Crapshoot? Yes and no. There definitely is inherent risk in owning common shares when capital is pre-plannned to run out at the end of 2017 and either trigger new draws from UST or insolvency proceedings. Personally, I view this extreme outlook as far less likely under the new administration. But the risk is real, which is why I remain hedged with an offsetting position in preferred shares that are likely to finish in the money at or near par, regardless of outcome.
But I added common shares in both Fannie and Freddie, also, despite the risk factor. Part of that investment thesis involves a very simple reality. Common shares traded in the $60+ area in 2007, and paid a $2 dividend, annualized. At that time Fannie had higher reserves, higher portfolio risk in Alt-A and subprime loan inventory and no deferred tax assets to speak of. Now fast forward to today. Fannie's business is basically unchanged, although its guarantee income has risen from higher fees charged. It's capital reserves have been drained by Senior Preferred payments to Treasury, later becoming the full Monty sweep (self)deal. But its market share has risen and its risk profile has been cleansed of all the crisis era garbage. So, in a nutshell, Fannie has only two obstacles to overcome to return to its pre-conservatorship S/P in the $60's.
1. Rebuild capital reserves.
2. Shed the warrant threat of 79.9% dilution.
Income and new preferred stock issues can accomplish the capital need in a few years, specially in a rising rate environment. The courts can resolve the warrant threat, or it can be negotiated down in a settlement and Amendment 4. These are not insurmountable tasks IF government is serious about removing itself from private enterprise adventures. I sense that this is the new Conservative imperative, starting January 20th.
I like the odds. But like you, I also fear a change of direction as this new team comes together and takes control. A lot of that fear evaporates if the courts cancel the warrants or award claw-backs to the Twins for over-payments above the original $186 B UST draws. This is why I watch the newswires like a hawk for updates.
GLTA.
