Adios Fannie Pref

Bruce Krasting's picture

 

I first wrote about (and got invested in) the Fannie and Freddie Preferred stock back in the summer of 2009, Link. As of today, the last of those shares have been sold. For those who followed my path, an explanation for my exit.

By pure luck I sold the Fannie T before 3/11 (The day that the Senate voted for an unwind of Fannie and Freddie, AKA The SHTF Day). At $13+ FNMAT was trading at 65% of original par - that's a rich price for busted pref. It was also a rich price relative to all of the other Agency Pref stock. Alas, the Ts were a small portion on my sheet. The bulk went off on SHTF day - down 15%+ from the prior close. Today was the clean up.

So I bailed on the Senate vote. But there was more than just that.

- The F/F story was getting to be a very crowded trade. Too many hedge funds had gotten involved late in the game. The 'easy money' had been made.

- You had guys like Dick Bove saying FNMA was an $18 stock and the pref was money good - That kind of optimism is always a sign of trouble (and of talking one's book)

- The common stock (I never owned a share) was being dominated by day traders and robots.

- This is (and always has been) a story where the outcome will be determined in the courts. The value of the Fannie Pref will be established by the SCOTUS. (An unbelievable outcome) I'm troubled by rolling the dice with the Supreemes.

- The calendar is 'not right':

The Senate Bill will not get acted on by the House until (at least) the November elections.

The legal cases being brought by the hedge funds could be delayed for years.

I don't see a catalyst that would reinvigorate market interest.

 

- There is also the question of Mel Watt. Mel is, as of today, the Director of FHFA. Now that he has his fingers on the button is Mel going to say anything that would swing markets? Because of the law suits he shouldn't; but he still might. Could he say:

 

I believe in shareholder's rights!

 

No, Mel's not going to say anything of the sort. The risk is he says:

 

I Support the Senate plan - wind em down - kill the speculators!

 

Notes:

1) Over (too) many years of messing with story stocks I've called the top exactly zero times. So for those who like the F/F story, don't read this to be a bearish view. I was looking at at a 10 bagger, and a very cloudy crystal ball. Should the Pref trade cheaper (below $5) I would reload. If it blasts up to par ($25), I'll still be smiling.

 

2) If the Senate deal happens:

A: The US taxpayers will lose $189B (the Senior Preferreds).

B: Say goodbye to the 30 year mortgage.

C: Look forward to prepayment penalties on mortgages (2-3% over the first 36 months). The embedded option in the current 30 year mortgage will be stripped out by the new mortgage lenders. Those new lenders will reside on Wall Street. (Where else?)

D: The Taxpayers will lose out on the chance to own 80% of F/F at a zero cost. That stake could be worth a fair bit. As much as $100b could be thrown out the door.

 

The Bull case for the F/F Preferreds is in A-D above. Those are compelling arguments against the Senate plan. But this is Washington, where nothing makes sense, so I'm moving on. I'm sure I'll find some other worthwhile trash.

 

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