real money...

I'm putting it where my mouth is.

I put another 10% into QID, for a total of 18%.
I put 14% short on ITB.

My portfolio now looks like this:

• 64% short (QID is counted twice because it is a levered product, and FXY is counted once, as a bet against the US economy)
• 41% long (FRO, CNE, PDC)
• 7% cash

Cash is a little low right now, but I have more coming into the account.

ALD is raising money...

ALD just raised $200 million at 6.875%, and that's an unsecured 6.875%! They are raising money at a lower rate than ever for unsecured notes, and the banks are giving them the lowest rates of any of the business development companies. That's quite a vote of confidence.

What is more interesting, though, is the question of timing. Why is ALD raising money now, when they could wait six months and possibly save a few points? I think they see a recession coming and they want to have the money ready.

I wish I knew what the best part of the credit or business cycle is the best time to buy them.

Nice report...

... from Credit Suisse. This report paints a very bad picture for the short and long-term housing market.

trades...

Trades on Yahoo! account:

bought Ultrashort QQQQ (QID) at $52.55
shorted Bankrate (RATE) at $34.75
bought Opteum (OPX) at $4.49

Thoughts from Barron's

Michael Santoli of Barron's says "It's ironic that the bullish case f0r stocks begins with global liquidity, and yet quickly segues to a Fed rate cut - necessary, we're told, for multiples to expand as profits slow."

Not a very good case, is it?

Subprime: Will it spread?

Sy Jacobs, interviewed in Barron's says that it will. The mechanism will be the housing market. But housing usually moves very slowly. But it did hit subprime very quickly. Why? Well, how long did it really take? All the damage of the last two months really happened with loans from the second half of 2006. So, it took about six months. How about employment? How long will that take? Let's watch it closely, because it's very hard to tell.

I smell a bust coming...

The title of this article says it all. The homebuilders are going to lose money this year. They will lay off hundreds of thousands of workers. The economy will tank. The Fed, knowing that employment numbers are a lagging indicator will cut rates aggressively.
Here's the real scoop on the housing numbers: after Janruary's biggest drop in new home sales in thirteen years, everyone expected a bounceback. Don't forget, February is the biggest month of the year for new home sales. That's because they are recorded differently than existing home sales. New home sales are recorded when the conctract is signed (often with a small or refundable deposit), not when the deal actually closes. Also, if someone subsequently cancels the contract, that is not recorded. In other words, not all the sales are real. The supply of new homes on the market is now at 8.1 months, and the forward rate of new homes (848,000) is 45% lower than the trailing numbers (~1,525,000). I expect that employment will be hit very quickly and brutally over the next couple of months, because now that the best month of the year is behind them, the homebuilders will know how many workers they need to build the ordered houses. On top of that, they are being pressed very hard to cut costs because they're so close to losing money. That will encourage them to lay off even more workers.

1. Hold cash.
2. Short more stocks
3. Bet on lower rates.

Thoughts on housing news

Housing sales were up 3.9% for the month of February. The bulls are running with the news. However, they've ignored the other news. Prices dropped again, for the seventh consecutive month for a yoy 3.9% loss. In addition, inventories still rose. I think that a sign that the housing market has reached the bottom will be when prices and rise and inventories contract. It doesn't matter how many houses sell.

credit crunch...

The prime lenders are starting to hurt, from both lack of business and a credit crunch, according to WSJ Online.

"LoanCity, which employed 300 people, says its mortgage business shrank by nearly 40% last year. Ironically, the company attributes that decline to its decision to stay out of the risky subprime market. 'We felt the risks associated with the subprime market were too great and tried to battle it out on the higher-credit spectrum,” said Mr. Soukoulis. “But by doing that, we lost some market share.' "

Hmmm... I thought that staying away from subprime loans was a good way to stay in business. It's not a good sign that some lenders lost either way.

Look out below!

Mortgage short sales will kill the home builders. Soon you will see them everywhere, as banks allow people to drop prices on their homes and sell them for less than the loan, in order to avoid foreclosure. I'm already starting to see "mortgage short sale" advertisements in the papers.

I think that this could easily drop home prices 10%+ nationwide. The homebuilders will drop workers like crazy. The Fed's been watching employment, but remember, employment is a lagging indicator. The spring season was a complete bust for the homebuilders. I think that the next employment numbers will be much worse than last month. It will be well worth watching them when they come out.

trends...

Here's a trend that I noticed is still going on. I remember three examples: HP announced today that they're buying back $8 billion in stock. That's about 7.5%. Another thing in this category is Dow Chemical's decision to abandon their AAA bond rating in favor of more leverage. The third thing is the general corporate trend of borrowing to buyback stock.

This tells me two things: 1. Debt is cheap compared to returns. 2. This will stay the same until spreads widen or returns diminish.

I wonder, is this trend a leading, current, or lagging indicator?

who'd a thunk it?

I never thought I'd be agreeing with Jim Cramer. I like the way he distinguishes between the wheat and the chaff (New Century vs. Thornburg, for example).
Even better is how he cuts through the cliches that the media have encouraged to work people into a frenzy. I must admit, even if you don't trust the propaganda more than an inch, you still have to watch it like a hawk to see what the sheep are following. I love the way Cramer backs up his arguments with historical experience.

Also: closed NFI at $5.50 for a 39% gain.

Kiyosaki...

what's new...

Bought more NFI at $3.40. Ouch. Now my basis is at $3.96. Was thinking last night how to hedge against it. Got the answer today with the DJIA's 250-point drop. QID is the perfect hedge. It goes up twice what the Nasdaq goes down. Bought QID at $56-$57.

Practice account:

Wish I had shorted more Treasuries, but the September's weren't available. I'll just have to hold onto the one I have left. I still got a better price than current market for the June's I sold. Other than that, just waiting. I've got a lot of room to maneuver.

Am I crazy... ?

Bought NFI today at the close for $4.24. They were down 20% on the news that NEW's lenders haven't renewed funding. Bancruptcy is imminent. However, I think that compared to NEW, NFI is in much better shape. They have only one negative quarter, NEW has had two in a row. Also, while NEW wrote five times as many loans last year, NFI has almost the same amount of reserves that NEW had at the beginning of the year.

What I don't know is probably more than I do know. For one thing, how much was NFI able to make on their last CDO? How much funding have they been able to secure? Will they be able to step into the vacuum that NEW left when they stopped funding new loans? Have they had the foresight to hedge their portfolio with derivatives? What are their current, but unannounced, liabilities? Any one of these questions could be crucial to whether this speculation succeeds or fails.

this could be huge...

China's planning to diversify their reserves, according to this Bloomberg story. How much might they put into the world markets? They say that they won't exit their Treasury holdings. Last year, their reserves grew by $200 billion. What if they invest half of that into global markets? They would probably buy out oil, mining, and resource companies. $100 billion would really shake up the markets immensely.

Victory!

"Einhorn quits New Century board"

Hmmm... seems that Einhorn's on the short end of the stick for being a board member of a company that has it's own federal criminal probe into its lending practices. Maybe they should have taught him at Cornell to remove the beam from his own eye before trying to criticize the speck in someone else's. Well, maybe a $140 million loss will teach him something.

One thing can be said for the school of hard knocks. It sure costs more than Cornell.

closing positions

today:

closed Treasury calls.

bought 112' at 0'01, sold at 0'10
bought 110' at 0'06, sold at 0'28

I think that the market may very well rebound cautiously, and have another nice run before the next crisis. Remember, in the 90's, we had the Long Term Capital Management crisis, then the Russian crisis in 1997, before the Asian Crisis in 1998, and the dot com bubble in 2000.

This is all too fast....

"substantial doubt exists as to the company's ability to continue as a going concern." -Marketwatch quotes NEW's auditor. NEW has only received waivers for new loans from 6 of 11 lenders, and will close if they are not able to secure additional funds.

I must admit, I am astonished at the speed and ferocity with which the subprime market has been hit. A self-reinforcing cycle is a scary thing to behold.

Subprime

People are still not taking this seriously. Here is a summary of Countrywide's (CFC) latest financial data. My quick math tells me that Countrywide should be down 20%, not 2%.

They have $1.3 trillion in loans. 9% of that is subprime. That leaves $117 billion. 19% of those accounts are suffering from late payments. That leaves $22 billion in bad accounts. Bad accounts typically lose 20%. That equals $4 billion. CFC's market cap is $22 billion, so there's your 20%

(Obviously, the quick math is flawed. Among other things, this doesn't take into account what portion of the mortgage is paid off, so it assumes a worst case scenario. However, it should be pretty close, since the most recent mortgages are in the worst shape. It also doesn't say anything about how many of the late loans were resold to investors in the last six months. This is the time period that investors have to return any bad loans to Countrwide.)

The acceleration of deterioration in loans last year shows an exponential increase. Delinquent loans went from 15.2% to 16.9% (1.7%) in the first half of last year. In the third quarter alone, the increase was 2.1%. Fourth quarter numbers aren't out yet.