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


twacowfca

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4 hours ago, sleepydragon said:

FT has a story about someone pumping the Trump odd on poly market. Here is another story from Yahoo:

 

https://finance.yahoo.com/news/mystery-trader-fredi9999-boosts-trumps-090850029.html

 

“Experts” are trying to guess what’s the motive. Well, he’s ID is Freddie9999. That seems obvious…to us? Is he trying to pump FNMA/FNMAS?

 

this sort of thing makes me nervous 

 

Hard to say ofcourse. Who knows who that is and what the motive is. At current odds that person is better off buying freddie preferreds at 20% of par and getting a higher return on their money then betting on trump on poly market. 

 

My take on Trumps increased odds are his polling numbers in swing states being equal to or better then Harris knowing he seems to always poll lower then the actual vote shows. Early voting also has been very strong for Repubs in VA, NC, and GA compared to 2020 and equally soft historically for Dems. 

 

My current take on common/preferred is this. Someone smart once said if common is worth a penny preferred is worth par. Par will likely take a symbolic haircut to get the deal done but with preferred trading at ~20% of par for most series that means common would need to trade over $7.00 share to get a better return. Not knowing the structure of the deal that seems on the unlikely side as there is the risk of conversion of the preferred to common, conversion of senior preferred to common and outstanding warrants.  

 

All speculation at this time but going into a deal the capital structure needs to be fixed which means Senior Preferred are restructured/converted and Jr Preferred are either converted or Divs turned back on. When 10 year treasury was at 1% that was unlikely. With it near 4% div yields in the 5-8% range on some of the preferred not as unrealistic now so a chance divs are restarted.....maybe. Either way if one or both of the Jr and Sr preferred are converted INTO common Im not sure how common is set up for a superior return. 

 

IMO at 20% of par I think FnF pref are fairly priced. Trump still has yet to win and this still has to go through the scrutiny of making every group happy in a restructuring. There is still alot of work to be done and the resistance to get this done will be STRONG from the DC lobby groups who don't want FnF private and the Treasury lawyers who were unwilling to forgive the Sr. Preferred in late 2019 with Mnuchin and Calabria. 

 

If Trump wins I think 40-50% of par is a fair price until a restructuring is figured out. Ive been in this trade in parts, pieces and different portfolio sizes since 2015. Its never as simple/clear/easy as it seems. 

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On 10/19/2024 at 7:26 AM, Mephistopheles said:

But what if Trump loses? This seems like a coin flip. Maybe up 100% if he wins and down 50% if he loses? Ok so it’s a good bet mathematically but it would have to be a small bet.

 

Thoughts?

Agreed. But perhaps it's even better when you believe as many do that in either situation it will go up from there. The win scenario goes up 100% and then likely increases to par in the next 1-2 years. The lose scenario goes down 50% and then, eventually, goes up likely to par.

 

As far as whether it should be a "small" bet. I agree but that's of course a personal decision to each investor depending on risk and volatility tolerance. An adherent to the wisdom in "The Intelligent Investor" by Benjamin Graham likely would stay far away from this investment, and Graham would call this speculation, not an investment. I've heard comments here in the past of limiting this investment to only a few percentage points of your portfolio. But, there are all types, and at least one investor is 100% in with leverage. Not for me but more power to him.

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I don't believe the FT article for the reason stated in the article itself. It's too expensive to "buy" this election by buying the betting markets. It would be better to just buy ads, and even that doesn't work.

 

As far as what's moving the markets and what's moving Trump's chances, I'd put far more weight on Musk catching a rocket and stumping in Pennsylvania. He's reaching a lot of young voters who otherwise might vote for Harris. That's huge.

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I don't want to believe it, but would be consistent with my every experience within the legal system so far. 

 

The system is broken and only "works" because people believe it works - not because it actually does. 

 

The US government getting away with stealing these entities has to be an outcome assigned a fairly significant probability  now that the courts have refused to enforce reasonable applications of property rights

Edited by TwoCitiesCapital
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5 hours ago, sleepydragon said:

Kaoboy has indeed spilled a lot of ink on this topic. He's extremely knowledgeable and experienced in the areas of restructuring, no doubt. This is a great read. But does he have experience in the restructuring of massive Federally-chartered institutions that cannot be changed or replaced easily? I noticed his whole restructuring thesis is predicated on changing the GSEs' charters (e.g., creating an explicit guarantee, etc.), which cannot be done without an act of Congress. That's a huge problem with his thesis, IMO. Let's set that possibility aside for a moment.

 

If the Trump administration wants to release the GSEs administratively without Congress -which Trump has already said he would do-, then how can the JPS be restructured without the JPS's explicit 2/3rds vote approval? I see how common dilution can occur without a Congressional act, but I don't see how for JPS. The only relevant question that Kaoboy seems to address with respect to administrative release is the legality of the SPS taking a haircut. He cites Calabria's book. Really? What law? Which Federal Statute? Moreover, since the SPS liquidation preference is higher than the book value of the GSEs, then the SPS would already be taking a haircut. I think what Mnuchin was referring to is that the Government cannot give its property away for free. Fine, but that's a different problem and isn't it in fact favorable to existing shareholders? In administrative release doesn't the Government extract more value by respecting current shareholders?

 

How about receivership? This can be done without Congressional approval, and JPS can indeed be wiped out in this scenario. But there are a whole bunch of reasons this seems unlikely. First, how would the Government get paid anything near what they would make with administrative release? They cannot sell the GSEs with their charters intact. They cannot even sell their SPS. They can only liquidate the GSEs assets. And the GSEs' greatest value is not in their assets, it's in their Congressionally-chartered business models. They used to have valuable portfolios but those are relatively small at this point. It would also create major havoc in the financial system.

 

Back to the act of Congress scenario. Anything under the sun is possible here. Who the hell knows? But I'm in full agreement with Kaoboy here on the chances of that. First, the R's would most likely need to control both the House and the Senate, and even then there are many priorities that would come first. So in that scenario it's likely not happening until 2026 or later, whereas administrative action can occur very quickly. And I'd bet that Trump, now a one-termer, would have little interest in the huge amount of work required on Congressional action. Does anyone envision an 80-year-old Trump putting his nose to the grindstone in hashing out a new mortgage system in 2026? And for what, so he can shaft his major donors, some of whom could be serving in the administration?

 

Here's another question for anyone worried about the act of Congress scenario. What would JD Vance do? I think it's an important question because if Trump wins and accomplishes even half of what he sets out to do, then I'd bet Vance is president in 4 years. In 2026 JD Vance is young and burnishing his political chops, not Trump. And Vance strikes me as a practical dude who definitely understands poverty and the importance of owning a house. Does anyone think he would expend his political capital to destroy "two great American companies" -to use Trump's parlance-, while tanking the US economy?

Edited by Wiggins
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  • 2 weeks later...

Just thankful for an opportunity to exit a portion of the position at reasonable gains to get the capital deployed elsewhere. Someone else can be a sucker for the next 4 years. 

 

Making 300-400% on my COVID era adds has made up for the losses on my $7-14 lots ($50 par) that I'll continue to bag hold on just in case...

 

 

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I realize that everyone has been hopeful and wrong for the ~12 years I've been a holder.

 

I realize that Trump's administration only made things worse, not better, the last time around. 

 

I realize  that that some people seem to believe that he'll do something opposite this time around because he said so while ignoring all of the other unfulfilled promises he's made. 

 

And I realize last time the preferreds were at these prices we still had potential remedies through the courts that have largely resolved against us removing that avenue for payment. 

 

And I realize there are people willing to ignore all of this and bid the shares back up again on hopium - so am happy to let some of mine go for what has been a reasonable trade over the last 3-4 years. 

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I mean, he did offer analysis. He said basically that:

  • Last time people thought Trump would intervene, and he didn't.
  • Trump lies a lot, so one should consider that when weighing the probabilities here.
  • This is the same valuation as previously, but the optionality value of the investment has declined because the legal issues have been resolved in a negative way.

That said, it was mildly insulting.  But also amusing....

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3 hours ago, RichardGibbons said:

I mean, he did offer analysis. He said basically that:

  • Last time people thought Trump would intervene, and he didn't.
  • Trump lies a lot, so one should consider that when weighing the probabilities here.
  • This is the same valuation as previously, but the optionality value of the investment has declined because the legal issues have been resolved in a negative way.

That said, it was mildly insulting.  But also amusing....

More prior comments from this user:  "it’s a lottery ticket", "It’s not an investment ". Is that analysis too?

If you think this "investment" is such a POS then please tell me why you're here discussing this "investment"? What do you hope to gain?

 

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15 minutes ago, Wiggins said:

More prior comments from this user:  "it’s a lottery ticket", "It’s not an investment ". Is that analysis too?

If you think this "investment" is such a POS then please tell me why you're here discussing this "investment"? What do you hope to gain?

 

 

Forgive me for being willing to admit that I was wrong and the investment was a mistake. 

 

I didn't buy it as a lottery ticket in 2012. I bought it because I believed in rule of law. 12 years later, multiple lost court cases, and administrations from both parties f*cking us over, I'm willing to call it what it is/was - a mistake. 

 

The reason I continued to hold it is because I recognized a very real possibility that Trump may win, that there are people  out there who are willing to suspend reality to believe Trump isn't who he is/was, and the very small possibility that I am wrong about being wrong. Not many investments offer a 10-20x pay off and I recognized this is one of them. 

 

Trump has been elected - I knew that was a possibility. The prices popped - I knew that was a possibility. I have now locked in 300-400% gains on most of my shares acquired during COVID which is bout 1/3 of my position. I have other limit orders in to sell well below par for higher gains as the disillusionment knows no bounds. 

 

If we get to $20+ again on the $50 preferreds, I'll be out entirely. Feel free to hit my asks on FMCCJ if you're so confident. 

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I don’t think there is any point jumping into this ahead of any confirmed release.  I traded in and out of FNMA for years, sometimes for gain and sometimes for a loss, and although I was slightly up overall it wasn’t worth the headache or the opportunity cost.

 

You can’t trust Trump, the courts, the head of FHFA, none of them.
 

If the GSEs get released I’ll almost certainly buy with the intention of holding them a very long time.  But  I’m done with betting on hopium that never came true.  Worse, any release could be very unfavourable to all holders of common and preferred - you could lose money maybe even all of it.

 

So why bother?

 

My strategy is to wait for release and try and get it at a reasonable price.

 

 

Edited by Sweet
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21 minutes ago, Sweet said:

I don’t think there is any point jumping into this ahead of any confirmed release.  I traded in and out of FNMA for years, sometimes for gain and sometimes for a loss, and although I was slightly up overall it wasn’t worth the headache or the opportunity cost.

 

You can’t trust Trump, the courts, the head of FHFA, none of them.
 

If the GSEs get released I’ll almost certainly buy with the intention of holding them a very long time.  But  I’m done with betting on hopium that never came true.  Worse, any release could be very unfavourable to all holders of common and preferred - you could lose money maybe even all of it.

 

So why bother?

 

My strategy is to wait for release and try and get it at a reasonable price.

 

 

Huh? If you wait until release, you will quite obviously be too late to get any material gains.

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2 hours ago, TwoCitiesCapital said:

 

What the bag holders, like myself, have been saying for 12+ years. 

No, this is different than the question of whether they WILL be released, and on what terms. But if they are eventually released and you wait until after that has occurred to buy, the market prices will be pretty fairly valued before you get there.

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10 hours ago, COBFInfinity said:

Huh? If you wait until release, you will quite obviously be too late to get any material gains.

 

🤨 - yes obviously

 

You might make some material gains, but you could also get a zero in any restructuring. 

 

7 hours ago, COBFInfinity said:

No, this is different than the question of whether they WILL be released, and on what terms. But if they are eventually released and you wait until after that has occurred to buy, the market prices will be pretty fairly valued before you get there.

 

 

This investment is riskier now than it was when this thread first opened. 

 

Nearly every bull option that could have provided relief for common and preferred shareholders was a bust.  Different presidents and congress, different heads of FHFA and all the legal cases - nothing. 

 

Trusting government or the judges to help the common and preferred looks foolish.  This will not be a priority for Trump and his admin.  Relief for the common and preferred complicates the GSEs release, I think shareholders are more likely to get nothing.

 

And what do you position size here then, 1-2%, are material gains on that 'material'?

 

If you have a position already I would do what TwoCitiesCapital would do, but I would not initiate a position here.

 

Last I checked (couple of years ago now) these were fantastic companies and even at fair price after release and a decent allocation you can make good money over the long run.

 

 

 

 

 

Edited by Sweet
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2 hours ago, Sweet said:

 

🤨 - yes obviously

 

You might make some material gains, but you could also get a zero in any restructuring. 

 

 

 

This investment is riskier now than it was when this thread first opened. 

 

Nearly every bull option that could have provided relief for common and preferred shareholders was a bust.  Different presidents and congress, different heads of FHFA and all the legal cases - nothing. 

 

Trusting government or the judges to help the common and preferred looks foolish.  This will not be a priority for Trump and his admin.  Relief for the common and preferred complicates the GSEs release, I think shareholders are more likely to get nothing.

 

And what do you position size here then, 1-2%, are material gains on that 'material'?

 

If you have a position already I would do what TwoCitiesCapital would do, but I would not initiate a position here.

 

Last I checked (couple of years ago now) these were fantastic companies and even at fair price after release and a decent allocation you can make good money over the long run.

 

 

 

 

 

I'm well aware of the current risks. What you said is, "Wait until all the restructuring risk is gone and then buy." At that point it's just another stock, with all the uncertainty removed, so there's no longer an expectation of above-market returns.

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34 minutes ago, COBFInfinity said:

I'm well aware of the current risks. What you said is, "Wait until all the restructuring risk is gone and then buy." At that point it's just another stock, with all the uncertainty removed, so there's no longer an expectation of above-market returns.

 

I know what I said.  I disagree there is no longer an expectation of above-market returns - nobody can know that at this stage.

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I guess the next catalyst will be who will be the next secretary of treasury? If it’s Paulson then this thing is going to explode. But I highly doubt it will be him. I met him a decade ago. He doesn’t talk much, doesn’t smile much. I ran into him walking on 5th Ave in NYC a few times instead of taking cabs or subways.  I feel he’s a very resourceful and smart guy, but I don’t think he wants to be a politician.

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