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

[DRValue]

so following on rros and locus, what is basis for a position in pref? 

 

failure. 

 

specifically the failure of fierce enemies of the GSEs to come up with anything workable to replace over 10 freacking years.  There Is No Alternative.  now, they are in modify mode, with calabria cheerleading for "competition".  I consider this a huge annoyance (harms capital raise execution prospects) but a victory nonetheless.  TINA.  and what I consider to be a favorable outlook for collins en banc. and a real banker at Treasury (mnuchin) who spent a successful career seeing firsthand the advantages of the GSEs

 

It's just occurred to me that Mnuchin wants housing finance reform done in 6 months and Calabria says the spsa will change September / October.

 

Seems to me Mnuchin is getting investor uncertainty out of the way before the capital raise, so all good. I don't think congress will continue to meddle because in the past they have said they want treasury to tell them what to do.

[Guest cherzeca]

"I don't think congress will continue to meddle because in the past they have said they want treasury to tell them what to do."

 

I dont dispute this, but note that congress is passive/aggressive as an institution, so that after they ask treasury to tell them what to do, and then treasury tells them what to do, congress gets pissed that treasury told them what to do...and even more pissed after treasury realizes congress cant enact what treasury tells them what to do

[DRValue]

"I don't think congress will continue to meddle because in the past they have said they want treasury to tell them what to do."

 

I dont dispute this, but note that congress is passive/aggressive as an institution, so that after they ask treasury to tell them what to do, and then treasury tells them what to do, congress gets pissed that treasury told them what to do...and even more pissed after treasury realizes congress cant enact what treasury tells them what to do

 

I feel like if the US government really wanted to get this done over 10 years they would've done. I won't speculate why it didn't get done.

 

Knowing how congress need to rely on the experts to make recommendations, I suspect that treasury will say "this is what reform looks like, do you want it?".

 

I can't see them debating it further when a recap and release formally closes the issue. I can't see congress keeping going with no justification.

[Luke 532]

FHFA's twitter account tweeted the American Banker article.  They are trying to tell the market what's going to happen.  The market is still in a coma.

 

FHFA just again sent a tweet about the American Banker article moments ago. 

[rros]

Changing subjects a bit... Is this our Judge Willet?

https://www.facebook.com/JusticeDonWillett/

 

Extravagantly blessed husband & co-founder of 3 wee Willetts. Former drummer and rodeo bull rider.

[Midas79]

FHFA just again sent a tweet about the American Banker article moments ago. 

 

This makes me want to do a really deep dive into the article. It's as if FHFA is sending the best signal it knows how.

 

But I don't know how much more we can glean from it.

[Cox022]

Another possible take on Calabria's 'roadmap with mileposts' could be:

step 1 would be to renegotiate the pspa/stop nws/retain earnings/other tweaks. 

Step 2 would be let congress react and let the dust settle, then

step 3 would be continue with an earnest capital raise. 

 

I fail to imagine another way Treasury threads this needle to fully recapitalize the companies while on the other hand saying congress should act. 

 

According to Calabria's comments, step 1 is going to happen.  If congress doesn’t do anything soon after step 1, I think they'd be less likely to do anything at or after step 3, because at this point, risk aversion will be an even bigger factor than usual and any big action congress could take could be easily be perceived as hurting the housing market. 

 

I don’t say this with a lot of confidence but it seems logical.

[Luke 532]

Another possible take on Calabria's 'roadmap with mileposts' could be:

step 1 would be to renegotiate the pspa/stop nws/retain earnings/other tweaks. 

Step 2 would be let congress react and let the dust settle, then

step 3 would be continue with an earnest capital raise. 

 

I fail to imagine another way Treasury threads this needle to fully recapitalize the companies while on the other hand saying congress should act. 

 

According to Calabria's comments, step 1 is going to happen.  If congress doesn’t do anything soon after step 1, I think they'd be less likely to do anything at or after step 3, because at this point, risk aversion will be an even bigger factor than usual and any big action congress could take could be easily be perceived as hurting the housing market. 

 

I don’t say this with a lot of confidence but it seems logical.

 

Well said.

[Guest cherzeca]

some have mentioned the need for a "validating" investment in the GSEs, so as to ignite the capital raise...those some might have included me as well.  what would this look like?

 

see https://seekingalpha.com/news/3456114-berkshire-commits-10b-help-finance-occidental-deal-anadarko

 

here brk is buying a new pref (8% div!) and warrants...$10B....for occidental to finance Anadarko buy.  the guy is nothing if not opportunistic

[Ahab]

https://thehill.com/business-a-lobbying/441364-new-bill-would-restrict-fannie-mae-and-freddie-mac-from-lobbying

 

Anyone think this has a chance of passing?

[rros]

https://thehill.com/business-a-lobbying/441364-new-bill-would-restrict-fannie-mae-and-freddie-mac-from-lobbying

 

Anyone think this has a chance of passing?

The real question is, how fast can Mnuchin and Calabria get them out before stuff like this produces long term damage?

[muscleman]

Respectfully, what does this have to do with Calabria correcting or not the shareholders' issue? This matter, the one we all care about, was born from an improper administrative action, not from Congress legislating. In fact, Congress followed the right path to protect shareholders based on Calabria's own contributions to HERA.

 

My fear is that Calabria will do too much of what Watt did: make no move and wait for Congress. However, I have re-read the article after taking a break, and it isn't as bad as I thought. Calabria has talked about a sense of urgency, and he is committed to getting FnF out of conservatorship. I don't think the article is entirely positive, but I have backed away from the ledge!

 

If/when Calabria makes a move to correct this faulty structure value is automatically added to all shares. And that value will not disappear. It will travel along with any reform.

 

For the juniors, I agree. But a capital raise could dilute the commons badly, especially if it's large-scale and fast. There will be value added, but much of it could accrete to the new common shareholders.

I ask myself everyday if I am being gullible in believing their words, while the real game is a waiting one. Government can wait forever.

 

That's the problem of fundamental analysis. A lot of times this kind of uncertainty drives me nuts and then I sell, and then right after I sell, the stock goes 3x.  :(

I don't have this problem any more after I give up on FA. The chart continues to look incredible. It is one of the best looking chart in all of my holdings right now. I see lots of buying and no sellers on the market. What's really funny is that on Tuesday, the collaborated bashes by John Carney and Gasparino happens to be the lowest volume day of this week for FMCKJ. That tells us that the last group of weak holders (Chris call them LIFO guys) are out. So now we have no sellers and eager buyers, so guess what's gonna happen next.  :)

In a strange kind of way, LocusofTexas got it right.

 

This, whether we like or not, is a gamble of the rankest kind. What makes this a sordid speculation is government's involvement. Not the kind of involvement known through 10k's, that is, Congress providing GSE's charters and public mission or government entanglement as a "sponsor", but the type of pervasive involvement that is so vast and widespread that involves both houses of Congress and all branches of government in an insidious type of way: politics.

 

I imagine that the day Warren Buffett reached a similar realization, way before any hint of any nws, he promptly concluded fundamentals really did not count or, if they did, they would take a back seat to anything even remotely connected to a politico farting, deciding -was it a large position in Freddie Mac?- it was time to pack and leave with a boatload of profits. Not to risk such fart would end up smelling worse than a rotten egg.

 

Judging this bet on a fundamental basis or a technical basis is an exercise in futility. Charts also looked GREAT on the day this article was published making it the first public acknowledgement of hedge funds' involvement on the Jrs.

https://www.bloomberg.com/news/articles/2014-03-10/westhus-reaping-fannie-windfall-to-rival-big-short-mortgages

 

That day, my friend, was the historical peak (or the day before if you want more precision). A day later, the sell-off began. And within 2 days Crapo announced a plan to eliminate and replace Fannie and Freddie:

https://www.forbes.com/sites/nathanvardi/2014/03/12/fannie-and-freddie-preferred-shares-fall/#567834e9423e

 

Then, a few months later, Lamberth hand-grenade blew us up into pieces.

 

Fundamentals? Technicals? Coincidence? Inside trading?

 

The only right way to handle a bet on these shares -and I only focus on the Jrs.- is by trying to assess in the best possible manner cumulative information from many different sources interpreting this data in many different ways with a great deal of latitude and an enormous amount of humility that allows for admitting errors. Sometimes major ones. And this assessing, in general, is more like reading tea leaves in its simplest form.

 

Today, I like to think Mnuchin is not yapping. He told us last year, to our great disappointment, that the GSEs were a 2019 story. We got crashed. But we now know he was honest. Why would he publicly say such thing last year and why continue to say it today, in an open forum, that not only this is a 2019 story but one that will unfold within the next 6 months? Why not continue to delay the story to 2020 and beyond? Given he was honest last year, I'd like to think it is true we may see things accelerating in the next few months.

 

 

Thank you for your kindness to help. But trust me, I am not the thrilled 18 year old high school kid who just discovered the "magic of fast moving average crossing the slow moving average." or something as naive as that.  :D

 

When I was 18 years old, I first started with technical analysis, and blew my whole account in one year. (Tiny account though). I stopped for a few years, and after graduation, I encountered value investing, learned really hard for 8 years, but eventually give up. I am back to technical analysis because I knew what  this is all about and why I blew up in the first place 16 years ago. I am not a pure TA though. I look at both TA and FA.

 

You mentioned 2014 events. I started tracking GSEs since 2009. I have studies those tops and the Perry ruling top. I've done intensive studies since last May on TA and went over thousands of charts per week.

[DocSnowball]

Is there a thing as value trading? Use TA to buy securities from amongst an undervalued pool? If it doesn't work out be patient and make a long term call based on fundamentals...do we do some of this when position sizing? Just curious if there is a sweet spot

[muscleman]

Is there a thing as value trading? Use TA to buy securities from amongst an undervalued pool? If it doesn't work out be patient and make a long term call based on fundamentals...do we do some of this when position sizing? Just curious if there is a sweet spot

 

There sure is. There are many ways to make/lose money. The most important thing is to find a way that suits your personality and day to day life. I think it is off topic here so I created another thread.

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/the-most-important-lessons-in-my-8-years-of-value-investing/

 

[allnatural]

Does anyone know how the senior pfd balance works on the governments balance sheet? If they decide  to settle with shareholders will there be a ~$189b writedown for the government and will it hurt the budget (such as giving up access to the GSEs earnings through the NWS will?). I know this can be offset with the warrant monetization and commitment fee going forward but wondering if they will need to take a $189b hit upfront. Thank you.

 

 

[DRValue]

I've said for a while that I feel like there is a reasonable chance that the spsa is amended to a lower interest rate.

 

Does anyone else think that's a possibility? Probability?

 

Imo it's clearly the easiest fastest way to largely recap the companies and the warrants can still net the government more money.

 

Also on lawsuits amending the nws as above may leave money to pay junior prefs dividends they should be owed. But the junior dividend suits may well have been decided and/or hit statute of limitations.

[Midas79]

I've said for a while that I feel like there is a reasonable chance that the spsa is amended to a lower interest rate.

 

Does anyone else think that's a possibility? Probability?

 

Imo it's clearly the easiest fastest way to largely recap the companies and the warrants can still net the government more money.

 

Also on lawsuits amending the nws as above may leave money to pay junior prefs dividends they should be owed. But the junior dividend suits may well have been decided and/or hit statute of limitations.

 

Amended retroactively? All that amounts to is Treasury sending a giant check to the companies. I can't see this happening at all. In fact, I think a highly plausible way to settle the Collins case is to extinguish the seniors and end the NWS, but not give FnF the tax credit that the plaintiffs ask for. Instead Treasury would just keep that overage.

 

Treasury would also net more money by not sending this giant check and having its warrants be worth somewhat less due to dilution from the capital raise.

 

In my opinion any projected course of action that involves Treasury voluntarily sending money out, instead of receiving it, is DOA.

[allnatural]

I've said for a while that I feel like there is a reasonable chance that the spsa is amended to a lower interest rate.

 

Does anyone else think that's a possibility? Probability?

 

Imo it's clearly the easiest fastest way to largely recap the companies and the warrants can still net the government more money.

 

Also on lawsuits amending the nws as above may leave money to pay junior prefs dividends they should be owed. But the junior dividend suits may well have been decided and/or hit statute of limitations.

 

Amended retroactively? All that amounts to is Treasury sending a giant check to the companies. I can't see this happening at all. In fact, I think a highly plausible way to settle the Collins case is to extinguish the seniors and end the NWS, but not give FnF the tax credit that the plaintiffs ask for. Instead Treasury would just keep that overage.

 

Treasury would also net more money by not sending this giant check and having its warrants be worth somewhat less due to dilution from the capital raise.

 

In my opinion any projected course of action that involves Treasury voluntarily sending money out, instead of receiving it, is DOA.

 

Agreed. Government will not pay a penny to anyone (shareholders or back to the companies).

[Guest cherzeca]

Does anyone know how the senior pfd balance works on the governments balance sheet? If they decide  to settle with shareholders will there be a ~$189b writedown for the government and will it hurt the budget (such as giving up access to the GSEs earnings through the NWS will?). I know this can be offset with the warrant monetization and commitment fee going forward but wondering if they will need to take a $189b hit upfront. Thank you.

 

my best guess is that if there were a 4th amendment that recharacterized prior "excess of 10% dividends" into pref reductions then the pref balance will be reduced to zero.  no hit.  what that does to prior years' accounting I know not

[DRValue]

Does anyone know how the senior pfd balance works on the governments balance sheet? If they decide  to settle with shareholders will there be a ~$189b writedown for the government and will it hurt the budget (such as giving up access to the GSEs earnings through the NWS will?). I know this can be offset with the warrant monetization and commitment fee going forward but wondering if they will need to take a $189b hit upfront. Thank you.

 

my best guess is that if there were a 4th amendment that recharacterized prior "excess of 10% dividends" into pref reductions then the pref balance will be reduced to zero.  no hit.  what that does to prior years' accounting I know not

 

So looks like I'm in the minority.

 

My thinking is shaped by the "let the gse's pay us back act" bill that was proposed where the interest rate was amended to 5pct. It didn't go anywhere but tells me it's possible.

 

It'd be quicker and give investors more confidence.

 

I can't help but think a capital raise is going to take a long time.

[Wiggins]

Yes Mulveney's bill proposal in 2015 was to have payments retroactively pay down the principal and also at a 5% rate, also retroactively. So, at least it's been proposed already (agreed with DrValue). Also, it could happen without any check being written if it appeared as a credit to be taken out of cash raised from warrant sales, just to name one possibility. I'm not saying any of this will happen or that it is likely, just that it's possible in this way. Further, plaintiffs counsel suggested that overage could appear as a tax credit, which also does not rely on a check being written.

 

On another note, I think Mnuchin is waiting for en banc. He needs that cover. The details of recap and rejiggering of PSPAs which dictate the precise amount of money that will stolen by Treasury from the GSEs when this is wrapped up cannot be calculated or decided until en banc issues their ruling, IMO.

[allnatural]

Maybe im misunderstanding you but how is amending the senior pfds to 5% and paying all that down going forward quicker than immediately writing it to down zero as part of settlement? And how does that solve any capital raise requirement to get the companies to 2.5% - 3% buffer if they have to pay off $189b at 5% first? Unless you are thinking they are going to retroactively amend the original 10% agreement back to 5%...?

 

Does anyone know how the senior pfd balance works on the governments balance sheet? If they decide  to settle with shareholders will there be a ~$189b writedown for the government and will it hurt the budget (such as giving up access to the GSEs earnings through the NWS will?). I know this can be offset with the warrant monetization and commitment fee going forward but wondering if they will need to take a $189b hit upfront. Thank you.

 

my best guess is that if there were a 4th amendment that recharacterized prior "excess of 10% dividends" into pref reductions then the pref balance will be reduced to zero.  no hit.  what that does to prior years' accounting I know not

 

So looks like I'm in the minority.

 

My thinking is shaped by the "let the gse's pay us back act" bill that was proposed where the interest rate was amended to 5pct. It didn't go anywhere but tells me it's possible.

 

It'd be quicker and give investors more confidence.

 

I can't help but think a capital raise is going to take a long time.

[rros]

Does anyone know how the senior pfd balance works on the governments balance sheet? If they decide  to settle with shareholders will there be a ~$189b writedown for the government and will it hurt the budget (such as giving up access to the GSEs earnings through the NWS will?). I know this can be offset with the warrant monetization and commitment fee going forward but wondering if they will need to take a $189b hit upfront. Thank you.

 

my best guess is that if there were a 4th amendment that recharacterized prior "excess of 10% dividends" into pref reductions then the pref balance will be reduced to zero.  no hit.  what that does to prior years' accounting I know not

 

So looks like I'm in the minority.

 

My thinking is shaped by the "let the gse's pay us back act" bill that was proposed where the interest rate was amended to 5pct. It didn't go anywhere but tells me it's possible.

 

It'd be quicker and give investors more confidence.

 

I can't help but think a capital raise is going to take a long time.

Those were Senators. Treasury is the baddest pirate. Ever.

[DRValue]

Maybe im misunderstanding you but how is amending the senior pfds to 5% and paying all that down going forward quicker than immediately writing it to down zero as part of settlement? And how does that solve any capital raise requirement to get the companies to 2.5% - 3% buffer if they have to pay off $189b at 5% first? Unless you are thinking they are going to retroactively amend the original 10% agreement back to 5%...?

 

Does anyone know how the senior pfd balance works on the governments balance sheet? If they decide  to settle with shareholders will there be a ~$189b writedown for the government and will it hurt the budget (such as giving up access to the GSEs earnings through the NWS will?). I know this can be offset with the warrant monetization and commitment fee going forward but wondering if they will need to take a $189b hit upfront. Thank you.

 

my best guess is that if there were a 4th amendment that recharacterized prior "excess of 10% dividends" into pref reductions then the pref balance will be reduced to zero.  no hit.  what that does to prior years' accounting I know not

 

So looks like I'm in the minority.

 

My thinking is shaped by the "let the gse's pay us back act" bill that was proposed where the interest rate was amended to 5pct. It didn't go anywhere but tells me it's possible.

 

It'd be quicker and give investors more confidence.

 

I can't help but think a capital raise is going to take a long time.

 

Ah yes you're right there is no chance of this,  unless changing the 10pct agreement to 5pct is actually possible.

 

I was confusing the nws with the 10pct original agreement. There isn't a legal argument against the original 10pct "agreement" so apologies.

[muscleman]

Chart shows a big move is coming soon, and most likely to the upside. Good luck to us!  :)

I see a lot of eager buyers but no sellers.