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

[Guest cherzeca]

I haven't seen McConnell set up the Calabria nomination for closure etc.

 

I suppose that is affected by the dividend question on 3/31, but I expect that the dividend will not be paid.  if it is paid, it could be for any number of reasons.  as a return on treasury's investment, I dont see why treasury couldn't add it to the treasury's drug interdiction money, which is being applied to the wall. I think trump hasn't really thought that one through, but maybe he has gotten advice that it is not possible.  another reason is to "protect" Calabria's nomination.  another reason could be that it makes no sense riling anybody up until the admin plan is ready to be released, and the plan isn't ready by 3/31. 

 

I come back to thinking about stegman, I believe, at milken institute who recently wrote in favor of stopping dividend distributions and building up capital, though his next proposed steps would require congressional action.  so absent application towards the wall, I dont see any huge opposition to retaining the dividend. whether that is the only step admin takes, and then tries to work with congress, as stegman proposes is quite another thing.

[ValueMaven]

Anyone have thoughts on the common at these levels??  Up BIGLY ytd ... but who knows. 

[Midas79]

Anyone have thoughts on the common at these levels??  Up BIGLY ytd ... but who knows.

 

I'm staying away from them. I don't see a reason to own the commons over the prefs. If the pref-holding plaintiffs end up with negotiating leverage over the lawsuits, and they think the commons are going to appreciate in price by more than the prefs will, they will likely push for a conversion to common. I can't see why Treasury or FHFA would object to this. The conclusion here is that the juniors would then have a de facto call option on the commons, capturing the upside without being exposed to the downside (like dilution risk).

 

The fact that the commons are up so much against the prefs recently makes my belief even stronger. Less room to run.

[Eye4Valu]

Anyone have thoughts on the common at these levels??  Up BIGLY ytd ... but who knows.

 

I'm staying away from them. I don't see a reason to own the commons over the prefs. If the pref-holding plaintiffs end up with negotiating leverage over the lawsuits, and they think the commons are going to appreciate in price by more than the prefs will, they will likely push for a conversion to common. I can't see why Treasury or FHFA would object to this. The conclusion here is that the juniors would then have a de facto call option on the commons, capturing the upside without being exposed to the downside (like dilution risk).

 

The fact that the commons are up so much against the prefs recently makes my belief even stronger. Less room to run.

 

Agree, well said Midas!

[muscleman]

Anyone have thoughts on the common at these levels??  Up BIGLY ytd ... but who knows.

 

I'm staying away from them. I don't see a reason to own the commons over the prefs. If the pref-holding plaintiffs end up with negotiating leverage over the lawsuits, and they think the commons are going to appreciate in price by more than the prefs will, they will likely push for a conversion to common. I can't see why Treasury or FHFA would object to this. The conclusion here is that the juniors would then have a de facto call option on the commons, capturing the upside without being exposed to the downside (like dilution risk).

 

The fact that the commons are up so much against the prefs recently makes my belief even stronger. Less room to run.

 

I agree. With that said, the performance of common has been much better than preferred so far YTD. Even in the most recent few weeks, when FNMAS keeps going down, FNMA is staying up.

Does anyone remember when this happened before?

 

[Midas79]

I agree. With that said, the performance of common has been much better than preferred so far YTD. Even in the most recent few weeks, when FNMAS keeps going down, FNMA is staying up.

Does anyone remember when this happened before?

 

FNMAS is only around 8% off its recent high in the low $10s, while FNMA is also around 8% off the recent high of $3.00. The YTD performance looks quite divergent because it's YTD. Extend it back a few months and they're about even.

 

What we have seen in 2019 is FNMA outperforming FMCC and FNMAS, while FNMAS has been outperforming FNMAT and FMCKJ. Before that, FNMA and FMCC traded at near parity, while the same was true for those three pref series. That tells me that the money coming in is mostly uninformed, all they hear is FNMA for the commons and FNMAS for the prefs. They choose the commons for the potential upside, not realizing that the litigants will capture much of it, if there is any to be had, in a settlement.

 

The last time the commons outperformed by this much was in the aftermath of Lamberth's first decision in 2014, when many of the pref holders just plain sold. This time it's most of the incoming money going to commons. There was also a short burst of the prefs outperforming the commons in late 2017 when Corker-Warner 2.0 came out, with rumors that prefs would be made whole while the commons wouldn't do so well.

[Guest cherzeca]

agree Midas.

 

my own view is that if you think collins en banc will be a win (and relief granted) then you should want exposure to commons.  on other hand, since no one knows what admin plan will look like, its safer to be in prefs. unclear which comes first

[rros]

Does Otting's support of FSOC proposal of using an activities-based approach to identify SI non-bank financial companies help or hinder?

 

On a quickie, I'd say it helps. Why would a monoline insurer with majority of assets being loans on single-family homes (risk-weighted at 50%) and no MBSs portfolio of its own (or minimal) be a SIFI? Wouldn't this move preempt such designation?

[Guest cherzeca]

here is a good quick explainer:  https://www.thinkadvisor.com/2019/03/07/fsoc-proposes-changes-to-nonbank-sifi-designation/?slreturn=20190207094706

 

I think this new guidance is smarter regulation generally; how it applies to GSEs is to be seen.  under old guidance unless I am missing something GSEs would have definitely fallen into SIFI classification

[rros]

here is a good quick explainer:  https://www.thinkadvisor.com/2019/03/07/fsoc-proposes-changes-to-nonbank-sifi-designation/?slreturn=20190207094706

 

I think this new guidance is smarter regulation generally; how it applies to GSEs is to be seen.  under old guidance unless I am missing something GSEs would have definitely fallen into SIFI classification

Thank you, Chris. Not a guarantee but this opens up the possibility of a more lenient approach when looking at Fannie and Freddie.

[Midas79]

here is a good quick explainer:  https://www.thinkadvisor.com/2019/03/07/fsoc-proposes-changes-to-nonbank-sifi-designation/?slreturn=20190207094706

 

I think this new guidance is smarter regulation generally; how it applies to GSEs is to be seen.  under old guidance unless I am missing something GSEs would have definitely fallen into SIFI classification

Thank you, Chris. Not a guarantee but this opens up the possibility of a more lenient approach when you looking at Fannie and Freddie.

 

Agreed. I think this is an excuse to not designate FnF.

 

And I agree with you as well, Chris. Prior to yesterday's meeting, I don't know if there would be a path to avoid the designation for FnF based on their size alone once they are released.

[allnatural]

Very quiet lately. While I am still optimistic they amend the NWS this month if Calabria is voted in.. is it safe to say if this step isnt taken by June dividend latest, that admin reform is dead for time being heading into election year? Thesis would shift back to courts where judges havent helped (other than the recent Lamberth ruling which won't decide damages until 2H 2020). I'm still cautious on Collins given past rulings give some judges an easy way out.

[DRValue]

Very quiet lately. While I am still optimistic they amend the NWS this month if Calabria is voted in.. is it safe to say if this step isnt taken by June dividend latest, that admin reform is dead for time being heading into election year? Thesis would shift back to courts where judges havent helped (other than the recent Lamberth ruling which won't decide damages until 2H 2020). I'm still cautious on Collins given past rulings give some judges an easy way out.

 

Still waiting on Senate confirmation. Not too confident on Collins since the defendants cited a recent case where being unconstitutional didn't erase actions.

 

Not sure about the electron year but calabria being independent and some fight back from the administration could make it doable imo.

 

I know lawsuits take a long time but any reason Lambeth is that far out? Also Sweeney has been quiet for a while, that must be getting close to longest case records...

[allnatural]

I wouldn't worry too much about the recent Collins filing. It potentially hurts plaintiffs constitutional argument but has no effect on the APA claim which is what the judges during oral arguments focused on / our best shot at a win there.

[ValueMaven]

What happened to Ottings 'Within Weeks' comment back in Jan??

 

 

[rros]

And... the wall keeps getting more expensive by the week.

 

The president’s proposal asks for an additional $5 billion in funding for the Department of Homeland Security and $3.6 billion in new military construction funds, according to a senior administration official, who requested anonymity to discuss the plan ahead of its release.

 

The request is in addition to the $6.7 billion that Trump is hoping to allocate through executive action after declaring a national emergency over the situation on the border in February, and is likely to tee up a new battle with Congress.

 

Didn't the wall max out at $5 bill only a few weeks ago? 5+3.6+6.7 = 15.3. At this pace even warrants won't be enough.

[allnatural]

Safe to say that got tabled as it wasn't supposed to leak and drew some scrutiny. Current focus is on getting Calabria confirmed and then taking it from there.

 

 

What happened to Ottings 'Within Weeks' comment back in Jan??

[Guest cherzeca]

allnatural is quite right, 5th C collins en banc may focus on the APA claim and if they find NWS ultra vires, they would have to invalidate it, and thus not need to address constitutional claim....which they will hear 3/12 in All American appeal.  even if collins addresses const claim, 5th C would not necessarily be impressed by the 1st C analysis in Aurelius. (I wasn't, but then again no one is asking me)

 

collins court may also just send back APA claim for trial, in which case I think they would have to address const claim.  we shall see.

[muscleman]

whats the likelihood that Calabria implements a capital plan exactly like what Watt did for the 3 bn buffer except a much larger number?

So say, the next 150 bn earnings will be retained while senior preferred balance increase by that same amount?

[allnatural]

High likelihood, but I think more like a years worth of earnings ($10-15b buffer), which buys them enough time to finalize reform as they retain capital.

 

 

whats the likelihood that Calabria implements a capital plan exactly like what Watt did for the 3 bn buffer except a much larger number?

So say, the next 150 bn earnings will be retained while senior preferred balance increase by that same amount?

[Guest cherzeca]

High likelihood, but I think more like a years worth of earnings ($10-15b buffer), which buys them enough time to finalize reform as they retain capital.

 

 

whats the likelihood that Calabria implements a capital plan exactly like what Watt did for the 3 bn buffer except a much larger number?

So say, the next 150 bn earnings will be retained while senior preferred balance increase by that same amount?

 

any capital markets plan to raise $150B in capital will take a long time. I'd say 2-4 years from start to finish.  in the first two years, I cant see how any dividends would be paid out.  so that is something like $30-40B of capital right there.  if the admin is serious about this, I cant see how they wouldn't want this div halt to begin 3/31.

[muscleman]

High likelihood, but I think more like a years worth of earnings ($10-15b buffer), which buys them enough time to finalize reform as they retain capital.

 

 

whats the likelihood that Calabria implements a capital plan exactly like what Watt did for the 3 bn buffer except a much larger number?

So say, the next 150 bn earnings will be retained while senior preferred balance increase by that same amount?

 

any capital markets plan to raise $150B in capital will take a long time. I'd say 2-4 years from start to finish.  in the first two years, I cant see how any dividends would be paid out.  so that is something like $30-40B of capital right there.  if the admin is serious about this, I cant see how they wouldn't want this div halt to begin 3/31.

 

 

I think both of you missed my point. The crux of that Watt 3 bn buffer is to INCREASE senior preferred liquidation value by that same amount. I am pretty sure the 3/31 dividend will be suspended, but what if that follows the same plan where senior preferred is increased by the same amount? I think it is quite likely that they’ll do this easiest path forward first and let litigation move forward to tell them if the senior preferred should be deemed fully paid off. What do you think?

[allnatural]

I agree with your view. They will increase the SPSA liquidation preference by the buffer they allow them to retain. This gives them cover while litigation plays out and they finalize a reform which involves the government declaring the senior prefs fully paid off (settlement w/ shareholders).

[muscleman]

I agree with your view. They will increase the SPSA liquidation preference by the buffer they allow them to retain. This gives them cover while litigation plays out and they finalize a reform which involves the government declaring the senior prefs fully paid off (settlement w/ shareholders).

 

Yeah... that’s what I am thinking. And that would totally throw the balls back to the courts.

Regarding Otting’s plan, it surely looks like a dead one now. I am surprised if he talked about such specifics in front of journalists, how can he be not concerned that it gets leaked out? That’s the journalist’s job!

[muscleman]

I am out again. I don't think the technicals will show immediate jump from here. I'll closely watch this to see if it is worth another shot.

 

 

Now this looks like a timely exit. At that time, it was unclear why I should sell from a fundamental perspective, but now it is clearer. (Otting’s 2-4 week plan probably dead. 3/31 sweep probably will happen. Calabria may increase the capital buffer by retaining earnings while increasing senior preferred liquidation value by same amount etc.)

 

The price action has been so lame that if I don’t see another Long setup this or next week, then it seems unlikely I’ll get a setup.