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

[Luke 532]

Audio of Ackman today on GSE's.  Starts at 28-minute mark: http://www.webcaster4.com/Player/Index?webcastId=23015&uid=4196886&g=110b0933-b9eb-47da-9c03-00cb6b62c8de&sid=

[beaufort]

Ackman talked about Corker and Warner again.  He talked about how he has been in touch with them and they will be leading the effort of what is likely to happen.  Ackman says Warner and Corker are sophisticated.  I think Ackman chooses his words carefully and in a calculating manner.  I realise I am not saying anything new here.  Ackman chose to repeat himself and to point out that the stock price, presumably the common, trades like an option.   

 

I have been buying preferreds lately.

[Luke 532]

Ackman talked about Corker and Warner again.  He talked about how he has been in touch with them and they will be leading the effort of what is likely to happen.  Ackman says Warner and Corker are sophisticated.  I think Ackman chooses his words carefully and in a calculating manner.  I realise I am not saying anything new here.  Ackman chose to repeat himself and to point out that the stock price, presumably the common, trades like an option.   

 

I have been buying preferreds lately.

 

Ackman talking favorably again about Corker/Warner is bizarre.

[Adrestian]

Ackman talking favorably again about Corker/Warner is bizarre.

 

I think it's called Stockholm syndrome.

[Luke 532]

I think it's called Stockholm syndrome.

 

LOL!

[rros]

Ackman talking favorably again about Corker/Warner is bizarre.

 

I think it's called Stockholm syndrome.

Specially happening after having been beaten down like a dog on his other stocks. The guy can't take one more day of punishment. Survival at any cost!

[Midas79]

The market seems to be discounting the idea that the junior prefs will ever pay dividends again. The correlation between dividend rate and price as a % of par is under 0.35, while it was over 0.9 a year ago. In particular, the series FNMAM, FNMAK, FNMAG, FNMAN, FNMAL (listed in order of decreasing dividend rate) are basically trading at parity while having the same liquidity, as well as FNMAJ and FNMAI, whose prices have recently come down much faster than the 5 aforementioned series.

 

The same is true for FMCKI, FMCKL, FMCKO, FMCKN, FMCKM which are nearly at parity and have similar liquidities.

 

Perhaps the market is also discounting the warrants being exercised, as commons are stronger against a weighted average of the preferreds than any point in the last 6 months, and almost as strong as a year ago (their post-election high point).

[investorG]

The market seems to be discounting the idea that the junior prefs will ever pay dividends again. The correlation between dividend rate and price as a % of par is under 0.35, while it was over 0.9 a year ago. In particular, the series FNMAM, FNMAK, FNMAG, FNMAN, FNMAL (listed in order of decreasing dividend rate) are basically trading at parity while having the same liquidity, as well as FNMAJ and FNMAI, whose prices have recently come down much faster than the 5 aforementioned series.

 

The same is true for FMCKI, FMCKL, FMCKO, FMCKN, FMCKM which are nearly at parity and have similar liquidities.

 

Perhaps the market is also discounting the warrants being exercised, as commons are stronger against a weighted average of the preferreds than any point in the last 6 months, and almost as strong as a year ago (their post-election high point).

 

could be also:

 

berkowitz liquidated / distributed a $400mm hedge fund 1 month ago, likely a meaningful portion of that was FnF preferreds - perhaps many of the investors in that vehicle have been exiting. 

 

 

[investorG]

Ackman talked about Corker and Warner again.  He talked about how he has been in touch with them and they will be leading the effort of what is likely to happen.  Ackman says Warner and Corker are sophisticated.  I think Ackman chooses his words carefully and in a calculating manner.  I realise I am not saying anything new here.  Ackman chose to repeat himself and to point out that the stock price, presumably the common, trades like an option.   

 

I have been buying preferreds lately.

 

Ackman talking favorably again about Corker/Warner is bizarre.

 

mnuchin wants to work with congress in 2018.  corker and warner are the influencers in the senate, along with crapo and brown.  i'm grateful to ackman for this.

[Midas79]

mnuchin wants to work with congress in 2018.  corker and warner are the influencers in the senate, along with crapo and brown.  i'm grateful to ackman for this.

 

Pros to Mnuchin wanting to work with Congress:

• A Congressional solution will be (semi-)permanent, while an administrative fix is subject to Congress pulling out the rug later
  
• Corker's retirement puts a deadline on the process
  
• I don't think enough Congresspeople are out to deliberately screw shareholders so the shares should retain some value
  
• Purely administrative reform will cost (perhaps significant) political capital and could be seen as Mnuchin catering to his "hedge fund buddies". In contrast a Congressional solution cannot be blamed on anyone in particular
  
• Maybe the RNC resolution actually means something? And some Congresspeople might actually care what it says?
  

 

Cons:

• Mnuchin might do nothing administratively in the meantime and keep taking the NWS payments until Congress acts
  
• Tax and healthcare reform are higher administrative priorities
  
• There is a large ideological divide over whether there should be an explicit government guarantee or none at all; Hensarling is in the latter camp and has a lot of pull in the House, though his retirement could affect his decisions
  

 

I would really, really like to see a SPSPA amendment postponing the 2018 sweep payments until the end of 2018. By then there should be enough done that the payment never actually gets made, hopefully.

[SnarkyPuppy]

So Mnuchin literally says he won't get rid of the GSEs.  Ackman states that they've had private conversations w Corker/etc and an IPO (recap) is coming.  And the stock price?  Down.

 

?

[doc75]

So Mnuchin literally says he won't get rid of the GSEs.  Ackman states that they've had private conversations w Corker/etc and an IPO (recap) is coming.  And the stock price?  Down.

 

?

 

After Ackman's nonsense regarding Valeant, it seems sensible that the market applies a heavy discount when he talks his book.

 

 

[Luke 532]

So Mnuchin literally says he won't get rid of the GSEs.  Ackman states that they've had private conversations w Corker/etc and an IPO (recap) is coming.  And the stock price?  Down.

 

?

 

Chapter 8 of my favorite investment book. :-)

[SnarkyPuppy]

So Mnuchin literally says he won't get rid of the GSEs.  Ackman states that they've had private conversations w Corker/etc and an IPO (recap) is coming.  And the stock price?  Down.

 

?

 

Chapter 8 of my favorite investment book. :-)

 

Mine too.  But this isn't exactly off the beaten path and the price has skyrocketed multiple times on news.  I was more curious if there was anything negative that was said by Phillips today that I haven't seen

[Cardboard]

For all of you Mnuchin fans, here you go.

 

http://i2.cdn.turner.com/money/dam/assets/171115144720-louise-linton-steven-mnuchin-currency-780x439.jpg

 

Don't you think that he has got better to do than thinking of Fannie Mae? LOL!

 

Cardboard

[rros]

Several names have already been tossed out to replace Watt, with one likely option being the Chief Economist to Vice President Mike Pence, Mark Calabria, who is also a long-time housing reform advocate.

[Luke 532]

Two interesting things...

 

Ali Rogin‏Verified account @AliABCNews

13h13 hours ago

SPOTTED: Treasury Sec. Steve Mnuchin leaving @SenBobCorker offices. Says tax negotiations are going great, going to keep reaching out to moderate Dems

 

Pershing Q4 Letter (emphasis added is mine)...

Senator Corker announced in late September that he will not seek re-election in 2018, and will leave the Senate upon expiry of his current term at the end of next year. Senator Corker has been one of the leading voices in Congress on housing finance reform for the last several years, and we believe that he would like to see this issue resolved before his retirement. He and his colleague Senator Warner have suggested that they will soon put forth new bipartisan legislation regarding housing finance reform, for which they should have the support of Secretary Mnuchin after the tax reform initiative concludes. In the meantime, the intrinsic earnings power of both entities continues to increase, driven by growth and improved credit quality in their core single-family guarantee businesses.

 

We believe that the current share prices do not reflect the significant momentum that continues to build for a bipartisan resolution of their status that would be highly profitable for the government and other shareholders, protect the taxpayer against future bailouts, and ensure that the dream of home ownership remains widely achievable for generations to come.

[DocSnowball]

So Mnuchin literally says he won't get rid of the GSEs.  Ackman states that they've had private conversations w Corker/etc and an IPO (recap) is coming.  And the stock price?  Down.

 

?

 

Chapter 8 of my favorite investment book. :-)

 

Reminds me of the “it was the best of times, it was the worst of times” quote I think from rros. It is a strange and moody mr. market or mrs. market - some of my small cap biotechs are also down to 40% of summer valuations while their story is moving along just fine, this despite indexes being at tops.  Those of us who have looked for investments not correlated with the indexes are getting just what we wished for...

[SnarkyPuppy]

I've always wondered-  How is ackman discussing what is essentially private conversations about the future material events not considered dissemination of mnpi?    Asssumung berkowitz, ackman, paulson can't sell even if they wanted to, if they have been made aware of any good OR bad news regarding the administration/legislations future intentions.  Any thoughts on this?

[SnarkyPuppy]

There does appear to be selling going on with FNMAS near 52 week low as per Glen. I don't think anything prevents them from selling or buying as SEC has proven usesless in the manipulation of GSE stock.

 

https://www.housingwire.com/articles/41830-hensarling-health-of-fha-is-clear-and-present-danger-to-economy

 

I just realized that FHA and FHFA are two different entities. Do not why. What a waste of resources. When FHA has so many programs, what is FHFA doing in this space?

 

I've always wondered-  How is ackman discussing what is essentially private conversations about the future material events not considered dissemination of mnpi?    Asssumung berkowitz, ackman, paulson can't sell even if they wanted to, if they have been made aware of any good OR bad news regarding the administration/legislations future intentions.  Any thoughts on this?

 

Actually amazing that you are invested in this without knowing the difference between FHFA and FHA.  Pretty sure Emily is a troll account.

[rros]

So the quarter the legislation is enacted Fannie/Freddie will record a large loss. If Trump signs the tax bill into law by Christmas, wouldn't that be this quarter?

[Midas79]

So the quarter the legislation is enacted Fannie/Freddie will record a large loss. If Trump signs the tax bill into law by Christmas, wouldn't that be this quarter?

 

I don't know how much discretion Watt has over the timing of the DTA writedown once the tax rate gets cut. FHFA has had quite a bit of accounting latitude in the past and Watt really wants to avoid a draw, so if he can push the writedown into Q1 2018 he likely will. That would then give Mnuchin an incentive to make dividend payments annual (giving FnF time to build up profits against the DTA losses) before March 31, 2018 or do something more dramatic.

[rros]

So the quarter the legislation is enacted Fannie/Freddie will record a large loss. If Trump signs the tax bill into law by Christmas, wouldn't that be this quarter?

 

I don't know how much discretion Watt has over the timing of the DTA writedown once the tax rate gets cut. FHFA has had quite a bit of accounting latitude in the past and Watt really wants to avoid a draw, so if he can push the writedown into Q1 2018 he likely will. That would then give Mnuchin an incentive to make dividend payments annual (giving FnF time to build up profits against the DTA losses) before March 31, 2018 or do something more dramatic.

Fannie explains this in their last filing. They don't have latitude. The filings say the loss will be recorded the same quarter the legislation gets enacted. I also wonder if a more dramatic maneuver represents receivership. Fannie explains that without a draw from Treasury's funds, receivership becomes mandatory. Both companies, of course, have 258 billion at their disposal so that risk seems non-existent.

 

FANNIE

The current Administration proposes reducing the U.S. corporate income tax rate. Under applicable accounting standards, a significant reduction in the U.S. corporate income tax rate would require that we record a substantial reduction in the value of our deferred tax assets in the quarter in which the legislation is enacted. Thus, if legislation significantly lowering the U.S. corporate income tax rate is enacted, we expect to incur a significant net loss and net worth deficit for the quarter in which the legislation is enacted and we could potentially incur a net loss for that year. As noted above, if we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership.

 

FREDDIE

“A reduction in corporate tax rates would require us to measure our net deferred tax asset using the new rate in the period in which the rate change is enacted, resulting in a one-time charge through the tax provision. This increase in tax expense could significantly increase the risk of a draw.”

 

FITCH

Fitch explains:

 

The GSEs may not have sufficient capital reserves to avoid a net worth deficit in 2017 if they incur a loss in a quarter, and after Jan. 1, 2018, they will have no capital reserves to absorb losses.

 

Additional capital draws from the US Treasury would not change Fitch's current view of the ratings, unless total draws start approaching the cap, which is highly unlikely even with potential deferred tax asset write-downs.

 

The remaining funding available to Fannie Mae and Freddie Mac (from the Treasury) totaled $258.1 billion at Sept. 30, 2016.

 

Fannie Mae and Freddie Mac had roughly $35.1 billion and $18.7 billion, respectively, of net deferred tax asset on their balance sheet, for a total net deferred tax asset of $53.8 billion at the end of the same period.

 

“The GSEs' DTAs consisted primarily of deferred fees, basis differences related to derivative instruments, mortgage related assets and allowance for loan losses,” Fitch explains.

 

“The GSEs determined in the past that it was more likely than not that their net DTAs would be realized,” Fitch continues. “Therefore, a valuation allowance was not necessary. However, a legislative change resulting in a lower federal corporate income tax rate could result in write-downs.”

 

Fitch’s report lays out three scenarios for what could happen if the corporate tax rate is cut. For example:

 

Fitch estimates that if the applicable corporate tax rate is reduced to 20% from the current 35%, Fannie Mae and Freddie Mac would write down their DTAs by $15.0 billion and $8.0 billion, respectively.

 

https://www.housingwire.com/ext/resources/images/editorial/Charts/More-charts/Fannie-Freddie-DTA-writedown-scenarios.png

 

This analysis by Fitch was from February so write downs will be smaller. Still, in the tens of billions.

[rros]

Does anyone here think Mnuchin might be secretly holding all the aces and comes out blazing once the companies incur massive draws? Like an extreme action stated by midas. Cancelling the seniors and doing away with the nws and letting the companies naturally recap. While blaming everything on Obama, as per the RNC resolution.

 

Maybe Mnuchin simply asked Watt to wait and see if the tax bill becomes law and if so, has a plan.

[Luke 532]

Does anyone here think Mnuchin might be secretly holding all the aces and comes out blazing once the companies incur massive draws? Like an extreme action stated by midas. Cancelling the seniors and doing away with the nws and letting the companies naturally recap. While blaming everything on Obama, as per the RNC resolution.

 

Maybe Mnuchin simply asked Watt to wait and see if the tax bill becomes law and if so, has a plan.

 

I'm surely suffering from bias at this point, but I wouldn't be at all surprised if that was the case.

 

Ever since his confirmation hearings I have gotten the impression that he knows these companies better than nearly anyone.  Especially at the confirmation hearing he realized he couldn't educate the politicians as to the ins-and-outs and it was almost useless to try, and repeatedly stated "I'm an expert on the GSE's."