Replies to post #15719 on Fannie Mae Preferred S (FNMAS)

[loobeyondbm]

Preferred/common

I am probably the first one on this board talking about switching between preferred/common and occasionally got ridiculed at. I have done this kind of switching 3 times, now I am 50% FMCKJ, 10% FNMAS and 40% FNMA.

I always assume the reasonable ratio of FNMAS/FNMA should be around 2, i.e., the ratio we are seeing after this sell off. It's a simple math. If FNMAS goes up to $25, it's likely FNMA will go to $12.5. I have seen several occasions after 3/2013 that FNMAS/FNMA ratio traded over 5 (9/2013, see my messages on this board) and close to 4 in 9/2014. If you held preferred and did the switch, you would have done much better.

I never believe preferred shareholders will get dividends before recap/structure events. It's thus likely FNMAS/FNMA ratio may go less than 2 in the coming days. That's why I keep 40% in FNMA. If FNMAS/FNMA ratio goes up to its normal range of 2.5~3, I will sell preferreds and switch back to commons.

However, I think in the coming days, preferreds may outperform commons simply because as the sell volume exhausts, it's very easy for the big funds to manipulate the share price and they will. The preferred was hit harder than common recently probably due to that a large number, pretended value investors who follow Fairholme and Pershing Square, and most of these people bought at around $4-$5 and so far sold and left.

Also, from my own experience, it has become very difficult to buy preferred in last 3-4 days. The price was good but there was no volume and you had to bid up continuously to get order filled.