Investors looking for a buy-and-hold stock should run from Fannie Mae (OTC:OTCQB:FNMA). The number of wild cards besetting the future value of the common shares are too many, with more dubious risks than potentially positive ones undermining sustained profitability and shareholder value on a long-term basis.
However, as far as traders are concerned, Fannie has good volume, volatility and plenty of intrigue to keep it high on the list of tradable stocks.
On the buy-side, the swing trade for Fannie may be found at the 200-day exponential moving average of $1.25, while heavy technical selling may come in as the price approaches $5.50-the intraday spike high achieved in May.
At close to the $2.50 level per share, the stock looks 'heavy', as the Slow STO remains elevated.
Overarching Reasons Not to Go Long FNMA
First, Fannie's outlook for continued profitability is quite dubious. And, secondly, if Fannie were to benefit from a continuation of the artificial (yet, still weak) recovery of the US housing market and liquidity-driven US economy, the US Treasury and taxpayers will most likely be the only beneficiaries.
If Fannie became marginally profitable, common shareholders won't fare so well, and will most likely become mere cannon fodder for US Treasury's desperation to report progress on the US budget deficit. And if the Fed continues on its insidious path of surreptitious capital controls, investors can bet Treasury won't be too considerate to shareholders of this floundering Government Sponsored Enterprise (GSE).
As a GSE under the conservatorship of the Federal Housing Finance Agency (FHFA), Fannie is subject to the whims of the primary stockholders of the GSE's 10-percent preferred dividend shares: the Treasury.
For approximately three years, Fannie continued to hemorrhage from the collapse of the US housing market, precipitated by the bankruptcy of Lehman Brothers of 2008.
However, just when Fannie began to throw off some meaningful cash due to the US housing 'recovery' of 2012, the original Preferred Stock Purchase Agreement (PSPA) between the FHFA and Treasury of Feb. 2012 was revised in Aug. 2012 (referred to as the Full-Income Sweep Agreement) to include an increase dividend paid to Treasury in an amount of, literally, "every dollar of profit," up from the original agreement of a 10-percent dividend rate paid to Treasury.
"The agreements will replace the 10 percent dividend payments made to Treasury on its preferred stock investments in Fannie Mae and Freddie Mac with a quarterly sweep of every dollar of profit that each firm earns going forward," according to a Treasury press release of Aug. 17, 2012. (emphasis added)
Under the Full-Income Sweep Agreement, the only beneficiary since Fannie's 2008/9 bankruptcy has been Treasury. No investor of Fannie's common shares (or junior preferred shares) has received one dime from the GSE's recent profitable streak, but Treasury received approximately $60 billion in Q2 (ending Jun. 30).
Carefully note the language found in a piece of the guidance section of Fannie's latest quarterly statement. "We are focused on paying Treasury for taxpayers' investment in Fannie Mae, which can be accomplished by supporting the housing recovery, helping struggling homeowners and laying the foundation for a better housing finance system going forward," according to Fannie's 10-Q of Aug. 8, 2013.
"Taxpayers" are Fannie's primary concern (of course), with homeowners coming in second as management's apparent 'constituency'. There is no mention of "common shares," "stockholders," "shareholders" or "investors" anywhere in the latest abbreviated 10-Q.
Shareholders should get the hint.
Higher Rates Will Kill FNMA's Chances of Survival
As interest rates continue to rise from the record-low of 1.39 percent on the 10-year Treasury, set in July 2012, an already tepid housing market will again dry up, putting Fannie back into enormous losses once again.
To illustrate the tenuous situation of Fannie stockholders, the graph, below, courtesy of Mortgage Daily News, shows that even when rates reached unprecedentedly low levels in the Dec. 2012 to Jan. 2013 time frame, home buying barely budged from its bottom-bouncing historically low levels. What would happen to Fannie's earnings if rates climbed further from today's rates?
It's not a reasonable assumption to conclude Fannie's stock has any more upside potential other than speculators driving the stock higher in anticipation of favorable judgments from the court regarding the LIBOR scandal or lawsuits filed by junior preferred shareholders as recourse to nullify Treasury's Full-Income Sweep Agreement of Aug. 2012.
With a desperate Treasury scrounging for every dollar and a political climate that focuses primarily on the return of taxpayer funds, investors of common shares of Fannie take on a very high gamble of making any return on capital.
Backroom pressure on the court to side with Treasury regarding lawsuits will be quite high and could be threatening as Washington becomes more and more desperate to appease foreign creditors.
However, higher rates remain the largest threat to shareholders. The most recent consumer spending data, sentiment and further declines in real household incomes are a dangerous recipe to the housing market.
With all the 'favorable' news out, FNMA may have reached its blow-off top of $5.50 in May, and the rebound from $1 could be attributed to the Fed's decision not to taper its open-market purchases of US Treasuries and MBSs. But further Fed purchases may now become counterproductive on the interest rate front, as creditors fear further devaluation of the US dollar.