Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 3712439 times)

abitofvalue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13360 on: August 27, 2019, 01:51:13 PM »
https://www.wsj.com/articles/a-primer-on-the-future-of-fannie-freddie-11566898207?mod=hp_lista_pos3

Plan to be released "shortly after Labor day."

I believe there is a piece of new information in this article:

"Privately they have said they would like to reduce Fannie and Freddie’s loan footprint to between 30% and 40% of the market, according to people familiar with their discussions."

Additionally, quite amazing if you take a step back 1-2 years and see how drastically the narrative has changed.  Could argue that Mnuchin has done a great job at "boiling the frog" in terms of creating sentiment shift (rather than doing everything at once), but that could be confirmation bias.

If Fannie and Freddie are 30-40^% o the market, profitability will be markedly lower than recent years.


allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13361 on: August 27, 2019, 02:28:32 PM »
They are currently ~60% of the single-family market, so even if you assume 30-40% they are still earning $10-15b a year, enough for the common to retain value and pfds to be made whole. But I think the probability of them losing that much market share overnight is close to zero. It would require new entrants to want to compete w/ the GSEs, which would probably require Congress to pass legislation to expand the charters (0-2% probability?).

As Layton recently explained, who actually wants to invest capital to compete w/ a duopoly? Here is his full quote: "At 50,000 feet I agree it would be better to have more competition but let me ask two questions. Number one: Who’s going to enter? Who’s going to raise capital with the following investment thesis, I’m gonna start from scratch and to make it work and deliver into the single security I need a nationwide footprint because otherwise it won’t be accepted as fungible with the others so that’s a market requirement and so I have to go big fast and I’m going to compete with two massively entrenched competitors. Who have scale advantages and 100% market share against me. So what private equity firm is going to go, I like that story. So we’ve sat there and go who actually is going to enter. I understand the theory it would be good if people enter but when you actually go and ask possible entrants they go it’s just not a good deal. So I’m not talking theory I’m talking will someone show up.”

https://www.wsj.com/articles/a-primer-on-the-future-of-fannie-freddie-11566898207?mod=hp_lista_pos3

Plan to be released "shortly after Labor day."

I believe there is a piece of new information in this article:

"Privately they have said they would like to reduce Fannie and Freddie’s loan footprint to between 30% and 40% of the market, according to people familiar with their discussions."

Additionally, quite amazing if you take a step back 1-2 years and see how drastically the narrative has changed.  Could argue that Mnuchin has done a great job at "boiling the frog" in terms of creating sentiment shift (rather than doing everything at once), but that could be confirmation bias.

If Fannie and Freddie are 30-40^% o the market, profitability will be markedly lower than recent years.

Cox022

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13362 on: August 27, 2019, 03:00:37 PM »

It surely is an exercise in speculation and short termism but are everyone's thoughts?

My thought is, the value of a business is the sum of its earnings it can produce for its shareholders over its lifetime.  In just a matter of days, according to the press, the government will state that the GSE's shareholders' interest in these profits will go from zero to $10-$15B. 

How that pie gets sliced remains to be seen.  In a theoretical sense, the expected value of the securities should increase, imo, meaningfully but I wouldn't presume to know how the market reacts in the short term-that consistently surprises me.  If the market prices today are 'fair', then theoretically they would move up after the announcement if it doesnt contain something out of left field.  But again, I have no evidence to think I have skill predicting short term movements, I'm just riffing here.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13363 on: August 27, 2019, 03:39:40 PM »
there are talkers and there are walkers.  someone is talking about reducing GSE "footprint" to 30-40%.  over what the period? after treasury has sold out its common position? maybe...that would be a few years at least.  wouldn't make much sense before, unless the talker is a clueless policy guy who doesn't understand finance. and exactly how does this bureaucratic central planner get to this number? tell calabria "just do it" a la nike?

this is all BS until the plan is released, and then we get to read what Phillips has actually written.  and wonder why HUD took so long.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13364 on: August 27, 2019, 03:56:43 PM »
@cox

re current pricing being fair, imo there are many investors who put the GSEs in the too hard pile.  waiting for clarity.  if clarity comes, then I think the supply/demand characteristics will change and prices will then become "fairer"

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13365 on: August 28, 2019, 05:59:26 AM »
Why not margin up or go all in if one hasn't already? Biggest risk seems to be the time this takes to be realized. No longer permanent loss of capital.  If your margin rate is 10%. The preferred arent 10% higher a year from now? Unlikely.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13366 on: August 28, 2019, 06:00:36 AM »
https://www.housingwire.com/articles/49952-trump-administration-to-release-plan-for-fannie-freddie-after-labor-day

Calabria discussed what he "thinks" will be in the release. He has already seen a copy/draft no? ;)

investorG

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13367 on: August 28, 2019, 06:07:25 AM »
Why not margin up or go all in if one hasn't already? Biggest risk seems to be the time this takes to be realized. No longer permanent loss of capital.  If your margin rate is 10%. The preferred arent 10% higher a year from now? Unlikely.

oh, this argument again...  the answer of course is because you can lose $ from here.  the market doesn't hand out free gains or easy doubles.  I can easily paint a scenario where the jr pref receives a major discount to par only after several more years and a handful of 25% drawdowns along the way. or something worse.  of course there are other positive potential outcomes also.   
« Last Edit: August 28, 2019, 09:08:01 AM by investorG »

investorG

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13368 on: August 28, 2019, 06:18:15 AM »
Todd Sullivan makes some great points about recent news starting at the 21:45 minute mark (Fitch, Sheila Bair, etc.): https://valueplays.podbean.com/e/16-aug-23-2019/

thanks, this has some interesting points.  however expecting a 75-100% rise from a report that has been read by many dozens or even hundreds of DC people would require a tremendous amount of confidentiality trust.    rather, imo, what we're hoping for is there's a small group of DC people working behind the scenes with a small group of bankers on a 1h2020 capital raise.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13369 on: August 28, 2019, 06:19:23 AM »
Why not margin up or go all in if one hasn't already? Biggest risk seems to be the time this takes to be realized. No longer permanent loss of capital.  If your margin rate is 10%. The preferred arent 10% higher a year from now? Unlikely.

oh, this argument again...  the answer of course is because you can lose $ from here.  the market doesn't hand out free gains or easy doubles.  I can easily paint a scenario where the jr pref receives a major discount to par only after several more years and a handful of 25% drawdowns along the way. or something worse.  of course there are other positive outcomes also.

Yes its back. Why not? We are here to make money right? What's your argument for preferred receiving a major discount to par once NWS ends and capital build starts? How is the common worth anything before the preferred is worth par as money flows down the capital structure? Cant be forced conversion. Do you have specific examples where this has happened?

Time I agree with. Some preferred trade~ 40% of par. 150% upside leaves a lot of room for waiting.