Tuesday, March 25, 2008

A Penny for Your Thoughts

In perhaps the most ridiculous subprime development yet, the former president of Countrywide and his cronies have established PennyMac, a company thought will purchase distressed mortgages and repackage them into more profitable products. The same criminals who led homeowners down the path to negative amortization loans are now repurchasing those same loans again for profit, sticking it in on both ends. Only our newly founded bailout at all costs Fed could allow such a thing. They're probably even encouraging it as it takes some of the heat off of them to do the same.

The markets continue to soar as the Bear bid hit $10 yesterday and the stock $13. JPM insists they weren't coerced into this action directly, but the threat of huge class action suits were impending. Had the gov't simply let Bear fail, JPM could have scooped up any piece they wanted for less than $2 and not had this hanging over their head. As it is however, life isn't so bad as they have a $29 billion free pass to cover Bear's assets over 10 years. The risk they run now is that their own shareholders will sue them for putting an additional $800 million into the deal.

Again, I urge you to acknowledge the last week's events as moment in time, not a bottom or impending bull-rally. Japan has 3 trillion yen in unrealized subprime losses, The Banks of China is writing down $1.3 billion in subprime exposure.....this is still a global problem. Yes, had you gone long every financial and homebuilder at noon last Monday you'd be looking like a genius. I sold out of my short positions based on gain vs. potential loss as this market has proved to be stormy, but I am far from convinced that there is any value in homebuilders or most financials. We'll see how new home sales made out as they have to compete with existing home sales and the glut of foreclosures. Mortgage rates have dropped temporarily but no one has the credit score to take advantage. All of this new liquidity for Fannie and Freddie still leaves them skittish about making new loans and they are requiring a larger down payment than ever.

I will continue to monitor Google and Microsoft for long-term calls and weak banks for possible strangle positions. This involves buying out of the money calls and puts in anticipation of sharp moves in either direction. As of now, UBS and WaMu are on my list.....

6 comments:

Tiger Coach said...

You should appreciate the irony... Three financial "analysts" on Fox News were touting XLF as their play on the year! They also called the "bottom" for financials. How in the @#$# do people make a living telling lies to the public?

One of the characters on Itulip went a step further and called Mad Money's Cramer to the carpet about his Bear Sterns call on 3/15...only to have the stock crash over the weekend!

Glad to hear you are a highly sought after commodity...you probably have some of the doctors asking you financial advice.

AX said...

Thanks, Bri. I was shocked to see CNBC throw Cramer under the bus a little for his UBS call in October after defending his Bear call last week. I'm curious to see what price these gurus end up or ended up buying XLF for. They've probably been dollar cost averaging all the way down from
$33.

One of the docs I work for is a conservative but intelligent investor, we've shared some ideas. Most docs, like most people, are clueless about their money. I've helped some of the nurses with their 401ks.

Awhile back, my brother started a limited partnership to invest some money for friends and family. I've been approached by several friends to do the same. My only worry is that my risk tolerance is much higher than most and that the fluctuations will be too hot to handle. I was down almost 50% in those puts at 2 different points....

Tiger Coach said...

My guess is the analysts were dollar cost averaging some of their client's money...that is why they are touting XLF...maybe they are looking for a Buffet type boost. Think about the kind of clout Warren has when a news release mentions what he is accumulating!

As long as you are forth-coming...and people are willing to accept risk v. rewards, I would encourage you to float at LTD Partnership...and handle investing. Was this brother #1 or #2 who started the investing? I know #1 was contemplating it at one time. Does both brothers read this blog?

It is good you have a conservative doc to speak with. As a collective group, doctors are notoriously poor investors.

I have people asking me financial advice all of the time as well. From re-financing to retirement I have become a resident expert...kind of scary huh:)

Anonymous said...

hello, i've been following for a while now and am glad you're back.

how can you trust what the numbers are saying at this point? i'd like your take on this.

with all the expected hits, is it possible that by announcing writedowns and projected losses, financials have created a bottom? ie...really really really bad projected earnings...earnings report just really really bad.

you sold to minimize risk in the stormy market, but i interpret your selling as kind of (wisely!) admitting to a possible rally, and now it appears the january bottoms were tested.

so if financials keep beating projections, in the process aiding the market,then did the financial's writedowns and revised earning projections point to a bottom signal.

i mean seriously, when are people and institutions supposed blindly and bullishly invest in retirement funds?

AX said...

It was brother #1 and no, they don't read it as often as I'd like! We do share some similar thoughts on investments though.

AX said...

Anonymous, thanks for your insights. Market timing is a loser's game. Some projections came in ahead of forecasts, but those forecasts were bottom-barrel, worst-case scenarios. GS and LEH were still 50 below last year's earnings, are we supposed to get excited about that? Under normal circumstances, we'd be killing these companies for those kinds of results. Same with homebuilders. Lennar "only" lost $.56 a share...sales were down over 60% year over year, and they're up today. Is this a company you want to own? I would not mistake this current rally as a signal that some more real destruction could occur. 5% of home equity loans are now delinquent, and as we've discussed previously, COF and Amex (AXP) have not felt the true crunch yet of people just going belly up.