Introduction


The Exit Cafe is dedicated to helping investors and professionals of all experience levels be more aware of changes to their risk exposure and the importance of using an intelligent exit strategy to control and act upon risk.

The editorial manager and a frequent contributor to our blog is Chuck LeBeau, an industry leader in the application of technical analysis for risk management. We hope you find our blog enjoyable, educational and valuable. Please feel free to chime in on any stories or analysis posted.

Sep 7, 2008

Fannie, Freddie: The biggest losers

Fannie, Freddie: The biggest losers

Investors in Fannie Mae and Freddie Mac face massive losses when trading opens Monday.
By Colin Barr, senior writer, Fortune

SmartStops comment: Only a few months ago these stocks were considered safe investments that were widely owned by banks and conservative institutions. Now FNM and FRE are close to worthless. (SmartStops would have had you out in the mid $20s on June 9th.) If you think that you own quality stocks that are so safe that you don’t need protection then you are clearly mistaken. Even the preferred shareholders are in trouble. Look at the list of supposedly knowledgeable investors and financial institutions that could have saved fortunes by simply using SmartStops.

Excerpts: NEW YORK (Fortune) -- Big investors in Fannie Mae and Freddie Mac face a brutal Monday. Shares in the mortgage giants, which have already lost 90% of their value over the past year, are likely to plunge anew in the wake of the government's announcement Sunday that it is taking control of the companies and ending the payment of common and preferred dividends.
The prospect of a virtual wipeout of existing Fannie and Freddie preferred shares could lead to declines Monday in the shares of regional banks and major insurers that hold the shares. Among the holders of Fannie and Freddie preferred issues are Genworth Financial (GNW, Fortune 500) and MetLife (MET, Fortune 500).
The government intervention comes just over a month after Legg Mason's Miller reported a sizeable purchase of Freddie shares. Miller came to fame with a 15-year run of beating the S&P 500. But that streak ended in 2006, and since then his Legg Mason Value Trust has lagged far behind the market.
Miller's run of poor results hasn't made him any less aggressive, however. He has owned Freddie shares for some time but has been doubling down on the company as its shares plunged over the past year. Legg Mason owned 15 million shares at the end of 2007, when Freddie stock was fetching $34 a share in the market. He then boosted that figure to 50 million in the first quarter, as shares dropped into the teens in the wake of the collapse of Bear Stearns, and 80 million at July 31, when the price was below $10.
If the outlook for Freddie shares - which closed Friday at $5.10 but traded as low as $3.50 in the after-hours session when news of the Treasury plan began to circulate - is bleak, one ray of hope comes from the March collapse of Bear Stearns. Those shares were to be sold to J.P. Morgan Chase at $2 apiece in a Fed-brokered rescue of Bear, but the shares traded sharply above that level for a week, until the deal was renegotiated at $10.

Link to article:

WHEN TO SELL

When To Sell Stock: Here's The Best Tool For Knowing When To Unload Your Investment by Alexander Green, Chairman, Investment U.

SmartStops comment: Another excellent article from Alexander Green, the Oxford Club’s Chairman of “Investment U”. However we would disagree on a couple of points. The article suggests a 25% trailing stop but our SmartStops formulas have been proven to work much better.
(See our comparison study)

Also the article says: “Under no circumstances should you lower your stop.” As you have observed our stops are frequently moved further away as volatility increases so that they are not triggered by random price action. That is one of the important pieces of logic that makes our SmartStops so much more effective than a simple 25% trailing stop.

Excerpts: Anyone can buy a stock. The art of investing is knowing when to sell stock.
There are a number of theories about when to cash in your chips. But most of them are misguided. And some are completely wrongheaded.
For example, any analyst who urges you to sell a stock because the market is about to tank is immediately discredited, in my view. While there are certainly many bear markets and bull markets ahead of us, no one - and I mean that literally - has ever demonstrated any proficiency at warning investors in advance.
If there is truth to any of the great maxims of Wall Street it's this one: cut your losses and let your profits run. Selling a rising stock, by definition, is not letting your profits run.
There is, however, one sell discipline that forces you to do just that. It's called a trailing stop. And if you're not using one to protect your stock positions, you should be.
A trailing stop is simply a stop-loss order set a certain percentage below the market - and then adjusted as the price rises.
Traders, who are short-term oriented, will always want to run their sell stops closer than long-term investors. But even a short-term trader shouldn't run his stops too close to the market. Why? Because no stock moves up in a straight line. And you don't want to get knocked out of a winning stock while its just going through its normal fluctuations.
There is plenty of research to back up the idea of running trailing stops, incidentally.

Link to article: