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FANNIE MAE WAVEFORM PREDICTED THRU 2007
By: Dr
Stephen A Rinehart
Date: March
2003
Background: There has been a lot of recent speculation about a possible real estate bubble as well as the dramatic rise of re-fi mortages in past two years and high demand in new mortages. The US mortage finance market is a complex and evolving industry that maybe headed for rough times beyond 2004. Currently, this market has over $4.5 trillion in outstanding loans, significant growth from early 1991 when outstanding loans totaled $2.74 trillion. Two changes of note to HUD are the legislatively mandated increase in GNMA fees which goes into effect in 2004, and the entrance of new participants, the Federal Home Loan Banks, in the resale market for mortages or the secondary market. In this paper we took a look to see of there were any significant “trading cycles” in the real-time weekly closing prices for Fannie Mae from 1977.
Results: The largest cycle or wave found in the Fannie Mae weekly closing prices was a 133-week cycle which was 5X larger than the next largest wave. The amplitude of this wave is about plus or minus $12 which still represents a variation of less than 20% of the stock price. However, the disturbing characteristic of this large wave is that it is growing significantly over the past two cycles. For over 25 years this wave’s amplitude was almost constant and less than 5% of the stock price. Fannie Mae began a major new trend in May 1993 with the overall increase in M3 in the 1990s. This cycle will again peak in 2005 and 2007. When it peaked in August 2001, the stock reached a peak within six months of this top and began a longterm downtrend. This major cycle has just bottomed in Jan 2003 and Fannie Mae should begin a major uptrend within the next six months. Chart 01 shows this cycle since 1987 crash. Other significant weekly cycles were also found at 9, 20, 25, 36, 50, 69 and 97 weeks in this dataset.
The cycles were added together and projected thru 2007 to see the effect of the large cycle. The prediction is conservative in that it did not assume the largest wave would continue to grow in amplitude. Chart 02 shows the predicted waveform thru 2008 for Fannie Mae.
Summary: It appears that Fannie Mae will make two broad tops in Oct 2003 and July 2004 followed by a major downtrend thru Aug 2005. Another rally in the stock is possible from late summer 2005 thru mid- 2006. Extreme caution should be exercised in remaining in this stock after mid-2005 and after early (Feb?) 2007 when a sharp drop could occur. There are two candidate periods to watch in regards to an overall weakness in the mortgage market. These are July 2004 thru Sept 2005 and Feb 2007 thru Nov 2008. Many other World Indices show a similar major downtrend from Feb 2007 thru 2008 with a Chinese rally in summer 2008 (Olympics!). Fannie Mae should continue to muddle through until mid-2006 but I would avoid this stock in the second half of 2004.