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

[undervalued]

Mnuchin confirmed as TS

 

so senate went straight to confirmation? excellent!

 

I guess it's a motion to advance him to full Senate vote. https://twitter.com/aspit/status/827273960354050049

[Guest cherzeca]

Mnuchin confirmed as TS

 

so senate went straight to confirmation? excellent!

 

I guess it's a motion to advance him to full Senate vote. https://twitter.com/aspit/status/827273960354050049

 

[waynepolsonAtoZ]

"'As interest rates rise,

Fannie Mae’s and Freddie Mac’s portfolios become even more valuable – and we anticipate that Q4 2016 results will reflect this positive impact. ""

 

I think this has to do with deriv costs. Deriv costs are marked-to-market each quarter, although other line items aren't. So, deriv costs are volatile, deriv losses when the Tsy yield curve goes down, deriv gains when the Tsy yield curve goes up. Note that the hedges don't "exactly" hedge the Tsy yield curve, I just use it as a proxy for whatever it is that they do. Note that (apparently) both the increase/decrease in the yield curve matter AND the extent of the "twist" in the curve.

 

Note that at the short end, the increase in the yield curve in 4Q2016 is in the neighborhood of 14 to 40 basis points, three to 10 years is in the range of 56 to 79 bp, and 10 to 30 is in the range of 27 to 78 bp.

 

Take a look at the yield curve changes in 2Q2015 when Freddie's deriv gains were $3.1 billion. 4Q2016 could be better than this based on a comparison to 2Q2015 yield curve changes.

 

Note also 3Q2016 deriv gains/losses were near zero. So, the improvement relative to last quarter will be big.

 

Hypothetically (and note that my analysis is incomplete) it does seem possible that Freddie could have $5 b of total comp income compared to $2.3 b last quarter.

 

The usual disclaimers apply.

 

 

 

 

 

 

 

 

 

 

[Guest cherzeca]

mnuchin vote for actual confirmation can take place 30 hours after the cloture vote, which was this afternoon.  so i guess that mnuchin will be confirmed either late friday or early monday

[orthopa]

Once Mnunchin is confirmed any good reasons to not put your portfolio 100% into a preferred if they trade meaningfully still to par? Some of the preferreds are still trading at less then 40% of par value.

 

Only reason I can think not to at this point is that he will screw Preferred shareholders. How low is that percentage what we know based on his testimony, comments, and suspected ties to Paulson/Berkowitz etc?

 

How much more of a home run bet is there the second after he is confirmed?

[no_free_lunch]

Thinking similarly. Its not 100 pct but quite high all the same.  Don't bet more than u can lose for sure.  Always a chance of wind down is biggest risk imo.

[waynepolsonAtoZ]

I think there could be a good earnings report too. I'm not sure that investor expectations fully reflect that as of now.

 

Last year, Freddie filed their 10K on Feb 18, Fannie on the 19th.

 

Not holding my breath, but it would be great to move up to the 40 percent of redemption value level. We're at 27 percent as of the end of January, based on the average % of redemption value of the FnF preferred stocks.

[SnarkyPuppy]

Thinking similarly. Its not 100 pct but quite high all the same.  Don't bet more than u can lose for sure.  Always a chance of wind down is biggest risk imo.

 

Liquidation preference at par value + legal provide the "margin of safety" here.  Someone hinted at the fact that it's possible the plaintiffs in the major cases negotiate a settlement privately that could screw public shareholders - some on this board mentioned it's not possible but still not sure I can think of every potential scenario within this space.  The citi bailout paid par to private preferred shareholders (I know this is different, Fairholme holds the same shares we do), but it just generally scares me a bit. 

 

Other than that, only a recap fully financed by only retained earnings seems to hurt the preferred holders (I own ~20% common as a backstop against this)

[hardincap]

Once Mnunchin is confirmed any good reasons to not put your portfolio 100% into a preferred if they trade meaningfully still to par? Some of the preferreds are still trading at less then 40% of par value.

 

if we get lamberth ii, shareholders would be in for another blizzard of uncertainty. im not sure mnuchin/trump will want to take the political risk of "rescuing" the shareholders in that scenario, though im not sure if f&f can be successfully restructured if they screw the shareholders

 

ive gone 100% once before, but that co had tons of cash, tons of fcf, zero debt, growing, etc, and the absolute worst case was maybe a 20% loss. here, your investment can theoretically go to zero

[Guest cherzeca]

portfolio decisions are always personal. cant be discussed meaningfully on a board.

 

i guess my sense is that if you have cut back on GSE investment sensibly because of risk, you may want to assess whether you are underweighted once mnuchin is confirmed.  dont forget that once this shakes out, par for the preferred may not be realized.  while this will be primarily a financial restructuring, there is a heavy political background, and in order to accommodate the political optics, all stakeholders may have to discount for the greater good.

[Mephistopheles]

Thinking similarly. Its not 100 pct but quite high all the same.  Don't bet more than u can lose for sure.  Always a chance of wind down is biggest risk imo.

 

Liquidation preference at par value + legal provide the "margin of safety" here.  Someone hinted at the fact that it's possible the plaintiffs in the major cases negotiate a settlement privately that could screw public shareholders - some on this board mentioned it's not possible but still not sure I can think of every potential scenario within this space.  The citi bailout paid par to private preferred shareholders (I know this is different, Fairholme holds the same shares we do), but it just generally scares me a bit. 

 

Other than that, only a recap fully financed by only retained earnings seems to hurt the preferred holders (I own ~20% common as a backstop against this)

 

Honestly this is my only real concern. If it wasn't, then I'd be 100% in. Yes it sounds legally impossible, but when has that stopped Trump from doing anything? Besides, if the government can come in and take 100% of a company, what is stopping them from giving that company to their friends? Yes we have the best corporate law in the world, and Delaware is held in high regard, but again, that hasn't stopped the Govt thus far, 4+ years later. The only reason the shares have jumped is because of the Trump-Paulson connection. If HRC was President, we would still be depressed.

 

What gives me hope is that Trump needs that warrant money for all of the Government spending he wants to do, which of course wouldn't be possible unless all shareholders benefit.

 

Having some faith that the Judicial system - Sweeney, Brown, etc wouldn't allow such a deal, helps.

[Mephistopheles]

portfolio decisions are always personal. cant be discussed meaningfully on a board.

 

i guess my sense is that if you have cut back on GSE investment sensibly because of risk, you may want to assess whether you are underweighted once mnuchin is confirmed.  dont forget that once this shakes out, par for the preferred may not be realized.  while this will be primarily a financial restructuring, there is a heavy political background, and in order to accommodate the political optics, all stakeholders may have to discount for the greater good.

 

I think ultimately the common benefit the most, because in order to combat the inevitable political firestorm of benefiting hedge funds, Trump needs to show the people "well look how much money the taxpayer made". People are worried about capital levels and share dilution but the way I look at it is: this Administration and Congress is different than the last, in that they want to roll back Dodd-Frank, loosen capital requirements. And they'll have a similar attitude with F+F, especially since their own interest is at stake. IPO the warrants, and allow capital to build up over many years is the way I see it. Maybe the most they will do is swap the preferred for common.

[Seahug]

Past month, I increased 35% pref count by adding cash (half) and swapping for the lower priced prefs (half) ending at about 9% of total portfolio at current prices.

 

I debate adding more. There are unknown unknowns....and, aside from what's been discussed here on the legal side, significant mark to market hits or much lower recovery if...

 

1) Progress is slower, even if process pushed back by just a year. Right now the psychology is too positive.

2) Capital requirements are not 3% as we imagine but closer to bank tier 1 car ratios, 10% - $300bn equity for FNMA alone? Prefs would never taste a dividend.

3) Some change in DJT policy

4) Global macro, for ex interest spike - if you read the UC Berkeley paper on interest spikes, I believe beyond a certain range FNMA would take quite a big hit and may need to draw on treasury. This would be a disaster.

 

By now it's seems certain Mnuchin gets confirmed. Even if he weren't, as my friend said, there are so many other goldman mortgage bankers out there. Confirmation would bump prices by 5%, more if he says something nice.

 

If I add another 20-30%, the additional short term or long term gain would be nice it all works out. But it would not change my life. For a material change, I would need to increase by 50+%. But why do do something outside my comfort zone? Is it just for $$$, greed, or bragging rights? This is not a sure thing.

 

Dunno. One my psychological weaknesses, analysis paralysis...

 

 

[Guest cherzeca]

@seahug

 

i tend not to worry about unknown unknowns because, well, i can't understand or quantify them by definition.  for me to try do so would be analysis paralysis. 

 

as for known unknowns, the biggest is the perry appellate decision.  i think affirmance is remote (10-20%). 

 

settlement probability is a known unknown, but one that i wouldnt have even tried to characterize before election day.  for me, the emergence of the trump administration with mnuchin as treasury secretary has turned fnma from just a litigation thesis into a litigation/political thesis (with politics that actually tends to favor GSEs, as opposed to hostility of obama administration or a HRC administration).  so two chances to win, in effect.  while the settlement path is hard to handicap, i think the whole notion of a realistic settlement path is something i wasnt expecting before election day.  so while there is risk of an extended settlement timeframe, or terms not as favorable as one would want, just having to gauge these risks presents a huge upside compared to how i thought about GSEs before election day.

 

what are the chances of a mnuchin surprise, that he is actually harsh to GSEs in order to make sure the taxpayer is protected?  again, the whole notion of a treasury secretary who is an investor in a mortgage banking firm himself, and is a GSE expert who has seen GSEs function very well for most of the time is totally unexpected, so the risk that he may not be as shareholder friendly as one might hope is a risk i am happy to have, under the circumstances.

 

so in a sense, i am pleased that i have these new risks, post election, to assess.

[Seahug]

@cherzeca

 

tx for reply. I agree much better risks now that 6 months ago, not just Mnuchin/DJT but also the mandamus. what's the right position size?

 

at 9% if i make 3x, I'd be pretty happy. at 12%, I'd be just slightly happier. At 25%, I'd be much happier, but not 2x happier.

 

if I lose 5%, not a big deal. at 10% i'd be kinda pissed. At 20%, I'd get into trouble with my wife :). At 50% I'd be depressed.

 

few here seem to really want to disclose % of port exposure so hard to gauge the measure of conviction. i actually like glen bradford because he updates developments fast and posts his port.

 

anyway, i've made a lot of progress on analysis paralysis :) - one of my big stumbling blocks.

 

 

 

[SnarkyPuppy]

@cherzeca

 

tx for reply. I agree much better risks now that 6 months ago, not just Mnuchin/DJT but also the mandamus. what's the right position size?

 

at 9% if i make 3x, I'd be pretty happy. at 12%, I'd be just slightly happier. At 25%, I'd be much happier, but not 2x happier.

 

if I lose 5%, not a big deal. at 10% i'd be kinda pissed. At 20%, I'd get into trouble with my wife :). At 50% I'd be depressed.

 

few here seem to really want to disclose % of port exposure so hard to gauge the measure of conviction. i actually like glen bradford because he updates developments fast and posts his port.

 

anyway, i've made a lot of progress on analysis paralysis :) - one of my big stumbling blocks.

 

Have no problem disclosing.  17.5% of NW at today's prices split between pref/common at 75/25.  Keep in mind the majority of my position is profits from this investment - when I initially invested a while back it was with the intention of having an overnight/binary decision and either fully working out or a goose egg.  This slow climb has been a bit more difficult to weigh expected value. 

[SnarkyPuppy]

http://pulse.com.gh/bi/finance/trump-is-reportedly-going-to-sign-executive-orders-on-friday-to-repeal-two-huge-wall-street-regulations-id6162623.html

 

"Cohn also told the Journal that the executive order will direct the Treasury department to change Fannie Mae and Freddie Mac, the government-backed mortgage lenders. Additionally, Cohn said that the executive action would not impact the Consumer Financial Protection Bureau, which was created as a part of Dodd-Frank."

[no_free_lunch]

@cherzeca

 

tx for reply. I agree much better risks now that 6 months ago, not just Mnuchin/DJT but also the mandamus. what's the right position size?

 

at 9% if i make 3x, I'd be pretty happy. at 12%, I'd be just slightly happier. At 25%, I'd be much happier, but not 2x happier.

 

if I lose 5%, not a big deal. at 10% i'd be kinda pissed. At 20%, I'd get into trouble with my wife :). At 50% I'd be depressed.

 

few here seem to really want to disclose % of port exposure so hard to gauge the measure of conviction. i actually like glen bradford because he updates developments fast and posts his port.

 

anyway, i've made a lot of progress on analysis paralysis :) - one of my big stumbling blocks.

 

 

 

 

6%, purchased over the last 2 months.  Overall I am up something small like 6 or 7%, so a tiny bit of a buffer right now.

 

17.5% of NW at today's prices split between pref/common at 75/25. 

 

As I look at this more I can see the benefit to having some in commons.  Still 100% preferred but will probably move some over to common if I see an opportunity.

 

[Flynnstone5]

http://pulse.com.gh/bi/finance/trump-is-reportedly-going-to-sign-executive-orders-on-friday-to-repeal-two-huge-wall-street-regulations-id6162623.html

 

"Cohn also told the Journal that the executive order will direct the Treasury department to change Fannie Mae and Freddie Mac, the government-backed mortgage lenders. Additionally, Cohn said that the executive action would not impact the Consumer Financial Protection Bureau, which was created as a part of Dodd-Frank."

 

I wonder what the order will direct Treasury to change? Could it possibly be to end the NWS?

 

As an aside, has anyone done any analysis on what a possible conversion of prfd to common might look like and how likely a scenario this is? I am currently at 10% of NW with 50/50 common/prfd.

[SnarkyPuppy]

http://pulse.com.gh/bi/finance/trump-is-reportedly-going-to-sign-executive-orders-on-friday-to-repeal-two-huge-wall-street-regulations-id6162623.html

 

"Cohn also told the Journal that the executive order will direct the Treasury department to change Fannie Mae and Freddie Mac, the government-backed mortgage lenders. Additionally, Cohn said that the executive action would not impact the Consumer Financial Protection Bureau, which was created as a part of Dodd-Frank."

 

I wonder what the order will direct Treasury to change? Could it possibly be to end the NWS?

 

As an aside, has anyone done any analysis on what a possible conversion of prfd to common might look like and how likely a scenario this is? I am currently at 10% of NW with 50/50 common/prfd.

 

Citigroup bailout was done at like a 15% discount to par if I remember correctly

[Mephistopheles]

Gary Cohn on CNBC says Mnuchin will make GSE reform one of his early priorities once he gets the job

[Guest cherzeca]

http://pulse.com.gh/bi/finance/trump-is-reportedly-going-to-sign-executive-orders-on-friday-to-repeal-two-huge-wall-street-regulations-id6162623.html

 

"Cohn also told the Journal that the executive order will direct the Treasury department to change Fannie Mae and Freddie Mac, the government-backed mortgage lenders. Additionally, Cohn said that the executive action would not impact the Consumer Financial Protection Bureau, which was created as a part of Dodd-Frank."

 

https://www.wsj.com/articles/trump-moves-to-undo-dodd-frank-law-1486101602

 

"Mr. Cohn laid out a road map for how the Trump administration plans to target new financial rules. He said the Treasury Department would lead an effort to overhaul mortgage-finance giants Fannie Mae and Freddie Mac, which were put into government conservatorship after the crisis."

 

i dont know what "overhaul" means, and since it isnt in quotes dont know that cohn said it, but if treasury is going to lead effort, then the solution will be administrative, not something wacko out of congress.  assuming cohn and mnuchin are sensible, this might involve enhanced capital standard and risk guardrails (to use a term that is seemingly in increased parlance), which would be fine.  i dont see them having them desire like sperling etc to do something more severe.

[Flynnstone5]

http://pulse.com.gh/bi/finance/trump-is-reportedly-going-to-sign-executive-orders-on-friday-to-repeal-two-huge-wall-street-regulations-id6162623.html

 

"Cohn also told the Journal that the executive order will direct the Treasury department to change Fannie Mae and Freddie Mac, the government-backed mortgage lenders. Additionally, Cohn said that the executive action would not impact the Consumer Financial Protection Bureau, which was created as a part of Dodd-Frank."

 

I wonder what the order will direct Treasury to change? Could it possibly be to end the NWS?

 

As an aside, has anyone done any analysis on what a possible conversion of prfd to common might look like and how likely a scenario this is? I am currently at 10% of NW with 50/50 common/prfd.

 

Citigroup bailout was done at like a 15% discount to par if I remember correctly

 

In such a scenario, if FNMAS shareholders were offered a conversion based on $21.25, then that would equate to an estimate of 3-4 common?

[Luke 532]

Wow, could be a big day.

 

http://pulse.com.gh/bi/finance/trump-is-reportedly-going-to-sign-executive-orders-on-friday-to-repeal-two-huge-wall-street-regulations-id6162623.html

 

"Cohn also told the Journal that the executive order will direct the Treasury department to change Fannie Mae and Freddie Mac, the government-backed mortgage lenders. Additionally, Cohn said that the executive action would not impact the Consumer Financial Protection Bureau, which was created as a part of Dodd-Frank."

[SnarkyPuppy]