If You Listen To Stansberry On Fannie And Freddie, You’ll Lose

The May issue of Stansberry’s Investment Advisory features a surprising reversal of sentiment from Porter Stansberry, who recommended that investors short Fannie Mae and Freddie Mac back in June 2008. (Excellent call on his part, by the way – I give credit where credit is due.)

Now, however, he’s reversed his call and is recommending that investors buy FNMA and FMCC, on the expectation that shareholders will win their ongoing case against the government and the GSEs’ stock will then shoot up as much as 1000%.

“This speculation is a bet on the American judicial process,” Stansberry explains. “A win for the plaintiffs will ignite a meteoric rise in the GSE shares. If the government wins, the GSE securities will all drop toward zero.” His bet, of course, is on the meteoric rise.

This is a quixotic and unoriginal argument.

It will also cost you perfectly good money.

Here’s why you shouldn’t listen to Stansberry – and what you should do instead.

The Government Is Actually In The Right This Time (Sort Of)

If you’ve been following the F&F debacle, you recall that in 2012, the government made the decision to start collecting nearly all of Fannie and Freddie’s profits every quarter – an arrangement that “systematically drained these entities of all value, leaving in its wake two unsound and insolvent zombies-a golden goose for the Treasury and utterly worthless for the individuals and institutions who in good faith invested in them,” according to attorney Theodore B. Olson, who represented Perry Capital, one of the plaintiffs in the ongoing court proceedings.

Stansberry is banking on the fact that the government repeatedly lied in court and court filings – most notably, about the fact that they actually knew Fannie and Freddie were on the road to recovery when they began re-routing funds. (Treasury officials claimed the amendment that allowed them to commandeer Fannie and Freddie’s profits was initially put in place to avoid a “death spiral,” but unsealed documents show that they knew exactly what they were doing.)