Minyan Mailbag - FNM & FRE
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I am currently short FNM and long FRE and long gamma on both; so as the two diverge that position gets larger. I am not anywhere near taking it off, although I will adjust it as the spread increases.
FRE is about 6 months to a year ahead of FNM in the process of "cleaning up its act" and most of the news is out in FRE while I believe we will continue to see disappointing news for shareholders of FNM. FNM is being "neutered" while FRE is already there.
FNM has about twice the leverage (52 times versus 27 times) as FRE. As leverage comes down in FNM, they will lose market share while FRE is stable.
Valuation parameters cannot be used because almost all of the assumptions for FNM are and will continue to change. The only one that has relevance in my opinion at this juncture is price to book value: FNM trades at 2.5 times book value and FRE trades at 1.7 times).
The only Wall Street firm that dares to tell some truth about this situation is Morgan Stanley. They still cannot venture to say sell FNM, but have demurely suggested preferring FRE to FNM.
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