navycmdr
3 days ago
$Booooom ! - Fannie And Freddie: My Favorite Trump Stocks
Jul. 03, 2024 10:00 AM ET - Chris DeMuth Jr. - Investing Group Leader
https://seekingalpha.com/article/4702129-fannie-and-freddie-my-favorite-trump-stocks?source=section%3Asummary%7Csection_asset%3Aall_analysis%7Cfirst_level_url%3Asymbol%7Cbutton%3ATitle%7Clock_status%3ANo%7Cline%3A1
.......... Summary ..........
--- Want a way to bet on Trump? There are bad choices but also good ones.
--- Here is my favorite way to bet on Trump at scale.
--- The major caveat is the likelihood of Democrats switching candidates.
--- But even with this risk, these securities remain undervalued.
--- I am Chris DeMuth Jr. I founded and run event driven hedge fund Rangeley Capital LLC,
a hedge fund specializing in value, arbitrage and event driven opportunities. I lead the investing
group Sifting the World which provides arbitrage and event driven ideas for long-term value investors.
Earlier this year, I wrote about several ways to get exposure to a possible second Trump term,
including Trump NFTs, Rumble (RUM, RUMBW), and Trump Media & Technology Group Corp. (DJT).
I disliked them all, especially DJT (DWAC at the time).
My views are unchanged since then. But I also mentioned a leveraged bet on Trump that I own and love:
There is a possibility that we see both the end of the Chevron Doctrine deferring to regulators at the
Supreme Court at around the same time as the end of the Biden administration. So, companies that
have suffered under aggressive regulatory burdens could flourish. One of the most leveraged bets
on Trump is Fannie (OTCQB:FNMA, OTCQB:FNMAS, OTCQB:FNMAT) and Freddie (OTCQB:FMCC,
OTCQB:FMCKJ, OTCQB:FMCCH); they've suffered under Biden but could have a route to realizing
value under Trump. Their prefs have more ways to win than common.
The Chevron Doctrine deferring to regulators was killed off by the Supreme Court today. But will Trump win?
Probably. I place the odds at least two out of three.
Will Donald Trump Win?
Betting markets have been remarkably stable until today’s volatility.
Poll averages show Trump ahead by about 2%, but I expect that margin to widen from here:
However, Biden’s problems are worse on a state-by-state basis. He is struggling
in sunbelt states such as Arizona, Nevada, and Georgia. That means he would
have to sweep the rust belt states of Wisconsin, Michigan, and Pennsylvania.
And then there was Biden’s debate disaster. It utterly validated special counsel
Robert Hur’s description of the president,
We have also considered that, at trial, Mr. Biden would likely present himself to
a jury, as he did during our interview of him, as a sympathetic, well-meaning,
elderly man with a poor memory. It would be difficult to convince a jury that they
should convict him—by then a former president well into his eighties—of a
serious felony that requires a mental state of willfulness.
Last night, he came across as every bit an elderly man with poor memory, incapable of a
mental state of willfulness. His handlers have been saying for months that he is spry and
alert away from the microphone. They have been lying.
Now what? Most likely: Biden loses and Trump wins. Biden’s weaknesses are difficult to
message. You are overtaxed? That isn’t a hypothetical concern that someone can explain
away. You see inflation at the grocery store? “No, you don’t” is hardly a convincing counterpoint. Y
ou were lied to about Biden’s fitness. A greater quantity of lies won’t improve their quality.
But this is a competitive system, and Democrats won’t go down with Biden if his loss looks
as likely as I think it is. California Governor Gavin Newsom was all over the post-debate spin
cycle, looking more in sadness than anger at the debacle, but also looking very presidential.
The Democrats could find a consensus alternative among the competent Democratic governors
such as Colorado Gov. Jared Polis or Pennsylvania Gov. Josh Shapiro (the Republicans are
more committed to Trump but could also switch out for a far more electable gov such as Georgia’s
Brian Kemp or Virginia’s Glenn Youngkin). An irony of this year’s political dynamics is that Biden
is the Republican’s not so secret weapon and Trump is the Democrats’. Any normal candidate
would obliterate the other party’s presumptive nominee in the electoral college.
A serious delegation, say, led by Pres. Clinton and Pres. Obama, could approach Biden
to step aside. If he balks, a compromise could be to replace the unpopular Vice President
with a consensus candidate, paired with a plan for Biden to step down shortly after a victory.
That could appease Biden’s ego and transition to a more sentient leader of the free world.
Caveat
Trump could lose or fail to privatize Freddie and Fannie if he wins. The chance radically
rises if the Democrats switch out Biden for a more electable nominee.
Conclusion
Trump has at least a two out of three chances of winning this election. If he does, he will probably
enrich Freddie and Fannie pref holders by privatization. And whether he does, the likelihood will
get meaningfully priced in if he gets elected.
TL; DR
I own some (FNMAS), (FNMAT), (FMCKJ), and (FMCCH); you might want to too.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Like underpaying for bargains?
Here's one more.
This article was written by - Chris DeMuth Jr. - 37.66K Followers
Chris DeMuth Jr., is founder of event driven hedge fund Rangeley Capital. Its strategy is to invest in mispriced securities with limited downsides and corporate events that unlock shareholder value. Rangeley exploits the seams between other hedge funds’ mandates.
Chris runs the investing group Sifting the World, in which he shares his best ideas, deep research, extensive resources and real time updates as investments play out. The group contains an experienced community that shares specialized knowledge when members have local knowledge of opportunities under discussion. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of OTCQB:FNMAS, OTCQB:FNMAT, OTCQB:FMCKJ, AND OTCQB:FMCCH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
https://seekingalpha.com/instablog/957061-chris-demuth-jr/5549358-legal-disclosure
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
navycmdr
6 days ago
Fannie Mae: An Indirect Bet On Trump Polling Numbers
Jun. 30, 2024 3:29 AM ET - Harrison Schwartz - 15.59K Followers
.......... Summary ..........
--- Fannie Mae's value has rocketed higher following the Trump-Biden debate, implying it is an indirect bet on a Trump win.
--- Historically, Trump is far more likely to end FNMA's conservatorship than the Biden administration.
--- There are no guarantees that Trump will successfully end the conservatorship, having not done so in his last term. Further, FNMA's fundamental risks would not necessarily decline in this scenario.
--- Fannie Mae's book value should be below its market value by 2027-2028 at its current income level, given it continues to retain its profits.
--- Although home prices seem likely to decline, Fannie Mae's exposure is limited because very few people are obtaining mortgages at today's extremely low affordability levels.
The Federal National Mortgage Association, or "Fannie Mae" (OTCQB:FNMA), has avoided significant headlines in recent years. The government-sponsored enterprise remains in conservatorship under the Federal government roughly sixteen years after its failure. Fannie Mae and its peer, Freddie Mac (OTCQB:FMCC), are the primary mortgage insurance providers to qualified or "agency-backed" mortgages, backing around 70% of US mortgages. Most mortgages are pooled into mortgage-backed securities or "MBS," such as those seen in the ETF (MBB).
Fannie Mae is on the hook if mortgage borrowers fail to pay their loans. Thus, theoretically, mortgage-backed securities have limited credit risk, given that Fannie Mae should protect against losses. Historically, that would not be true if not for the government bailout in 2008, as Fannie Mae (and its peer) lacked the funds to meet the immense obligations created during the 2008 foreclosure crisis.
The company has not been tested to the same degree since then. Although delinquencies rose in 2020, these were classified as "forbearance," stemming from the temporary issues created during the large but short-lasting unemployment spike during lockdowns. In my view, if not for the immense QE-driven decline in mortgage rates in 2020 and the stimulus efforts, we would not have seen the recovery in real estate.
Of course, we could argue that the housing market's "recovery" since 2020 has created a renewed housing bubble. Home valuations are at record highs. Now that mortgage rates are far higher, affordability is extremely low. Home sales are also at, and often below, the levels seen during 2008. The market has had added support from rising rents and low inventories, though these two beneficial factors are fading, increasing the potential for a decline in home prices over the coming year or two. As such, we must reconsider the risk profile facing Fannie Mae to determine if its long era of conservatorship has improved its stability.
Further, we must consider the election, as it is generally viewed that a Trump administration would end its conservatorship. Hence, the stock is positively correlated to Trump's poll numbers. The company was close to restructuring and privatization toward the end of his term, but that was upended by the economic shock caused by lockdowns. As such, I'd argue that macroeconomic factors play a more significant role in FNMA's value regardless of who wins in November.
Fannie Mae's Capitalization is Improving
Investors in mortgage-backed securities indirectly pay a small fee to Fannie Mae to provide insurance risk coverage, ranging from 25 to 50 bps. Typically, the number of mortgages in default that require Fannie Mae coverage is relatively low and predictable. Thus, the company usually earns a solid profit margin on its revenue. In a normal (non-recessionary) period, its profitability is primarily driven by its operating overhead costs, which have been sustained at ~10% in recent
years. See below:
Fannie Mae is earning significant profits today because very few mortgage owners are in default. The 2010s decade saw very low mortgage rates and fair housing prices. Those who borrowed in this period often had lower payments than their incomes, giving them low default risks. Fannie Mae cannot pay its income out to investors, per its conservatorship rules, but it has used this income to improve its balance sheet. Still, its net book value for common stock investors is quite negative. See below:
The company's shareholder equity was near zero from 2010 to 2020, as it was still not seeing great solvency improvement as it recouped its immense losses from the decade prior. Thus, there is a large time lag between the company's solvency and the solvency of homeowners. Today, it is benefiting from the strong solvency conditions of those who borrowed during the 2010s. Depending on what occurs in the property market, it may be years before current borrowing conditions impact its solvency.
Fannie Mae's equity is much healthier today, but its equity for common stockholders remains very negative, amounting to a book value per share of -$50. In other words, should the company liquidate all its assets, liabilities, and preferred equity, it would have no money for common shareholders in FNMA. Thus, FNMA is similar to a stock option or warrant on the company's overall equity. Its fundamental value may rise dramatically above its current value only if its common equity rises by another ~$58B.
FNMA's market value is $8.2B, so a $66B increase to its common equity (through retained earnings) must be discounted to its book value. The company's annual income has been around $15B to $20B in recent years, and all else being equal, it should rise with today's larger mortgage sizes (given home prices), so its book value should be very attractive within three to four years.
If we could assume that there was zero risk to the housing market, FNMA would likely be undervalued today since its net income is generally 2X its market value. However, if a slight shock exists in the property market, this value trade is upended. Fannie Mae's solvency has markedly improved, but its total liabilities to assets remain at 98%. See below:
So, if Fannie Mae takes a 2% loss on its assets, its shareholder equity (including preferreds) would be back at zero. From 2008 to 2012, Fannie Mae's book value fell by ~$150B. It had around $880B in assets in 2008, meaning it took a ~17% loss due to that mortgage crisis. So, even if we see a similar issue around a sixth as large, there is decent potential that FNMA's equity would be back at zero.
Home Prices Will Fall, But Fannie's Risk Is Low
The housing market today is similar to that of 2008 in many respects. However, the key difference is that most outstanding mortgages were made at far more affordable rates and prices. From 2020 to 2022, the company saw its assets rise by a staggering ~$750B, but that figure has stagnated since then since very few people are willing to buy homes at today's affordability level.
Theoretically, this limits Fannie Mae's exposure significantly because current borrowers are at much greater default risk than those of the 2012-2022 period, given affordability. We can see this statistic from today's low mortgage debt service payments to disposable income ratio:
This figure is more important for Fannie Mae than others. In 2006-2008, there was a housing valuation bubble, and many people were buying into that bubble. Today, there is, in my view, a potentially larger housing bubble, but far fewer people are exposed to it. Indeed, if we look at mortgage debtors at large, their ability to pay their debt has never been better.
It is the new borrowers that Fannie Mae needs to worry about. Home sales prices to income are relatively high today as affordability is low. Home sales are back at extreme lows after the housing shock and 2020. See below:
Notably, the US median home price to income ratio is around 7.7X today, well above the 6.7X peak in 2006. The metric above compares the price of homes sold to disposable incomes (which are lower), so it is a higher ratio. Further, the metric above has declined because smaller-priced homes are moving much better today than larger, more expensive ones; the actual overall home price-to-income ratio has not declined since 2022, as home values continue to march to all-time highs.
Realistically, large homes are probably significantly overvalued today. Technically, their values have not declined significantly, but they're also not moving. This is seen as older Americans are typically not selling their usually larger homes, defying the historical pattern. Suppose this changed and more looked to downsize. In that case, I believe there would be significant negative price discovery in larger homes because they're currently highly unaffordable to those who require a large mortgage.
This is a significant risk to the housing market but is likely not a risk to Fannie Mae. Most owners of large homes are older and, therefore, have lower mortgage debt insured by Fannie. Further, that demographic likely purchased their homes at a much lower price, so a decline in valuation would only limit appreciation gains, not resulting in negative equity.
Arguably, home prices have not declined because inventories have been low. Rental vacancy levels have also been low, stemming from decreased building activity in the 2010s. This is starting to change, as building activity rose significantly from 2019 to 2022 and is now reversing. Inventories and rental vacancies are also increasing, signaling a shift back toward a "buyers' market." See below:
Overall, I think there are many tell-tale signs that US home prices are in the process of peaking and should decline. Theoretically, a substantial decline of around 50% is needed for affordability to return to historically normal levels. Realistically, home prices should not fall by 50% outside of a severe economic crisis. Instead, I expect prices will stagnate or decline while inflation will increase, creating a ~50% decline compared to a decade or more in the future. Thus, it will likely be that people will begin to see housing as a poor investment, but I only expect those who purchased from 2022 onward to be at risk of negative equity (the chief risk for Fannie Mae).
Fannie Mae's Political Exposure is Large
FNMA's value has spiked by 25% over the past week, with most gains occurring after the recent Trump-Biden debate. It is not my aim to present a political bias here, but it is a fact that Trump is far more interested in releasing Fannie Mae than Biden. In 2021, the Biden administration utilized a Supreme Court ruling to fire the Trump-appointed FHFA chief interested in ending its conservatorship.
Since the debate, betting odds of Trump returning to office rose from ~52% to ~59%, while Biden's fell from 45% to 36%. FNMA's value has spiked accordingly, adding to its 230% YoY gain, which largely stems from the positive longer-term trend in Trump's odds compared to Biden's. Still, there remains considerable potential that Democrats do win, which would likely delay Fannie Mae's restructuring. Further, Trump did not end this issue during his term, so there is no guarantee that he will in a potential future term.
The political issue seems to have had a significant impact on FNMA's volatility lately. That said, I don't think it's essential in the long run. Fundamentally, FNMA's equity value will rise if mortgages don't go belly-up. Yes, FNMA could have dividend potential under Trump, but I think it would be fine if it retained its income and improved its solvency further before paying dividends. Of course, an end to conservatorship would give FNMA other benefits, such as more capital access that may benefit it, so a Republican win is bullish for FNMA.
The Bottom Line
Fannie Mae's risk-reward profile today is tricky. I'd argue the US housing market is weak. Further, based on an argument I've presented regarding bonds, unemployment will likely rise over the coming year in a recession. For this reason, I think investors should be cautious about buying housing-related stocks, particularly homebuilders.
However, Fannie Mae's risk is significantly mitigated because most homeowners today are not in the high-risk cohort created in 2022. It would take a massive decline in home prices for the median homeowner today to have negative equity.
Still, even if a small portion of Fannie Mae's exposure is to those new buyers since 2022, that could be enough to create significant issues for the company, particularly if it coincides with an unemployment driven recession. Its solvency is much better than it was, but it is still not necessarily adequate.
On the other hand, FNMA's valuation is extremely low compared to its potential EPS if released from conservatorship. My view on FNMA is very speculative, but I am bullish on it since I think its financial risk exposure to mortgages is low. The odds of Trump winning are decent, albeit far from guaranteed, at ~60%. That is not a political opinion but a view based on the betting market odds (which may be more accurate than polling data).
That said, FNMA faces significant risk. It is very volatile and has a negative common book value. I expect it may decline during a housing market shock and recession over the next year or two, so my bullish outlook is long-term. Unless the recession is severe, I'd see declines in FNMA's value as a buying opportunity. Lastly, the long-term risk to FNMA is likely new homebuyers from 2022 onward. If the housing bubble continues, FNMA may end up in a 2008 repeat as it's exposed to a more significant portion of high-risk loans.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by - Harrison Schwartz - 15.59K Followers