Markets Brace For Freddie Mac Earnings Disaster (FRE, FNM)

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On Thursday morning we’ll get to see earnings out of Freddie Mac (NYSE: FRE). The estimates from First Call for the government sponsored entity are roughly -$2.34 EPS on what is listed as -$198.30 million in revenues.  Have you ever seen a "negative" on revenues?  Frankly, while First Call and other consensus estimates do have formal numbers we are not even paying attention.  Why do we call this a disaster, even before the disaster has happened?  Well, the only good thing expected or hoped for is something slightly better than a life sentence.

Analysts have an average price target north of $33.00, assuming that hasn’t changed.  But we have yet to find anyone who is a) looking for any overly positive comments and 2) expects that the estimates mean much of anything.   We would note that Goldman Sachs just slashed ratings on these and others tied to financials and lending.  Despite the negativity, the housing stocks are at least looking like they are trying to convey a message that the worst has been seen. Lehman was slightly positive to cautious in new research coverage of the homebuilders today.

If options prices were any indication, we think options traders are braced for at least a 10% move.  The truth is that the earnings estimate range is so wide that these numbers are irrelevant, even if noting that is financial blasphemy.  We already saw a note our of Fannie Mae that it sees a weak housing market for the rest of 2008 with additional prices-falling expected.  Bernanke noted that the Fed would cut to save the economy even at the expense of letting inflation go unchecked for a while.

Freddie Mac closed down 0.48%, despite an intra-day run on Wednesday on the news that OFHEO was lifting the ceiling on the amount in mortgages that both Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) can buy.  Freddie Mac’s 52-week trading range is $22.90 to $68.12.  We have also noted how a key value investor was out ahead of the curve on this one.  It looks like even the famed Ken Heebner of CGM, one of our top managers and pundits, was out buying too far ahead of time on this one.

Jim Cramer interviewed Hillary Clinton on Wednesday night, and here you can see some of the comments that overlap with the mortgage and housing problems regarding bringing in the FHA. We will of course stay tuned, but the best thing that can happen here is that the atrocious news is just slightly less-bad than chaos, torture, and mayhem.

Jon C. Ogg
February 27, 2008