April 21 2009 10:31 PM EDT

When there is blood in the streets

Here's something to think about: 1933-35: Home Owners Loan Corp. (federal agency) took over 200,000+ mortgages and recovered 92% of original capital by 1951. Yes, that's 18 years...but imagine what will happen to FNM and FRE over an 18 year period from right now. If the mortgages they hold end up being worth something (anything!), the stocks will experience a massive percent gain. When FNM was trading in the 60's people were arguing that FNM and FRE were special because the government won't let them fail. It's a good observation but not at high prices when they are on the brink of unprecedented chaos. Now is when it matters most because the stock is almost worthless while you can bet the common shareholders aren't going to get wiped out. These stocks are never recommended now, when the fact that they "can't fail" is inseparable from future returns. I feel like this is an "invest now, investigate later" situation where you can sit on the stock, reasonably expecting that the government is not going to force them into bankruptcy. In the meantime you can do some research and try to put a value on the assets.

FNM is the subject of one of the best calls of all time:

"Fannie Mae is a $5 stock." -- Jim Rogers 2003 (FNM at $60)

He was wrong. It is an 80-cent penny stock. But I think over time it will be worth $5 or more once again (*** changed my mind ***)