FNM: Sampling the Kool-Aid

Hard to believe, but Fannie Mae (FNM) has been tracing a series of high highs and higher lows since November 2008.

Any other stock, I'd say, "Wow!", and park some long-term money in shares to ride the trend.

But Fannie, of course, played a starring role in the collapse of capitalist finance in 2008. That's why the stock, which once traded above $70, tumbled to 30 cents a share.

Since that dismal day, the shares have risen to a high of 2.13, on Aug. 25, 2009, and are in the process of correcting some of that rise. Shares are trading at 97 cents, just a few cents below of the 61.8% Fibonacci retracement level. In fact, shares have been more or less bounded by the 50% and 61.8% levels since last October. Sometimes, you just have this insane urge to sample the Kool-Aid. The thinking goes like this, if I parked $1,000 in long term money in Fannie rather than in a bond fund, and if shares recover even 25% of the decline, then I've turned $1,000 into nearly $20,000, just like that.

And Fannie is being managed by the Federal government now, which means it has some deep pockets backing it. It is the avatar of too big to fail. The Feds want Fannie to lend, to help out distressed homeowners. So they'll be bringing it back to financial health, and at some point Fannie will resume paying dividends, and then who knows what could happen.

I mean, it's better than visions of sugar plums dancing in my head on the night before Christmas.

Now, I've done this before, during the Internet bubble. I bought shares of a company called PSINet. They were a big player in the development of the 'Net. They even had their name on the Baltimore Ravens football stadium.

And when they collapsed, I bought more shares, using the same 1 to 20 scenario. I was still holding those shares when the company collapsed. It was acquired piecemeal by other companies, Cogent Communications taking the largest part.

Shareholders like me got nothing. Our value was negotiated away.

So that's a cautionary tale.

Federal policy could change. They could replace Fannie with some other vehicle to support the mortgage industry. Or perhaps housing won't come back for a decade or more. The present "recovery" could be a economic equivalent of a sucker rally.

One thing for sure: Fannie's future will be molded by government policy, not the marketplace. The deliberations of governments are far less predictable than the consensus of buys and sellers.

Even so, it is so attractive to see shares of a household name or an industry leader, Fannie Mae, selling for such a low price. I'm drawn to it like a moth to flame, as I think, "If, and if, and because, and if again . . ."