Wednesday, August 18, 2010

FNMA Watch

Will the last trader holding Fannie Mae please turn out the lights?

The chart on Fannie (FNMA) is looking like a game of musical chairs, as traders scramble to get out in order to not be left standing.

FNMA $0.33

The price fell as much as 13.9% intraday. The volume is running around three times that of Monday.

The stampede was came after a housing finance reform conference on Tuesday heard a chorus of voices saying the present system -- risk to the government, profit to a couple of private companies -- needs to be changed. The chairman of House Financial Services Committee, Rep. Barney Frank, was one very powerful voice in support of change.


A couple of points.

At today's low the price of FNM was at levels last seen on July 20. The market gave up about a month's worth of gain. That's not too terribly unusual. The volume, while high compared to the last week or so, is well below the spikes seen in early and late July, when FNM made price moved that dwarfed today's action.

So, yeah. It's a news inspired sell off, but not the end of Fannie's World, not just yet.

Second, anyone who has been reading the news has known for months and months that change would happen. Chairman Frank has argued for change before. Everyone who's interested knows that the present system broke when housing prices collapsed and that it would be replaced by a new model.

So today's action falls short of a credible Doomsday scenario.

Moreover, this was a brainstorming session, not a policy decision. The final decision will be made by Congress, probably next year. Hint: There's an election in November. Double-hint: The Democrats by all accounts are likely to lose seats, and maybe even lose their majority in the House.

And there was nothing said that came close guaranteeing that FNM shareholders would be wiped out by reform. Nor were their guarantees that they won't be. No one knows.

However, with Republican influence strengthened, I think it will be hard for the administration to get a bill passed that wipes out shareholders. Republicans love shareholders, much more than they do Hispanics, gay people and Moslems.

Reversal Levels
  • $0.42, +27.3% (July-Aug. high)
  • $0.33 <== You are here.
  • $0.31, -6.1% (today's low)
  • $0.19, -42.4% (July-Aug. low)
Bottom line: I like FNMA only as the riskiest of risky plays. It carries huge policy risks. A decision by government, and everything is lost. Or maybe won. But it's the sort of risk that is not amenable to rational analysis.

There's a story, retold (or made up?) by the science fiction writer Jerry Pournelle. The King's men arrest his court musician for flat note on his oboe and flings him into the dungeons. The poor musician, brought before the King, says that if the King will only release him, he will within a year teach the royal to sing. "If I fail", he says, "then take my head." The King agrees.

A friend of the musician (the third cellist) berated him as a fool. Well, maybe, said the musician, with a wan smile. "But who knows? A lot can happen in a year. I might die. The horse might die. And who knows, the horse might learn to sing."

I own a little piece of FNMA, and I'll hang on to it for awhile. The loss won't break the bank. And who knows, this dog may learn to sing.  

Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment. No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
  • psar - Parabolic Stop and Reverse
  • adx - Average Directional Index
  • pps - Person's Proprietary Signal
  • ma20 - 20-day moving average
  • macd - Moving Average Convergence-Divergence
  • sto - Fast Stochastic
About the glance: The colors indicate the state of each signal.
  • trend: Determined by the 5-day moving average, green for up, red for down, yellow for sideways
  • adx: orange for above 30-up, blue for 20-down, purple for in the middle. Red is most prone to whipsaws
  • psar, pps, macd: green for bull mode, red for bear
  • sto: green for overbought, red for oversold, yellow for the neutral zone.
  • sto zone: green for bull phase, red for bear phase.

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