Buying MBS at a Discount

October 29, 2009

An unusual event occurred last spring, and it may happen again.

Exactly one sub-segment of the stock market has flourished during this crisis. The Fed’s tsunami of liquidity and the Government’s “guarantee them all, and sort it out later” crisis strategy has been nirvana for a small group of mortgage REITs that specialize in buying guaranteed mortgage securities and financing them through repo (repurchase agreements).

By offering the Federal Reserve’s balance sheet to broker-dealers for repo and by taking over Fannie Mae and Freddie Mac, Washington created the closest thing to free money that we’ve seen in two decades.  It reminds me of the Savings and Loans offering any  CD rate they could remotely justify, yet investors had a rock-solid taxpayer guarantee that the CD would be paid even if the S&L was drinking real estate developer kool-aid.

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Only the Last Trade Counts

October 26, 2009

I realized when reading the last post that some might disagree with the idea that commercial real estate runs on a 10-year cycle while residential real estate reprices more quickly.

To see why, we can’t  look at the 30-year maturity of residential loans and conclude they are longer than their 10-year commercial mortgage cousins.  We have to look at how long people stay in their mortgages.  The reality is that most mortgages are paid off (by one means or another, including default) in five to seven years.  Only a tiny fraction of 30-year mortgages actually last 30 years.

Like with stocks, where everyone’s stock is worth the last trade and not what they paid for it, the value of residential mortgages moves up and down with the market, and so does the value of their houses.

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The Dogs Aren’t Barking

October 26, 2009

Like the title of the Sherlock Holmes story, when the expected is drastic, it’s sometimes hard to see the unexpected.

Late yesterday (Sunday) Capmark Realty threw in the towel.  It was the former commercial real estate lending division of the GMAC, which had been through name and ownership changes on the way to bankruptcy court.

I fully expected to get a chance to buy stock in a handful of other commercial mortgage lenders at levels in the neighborhood where they priced last March.  I could see a drastic one day plunge, followed by a partial recovery, even later in the trading day.

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It’s What They Do

October 24, 2009

Companies try to maximize profit.  Crocodiles attack wildebeasts. Conspiracy theorists see conspiracies behind every tree.  Politicians lie to get votes.  Monopolies expand costs to absorb all available revenue.

When my friend asked about the general trend toward de-regulation, he pointed out that he would have made a lot more money selling his business to a national chain, but when he was selling, the Federal Trade Commission ruled that his proposed sale of a regional chain of supermarkets to A&P would have made an illegal monopoly where he operated.  He had to settle for a lower price.

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Sir Alan’s Big Mistake

October 24, 2009

I’ve heard that blogs do well when they deal with controversy, and few things stir up more controversy that looking at the reasons behind the meltdown.  I’ve even had some politically-driven comments here in my first week of blogging, and I imagine this post will cause even more.

A friend made a comment on a post I made on a pay-to-play discussion board,  and the ensuing remarks should stir up some interest among those that read here.

For those who haven’t viewed the Frontline special entitled The Warning, you could do worse things with 52 minutes than watching it.  For me, the highlights were Arthur Levitt and Alan Greenspan admitting they were wrong.

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Disaster du Jour

October 23, 2009

Elan Pharmaceuticals, (ELN – US ADR)

This seems to happen to Elan every couple of years — a review board (or in the earlier case, their US partner with a less efficient competing drug) decides the PML infection risk might be too high with their Tysabri.

I first shared my opinion with online friends about the potential for this new type of drug back when it got crushed from $30 to $3 virtually overnight back then (February 2005). It’s been back up to the $30’s since then, and today’s news out of the UK (where they weren’t testing for PML) has it down to $5, where I’m buying.

Warning: I have a reverse magic touch on stocks. Invest at your own risk. This is NOT investing advice. Check with your own advisors. Not suitable for conservative investors. Your mileage may vary.

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Reporting Rhythms

October 22, 2009

Technical analysis of markets often includes the sense of time, or cycle length. As any technical analysis devotee will tell you, the point is to see and predict the effect of the decisions being made by investors without dwelling on the reasons.

More than one stock analyst has noted that bad news from a company will cause an immediate plunge in stock price, but that there is often an “echo” of that plunge three days later. I may have even seen the theory that margin calls, due in three days, are the reason for the echo.

Then there’s the well-known “window dressing” end-of-quarter effect, where stocks that have been on a bull run get another boost just in time for them to appear in mutual funds’ quarterly statements. On the other side of the coin, losers can feel even more selling pressure, purportedly for the same reason, that fund managers don’t want to show that they held the dogs when their investors see the reports.

I think this can be generalized to all investors, and probably in all sectors.

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