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

[Gregmal]

17 minutes ago, ValueMaven said:

Given todays ruling even $2.50 is rich for FNMAS.  Talk anchoring and time value of money.  Brutal.  

Eh DTLA still trades well north of 50% par and I'd amusingly wager the FNMAs are settled up/resolved well before that shitshow. 

[Castanza]

Some interesting commentary 

[orthopa]

4 hours ago, allnatural said:

Tough day for shareholders / rule of law. What value is left if any is left in the preferred shares?

 

1) Biden Admin optionality: Word is that the Biden admin is against the high capital requirements and footprint shrinking set by Calabria. Why do capital requirements even matter if they are stuck in perpetual conservatorship? Biden will shortly nominate a replacement and that replacement will share his views on the future of housing finance reform (could be bullish or more of the same aka nothing).

 

2) SCOTUS remand for relief: Based off the ruling today, very low likelihood shareholders see any relief here.

 

3) Lambert/contracts case: Probably shareholders best shot at short-term relief in litigation. Set for trial in ~9 months from today. Lamberth already ruled in favor of shareholders that the government allegedly violated our contractual rights with the NWS (whether the NWS is legal or not is irrelevant to his analysis). The crux of his ruling was that no shareholder could have ever expected at a time when the GSEs were about to hit record profitability, for the government to come in and to arrange the contracts so they take everything for themselves while zeroing out the shareholders in exchange for NOTHING. He then went on to list all the facts to support this view. Damages/relief would potentially entail PAR+ interest in damages in the form of a direct monetary check to shareholders.

 

4) Takings case: Another good shot on goal but I think its at least 1-2 years away.

 

5) TINA: As always, GSEs are more stable / reformed than ever before and have ~$40-50b of retained capital on their books. I don't think unwind/replace is a real risk here but being stuck in limbo may be. TINA provides shareholders a perpetual call option either way.

 

Add it all up and you get ~10% of PAR for FNMAS. 

Do you have readily accesible links to that lamberth stuff? Is it just in the court filings? Not sure I read that before. 

[orthopa]

http://delawarebayllc.com/images/Time_for_a_fresh_look_2.pdf

 

The ruling today jogged my memory of this Hindes letter from earlier this year. FWIW he didnt seem to give two shits about the SCOTUS. The market obviously thinks otherwise. 

 

At ~10% of par does a disgusted long time shareholder add here? Starting a new position here maybe, DCA down, ugh....

[COBFInfinity]

Just wanted to mention for those who weren't watching the price action - the earliest trades after the decision was released caused a pop in common and preferred shares, but then soon sunk. Some investors either jumped the gun after seeing something positive but not going through all the details, or algorithms assigned to decipher the decision got it wrong.

[allnatural]

28 minutes ago, orthopa said:

Do you have readily accesible links to that lamberth stuff? Is it just in the court filings? Not sure I read that before. 

https://www.govinfo.gov/content/pkg/USCOURTS-dcd-1_13-cv-01053/pdf/USCOURTS-dcd-1_13-cv-01053-1.pdf

 

See page 14 section B for the relevant section. The government tried to file for a motion for rehearing after this decision came out which Lamberth promptly rejected as well. Section A of page 26 explains that even with todays confirmation from SCOTUS that HERA allows FHFA to act in its own best interest (the "death knell" in the SCOTUS APA claim), shareholders still win.

[muscleman]

2 hours ago, COBFInfinity said:

Just wanted to mention for those who weren't watching the price action - the earliest trades after the decision was released caused a pop in common and preferred shares, but then soon sunk. Some investors either jumped the gun after seeing something positive but not going through all the details, or algorithms assigned to decipher the decision got it wrong.

 

That resembles the opposite of Rothchild's UK bond trade. When the war news came, he was the first one to know it, and he sold as much as possible. Others did not know what was going on but they saw Rothchild selling like the end of the world so they joined, selling at pennies, and Rothchild bought aggressively from them.

 

There are algos that are designed to trick the other algos to think the other algo knows something that it didn't, and follow the action there. I suspect the initial pop was done by one algo trying to trick the other algo.

[TwoCitiesCapital]

1 hour ago, allnatural said:

https://www.govinfo.gov/content/pkg/USCOURTS-dcd-1_13-cv-01053/pdf/USCOURTS-dcd-1_13-cv-01053-1.pdf

 

See page 14 section B for the relevant section. The government tried to file for a motion for rehearing after this decision came out which Lamberth promptly rejected as well. Section A of page 26 explains that even with todays confirmation from SCOTUS that HERA allows FHFA to act in its own best interest (the "death knell" in the SCOTUS APA claim), shareholders still win.

 

We can dream. I don't think we should hope to rely on the courts any further. 

[Castanza]

Sandra Thompson 

 

"Thompson has served as deputy director of the Division of Housing Mission and Goals since 2013. As the deputy director, Thompson oversaw FHFA’s housing and regulatory policy, capital policy, financial analysis, fair lending and all mission activities for Fannie Mae, Freddie Mac and the Federal Home Loan Banks."

[DocSnowball]

10 hours ago, TwoCitiesCapital said:

 

We can dream. I don't think we should hope to rely on the courts any further. 

 

Agree. I had come into this investment with the thesis that this is a takings. However, the Supreme Court ruling has little mention of acknowledging any injury to shareholders, in fact they write that prospective relief is not an issue anymore with the 4th amendment (really?). Not surprised with the decision but surprised that they did not give any directions for the shareholder injury (rather left it to lower courts whether it even occurred, and if it did contingent to the unconstitutional structure rather than the fact that it did occur). They sized up the tree but didn't care to do anything about the forest. Not a lawyer but not relying on courts anymore. Won't be surprised if they limit any damages to holders before 2012. 

 

Personally I had around 6% of portfolio in this, so a significant setback. It is the second large one for me in the last 3 years, and leaves a lot to reflect on. I've been moving away from security selection to Vanguard style, Vanguard funds based asset allocation for 80% of my portfolio and that may be the best fit for me. This investment has shown me to never rely on the story even again, no matter what the reasoning - the importance of avoiding binary investments, people in management/ control really matter, and avoiding special situations as an amateur. Still holding the stubs at least until Sept 30th, yet it is more anchoring and rationalization than anything concrete. Perhaps seeing this in my portfolio will be a reminder never to make this mistake again. 

[JRM]

lol.  You're better off throwing darts at a wall than trying to guess how the current SCOTUS is going to rule on anything.  I haven't seen a clear pattern yet.

[james22]

1 hour ago, DocSnowball said:

Perhaps seeing this in my portfolio will be a reminder never to make this mistake again. 

 

This has hurt: ~8% of portfolio and significant opportunity cost.

 

But still unsure what my takeaway should be.

 

I tend to believe it was a good bet, based on precedent.

 

But we have had recent examples of SCOTUS shying away from difficult decisions.

 

As a value investor, I've been trying to remember John Templeton's When people say things are different, 20 percent of the time they are right. 

 

I'd assumed stare decisis was more reliable than mean reversion, but I guess the Rule of Law is something I have to now question.

 

Maybe I can recoup my losses by looting? Or shoplifting?

[buffetteer1984]

 

This was Ackman back in November speaking about fnf

Edited June 24, 2021 by buffetteer1984

[james22]

Consider the guidance the Court offers. It says lower courts should examine clues such as whether the President made a “public statement expressing displeasure” about something the Director did, or whether the President “attempted” to remove the Director but was stymied by lower courts. Ibid. But what if the President never considered the possibility of removing the Director because he was never advised of that possibility? What if his advisers themselves never contemplated the option given statutory law? And even putting all that aside, what evidence should courts and parties consult when inquiring into the President’s “displeasure”? Are they restricted to publicly available materials, even though the most probative evidence may be the most sensitive? To ascertain with any degree of confidence the President’s state of mind regarding the Director, don’t we need testimony from him or his closest staff?

 

The Court declines to tangle with any of these questions. It’s hard not to wonder whether that’s because it intends for this speculative enterprise to go nowhere. Rather than intrude on often-privileged executive deliberations, the Court may calculate that the lower courts on remand in this suit will simply refuse retroactive relief. See, e.g., ante, at 6 8 COLLINS v. YELLEN GORSUCH, J., concurring in part (KAGAN, J., concurring in part and concurring in judgment in part). But if this is what the Court intends, why not just admit it and put these parties out of their misery?

 

https://www.supremecourt.gov/opinions/20pdf/19-422_k537.pdf

[TwoCitiesCapital]

2 hours ago, james22 said:

 

This has hurt: ~8% of portfolio and significant opportunity cost.

 

But still unsure what my takeaway should be.

 

I tend to believe it was a good bet, based on precedent.

 

 

 

I don't know what my take away is either.

 

There were multiple times I could have trimmed the position at a significant gain to manage the risk and I only did a slight trim once or twice. 

 

Hard part is, when I trim my winners, they continue to win (happened with Google, Zillow, SBSW, CLF, etc) and the lesson I'm supposed to take is "don't pick your flowers and water your weeds" - let your winners run!  So I tried to do that here since it never got above 50% of par and there was always optimism for another double in the near term. 

 

But of course, if I don't trim my winners, they inevitably become my losers again and the lesson is "should've rebalanced to manage the risk". 

 

Maybe this is all my fault. Had I just trimmed at $20, this shit would've gone to the $50 par for the rest of you.  I think I just suck at handicapping outcomes - always too pessimistic when I should be optimistic and always too optimistic when I should be pessimistic. 

 

[Spekulatius]

3rd Avenue RE fund also got into Fannie/Freddie late last year:

https://thirdave.com/wp-content/uploads/shareholder-letters/Archive/TAREX/2020-Q4-TAREX-Shareholder-Letter.pdf

 

 

Seems off mandate to me and I am sure they are going to get heat now that this bet didn't work out.

 

Edited June 24, 2021 by Spekulatius

[DRValue]

Ultimately I'm in this because of the business rather than the lawsuit. The hope was the court would force the government's hand. It's risky now as it's not known what the government will do, but I'm reminded that bill Ackman is a non litigating shareholder. The businesses are some of the best in the world. Just hope it stays that way. Hold and add if price goes to the literal pennies for me.

[Sunrider]

Well, sadly, 10 years later, we now should update the title of this thread to '15 or 16 baggers', which is what some of the prefs now trade at. This one hurt.

 

I've re-read the delawarebay paper, and the Lamberth opinion ... main worry is

(a) question about whether not only the rights to liquidation preference and dividends travel with the shares but also the expectation of fair dealing (as plaintiffs will be able to show that GSEs were about to be profitable and as a matter of record did not receive anything new in return for the NSW). -> My brain has trouble thinking of how this might practically work if they were divorced, but then again it seems that judges have now split hairs so fine they could circumcise a mosquito. 

 

(b) Sweeney seemed to be balanced and didn't take too much of the government's BS ... not clear what to make of the new judge ... and there seems to be a leaning towards the government once these guys are in the seat, irrespective of what their views were previously.

 

(c) whether this admin is genuinely interested in getting the GSEs off the government's books (so to speak). If so, then they will work towards recap. If not, they may simply want to speculate that the next crisis requiring a bailout may be a problem for the next guy/girl in the role.

 

I am tempted to average down, but I am aware that I may just be blinded by commitment bias and the (so far) stupid belief that the land of liberty will eventually conclude that if this all stands, property rights don't matter, and will therefore correct this. Perhaps that is pure naiveté. 

 

On the other hand, one should evaluate investments based on what they offer today.  FNMAH at 1.68 is about 1:15. The fact that the total investment IRR after such a long time would be pedestrian doesn't matter, it's a sunk cost. Giving it 3 more years and making 15x does look attractive compared to everything else, but I am genuinely wondering whether this is  the right mental model for such a binary situation.

 

Input welcome.

 

 

 

[allnatural]

1 hour ago, Sunrider said:

Well, sadly, 10 years later, we now should update the title of this thread to '15 or 16 baggers', which is what some of the prefs now trade at. This one hurt.

 

I've re-read the delawarebay paper, and the Lamberth opinion ... main worry is

(a) question about whether not only the rights to liquidation preference and dividends travel with the shares but also the expectation of fair dealing (as plaintiffs will be able to show that GSEs were about to be profitable and as a matter of record did not receive anything new in return for the NSW). -> My brain has trouble thinking of how this might practically work if they were divorced, but then again it seems that judges have now split hairs so fine they could circumcise a mosquito. 

 

(b) Sweeney seemed to be balanced and didn't take too much of the government's BS ... not clear what to make of the new judge ... and there seems to be a leaning towards the government once these guys are in the seat, irrespective of what their views were previously.

 

(c) whether this admin is genuinely interested in getting the GSEs off the government's books (so to speak). If so, then they will work towards recap. If not, they may simply want to speculate that the next crisis requiring a bailout may be a problem for the next guy/girl in the role.

 

I am tempted to average down, but I am aware that I may just be blinded by commitment bias and the (so far) stupid belief that the land of liberty will eventually conclude that if this all stands, property rights don't matter, and will therefore correct this. Perhaps that is pure naiveté. 

 

On the other hand, one should evaluate investments based on what they offer today.  FNMAH at 1.68 is about 1:15. The fact that the total investment IRR after such a long time would be pedestrian doesn't matter, it's a sunk cost. Giving it 3 more years and making 15x does look attractive compared to everything else, but I am genuinely wondering whether this is  the right mental model for such a binary situation.

 

Input welcome.

 

 

 

All valid points / concerns. Re claims traveling in the Lamberth case, he ruled that they indeed do travel.

[Mephistopheles]

2 hours ago, Sunrider said:

Well, sadly, 10 years later, we now should update the title of this thread to '15 or 16 baggers', which is what some of the prefs now trade at. This one hurt.

 

I've re-read the delawarebay paper, and the Lamberth opinion ... main worry is

(a) question about whether not only the rights to liquidation preference and dividends travel with the shares but also the expectation of fair dealing (as plaintiffs will be able to show that GSEs were about to be profitable and as a matter of record did not receive anything new in return for the NSW). -> My brain has trouble thinking of how this might practically work if they were divorced, but then again it seems that judges have now split hairs so fine they could circumcise a mosquito. 

 

(b) Sweeney seemed to be balanced and didn't take too much of the government's BS ... not clear what to make of the new judge ... and there seems to be a leaning towards the government once these guys are in the seat, irrespective of what their views were previously.

 

(c) whether this admin is genuinely interested in getting the GSEs off the government's books (so to speak). If so, then they will work towards recap. If not, they may simply want to speculate that the next crisis requiring a bailout may be a problem for the next guy/girl in the role.

 

I am tempted to average down, but I am aware that I may just be blinded by commitment bias and the (so far) stupid belief that the land of liberty will eventually conclude that if this all stands, property rights don't matter, and will therefore correct this. Perhaps that is pure naiveté. 

 

On the other hand, one should evaluate investments based on what they offer today.  FNMAH at 1.68 is about 1:15. The fact that the total investment IRR after such a long time would be pedestrian doesn't matter, it's a sunk cost. Giving it 3 more years and making 15x does look attractive compared to everything else, but I am genuinely wondering whether this is  the right mental model for such a binary situation.

 

Input welcome.

 

 

 

As has been demonstrated for the past 10 years on this one, there's no predicting what the government will do. All we have is a highly profitable duopoly and bunch of possibilities to realize those profits. Right now there's perhaps $12-13 (par value) in the pot of possibilities for every $1 you bet. How much is that pot valued? I'd say it's >$0. Maybe we should wait to get 30:1 (another 50% draw down), idk. But at some point the option becomes a good bet. When sentiment changes the option becomes fairly or overvalued, then you sell.

 

I was fortunate to have completely sold out not so long ago at about 20% par and I've developed an appreciation for this being a trading vehicle, not a buy and hold forever investment. I started nibbling again yesterday and today. Hoping to get 99:1 odds (which is where it went to right after the 3rd amendment).

 

Edited June 24, 2021 by Mephistopheles

[COBFInfinity]

4 hours ago, Sunrider said:

Well, sadly, 10 years later, we now should update the title of this thread to '15 or 16 baggers', which is what some of the prefs now trade at. This one hurt.

 

I've re-read the delawarebay paper, and the Lamberth opinion ... main worry is

(a) question about whether not only the rights to liquidation preference and dividends travel with the shares but also the expectation of fair dealing (as plaintiffs will be able to show that GSEs were about to be profitable and as a matter of record did not receive anything new in return for the NSW). -> My brain has trouble thinking of how this might practically work if they were divorced, but then again it seems that judges have now split hairs so fine they could circumcise a mosquito. 

 

(b) Sweeney seemed to be balanced and didn't take too much of the government's BS ... not clear what to make of the new judge ... and there seems to be a leaning towards the government once these guys are in the seat, irrespective of what their views were previously.

 

(c) whether this admin is genuinely interested in getting the GSEs off the government's books (so to speak). If so, then they will work towards recap. If not, they may simply want to speculate that the next crisis requiring a bailout may be a problem for the next guy/girl in the role.

 

I am tempted to average down, but I am aware that I may just be blinded by commitment bias and the (so far) stupid belief that the land of liberty will eventually conclude that if this all stands, property rights don't matter, and will therefore correct this. Perhaps that is pure naiveté. 

 

On the other hand, one should evaluate investments based on what they offer today.  FNMAH at 1.68 is about 1:15. The fact that the total investment IRR after such a long time would be pedestrian doesn't matter, it's a sunk cost. Giving it 3 more years and making 15x does look attractive compared to everything else, but I am genuinely wondering whether this is  the right mental model for such a binary situation.

 

Input welcome.

 

 

 

This 1:15 idea implies that par value is still a realistic target. I think that possibility went to zero yesterday. The best case is plaintiffs win another judgement somewhere along the line and instead of rolling the dice with the same clueless and hostile SCOTUS, a settlement well below par occurs.

[COBFInfinity]

As for lessons learned, I said a while back that I will never bet on a legal outcome again. Obviously, my conviction on that is even higher.

 

The other lesson is to stick to contrarian investing. Value investors are constantly bombarded with comments from momentum investors that the way to invest is to buy more as the price increases, that's the market telling you you're right, etc. I have routinely disregarded that viewpoint throughout my years investing, preferring to buy low, and then buy more even lower. But after the 5th Circuit win in Sep 2019, after a pop to around 50% of par, the Pfds I track pulled back to about 45% and I told myself it was just profit taking, this was the moment to buy after the price going up. Those shares are down about 80%. I'm sure some momentum investor will come along and said I should have sold on the way down, but that's not something I do just because of price action. I finally let myself get lulled into the idea that buying high was a good move and it has been a disaster.

[james22]

43 minutes ago, COBFInfinity said:

As for lessons learned, I said a while back that I will never bet on a legal outcome again.

 

Yeah, how could you?

 

Grouch:

The Court points to not a single precedent in 230 years of history for the distinction it would have us draw. Nor could it. The course it pursues today defies our precedents. ...

 

Instead of applying our traditional remedy for constitutional violations like these, the Court supplies a novel and feeble substitute. ...

Not only is this “relief ” unlike anything this Court has ever before authorized in cases like ours; it is materially identical to a remedial approach this Court previously rejected.

Edited June 25, 2021 by james22

[Sunrider]

9 hours ago, allnatural said:

All valid points / concerns. Re claims traveling in the Lamberth case, he ruled that they indeed do travel.

 

The way I read it is that the rights travel with the securities, but not necessarily what should be deemed 'fair' and 'reasonable expectations' ... i.e. those might be different for those who bought prior to NWS and those who bought after ...  in other words, no question that prefs have liquidation preference, etc., but whether a shareholder who bought post NWS could've reasonably expected that the liquidation preference is worth >0 is a question he left open.

 

if you read that differently, could you please point to where Lambeth addresses the point in the way you interpret it?

 

Thank you.

Christian

 

[allnatural]

5 hours ago, Sunrider said:

 

The way I read it is that the rights travel with the securities, but not necessarily what should be deemed 'fair' and 'reasonable expectations' ... i.e. those might be different for those who bought prior to NWS and those who bought after ...  in other words, no question that prefs have liquidation preference, etc., but whether a shareholder who bought post NWS could've reasonably expected that the liquidation preference is worth >0 is a question he left open.

 

if you read that differently, could you please point to where Lambeth addresses the point in the way you interpret it?

 

Thank you.

Christian

 

 

This is a direct quote from David Thompson after the ruling was released: 

 

"... And a couple of things are significant on page 17 of Judge Lamberth's ruling he holds that the claims travel with the security. That's a point we had briefed. The Delaware law is uniform on that point saying that is what happens but still, there had been a gray area there so that was important that current holders owned these claims not people who owned it before..."