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

[orthopa]

Why do some seem to think that Tsy and FHFA will agree to execute an IPO 5x the size of the largest IPO of all time under terms that are unreasonable and not certain to garner full private capital buy-in (i.e. unreasonably high capital requirements)? 

 

These guys aren't going to close their eyes and hope for the best under this much spotlight.  If they genuinely go with recap approach they will acknowledge reality.  Reasonable capital requirements and treat prior private capital fairly while providing a decent rate of return for new investors. 

 

I can't do chaos math theory but if you remove the noise and think about this using first principles, incentives, and invert the final outcome - what are you worried about? 

 

There won't be a failed IPO attempt - just isn't a plausible downside scenario.

 

Maybe Im just drinking the kool aid but Ill let everyone else worry too. I dont think at this point the worry should be whether or not this all goes through but on ultimate return at these prices. Second on my list of worries is just how long it will take to ultimately realize the final upside return and that is only because crazy or not Im contemplating buying more on margin. 

 

My biggest prfd holding is trading at 47% of par. In bedded in final return could be a sweetener conversion to common, dividend turn on? (unlikely). At a 7% margin rate borrowing at these prices and holding for a year you would break even on a 50% of par final pay out.

 

So what is coming up?

 

1. Treasury plan by end of June to end conservatorship?

2. FNMA proposed capital rules by July-Augustish?

3. Amendment by Calabria by fall with treasury to stop sweep by end of year?

4. IPO/recap starting in winter spring of 2020.

 

So 1 year from now you need 50% of par to break even buying on margin at 7% with FNMAH. Ill take that bet all day this point.  :)

 

As many has mentioned Calabraia has diarrhea of the mouth and mentioned conversion to common and do prfd holders get par. He also mentions he is very confident he can get to an agreement with Mnuchin. Well of course like Otting said everyone has signed off remember? He speaks and I listen.

[HalfMeasure]

Why do some seem to think that Tsy and FHFA will agree to execute an IPO 5x the size of the largest IPO of all time under terms that are unreasonable and not certain to garner full private capital buy-in (i.e. unreasonably high capital requirements)? 

 

These guys aren't going to close their eyes and hope for the best under this much spotlight.  If they genuinely go with recap approach they will acknowledge reality.  Reasonable capital requirements and treat prior private capital fairly while providing a decent rate of return for new investors. 

 

I can't do chaos math theory but if you remove the noise and think about this using first principles, incentives, and invert the final outcome - what are you worried about? 

 

There won't be a failed IPO attempt - just isn't a plausible downside scenario.

 

Maybe Im just drinking the kool aid but Ill let everyone else worry too. I dont think at this point the worry should be whether or not this all goes through but on ultimate return at these prices. Second on my list of worries is just how long it will take to ultimately realize the final upside return and that is only because crazy or not Im contemplating buying more on margin. 

 

My biggest prfd holding is trading at 47% of par. In bedded in final return could be a sweetener conversion to common, dividend turn on? (unlikely). At a 7% margin rate borrowing at these prices and holding for a year you would break even on a 50% of par final pay out.

 

So what is coming up?

 

1. Treasury plan by end of June to end conservatorship?

2. FNMA proposed capital rules by July-Augustish?

3. Amendment by Calabria by fall with treasury to stop sweep by end of year?

4. IPO/recap starting in winter spring of 2020.

 

So 1 year from now you need 50% of par to break even buying on margin at 7% with FNMAH. Ill take that bet all day this point.  :)

 

As many has mentioned Calabraia has diarrhea of the mouth and mentioned conversion to common and do prfd holders get par. He also mentions he is very confident he can get to an agreement with Mnuchin. Well of course like Otting said everyone has signed off remember? He speaks and I listen.

 

I would think the NWS needs to end and capital rules need to be established first before ending conservatorship.

[SnarkyPuppy]

How do you do TA analysis? What tools do you use? I am interested in learning it. Thank you.

 

My TA analysis shows this should now make an accelerated run with small volatility. Hold on tight guys.  :D

 

Wait for news -> wait for stock price to go up -> TA tells you stock will go higher.  Where's TA analysis today on no apparent news but a rumored 5th circuit decision?

[orthopa]

Why do some seem to think that Tsy and FHFA will agree to execute an IPO 5x the size of the largest IPO of all time under terms that are unreasonable and not certain to garner full private capital buy-in (i.e. unreasonably high capital requirements)? 

 

These guys aren't going to close their eyes and hope for the best under this much spotlight.  If they genuinely go with recap approach they will acknowledge reality.  Reasonable capital requirements and treat prior private capital fairly while providing a decent rate of return for new investors. 

 

I can't do chaos math theory but if you remove the noise and think about this using first principles, incentives, and invert the final outcome - what are you worried about? 

 

There won't be a failed IPO attempt - just isn't a plausible downside scenario.

 

Maybe Im just drinking the kool aid but Ill let everyone else worry too. I dont think at this point the worry should be whether or not this all goes through but on ultimate return at these prices. Second on my list of worries is just how long it will take to ultimately realize the final upside return and that is only because crazy or not Im contemplating buying more on margin. 

 

My biggest prfd holding is trading at 47% of par. In bedded in final return could be a sweetener conversion to common, dividend turn on? (unlikely). At a 7% margin rate borrowing at these prices and holding for a year you would break even on a 50% of par final pay out.

 

So what is coming up?

 

1. Treasury plan by end of June to end conservatorship?

2. FNMA proposed capital rules by July-Augustish?

3. Amendment by Calabria by fall with treasury to stop sweep by end of year?

4. IPO/recap starting in winter spring of 2020.

 

So 1 year from now you need 50% of par to break even buying on margin at 7% with FNMAH. Ill take that bet all day this point.  :)

 

As many has mentioned Calabraia has diarrhea of the mouth and mentioned conversion to common and do prfd holders get par. He also mentions he is very confident he can get to an agreement with Mnuchin. Well of course like Otting said everyone has signed off remember? He speaks and I listen.

 

I would think the NWS needs to end and capital rules need to be established first before ending conservatorship.

 

I was referencing the treasury plan via phillip/ mnuchin with the road map etc.

[muscleman]

How do you do TA analysis? What tools do you use? I am interested in learning it. Thank you.

 

My TA analysis shows this should now make an accelerated run with small volatility. Hold on tight guys.  :D

 

Wait for news -> wait for stock price to go up -> TA tells you stock will go higher.  Where's TA analysis today on no apparent news but a rumored 5th circuit decision?

 

Well, if you guys think I am annoying when I post TA, I'll stop. Sorry that it is not helpful to you guys. I'll just stay quiet as before then, as I am not good FA.

 

 

[Guest cherzeca]

if I was running the recap, I would first do an institutional private placement, before doing a public underwriting, and ask brk to backstop the PP...giving him warrants to agree to buy any amount not raised in the PP.  maybe PP=$20B. then with that as a successful first step, I would do a follow on $30B public offering. that would be a very good two step. so I can see Buffett being very helpful and willing, for a pound of flesh

 

Yes, please.

 

I reckon Buffett would be willing to buy the whole business if he were allowed. I think he's very fond of the core mortgage guarantee business.

 

my thoughts were that Buffett would detoxify the GSEs if he invested.  it has been fashionable to hate on the GSEs but if warren buys in, GSEs become apple pie and motherhood

[Midas79]

if I was running the recap, I would first do an institutional private placement, before doing a public underwriting, and ask brk to backstop the PP...giving him warrants to agree to buy any amount not raised in the PP.  maybe PP=$20B. then with that as a successful first step, I would do a follow on $30B public offering. that would be a very good two step. so I can see Buffett being very helpful and willing, for a pound of flesh

 

Yes, please.

 

I reckon Buffett would be willing to buy the whole business if he were allowed. I think he's very fond of the core mortgage guarantee business.

 

my thoughts were that Buffett would detoxify the GSEs if he invested.  it has been fashionable to hate on the GSEs but if warren buys in, GSEs become apple pie and motherhood

 

I would just be afraid that Buffett's terms would be unfavorable to all current shareholders. He can certainly crush the commons if he gets to dictate the terms, and he could probably find a way to hurt the juniors too if it benefits him/Berkshire enough.

[orthopa]

How do you do TA analysis? What tools do you use? I am interested in learning it. Thank you.

 

My TA analysis shows this should now make an accelerated run with small volatility. Hold on tight guys.  :D

 

Wait for news -> wait for stock price to go up -> TA tells you stock will go higher.  Where's TA analysis today on no apparent news but a rumored 5th circuit decision?

 

rumored decision? Source? Either way these things to tend to be a predictive in regards to timing. Should be coming way sooner then later.

[TwoCitiesCapital]

One would have to wonder if we have met or coming very close to the all in moment if one is inclined to do so. Best would be to hold out till midterms later this year then go for the gusto. Seems like time is the biggest impediment to ROI at this point. If you were willing to put 5-10% etc of your portfolio with what we as investors knew 2-3 years ago it seems like a significant increase in exposure would be in order relative to what is thought/known now.

 

I was willing to put up to 10% of my portfolio with a coin flip of whether or not they were going to be "wound down". Where we sit now an increase in exposure should be in order no?

 

I'm about 80/20 preferred to common. I'm expecting the recap to take some time and the dilution issue to put downward pressure on the common.

 

If we know for sure commons are ok then I'll go all in common if the price is weak enough for a multi bagger return on a sure thing.

 

Anyone adding to their position with the recent news?

 

Or waiting for something more "sure" - a court decision, an endorsed plan, etc.?

 

(Count me in the second group - still a speculative position for me.)

 

I'm torn between adding because outcome appears to be getting more positive than what it was a year ago

 

and

 

Reducing exposure because the price reflects those developments, we've been burned by rallies before, and it's what prudent risk/portfolio management would advise.

 

I think I'm gonna settle in the middle and just hold what I already have recognizing that the 2-3x appreciation we've seen increased the position for me.

 

I bought a few more preferred shares this year.  Not too much though.

 

For position sizing I’m currently using a model where, within a year or so, the investment “works out” with probability p, in which case I get back a fraction f of par, or it doesn’t (with probability 1-p), in which case I get x.  My (subjective) belief at the moment is that p >= 80% and that the distribution of f should be no worse than a uniform distribution between 50% and 100%.  I have no idea what x is but I know it’s >= 0.  So I ran some simulations using my most conservative/pessimistic assumptions (p=.8, f~U[.5, 1.], x=0), and from that I got an optimal portfolio allocation (in the Kelly sense, assuming there are no competing investment opportunities) of about 25%.  That number is of course very sensitive to the inputs, but having played around with them, I decided that I feel fine with, say, a 10-20% position, so that is where I’m at. 

 

My general view of this bet is that the expected return may no longer be spectacular but it is still pretty high among those opportunities where one can reasonably expect a very low (in fact close to zero) beta.  I happen to be somewhat macro bearish at the moment so for me that is a big plus.

 

Understood. My approach is far less sophisticated, but still ended up with a position at my maximum allowed 10% concentration.

 

The struggle is knowing if I should implement my risk controls and potentially make less and let the sucker run and make more (but also risk losing more).

 

In the words of Howard Marks, "Investing is hard!"

[SnarkyPuppy]

How do you do TA analysis? What tools do you use? I am interested in learning it. Thank you.

 

My TA analysis shows this should now make an accelerated run with small volatility. Hold on tight guys.  :D

 

Wait for news -> wait for stock price to go up -> TA tells you stock will go higher.  Where's TA analysis today on no apparent news but a rumored 5th circuit decision?

 

rumored decision? Source? Either way these things to tend to be a predictive in regards to timing. Should be coming way sooner then later.

 

It was on Maloni's blog.  Almost definitely bologna.

[orthopa]

How do you do TA analysis? What tools do you use? I am interested in learning it. Thank you.

 

My TA analysis shows this should now make an accelerated run with small volatility. Hold on tight guys.  :D

 

Wait for news -> wait for stock price to go up -> TA tells you stock will go higher.  Where's TA analysis today on no apparent news but a rumored 5th circuit decision?

 

rumored decision? Source? Either way these things to tend to be a predictive in regards to timing. Should be coming way sooner then later.

 

It was on Maloni's blog.  Almost definitely bologna.

 

That guy looks like a piece of old bologna.

[james22]

if I was running the recap, I would first do an institutional private placement, before doing a public underwriting, and ask brk to backstop the PP...giving him warrants to agree to buy any amount not raised in the PP.  maybe PP=$20B. then with that as a successful first step, I would do a follow on $30B public offering. that would be a very good two step. so I can see Buffett being very helpful and willing, for a pound of flesh

 

Yes, please.

 

I reckon Buffett would be willing to buy the whole business if he were allowed. I think he's very fond of the core mortgage guarantee business.

 

my thoughts were that Buffett would detoxify the GSEs if he invested.  it has been fashionable to hate on the GSEs but if warren buys in, GSEs become apple pie and motherhood

 

Especially so, having sold out of FNMA/FMCC once before when he became concerned with their management. He is really uniquely suited to lend them credibility.

 

And given the Presidential Medal of Freedom by Obama, he somewhat protects Trump's administration from being seen as favoring "big finance" from the Left.

[james22]

if I was running the recap, I would first do an institutional private placement, before doing a public underwriting, and ask brk to backstop the PP...giving him warrants to agree to buy any amount not raised in the PP.  maybe PP=$20B. then with that as a successful first step, I would do a follow on $30B public offering. that would be a very good two step. so I can see Buffett being very helpful and willing, for a pound of flesh

 

Yes, please.

 

I reckon Buffett would be willing to buy the whole business if he were allowed. I think he's very fond of the core mortgage guarantee business.

 

my thoughts were that Buffett would detoxify the GSEs if he invested.  it has been fashionable to hate on the GSEs but if warren buys in, GSEs become apple pie and motherhood

 

I would just be afraid that Buffett's terms would be unfavorable to all current shareholders. He can certainly crush the commons if he gets to dictate the terms, and he could probably find a way to hurt the juniors too if it benefits him/Berkshire enough.

 

Sure, but the value he would add might more than offset?

[rros]

if I was running the recap, I would first do an institutional private placement, before doing a public underwriting, and ask brk to backstop the PP...giving him warrants to agree to buy any amount not raised in the PP.  maybe PP=$20B. then with that as a successful first step, I would do a follow on $30B public offering. that would be a very good two step. so I can see Buffett being very helpful and willing, for a pound of flesh

 

Yes, please.

 

I reckon Buffett would be willing to buy the whole business if he were allowed. I think he's very fond of the core mortgage guarantee business.

 

my thoughts were that Buffett would detoxify the GSEs if he invested.  it has been fashionable to hate on the GSEs but if warren buys in, GSEs become apple pie and motherhood

 

I would just be afraid that Buffett's terms would be unfavorable to all current shareholders. He can certainly crush the commons if he gets to dictate the terms, and he could probably find a way to hurt the juniors too if it benefits him/Berkshire enough.

 

Sure, but the value he would add might more than offset?

What added value he may bring to offset the loss of value on the Jrs. if he requests cumulative preferreds senior to them?

[Luke 532]

Gasparino.  I know, I know, but still...

 

SCOOP—Trump Administration actively discussing what could be the largest public offerings in history to recapitalize @FannieMae @FreddieMac more now @FoxBusiness @TeamCavuto $FNMA $FMCC

 

Not that this is news to us on this board, but thought it was worth mentioning this tweet.

[DRValue]

Gasparino.  I know, I know, but still...

 

SCOOP—Trump Administration actively discussing what could be the largest public offerings in history to recapitalize @FannieMae @FreddieMac more now @FoxBusiness @TeamCavuto $FNMA $FMCC

 

Not that this is news to us on this board, but thought it was worth mentioning this tweet.

 

Any post is a good post when the board has been quiet for so long.

[muscleman]

Gasparino.  I know, I know, but still...

 

SCOOP—Trump Administration actively discussing what could be the largest public offerings in history to recapitalize @FannieMae @FreddieMac more now @FoxBusiness @TeamCavuto $FNMA $FMCC

 

Not that this is news to us on this board, but thought it was worth mentioning this tweet.

 

That's interesting from this guy lol. Honestly, I'd rather see him bashing the stock hard. Then I could check how the stock reacts, as part of my technical analysis.  ::)

[Midas79]

A couple percent on the common and no movement on the prefs on this "news".

 

This isn't really a scoop, but it might quash some of the chatter about the recap being difficult due to its sheer size. Trump would see a $75-100B equity raise (a yuge number) as a feather in his cap.

 

I would just be afraid that, in order to raise that much money, Treasury and FHFA would have to promise a huge chunk of the equity to the investors. That limits the value of the warrants and pushes the outstanding commons into a corner.

[muscleman]

A couple percent on the common and no movement on the prefs on this "news".

 

This isn't really a scoop, but it might quash some of the chatter about the recap being difficult due to its sheer size. Trump would see a $75-100B equity raise (a yuge number) as a feather in his cap.

 

I would just be afraid that, in order to raise that much money, Treasury and FHFA would have to promise a huge chunk of the equity to the investors. That limits the value of the warrants and pushes the outstanding commons into a corner.

 

i am sure they are smarter than that. If they stop NWS, and do phases equity raises, then it could work out well in a few rounds.

[Guest cherzeca]

"This isn't really a scoop, but it might quash some of the chatter about the recap being difficult due to its sheer size."

 

well, the recap will be VERY hard to execute due to its sheer size.  especially if treasury doesn't want to do a laydown on some of its warrants.

 

I've been thinking that there may be a pricing game that will go on with the common.  seems to me the common will appreciate first because i) the treasury plan is announced without numbers, and common likes what it sees, and/or ii) Collin en banc is favorable.  this within next 4 weeks.

 

then eventually the bankers get involved and flesh out what the offering will look like, and the common doesn't like what it sees.  and common goes down, which is fine with bankers since as @IG has mentioned, bankers will want a low selling price target.

 

of course if things get accelerated then this window for the common to have gone up before it goes down can become quite small, but I dont know how the bankers can do their thing before fhfa finalizes the capital rule, and that should take awhile because calabria is too busy giving interviews.

 

so the common for a trade...no?

[allnatural]

If (big IF) the capital requirement lines up w/ FHFA's recent proposal pre-Calabria. I have common value at IPO of ~$9 if they win the Collins case (and they receive a $20-25b tax credit), and ~$7 without. This factors in 90-92% dilution (full warrant monetization, 50% of jr pfd converting to new common, and new capital via ipo), 2 years of retained earnings adjusted for commitment fee, and discounting the IPO valuation to 7.5x p/e to entice new investors.

 

Risk is Calabria wants more capital than the original proposal, common could get smoked with 95-98% dilution. But that would go against best interest of a) raising new private capital (# might be too large, I have it now at ~$60-$80b required via IPO) and b) maximizing treasury's warrant value.

 

Common isnt a horrible bet here if you believe common sense will prevail.

[DRValue]

Common isnt a horrible bet here if you believe common sense will prevail.

 

Careful now.

[allnatural]

Pun was intended  8)

 

Common isnt a horrible bet here if you believe common sense will prevail.

 

Careful now.

[beaufort]

Any Canadians holding prefs in their TFSA or RRSP? 

 

I know that the the common of both FnF trade in Germany on the major exchange and could be ok with CRA. 

 

This fellow had common and prefs in his TFSA:  https://business.financialpost.com/personal-finance/tfsa/how-about-a-big-bet-on-the-u-s-housing-market-for-your-tfsa

 

 

 

[Guest cherzeca]

@allnatural.  I like your work...moelis-like

@beaufort. and I thought you were from South Carolina...