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

[no_free_lunch]

I don't know why.

 

I do know that the 2 should negatively correlate.  A lower FNMA price would put pressure on admin to give more fannie shares per preferred share in a conversion scenario.  A higher fannie price lowers the number of shares per preferred.  As a preferred holder I want FNMA to stay down.

[Flynnstone5]

last 10 days fnmas has outperformed fnma by about 20%.

 

anyone have a view why?

 

Just a guess that common is easier to manipulate by MM. It would be nice to get out of OTC land.

 

Side note: “We are going to be announcing something over the next two or three weeks that will be phenomenal in terms of tax,” President Trump says in meeting with airline CEOs.

[Luke 532]

last 10 days fnmas has outperformed fnma by about 20%.

 

anyone have a view why?

 

My view on why is mentioned in chapter 8 of The Intelligent Investor.

[investorG]

last 10 days fnmas has outperformed fnma by about 20%.

 

anyone have a view why?

 

most likely:

-- overly pessimistic (imo) dilution concerns from things like random street account reports, which holds back the common but not preferred

-- perception, perhaps accurate, that common needs mnuchin more than preferred, people want to see confirmation first

 

also potentially:

-- some news of a plan has leaked and it's more preferred positive

-- court ruling coming that helps preferred but not common

 

i have no material emotional preference to either, and have rotated frequently, but i would remind those only in love with the preferred that the combined (FNMA+FMCC) ~10th largest company in the US has a common equity float of less than $10bn and any likely dilution levels are circular based on the price at which the stock is sold.  I don't assume that any potential plan assumes to cram down all  of the needed equity right away.

 

moreover any potential 'overhaul' would be highly scrutinized given the President's ties to paulson and Mnuchin's to Berkowitz, suggesting to me that a 'fair' deal between preferred and common is a base case view in a positive scenario for justice.  the uproar over excessively favoring preferred at the expense of common (and likely the govt through potentially revised warrants) would be likely not worth it.

 

good luck everyone the next 50 hours!

[orthopa]

I also think that even tho there is more certainty regarding fate of FNF then ever there is still a lot of uncertainty regarding ultimate value for the common and preferred. The par value of the preferred gives some benchmark to at least argue against +/- any div that may ever come. 

[Desert_Rat]

Hi all. I'd like to say hello and also thank all the members of this board for keeping up the conversation over the years.

 

Preferred owner since Lamberth.

 

My 2 cents on recent topics:

 

1) My greatest fear, the only reason I don't go "all in", is the fact that Trump only has GOP support in both houses and too many of them will always want FnF to burn. I'm not confidant even Trump can push housing reform to our liking. He could introduce a bill that wipes clean all residential mortgages and the Dem's would still reject it.

 

2) I think the reason the preferreds are doing better than common shares is because people are reading about the gravy train and are wanting the safest passage possible.

 

[Guest cherzeca]

thanks for thoughts on recent pricing action.

 

i have no clue, but i suppose that IF one was going to hedge, you would go long pref and short common.  in the event of disappointing news, the downside delta would arguably favor that positioning.

 

EDIT:  one more guess.  at this point fnma is mostly a momentum trader stock at margin, so no news means no action.  as developments have occurred (devos making it through being a big relief for me as to what to expect re mnuchin vote), the institutional money will go to preferreds as arguably more safe.  these developments dont interest the momentum trader as they are a little ambiguous

[hardincap]

theres been very narrow trading range for the common the past few weeks. im not into TA much but that seems to suggest a whale is trying to get out or sell short.

[investorG]

theres been very narrow trading range for the common the past few weeks. im not into TA much but that seems to suggest a whale is trying to get out or sell short.

 

or sit on the ask to prevent undue attention from a share price rise drawing attention in a tricky nomination process

[Eye4Valu]

I have a feeling that in due time, we'll all figure out exactly what is going to happen here. Or am I just stating the obvious.

[orthopa]

Maybe Im just thick but being I hold mostly preferred I figure I would try to understand this. Outside of a purposefully attractive conversion rate to common and ability to hopefully participate in more upside over $25 a share why would a preferred shareholder convert?

[Flynnstone5]

Maybe Im just thick but being I hold mostly preferred I figure I would try to understand this. Outside of a purposefully attractive conversion rate to common and ability to hopefully participate in more upside over $25 a share why would a preferred shareholder convert?

 

They wouldn't. I'm 50/50 prfd/common and my hope is that a plan is structured that allows for a common pps of $20-$25 with a conversion offer of at least 2:1. A conversion makes a lot of sense here as it simplifies the capital structure of the company, allows them to hold off on prfd divs which are way too high for current environment, therefore allows greater raise through retained earnings and they can raise additional capital through new prfd issuance at much more reasonable rates.

[BTShine]

Any deal put together by Mnuchin in the next 6 months would likely bring the value of Preferred to near par. 

 

For the Preferred there would either be  1) a payout (near par)  2) conversion into another security with par value determining the number of shares or warrants received  3) No transaction yet dividends likely to be turned back on soon (unless recapitalization done purely through earnings)

 

 

For common we likely won't know their true value until this deal from Mnuchin is announced.  Will warrants continue to dilute fnma shareholders?  Will overpayment from NWS be returned to each company & shareholders?  Or, will a large capital infusion from shareholders be required?

 

The odds of a positive shareholder outcome for fnma are better, but still very murky. 

 

Chuck Cooper is representing Fairholme and will likely be joining the administration.  Has the Fairholme case against the govt been solely for preferred shareholders?  Or, is he specifically fighting for common shareholders, too?  If purely focused on preferreds that might keep the common shareholders less confident in the outcome. 

 

 

 

[investorG]

Maybe Im just thick but being I hold mostly preferred I figure I would try to understand this. Outside of a purposefully attractive conversion rate to common and ability to hopefully participate in more upside over $25 a share why would a preferred shareholder convert?

 

a) non-cumulative dividends remain turned off for a while until capital thresholds met.

 

b) more potential upside vs par. 

 

these are 2 excellent reasons, if that is the path chosen.

 

if the warrants are altered or eliminated, as is fair, perhaps some might change their opinion on the desirability of any potential conversion option.

 

remember, you can switch to common any day but the big guys --- driving any negotiations --- can't.

[rros]

I also think that even tho there is more certainty regarding fate of FNF then ever there is still a lot of uncertainty regarding ultimate value for the common and preferred. The par value of the preferred gives some benchmark to at least argue against +/- any div that may ever come.

I actually think this is a black and white thing. If equity is revived in any way, shape or form the Jrs. are automatically at par. Period. That is the big picture. No matter who whines. Then, comes reform.

[Guest cherzeca]

@BT

 

the fairholme case is a takings case brought by preferreds, but the case can also benefit common, though the value of the takings is more easily proved for preferred than common

 

@board

 

i just find the recent price divergence between common and pref to be confounding.  both are options in effect on a favorable mnuchin plan, and i would have thought common had more option value than prefs. 

 

@eye4

 

as an investor, i am always trying to think forward.  yes we will all see (i think) soon enough, but anticipation is the name of investment game as far as i can tell

[investorG]

I also think that even tho there is more certainty regarding fate of FNF then ever there is still a lot of uncertainty regarding ultimate value for the common and preferred. The par value of the preferred gives some benchmark to at least argue against +/- any div that may ever come.

I actually think this is a black and white thing. If equity is revived in any way, shape or form the Jrs. are automatically at par. Period. That is the big picture. No matter who whines. Then, comes reform.

 

if dividends aren't turned on until a ~3pct capital threshold is met, and the companies are allowed to reach that through a combination of capital raises and retained earnings over a couple years, then they wouldn't trade at par. 

 

there's a reasonable chance, despite your current attitude, that you would be asking for a conversion option if / when the warrants are adjusted or eliminated in a potential positive scenario; as a reminder, of the 76bn of net profits from the 2008 bailouts, 68bn has come from the GSEs vs $13bn from Citi and $5bn from AIG, 2 often-cited (and mis-guided imo) comparisons.

 

 

 

 

 

 

 

[investorG]

first things first -- mnuchin still needs to get in which isn't over til it's over

[SnarkyPuppy]

I also think that even tho there is more certainty regarding fate of FNF then ever there is still a lot of uncertainty regarding ultimate value for the common and preferred. The par value of the preferred gives some benchmark to at least argue against +/- any div that may ever come.

I actually think this is a black and white thing. If equity is revived in any way, shape or form the Jrs. are automatically at par. Period. That is the big picture. No matter who whines. Then, comes reform.

 

Not saying I think this is likely, but if the GSE's are released and recap is decided to be funded purely through retained earnings, I think the Preferred would be priced at a discount to Par given time value of money until dividends are able to be reinstated.

 

This won't happen because it's not the rational way of recapping, but nothing is 100% here. 

[Cox022]

 

@board

 

i just find the recent price divergence between common and pref to be confounding.  both are options in effect on a favorable mnuchin plan, and i would have thought common had more option value than prefs. 

 

 

 

I've followed you and the board for a while.  I think it's reasonable to suggest you are more informed than the average person regarding this investment.  So what you are seeing may truly be irrational (I think so).

 

I'll speak for myself.  Uncertainty is a factor.  I woke up one morning not knowing what could happen with FNMA, whereas the day before all I had to know was Fannie Mae probably wasnt going to be liquidated.  Figuring out what is going to happen to the common now is much more unpredictable  versus predicting if Fannie Mae was going to be wound down or not.

 

Psychologically, some interesting things might be in play.  The pain of regret may be an influence- and wouldnt it be painful to be a common investor and do poorly while the preferred did well?  Like a gambler might feel if he lost the lottery by one digit or something ('I was soo close' hah).

 

Anywho, I see  your point and seem to feel the same way you do.

[Flynnstone5]

CNBC Exclusive: Fannie Mae executive with ties to Mnuchin is among candidates for consumer protection boss

 

http://www.cnbc.com/2017/02/09/cfpb-white-house-is-looking-at-fannie-mae-exec-as-boss.html

[Guest cherzeca]

CNBC Exclusive: Fannie Mae executive with ties to Mnuchin is among candidates for consumer protection boss

 

http://www.cnbc.com/2017/02/09/cfpb-white-house-is-looking-at-fannie-mae-exec-as-boss.html

 

"Mr. Brian Brooks has been an Executive Vice President, General Counsel and Corporate Secretary of Federal National Mortgage Association since November 10, 2014. Mr. Brooks was a Partner in O'Melveny & Myers LLP's Washington, D.C. office. Mr. Brooks served as Managing Partner of The Washington, D.C. office at O'Melveny & Myers LLP. He served as the Chief Legal Officer of OneWest Bank."

 

so the former chief in house lawyer for onewest is current fnma general counsel...

[orthopa]

Anyone's have any insight or educated guess when the mnuchin vote may take place?

[investorG]

Anyone's have any insight or educated guess when the mnuchin vote may take place?

 

unclear.  it appears the R's can't stay til Saturday.  so it comes down to the D's at 2am agreeing to vote on Mnuchin some time on Friday rather than take the full 30 hours which would last til 8am on Saturday.  based on actions to date, the Dems won't allow it and thus delay. 

[Guest cherzeca]

http://abovethelaw.com/2017/02/breaking-chuck-cooper-withdraws-from-the-solicitor-general-sweepstakes/

 

understandable, given he doesnt want to go through what his good friend sessions went through.  i suppose it is easier for cooper to talk to sessions about GSEs as private counsel than as SG with a conflict