Fannie Mae is a “Government-Sponsored Enterprise,” but even so, it is a private corporation whose shares are widely owned, principally by financial institutions. In recent months, the value of those shares has plummeted from a high of $70.57 in August 2007 to a low of $6.68 on July 11, 2008. The final descent began on March 24 and accelerated rapidly in July as investor confidence unraveled. The progress of the fall was marked at the beginning and along the way by bearish Candlestick patterns which foretold declining prices to follow.

The patterns which have come to the fore over the past few days could lead to the conclusion that a rebound is due. What might stoke such a rebound?

The decline has raised questions in the minds of some observers about the very solvency of the company. Suggestions have been made that it has little choice now but to seek additional funds in order to shore up its capital base. This leads to the questions – who will buy, and who would be permitted to buy – or, rather, prohibited from buying?

As the value of the dollar has declined in recent times, offshore funding has played a large part in new investments in the United States. Chrysler can no longer be called an “American” company. Some of the money-center banks have felt that they had no choice but to look overseas to “sovereign wealth funds” to buy large blocks of their stock. Overseas interest in “trophy” American real estate is rising again, as is seen by the announcement that the Chrysler Building will be sold to one such fund. Even a thoroughbred American iconic company, Anheuser-Busch, may be sold to a foreign brewing combine. Some of these sales are quite distressing to see.

If Fannie Mae must replenish its capital base by selling additional stock, who will buy? Might it be the financial institutions which have large blocks of its shares and which have been terribly hurt by the falloff in the value of those shares? Do those institutions, themselves, have the wherewithal to do the funding – after many of them have themselves been badly damaged and have had to seek new capital? Apart from that, who will be permitted to buy, or prohibited from buying? Is it even conceivable that effective control of Fannie Mae (together with Freddie Mac), which, together, are dominant in the USA mortgage market, would be allowed to pass to foreign hands?

It does not seem possible. Rather, it seems more likely that the Federal Reserve would create dollars out of thin air, make such capital investment as is deemed necessary to keep them afloat – while taking new shares in exchange, and that effective control of the companies would pass to the Federal government.

The Candlestick patterns in Fannie Mae shares are calling for an upside reversal. Perhaps the only way that its share prices can fulfill that forecast is for Government to take over the company; because allowing it to simply go out of business has severe implications for the ability of the American economy to continue in its present form.

William Kurtz
Candlewave