Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Wednesday, August 15, 2007: This
is where the money is being made at present -- shorting home mortgage lender
stocks, like this one:
What was most interesting (entertaining?) is that yesterday's 47% drop in price
(from $14.28) happened after five brokerage firms had downgraded the
stock to "underperform." Before their downgrades, the stock
had already dropped 48% (from $28). Wall Street analysts are, if anything,
on the ball. (I don't make this stuff up.)
Essentially, anyone lending money on homes has stopped lending. The reason:
lenders don't hold their home loans any longer (like in my father's day). The
loans are bundled and then sold to investors, like pension funds. The problem
today is that nobody is buying loans. Hence the home lenders are fearful that
if they lend money, they won't be able to sell the loans. Or if they ultimately
do sell them, they might sell them at a loss. Hence, shut down until the mess
clears -- hopefully soon. Thornburg (the one I've charted above) said it would
not accept requests to lock in rates for four days. When you buy a house, you
need to get a commitment (a lock) from your mortgage lender that they will lend
you the money. Without a commitment, there's no sale.
said it was being inundated with lock requests because few other lenders were
honoring requests. What you're now seeing is a total shutdown (hopefully temporary)
of the housing market, and to a lesser degree, the commercial real estate market
(for the same reason).
There will be
other Thornburgs doing a swan song. Last week, American Home Mortgage Investment
Corp. filed Chapter 11 and said it would lay off 90% of its 7,000 employees.
American Home Mortgage's 40 biggest creditors include virtually all of Wall
Street. Its three biggest creditors are Deutsche Bank AG, Wilmington Trust Co.,
and JPMorgan Chase & Co.
contagion is spreading like an ebola virus -- fast and deadly.
is a hugely important part of our economy. It fuels jobs (think mortgage brokers).
It builds houses. It provides sales to companies who make bathroom fixtures,
floor boards, electrical wiring. All these suppliers will suffer as housing
specifically and real estate in general shuts down.
This has all the
makings of a recession and a much much larger plummet in world stockmarkets.
Fear is driving stockmarkets at present. Raw fear. Yesterday the Dow fell 1.6%,
Nasdaq 1.7%. Australia and Taiwan fell 3%. Japan and Hong Kong each fell more
than 2%, Indonesia dropped more than 6%.
Japanese markets got a jolt when two of the country's biggest lenders, Mitsubishi
UFJ Financial Group and Sumitomo Mitsui Financial Group reported losses on investments
related to U.S. subprime loans, In Australia, hedge-fund manager Basis Capital,
which was one of the first firms outside the U.S. to suffer from the subprime
fallout, said losses at its Yield Alpha Fund may exceed 80%,
In Europe today
(trading is continuing as I write this), London, Paris and Frankfurt all fell
around 1% with financial shares dropping, with some help from Merrill Lynch
downgrading Deutsche Bank.
should you and I do now? Clearly we shouldn't
be in financial stocks. I wrote that last week. Look what's happened to the
mightiest of them.
We should be
heavily in cash. And we shouldn't be in any of these stocks. For those with
large kahonas, shorting or buying puts might be a good move:
Capital Source Inc.
American Home Mortgage Investment
Radian Group (Credit Protection to Lenders)
a falling knife? How quickly the world changes.
Earlier this week, I was waxing on the high dividend yields from fallen financials.
A friend in the business turned me onto these four:
We called all.
None have exposure to subprime. They all seemed to have assigned someone to
say NO to the zillions of phone calls. Yesterday I assigned the task to my Dartmouth
Bridge graduate summer intern, Michael Biblowit. "Give me your analysis."
This is what he wrote:
As Harry mentioned
in Monday's column, the recent drop in the stock market means that dividend
yields are becoming appealingly high for a lot of companies. Four examples
are Capital Trust (CT), Gramercy Capital Corporation (GKK), iStar Financial
(SFI) and Centerline Holding Company (CHC). The first three are real estate
investment trusts, while CHC is the parent of a full service mortgage finance
operation. These stocks all sit slightly above their 52-week lows, having
suffered along with the collapse in subprime mortgages. None of these companies,
however, actually has any subprime exposure, according to their respective
investor relations departments. So, although the problems of risky mortgages
have had repercussions spreading throughout the credit markets, perhaps stocks
like these are good candidates for recovery. As Harry put it, the saying goes
that a rising tide lifts all boats. In this case, the receding tide of subprime
borrowing is sinking all stocks. At some point, people might realize that
certain firms have been punished a bit unfairly for the mistakes of others.
The combination of attractive yields and value pricing could make for solid
Out of this
group, GKK and CT appeal to me for similar reasons. Their dividend
yields are 11.15% and 9.45%, respectively. They have low P/E ratios of 8.41
and 7.91. They also have the lowest price/book ratios out of the four. These
stocks have lost a lot of their market cap over the last few months and definitely
appear to fit the profile of generous dividends and high yields that we're
looking for. Also, at first glance at least, their management looks capable
of weathering the current storm. Each has a history of beating earnings estimates
and much better margins than the other firms in the industry. Finally, GKK
in particular has continued to demonstrate strong growth, with EPS up 46%
for the most recent quarter. CT managed 18.3%.
SFI does offer nice dividends, but is not as value-priced. Its yield is 9.57
while its P/E ratio is up at 13.17. SFI has tended to disappoint with its
earnings reports. Another difference is that while GKK and CT have declined
steadily over the past 3 months, SFI's drop has been concentrated in the last
few weeks. Are GKK and CT thus closer to being "due" to recover?
Finally, a point worth noting is that GKK is the riskiest of all these stocks.
It has a beta value of 1.7, compared to 0.2, 0.3 and 0.4 for CT, CHC and SFI,
CHC, quite simply, has some very odd numbers. EPS is down 87.37% for the past
four quarters. The P/E ratio is listed as 119.92. Huh? I'm not sure what to
make of it and that tends to scare me away. More research into exactly what
happened at the company is definitely required. Its yield is 11.68. However,
while the other three have steadily increased dividends over the past few
years, CHC boosted them significantly at the start of 2006 and has left them
at the same level since. One last concern with CHC is that it already has
seen some recovery. The stocks I've written about all hit their 52-week lows
this August, but CHC has risen from a low of $10.35 back up to $13.29.
up on Goldman's $3 billion "rescue" of its quant hedge fund: Goldman
got $3 billion into the fund from itself and outside money. The terms?
No 2% management fee, and no incentive fee until the fund is up
Tuck revisited. Everyone
and their uncle sent yesterday's column on the Tuck Bridge Program to their
friends with kids in their twenties. A flood of emails said the info on Tuck
was this column's "best material" ever. To read it again,
for today's difficult times:
If you have a lot of tension and you get a headache, do what it says
on the aspirin bottle: "Take two aspirin" and "Keep away from
"My Mom said
she learned how to swim when someone took her out in the lake and threw her
off the boat. I said, 'Mom, they weren't trying to teach you how to swim.'"
Sea World have a seafood restaurant?? I'm halfway through my fish burger and
I realize, Oh my God....I could be eating a slow learner." --Lynda Montgomery
that's how Chicago got started. Bunch of people in New York said, 'Gee, I'm
enjoying the crime and the poverty, but it just isn't cold enough. Let's go
west.'" --Richard Jeni
were fair, Elvis would be alive and all the impersonators would be dead."
This column is about my personal search
for the perfect investment. I don't give investment advice. For that you have
to be registered with regulatory authorities, which I am not. I am a reporter
and an investor. I make my daily column -- Monday through Friday -- freely available
for three reasons: Writing is good for sorting things out in my brain. Second,
the column is research for a book I'm writing called "In Search of the
Perfect Investment." Third, I encourage my readers to send me their
ideas, concerns and experiences. That way we can all learn together. My email
address is .
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