Are We Witnessing a Four-Pronged Short Squeeze of Epic Proportions? (AIG, FNM, FRE, C)

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AIG Hot Sheet

By most fundamental measures, AIG (NYSE: AIG), Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE) and Citigroup (NYSE: C) are overvalued. These companies are mostly owned by the federal government and are strapped with billions in debt, tons of toxic loans and questionably business prospects. Why then do their stocks continue to climb? One explanation is that what is taking place is the 'mother of the mother of all short squeezes'.

Back in 2008, the 'mother of all short squeezes' occurred in Volkswagen shares after Porsche effectively cornered the market by taking control of 74.1% of VW stock. The news sent shorts running and promoted a surge of buying in VW stock. The short squeeze in Volkswagen was so massive that it pushed Volkswagen's valuation as high as $370 billion, above the market cap of Exxon Mobil (NYSE: XOM).

Fundamentals - HA!

Could what we're witnessing now be a four-pronged short squeeze of death? But who is coordinating this massive squeeze? Not to put conspiracy theories out there, but the U.S. government is the largest shareholder of all these companies. Hmmm.

Today, AIG traded a bit more like a rational stock, falling 10% after Barron's put out a negative article on the stock. FNM and FRE both saw 5% moves lower after FBR Capital said the common shares have no fundamental value. Citi was down 4%. But today's moves pale in comparison to the enormous run-ups in the stocks over the past few months. Citigroup is up 310% in the last six months, AIG is up 430% in that time, FNM is up 408% in that time and FRE is up 490% in that time.

So while StreetInsider.com, Barron's and others continue to pound the table that these stocks are significantly overvalued, there is a chance that their march higher can continue as the 'mother of the mother of all short squeezes' plays out.

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