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

[sampr01]

thanks. how much upside u r looking at?

hi twacowfca

 

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

 

Thanks

 

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

 

 

We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

[hyten1]

twacowfca,

 

how do you guys value these, there are tons of prefers, many with low vol, all dividend are non-cumulative

 

- you think they will ever get back to $25/$50? will fmcc or fnma ever pay dividend on these?

- considering they still have over 180bil to pay the treasury combine (fnma 88bil, fmcc 42bil)?

- i guess you guys are just playing the fact as housing improve prospect fo fnma/fmcc improve their prefers will move closer to $25/$50?

- i assume if fnma/fmcc do ever decide to redeem some of these they will start with the higher dividend ones

 

sorry for so many question, all newbie

 

i guess at end of day as long as prospect for fnma/fmcc are improving (housing improving) these prefers will move up, but i have no gage if $3 is a good price or $5, how do you value these?

 

hy

[twacowfca]

thanks. how much upside u r looking at?

hi twacowfca

 

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

 

Thanks

 

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

 

 

We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

 

That's not the way we look at these.  The margin of safety lies in the assumption that the UST won't wipe out their own investment in their F&F preferreds by a bankruptcy or similar reorganization.  Therefore, it would be unfair to wipe out the rest of the capital structure and unnecessary because the UST's preferred is senior to the rest of the equity claims. 

 

Eventually, F&F should be able to earn their way out of the hole in the sense of returning more to the UST than the UST put into them.  ( this is more or less the way our government spins accounting to prove they haven 't lost money on organizations they bailed out.)  If that 's the case, then something good may happen to the holders of the public preferred.  And possibly something less for the common.

[sampr01]

Thanks tw

do you have timeframe?

thanks. how much upside u r looking at?

hi twacowfca

 

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

 

Thanks

 

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

 

 

We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

 

That's not the way we look at these.  The margin of safety lies in the assumption that the UST won't wipe out their own investment in their F&F preferreds by a bankruptcy or similar reorganization.  Therefore, it would be unfair to wipe out the rest of the capital structure and unnecessary because the UST's preferred is senior to the rest of the equity claims. 

 

Eventually, F&F should be able to earn their way out of the hole in the sense of returning more to the UST than the UST put into them.  ( this is more or less the way our government spins accounting to prove they haven 't lost money on organizations they bailed out.)  If that 's the case, then something good may happen to the holders of the public preferred.  And possibly something less for the common.

[BargainValueHunter]

The common squeaks out another 50% gain today but the danger is that with one swipe of its collective hand Congress can just wipe you out.

 

Even the mere mention of an "overhaul" sliced the preferreds in half not too long ago.

 

Be careful.

[valueorama]

The common squeaks out another 50% gain today but the danger is that with one swipe of its collective hand Congress can just wipe you out.

 

Even the mere mention of an "overhaul" sliced the preferreds in half not too long ago.

 

Be careful.

 

I feel Congress's hands are tied. Fannie and freddie are the mortgage market as we speak. Private business is negligible. If you  say no more fannie or freddie, private mortgage lenders would demand a much higher rate and will kill housing market.

 

I see very little risk of Congress killing Fannie or freddie for the near term (1-3yrs). But given that all profits are to be paid as dividends to govt held preferreds., essentially the public preferred+common gets nothing. it needs to be treated as a call option on a future action by congress to retain profits.

[twacowfca]

The common squeaks out another 50% gain today but the danger is that with one swipe of its collective hand Congress can just wipe you out.

 

Even the mere mention of an "overhaul" sliced the preferreds in half not too long ago.

 

Be careful.

 

I feel Congress's hands are tied. Fannie and freddie are the mortgage market as we speak. Private business is negligible. If you  say no more fannie or freddie, private mortgage lenders would demand a much higher rate and will kill housing market.

 

I see very little risk of Congress killing Fannie or freddie for the near term (1-3yrs). But given that all profits are to be paid as dividends to govt held preferreds., essentially the public preferred+common gets nothing. it needs to be treated as a call option on a future action by congress to retain profits.

 

That's right.  There is always the possibility that the preferred and common could be wiped out because governmental decisions may be arbitrary.  That's why the public preferred is selling for pennies on the dollar.  This is not something one should put a big chunk of life savings into,

 

Interestingly, for those who like arbitrage, the recent run up in prices has taken the market value of the F&F common way ahead of the market cap of the F&F preferreds.  Yet the stated value of the preferreds is a lot more than the common should be worth in all but a pipe dream.  What is the cost to borrow the F&F common?

[Olmsted]

Interestingly, for those who like arbitrage, the recent run up in prices has taken the market value of the F&F common way ahead of the market cap of the F&F preferreds.  Yet the stated value of the preferreds is a lot more than the common should be worth in all but a pipe dream.  What is the cost to borrow the F&F common?

 

+1.  Tweeted same sentiments yesterday.  It is a great time to trade up the capital structure or engage in outright capital structure arbitrage.

 

Incidentally, the same common/preferred disparity existed in 2009-2010, but it was even more glaring - the common traded not just at a higher market cap, but if memory serves me correctly, a higher nominal price as well.  So save some dry powder for the trade, once fast money gets into something they can blow prices from merely irrational to insane.

 

I was offered a borrow of 5.5%.  But I'm afraid of a squeeze, and I don't have enough experience doing risk management for short-selling in situations like these in order to enter the trade with confidence.  (Tips?)  Unfortunately, there are no options.

[twacowfca]

Interestingly, for those who like arbitrage, the recent run up in prices has taken the market value of the F&F common way ahead of the market cap of the F&F preferreds.  Yet the stated value of the preferreds is a lot more than the common should be worth in all but a pipe dream.  What is the cost to borrow the F&F common?

 

+1.  Tweeted same sentiments yesterday.  It is a great time to trade up the capital structure or engage in outright capital structure arbitrage.

 

Incidentally, the same common/preferred disparity existed in 2009-2010, but it was even more glaring - the common traded not just at a higher market cap, but if memory serves me correctly, a higher nominal price as well.  So save some dry powder for the trade, once fast money gets into something they can blow prices from merely irrational to insane.

 

I was offered a borrow of 5.5%.  But I'm afraid of a squeeze, and I don't have enough experience doing risk management for short-selling in situations like these in order to enter the trade with confidence.  (Tips?)  Unfortunately, there are no options.

 

 

You're right.  The arbitrage is virtually a sure thing in the long run, but the long run could be very long indeed.  One reason the common is so pricey relative to the preferred is an extreme liquidity premium.  Another reason is a little short squeeze.  The squeeze may not extreme because the cost to borrow is "only" 5%.

 

The pricing differential was indeed extreme in 2009 2010 because the preferred was completely off the radar.  It took us quite a few weeks to accumulate a meaningful position in the preferred that was mostly owned by small banks that had been allowed by their regulator to own it because it was the only high yield security deemed to be "safe".  We were the first to point out the differential between the common and the preferred, on this board.  Then the idea got picked up on VIC , SA and other sites.  Since then the differential has been smaller.

[LC]

Can you sell short something related? Not sure what that something would be given the special position Freddie/Fannie are in...

[compoundinglife]

I remember reading Ori Eyal's thesis on the prefs way back when, it seemed really enticing but I put it in the too hard pile, would have made some money. He had a list a of the issues and suggested a basket approach.

 

Anyone know of any CEFs that hold decent amount of prefs or common? Could be an interesting way to play either side.

[value-is-what-you-get]

 

Be careful.

 

Indeed!

[Olmsted]

Can you sell short something related? Not sure what that something would be given the special position Freddie/Fannie are in...

 

Usually that would work but here I am not sure that would help since half of the trade would be buying something related - the preferred stock.

[twacowfca]

The spikey price action today of the common suggests lots of shorting and short covering.  We took some profits on some of the more liquid preferreds and continue to hold most of the others.  :)

[mrvlad0]

In the Markets, at Least, Fannie and Freddie Still Astound

 

http://dealbook.nytimes.com/2013/04/09/in-the-markets-at-least-fannie-and-freddie-still-astound/

 

The federal government even has agreements with both Fannie Mae and Freddie Mac that say that through 2017 they will turn over a set measure of profits to the government. After that, they will give all of their profits to the government.

 

Let’s face it, what value is there in a stock where you have no vote, right to dividends or profits? Let alone the fact that each company is in debt to the government by over $160 billion. Then there is the government plan to shrink them, perhaps into nothing. The recent profits are rather meaningless in this light.

 

Yet the trading continues.

[LC]

Wish I had put some more money into these....any idea how to value the preferreds going forward?

[constructive]

FHFA’s Conservatorship Priorities for 2013

http://www.fhfa.gov/webfiles/25024/EJDNABESpeech.pdf

[constructive]

As part of the backdrop to issuing the Strategic Plan, there seems to be broad consensus that

Fannie Mae and Freddie Mac will not return to their previous corporate forms. The

Administration has made clear that their preferred course of action is to wind down the

Enterprises. Of the various legislative proposals that have been introduced in Congress, none of

them envision the Enterprises exiting conservatorship in their current corporate form. In

addition, the recent changes to the PSPAs, replacing the 10 percent dividend with a net income

sweep, reinforces that the Enterprises will not be building capital as a potential step to regaining

their former corporate status.

[constructive]

Analysis of the 2012 Amendments to the Senior Preferred Stock Purchase Agreements

http://fhfaoig.gov/Content/Files/WPR-2013-002_2.pdf

 

Key discussion

 

In the end, in 2012, Treasury settled on the “positive net worth” model, in which Treasury would simply take, as dividends, the entire positive net worth of each Enterprise each quarter. Treasury is phasing in this change by establishing a net worth “buffer” such that net worth above the level of the buffer will be paid to Treasury. The buffer was set at $3 billion for each Enterprise initially, to be incrementally reduced to zero over five years.

 

...

 

The PSPAs also prohibited the Enterprises, without the consent of Treasury, from making any changes to their capital structures, issuing capital stock, increasing their debt significantly, paying any dividends (other than those to Treasury), engaging in certain transactions with affiliates, or disposing of any assets unless they are for “fair market value” in “the ordinary course of business.”

 

...

 

Thus, Treasury has liquidation preferences ahead of other stockholders to receive $189.5 billion if the Enterprises are liquidated. This liquidation preference does not decrease by the amount of dividends paid.

 

...

 

Absent express consent from Treasury and FHFA, an Enterprise cannot redeem the senior preferred stock until the termination of Treasury’s funding commitment. Treasury’s funding commitment to an Enterprise will terminate if: (i) the Enterprise’s assets are completely liquidated; (ii) the Enterprise pays its liabilities and obligations (including MBS) in full; or (iii) the Enterprise reaches the funding cap.

 

...

 

The PSPAs originally required that each Enterprise reduce its mortgage assets by 10% per year down to $250 billion. The 2012 Amendments accelerate the reduction to 15% per year.

 

...

 

The 2012 Amendments make it impossible for the Enterprises to build up any capital because their net worths, except for the temporary buffer amount, will be zero after they make each quarterly dividend payment to Treasury. Treasury’s press release announcing the amendments stated that with this change, the Enterprises “will not be allowed to retain profits, rebuild capital, and return to the market in their prior form.”

[BargainValueHunter]

Freddie common up 40% today! :o

[twacowfca]

There it goes again. This is the third grand slam home run we've had on these. Rational expectations or frothy market?  One thing is different now. Most of these preferred issues are rationally priced in relation to each other except one that was about 35% percent ahead of the herd. We took some profits on that one (about 7% of the total ) on its liquidity premium, but were unable to replace it with another relative bargain.

 

The preferreds continue to be a huge relative bargain, compared to the common that's been more than a ten bagger this year on its extreme liquidity premium.  I hate to short, but the arbitrage is compelling for those who do.  :)

[Guest valueInv]

What caused the jump?

[PlanMaestro]

Indeed. I passed on the third ride, it was not as simple as the first two.

 

Market madness from 2009.

http://variantperceptions.wordpress.com/2009/09/07/market-madness-freddie-mac-edition/

[onyx1]

There it goes again. This is the third grand slam home run we've had on these. Rational expectations or frothy market?  One thing is different now. Most of these preferred issues are rationally priced in relation to each other except one that was about 35% percent ahead of the herd. We took some profits on that one (about 7% of the total ) on its liquidity premium, but were unable to replace it with another relative bargain.

 

The preferreds continue to be a huge relative bargain, compared to the common that's been more than a ten bagger this year on its extreme liquidity premium.  I hate to short, but the arbitrage is compelling for those who do.  :)

 

Great timimg on your third purchase, looks to me like you bought just weeks before the price doubled...way to go Twa! 

[sswan11]

which preferreds are recommended?