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.)

In total, there are over 11,000 of these documents available in a case proceeding through the Federal Court of Claims (Fairholme Funds, Inc. et. al., v. The United States), showing that the government lied about its 2012 restructuring of its relationship with Fannie Mae (FNMA) and Freddie Mac (FMCC).

The Court of Claims case is separate from the one brought in Judge Royce Lambeth’s court where Judge Lambeth ruled against shareholders claiming they were wrongfully deprived of the companies’ profits by the 2012 deal that directed all profits to be paid to the government. That case is now being appealed while the Court of Claims case proceeds.

Stansberry’s rationale for why the government will lose is not based on any solid data, but on the fact that these cases will be tried in the court of public opinion, and that, in the best of all possible worlds, “justice” will triumph.

“While they defy common sense, some of the government’s defense arguments are legally sound,” he admits. “But these cases will largely be resolved in a public relations forum, not in a strictly legal forum. The government may try to frame this as billionaire hedge-fund managers versus taxpayers…but justice and common sense will ultimately prevail.”

Did you catch that?

Against your giant government with sound defense arguments and infinite resources, we raise treacly sentiment.

“Justice” and “common sense” aside, the most compelling defense argument the government has is that it had a right to take the profits in the first place. It was not “stealing” from investors; it was using its own property.

The government (i.e. the American people) are entitled to the profits rather than investors who were nowhere to be found when Fannie and Freddie needed a bail out in 2008. The fact that the government lied about what it did does not change the fact that it had the right to take those profits, but the dishonesty highlights the ongoing crisis of leadership in this country and the inexcusable complacency of the citizenry.

Of course, the government’s plan to sweep all of these companies’ profits was foolish. Their period of profitability has come to an end and Fannie and Freddie find themselves with no capital, an intolerable situation. If (when) the U.S. housing market weakens again, the government will be back writing checks. (At some point, you would think our political leaders would be embarrassed by their actions but apparently they are immune to such feelings. When Donald Trump calls our leaders incompetent and stupid, he is right and he can point to the handling of Fannie and Freddie as Exhibit 1.)

The evidence showing that the government lied about Fannie’s and Freddie’s financial condition in 2012, portraying it as much worse than it was, certainly opens the door for a settlement. But it does not mean the government will lose its case. And Stansberry’s bet that it will do so is profoundly misguided.

Fannie and Freddie Have Been In My Short Column Since 2014

Stansberry sees Fannie and Freddie’s current prices, inexplicably, as “buy” signals.”

“Fannie and Freddie shares currently trade around $1.75. That’s less than one times earnings – a valuation typically reserved for companies in grave danger of bankruptcy. In other words, the market has priced these shares as if the plaintiffs have almost no chance of winning,” he says almost gleefully.

Could it be that Fannie and Freddie are priced near bankruptcy because they are, in fact, near bankruptcy?

I have been vocal in The Credit Strategist that these claims against the government will fail and I still believe that to be the case.In December 2014, I put Fannie and Freddie on my “short list” for 2015, as you see here. They have kept right on plummeting since then – about a 15% decline for Freddie and a 17% drop for Fannie.

I still recommend that you stay well away from Fannie and Freddie, because they are going nowhere but down.

I respect a good contrarian thinker, but right now, Stansberry is just being unrealistic.