One of the reputed advantages of betting on a bull market rather than a bear is that a rising stock can theoretically go to infinity – and in the throes of the rally that finished its upward flight last October, many fully expected this outcome. On the other hand, a bear market can fall only to zero.
But back in September 2001, The Elliott Wave Financial Forecast introduced readers to the infinity-or-bust syndrome, which holds that in an unfolding bear market, it is theoretically possible for a formerly high flying stock to plunge, sometimes by “80%, 90% and 98%,” an infinite number of times – allowing the shorts to have a field day over and over again. At that time, the lesson was well illustrated by various technology stocks.
Now, we have a more recent example of this phenomenon in the fate of Fannie Mae and Freddie Mac shares, which plunged again in July 2008 as the U.S. Treasury came to their rescue. We showed them here on July 10, but to observe the full measure of the downside potential created by a truly nasty bear market, we have to travel back to 2002 when Fannie Mae was still riding high. Here’s what The Elliott Wave Financial Forecast said about the mortgage giants at that time:
[In] the coming downturn, Fannie Mae and Freddie Mac, “the government sponsored enterprises” that have pushed home ownership into the depths of the population, will be extremely vulnerable.… Fannie Mae and Freddie Mac will be getting the worst of the downturn from every angle. To stay on top of this debacle, keep an eye on Fannie Mae’s stock price.… – March 2002, The Elliott Wave Financial Forecast
Here’s a chart that shows the tremendous rise in Fannie Mae's stock that preceded this statement:
The "Impossible" is Happening, writes Bob Prechter in his just-published
Elliott Wave Theorist. He goes on to elaborate under these headings: The Fed's "Uncle" Point is in View; The Last Bastion Against Deflation: The Federal Government; and a Q&A about Righting Some Misconceptions About the Latest Bailout. Get more information about this
Theorist and
how to subscribe here.
Most of Fannie’s gains over the course of the 1990s, however, were given back last year as the great housing bust set in. By December, when many economists were still suggesting that Fannie Mae and Freddie Mac should be used to keep the “flow of reasonably priced loans to creditworthy home purchasers,” we recognized the significance of the 70% plunge in Fannie with this statement: “[S]uch measures are a pipe dream.” Here’s the chart we showed alongside that statement in the December issue:
And here’s the latest version of this chart, which shows Fannie falling another 94% after it was already down 87% on July 10! So, the once mighty mortgage giant illustrates the theoretically unlimited potential of a downside waterfall in a big bear market.
To get another picture of this effect, Bob Prechter offered a different way to view Fannie’s share price in a recent Bloomberg TV appearance. He noted that Fannie is now so deeply depressed that we need to look at its price chart on log scale, which presents its price in percentage terms. Here’s the chart Bob showed on August 20, 2008:
And here’s what Bob told Bloomberg’s TV audience:
"People wonder why people are shorting [Fannie Mae] at $18; it’s already down from $89, isn’t that enough? And then it goes to $9, and they are still shorting it. Well, now it’s $4.50. And this chart shows why. If you look at the low way back in 1981, it was 40 cents. Somebody might look at this today and say it’s got 90% more to go even though it’s down 95%. That’s hard to conceive of, but that’s what happens in severe, severe bear markets. What this chart is telling us, which everybody now knows, it’s pretty obvious that these companies are in serious trouble."
Still, bearish investors are reaping the considerable benefits of the downside. Here’s the latest version of this same chart, created on September 12, 2008.
Fannie Mae's share price went down another 85% in less than a month! On July 10, we noted here that it’s not too late to take advantage of everything that these charts have to say about the overall stock market and economy. For our latest take on Fannie and Freddie and the federal effort to bring them back from the brink, check out this month’s issue of
The Elliott Wave Theorist. Believe it or not, many of the most exciting downside trips are still to come.
The "Impossible" is Happening, writes Bob Prechter in his just-published
Elliott Wave Theorist. He goes on to elaborate under these headings: The Fed's "Uncle" Point is in View; The Last Bastion Against Deflation: The Federal Government; and a Q&A about Righting Some Misconceptions About the Latest Bailout. Get more information about this
Theorist and
how to subscribe here.