Replies to post #795654 on Fannie Mae-No Politics (FNMA)

[kthomp19]

The difference is that some are blinded by what they *think* will happen, ignoring other possibilities.

The difference is that some people, like me, actually put forth a number for things like the chances that Treasury converts (75%) or writes down (25%) the SPS. Most others just list possibilities without assigning numbers to them, which is completely useless when deciding whether to buy, sell, or hold at current prices.

But players are reluctant to relinquish their pick because that's the path they chose. The closer they get to the end, the more they think their pick is right.

That's just the endowment effect, a well-documented phenomenon.

Even I would sell some juniors to buy commons if the prices diverged enough. The FNMAS:FNMA ratio hit 4.0 today; if it goes much higher I probably will do just that.

Calculated from my cost basis. As the market fluctuates, I need to adjust my ratios as I accumulate. I haven't accumulated since common went back over 0.65. I've averaged down to roughly $1.00 per common, and less than $0.068 per $1 of JPS redemption value (mixed $25s & $50s).

The 6.8% figure depends pretty heavily on if you're buying the most liquid series (FNMAS, FMCKJ), the least liquid (usually the 5-letter ones starting with FMCC), or somewhere in between. They have all done well recently though.

Yes, and not knowing how much of each of those will actually happen, I've positioned myself for as many variations as I can.

You can only position yourself one way. It will be a function of the different possibilities and probabilities you assign to those variations.

If junior come out ahead of common, I win. If common realizes a higher multiple than JPS, I win more. I don't think Common nor JPS are getting wiped. I think there is upside in both.

I suppose that depends on what you define "winning" to be. If the juniors outperform the common you would lose relative to owning only juniors and no commons. But differences of opinion are what make a market.

I don't think either class gets totally wiped, but a SPS conversion would cause there to be little upside, and perhaps substantial downside, from current prices.