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How To Invest Long Term Without Losing Your Fannie … Mae
In the news bag this week, we learned that Fannie Mae, the largest provider of U.S. mortgages, reported a third straight quarterly loss. Not long after, Moody's Investors Service downgraded its bank financial strength rating on the Federal National Mortgage Corp. (aka Fannie Mae) by one notch to "B" from "B-plus," as reported by Reuters in its story,
"Fannie Mae Bank Rating Cut." The two other rating agencies, Standard & Poor's and Fitch Ratings, warned that they may cut Fannie Mae's preferred stock rating.
How times have changed. Seven years ago, Fannie Mae's stock was riding high. As the U.S. economy slipped into recession in late 2000 and early 2001, the financial press cited the resiliency of a few mortgage giants. American Banker in December 2000 noted that stocks like Fannie Mae were a “good place to be because they are safe havens.” Fannie’s profits zoomed higher to reach an all-time peak that same month. After net income jumped 69% in the fourth quarter of 2001, a Goldman Sachs analyst said, “Fannie Mae right now is a company riding a galloping stallion." Money magazine called Fannie Mae's CEO Franklin Raines the "most confident man in America." Countless analysts put its stock on their recommendation lists. With a gain of more than 1000% from a low of $6 in 1990, who could blame them?
But The Elliott Wave Financial Forecast offered a different take in April 2002. With the stock at $80 – within 10% of its December 2000 all-time high of $89.38 – The Elliott Wave Financial Forecast stated that Fannie Mae was “extremely vulnerable, ” adding that it would get the worst of an unfolding “downturn from every angle.” Based on the structure of its rise into its 2000 high, our analysts called for a "final burst to one more new high.… After that, it will be all downhill.”
Looking for useful information about financial markets?
You can read our up-to-date outlook for all the major financial markets, bonds, gold and silver, the U.S. dollar, General Electric and more in the latest issue of The Elliott Wave Financial Forecast.
When that final burst failed to appear, the August 2002 issue of The Elliott Wave Financial Forecast asserted that the top was in place: “In March, we were looking for one more new high, but Fannie’s break of 75 suggests that it has entered a long-term decline.”
Here’s a chart that shows how the Wave Principle helped us to prepare subscribers for the aftermath of Fannie Mae’s huge bull market.
In May 2002, Elliott Wave International’s founder, Bob Prechter, published an investment primer on the unfolding bear market, called Conquer the Crash, in which he noted that Fannie Mae and the Federal Home Loan Mortgage Corp. had extended $3 trillion worth of mortgage credit. “Major financial institutions actually invest in huge packages of these mortgages, an investment that they and their clients (which may include you) will surely regret,” he wrote. Regarding Raines' confidence, he added, "Certainly his stockholders, clients and mortgage-package investors had better share that feeling, because confidence is the only thing holding up this giant house of cards."
“Our bearish stance on Fannie is well known, and our view has not changed,” added our Short Term Update on September 5, 2003.
In July 2004, we made clear just how negative we were on the stock: “Fannie Mae may survive, but probably not without a complete round trip to $1 a share, which is where it was at the beginning of the bull market.”
Finally, in October 2004, as federal investigations and auditors were storming the enterprise, The Elliott Wave Financial Forecast noted, “Fannie will now be forced to scale back the lending and securitization effort that has pumped trillions into the economy over the course of the long bull market. [It] is a portrait of a bull market icon being overcome by bear market forces."
The “Damage to Date” chart below shows the result. The big move was a drop from more than $70 in August 2007 to less than $20 in March 2008.
The key thing to keep in mind is that this forecast didn’t happen overnight. Reaping the windfall benefits of a sharp decline in Fannie Mae’s shares took patience, tenacity and some follow-up analysis. First and foremost, it took a willingness to look for the opportunity that lies on the flip side of every rising market. As The Elliott Wave Financial Forecast revealed in its March 2008 Special Section, "The Long Un-Winding Road,” a long-term strategy must account for big moves in both directions. Fannie’s break to below $20 is a perfect example of how it can work on the downside – in a big- time way.
Looking for useful information about financial markets?
You can read our up-to-date outlook for all the major financial markets, bonds, gold and silver, the U.S. dollar, General Electric and more in the latest issue of The Elliott Wave Financial Forecast.