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November 12, 2007
Selling Fannie Mae (FNM)
The Federal National Mortgage shareholder presentation which accompanied the recent 10-Q is chock full of telling information.
http://www.sec.gov/Archives/edgar/data/310522/000095013307004554/w42414exv99w1.htm
I consider two points to be of utmost importance in this overview.
1. If temporary impairments are ultimately considered to be long term, and adjusted accordingly in the future by auditors, FNM's shareholder equity will decline to as little as $34.9 billion. This is just adequate to maintain the existing mortgage portfolio, at status quo.
2. Absent any other positive changes to the current business model, a 10 basis point loss on mortgages in 2008 will make FNM unprofitable in that fiscal year.
My investment mandate is to own companies with strengthening balance sheets and growing EBITDA. FNM management is apparently confirming that neither event is likely to occur in the next 12 months. Therefore, I will elect to remove my entire position of FNM from RMG#1 in the near term.
When evidence of a sustained turnaround in FNM's business model presents itself, I will certainly consider reinvesting in the company.
Disclosure: On November 12th, the entire FNM position was closed out at a net price of $47.20 per share.
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