FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[hardincap]

http://seekingalpha.com/article/4030454-fannie-mae-sold-preferred-common

 

@cherzeca seems like wishful thinking to me, but curious what you think. wishful thinking bc i doubt Ps will want to push their luck and risk getting on the bad side of trump

[doughishere]

Curios if anyone has given thought to the probability that prfd shareholders are offered a very attractive conversion to common under a settlement? I initially bought about 40% of my position in prfd's primarily as a hedge on the common. We all know the pro's and con's of the shares. I have planned to add another substantial position in common, but for the last couple of weeks, I keep coming back to the idea that prfd's may be offered a very attractive conversion ratio with some sort of incentive to remain invested. If this turned out to be the case, the prfd's could not only be a safer play, but could also yield a greater upside. Like to hear others feedback.

 

i think in a settlement there are incentives that favor each of the junior preferred and the common.  i think the pie can be large enough for both to do well.

 

i was looking for reason for slight selloff today, and noticed that watt is reported to have told fhfa employees that he plans to stay on for remainder of his term (2019).  what a joke.  there will 50 ways to tell watt to get lost.

 

I dont know about price movements any given day but theres belief in some of the DC circles that Mnuchin may be hard to get confirmed.

[Guest cherzeca]

http://seekingalpha.com/article/4030454-fannie-mae-sold-preferred-common

 

@cherzeca seems like wishful thinking to me, but curious what you think. wishful thinking bc i doubt Ps will want to push their luck and risk getting on the bad side of trump

 

i think mnuchin has in mind a negotiated settlement with plaintiffs that reverses the NWS, encourages the junior pref to exchange for common by saying no dividends until capital reaches X, and kicks off a rights offering for the common.  he said pretty fast, meaning he has a sense of what plaintiffs will agree to, and a sense as to what treasury's power under HERA is.  i dont see the thin reed of watt's backbone causing fhfa to stop any of this.

[Flynnstone5]

Curios if anyone has given thought to the probability that prfd shareholders are offered a very attractive conversion to common under a settlement? I initially bought about 40% of my position in prfd's primarily as a hedge on the common. We all know the pro's and con's of the shares. I have planned to add another substantial position in common, but for the last couple of weeks, I keep coming back to the idea that prfd's may be offered a very attractive conversion ratio with some sort of incentive to remain invested. If this turned out to be the case, the prfd's could not only be a safer play, but could also yield a greater upside. Like to hear others feedback.

 

i think in a settlement there are incentives that favor each of the junior preferred and the common.  i think the pie can be large enough for both to do well.

 

i was looking for reason for slight selloff today, and noticed that watt is reported to have told fhfa employees that he plans to stay on for remainder of his term (2019).  what a joke.  there will 50 ways to tell watt to get lost.

 

Agree. Or he stays and executes exactly what Trump/Mnuchin want him to do.

[Eye4Valu]

Didn't Michael Bright help implement the NWS? Of course that guy is putting forth pro NWS propaganda.

[investorG]

 

I dont know about price movements any given day but theres belief in some of the DC circles that Mnuchin may be hard to get confirmed.

 

this is a real risk and likely will cap the share prices for the next month. 

 

i believe it comes down to a) any new bombshells not currently known and b) how hard trump pushes behind the scenes for him.   

 

purely guessing here, but gary cohn is likely the backup option.

[investorG]

Curios if anyone has given thought to the probability that prfd shareholders are offered a very attractive conversion to common under a settlement? I initially bought about 40% of my position in prfd's primarily as a hedge on the common. We all know the pro's and con's of the shares. I have planned to add another substantial position in common, but for the last couple of weeks, I keep coming back to the idea that prfd's may be offered a very attractive conversion ratio with some sort of incentive to remain invested. If this turned out to be the case, the prfd's could not only be a safer play, but could also yield a greater upside. Like to hear others feedback.

 

yes it's possible that a conversion option is offered to boost common equity ratios and provide liquidity to preferred holders (especially those in the less liquid ones).  A 2:1 ratio would be reasonable since that's where they've traded this year and thus is easy to justify.

 

an alternative is to just turn back on all dividends right away.  while this might sound silly at first, one argument for this strategy is that it will get the stock price up and thus allow reduced dilution due to the circular nature of capital raises --- enabling the govt to maximize warrant value over the long term.

 

among a range of other good / bad options, of course.....

[Flynnstone5]

Curios if anyone has given thought to the probability that prfd shareholders are offered a very attractive conversion to common under a settlement? I initially bought about 40% of my position in prfd's primarily as a hedge on the common. We all know the pro's and con's of the shares. I have planned to add another substantial position in common, but for the last couple of weeks, I keep coming back to the idea that prfd's may be offered a very attractive conversion ratio with some sort of incentive to remain invested. If this turned out to be the case, the prfd's could not only be a safer play, but could also yield a greater upside. Like to hear others feedback.

 

i think in a settlement there are incentives that favor each of the junior preferred and the common.  i think the pie can be large enough for both to do well.

 

i was looking for reason for slight selloff today, and noticed that watt is reported to have told fhfa employees that he plans to stay on for remainder of his term (2019).  what a joke.  there will 50 ways to tell watt to get lost.

 

I dont know about price movements any given day but theres belief in some of the DC circles that Mnuchin may be hard to get confirmed.

 

From CNBC a couple days ago: http://www.cnbc.com/2016/12/12/2017-wake-up-call-how-hard-it-will-be-to-confirm-tillerson-and-mnuchin.html

 

The Trump team surely vetted Mnuchin knowing the attacks he would face. Hopefully his confirmation is early on with republicans united and my guess is push come to shove Tillerson is the one they really want to stop. Also filibuster is gone so that makes confirmations easier as well. Typically it is pretty rare to block a cabinet pick, but the dems of today will surely try anything and everything.

[Flynnstone5]

@cherzeca @merket @hardincap @steve_berk

 

I joined this board primarily after following you guys for the last year. Terrific insight, knowledge and analysis on FnF.

 

The length of time that has gone by without a decision in Perry just seems ridiculous at this point. I know this is purely a speculative question, but is it probable that they are waiting for the writ of mandamus decision to obtain docs that allow them to basically drop the hammer on the gov.? If not, would it really take this long to write a dissent? Appreciate hearing your thoughts.

 

perry is a tough and momentous case. If one judge wants to stall on producing a dissent nothing goes forward. This is what I think may be happening here. Only reinforced if that judge thinks the issue will go away through eventual settlement.

 

How long can a dissenting judge stall? Is there a certain time frame where the other judges will intervene and/or the judge is forced to issue?

[merkhet]

There's no set time frame for decisions. (Appeals or Mandamus)

[Flynnstone5]

There's no set time frame for decisions. (Appeals or Mandamus)

 

So Millet could potentially just stall indefinitely and P's would simply have no recourse and/or same with other court handling mandamus?

[merkhet]

There's no set time frame for decisions. (Appeals or Mandamus)

 

So Millet could potentially just stall indefinitely and P's would simply have no recourse and/or same with other court handling mandamus?

 

This is getting beyond my general knowledge, but I think that's theoretical mostly true. I suppose there are interlocutory appeals or something procedural that can be done once the wait gets egregious. In general, I think you just asssume judges will do their job...eventually.

 

But I could be wrong on this, so I'll defer to someone who has more knowledge than me on this matter. Like, someone who clerked federally or something. My focus is currently on whether the EC ends up voting for Trump on Monday.

[Guest cherzeca]

There's no set time frame for decisions. (Appeals or Mandamus)

 

So Millet could potentially just stall indefinitely and P's would simply have no recourse and/or same with other court handling mandamus?

 

This is getting beyond my general knowledge, but I think that's theoretical mostly true. I suppose there are interlocutory appeals or something procedural that can be done once the wait gets egregious. In general, I think you just asssume judges will do their job...eventually.

 

But I could be wrong on this, so I'll defer to someone who has more knowledge than me on this matter. Like, someone who clerked federally or something. My focus is currently on whether the EC ends up voting for Trump on Monday.

 

so steve_berk would know best but i am not aware of any rules whereby a federal appeals court panel is obligated to render a decision during any time frame

 

which is disconcerting for the recap because if i am being asked to invest (or even reinvest pursuant to a rights offering) in fnma, and HERA is still out there as a statute governing GSEs, then i sure as shit would be shy to invest unless i have a ruling from the perry appeals court that makes clear that lamberth's interpretation of HERA was wrong.

[Flynnstone5]

There's no set time frame for decisions. (Appeals or Mandamus)

 

So Millet could potentially just stall indefinitely and P's would simply have no recourse and/or same with other court handling mandamus?

 

This is getting beyond my general knowledge, but I think that's theoretical mostly true. I suppose there are interlocutory appeals or something procedural that can be done once the wait gets egregious. In general, I think you just asssume judges will do their job...eventually.

 

But I could be wrong on this, so I'll defer to someone who has more knowledge than me on this matter. Like, someone who clerked federally or something. My focus is currently on whether the EC ends up voting for Trump on Monday.

 

Appreciate your feedback. If you don't know, I'm not sure anyone does! I think there's virtually no chance that EC overturns Trump.

 

Question I asked a while ago that you might know the answer to: assuming mandamus is rejected and gov eventually is forced to turn over the 56 docs to P's council, can Sweeney decide to release those docs to the public?

[merkhet]

@cherzeca, I agree with that. I can see a few ways around it, such as spinning the companies off and leaving behind the Senior Preferred shares the way Millstein envisioned -- which might get NewCos out from under HERA/FHFA

 

@Flynnstone5, unclear, but I don't immediately see a reason why not -- so long as Ps make a filing to de-designate the documents.

[Eye4Valu]

I'm sure you all know as well as I do that they'll make a ruling eventually. I'm sure it's not that far off, even though it has taken much longer than anybody would have thought. I just hope it's the decision that we weight as the most likely, i.e. remand. Although I wouldn't complain if they reversed Lamberth's decision in its entirety. Could that be why Millet is taking so long in writing her dissent? Maybe it reads like War and Peace!

[Luke 532]

Mick Mulvaney picked for Budget Director.  Trump is assembling pretty much the most GSE-friendly staff that I could possibly imagine, short of picking Berkowitz and Ackman.

 

Articles on Mulvaney:

Housing Wire... http://www.housingwire.com/articles/37023-conservative-groups-join-growing-push-to-recapitalize-fannie-mae-freddie-mac

 

Carney at WSJ... http://blogs.wsj.com/moneybeat/2016/05/17/the-latest-fannie-and-freddie-reform-bill-offers-a-bonanza-for-hedge-funds/

[Luke 532]

Given the numerous recent developments, if anybody thinks there is more than a 10% chance that preferred shareholders (at roughly 30% of par value) lose money long-term, they're kidding themselves.

[hardincap]

luke, disagree. i dont think you can come up with any sort of precision w these probability estimates. bayes theorem tells us to focus on the base rate and the error rate (false pos), but how you do that with any sort of precision in a socio-political situation like this is beyond me. i think keynes had an argument that that you can only say whether the odds are greater than or less than 50%, but not much more than that.

 

we also need to build in a margin of safety that accounts for our long confirmation bias. easier said than done

[Luke 532]

luke, disagree. i dont think you can come up with any sort of precision w these probability estimates. bayes theorem tells us to focus on the base rate and the error rate (false pos), but how you do that with any sort of precision in a socio-political situation like this is beyond me. i think keynes had an argument that that you can only say whether the odds are greater than or less than 50%, but not much more than that.

 

we also need to build in a margin of safety that accounts for our long confirmation bias. easier said than done

 

It's not an exact science for sure.  Investing is more art with some science mixed in, so take my percentage with a grain of salt.  To put it in qualitative terms, I'm comfortable saying that there is a much greater chance that preferred shareholders make money long-term than the chance of them losing money.  Perhaps I'm wrong, but every way I've sliced and diced the risk/reward on this investment it comes up heavily in favor of investors.

 

I've always viewed Keynes as being a bit gun-shy and that shows in his letters.  I probably would be, too, if I had been wiped out twice (which I think he was in the 1920's if I remember correctly).

[hardincap]

you can say the same thing about buffett: being gun shy (or said differently, extremely picky) is sort of his genius

 

anyway, dont mean to go off topic. i am long f&f so im obviously comfortable with the odds as i perceive it, but i regularly try to talk my optimism down

[Luke 532]

you can say the same thing about buffett: being gun shy (or said differently, extremely picky) is sort of his genius

 

anyway, dont mean to go off topic. i am long f&f so im obviously comfortable with the odds as i perceive it, but i regularly try to talk my optimism down

 

I agree as I spend my days trying to kill the thesis of each of my investments. But at some point I have to call a spade a spade and I think we've reached that point with this investment.  With that said, one should always exert a certain level of caution in any situation.

[Guest cherzeca]

you can say the same thing about buffett: being gun shy (or said differently, extremely picky) is sort of his genius

 

anyway, dont mean to go off topic. i am long f&f so im obviously comfortable with the odds as i perceive it, but i regularly try to talk my optimism down

 

I agree as I spend my days trying to kill the thesis of each of my investments. But at some point I have to call a spade a spade and I think we've reached that point with this investment.  With that said, one should always exert a certain level of caution in any situation.

 

among all of the buffett wisdoms and witticisms, the one i like best is to invest like you have a punchcard, 20 stocks that you buy over 40 years.  at this point, fnma would be on my buffett punchcard

[Ballinvarosig Investors]

I have no skin in this game, because quite frankly I don't like investment decisions to hinge on personalities, politics, or an implicit government guarantee. However, in this instance I was an investor in FNMA/FMCC - I would absolutely sitting on my hands with this one. I think Trump has enough incentive from his campaign backer to make you whole.

[Guest cherzeca]

@luke

 

while mulvaney was one of only two members of house financial services to introduce a bill attacking NWS (capuano the other), i am not sure he can be much help to GSEs as dir of OMB.  is there some omb/gse relationship there such that he can influence the recap?

 

as for some who have questioned mnuchin's ability to get confirmed, i just dont see that.  i think dems will have their photo ops with a bunch of these nominations and all will go through.  no 60 vote requirements thanks to harry reid