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

[rros]

I think we're correct, Beaufort. It's also refreshing to read genuine instead of influenced impressions.

 

IMO, no one watching that hearing could conclude that Watt is a partisan hack whose time is limited. the most obvious thing about it was that the man just wants to do his job, and damn you politicians for not doing yours.

 

Could he be doing all this to avoid being fired for cause? Why wake up now to risk of capital depletion?

He's been driving this car without airbags all along?

 

Either way actions speak louder than words - looking to see how much capital will be held? Magic number would be enough to pay par in case of liquidation! Even for that we are in line behind senior preferreds which Mnuchin is in charge of.

I hope Mnuchin doesn't set a fix amount and he continues on Watt's path of separating the role of Congress (reform) from the agreement between Treasury and the FHFA (sound and solvency). This would be positive for repairing GSEs balance sheets and more administrative action down the road. I would not like to see a delay arrangement of "collecting now and sweeping later".

[Desert_Rat]

I think we're correct, Beaufort. It's also refreshing to read genuine instead of influenced impressions.

 

IMO, no one watching that hearing could conclude that Watt is a partisan hack whose time is limited. the most obvious thing about it was that the man just wants to do his job, and damn you politicians for not doing yours.

 

Could he be doing all this to avoid being fired for cause? Why wake up now to risk of capital depletion?

He's been driving this car without airbags all along?

 

Either way actions speak louder than words - looking to see how much capital will be held? Magic number would be enough to pay par in case of liquidation! Even for that we are in line behind senior preferreds which Mnuchin is in charge of.

 

He could, sure, but I think Beaufort hit the nail on the head: Things have changed, as have Watt's perception on what he should do. Namely, if tax reform passes and FnF would draw because of it, he should do everything in his power to ensure that draw doesn't happen, and that means building capital asap. I don't think this is unreasonable.

[Flynnstone5]

As of now, how many are preferred, common or mix of the two given where we are? I'm all prfd, but am curious how if at all people have adjusted positions over the last six months. I just can't see the rationale at all for holding common anymore.

[TwoCitiesCapital]

As of now, how many are preferred, common or mix of the two given where we are? I'm all prfd, but am curious how if at all people have adjusted positions over the last six months. I just can't see the rationale at all for holding common anymore.

 

Same. Gave up on the common after the last "unfavorable ruling." I understand the argument for gov't incentive to maximize the warrants, but have far less confidence that everything works out favorably for a restructuring with the common. I'm able to sleep better at night in the preferred.

[Desert_Rat]

Always been all preferred. Think common is for trading, preferred is for good.

[Williams406]

All preferred.

[DocSnowball]

All preferred - 8% of portfolio

[beaufort]

All preferred following the appellate court Perry ruling. 

[SnarkyPuppy]

80% pref 20% common

[Guest cherzeca]

isn't the senate finance committee out of ideas, after whiffing on proposals for last three years?  they werent even coherent, as they criticized the bailout but then proposed a govt guarantee which locks in a bailout as something the govt is obligated to do.  even MBA is proposing utility reg-like reform, which is what ackman and berkowtiz have been saying all along.  talk of distinguishing between gse reform and housing finance reform is somewhat amusing, since if senate cant come up with a sensible plan for gses, who thinks it can come up with something workable for housing reform generally?  the waiting is annoying but i think the lapse of time is not a friend of foes of gses.

[SnarkyPuppy]

As of now, how many are preferred, common or mix of the two given where we are? I'm all prfd, but am curious how if at all people have adjusted positions over the last six months. I just can't see the rationale at all for holding common anymore.

 

All commons, switched from preferreds to commons.  There is no chance that they will restore dividends and no chance they will pay at par in next 2-3 years. That would be the only way to be in preferreds. False sense of security does not work for me.

 

I hope you understand the risks involved in holding commons are tremendously higher.  There are quite a few ways (in my opinion, the most probable ways) where preferreds are made whole without a dividend being paid. 

[investorG]

imo its better to own both given the uncertainty. 

 

currently I have a mix of 70-30 common / preferred but I change frequently depending on relative outperformance.

 

why own common too? ---

a) it's priced closer to 0 if things go bad (optics matter for some people), and less hedge fund ownership

b) it's possible but hard to justify crapping on the warrants while giving 3-5x payouts on preferred

c) the preferred-centric court cases seem like low-ish odds for material payouts and even so appear to be 2018 events

 

I do think there is a false sense of security among some preferred holders, even though I believe it's important to have a mix of both.  it's somewhat pathetic all of the arguing on some of the boards about common v preferred, but I guess when things aren't currently going our way then these things happen.

 

Tim howard's latest comment on his blog sums it up for me -- mnuchin needs legislative failure and/or some court changes to happen first before any potential administrative solution which means the near term catalysts, aside from the sweep potentially stopping, aren't too visible.  I do think the securities still represent great value at these levels.

[hardincap]

isn't the senate finance committee out of ideas, after whiffing on proposals for last three years?  they werent even coherent, as they criticized the bailout but then proposed a govt guarantee which locks in a bailout as something the govt is obligated to do.  even MBA is proposing utility reg-like reform, which is what ackman and berkowtiz have been saying all along.  talk of distinguishing between gse reform and housing finance reform is somewhat amusing, since if senate cant come up with a sensible plan for gses, who thinks it can come up with something workable for housing reform generally?  the waiting is annoying but i think the lapse of time is not a friend of foes of gses.

 

the takeaway I got from videos of watt's testimony and the house finance committee talking about the gses is they havent a clue how to mortgage finance actually works, and so they get stuck on political talking points. indeed thats the very reason we're in this mess after 9 years. who breaks this deadlock? if you're long f&f, you have to believe mnuchin will, if not administratively then by building a political alliance from the inside. this is not going to be "reasonably fast"

 

 

[rros]

I doubt Mnuchin would say anything of significance tommorrow. Do you agree? He may quote Watt that they need capital, that is all.

I will be surprised if he doesn't solidify the present path, the one initiated by Watt. That is, an incipient recapitalization. Although he may try a sanitized version of it focusing on taxpayers, liquidity and the 30 year mortgage. Watt has focused entirely on MBS investor's confidence. The shocker will be suspending the already announced dividends. But that's a slim chance.

 

In the very near term, next 3 to 4 months, many headwinds may cloud the outlook: labor markets continue tightening while economic data begins to weaken, fed continues raising rates all on the backdrop of equity markets taking a hit. Altogether, may scare enough participants that any kind of recapitalization may start to look more reasonable.

[waynepolsonAtoZ]

Plus, The Donald is in crisis. Who knows what Pence thinks of FnF?

[no_free_lunch]

All preferred.  2% position as of today but that changes week by week.

[Midas79]

75/25 pref/common for me, have been in the 90/10 to 60/40 range depending on relative strength and weakness of the prefs and commons but usually where I am now. 100% of my individual brokerage and self-directed retirement accounts, but that's only ~10% of net worth.

[Flynnstone5]

Thanks for the feedback everyone. Emily - have to say I think you're absolutely crazy being 100% common. I think you're missing the big picture and unbelievable risk IMO.

[SnarkyPuppy]

Thanks for the feedback everyone. Emily - have to say I think you're absolutely crazy being 100% common. I think you're missing the big picture and unbelievable risk IMO.

 

Mentioned in an earlier post that she's trying to pay for tuition.  Can't see how this ends poorly  ::)

[Guest cherzeca]

since we dont know what the outcome will be, and the distribution of outcome probabilities is hard to estimate, i dont think anyone can say objectively whether an investment in common v preferred is way to go, or someone is dumb to do one or the other.  yes one is more risk-seeking than another, but you are fooling yourself if you dont think both are risk-seeking

[Desert_Rat]

Well, you never asked  8)

[waynepolsonAtoZ]

Still, swapping from stocks to preferreds has difficulties. Selling commons to buy preferreds might make sense in some scenarios, but not all. It's more than possible to get burned based on the timing alone.

[Midas79]

since we dont know what the outcome will be, and the distribution of outcome probabilities is hard to estimate, i dont think anyone can say objectively whether an investment in common v preferred is way to go, or someone is dumb to do one or the other.  yes one is more risk-seeking than another, but you are fooling yourself if you dont think both are risk-seeking

 

I think this is the operative phrase. Both are very risky, so calling one more risky than the other isn't necessarily saying much.

 

For me, I am in mostly preferreds to align myself with the big money, i.e. those who have brought and paid for the big lawsuits. Though following Berkowitz on SHLD would have been a disaster...

 

My position in commons is because I see a relatively small probability of junior prefs winning and commons losing, and that the upside is a good bit higher.

[Flynnstone5]

since we dont know what the outcome will be, and the distribution of outcome probabilities is hard to estimate, i dont think anyone can say objectively whether an investment in common v preferred is way to go, or someone is dumb to do one or the other.  yes one is more risk-seeking than another, but you are fooling yourself if you dont think both are risk-seeking

 

I'm certainly not claiming anyone is categorically wrong for being in common. I just find with all of the changes that have occurred and the likelihood of a capital buffer perhaps much larger than people had hoped, i.e. at least $100B if you factor in DTA, common just doesn't have the upside we once thought, but it does have substantially more risks than prfd now. I just get the feeling and maybe I'm completely wrong that the buffer size is going to be a shock and if so they're likely to call the jr's so they can issue new with much lower rates. Or maybe they convert, but at least you still get a par value IMO. At the very least, I don't see how a situation where prfd get a bad deal yet common come out ok. The largest players, friends of Trump and litigants are all prfd so I don't see them just rolling over.

[Desert_Rat]

since we dont know what the outcome will be, and the distribution of outcome probabilities is hard to estimate, i dont think anyone can say objectively whether an investment in common v preferred is way to go, or someone is dumb to do one or the other.  yes one is more risk-seeking than another, but you are fooling yourself if you dont think both are risk-seeking

 

I think this is the operative phrase. Both are very risky, so calling one more risky than the other isn't necessarily saying much.

 

For me, I am in mostly preferreds to align myself with the big money, i.e. those who have brought and paid for the big lawsuits. Though following Berkowitz on SHLD would have been a disaster...

 

My position in commons is because I see a relatively small probability of junior prefs winning and commons losing, and that the upside is a good bit higher.

 

I agree with your last statement. Problem is though, the common can be made whole @ .001