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

[BargainValueHunter]

http://www.cnbc.com/id/100765505

 

In a Wall Street Journal op-ed, Nader argues that the government treated shareholders of the government-sponsored enterprises or GSEs unfairly when it placed the agencies in conservatorship in 2008. Nader made a similar case in the newspaper in 2011.

 

Shareholders, including Nader himself, had purchased Fannie Mae and Freddie Mac shares believing them to be safe investments, he said. They had held on to their investments even as the financial crisis loomed larger, encouraged by statements from the companies' executives and high-ranking government officials that the agencies were "adequately capitalized."

[valuecfa]

Great call on this one.

 

I remember initially considering the idea from the original post, i thought it it would make a good 2% position for me. For some reason, i never gave it more time to look into.

 

C'est la vie

 

Congrats on this one!

[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.  :)

 

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

 

Last summer, I had a very different take than Mr. Market when the US government decided to hog all their profits instead of merely receiving their 10% dividend.  By GAAP that new regime wasn't good for the private common and preferred holders, and the common and preferred sold off. 

 

However, by Washington's score keeping to show how they "got even" or " "made a profit" on a bail out, I thought that new regime was a way that, measured by  funny money accounting, F&F could eventually get out of the hole relatively quickly. If they had had to continue paying that exorbitant dividend, it might take a decade or two before inflation would eventually enable them to pay off the principal of the US preferred.

 

My mistake was to anticipate waiting until the end of the year before building up our position once again.  By then, the preferred had already rebounded and recovered most of the selloff loss.  I was very happy that the market had become liquid enough for us to rebuild our position quickly in Q1  before the recent surge. We got back in before I posted, so it's a good bit more than a two bagger. :)

 

Having said all that, the outcome is entirely dependent on politics inside the beltway.  :o

 

 

[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!

 

Last summer, I had a very different take than Mr. Market when the US government decided to hog all their profits instead of merely receiving their 10% dividend.  By GAAP that new regime wasn't good for the private common and preferred holders, and the common and preferred sold off. 

 

However, by Washington's score keeping to show how they "got even" or " "made a profit" on a bail out, I thought that new regime was a way that, measured by  funny money accounting, F&F could eventually get out of the hole relatively quickly. If they had had to continue paying that exorbitant dividend, it might take a decade or two before inflation would eventually enable them to pay off the principal of the US preferred.

 

My mistake was to anticipate waiting until the end of the year before building up our position once again.  By then, the preferred had already rebounded and recovered most of the selloff loss.  I was very happy that the market had become liquid enough for us to rebuild our position quickly in Q1  before the recent surge. We got back in before I posted, so it's a good bit more than a two bagger. :)

 

Having said all that, the outcome is entirely dependent on politics inside the beltway.  :o

 

Indeed, politics makes this an impossible forecast.  I bought two years ago and the position has almost tripled.  But it's been a bumpy ride as I was down 75% at one point right after the 2012 amendments when Kyle Bass and others bailed.

 

I'm always glad to have someone make a public case for the thesis, but I wish it was anyone but Ralph Nader.  The only group that loathes Nader more than the Republicans is the Democrats (they blame him for Bush vs. Gore in 2000).  Politicians are spiteful and have long memories!

[PlanMaestro]

Having said all that, the outcome is entirely dependent on politics inside the beltway.  :o

 

True that.

 

The longer it takes the better but I was hoping for a more supportive Obama administration. The GSEs should have had an end similar to AIG's.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/millstein's-plan-for-fannie-and-freddie/msg77842/#msg77842

 

[twacowfca]

Having said all that, the outcome is entirely dependent on politics inside the beltway.  :o

 

True that.

 

The longer it takes the better but I was hoping for a more supportive Obama administration. The GSEs should have had an end similar to AIG's.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/millstein's-plan-for-fannie-and-freddie/msg77842/#msg77842

 

What happened to AIG and the TBTF  banks is the most powerful argument for the eventual return of substantial value to F&F, especially the preferred holders. 

 

Imagine sometime in the not too distant future when F&F have returned in some way more than the government put into them.  Here are those GSE securities that the US advised the small commercial banks were the only high yield preferred that it was safe enough for them to hold as capital.  And then all the TBTF banks plus AIG shareholders have had a substantial recovery, while the small commercial banks that have had to bear a disproportional burden to replenish the FDIC deposit insurance fund, have got zippo from the very GSE security that their regulator told them was safe to hold. 

 

What kind of justice is that?

[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.  :)

 

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

 

Last summer, I had a very different take than Mr. Market when the US government decided to hog all their profits instead of merely receiving their 10% dividend.  By GAAP that new regime wasn't good for the private common and preferred holders, and the common and preferred sold off. 

 

However, by Washington's score keeping to show how they "got even" or " "made a profit" on a bail out, I thought that new regime was a way that, measured by  funny money accounting, F&F could eventually get out of the hole relatively quickly. If they had had to continue paying that exorbitant dividend, it might take a decade or two before inflation would eventually enable them to pay off the principal of the US preferred.

 

My mistake was to anticipate waiting until the end of the year before building up our position once again.  By then, the preferred had already rebounded and recovered most of the selloff loss.  I was very happy that the market had become liquid enough for us to rebuild our position quickly in Q1  before the recent surge. We got back in before I posted, so it's a good bit more than a two bagger. :)

 

Having said all that, the outcome is entirely dependent on politics inside the beltway.  :o

 

Indeed, politics makes this an impossible forecast.  I bought two years ago and the position has almost tripled.  But it's been a bumpy ride as I was down 75% at one point right after the 2012 amendments when Kyle Bass and others bailed.

 

I'm always glad to have someone make a public case for the thesis, but I wish it was anyone but Ralph Nader.  The only group that loathes Nader more than the Republicans is the Democrats (they blame him for Bush vs. Gore in 2000).  Politicians are spiteful and have long memories!

 

I'm so glad to hear that you held on to them then. I thought you had sold out.  That was one reason I didn't flog my bull case then; I didn't want to rub salt into an open wound. 

 

Also happily, I checked our records and found that we had in fact bought a substantial mount of F&F preferred last summer after the big blowup, contrary to what I said, although not nearly as much as we should have bought.  :)

 

Some of these are up as much as 600%.  :)

[PlanMaestro]

What kind of justice is that?

 

Well said.

[Packer16]

It looks like the incentives are set up for these pfd to reach par with the opposing opinion based upon a "get even" government.  I was one of the folks that bought at the high then sold after the crash based upon my view at the time that the gov't was going to hose the hedge funds holding the pfds.  I ignored the incentives of the other players to my shagrin.  Does there have to be giant recovery assumptions going forward for these pfd to reach par?  TIA

 

Packer

[Olmsted]

Well I may regret this but I sold most of my Freddie holdings today.  I'll sell the rest over the next few days if I can get a good price.  I still think the case for them to be made whole is intact, but it is still a probabilities game with significant probability density at 0.

 

Why did I sell today?  F&F price appreciation just seems driven by speculative traders.  My evidence is the massive liquidity premium in the common shares, and to some extent the more-liquid preferred series.  Fundamental-oriented investors, wisely considering all outcomes, would not pile into common shares just because they can.  Not when the preferred and common are signalling widely disparate outcomes.  When risk-addled gamblers are driving valuation, it is time for me to sell and wait on the sidelines for a better entry. 

 

My plan is to wait for the blowoff I think is coming and re-enter at a lower price.  If I'm wrong and these prices aren't seen again, that's okay.  Freddie preferreds have been good to me, but at $.25, and with a long road still ahead for F&F, I think I can find better risk-rewards elsewhere.

[twacowfca]

Well I may regret this but I sold most of my Freddie holdings today.  I'll sell the rest over the next few days if I can get a good price.  I still think the case for them to be made whole is intact, but it is still a probabilities game with significant probability density at 0.

 

Why did I sell today?  F&F price appreciation just seems driven by speculative traders.  My evidence is the massive liquidity premium in the common shares, and to some extent the more-liquid preferred series.  Fundamental-oriented investors, wisely considering all outcomes, would not pile into common shares just because they can.  Not when the preferred and common are signalling widely disparate outcomes.  When risk-addled gamblers are driving valuation, it is time for me to sell and wait on the sidelines for a better entry. 

 

My plan is to wait for the blowoff I think is coming and re-enter at a lower price.  If I'm wrong and these prices aren't seen again, that's okay.  Freddie preferreds have been good to me, but at $.25, and with a long road still ahead for F&F, I think I can find better risk-rewards elsewhere.

 

Kind of agree.  We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold.  At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue.  The preferreds were so illiquid then that it took us a couple of months to build a significant position.

 

The big thing that has changed now is the financial health of their business.  Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs  have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures.  Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago.

 

Nevertheless, these are not something to bet the farm on. :)

[onyx1]

Does there have to be giant recovery assumptions going forward for these pfd to reach par?  TIA

 

Packer,  here is a copy of text I posted from a similar thread a few weeks ago, FYI:

 

"The 2012 Amendments, as written, do allow the Treasury to take every last dollar from the GSEs over the next 20 years if they want to.  But just because they can, doesn't mean they will.  This is Washington after all and anything can happen when it comes to contracts especially when a political victory is possible for both sides.  Add in a large one-time cash infusion to the government coffers and there is lots more to grease any wheels that appear stuck. 

 

It looks to me like the Private Preferred shareholders are counting on the Treasury and lawmakers desire to have a lump sum today rather than a stream of income over decades.  Without this desire, nothing happens.  In order to receive this lump sum, an IPO is required.  But an IPO cannot happen with the Senior Preferred dividend and liquidation preference as currently written, so the Treasury would need to forgive the Senior Preferred.  What?  Forgive?  Why would they do that, its taxpayers money!  The key here is that at some point in the near future taxpayers will have received back much or all the $189.5B extended to the GSEs.  The GSEs have returned $55B as of 12/31/2012.  Add over $90B of valuation allowances against DTA's that are about to be reversed and they are 75% repaid.  With IPO proceeds from the warrant position enough to cover any remaining amounts due, politicians don't even need to lie with a straight face to claim triumphantly that taxpayers have been paid back in full plus a big return on their investment, and the GSEs are now capitalized with private dollars.  Pats on the back and congratulatory handshakes for all!!  How does this help the Private Preferred?  Since the new common shareholders can't receive dividends until the Private Preferreds coupons are reinstated, IPO participants are likely to balk unless the Private Preferred issues are addressed.  Maybe the Privates get their coupons reinstated, or even better paid in full.  Either way the Private Preferreds emerge a winner.

 

This scenario seems plausible, reasonable, logical, rational, and a winner for everyone.  Of course this combination may just doom it for failure since it's Washington after all.  But that's why the Private Preferreds are getting such longs odds."

 

 

 

[onyx1]

Well I may regret this but I sold most of my Freddie holdings today.  I'll sell the rest over the next few days if I can get a good price.  I still think the case for them to be made whole is intact, but it is still a probabilities game with significant probability density at 0.

 

Why did I sell today?  F&F price appreciation just seems driven by speculative traders.  My evidence is the massive liquidity premium in the common shares, and to some extent the more-liquid preferred series.  Fundamental-oriented investors, wisely considering all outcomes, would not pile into common shares just because they can.  Not when the preferred and common are signalling widely disparate outcomes.  When risk-addled gamblers are driving valuation, it is time for me to sell and wait on the sidelines for a better entry. 

 

My plan is to wait for the blowoff I think is coming and re-enter at a lower price.  If I'm wrong and these prices aren't seen again, that's okay.  Freddie preferreds have been good to me, but at $.25, and with a long road still ahead for F&F, I think I can find better risk-rewards elsewhere.

 

Kind of agree.  We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold.  At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue.  The preferreds were so illiquid then that it took us a couple of months to build a significant position.

 

The big thing that has changed now is the financial health of their business.  Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs  have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures.  Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago.

 

Nevertheless, these are not something to bet the farm on. :)

 

Twa - you were the first to the party indeed, but that's not a big surprise!!  :)  And I generally agree with you and Olmsted.  The attraction of this trade is the positive convexity in price outcomes combined with lots of uncertainty and no time to expiry.  The convexity part is still positive, but not as attractive anymore.

 

 

[Olmsted]

Kind of agree.  We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold.  At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue.  The preferreds were so illiquid then that it took us a couple of months to build a significant position.

 

.02 - nice!  My buys averaged .035.

 

The big thing that has changed now is the financial health of their business.  Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs  have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures.  Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago.

 

I agree.  The (dramatic) return to financial health was condition 1 of 2 for these to see an actual return. Condition 2 is a restructuring that recognizes that fact and recognizes the legal position of the preferred holders.  Since we now have one of these two conditions in place, it is perfectly rational that the price has rallied.  And the incentives should be aligned for condition 2.  The froth just tells me that the rally may have overshot a bit - for now...

 

Nevertheless, I decided I will hang on to the the ~1/3 of my shares that weren't bought yesterday, and still hope to buy more if the price is right.

[CorpRaider]

They're talking about this on CNBC now.  Berkowitz was talking to David Faber about restructuring them.

[fareastwarriors]

They're talking about this on CNBC now.  Berkowitz was talking to David Faber about restructuring them.

 

http://video.cnbc.com/gallery/?video=3000171775&play=1

[nkp007]

They're talking about this on CNBC now.  Berkowitz was talking to David Faber about restructuring them.

 

http://video.cnbc.com/gallery/?video=3000171775&play=1

 

Oh boy

[hyten1]

so many prefers ... which one

[nkp007]

so many prefers ... which one

 

He put $500mm into the prefs. It looks and smells like a speculation, but there's no way he puts that much money in there without knowing something else.

[BargainValueHunter]

They're talking about this on CNBC now.  Berkowitz was talking to David Faber about restructuring them.

 

Well I didn't see that one coming!

 

http://s.wsj.net/public/resources/images/MI-AU350_Fairho_D_20090102152555.jpg

[twacowfca]

Kind of agree.  We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold.  At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue.  The preferreds were so illiquid then that it took us a couple of months to build a significant position.

 

.02 - nice!  My buys averaged .035.

 

The big thing that has changed now is the financial health of their business.  Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs  have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures.  Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago.

 

I agree.  The (dramatic) return to financial health was condition 1 of 2 for these to see an actual return. Condition 2 is a restructuring that recognizes that fact and recognizes the legal position of the preferred holders.  Since we now have one of these two conditions in place, it is perfectly rational that the price has rallied.  And the incentives should be aligned for condition 2.  The froth just tells me that the rally may have overshot a bit - for now...

 

Nevertheless, I decided I will hang on to the the ~1/3 of my shares that weren't bought yesterday, and still hope to buy more if the price is right.

 

Back then the pricing of the F&F prefs was all over the place.  Some traded at 1% of stated value, others at 2% or more.  The more liquid prefs often were twice as pricey as the least liquid. 

 

When a holder was selling a particular issue, the price could drop 20% or more.  We had to creep into them by waiting until some significant holder was selling because market makers had stopped making markets in those illiquid issues that Mr. Market thought were almost certainly worthless.  No funds were accumulating any of the prefs. 

 

We were buying 1/3 to 1/2 the shares that erratically traded, usually the issues that seemed to be greater bargains and sometimes others when big blocks were offered (measured by number of shares). We could usually buy blocks at a large discount to the recent price range of that issue. 

 

It was a buyers dream like when we were buying a large percentage of The shares of USG that traded in 2001 after they went into Cpt 11.  :)

 

 

[PlanMaestro]

Bruce being premature once again?  ;)

[Olmsted]

Bruce being premature once again?  ;)

 

Haha.  Maybe that means I will have a chance to buy back in 50% lower.

[nkp007]

Bruce being premature once again?  ;)

 

Haha.  Maybe that means I will have a chance to buy back in 50% lower.

 

50% lower AND with more clarity.

[twacowfca]

Like Chanticleer, I must conclude that Mr. Market has taken my advice to sell the F&F common to arbitrage the difference in prospective value of the F&F preferred.  The common has lost half its market value in the last couple of days while the preferred has been flattish.

 

Should I try for making the sun rise?  :)