The Chart du Jour

Fannie Mae: Three Month Coil

May 12, 2001

By, Barclay T. Leib

Chart produced using Advanced GET End-of-Day

Despite the perceived wisdom that lower interest rates are bullish for mortgage finance stocks, Fannie Mae has been unable to muster a substantive rally over the past three months. There are an increasing number of "For Sale" signs appearing across America, but at the still lofty prices offered, many houses -- particularly in California -- are not moving.

At some point in this cycle we expect all those "assessed valuations" underlying America's mortgage commitments to wreak a bit of havoc in the mortgage lending market. Should a house that was worth $650,000 three years ago, and assessed via comparable last sales as being worth $1,200,000 today, really supposed to currently be eligible for a $1,000,000 mortgage? That's the functional case on both the East and West coasts today. Even though this example involves so-called "jumbo loans," there's a problem brewing here.

Hedge fund managers we have recently met all categorically state that "If there was an easy way to get short California real estate," that this would "likely be the best trade for 2001-2002."

We don't have particular expertise here, but we do see the 3-month "coil" in Fannie Mae as a potential warning sign. If prices were to start breaking down from this coil, it would likely be a sign that real estate investments across the country are going to start diminishing in value. Where the "chicken" and the "egg" are in the Fannie Mae case, are not all that important.

Subscribers are invited to click here for a closer look at the FNMA daily chart and immediate potential downside targets if this "coil" resolves itself to the downside.

Non-subscribers are invited to sign up for a quarterly subscription below. Sand Spring's latest subscriber-only article "Expert Short Picks," as well as our prior February 20th article "Measuring Financial Time: The Magic of Pi," and current "FNMA Daily View" will both be accessible on the final page of the order process. A user-id and password for web access to all past and future articles will then follow by e-mail.

It may also be of interest to some that because so much time (and thus timeliness) has now transpired, we recently released three of our 2000 subscriber-only articles. These now appear under the public Earlier Articles section of the website. Perusing through them may give one a sense of the added premium level of analysis we provide to subscribers.

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