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

[TwoCitiesCapital]

I wouldn't say forgone conclusion but I would say it is highly likely the administration will go forward with a plan without waiting for congress.  now, do the equity markets tank in the meantime? does congress try to do something stupid (jumpstart-ish)? what will be the conversion rate (will juniors get par value conversion)? does calabria come up with a stupid capital target (which may actually improve the junior conversion rate...common price goes down...but also may put the capital raise in jeopardy)?  so lots still to unfold.

 

Speaking of the conversion rate, are the juniors going to care what price the IPO is set at as long as they get par? I didn't understand the latest Moelis plan, which called for juniors to get 2 or even fewer than 2 commons for every $25 in par value, even though the market ratio far exceeded that. The comments by orthopa about the preferred holders wanting to win versus the commons, not just getting par, has me thinking.

 

I also don't see why the IPO would be conducted at prices 4-5 times what we see now. Won't the price be set by the market, and if so why assume such a high price? Why would the preferred shareholders behind the Moelis plan come out with something that advantages the commons so much more?

 

my guess is that the major junior holders have argued like this:  first, if you want to give us par in cash, that's fine. second, seeing that you dont want to do that and you would prefer to level the capital structure, we will convert into common at the re-IPO price.  third, since you need 2/3rds of each class to force conversion and you need to settle lawsuits, we have these various other items to discuss (high on my list would be getting the $20B or so back into the companies beyond the 10% moment).

 

now if the re-IPO price sinks, the junior who is about  to convert is protected by getting more common shares.

 

this is a very straightforward scenario in my view

 

I agree with this line of thinking as a preferred holder.

[muscleman]

I wouldn't say forgone conclusion but I would say it is highly likely the administration will go forward with a plan without waiting for congress.  now, do the equity markets tank in the meantime? does congress try to do something stupid (jumpstart-ish)? what will be the conversion rate (will juniors get par value conversion)? does calabria come up with a stupid capital target (which may actually improve the junior conversion rate...common price goes down...but also may put the capital raise in jeopardy)?  so lots still to unfold.

 

Speaking of the conversion rate, are the juniors going to care what price the IPO is set at as long as they get par? I didn't understand the latest Moelis plan, which called for juniors to get 2 or even fewer than 2 commons for every $25 in par value, even though the market ratio far exceeded that. The comments by orthopa about the preferred holders wanting to win versus the commons, not just getting par, has me thinking.

 

I also don't see why the IPO would be conducted at prices 4-5 times what we see now. Won't the price be set by the market, and if so why assume such a high price? Why would the preferred shareholders behind the Moelis plan come out with something that advantages the commons so much more?

 

my guess is that the major junior holders have argued like this:  first, if you want to give us par in cash, that's fine. second, seeing that you dont want to do that and you would prefer to level the capital structure, we will convert into common at the re-IPO price.  third, since you need 2/3rds of each class to force conversion and you need to settle lawsuits, we have these various other items to discuss (high on my list would be getting the $20B or so back into the companies beyond the 10% moment).

 

now if the re-IPO price sinks, the junior who is about  to convert is protected by getting more common shares.

 

this is a very straightforward scenario in my view

 

Convert at the re-IPO price? That seems like a pipe dream and even Moelis was not targeting that.

Here is the biggest catch 22. Any institutional player aiming to buy the re-IPO would request that the lawsuit drop and that probably implies all consent to convert the preferred to common at a ratio as low as possible, so these players won't get too much dilution. And the preferred holders know if they aim at a favourible conversion rate, there will not be many buyers in the re-IPO. However, if it is converting at such a low price of 2 common shares per FNMAS, then that would be a big drop from the existing price of over 12.46. What would they do in this case? They would have to demand cash in this case to make them whole, which means no buyers in the re-IPO. Therefore, I think everyone is waiting on Collins at the moment. I could not imagine an investment banker plan saying, let's just ignore Collins, and just work out the re-IPO regardless of what the ruling say. Once the ruling is out, there may be a clearer path forward.

 

Another thing to consider, does anyone know the total par value of all preferred shares? Is it something like 10 Bn? 20 Bn? 40 Bn?

 

Whatever happened in that JPM meeting, I can't imagine the investment bankers keeping the lip so tight that no one is talking to their trading desk during lunch time. There will also likely be more than just JPM doing this re-IPO. How about Goldman Sachs?

 

[no_free_lunch]

The total market cap was discussed earlier in the thread.  It's literally about 3000 posts back.  Not sure why you couldn't find it. ;) 

 

As I recall it was around $15B at par for fannie.  That is the thing, given they need well over $100B in capital, the preferred's are a factor but they are not everything.  You also need to provide the investors to be with some confidence that their property rights will be respected.  Personally, I hold some high yielding preferred's so I am hoping they just retain the preferred's and pay out the dividend for the time being.

[Midas79]

Convert at the re-IPO price? That seems like a pipe dream and even Moelis was not targeting that.

Here is the biggest catch 22. Any institutional player aiming to buy the re-IPO would request that the lawsuit drop and that probably implies all consent to convert the preferred to common at a ratio as low as possible, so these players won't get too much dilution. And the preferred holders know if they aim at a favourible conversion rate, there will not be many buyers in the re-IPO. However, if it is converting at such a low price of 2 common shares per FNMAS, then that would be a big drop from the existing price of over 12.46. What would they do in this case? They would have to demand cash in this case to make them whole, which means no buyers in the re-IPO. Therefore, I think everyone is waiting on Collins at the moment. I could not imagine an investment banker plan saying, let's just ignore Collins, and just work out the re-IPO regardless of what the ruling say. Once the ruling is out, there may be a clearer path forward.

 

Another thing to consider, does anyone know the total par value of all preferred shares? Is it something like 10 Bn? 20 Bn? 40 Bn?

 

Yes, Moelis does call for the juniors to be converted at par. However, their projection for the offering price is so high that a FNMAS shareholder would get right around 2 commons per FNMAS share. I don't think that will fly since I agree with orthopa that the preferred holders will want to win versus the commons. They can turn down any conversion offer, and can even potentially convert at above par. I also don't get why the offering would happen at a price so far above today's price. This was probably a sop to Treasury to make it look like they could get a ton of money for their warrants, but I don't think that's realistic at all. I expect Treasury's warrants to be worth $50B if they're lucky, and more like $30B.

 

The rest of your argument is nullified if the conversion happens before the offering, which I (and Moelis) believe will be the case. This protects the offering investors from being diluted by the conversion. The same goes for the warrants, if Treasury is going to exercise them they will do so before the offering.

 

Total par value of all junior preferred shares is $33.24B. It's $19.13B for Fannie and $14.11B for Freddie.

[muscleman]

Convert at the re-IPO price? That seems like a pipe dream and even Moelis was not targeting that.

Here is the biggest catch 22. Any institutional player aiming to buy the re-IPO would request that the lawsuit drop and that probably implies all consent to convert the preferred to common at a ratio as low as possible, so these players won't get too much dilution. And the preferred holders know if they aim at a favourible conversion rate, there will not be many buyers in the re-IPO. However, if it is converting at such a low price of 2 common shares per FNMAS, then that would be a big drop from the existing price of over 12.46. What would they do in this case? They would have to demand cash in this case to make them whole, which means no buyers in the re-IPO. Therefore, I think everyone is waiting on Collins at the moment. I could not imagine an investment banker plan saying, let's just ignore Collins, and just work out the re-IPO regardless of what the ruling say. Once the ruling is out, there may be a clearer path forward.

 

Another thing to consider, does anyone know the total par value of all preferred shares? Is it something like 10 Bn? 20 Bn? 40 Bn?

 

Yes, Moelis does call for the juniors to be converted at par. However, their projection for the offering price is so high that a FNMAS shareholder would get right around 2 commons per FNMAS share. I don't think that will fly since I agree with orthopa that the preferred holders will want to win versus the commons. They can turn down any conversion offer, and can even potentially convert at above par. I also don't get why the offering would happen at a price so far above today's price. This was probably a sop to Treasury to make it look like they could get a ton of money for their warrants, but I don't think that's realistic at all. I expect Treasury's warrants to be worth $50B if they're lucky, and more like $30B.

 

The rest of your argument is nullified if the conversion happens before the offering, which I (and Moelis) believe will be the case. This protects the offering investors from being diluted by the conversion. The same goes for the warrants, if Treasury is going to exercise them they will do so before the offering.

 

Total par value of all junior preferred shares is $33.24B. It's $19.13B for Fannie and $14.11B for Freddie.

 

Thank you! So to avoid additional lawsuits, Treasury would have to exercise their warrants first, before getting the preferreds converted, yeah? And the market cap for FNMA is just 3 Bn, which means once treasury converts, it will be 15 Bn. Then Fanny preferred of 19 bn converts at par to common, making the market cap 34 Bn, diluting treasury by over 50%. Then some kind of re-IPO comes in for, say another 34 Bn, diluting both treasury and preferreds (both now already common) by another 50%.

 

Does that sounds like a good deal to treasury? It doesn't look like that to me. Not sure if they care though.

 

Not sure why preferred conversion seems like a must-do step in this restructuring to me. It only adds up complexity.

 

 

[Guest cherzeca]

let me try to simplify the whole process and we'll see if it makes sense.

 

number one rule in finance (and business generally) is to try to engage in a course of action in which all parties to a transaction prosper.  even better if that course of action is really the only feasible course of action.

 

rule number two is that you almost never find transactions that satisfy rule number one.

 

but consider this:  the only way to raise $100B of capital is to nuke the senior prefs.  the only way to settle the lawsuits is to nuke the senior prefs.

 

wow.  it looks like we are pretty close to satisfying rule number one.  . nuking the senior prefs is the core course of action.

 

now there are a lot of details around this core course of action that needs to be worked through, and fhfa will have its say (capital), treasury will have its say (how much more than the 10% return does it need...which affects whether the $20B+ it has received beyond the 10% moment will be put back into companies...remember that if treasury does this, it stands to gain 80% from this through the warrants...and how much of the 80% warrants it wants to monetize...understanding that the more it monetizes the harder the capital raise), the market will have its say because the market always has its say, and the large junior prefs will have their say.

 

so this will shake out slower than one might want, and since this is a dynamic non-linear process, it will also shake out likely in a more unpredictable way than one might want.

[DRValue]

Anyone hopeful of a 4th July weekend Treasury Plan release. Someone give me hope....

[muscleman]

Anyone hopeful of a 4th July weekend Treasury Plan release. Someone give me hope....

 

 

Do not ever trade on hope and gut feelings. They will destroy your account. Trade on discipline!

[muscleman]

Can you tell us how you do your technical analysis? What tools do you use?  Which website you use for charting? I think if you combine Technical Analysis with value analysis, it is better, as I read it.

 

Can someone recommend me good quarterly dividend paying stock or resources to screen them so I do not have to worry about paying these tuition bills?

 

 

Anyone hopeful of a 4th July weekend Treasury Plan release. Someone give me hope....

 

 

Do not ever trade on hope and gut feelings. They will destroy your account. Trade on discipline!

 

 

I replied not a few pages ago for the details.

[muscleman]

I read it but do not see specifics. I like to try it, like which site do you use for charting? what do you chart ? how many indicators, which indicators, what do you look for and make your decision? Thank you.

 

Can you tell us how you do your technical analysis? What tools do you use?  Which website you use for charting? I think if you combine Technical Analysis with value analysis, it is better, as I read it.

 

Can someone recommend me good quarterly dividend paying stock or resources to screen them so I do not have to worry about paying these tuition bills?

 

 

Anyone hopeful of a 4th July weekend Treasury Plan release. Someone give me hope....

 

 

Do not ever trade on hope and gut feelings. They will destroy your account. Trade on discipline!

 

 

I replied not a few pages ago for the details.

 

 

I use ThinkOrSwim for charting. I think Tradingveiw.com is also good.

Other than that, I think my post there answers all of your questions.

 

Damn........ I was using my mobile phone to view the page and somehow emily was not blocked, and I didn't check who I was replying too. So this will be my last post for him/her.

Emily, not a long ago, I recommended that you read books about capital structures and bankruptcy investing to understand the difference of preferred vs common. You never read those kind of books do you?

Then why ask me more questions? You'll never learn anyway.

 

Maybe someone will view my posts as mean and harsh. But the market is never nice to lazy traders. The losses will reflect on his/her account as reality. I am simply trying my last time to help wake up this poor soul.

 

 

[Wiggins]

I read a book that was recommended by one of you guys: "The Little Book of Behavioral Investing." It was a highly enjoyable read. I can't remember who recommended it, perhaps @muscleman. Thanks for recommending it!

 

Happy birthday to the Nation that has sponsored the GSEs!

[Luke 532]

I read a book that was recommended by one of you guys: "The Little Book of Behavioral Investing." It was a highly enjoyable read. I can't remember who recommended it, perhaps @muscleman. Thanks for recommending it!

 

Happy birthday to the Nation that has sponsored the GSEs!

 

It was probably me.  It is one of two books I recommend... it and The Intelligent Investor.  Glad you liked it!  James Montier is great.

[Wiggins]

Yes that makes sense. Thanks for recommending those excellent books. I bought the Intelligent Investor as well at the same time based on your recommendation. I read a little bit of it and enjoyed it but got sidetracked for a book club I'm in so looking forward to getting back to Graham's book. Both just outstanding books and enjoyable to read.

 

I read a book that was recommended by one of you guys: "The Little Book of Behavioral Investing." It was a highly enjoyable read. I can't remember who recommended it, perhaps @muscleman. Thanks for recommending it!

 

Happy birthday to the Nation that has sponsored the GSEs!

 

It was probably me.  It is one of two books I recommend... it and The Intelligent Investor.  Glad you liked it!  James Montier is great.

[Luke 532]

Indeed they are great books. I recommend reading chapters 8 and 20 first, then reading the remainder of The Intelligent Investor.

[muscleman]

I read a book that was recommended by one of you guys: "The Little Book of Behavioral Investing." It was a highly enjoyable read. I can't remember who recommended it, perhaps @muscleman. Thanks for recommending it!

 

Happy birthday to the Nation that has sponsored the GSEs!

 

I don't recall if I have recommended that book, but I have definitely read that book.

You have to be careful with the concepts in Intelligent investors. I don't think it is applicable anymore, and even buffet didn't use those concepts of NAV margin of safety. Munger taught him to focus on the moat.

There are countless times when I bought a declining stock, thinking that I got a deal, and it is safe because there is margin of safety, and later some shocking news came out and I had to sell at big losses, which eventually caused me to quit value investing.

Even GSE preferreds could be a very good example. There are countless times in this thread where we were really bullish, and stock was going up. Later it came down on unbelievable news. I learned that lesson and changed the way I operate.

 

 

 

[rros]

It is a very good book, i have already read it twice, skimmed through second time. It isn't little, if you take time to read it thoroughly. I may need to read a third time as i still feel stupid.

 

I read a book that was recommended by one of you guys: "The Little Book of Behavioral Investing." It was a highly enjoyable read. I can't remember who recommended it, perhaps @muscleman. Thanks for recommending it!

 

Happy birthday to the Nation that has sponsored the GSEs!

 

I don't recall if I have recommended that book, but I have definitely read that book.

You have to be careful with the concepts in Intelligent investors. I don't think it is applicable anymore, and even buffet didn't use those concepts of NAV margin of safety. Munger taught him to focus on the moat.

There are countless times when I bought a declining stock, thinking that I got a deal, and it is safe because there is margin of safety, and later some shocking news came out and I had to sell at big losses, which eventually caused me to quit value investing.

Even GSE preferreds could be a very good example. There are countless times in this thread where we were really bullish, and stock was going up. Later it came down on unbelievable news. I learned that lesson and changed the way I operate.

Most here will not tell you this. Just like my simple, underrated 5 month MA that to this day continues to hold the line and has shown NO sell signal since this last run, here is another simple -perhaps even useful- nugget. To learn, all you need is to be active in the market and be utterly observant. Become a student of the game. Continually and constantly. Along the way read some, hear some as a complement to your own observation. And be prepared to lose about $100,000 of your savings and 5 years to walk through several economic cycles. By far, the largest and most important lesson in this journey is about yourself. What you can safely handle, emotionally and intellectually, together with being patient.

[muscleman]

It is a very good book, i have already read it twice, skimmed through second time. It isn't little, if you take time to read it thoroughly. I may need to read a third time as i still feel stupid.

 

I read a book that was recommended by one of you guys: "The Little Book of Behavioral Investing." It was a highly enjoyable read. I can't remember who recommended it, perhaps @muscleman. Thanks for recommending it!

 

Happy birthday to the Nation that has sponsored the GSEs!

 

I don't recall if I have recommended that book, but I have definitely read that book.

You have to be careful with the concepts in Intelligent investors. I don't think it is applicable anymore, and even buffet didn't use those concepts of NAV margin of safety. Munger taught him to focus on the moat.

There are countless times when I bought a declining stock, thinking that I got a deal, and it is safe because there is margin of safety, and later some shocking news came out and I had to sell at big losses, which eventually caused me to quit value investing.

Even GSE preferreds could be a very good example. There are countless times in this thread where we were really bullish, and stock was going up. Later it came down on unbelievable news. I learned that lesson and changed the way I operate.

Most here will not tell you this. Just like my simple, underrated 5 month MA that to this day continues to hold the line and has shown NO sell signal since this last run, here is another simple -perhaps even useful- nugget. To learn, all you need is to be active in the market and be utterly observant. Become a student of the game. Continually and constantly. Along the way read some, hear some as a complement to your own observation. And be prepared to lose about $100,000 of your savings and 5 years to walk through several economic cycles. By far, the largest and most important lesson in this journey is about yourself. What you can safely handle, emotionally and intellectually, together with being patient.

 

Yeah.... But the only problem is that such a slow MA won't be much useful when the tidy turns. It would likely go down 30% before you get out.

I do use MA as one of my only few indicators, but only to get the idea that the trend is up.

And I strongly agree that "By far, the largest and most important lesson in this journey is about yourself. What you can safely handle, emotionally and intellectually, together with being patient."

 

[orthopa]

It is a very good book, i have already read it twice, skimmed through second time. It isn't little, if you take time to read it thoroughly. I may need to read a third time as i still feel stupid.

 

I read a book that was recommended by one of you guys: "The Little Book of Behavioral Investing." It was a highly enjoyable read. I can't remember who recommended it, perhaps @muscleman. Thanks for recommending it!

 

Happy birthday to the Nation that has sponsored the GSEs!

 

I don't recall if I have recommended that book, but I have definitely read that book.

You have to be careful with the concepts in Intelligent investors. I don't think it is applicable anymore, and even buffet didn't use those concepts of NAV margin of safety. Munger taught him to focus on the moat.

There are countless times when I bought a declining stock, thinking that I got a deal, and it is safe because there is margin of safety, and later some shocking news came out and I had to sell at big losses, which eventually caused me to quit value investing.

Even GSE preferreds could be a very good example. There are countless times in this thread where we were really bullish, and stock was going up. Later it came down on unbelievable news. I learned that lesson and changed the way I operate.

Most here will not tell you this. Just like my simple, underrated 5 month MA that to this day continues to hold the line and has shown NO sell signal since this last run, here is another simple -perhaps even useful- nugget. To learn, all you need is to be active in the market and be utterly observant. Become a student of the game. Continually and constantly. Along the way read some, hear some as a complement to your own observation. And be prepared to lose about $100,000 of your savings and 5 years to walk through several economic cycles. By far, the largest and most important lesson in this journey is about yourself. What you can safely handle, emotionally and intellectually, together with being patient.

 

Yeah.... But the only problem is that such a slow MA won't be much useful when the tidy turns. It would likely go down 30% before you get out.

I do use MA as one of my only few indicators, but only to get the idea that the trend is up.

And I strongly agree that "By far, the largest and most important lesson in this journey is about yourself. What you can safely handle, emotionally and intellectually, together with being patient."

 

To just further the TA talk in true market form it appears that the market is trying to price in good news (get in while you can but at the last minute) before the Treasury plan in released. Looking at FNMAS previous highs are within striking distance and the trend is still up.

 

Muscleman my biggest fear trading purely on technicals and on news, esp with this situation is official news is likely to come out either pre market or after hours negating the ability to get in and enjoy the updraft. We may get a politico or WSJ warning like "plan coming this week" that will juice things a little but if this plan contains anything of good substance for either common or preferred then the only meat left on the bone maybe time value to expiration for when the plan goes through. It very well likely could be completely vague again with discussion of an upcoming capitalization plan in the fall or something and if the end game truly is par for preferred then one would think there could be a bump with the upcoming plans' release, a bump when the NWS is stopped this fall/winter, and then when the recapitalization starts.

 

What will be really interesting to me is to see what the market guesses the common to be worth with each of the above developments. Think about what has transpired since the end of Jan and the price of the common has gone nearly sideways. One would think it would also jump with each development but until the final capitalization plan comes out it could easily trade sideways. I mention it only bc of conversion value. At some point if not already conversion value needs to be determined and I believe the longer it takes the plan to come out the better the rate will be for preferred as the negotiating holders will simply say look at what the market is tell you.  There could be a clash here with the IPO price but the market will immediately price that in once known so maybe its a moot point.

[muscleman]

To just further the TA talk in true market form it appears that the market is trying to price in good news (get in while you can but at the last minute) before the Treasury plan in released. Looking at FNMAS previous highs are within striking distance and the trend is still up.

 

Muscleman my biggest fear trading purely on technicals and on news, esp with this situation is official news is likely to come out either pre market or after hours negating the ability to get in and enjoy the updraft. We may get a politico or WSJ warning like "plan coming this week" that will juice things a little but if this plan contains anything of good substance for either common or preferred then the only meat left on the bone maybe time value to expiration for when the plan goes through. It very well likely could be completely vague again with discussion of an upcoming capitalization plan in the fall or something and if the end game truly is par for preferred then one would think there could be a bump with the upcoming plans' release, a bump when the NWS is stopped this fall/winter, and then when the recapitalization starts.

 

What will be really interesting to me is to see what the market guesses the common to be worth with each of the above developments. Think about what has transpired since the end of Jan and the price of the common has gone nearly sideways. One would think it would also jump with each development but until the final capitalization plan comes out it could easily trade sideways. I mention it only bc of conversion value. At some point if not already conversion value needs to be determined and I believe the longer it takes the plan to come out the better the rate will be for preferred as the negotiating holders will simply say look at what the market is tell you.  There could be a clash here with the IPO price but the market will immediately price that in once known so maybe its a moot point.

 

I think I explained this but you probably missed it. Why do you assume that people only trade when the major news come out? People trade in anticipation of good and bad news. And sometimes even worst, players with insider info trade ahead of the news he KNOWS instead of guesses.

Take yourself for example, do you buy FNMAS because you just heard some major good news? Or do you buy because you did your research and feel confident that some major good news will eventually come?

 

TA is to analyze how traders as a whole group anticipates. It is too late to buy/sell when the news actually hit.

[Luke 532]

Attached...

[muscleman]

Attached...

 

Errr.... The image is so blurry that it is painful to read. I did a quick glance and it seems to be a rehash of what we already expect, right?

[Luke 532]

Attached...

 

Errr.... The image is so blurry that it is painful to read. I did a quick glance and it seems to be a rehash of what we already expect, right?

 

Try from your computer and not your phone.

[Guest cherzeca]

seems like the same tea leaves we have been reading, right Luke? 

[Luke 532]

seems like the same tea leaves we have been reading, right Luke?

 

Mostly.  "Agreeing to end NWS by the Sept 30 dividend date" is nice to read.

[Midas79]

now there are a lot of details around this core course of action that needs to be worked through, and fhfa will have its say (capital), treasury will have its say (how much more than the 10% return does it need...which affects whether the $20B+ it has received beyond the 10% moment will be put back into companies...remember that if treasury does this, it stands to gain 80% from this through the warrants...and how much of the 80% warrants it wants to monetize...understanding that the more it monetizes the harder the capital raise), the market will have its say because the market always has its say, and the large junior prefs will have their say.

 

I have never understood this reasoning. If Treasury just exercises the warrants in full right now, or any time before the capital raise, how does it affect the capital raise at all?

 

Also, if Treasury is able to keep all the overage money, including last week's NWS payment and probably the one on Sept 30, that's something in the neighborhood of $30B. If they give that money back voluntarily in order to increase the warrants' value, the common share price would have to rise by over $4 to make that course of action more profitable. Treasury would, in nearly all cases, be better off just keeping the money and not worrying about maximizing the value of the warrants. Of course if Treasury is forced to give the money back by the Fifth Circuit then this is out the window.