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

[james22]

The government will always win when the Supreme Court imputes to Congress a definition of a conservator never adopted in the history of the world, by broadly reading a narrow exception for incidental powers to let a conservator gobble up all the money for itself—an action that could never be challenged in court as an abuse of power.  A unanimous travesty.

 

https://www.forbes.com/sites/richardepstein/2021/07/13/the-supreme-court-throws-fannie-and-freddies-private-investors-to-the-wolves/?sh=4740ad6c15e3

[muscleman]

This is likely dead money for at least a year right?

One really important thing to remember: Anything Glen Bradford touches, he turns gold into lead. Same for those Chinese reverse mergers in 2011. Same for FNMAS.

Back in 2011, when those Chinese reverse mergers got delisted, investors were making cases for why it would be a buying opportunity because these were legit companies and they would move to HK to relist. They later drafted lower and lower to worthless.

I think the same is likely to happen here, until we get close to another legal catalyst.

I would warn anyone trying to bottom fish this sucker now.

 

Edited July 16, 2021 by muscleman

[Wiggins]

12 hours ago, muscleman said:

This is likely dead money for at least a year right?

One really important thing to remember: Anything Glen Bradford touches, he turns gold into lead. Same for those Chinese reverse mergers in 2011. Same for FNMAS.

Back in 2011, when those Chinese reverse mergers got delisted, investors were making cases for why it would be a buying opportunity because these were legit companies and they would move to HK to relist. They later drafted lower and lower to worthless.

I think the same is likely to happen here, until we get close to another legal catalyst.

I would warn anyone trying to bottom fish this sucker now.

 

Disagree; I am buying.

Throwing out someone's name as justification for any type of investment decision is weak. If you're following the herd this looks like a bad investment.

This is a contrarian investment and that couldn't be clearer now.

 

 

 

 

[james22]

Why not buy after good news?

 

Give up the immediate jump, but hopefully capture some of the move to par.

 

Without risk of loss or opportunity cost.

[investorG]

The prices appear excessively pessimistic.

 

Put yourself in the Democrats' shoes -- with the SCOTUS ruling, we are perhaps 3.5 years away from a Republican president putting Bob Corker in at Tsy and French Hill at FHFA who could effectively partially wind down the GSEs for 4 years through various pricing and business selection initiatives.  OR, the Democrats could work for 3 years on a solution that gets them out of conservatorship via Congress (preferably) or admin (backup) and more entrenches FnF's future.

In regards to timeline, I would expect this to play out over a few years -- but that's no guarantee that the prices will remain in the cellar in the mean time.

[muscleman]

4 hours ago, Wiggins said:

Disagree; I am buying.

Throwing out someone's name as justification for any type of investment decision is weak. If you're following the herd this looks like a bad investment.

This is a contrarian investment and that couldn't be clearer now.

 

 

 

 

"couldn't be clearer now."???

I don't see that point. If we get a SCOTUS positive ruling then you could say that. But how could you say that with such a negative ruling.

 

 

[TwoCitiesCapital]

1 hour ago, investorG said:

The prices appear excessively pessimistic.

 

 

It seems about right to me. 

 

How do you price the value of the rule of law when the current precedent is "Congress/Treasury can steal with impunity as long as Congress says they can steal with impunity"? 

 

Seems the price is absolutely reflecting the correct amount of pessimism for how terrible that last SCOTUS ruling was and knowing all future rulings have the potential to be taken to the same level and simply take years to disappoint again. 

Edited July 16, 2021 by TwoCitiesCapital

[Wiggins]

24 minutes ago, muscleman said:

"couldn't be clearer now."???

I don't see that point. If we get a SCOTUS positive ruling then you could say that. But how could you say that with such a negative ruling.

 

 

Most people are selling and very pessimistic, but I am buying. What part of "contrarian" about that scenario is unclear?

[Wiggins]

1 minute ago, TwoCitiesCapital said:

 

It seems about right to me. 

 

How do you price the value of the rule of law when the current precedent is "Congress/Treausry can steal with impunity as long as Congress say they can steal with impunity"? 

 

Seems the price is absolutely reflecting the correct amount of pessimism for how terrible that last SCOTUS ruling was and knowing all future rulings have the potential to be taken to the same level and simply take years to disappoint again. 

Because that's not what SCOTUS said. SCOTUS said they could take (what you call steal), but they didn't say it wasn't a taking and they made no mention of "impunity". In fact, David Thompson was asked "why not bring this up in the court of claims?"  Lamberth also said as much, but went further in proposing that even if HERA does allow the NWS it still may violate covenants. Your post perfectly encapsulates the mismatch between market participants understanding of the situation and the reality in courts, and hence why there is such a great opportunity at present.

[Wiggins]

2 hours ago, james22 said:

Why not buy after good news?

 

Give up the immediate jump, but hopefully capture some of the move to par.

 

Without risk of loss or opportunity cost.

The answer to this question is best stated by Baron Rothschild: "the time to buy is when there's blood in the streets."

[TwoCitiesCapital]

10 minutes ago, Wiggins said:

Because that's not what SCOTUS said. SCOTUS said they could take, but they didn't say it wasn't a taking and they made no mention of "impunity". In fact, David Thompson was asked "why not bring this up in the court of claims?"  Lamberth also said as much, but went further in proposing that even if HERA does allow the NWS it still may violate covenants. Your post perfectly encapsulates the mismatch between market participants understanding of the situation and the reality in courts, and hence why there is such a great opportunity at present.

 

Implying permission to take based on the their reading of the statute implies their collective view that it wasn't illegal/wrong to do so - so yes, their collective view appears to be that it wasn't a takings. 

 

Maybe we get more court rulings - but if the last 9 years has taught us anything it's that nearly every single court ruling, including Lamberths, has largely been a bust so far. This is why the preferreds now trade at 5% of par. It's not that the market misunderstands - it's that it understands all too well. 9 years of disappointment after disappointment and the only thing that we can point to with hope is more of the same stuff that caused all of the disappointment. 

 

You say opportunity. I say status-quo. 

Edited July 16, 2021 by TwoCitiesCapital

[Gregmal]

The trading on this has been consistent. Buy immediately after good news and hold for a few days. Sell/short immediately after bad news, hold for a few weeks. Holding this long term(as I have) has been a waste of time. 

[Wiggins]

40 minutes ago, TwoCitiesCapital said:

 

Implying permission to take based on the their reading of the statute implies their collective view that it wasn't illegal/wrong to do so - so yes, their collective view appears to be that it wasn't a takings. 

 

Maybe we get more court rulings - but if the last 9 years has taught us anything it's that nearly every single court ruling, including Lamberths, has largely been a bust so far. This is why the preferreds now trade at 5% of par. It's not that the market misunderstands - it's that it understands all too well. 9 years of disappointment after disappointment and the only thing that we can point to with hope is more of the same stuff that caused all of the disappointment. 

 

You say opportunity. I say status-quo. 

It's exactly like eminent domain. Under certain situations the government may take your house (e.g. to build a highway that must go through your property), but they cannot do so without compensating you fairly for property taken. The first part is perfectly legal; the second part is a completely separate issue. SCOTUS said FHFA can enact the NWS (it's legal), but they said nothing whatsoever about the second part.

 

The above is also why you can't say things like "what we've learned over the past 9 years".. The past is irrelevant since court cases have all been procedural and none have looked at the facts. I think Gary Hindes has it right. Now, it's only a matter of how much recovery there is. I think when the facts come out it will be very bad for the government given the officials involved in this case who have lied, as well as the accounting which will come to light. They GSEs are not AIG. They were profitable the whole time.

Edited July 16, 2021 by Wiggins

[muscleman]

58 minutes ago, Wiggins said:

Most people are selling and very pessimistic, but I am buying. What part of "contrarian" about that scenario is unclear?

Oh i see. Yeah that's absolutely clear that going in right now is a contrarian bet.

Over the years, I found that neither contrarians nor herd followers make consistent money. It is important to understand when to be a herd follower and when to be a contrarian.

I see too much risk being a contrarian right now.

 

[muscleman]

53 minutes ago, Wiggins said:

The answer to this question is best stated by Baron Rothschild: "the time to buy is when there's blood in the streets."

Never believe in what the guys say. They make money from insider trading. Remember the Rothchild's family's most famous UK bond trade?

If you get excited simply because everyone else is scared, you can still lose a lot of money. Look at the oil stocks from 2014-2020.

[Wiggins]

9 minutes ago, muscleman said:

Never believe in what the guys say. They make money from insider trading. Remember the Rothchild's family's most famous UK bond trade?

If you get excited simply because everyone else is scared, you can still lose a lot of money. Look at the oil stocks from 2014-2020.

I agree with your last two posts.

You may be right and I might lose, but I like my odds at 6% of par. If we recovered 75% of par and it took a few years that's still a massive return.

This feels like distressed debt investing to me, which is not for everyone. It sucks, it's uncomfortable, it's unnerving... and then you win. And in those situations the time to buy is when people are panicking. Yes, it doesn't always work out but I believe this one will...

 

I would like to see more analysis on Lamberth and on Schwartz. That's where the action is IMO.

[muscleman]

2 hours ago, Wiggins said:

I agree with your last two posts.

You may be right and I might lose, but I like my odds at 6% of par. If we recovered 75% of par and it took a few years that's still a massive return.

This feels like distressed debt investing to me, which is not for everyone. It sucks, it's uncomfortable, it's unnerving... and then you win. And in those situations the time to buy is when people are panicking. Yes, it doesn't always work out but I believe this one will...

 

I would like to see more analysis on Lamberth and on Schwartz. That's where the action is IMO.

Good luck!

I've been trading this around over the years and I don't think the bottom is in yet. This is a highly illiquid stock with big funds buying day after day when some good news start to show up, or selling day after day when some bad news start to show up. I think there is still a long way to go before they finish dumping all their positions.

I think the best time to get in is when we start to have some hints of good news showing up and we know these big boys will start buying day after day for multiple weeks.

[sholland]

If the government wants to win in the takings case all they have to say is that dividends will be resumed when the GSEs are fully capitalized. Current trajectory is about 15 more years. Preferred shareholders aren’t entitled to dividends until fully capitalized. 

[muscleman]

10 minutes ago, sholland said:

If the government wants to win in the takings case all they have to say is that dividends will be resumed when the GSEs are fully capitalized. Current trajectory is about 15 more years. Preferred shareholders aren’t entitled to dividends until fully capitalized. 

Why is the takings case taking so long? There hasn't been any progress at all in the last 2 years right? Is the judge sleeping?

[orthopa]

22 hours ago, sholland said:

If the government wants to win in the takings case all they have to say is that dividends will be resumed when the GSEs are fully capitalized. Current trajectory is about 15 more years. Preferred shareholders aren’t entitled to dividends until fully capitalized. 

 

I don't know if I agree with that. How can the govt take without compensation? The NWS took property without any additional investment in the GSEs. Gov could have rightly taken the NWS if say more support was given in exchange. Nothing was given. The reason then given was a lie which the court cases will show. 

 

Reading lamberths last opinion gives a good look into what areas and questions the plantiffs raise regarding fair dealing, contract right etc. Im not a lawyer and will defer from a strong opinion due to holding the position but Im not sure how an impartial person can look though the evidence and not find the gov lied and blatantly expressed the desire to wind down and get rid of FnF.  Does it matter? It remains to be seen. 

 

Assuming the court cases go no where the gov still has to either wind them down or has the option to maintain the status quo until either a housing market/stock market crash or the companies recap themselves over time. Anyones guess as to what happens. 

 

There is nearly a 1 year quiet period until lamberth trial, no apparent rush to nominate a new FHFA director and the Biden admin has been mum on any comment regarding FnF...thus we are at $.06 on the dollar. That being said since I was not in the trade when these prices were last seen I have been nibbling. At some point in the next couple of years I think the shares are up at a multiple of $.06. 

 

This is surely max pessimism since I have been in the trade and it was always the wrong time to buy during max optimism. Question is, is this time different?

[benchmark]

2 hours ago, orthopa said:

 

I don't know if I agree with that. How can the govt take without compensation? The NWS took property without any additional investment in the GSEs. Gov could have rightly taken the NWS if say more support was given in exchange. Nothing was given. The reason then given was a lie which the court cases will show. 

 

Reading lamberths last opinion gives a good look into what areas and questions the plantiffs raise regarding fair dealing, contract right etc. Im not a lawyer and will defer from a strong opinion due to holding the position but Im not sure how an impartial person can look though the evidence and not find the gov lied and blatantly expressed the desire to wind down and get rid of FnF.  Does it matter? It remains to be seen. 

 

Assuming the court cases go no where the gov still has to either wind them down or has the option to maintain the status quo until either a housing market/stock market crash or the companies recap themselves over time. Anyones guess as to what happens. 

 

There is nearly a 1 year quiet period until lamberth trial, no apparent rush to nominate a new FHFA director and the Biden admin has been mum on any comment regarding FnF...thus we are at $.06 on the dollar. That being said since I was not in the trade when these prices were last seen I have been nibbling. At some point in the next couple of years I think the shares are up at a multiple of $.06. 

 

This is surely max pessimism since I have been in the trade and it was always the wrong time to buy during max optimism. Question is, is this time different?

are you buying preferred or common?

Edited July 18, 2021 by benchmark
typo

[allnatural]

Some upcoming catalysts/events to keep an eye out over the next year including litigation timeline:

 

Edited July 20, 2021 by allnatural

[orthopa]

On 7/17/2021 at 9:38 PM, benchmark said:

are you buying preferred or common?

preferred as I do not see a scenario where common get more then $25 a share by the the time this is all done and over with. The market is essentially pricing the two the same implying  in the end the value of both is very close by assuming the companies only recap by means of retained earnings and there is little common share dilution. I disagree with this although I wouldn't call someone who believed otherwise foolish. 

 

Also the way things have been going I continue to like a higher place in the capital structure. My assumption is divs are never turned back on and preferred is converted to common. 

[DRValue]

5 hours ago, orthopa said:

preferred as I do not see a scenario where common get more then $25 a share by the the time this is all done and over with. The market is essentially pricing the two the same implying  in the end the value of both is very close by assuming the companies only recap by means of retained earnings and there is little common share dilution. I disagree with this although I wouldn't call someone who believed otherwise foolish. 

 

Also the way things have been going I continue to like a higher place in the capital structure. My assumption is divs are never turned back on and preferred is converted to common. 

Preferred definitely the play at these prices in comparison to common. 

[Wiggins]

On 7/16/2021 at 5:18 PM, muscleman said:

Good luck!

I've been trading this around over the years and I don't think the bottom is in yet. This is a highly illiquid stock with big funds buying day after day when some good news start to show up, or selling day after day when some bad news start to show up. I think there is still a long way to go before they finish dumping all their positions.

I think the best time to get in is when we start to have some hints of good news showing up and we know these big boys will start buying day after day for multiple weeks.

Thank you! If I didn't have bad luck I wouldn't have any at all. ha