Shorting the LendersThere has been alot of talk about shorting the lenders lately, so I thought I would devote a day to discussing this. Accredited Home Lenders is displayed over on the left. As you can see it has dropped from a high of 60.13 to a last trade of 24.50. It is clearly in a downtrend, yet if we look at the last 12 months earnings, we see a nice uptrend. Also, another filter I like to look at is debt. Their debt ratios are actually dropping.
Many people are expecting both the EPS to deteriorate, as well as the debt to increase, due to the difficult period that lenders in general are in.
However, as I have told people over the last 6 months to a year with the homebuilders, the balance sheets of most of these companies have very attractive ratios still. This does not make them prime candidates for shorting. I want deteriorating debt ratios, and declining earnings for stocks I am shorting, and the reverse for stock buy candidates. Further, this is a stock that has already dropped 60%, so although there may be more downside, the fat of the move is already over.
For those that cannot help themselves, and are dead convinced that the worst is just beginning, I suggest just waiting for 3 to 7 day reactions upward against the downtrends to taks short positions, or buy puts. Then hope the downtrend resumes. These little retracements visually look like flags, so we call them bear flags. I would start this process by looking at stocks that have increasing debt and declining 12 month earnings ( not just one quarter ). This will itleast line up the fundamentals with the "story."
For Sam, NFI has fallen way more than these others from 70.32 to a last of 15.96, too late there. NEW is the same story. AHM looks better as the 12 month EPS has declined and debt ratios have risen, and the stock has only dropped about 25% off the high. However, it is not in a downtrend yet. I would wait for a break, and short the first retracement of that one.
2 comments:
Very good points. How much of a factor is the pay option arm and the negative am that they are seeing and booking as income? AHM, NFI and NDE for example don't show how much dollar wise they do for option arm volume or the amount of negative they book that as income in their 10-Q's. CFC does and this is what it looks like pay option dollar volume from 2005 to 2006 increased 25% but the amount of negative am increased by 775% (no that isn't a typo it is 775%) and they are booking this as income. NDE 25% of the loans in 2006 were option arms. I scoured the 10-Q's and couldn't find anything that seperates option arms out other than CFC.
Now here is where I think the problem really is and that is on the ground level. The girl who cuts my hair asked me to take a look at her mortgage that she was getting into. Keep in ming she is on a fixed income and was excited since her payment was dropping by $800 but she was getting a pay option arm. The broker was making 25k, made up a job for her and told her it was fixed for 10 years. The scary part is her payment would jump from $2200 to $4500 in 22 months and maybe sooner with rising short term rates. So with all that in mind, trust me this what the mortgage hacks are duping people into, what do you think?
I am not the doom and gloom guy but this is info I know and have seen. Most of the mortgage hacks tout the option arm because they can make 3% on the back end which makes for a margin of 3%+ and the index of 5.4% then the total rate equals 8.5% and when they are only paying 1% that reset like above hits them really fast and hard.
This is why I don't like the lenders.
I also have had similar conversations with people who have relayed situations like that to me. It does seem like it is a powderkeg. However, that is what I call the story. The story is what I refer to as the subjective situation surrounding an investment. When analyzing the story, it is very difficult to quantitatively assess each component to reach a non-subjective decision. This is why I do not make trades based on the story, I am a systematic trader.
My web site spells out this approach and why I use it. As a result, even though this seems like an obvious mushroom cloud, it falls under subjective analysis, and as a result, I cannot compare it to what has happened in the past when these conditions have been present.
Eventually, when this problem is forced to the surface, it will show in the Earnings and debt numbers. My feeling is that when trading on the story, even though I don't do it, you have to really front run the timing. Once the story comes out it is too late, so you have to just step in front of the train when it is screaming higher.
My gut on this whole situation is that someways are going to be created for these people that have been defrauded like this, to have thier loans refinanced or forgiven. Like they say in trading, whatever is obvious, obviously isn't. There is so much goofy accounting that goes on in this country, this is just another example of it.
Either way, it is still a tough play to short a stock that has already fallen 60-70% with the hope that it goes to zero. It could happen, but the odds are not as good. I am looking to short some stocks once my big picture timing signal triggers a sell, and it is beyond February date wise. If I find any lender stocks that meet my criteria, I will display the trades in here.
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