Fannie Mae-No Politics (FNMA)

[kthomp19]

PAR is the MAX - FACT

This isn't a fact. A junior-to-common conversion removes that cap.

why not shift some of that money to where the potential downside is higher but the upside might be my long time guess of 8-12 or say 10 -- 4x or so

The higher the prefs rise, especially as the commons either keep pace or lag behind, the lower the commons' ceiling implied by the market.

The way I see it, multiply the common price by whatever factor it takes to get the juniors to around par (a bit more for FNMAS and FMCKJ due to call protection and high dividends, a bit less for lower-dividend series like FNMAL). Add 25% for uncertainty, and that's the de facto ceiling for the commons. With FNMAS at $12, the multiplier is around 2.25 (108% of par, to reflect 1 year of dividends before the call date at the end of 2020). $2.66 * 2.25 = $5.99, add the fudge factor and I get $7.50. That's right around the ceiling I have for the commons in my model.

In other words, if someone agrees with your valuation then they should be buying commons instead of prefs. Since the FNMAS:FNMA ratio is still around 4.5:1, the market doesn't think $8-12 is a realistic possibility.