Going into election night, most betting markets were giving Hillary between an 80%-90% chance of winning the US presidential election. Additionally, most securities were pricing in those same odds as well. However, we believe one name which was mispriced given a Trump victory was Fannie and Freddie (prefs and common stock). While it is impossible to prove in retrospect, we believe the common stock and prefs would have almost stayed unchanged if Hilary won, given her position on Fannie/Freddie was officially unclear. Additionally, the securities had sold off for the previous month in anticipation of a Clinton victory.

In our view FNMA common offered a great asymmetric risk reward. A Clinton victory could have caused FNMA to fall maybe 5% (but one can actually argue they could have rallied, as uncertainty should be viewed as a positive) and a Trump victory could cause the name to rally by at least 100%. This is exactly what happened, see the chart from the week after the election below:


Additionally, in the month since the election, FNMA common is up almost $0.90 more to $3.98, given Trump’s cabinet selection Mnuchin advocates the GSEs release from government control.

Volmanac has been a small holder of Fannie common and prefs for years (long before Judge Lamberth’s ruling in 2014), as we believe it will be difficult for the government to fire 10K+ workers at Fannie/Freddie, establish a new entity, and give up potential economic interest in the existing entities. We always believe that some sort of recapitalization deal with the government would eventually get done given the large bureaucratic undertaking it would be the start a new entity. For those of you unfamiliar with the name/trade, it is worth reading the Pershing Square Presentation from a few years ago.

Additionally, we believe that asset volatility is sure to be relatively higher over the next few years as securities over-react then reverse to potential policy changes and administrative jawboning as we have already seen with the GSEs, infrastructure companies, and generally the whole stock market after the Trump election. For example, the market is hyped up on tax reform, a corporate tax holiday going to share buybacks, and fiscal stimulus, but do we know for sure the administration will prioritize these policies? We are not sure. For example, today (over a month after the election) Trump was still is bragging to pundits that he won the election. It is almost 2017 and the election is long over, he should be working on these potential policy changes and not tweeting. We think there are a lot more unknowns and there will be a lot of volatility in these names which ripped post election.