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

[orthopa]

 

Treasury has submitted its GSE plan to the White House for approval — http://go.politicoemail.com/?qs=fae052525580081f05575e20604e86684b54f4bb38ae7fbf38e01aeb97583c46e2153b4d78e5d9311ad52a07a3cce4a8 …

[Guest cherzeca]

 

Treasury has submitted its GSE plan to the White House for approval — http://go.politicoemail.com/?qs=fae052525580081f05575e20604e86684b54f4bb38ae7fbf38e01aeb97583c46e2153b4d78e5d9311ad52a07a3cce4a8 …

 

This means mnuchin has signed off. God help us if potus gives it a substantive look.

[muscleman]

re rumor that Pompeo was itching to leave: 

 

Didn't T-rex say the same thing when the rumor came out? Then after a few months, he left.

Same for John Kelly.

 

[Luke 532]

Plan will include details on ending the net worth sweep and a path out of conservatorship. #GSEs

[Guest cherzeca]

from Tim howard's blog:

 

 

Tim

 

I was able to determine by inquiry with a reputable journalist that the “treasury plan” is really a single plan with contributions by treasury and HUD, and the treasury portion of the plan was completed in June, but that the HUD portion of the plan has been subject to revision until just now…when news trickled out that the plan has been submitted to POTUS for his review and for expected release in September. this journalist may publicize this clarification (as I suggested he should), but I am writing on background until he does.

 

I think this should eliminate some doubt in the fannie-sphere as to Mnuchin’s intentions. it seemed to me that Mnuchin and Phillips were in synch and I doubted that the Phillips’ plan would need much post-hoc revision. of course, the proof of the pudding will be in the reading.

 

rolg

[Midas79]

from Tim howard's blog:

(snip)

 

Great stuff, thank you for your efforts and reporting. I agree that this is particularly good news about Mnuchin. It seems that instead of being too busy to get around to reading, finalizing, and approving the plan, he instead had already done all that and was attending to other duties while HUD did their part. It also fits with Phillips's departure; he really had done his part by that point and might now be trying to work the deal from the Wall Street side.

 

Does this mean that Treasury and FHFA have possibly been working together since June and might be farther along in SPSPA/capital raise negotiations than otherwise might be implied by the plan being delayed this long?

[Guest cherzeca]

from Tim howard's blog:

(snip)

 

Great stuff, thank you for your efforts and reporting. I agree that this is particularly good news about Mnuchin. It seems that instead of being too busy to get around to reading, finalizing, and approving the plan, he instead had already done all that and was attending to other duties while HUD did their part. It also fits with Phillips's departure; he really had done his part by that point and might now be trying to work the deal from the Wall Street side.

 

Does this mean that Treasury and FHFA have possibly been working together since June and might be farther along in SPSPA/capital raise negotiations than otherwise might be implied by the plan being delayed this long?

 

I had posted here awhile ago a suspicion that the holdup was HUD, since Mnuchin and Phillips are finance pros who know how to deliver on time, and HUD is far less rigorous and, whatever you think of Carson, reliable.

 

I also have posted that just like an attorney in cross-examination who doesn't ask a question he doesn't know the answer to, I suspect that Mnuchin and calabria have ballparked a lot of what they are about to negotiate.  so this will not be a big lead up to a serious inability to reach a deal.

[hardincap]

ackerman yes? https://www.wsj.com/articles/fannie-and-freddie-plan-is-likely-next-month-11566432606

 

positive so far but we'll see soon enough

[Cox022]

I'm speculating, but with so many journalists and others seemingly aware of the plan, it seems like it would just be a matter of days until details of the plan surface to the mainstream.  The circumstance where so many are away of the plan and its movement yet don't know its detailed contents can't last long.

 

I know this isnt useful and doesn't imply anything favorable/unfavorable to us as investors, but just a thought I had.  Maybe this kind of development shows up in the 'TA' before the mainstream news flow, idk.  Maybe MuscleMan is about to have his day in the sun!

 

Edit: i spoke too soon, this is already happening it seems.  See WSJ Ackerman article.  There is still room for more details to be reported.  We will see.

[muscleman]

I'm speculating, but with so many journalists and others seemingly aware of the plan, it seems like it would just be a matter of days until details of the plan surface to the mainstream.  The circumstance where so many are away of the plan and its movement yet don't know its detailed contents can't last long.

 

I know this isnt useful and doesn't imply anything favorable/unfavorable to us as investors, but just a thought I had.  Maybe this kind of development shows up in the 'TA' before the mainstream news flow, idk.  Maybe MuscleMan is about to have his day in the sun!

 

Edit: i spoke too soon, this is already happening it seems.  See WSJ Ackerman article.  There is still room for more details to be reported.  We will see.

 

 

The TA readings have slightly improved but I wouldn’t turn bullish yet.

[Luke 532]

Todd Sullivan makes some great points about recent news starting at the 21:45 minute mark (Fitch, Sheila Bair, etc.): https://valueplays.podbean.com/e/16-aug-23-2019/

[Guest cherzeca]

Todd Sullivan makes some great points about recent news starting at the 21:45 minute mark (Fitch, Sheila Bair, etc.): https://valueplays.podbean.com/e/16-aug-23-2019/

 

agree that Bair has a lot of credibility in the eyes of the market, but also one would think ms Bair would have asked a bunch of questions of Calabria before taking the job, and I assume those answers were satisfactory to her.  Bair doesn't want to rent out her good reputation for a plan that will be a dud

[Wiggins]

https://www.wsj.com/articles/a-primer-on-the-future-of-fannie-freddie-11566898207?mod=hp_lista_pos3

 

Plan to be released "shortly after Labor day."

[SnarkyPuppy]

https://www.wsj.com/articles/a-primer-on-the-future-of-fannie-freddie-11566898207?mod=hp_lista_pos3

 

Plan to be released "shortly after Labor day."

 

I believe there is a piece of new information in this article:

 

"Privately they have said they would like to reduce Fannie and Freddie’s loan footprint to between 30% and 40% of the market, according to people familiar with their discussions."

 

Additionally, quite amazing if you take a step back 1-2 years and see how drastically the narrative has changed.  Could argue that Mnuchin has done a great job at "boiling the frog" in terms of creating sentiment shift (rather than doing everything at once), but that could be confirmation bias.

[Luke 532]

https://www.wsj.com/articles/a-primer-on-the-future-of-fannie-freddie-11566898207?mod=hp_lista_pos3

 

Plan to be released "shortly after Labor day."

 

Yes, that's a few outlets now that have said shortly after Labor Day instead of September/October.  Interesting that this is what ACG Analytics said two weeks ago (on August 13th)...

#GSE #FHA #Presidential memo out post Labor Day. Not surprising DC roads vacant of traffic. Summer Ghost town.

 

Q:Do you know how long after Labor Day?  Days, weeks, maybe longer?  Many thanks!

A: ASAP

Q: So around September 3rd, 4th, 5th... that week?  Thanks.

A: That’s what we are told in DC.

[Guest cherzeca]

I believe there is a piece of new information in this article:

 

"Privately they have said they would like to reduce Fannie and Freddie’s loan footprint to between 30% and 40% of the market, according to people familiar with their discussions."

 

****

 

this is double hearsay, not news.  in fact, there was not a single tidbit of actual reporting in this piece. 

[orthopa]

Anyone able to PM me the text of the lastest WSJ article? Thanks in advance!

[orthopa]

My only fear from a very short term perspective is that the WH plan release tell us a lot but doesn't tell us how much the preferred and common shares are going to be worth in the end. The mile markers that Calabria has discussed and hint or discussion of the end of NWS are likely shown as a path out of conservatorship. But until the FHFA capital rules are released and final recap plan revealed I think the preferred will still trade at a substantial discount to par. Maybe there is a slight bump with each significant development along the way?

 

It surely is an exercise in speculation and short termism but are everyone's thoughts? Looking at Calabrias previous comments regarding the preferred getting par or getting converted. When is that revealed? With the recap plan? That could still be well into 2020 which is fine but if there was a chance to maybe look for a short term trade this could be it.

 

Im likely putting the cart way before the horse here but any substantial shrinkage in FnF foot print or business could certainly throw a wrench in long term value of common shares. Something to think about in any conversion situation. Could be a double edged sword.

[Midas79]

I believe there is a piece of new information in this article:

 

"Privately they have said they would like to reduce Fannie and Freddie’s loan footprint to between 30% and 40% of the market, according to people familiar with their discussions."

 

This is important for any future common share valuations, including scenarios where the juniors get offered a conversion. What I thought was more important is one of Ackerman's tweets that Alec Mazo caught, that the administration will likely "put additional restrictions on the companies' business in exchange for continued Treasury support for the firms". Mazo, correctly in my opinion, pointed out the importance of the continued government backing.

 

https://mobile.twitter.com/Alec_Mazo/status/1166348489015447552

 

Ackerman thinks this is essential for FnF's business model, and I (among others, I'm sure) think that this backing is required to keep the MBS market stable. After all, as cherzeca correctly told Christopher Whalen, if the MBS market is fine right now when FnF have very little capital and a line of credit from Treasury, it should be at least as stable with FnF recapitalized and the same line of credit in place.

 

Additionally, quite amazing if you take a step back 1-2 years and see how drastically the narrative has changed.  Could argue that Mnuchin has done a great job at "boiling the frog" in terms of creating sentiment shift (rather than doing everything at once), but that could be confirmation bias.

 

The first sentence is certainly not confirmation bias, it is just the truth. We are at a complete 180 from four years ago, and have come a long way even in the last two. I don't know how much of it is attributable to Mnuchin, but it has happened nonetheless. Hensarling and Corker retiring certainly helped this trend along.

[abitofvalue]

https://www.wsj.com/articles/a-primer-on-the-future-of-fannie-freddie-11566898207?mod=hp_lista_pos3

 

Plan to be released "shortly after Labor day."

 

I believe there is a piece of new information in this article:

 

"Privately they have said they would like to reduce Fannie and Freddie’s loan footprint to between 30% and 40% of the market, according to people familiar with their discussions."

 

Additionally, quite amazing if you take a step back 1-2 years and see how drastically the narrative has changed.  Could argue that Mnuchin has done a great job at "boiling the frog" in terms of creating sentiment shift (rather than doing everything at once), but that could be confirmation bias.

 

If Fannie and Freddie are 30-40^% o the market, profitability will be markedly lower than recent years.

[allnatural]

They are currently ~60% of the single-family market, so even if you assume 30-40% they are still earning $10-15b a year, enough for the common to retain value and pfds to be made whole. But I think the probability of them losing that much market share overnight is close to zero. It would require new entrants to want to compete w/ the GSEs, which would probably require Congress to pass legislation to expand the charters (0-2% probability?).

 

As Layton recently explained, who actually wants to invest capital to compete w/ a duopoly? Here is his full quote: "At 50,000 feet I agree it would be better to have more competition but let me ask two questions. Number one: Who’s going to enter? Who’s going to raise capital with the following investment thesis, I’m gonna start from scratch and to make it work and deliver into the single security I need a nationwide footprint because otherwise it won’t be accepted as fungible with the others so that’s a market requirement and so I have to go big fast and I’m going to compete with two massively entrenched competitors. Who have scale advantages and 100% market share against me. So what private equity firm is going to go, I like that story. So we’ve sat there and go who actually is going to enter. I understand the theory it would be good if people enter but when you actually go and ask possible entrants they go it’s just not a good deal. So I’m not talking theory I’m talking will someone show up.”

 

https://www.wsj.com/articles/a-primer-on-the-future-of-fannie-freddie-11566898207?mod=hp_lista_pos3

 

Plan to be released "shortly after Labor day."

 

I believe there is a piece of new information in this article:

 

"Privately they have said they would like to reduce Fannie and Freddie’s loan footprint to between 30% and 40% of the market, according to people familiar with their discussions."

 

Additionally, quite amazing if you take a step back 1-2 years and see how drastically the narrative has changed.  Could argue that Mnuchin has done a great job at "boiling the frog" in terms of creating sentiment shift (rather than doing everything at once), but that could be confirmation bias.

 

If Fannie and Freddie are 30-40^% o the market, profitability will be markedly lower than recent years.

[Cox022]

 

It surely is an exercise in speculation and short termism but are everyone's thoughts?

 

My thought is, the value of a business is the sum of its earnings it can produce for its shareholders over its lifetime.  In just a matter of days, according to the press, the government will state that the GSE's shareholders' interest in these profits will go from zero to $10-$15B. 

 

How that pie gets sliced remains to be seen.  In a theoretical sense, the expected value of the securities should increase, imo, meaningfully but I wouldn't presume to know how the market reacts in the short term-that consistently surprises me.  If the market prices today are 'fair', then theoretically they would move up after the announcement if it doesnt contain something out of left field.  But again, I have no evidence to think I have skill predicting short term movements, I'm just riffing here.

[Guest cherzeca]

there are talkers and there are walkers.  someone is talking about reducing GSE "footprint" to 30-40%.  over what the period? after treasury has sold out its common position? maybe...that would be a few years at least.  wouldn't make much sense before, unless the talker is a clueless policy guy who doesn't understand finance. and exactly how does this bureaucratic central planner get to this number? tell calabria "just do it" a la nike?

 

this is all BS until the plan is released, and then we get to read what Phillips has actually written.  and wonder why HUD took so long.

[Guest cherzeca]

@cox

 

re current pricing being fair, imo there are many investors who put the GSEs in the too hard pile.  waiting for clarity.  if clarity comes, then I think the supply/demand characteristics will change and prices will then become "fairer"

[orthopa]

Why not margin up or go all in if one hasn't already? Biggest risk seems to be the time this takes to be realized. No longer permanent loss of capital.  If your margin rate is 10%. The preferred arent 10% higher a year from now? Unlikely.