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

[sampr01]

thanks. how much upside u r looking at?

hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

[hyten1]

twacowfca,

how do you guys value these, there are tons of prefers, many with low vol, all dividend are non-cumulative

- you think they will ever get back to $25/$50? will fmcc or fnma ever pay dividend on these?
- considering they still have over 180bil to pay the treasury combine (fnma 88bil, fmcc 42bil)?
- i guess you guys are just playing the fact as housing improve prospect fo fnma/fmcc improve their prefers will move closer to $25/$50?
- i assume if fnma/fmcc do ever decide to redeem some of these they will start with the higher dividend ones

sorry for so many question, all newbie

i guess at end of day as long as prospect for fnma/fmcc are improving (housing improving) these prefers will move up, but i have no gage if $3 is a good price or $5, how do you value these?

hy

[twacowfca]

thanks. how much upside u r looking at?

hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

That's not the way we look at these.  The margin of safety lies in the assumption that the UST won't wipe out their own investment in their F&F preferreds by a bankruptcy or similar reorganization.  Therefore, it would be unfair to wipe out the rest of the capital structure and unnecessary because the UST's preferred is senior to the rest of the equity claims. 

Eventually, F&F should be able to earn their way out of the hole in the sense of returning more to the UST than the UST put into them.  ( this is more or less the way our government spins accounting to prove they haven 't lost money on organizations they bailed out.)   If that 's the case, then something good may happen to the holders of the public preferred.  And possibly something less for the common.

[sampr01]

Thanks tw
do you have timeframe?

thanks. how much upside u r looking at?

hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

That's not the way we look at these.  The margin of safety lies in the assumption that the UST won't wipe out their own investment in their F&F preferreds by a bankruptcy or similar reorganization.  Therefore, it would be unfair to wipe out the rest of the capital structure and unnecessary because the UST's preferred is senior to the rest of the equity claims. 

Eventually, F&F should be able to earn their way out of the hole in the sense of returning more to the UST than the UST put into them.  ( this is more or less the way our government spins accounting to prove they haven 't lost money on organizations they bailed out.)   If that 's the case, then something good may happen to the holders of the public preferred.  And possibly something less for the common.

[BargainValueHunter]

The common squeaks out another 50% gain today but the danger is that with one swipe of its collective hand Congress can just wipe you out.

Even the mere mention of an "overhaul" sliced the preferreds in half not too long ago.

Be careful.

[valueorama]

The common squeaks out another 50% gain today but the danger is that with one swipe of its collective hand Congress can just wipe you out.

Even the mere mention of an "overhaul" sliced the preferreds in half not too long ago.

Be careful.

I feel Congress's hands are tied. Fannie and freddie are the mortgage market as we speak. Private business is negligible. If you  say no more fannie or freddie, private mortgage lenders would demand a much higher rate and will kill housing market.

I see very little risk of Congress killing Fannie or freddie for the near term (1-3yrs). But given that all profits are to be paid as dividends to govt held preferreds., essentially the public preferred+common gets nothing. it needs to be treated as a call option on a future action by congress to retain profits.

[twacowfca]

The common squeaks out another 50% gain today but the danger is that with one swipe of its collective hand Congress can just wipe you out.

Even the mere mention of an "overhaul" sliced the preferreds in half not too long ago.

Be careful.

I feel Congress's hands are tied. Fannie and freddie are the mortgage market as we speak. Private business is negligible. If you  say no more fannie or freddie, private mortgage lenders would demand a much higher rate and will kill housing market.

I see very little risk of Congress killing Fannie or freddie for the near term (1-3yrs). But given that all profits are to be paid as dividends to govt held preferreds., essentially the public preferred+common gets nothing. it needs to be treated as a call option on a future action by congress to retain profits.

That's right.  There is always the possibility that the preferred and common could be wiped out because governmental decisions may be arbitrary.  That's why the public preferred is selling for pennies on the dollar.  This is not something one should put a big chunk of life savings into,

Interestingly, for those who like arbitrage, the recent run up in prices has taken the market value of the F&F common way ahead of the market cap of the F&F preferreds.  Yet the stated value of the preferreds is a lot more than the common should be worth in all but a pipe dream.  What is the cost to borrow the F&F common?

[Olmsted]

Interestingly, for those who like arbitrage, the recent run up in prices has taken the market value of the F&F common way ahead of the market cap of the F&F preferreds.  Yet the stated value of the preferreds is a lot more than the common should be worth in all but a pipe dream.  What is the cost to borrow the F&F common?

+1.  Tweeted same sentiments yesterday.  It is a great time to trade up the capital structure or engage in outright capital structure arbitrage.

Incidentally, the same common/preferred disparity existed in 2009-2010, but it was even more glaring - the common traded not just at a higher market cap, but if memory serves me correctly, a higher nominal price as well.  So save some dry powder for the trade, once fast money gets into something they can blow prices from merely irrational to insane.

I was offered a borrow of 5.5%.  But I'm afraid of a squeeze, and I don't have enough experience doing risk management for short-selling in situations like these in order to enter the trade with confidence.  (Tips?)  Unfortunately, there are no options.

[twacowfca]

Interestingly, for those who like arbitrage, the recent run up in prices has taken the market value of the F&F common way ahead of the market cap of the F&F preferreds.  Yet the stated value of the preferreds is a lot more than the common should be worth in all but a pipe dream.  What is the cost to borrow the F&F common?

+1.  Tweeted same sentiments yesterday.  It is a great time to trade up the capital structure or engage in outright capital structure arbitrage.

Incidentally, the same common/preferred disparity existed in 2009-2010, but it was even more glaring - the common traded not just at a higher market cap, but if memory serves me correctly, a higher nominal price as well.  So save some dry powder for the trade, once fast money gets into something they can blow prices from merely irrational to insane.

I was offered a borrow of 5.5%.  But I'm afraid of a squeeze, and I don't have enough experience doing risk management for short-selling in situations like these in order to enter the trade with confidence.  (Tips?)  Unfortunately, there are no options.

You're right.  The arbitrage is virtually a sure thing in the long run, but the long run could be very long indeed.  One reason the common is so pricey relative to the preferred is an extreme liquidity premium.  Another reason is a little short squeeze.  The squeeze may not extreme because the cost to borrow is "only" 5%.

The pricing differential was indeed extreme in 2009 2010 because the preferred was completely off the radar.  It took us quite a few weeks to accumulate a meaningful position in the preferred that was mostly owned by small banks that had been allowed by their regulator to own it because it was the only high yield security deemed to be "safe".   We were the first to point out the differential between the common and the preferred, on this board.  Then the idea got picked up on VIC , SA and other sites.  Since then the differential has been smaller.

[LC]

Can you sell short something related? Not sure what that something would be given the special position Freddie/Fannie are in...