PM  
Anonymous Anonymous said...

I'm a huge fan of Jim (have been for years). I follow all his interviews, youtube videos, etc.

About being "the worlds worst short term trader", the interviewers and media never seem to realize that he's a long term investor (you can see that from his books, and past interviews). He likes to buy very cheap and sell when they're expensive. 5-10-15 years.

I.e. buying commodities at the bottom in 98/99 and expecting a 20 year bull market. Or being bearish on the dollar since the late 80's.

The Fannie, Freddie bets were medium term (a few years). He was short in the 50's and 70's, and now it's at 6.

But in terms of making 3 month or 6 month predictions, no.

6:25 AM  

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