Wednesday, September 17, 2008

Stuck Holding the Bag

I posted a little while back about the silliness of this comment I heard on CNBC:
Pisani : …What fool would buy Fannie Mae now when everyone knows the equity is worthless? Here’s a fool who just bought Fannie Mae this morning. Now, what’s going on, why would you buy Fannie Mae right after the open, what price did you buy it at, what price did you get out at, and why?

Redler: Well as active traders we loFok for over-emotion. Everyone on TV was saying Fannie and Freddie are zeros. They might as well be zeros, but it doesn’t have to be a zero tomorrow…

Essentially, this trader was playing with fire. There was no actual value underlying the common shares- as far as I'm concerned, he might as well have been trading tulips. He was buying an asset he was willing to admit to be worthless, on the hope that he could sell it to someone else for more before the "jig was up", so to speak.

Well, Fannie and Freddie both rallied that day, to close at $4.85 and $3.16 per share, respectively, earning this trader a short segment on CNBC. Today, these stocks closed at $.43 and $.27 . Thats a loss of 91% for these stocks in a little under a month. What you will not see on CNBC though, are the millions of traders who tried to play the game and were stuck holding the bag.

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