Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Sad Conclusion

By

PrintPRINT


The following reflects our firm's current view of Fannie Mae (FNM:NASD). It is offered as an assimilation of our thought process and not intended as advice.

Fundamental: The company has always had a poor business model. It is one that is based on leveraging very small spreads. The company is extremely vulnerable to small increases in their expenses. The primary expense (risk) is higher volatility in the bond market where they must constantly re-hedge their duration risk. These risks are now being slowly discounted by the markets. Bond holders are realizing that there should be a higher risk premium associated with their corporate debt. As the costs to the company rise, the business model becomes almost untenable. Their regulator correctly is requiring the company to maintain a higher capital base. This should preclude the company from making money in the future. What is the equity really worth then? In our estimation, not much.

Technical: This company is perhaps the most important company to an over-indebted economy and is probably most responsible for the recovery: home re-financings have been the primary fuel of liquidity. For that reason, it will not be allowed to fail, at least in the short term. Add to that the fact that three large mutual funds own nearly 25% of the company (two of the three have bought 15 million shares or 1.5% of the float more over the last three months), and you get a confluence of events.

The power of these three mutual funds will probably preclude the company from issuing equity to raise capital. They are more likely to raise capital by just slowing the growth of their balance sheet. As the three large mutual funds "support" the stock by buying more (they own too much to sell it anyway), the stock will grind higher given no new supply.

Of course this is the worst thing for the company in the long run and should provide a "slow death" scenario for the stock. But these large mutual funds "hope" to be bailed out over time. Watch to see if they turn net sellers once the stock climbs over $70.

This, as an aside, shows why non-linear models built around "phi" are more relevant than fundamental analysis. Even though there are serious fundamental deteriorations at work, the stock is climbing higher as "real" forces in the markets work the stock price. Scotty Reamer's work reflects the above analysis.

Of course anything could happen. We have adjusted our position to reflect some of the above, but are still reticent to ignore the downside risk. We have been long longer term options, and remain buyers of them, but have sold a fair amount of short term options at very high prices. If the stock grinds higher we will just break-even, having made some money in the past month. If the stock collapses we will not make as much as we would have previously.


< Previous
  • 1
Next >
position in fnm

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE