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i donno carnac; the climb today was mirrored by decreasing volume which makes me a bit wary. could go either way next week IMO.
but..........you're posts have been very helpful and much appreciated.
not sure if you've had a chance to see the wsj article 5/15
http://blogs.wsj.com/moneybeat/2013/05/15/why-the-fannie-bet-faces-long-odds/?KEYWORDS=fmcc
Hedge funds and other investors are betting on the recovery of Fannie Mae FNMA +18.50% and Freddie Mac FMCC +23.75%, but political analysts say that this investment faces long odds. Here’s a primer on what has to happen for these investors to see their bets redeemed:
What do investors see in Fannie and Freddie? Some funds have been betting on the preferred shares of the bailed-out mortgage-finance giants for years on the assumption that the companies would one day become very profitable, and lately, they’ve been proven right on that score. The companies are raising their loan-guarantee fees, they are backing very conservative loans, and they enjoy very low borrowing costs thanks to their effective federal backstops. All of those have led to huge profits in recent quarters. (John Hempton of Bronte Capital first laid out a bull case in the summer of 2009.)
If the financial side of the bet is showing a payoff, what about the political side? If investors should have learned anything by now, it’s that Fannie and Freddie will not be treated by Washington as normal companies. The companies were effectively nationalized in 2008 to keep mortgage markets functioning. At the time, the U.S. Treasury created a new class of “senior preferred” shares that paid a 10% dividend, which they took in exchange for injecting cash. The government also received warrants to acquire 79.9% of the firms’ common stock. (The U.S. didn’t simply nationalize the companies because that would have brought the companies’ $5 trillion in assets and liabilities onto the federal ledger.)
The Treasury made a very important change last summer in amending those bailout agreements. It replaced the previous 10% dividend structure with a new arrangement that requires the companies to send nearly all of their profits as a dividend payment to the government. The upshot is that Fannie and Freddie can’t recapitalize themselves, which means there is no way for them to ever redeem the $188 billion in senior preferred shares now held by the Treasury. Dividend payments do not count as “repayment” of the senior preferred.
If Fannie and Freddie are profitable but can’t build capital and exit conservatorship, then what are investors betting on? The bull case goes something like this: policymakers will change their minds.
Fannie and Freddie are now profitable enough that, at some point in the next year, they will likely have sent more in dividends to the Treasury than they have borrowed. Even though it doesn’t mean anything legally—Fannie and Freddie will still owe at least $188 billion to Uncle Sam—this will be an important symbolic moment, potentially changing the political calculus about what to do with the companies, because policymakers will be able to say that taxpayers were made whole on the bailout.
“I’m not aware that there’s ever been an instance in 200 years where equity shareholders in a company that’s currently profitable were forced to take 100% losses,” says Rob Zimmer, a former Freddie Mac lobbyist who has his own government-relations practice.
Meanwhile, there’s a growing consensus among policymakers and the industry that the government will still play a key role backstopping the mortgage-securitization market so that banks make long-term fixed-rate mortgages. The bull case assumes that when Congress rolls up its sleeves and does the heavy lifting to sort out how to rebuild the nation’s $10 trillion mortgage market, lawmakers will preserve the corporate entities of Fannie and Freddie in some refashioned form rather than completely reinventing the wheel.
So why are political analysts so skeptical? There are essentially three ways that investors can make their political bet pay off, all of which require having last summer’s amendments withdrawn or changed.
First, they would need to convince the Treasury Department to revisit those amendments once they start the process of overhauling Fannie and Freddie. That isn’t likely to happen, at least not under the current administration, according to people familiar with the matter. This political bet “faces unimaginably long odds,” said Jim Parrott, who served as a top housing-finance adviser in the White House until the end of last year.
Second, Congress could entertain the hoped-for spin-off of Fannie and Freddie. Right now, lawmakers of both parties agree on little, but they both believe the companies should be buried. Given that, investors’ gamble on Congress’s change of heart “seems totally irrational,” says Charles Gabriel, a policy analyst at Capital Alpha Partners in Washington. “To some lawmakers, the move seems all but insulting—reflective of savvy hedge funds’ bet that Congress might ultimately be compelled to change its mind.”
Third, if both of those are dead ends, investors could sue the government to challenge the legitimacy of last summer’s amendments. Some legal experts, for example, have argued that Fannie and Freddie’s regulator may have violated its responsibility to conserve and preserve the companies’ assets when it agreed to the amendments last summer, which do not allow the companies to rebuild capital or exit conservatorship.
Ultimately, this is a political bet, not a financial one. Investors are gambling on a political outcome that, for now, has long odds, or they’re betting on a court ruling that goes against the U.S. Treasury.
thanks admiral, nice post.
I've taken a small position in FMCKJ just to have it as a reference in my portfolio, and will likely trade it off some key support levels if it falls. There's so much interest in these stocks at the moment, and its likely to continue. But I'm for sure watching the volume and movement of the stock. a big tank would have a nice rebound IMO.
this trade is not over, at least not for the preferred shares. I've set a number of pricelines to accumulate these. FMCKJ could get down to $3, but now that these stocks are on everyones radar its also likely they don't drop much at all.
will be worth keeping an eye on volume.
in hindsight the $5 price target is a major level as the $1 level.
my sense is the run was manipulated by a large trader or traders who began accumulating shares back in early may until the float was thin enough to cause the stock price to go up very easily on low volume, who then set an automated sell plan starting when the stock hit $5. Its possible this same trader played the bounce yesterday, then took a short position. All of this began with this trader knowing full well that this hedge fund news, the wsj news, the housing data, the return to profitability acted like a perfect storm on the preferred and lighting up the screens of traders looking for volume movements.
this is a game where the big guys control the levers. And there's no way to really guess at what their sell targets are since its all a bit arbitrary.
Really, there should be some way to criminalize this manipulation except a lot a small time traders love playing along and do rather well.
just catching up on the preferred; nice work on this and thanks
but it underscores placing really low ball buy and high end sell orders
these "software glitches" are curious.
amen to that
were u looking to get more of the preferred around 6ish. or down around 5.50?
I don't think you can tell from a chart what the news will be.
looks to me like its going down
any hints as to what that might be????
do you think its possible that the news of hedge funds lobbying congress to take these entities private is part of a game to play a stock surge. not that i'm skeptical by nature, nor a conspiracy theorist. but the profits are astounding; all the way from .26 to $5. we're talking many millions of dollars.
and quite a dive it was. big fund traders unloading. probably will be followed by some mid level traders taking advantage of todays rebound over the next couple days. If this makes a run toward 5 on friday i'll be calling you president and not admiral.
nice post, really nice. might take a bit to digest the analysis. not sure congress is limited to the options you mention
Thanks much
I'm apologizing in advance for this question; to get the payout on the k's, do you have to register with the litigation attourneys and fill out the claim forms?
I've been assuming that the payout comes automatically.
Nice post. The losers will be the small banks.
Any sense on the risk to the commons? Generally going private means some sort of buyout. So a possible scenario is the fed reducing the insurance backstop, converting their preferred to commons and eventually selling out?
Conversion to commons would allow the fed to get out over time just as they did with Citi? But with significant dilution initially and no way to value the common?
Also, If congress drags on the reform process long enough for housing to start rebounding not much will happen legislatively I'm guessing.
Any idea on how strong the Fanni / Freddie lobby is these days?
It was the strongest lobby in DC until the collapse.
Thanks for this link. We're in for lots of fun explosive court action coming up.
This article from The Atlantic reminds me of the two books I read recently;
"The Big Short" by Michael Lewis
"Capitol Offence" by Michael Hirsh
These are really fun books as reading them gets your blood rate up besides getting you inside the traders and government processes.
Before I read these books it seemed likely that Ambac would have some sort of case against the fraud passed on to them from the banks to the credit agencies to the insurers, but I was skeptical. But now there's a case to be made; this wasn't simply that the insurers didn't do due diligence. They really couldn't see what was in these derivatives because it was actively hidden.
However, proving fraud requires a paper trail and obvious intention, always difficult. Get ready for a long court schlogg.
Really nice reading!
My sense is that the stock will rise in fits and starts as the BK process grinds through the courts. For the moment Ambac seems primarily concerned with keeping the bad loans sequestered ala the Wisconson Commissioner. But they are also going after the credit agencies and banks as having shared responsibilities. As the litigation proceeds it may go well for Ambac, or not. There's a lot of money at stake and this will directly effect the implied value of the common shares. Parallel to this process is the BK court proceedings which will directly impact the share price. This is a slow process with many unknowns.
http://www.reuters.com/article/idUSTRE6AH62H20101118
There are some very savvy people on this site who deal in these BK stocks. Check out CEMJQ and TRXBQ. These pros are very good at determining share value along the way as a BK stock trudges along in the courts. And just for the record I am not an expert in these matters. I'm learning more by osmosis as I did with CEMJQ, made a good amount of money but not nearly as much as the pros and those lucky souls who stayed on the blogs and held out. It can be nerve racking but playing BK stocks seems to be very lucrative if you learn to pick the right ones and learn the legal and technical processes involved. Ihub is a great place to do this.
Here's a link to court dates:
http://www.kccllc.net/Ambac
Looking at todays volume shows steady selling beginning with a 500k spike around 11am. Looks like steady dumping in chunks from there. Its always a bit disconcerting when this happens if you're long but this is a bk stock and very volatile.
I've seen various values on the common down as low as .12. It can only go up if the judgement against the hedge funds holds. I expect an appeal as do many others which if you are a trader means take the profits.
I agree, this stock is headed for .0001. you can't fight this kind of dilution. perhaps Dennis will let us know when he's done selling. He says he's not taking any money....wonder what he's living on?????
but,,,,,,,once the selling is over and there's a hint of profit, which we are all counting on, volume will come in, traders will see it blip on their scanners and the stock will soar, plummet, flatten, soar etc.
i am in for the long haul, buying on the way down and ready to place the .0001 order for the team.
but really, two billion shares, holy sh............t. how do you even begin to place a pps that makes any kind of sense other than hope and promise.
Good morning all...new to the board and just getting acquainted with all the wonderful posts here. Hopefully i can be helpful but have limited time because of work.
love the q's but really need a bunch more experience so............
I'm holding long on this, but the direction is pointing to .002 to .001 and lower. Might try and pick up more at these lower levels because if you believe in the co its going to explode up at some point.
Its interesting that the recent news hasn't moved the share price up. I think the dilution issue is still hurting the stock. Not sure when this will end, but it could really push the PPS down. I've been burned by co.s that dilute and have learned the hard way to get out even with a significant loss, before all the chickens leave the coup. With BEHL I'm so far down, it doesn't make sense to get out now but to add at a lower level, perhaps even lower than .001.
Any ideas on who they might pick? Have you applied for the job?\
you should!
So beautifully written ilenes, i feel like i was in the courtroom!
quite the drama unfolding; the judge's skepticism toward the fed coming alive if i'm reading this right.
Thanks jaxstraw; shorting this stock, its not a good risk reward. my comment was more about the risk of optimism in a better settlement.
Just read through the chemtura blogspot review and mc's work and its just seems likely the stock will fall significantly, like back to the .10 level as the reorganization dilution plan pick up steam, at least psychologically speaking.
Maybe you have some insight on the EC's intentions to fight this?
sounds like a good argument for shorting the stock.
I have to say madclown, your analysis is informative and cautious. As a beginner to the BK stocks, i wonder if you have any suggestions other than following the boards?
As a builder I can tell you that this lack of permit knowledge by one member in the planning dept. is not surprising, its expected.
The permits could very well be in process.
Good point Gofer. but the financing issue is not resolved and coming to this point could be a cliff.
The drop to .004, related to the continuing sale of the dilution????? need for cash?
Anyone verified the dilution?
Anyone in a position to go to the company headquarters and do some investigation on DF and his relationship with workers and colleages????????
You loose all credibility when you say that the personalities running the company have no impact on the future of the company.
It concerns me and the market. Leadership is everything.
Are you sure? Looks like the kind of site that better have money behind it. And what/where is the capitol behind this??????????
Do you have something more specific on Dennis? I certainly appreciate your opinion but would like to get a handle on this company.