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

[rros]

Some vaguely interesting language in Freddie's 10-Q.  In my reading, there wasn't discussion of post-conservatorship or exiting conservatorship in previous 10-Q's.  I could be wrong.

 

On page 59 (page 61 of 216 in PDF format)...

These returns may not be indicative of the returns that would be generated if we were to exit conservatorship, especially as the terms and timing of any such exit are not currently known and will depend upon future actions by the U.S. government. Our belief, should we leave conservatorship, is that returns at that time would most likely be below the levels calculated above, assuming the same portfolio of risk assets, as we expect that we would hold capital post-conservatorship above the minimum required regulatory capital. It is also likely the we would be required to pay fees for federal government support, thereby reducing our total comprehensive income.

I checked the 10Q from May. The word "conservatorship" appears 35 times in the document. The phrase "exit conservatorship" does not show up. It looks like you are correct. However, it is now known with some certainty that the most likely agents of change (Mnuchin, Jerome Powell, perhaps Mulvaney) are pointing at high levels of capital and a paid-for government guarantee. So, it may be prudent to start including this information.

[SnarkyPuppy]

Berkowitz has substantially reduced his exposure. 

[blackcoffee]

Berkowitz has substantially reduced his exposure.

 

Please define substantially and share source?

[SnarkyPuppy]

Berkowitz has substantially reduced his exposure.

 

Please define substantially and share source?

 

Fairholme website - letter posted last night.  Substantially can be defined as "a lot" - I'm on my phone so I just eyeballed in period over period.

[blackcoffee]

Berkowitz has substantially reduced his exposure.

 

Please define substantially and share source?

 

Fairholme website - letter posted last night.  Substantially can be defined as "a lot" - I'm on my phone so I just eyeballed in period over period.

 

I see. Typically when finance people ask for definitions they want %s but you're snarky so it was a good joke.

 

BUT anyway.

 

Sounds like people are losing faith in this very trustworthy and sane administration to do the right thing for shareholders (other than WFC)

[SnarkyPuppy]

Berkowitz has substantially reduced his exposure.

 

Please define substantially and share source?

 

Fairholme website - letter posted last night.  Substantially can be defined as "a lot" - I'm on my phone so I just eyeballed in period over period.

 

I see. Typically when finance people ask for definitions they want %s but you're snarky so it was a good joke.

 

BUT anyway.

 

Sounds like people are losing faith in this very trustworthy and sane administration to do the right thing for shareholders (other than WFC)

 

Thanks for the lesson

[Luke 532]

Berkowitz has substantially reduced his exposure.

 

The news certainly is concerning.  On one hand I love the thesis and the odds of administrative reform into a utility/Moelis/etc. seem to get stronger as time goes on and news is released.  On the other hand one of the largest players who is in on a major lawsuit has reduced his position.  Perhaps it's redemptions (but he didn't reduce St. Joe's and he has bought other new stuff).  Perhaps he thinks the time it takes to win is going to still be a few years (and he thinks St. Joe's and other new investments will appreciate in a shorter time period).  Perhaps he has lost faith in his thesis.  Perhaps he knows something from his lawyers that will be detrimental to his case. 

 

Berkowitz doesn't hold very many large positions, but he still does have a large position in the GSE's.  Clearly St. Joe's is his favorite holding at the moment.

 

Personally, I'm not selling any of my holdings as all-told I still really like the investment, but him selling this much is concerning.

[blackcoffee]

Berkowitz has substantially reduced his exposure.

 

The news certainly is concerning.  On one hand I love the thesis and the odds of administrative reform into a utility/Moelis/etc. seem to get stronger as time goes on and news is released.  On the other hand one of the largest players who is in on a major lawsuit has reduced his position.  Perhaps it's redemptions (but he didn't reduce St. Joe's and he has bought other new stuff).  Perhaps he thinks the time it takes to win is going to still be a few years (and he thinks St. Joe's and other new investments will appreciate in a shorter time period).  Perhaps he has lost faith in his thesis.  Perhaps he knows something from his lawyers that will be detrimental to his case. 

 

Berkowitz doesn't hold very many large positions, but he still does have a large position in the GSE's.  Clearly St. Joe's is his favorite holding at the moment.

 

Time will tell, but him selling this much is concerning.

 

Probably redemptions

[investorG]

Berkowitz has substantially reduced his exposure.

 

Seems reasonable - he has a big business to run and surprisingly phillips-mnuchin early this year punted to 2019.

[Luke 532]

Probably redemptions

 

That might be wishful thinking.  It reads to me like he is diversifying a bit other than his massive position in St. Joe.  Odd for a guy like Berkowitz to diversify but he was down to something like 3 or 4 positions so perhaps he felt the need, and the heat from his investors, to spread it out a bit.

[investorG]

Berkowitz has substantially reduced his exposure.

 

The news certainly is concerning.  On one hand I love the thesis and the odds of administrative reform into a utility/Moelis/etc. seem to get stronger as time goes on and news is released.  On the other hand one of the largest players who is in on a major lawsuit has reduced his position.  Perhaps it's redemptions (but he didn't reduce St. Joe's and he has bought other new stuff).  Perhaps he thinks the time it takes to win is going to still be a few years (and he thinks St. Joe's and other new investments will appreciate in a shorter time period).  Perhaps he has lost faith in his thesis.  Perhaps he knows something from his lawyers that will be detrimental to his case. 

 

Berkowitz doesn't hold very many large positions, but he still does have a large position in the GSE's.  Clearly St. Joe's is his favorite holding at the moment.

 

Personally, I'm not selling any of my holdings as all-told I still really like the investment, but him selling this much is concerning.

 

 

I dont know his motivations but it's hard for underperforming funds to hold 25-30pct positions in investments that are viewed as dead money for 12+ months.  Unlike many of us, he has outside investors to answer to -- so he sold this and bought some other more traditional positions.    Good chance he was disappointed in the lack of leadership on the matter.

 

[investorG]

Probably redemptions

 

That might be wishful thinking.  It reads to me like he is diversifying a bit other than his massive position in St. Joe.  Odd for a guy like Berkowitz to diversify but he was down to something like 3 or 4 positions so perhaps he felt the need, and the heat from his investors, to spread it out a bit.

 

 

I'm guessing he's also realizing it's unlikely that par value is a realistic upside target.  In a hopeful future deal, it's necessary for both sides to compromise.

[SnarkyPuppy]

Berkowitz has substantially reduced his exposure.

 

The news certainly is concerning.  On one hand I love the thesis and the odds of administrative reform into a utility/Moelis/etc. seem to get stronger as time goes on and news is released.  On the other hand one of the largest players who is in on a major lawsuit has reduced his position.  Perhaps it's redemptions (but he didn't reduce St. Joe's and he has bought other new stuff).  Perhaps he thinks the time it takes to win is going to still be a few years (and he thinks St. Joe's and other new investments will appreciate in a shorter time period).  Perhaps he has lost faith in his thesis.  Perhaps he knows something from his lawyers that will be detrimental to his case. 

 

Berkowitz doesn't hold very many large positions, but he still does have a large position in the GSE's.  Clearly St. Joe's is his favorite holding at the moment.

 

Time will tell, but him selling this much is concerning.

 

Probably redemptions

 

Very obviously not due to redemptions.  Berkowitz selling is a bad data point - I wouldn't try to rationalize this away

[beaufort]

The news of Berkowtiz selling SRG printed hours after we learned that BRK will lend 2B to SRG, relieving SRG of the pressure from constantly decreasing SHLD rents and SRG's funding gap.  The stock is popping today with a significant short float.  Bruce has sold out completely.

 

I don't like Bruce selling either because he is funding lawsuits.  I don't know how many.  Shareholders need the lawsuits.  I have to assume others will stop in and fund the lawsuits.  Perhaps the lawyers will work on a contingency. 

 

Bruce's moves are not good from a funding perspective, but my SRG point is that everybody makes mistakes and gets timing wrong.  Bruce has understood the SRG thesis from the beginning of his investment in SHLD, and it didn't work out for him even though he was right.

[blackcoffee]

Berkowitz has substantially reduced his exposure.

 

The news certainly is concerning.  On one hand I love the thesis and the odds of administrative reform into a utility/Moelis/etc. seem to get stronger as time goes on and news is released.  On the other hand one of the largest players who is in on a major lawsuit has reduced his position.  Perhaps it's redemptions (but he didn't reduce St. Joe's and he has bought other new stuff).  Perhaps he thinks the time it takes to win is going to still be a few years (and he thinks St. Joe's and other new investments will appreciate in a shorter time period).  Perhaps he has lost faith in his thesis.  Perhaps he knows something from his lawyers that will be detrimental to his case. 

 

Berkowitz doesn't hold very many large positions, but he still does have a large position in the GSE's.  Clearly St. Joe's is his favorite holding at the moment.

 

Time will tell, but him selling this much is concerning.

 

Probably redemptions

 

Very obviously not due to redemptions.  Berkowitz selling is a bad data point - I wouldn't try to rationalize this away

 

Did his AUM stay the same?

[frugalchief]

Berkowitz has substantially reduced his exposure.

 

The news certainly is concerning.  On one hand I love the thesis and the odds of administrative reform into a utility/Moelis/etc. seem to get stronger as time goes on and news is released.  On the other hand one of the largest players who is in on a major lawsuit has reduced his position.  Perhaps it's redemptions (but he didn't reduce St. Joe's and he has bought other new stuff).  Perhaps he thinks the time it takes to win is going to still be a few years (and he thinks St. Joe's and other new investments will appreciate in a shorter time period).  Perhaps he has lost faith in his thesis.  Perhaps he knows something from his lawyers that will be detrimental to his case. 

 

Berkowitz doesn't hold very many large positions, but he still does have a large position in the GSE's.  Clearly St. Joe's is his favorite holding at the moment.

 

Time will tell, but him selling this much is concerning.

 

Probably redemptions

 

Very obviously not due to redemptions.  Berkowitz selling is a bad data point - I wouldn't try to rationalize this away

 

He has plenty in cash equivalents to cover redemptions.  It's a little concerning to me too as a FAIRX holder.  Still around 20% of AUM is comforting right now.

 

Regarding JOE, I think BB has the restrictions of insider ownership since he's Chairman?  Correct me if I'm wrong.

 

My first post on this thread, I'm long FNMAS only (right now)

[Luke 532]

https://www.insidemortgagefinance.com/imfnews/1_1411/daily/treasury-wants-hud-to-make-fca-changes-1000047046-1.html?ET=imfpubs:e11211:73599a:&st=email&s=imfnews

 

“Watch for an end to the [GSE] conservatorships under a Republican director at the FHFA. GSE preferred stock will be converted to common and dividends will end to build capital.” – Tim Rood, chairman of The Collingwood Group.

[Eye4Valu]

Am I the only one who thinks Bruce is pretty straight forward in his semi-annual report that he still likes his investment in the preferreds? Here are some quotes: "We remain confident in our preferred equity ownership." "Trading at approximately one-quarter of their intrinsic value, we continue to view the preferred shares as an excellent investment." His cost basis was below the price he sold at. He used the losses he took on selling some of his SHLD position to offset those gains. I wouldn't read too much into the reduction and portfolio re-balancing. Once this works out, he'll sell his position like he always does, and will be off to the next investment no one believes in except for him and maybe a few other contrarians.

[undervalued]

He reduced GSE from 30% of total portfolio to around 16%. As Eye mentioned, he still likes the investment. He might buy it back in the future. I guess time will tell.

[muscleman]

The news of Berkowtiz selling SRG printed hours after we learned that BRK will lend 2B to SRG, relieving SRG of the pressure from constantly decreasing SHLD rents and SRG's funding gap.  The stock is popping today with a significant short float.  Bruce has sold out completely.

 

I don't like Bruce selling either because he is funding lawsuits.  I don't know how many.  Shareholders need the lawsuits.  I have to assume others will stop in and fund the lawsuits.  Perhaps the lawyers will work on a contingency. 

 

Bruce's moves are not good from a funding perspective, but my SRG point is that everybody makes mistakes and gets timing wrong.  Bruce has understood the SRG thesis from the beginning of his investment in SHLD, and it didn't work out for him even though he was right.

 

Don't forget his MBI sale either. I sold MBI flat after I saw Bruce selling it. Ironically just days after I sold, MBI settlement came and shares were up like 50%.

[muscleman]

Am I the only one who thinks Bruce is pretty straight forward in his semi-annual report that he still likes his investment in the preferreds? Here are some quotes: "We remain confident in our preferred equity ownership." "Trading at approximately one-quarter of their intrinsic value, we continue to view the preferred shares as an excellent investment." His cost basis was below the price he sold at. He used the losses he took on selling some of his SHLD position to offset those gains. I wouldn't read too much into the reduction and portfolio re-balancing. Once this works out, he'll sell his position like he always does, and will be off to the next investment no one believes in except for him and maybe a few other contrarians.

 

I am sure his fund has been under dramatic pressure after his high profile SHLD bet failed to work.

[Luke 532]

Seems like David Stevens' mouthpiece is slowly but surely coming around.  Heck, if Stevens gets a little piece of the pie for banks then it's a win-win, so might as well start angling for this end-game to take place sooner rather than later as the earlier timing is better for all.  Especially since he is retiring the end of September.

 

Yesterday

https://www.insidemortgagefinance.com/imfnews/1_1411/daily/treasury-wants-hud-to-make-fca-changes-1000047046-1.html

QUOTE OF THE WEEK: “Watch for an end to the [GSE] conservatorships under a Republican director at the FHFA. GSE preferred stock will be converted to common and dividends will end to build capital.” – Tim Rood, chairman of The Collingwood Group.

 

 

Today

https://www.insidemortgagefinance.com/imfnews/1_1412/daily/mick-mulvaney-shows-interest-in-fannie-freddie-1000047053-1.html

By the end of September, Fannie Mae and Freddie Mac will roll their wheelbarrows full of cash down to Pennsylvania Ave. to dump $6.1 billion worth of dividend payments into the collection box at the U.S. Treasury. Needless to say, certain factions of the mortgage industry are not happy. “The money should be retained as capital [by the GSEs] and used to protect taxpayers and housing markets,” said the Community Mortgage Lenders of America. “If it is swept into general revenues, it’s just a tax on mainly younger buyers. And since most of the federal budget is entitlements to older Americans, it’s an inter-generational transfer of wealth…”

 

We’ve heard chatter around Washington that acting CFPB Director Mick Mulvaney has taken an interest in GSE reform. As to why…

[rros]

Class action by Hamish Hume

 

http://gselinks.com/wp-content/uploads/2018/08/18-1124-0001-Wazee-case-filing-8-2-18.pdf

 

Plaintiff Wazee Street owns Fannie Mae common stock.

This seems only for common stock class.

 

I was wondering if the accumulation of judges dissenting (J. Brown and J. Willet, so far) creates either incentive or momentum for new lawsuits, backed by their opinions. In which case, anything positive coming from Saxton's might be useful.

[beaufort]

I listened to the Saxton oral argument again a couple of days ago.  Abbie Wright laughs to herself after she says that FnF got relief from the downside quarters, and Treasury got greater upside in positive quarters ie all profit in perpetuity as a result of the third amendment.  I am paraphrasing.  The context was what remains for shareholders as a result of the third amendment. 

 

I wish I was there to see the expression on the judges' faces when she was laughing.  My read of her laugh is that she is well aware that what she was saying is preposterous.  Of course, there can be nothing that remains for shareholders with the third amendment in place. 

 

If anybody was in attendance on the day of oral argument, please provide your observations. 

[Luke 532]

Unconstitutional ruling, Watt under investigation for sexual misconduct with his employee, now this below. Tough couple weeks for FHFA...

 

Investigating the investigator: Fannie-Freddie watchdog under scrutiny

https://www.politico.com/story/2018/08/02/fannie-freddie-watchdog-scrutiny-laura-wertheimer-mel-watt-720176