Fannie Mae has been under conservatorship ever since the 2008 implosion of the housing market left the US government no choice but to rescue it. That arrangement was never meant to be permanent, however, and the new administration’s libertarian leanings make Fannie Mae probably the biggest Trump trade out there. Many investors, most notably Bill Ackman, bet that the company is going to exit conservatorship during Trump’s second term. Under this scenario, its huge profits – $17B in 2024 alone – will stop being paid out to the US government and will become available to private shareholders again. The company’s market cap of $35B and the resulting P/E ratio of just ~2 can make any investor salivate. That’s the reason why the common stock is up 350% since the election on November 5th.
There are a few important caveats, though, but first let’s examine the recent surge through Elliott Wave lens and see if chasing it is worth the risk.
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Fannie Mae’s daily chart reveals an almost complete five-wave impulse pattern starting in January, 2023. We’ve marked it (1)-(2)-(3)-(4)-(5), where the five sub-waves of wave (3) are also visible. Wave (5) has yet to reach a new high, so the stock price can approach the $9 mark in the not-so-distant future for a ~50% gain from current levels.
Once there, however, the impulse pattern would be complete and it would be time for a notable three-wave correction, before the uptrend can resume. Perhaps that would coincide with investors starting to think more about the realities of Fannie Mae’s return to being a private company.
One problem could be the fact that in its current form the company is significantly undercapitalized with an assets-to-equity ratio of 46. So any conservatorship exit would require an immense recapitalization most likely via a combination of new common stock issuance and preferred stock conversion. The exact amount of dilution has yet to be decided, but it is likely to be significant to common shareholders. That’s why some investors focus on the preferred shares instead, given their seniority over the common. But the Elliott Wave picture is not much different there, either.
Here too, we see a five-wave impulse with a missing fifth wave. This tells us that even the preferred stock, which is significantly more protected from dilution, is likely to experience a notable corrective decline soon. Maybe because even if the Trump administration really does decide to reprivatize Fannie Mae, the process is going to take at least until 2027 before it is done.
In closing, Fannie Mae holds enormous potential, but comes with a lot of uncertainty, many unknowns and moving parts. Investors must make sure to read about, follow and know things in detail, before deciding to put money on the line. Fortunately, if our Elliott Wave analysis is correct, there will be plenty of time to do so.
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