Here’s LADR’s incredible fall from grace this year. It came public at $17 in February, 2014. Remember this thing is still profitable and, for now, yielding 7.59%.<\/p>\n
Picking stocks is hard, if not impossible.<\/p>\n
It’s a guessing game. No matter how much research you do, luck plays the dominant role.<\/p>\n
Facebook is up. Chipotle is way down. HD is up. NLY is way down. BX continues to fall.<\/p>\n
Want a feeling of how lousy things are in the financials? Here are some excerpts from Ladder Capital’s depressing earnings call last night (symbol LADR):<\/p>\n
Market conditions in the third quarter were about as difficult to operate in as I can recall in recent memory. While stock indices around the world fell rapidly, wiping out trillions of dollars in shareholder value after China devalued its currency in August, already somewhat illiquid markets due to the summer season in the U.S. became even more illiquid sending credit spreads wider and wider as the quarter wore on. While sellers of all kinds of financial instruments look for buyers, prices in our mortgage market declined rapidly.<\/p>\n
During this period, we contributed $860 million of loans into three CMBS securitizations with profit margins declining as each month went by. To put a little context around these results, let me go back to the first half of the year. In the first six months of the year, we participated in a total of four securitizations with AAA 10-year classes being sold in a range of 85 to 92 basis points over the 10-year swap. In our three securitizations in the third quarter, this class sold at progressively wider spreads of 102, 116 and 122 basis points over the curve in July, August and September, as investors demanded higher returns as market conditions deteriorated.<\/p>\n
These wider credit spreads had the effect of causing us to realize an asset average profit margin of 1.42% or $12.2 million on the sale of $860 million of loans in the quarter. This result was 2% below what we had been expecting while we were accumulating loans for the securitizations. In short, our conduit business housed in our taxable REIT subsidiary made $17 million less than we had hoped for in pretax earnings during the quarter.<\/p>\n
…While our management fully expect there to be volatile conditions from time to time, the pace of deterioration in value in the 90 days of the quarter was quite extraordinary.<\/p>\n
We won’t soon forget the volatility of third quarter fueled by widespread deterioration in leading indicators out of China and the U.S., a collapse in the commodity prices and news from Glencore, Alibaba, Volkswagen and Puerto Rico that unsettled investor confidence on a global scale. We are cautiously optimistic about the months ahead feeling that worst is behind us at this point.<\/p>\n
Of some concern to us still, is that after a poor third quarter in stock markets around the world, many of those same markets experienced an extraordinary recovery in the month of October recouping much of the value lost in the third quarter. While our markets have stabilized as fourth quarter began, I would not say there has been any meaningful recovery of lost ground from the third quarter. The stock market has recovered nearly all that it lost while spread markets have simply stopped getting worse. They have not gotten better.<\/p>\n
Much of this divergence has to do with the mixed message being sent by the Federal Reserve as it relates to its next interest rate hike. It is confusing to say the least. Another big factor that keeps credit spreads wide is the rather large supply of corporate debt flooding the fixed income markets. It seems there are simply too many bonds offered to too few buyers. This has knock-on effects in the residential and commercial mortgage businesses here in the U.S. It seems that the forward calendar for corporate bond issuance is quite large, if it all comes to market as planned.<\/p>\n
This oversupply, while technical in nature, will probably prevent credit spreads in the mortgage market from recovering to where they have historically been. Falling energy prices and its partner the strong dollar are both a blessing and a curse. And that causes volatility and we are seeing it play out in our markets. If the Fed moves in December and that move is interpreted as a one and done event, then one factor causing poor pricing in spread instruments like mortgages will have been resolved. But I would hold off on any view of tightening credit spreads until the supply side of the corporate bond market becomes more in sync with the demand side of that business.<\/p>\n
My financial adviser and dear old friend Todd Kingsley said wisely this morning, “Now you know why I don’t own stocks.”<\/em><\/p>\n Here’s LADR’s incredible fall from grace this year. It came public at $17 in February, 2014. Remember this thing is still profitable and, for now, yielding 7.59%.<\/p>\n
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