Saturday, September 5, 2009

Reality TV - America's Worst Financial Companies

Its truly stupid the rally we are seeing. The markets rallied on less jobs being lost in the economy, totally not paying attention to the Household Survey and rise in the unemployment rate to 9.7% that accompanied the payroll report.

tradersutra.blogspot.com/2009/09/labor-day-not-good-times.html


Lets forget for the moment all of the spin the government has been putting on every single economic report. Lets forget that housing is a total mess, I would venture a guess that the Detroit Lions are in better shape then housing is, and they went 0-16 last season. Lets forget that employment is a disaster and getting much worse. Lets also forget that the market is completely dominated by High Frequency Trading Systems that push stocks in one general direction only to collect exchange rebates. Lets forget and forgive all of these for the moment.

But whats truly unacceptable is that so much money flow and trading volume is being directed at crappy companies.

In case you haven't noticed, America’s worst financial companies were the market’s best performing stocks. Take a look at Freddie Mac & Fannie Mae. They have nearly tripled from their recent lows. These companies are fully controlled by the government, yet they trade like healthy public companies. The stock market has their own realty to what they are worth. Its quite debatable what the true value is.

Market Capitalization is a way to value a company. Take the total number of diluted shares outstanding, then multiply by current stock price. This is the simplest way to calculate what a company is publicly worth.

Freddie Mac in their most recent filing stated they had 648.3 million shares outstanding. So their Market Cap is $1.277B based on a closing price of $1.97. But this is not taking into account the dilution to the government. The company is using a share count of 3.3 Billion in calculating its loss per common share last quarter. So what is it 648.3MM or 3.3 Billion shares outstanding? OK..when calculating losses, you use the higher figure which includes the taxpayer, but when you file with investors, you use the lower share count? Interesting. So investors are left with either 1.2B or 6.5B as the market cap. Just create more confusion while officers of the company rape shareholders, which is the tax payer.

Fannie Mae is also in the business of misinformation. Their market cap is either $1.937B or $10B. Nice gap there. The larger share count includes all warrants the Treasury owns. Who in their right minds would think Fannie Mae is worth 10B?

The question I have is: Why would anyone pay anything to own any of these crappy companies common shares? If you read their disclosures, Fannie and Freddie tell you straight in your grill, that their common equity is worth less than zero.

These two government owned entities publish quarterly fair value balance sheets showing estimates of the real world values for all their assets and liabilities.

As of June 30Th 2009 FRE has negative $122.6B, and Fannie had negative $138.1B. Combined its a total loss of $260B, for which investors are currently valuing them at a combined $17Billion.

You don't even want to talk about the ludicrous trading in AIG. Their current filings show only 134.6MM in shares outstanding, which is at least the same when they calculate share loss, but they also publish a hypothetical share count if all preferred shares were converted over to common. In that case 697MM shares outstanding would be the figure used. So the market cap is either $5.3B or $28B. Anybody think AIG is worth $5B let alone $28B? AIG also has negative common equity of $35B as of June 30Th.

The only reason these crap stocks went up was because of short covering, nothing else.

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