Here's the linked article talking about stocks that are trading well but worthless.
http://articles.moneycentral.msn.com/Investing/CompanyFocus/4-zombie-stocks-better-off-dead.aspx4 'zombie' stocks better off deadMeltdown casualties Fannie Mae, Freddie Mac, GM and AIG soared in August, with tons of shares changing hands. But don't be fooled; they're worthless.
By Michael Brush
MSN Money
The market rebound off the March lows is even raising the dead.
I'm talking about four "zombie" stocks in particular, housing meltdown casualties with no real value by virtually any measure. Yet they're up 100% or more in the past month, with big numbers of shares changing hands as traders game the system.
As an investor, you need to avoid these zombies at all costs. Don't get drawn in by the hoopla.
The two most prominent are those ill-fated twins of the housing disaster, Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). These are the government-sponsored entities that used to print money by guaranteeing and buying home mortgages.
Now they're mere shells reporting huge losses. If they ever manage to make money again, it will go to pay back huge loans from the government -- $100 billion and climbing. Average shareholders don't have a prayer.
Yet during the month, these two zombies soared around 300% on enough volume to rank them at times among the market's most-traded stocks.
Another zombie is General Motors' pre-bankruptcy stock. Motors Liquidation (MTLQQ, news, msgs) contains little more than unwanted factories and legal claims against the company. Yet in early August, it surged 140% on huge volume.
Motors Liquidation is at least relegated to the market netherworld of the pink sheets; Fannie and Freddie still trade on the New York Stock Exchange. So does the insurance company American International Group (AIG, news, msgs), which traded up as much as 330% in August. The AIG case is more arguable, but I still consider it a zombie.
All four stocks took a beating yesterday as September opened. But that only begs the question: If these stocks are better off dead, why have investors been bidding them up?
Who's playing with zombies?
Some of the buying is legitimate, coming from investors who went short, selling borrowed shares in hopes of buying them back at a lower price later. Now they need to cover their positions by buying replacements for the borrowed shares to lock in their gains.
Beaten-down shareholders are also likely to sell on any move up. But these factors don't explain all the action.
Some buyers chasing these zombies are clearly getting duped by penny-stock touts -- who take positions in dirt-cheap stocks, talk them up and then sell. Back in July, for example, one penny-stock service issued a news release stating that the GM zombie "emerged from the remains of bankrupt General Motors Corp. by taking over the best assets of the biggest U.S. automaker."
The best assets? Hardly. The same release also stated correctly that the real GM -- the part that actually makes cars -- is now a private company. But analysts aren't sure people get that. "I think there are some retail investors out there who don't realize Motors Liquidation is not GM," says David Whiston, who covers the auto sector for Morningstar. Otherwise, its movements are "just baffling," says Whiston.
These zombies have also come back to life because of reckless gambling. "Given the rise in many of the financial stocks, people are looking around for things that rhyme, and they looked to Fannie and Freddie," says Matthew Warren, who follows those stocks for Morningstar. "People are day-trading those stocks, but I imagine that it won't end well."
Very low-priced stocks tend to attract this sort of action. But average investors who try to play the game are painfully overmatched by high-volume traders who can move cheap stocks with their buys, then exit positions, leaving others to take the losses. If you choose to play this game, you're on your own.
Here's why I think you should avoid these zombies at all costs.
Part 2
Fannie and Freddie
Despite the action, the "smart money" agrees with Warren that Fannie and Freddie stocks are worthless. "Our institutional (clients) are pretty confident the value is zero," says Bose George, who follows the stock for Keefe, Bruyette & Woods. George agrees.
Here's why:
Reason No. 1: The government has a claim on most of the value of Fannie and Freddie.
The only reason they haven't gone under is that the U.S. Treasury has given them billions -- $46 billion to Fannie and $51.7 billion to Freddie, to be exact. They also pay what is in effect interest to the government of about $5 billion a year.
In return for cash, the government gets "senior preferred" stock, with the highest claim on any value in these companies. Shareholders of regular preferred stock are next, follow by owners of common stock -- the widely traded, regular stock that shot up so much in August.
Being last in line, owners of the regular stock have little claim on any value or profit these companies will ever produce.
Reason No. 2: More dilution of common shares is likely.
It gets worse. Fannie and Freddie will need "massive amounts" of additional capital to continue, says George. That money will come from the government. Since the government's stake will continue to have the highest claim on assets, the common stock will be devalued yet again.
Each quarter that Fannie and Freddie rack up more losses, they have to go to the government to get more money. Fannie Mae reported a $14.8 billion loss in the second quarter. Freddie Mac reported a loss of $374 million. That's down from losses of $10.2 billion in the first quarter, but don't be fooled -- business didn't get that much better. The improvement was mainly due to accounting changes.
Other accounting changes, though, may require the pair to hold a lot more capital in reserve. To get that, the companies would need -- you guessed it -- even more billions in government aid.
Reason No. 3: The Obama administration could slay these zombies next spring.
The fate of Fannie and Freddie is now in the hands of the government, and it's not clear what it will do. But here's one likely option: The Obama administration could nationalize these zombies and turn them into mere mortgage guarantors, like the Federal Housing Administration, a federal agency that insures home mortgages. In that case, the stock gets wiped out, because so much of the underlying businesses will be gone.
The administration says it will deal with the issue next spring.
To own these stocks, "you really have to make a case for the political will to keep these things public," says Mark Morgan, a bank-sector analyst with Thrivent Financial for Lutherans. "I don't think there is a lot of political support for that right now."
GM stock: The ultimate clunker
Here's a basic rule of thumb for when companies go bankrupt: The old shares continue to trade, but they are nearly always worthless. That's because shareholders are last in line among those with claims on the assets of a bankrupt company, says George Putnam, a value investor who writes The Turnaround Letter. Banks, bondholders and other creditors have to get paid off before the shareholders. "Very rarely is there enough left over for stockholders," says Putnam.
That's the case with shares in the old General Motors, which is now called Motors Liquidation. All the valuable parts of the old GM are inside a private company, called General Motors Co., which someday will trade as a stock. It is owned by the U.S. and Canadian governments, the United Auto Workers Voluntary Employees' Beneficiary Association (an entity set up to manage the health and pension benefits of autoworkers) and former GM bondholders.
The old stock represents only what the new owners refused to touch. They're telling investors to stay away from the zombie because it is worthless
(.pdf file).
American International Group
Like Fannie, Freddie and the old GM stock, shares of troubled insurer American International Group shot up in August. The move looks equally unwarranted.
Investors took hope from AIG's early August report of $1.8 billion in profits for the second quarter, compared with a loss of $5.4 billion a year ago. Next, investors saw it as a sign of strength that chief Robert Benmosche said he could wait up to three years to sell off some foreign units the insurer earlier seemed to be in a hurry to unload. Benmosche also said he's consulting with former AIG chief Maurice Greenberg on how to revive the insurer.
All three factors sparked a panic among short sellers who scrambled to buy the stock to close positions, which would decline as the stock price rose. That probably contributed to strength in the shares.
At around $45, this stock isn't quite the basket case the others represent. And AIG's core insurance businesses still have some value.
But I still consider it among the walking dead. Any income it can generate pales in the foreseeable future in comparison to the $46 billion it owes the government. Plus the common stock has been diluted by a $41.6 billion preferred stock investment in the company by the U.S. Treasury.
AIG declined comment for this column.
"The prospects for getting out of debt are not good," says John Tabacco Jr. at locatestock.com, which helps short sellers find the stock they need to borrow go short. Recently, AIG came in at No. 1 on the top 10 list of stocks that shorts are hunting at locatestock.com.
That's not a good sign for this zombie, either. Stocks in high demand at locatestock.com have a tendency to do poorly.
At the time of publication, Michael Brush did not own shares of any company mentioned in this column.
