Freddie Mac and Fannie Mae

The Federal National Mortgage Association (FNMA) commonly known as Fannie Mae was founded in 1938 during the Great Depression to make mortgages more available to low-income families and at the same time to facilitate liquidity within the mortgage market. The mechanism is rather simple, Fannie Mae purchases (takeover) home loans or other mortgage loans from banks and financial institutions so that banks and financial institutions have fresh money to provide more loans to house buyers. Fannie Mae then pools and repackages the homeloans and other mortgage loans into mortgage-backed securities (MBS) and sell these MBS to local and oversea investors ( oversea banks, investment funds, insurance companies, etc). Fannie Mae then uses the fresh money to buy more homeloans and mortgages form the banks and financial institutions and the whole cycle is repeated.

In 1970 US Government created Federal Home Loan Mortgage Corporation (FHLMC) commonly known as Freddie Mac to purchase home loans and mortgages on Secondary Market and the same mechanism is repeated, the loans and mortgages are pooled and repackaged and again sell to local and oversea investors as MBS. Each cycle will pump more money into the housing market.

Fennie Mae and Freddie Mac by repeating the process mentioned above together they own and securitize 70% of the total residential mortgage loans in the US. Thus the general perception is that they are 'too large to fail' and, therefore, will be bailed out by the Government should they get into any financial trouble. True enough, the effects on the subprime mortgage crisis have led the government to support the soundness of the obligations and guarantees on securities issued by Fannie and Freddie to obtain funds. As of 2008 the two of them owned or guaranteed about half of the US's $12 trillion mortgage market.

The Housing and Economic Recovery Act of 2008 passed by Congress in July 2008 gave the US Treasury the authority to advance funds for the purpose of stabilizing Fannie and Freddie. The Act raised the Treasury's debt ceiling by US$800 billion to a total of US$10.7 trillion in anticipation of the need for Treasury to have the flexibility to support Fannie and Freddie. From September 2008 to December 2008, the Government has spent $450 billion to take over the mortgage guarantees of Fannie and Freddie. In March 2009, the Government has proposed to spend another $750 billion on them. Last week the Obama administration's Mortgage Rescue Plan was finally underway to help homeowners avoid foreclosure. It is very obvious that the US Government will not allow Fannie Mae and Freddie Mac to fail.

On technical chart reading for Fannie Mae, I have to use both linear and semi-log charts to get a proper wave count (double clicks on chart to enlarge ). The linear chart above shows waves A-B and sub-wave 1-2 of wave C. The sub-wave 3-4-5 of wave C are as indicated by the following semi-log chart.
The Major corrective wave A-B-C was completed in November 2008. I am assuming the November 2008 low of US$0.30 is the bottom. Refer to the 6-Month short-term chart below, Fannie has completed wave 1-2 abd sub-wave 1 of wave 3 as shown.
Currently Fannie is at sub-wave c of sub-wave 2 of wave 3. This wave 2/3 is likely to end around US$0.60. wave 3/3 can go to a height of US$2.30

Freddie long-term wave counts is slightly different from Fennie Mae. Freddie wave c consists of 9 sub-waves instead of 5 sub-waves. Its wave 9 low of US$0.35 is likely to be the bottom. Since the March bottom, Freddie has completed wave 1 and sub-wave a-b of wave 2. Similarly wave 2 is likelt to end around US$0.60. A good entry point to ride on wave 3 that can go as high as US$2.50 (1.618x magnitude of wave 1)

It is a Doji

Dow formed a 'Doji' on Friday. Doji in candlestick indicates indecision - market ends where it began. Doji can be found at the turning points at market tops or market bottoms but its presence does not necessary mean that the market is turning, confirmation candlesticks are needed over the next two trading sessions. A breakout following a Doji is going to be powerful but a red candlestick after a Doji will signal a turning point. It can go either way but technical indicators at high levels currently are in favour of a turning point.

Is Dow Running Away ?

Dow instead of confirming whether the market is heading for option 1 or option 2 as mentioned in my previous post, its two latest positive candlesticks bring back my previous 'Diagonal wave 5' option that I have just written off not so many days ago. It really illustrated the saying that anything can happen. But stock market has to be that way otherwise the market cannot exist.


Option 1 as shown above, still hold. Dow at this stage is not running away yet, however if its next two candlesticks continue to run up with another 200 poins, then it is running away. In view of the overbought situation, I would say "It is possible but unlikely". Have to wait for another 1 or 2 days to confirm.

Option 2 is as shown above, Dow is very well behaved until Thurseday closing, it has formed the b sub-wave. If in the next few days Dow moves lower in an orderly manner (not plunge down), it is in sub-wave c.

The chart shown above is very pessimistic, it is option 3 (Diagonal wave 5). The last two candlesticks of Dow have given the chart a new twist. As shown above, it formed a i-ii-iii-iv-v diagonal wave 3. From the March low of 6547, Dow has formed 3 waves with a weak diagonal third wave. 3 waves formation is always a corrective wave. If next two days Dow moves down sharply, it is very very likely that it is heading for the March low of 6547.

Market Highly Overbought

All the indicators are telling only one thing, the market is highly overbought. In a normal and well behaved market, the indicator tops and bottoms correlate nicely with the KLCI turning points. However the problem with indicators at extream market condition is that the indicators can remain at the tops and bottoms for quite a while under over-bought or over-sold conditions whereas the indices and stock prices can continue to move up by quite a substantial amount. Normally the longer the indicators remained at the tops or at the bottoms, the stronger is the following up-ward or down-ward movement. Similarly the longer the current KL market remains at over-bought position the more drastic the correction will be when it comes. This condition is always a problem to traders that moved in and out of the market frequently, but to the medium-term and long-term investors that hold the stocks until the final phase of Wave B, this condition does not require any action.

No Changes to the two possibilities for Dow

What we have established so far is as summarized in the above chart. Dow has completed its major wave A and is currently in major rebound wave B, this is a major bear market rebound, in theory it can last until end of 2009. The detailed wave count is as shown in my older posts. The Monday and Tuesday candlesticks do not alter the wave counts that were mentioned in my last Friday post. My two possibilities for Dow remain the same as shown below. Hopefully the next candlestick can confirm one of the following options


If one were to refer to other indicators such as RSI, MACD, stochastics, etc from Yahoo or Google Finance, Dow is due for correction/consolidation. The technical indicators are pointing more toward Option 2.

If Dow goes for Option 2, Fannie Mae and Freddie Mac are likely to complete their sub-wave ii with an a-b-c corrective wave. So far the a and b mini waves were completed. The mini c wave is likely to move their respective prices to about 60 cents level. The subsequent wave for both of them will be sub-wave iii of wave 3. As mentioned before, the iii of 3 wave is usually strong, dynamic and is accompanied by high volume. This wave 3 is likely to bring both their prices from 60 cents to a minimum of US$2.20 (1.618x wave i magnitude)

Freddie Mac and Fannie Mae are the 'giants' of martgage business in the USA. Between two of them the total martgage gaurantees is an incredible US$5 trillion. These mortgages were financed mainly by issuing bonds that were sold to financil organization all over the world. Due to the free-fall in house prices and the subprime mortgage crisis their stock prices have fallen from above US$60 to about 30 cents. Following the injection of US$1.2 trillion by the Federal Reserve to take over the toxic mortgage gaurantees, their stock prices have recovered.

Refer to the Federal Reserve's assets explosion as mentioned in me older post, we are about to enter a new era of weakening US dollars, high inflation and high interest rate. The initial phase of inflation and raising interest rate is usually good for real estate and related business, it will benefit Freddie Mac and Fannie Mae.

Trader and Investor

Trader will buy or sell whenever he feels that there is an opportunity irrespective of whether it is market top or market bottom, uptrend or downtrend. He usually follows the short-term trend and the 'herd' movement. An alert trader that can follow the market closely can be very successful in a 'well behaved' market. Trader goes for active stocks that are in motion. he looks at short-term chart movement as long-term has no meaning to him. Stocks such as IOI, IJM and Gamuda are the preferred stocks for trader. These stocks have moved, active and are still moving as shown in the following short-term chart.



Investors usually looking for long-term or at least medium-term return. They look for value buy, good earning, good NTA and good dividend yield, they like to 'average down' for their selected 'value stocks'. They avoid the 'herd' and at time be a 'contrarian', buy when others are selling (this action sometimes can be an expensive adventure). They usually look at long-term chart as shown below to make sure that their entry point is low. Stocks which are hovering at the long-term bottoms are their choice. Stocks such as HDBS, TA, OSK, Bandar Raya or any other stocks with similar pattern are usually in their shopping list.

Inch Kenneth after touching a low of 16 cents, it closed last Friday at 22 cents. In its Dec 2008 quaterly report, it last quarter earning is -0.39 cents. Net asset per share is Rm 1.26. It was reported that 'the company is in final dicussions with a few parties to dispose of its 600 acres of land near Bangi'. This alone will give the company a cash backing per share of about 30 cents (using Rm 200,000.00 per acre). The company has another piece of land 350 acre in Kajang with an estimated gross development value of Rm 1.2 billion to Rm 1.5 billion. Bank borrowings and other payables totalled Rm27 million against cash in hand and other receivables of Rm 14 million. At 22 cents Inch Kenneth should be in the list of the investor.

Can Rule Out Diagonal Wave 5

Thursday (9 April) Wall Street rally has ruled out the second possibility of 'Diagonal wave 5' mentioned in my previous post. The 6547 level in March with high possibility marked the end of 17 months of downtrend. Possibility 1 alternative B that was mentioned in my previous becomes the most likely scenario. In fact the S&P 500 below has shown a clear break-out even though the Dow has yet to show a clear break away. However, another 100 to 200 points up by Dow after the Good Friday holiday will be sufficient to confirm the wave 3 uptrend.
Last 10 sessions of Dow are forming a corrective a-b-c wave 2 (Possibility 1 alternative B in my previous post). The 3.14% surge yesterday marks the begining of wave 3 that can bring Dow to 10,000 level.

Under this scenario for Dow, KL composite can be interpreted as having a very bullish i-ii and 1-dot 2-dots of sub-wave 3 formation. Currently it is forming the 3-dots of sub-wave iii. Next week KLCI will move higher to finish the 3-dots follows by 4-dots one or two days pull back and another surge to form 5-dots to complete the iii.
However, if Dow fails to move higher after the holiday and instead of breaking the ceiling, the Dow starts to move lower, it is possible that Dow is taking a short consolidation as shown below before the next surge. So there is nothing to worry, after a few days of consolidation to form wave (2) as shown, Dow will proceed to form the wave 3 that can put on another 2,500 points
To move in-line with Dow under this scenario, KL Composite is likely to take the form as per chart shown below, a leading wedge formation of i-ii-iii-iv-v which by itself is a bullish formation. Similarly, there is nothing to worry, KLCI can move up by another 160 points after the completion of wave (2) which can take the form of a zig-zag a-b-c (2) or a straight down (2).