Fannie Mae-No Politics (FNMA)

[kthomp19]

Does your model care--or do you care--at all about coupon rate if two series are similarly priced relative to par?

No. It only takes into account past prices and movements, and makes recommendations on what to do given current prices. So it takes div rates into account to the extent that the rest of the market does and has in the past.

Personally, I want to be in the mid fixed divs when the endgame approaches. At least if they are not priced at too much of a premium (>5%) relative to the floaters. Once I perceive the endgame approaching I plan to abandon the model and move into Category B:

A) Highly liquid: FNMAS FMCKJ FNMAT
B) Mid fixed divs: FMCCH FMCCK FMCCO FMCCP FMCCS FMCCT FMCKI FMCKK FMCKL FMCKM FMCKN FMCKO FMCKP FNMAG FNMAH FNMAI FNMAJ FNMAK FNMAL FNMAM FNMAN FNMFM FNMFN
C) Floaters: FMCCG FMCCI FMCCJ FMCCL FMCCM FMCCN FNMAO FNMAP

The A shares generally carry too much of a premium for me to buy (I don't care about liquidity), and the C shares run the risk of either having their very low divs turned on or being offered a worse conversion deal than the other series.

I know Glen disagrees with me on this point: he thinks par is all that matters. That is perfectly fine, I just think there is enough chance that div rate does matter that I'm willing to pay a premium of 5% or so to own the Bs. Differences of opinion are what make markets.

Right now the Cs trade at a significant discount to everything else, though, so I have been switching a lot of my shares into that category. Tidbit: FNMAP is surprisingly liquid (not at all uncommons to have 10k volume) and is, for some reason, much more liquid than the essentially-identical FNMAO.

I owned a lot of odd series before the Supreme Court ruling, then rolled everything into FNMAT and some other high-coupon series when they were around 17:1, but at 9:1 (currently) they're a little less appealing. FNMAO is nearly 17:1.

My model says FNMAT is a screaming sell right now, in that its premium to the B and C series is much higher than normal. But my model cares nothing for liquidity or taxes, so it might not be good for your situation. If you plan to HODL then right now the Cs are by far the best bet. If you plan to trade in and out entirely (instead of just trading between the categories as I do), the As are still probably your best bet.

I'll say that the coupon rates seem attractive to me, even though I'm pretty sure their dividends won't be reinstated. I also expect a blanket 6% rate or something in a damages scenario, so it wouldn't matter much there, either.

Right; Lamberth's case has simple interest damages of 6% of par per year since the NWS if I understand things correctly, and div rates don't matter at all there.

What are some situations where coupon rate might matter? Order of redemption? Am I wasting my time with these, or should I be worried about liquidity--trying to unload tens of thousands of shares of FNMAO--if something cataclysmic happens?

Citi's preferred-to-common conversion offer took dividend rates into account, with the ~6% div series getting 85% of par and the ~8% div series getting 95%. That's the precedent that says div rates could matter.

If you're worried about liquidity, your only option is to pay the (currently very large) liquidity premium for FNMAS/FMCKJ/FNMAT.

Two points about "something cataclysmic happen[ing]":

1) It basically already has. It's hard for me to imagine what could cause a sustained drop from 6-7% of par.
2) My main junior pref investment thesis is TINA. I view the juniors as perpetual options, and since the vast majority of my shares are in a retirement account that I can't touch for a long time anyway, I don't mind the resolution taking 10+ years from now. Pref swapping means I get paid to wait, and also gives me the option to cash out for early-retirement-level money down the road at less than full par.

If your situation is different and you want to stay liquid then my model is not appropriate for you.

Ironically, when the Collins decision came out I was mostly in FMCKJ anyway, as a result of the model (FMCKJ fell faster than the other series in the run-up to Collins), allowing me to liquidate a good portion in the cataclysm and buy back in much lower. I nearly tripled my par value that week without investing an extra dime, but I attribute that mostly to luck in that I was only mostly in FMCKJ due to the model, and I happened to be at my computer when the decision came out. A friend was traveling that day and was unable to take advantage.