Whipsaw World

November 17, 2010

In a few minutes the CEO of Human Genome Sciences (HGSI) will be on CNBC.

In the “good old days” that would be worth a half a point bump up in price.  But an FDA positive recommendation from the review panel on a drug for a disease with no effective treatment usually is good for several points at least.  Today the stock already traded down by more than 10% at its low.

To me, with my short strangle in November options, I got out of the options positions profitably (in every position), though not with perfect timing.  I also legged into a short $25 straddle for December, again with less than optimal timing.

Still, with over $4 per share in option premium taken in, with the really big binary question (mostly) answered, and the stock seeming to stabilize between $25 and $26, the volatility sale still makes sense.  As before, I am biased long, with holdings in the underlying stock, and a ratio straddle on in the options.

Between last night’s after hours optimism that took the stock up to $28 to $29, and today’s premarket short seller onslaught that took it down below $22, it does look like the stock will stabilize and these options premiums will decay away nicely.  The liquidated November options positions gave me over $5 per share in profits vs. my long stock position, so when I add in the $4+ in December option premiums, I can now look at this whole adventure as being profitable anywhere from $15 to $35 per share, and resolved in just 30 days.



And Then There Were None

November 17, 2010

Jody Shenn has an interesting article out this morning that shows how the monster banks are cranking up the pressure on independent mortgage brokers.

The article tells us how Wells Fargo and BankAmerica have increased the minimum FICO score for FHA loans they buy wholesale from other lenders.  What’s interesting, I think, is the fact that they haven’t raised the minimum FICO score for lending by their own loan officers.

The difference is dramatic.  In-house lending for FHA guarantee loans carries a 600 FICO minimum at these banks.  With this change, WFC and BAC join JPM, which already had a 640 FICO floor for third party origination.

How does this compare with lending before the crisis?

According to the article, before 2008, a whopping half of FHA’s new loans either had FICO scores below 620 (popular cutoff for “subprime”) or no scores at all.  Today, just 3.8% of FHA loans fall into that category.  In other words, FHA already tightened credit standards substantially.

The “layering” of another 20 FICO points by these three big banks basically cuts 15% off the independents’ volume.  If you happen to be one of those 6.8 million people with a credit score between 620 and 640, you won’t be able to get a loan funded by Wells Fargo unless you’re talking to Wells directly (or Chase, or BankAmerica).

The big get bigger.


Hat Trick Day

November 16, 2010

I had to wait until after the FDA panel voted today on HGSI’s drug to treat Lupus, but the after-hours trading made it three big winners on a truly lousy day.

Overall, NAV went up about 1%, which counts as a win in a market like today’s.

I had pointed out all three in a post last week.

Each position was complex, consisting of long or short stock and both long and short options.

As I said in that post, the IOC parabolic rise since the secondary seemed unsustainable, so I had a net short position on there.  FAZ finally got moving today in response to the potential for a domino bank problem in Europe.  Yesterday I rolled the November options in FAZ to December, and today’s increase in the price and the volatility helped the position quite a bit.  For HGSI, I was selling puts and calls (strangles) for November (just two days left) and had a long stock position with matched covered calls.

In other words, all three worked in the direction I thought they might, but in each one I gave up some upside in exchange for lowered risk.


Citizens United: The Sequel

November 10, 2010

In its continuing campaign to make sure that corporations are protected from people, the Supreme Court is about to remove the free market mechanism that prevents companies from stealing small amounts of money from thousands or millions of customers.

The case is AT&T Mobility vs. Concepcion, and the existing free market control mechanism is the class action suit.

It’s premature to say the Gang of Five on the Supreme Court decided — they haven’t formally done so.  First comes the theater of hearing arguments and the pretense of considering precedent.  They haven’t ruled yet, but the unusual decision process in Citizens United shows me that this Supreme Court is determined to do all they can for companies. If that includes changing centuries of judicial procedure by arguing cases for the plaintiffs, the “conservative” block on the court will do it.  If it means broadening a case so they can reverse a century of laws passed by Congress in one stroke, they’ll do it.

So just call it a hunch that this is a done deal.

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mREIT Primer

November 9, 2010

This quarter was the most-covered I’ve seen in years.  (Is that an early top indication?)

There were write-ups on mREITs from nearly a dozen firms. I’ve had the pleasure of reading coverage from Deutsche, BankAmerica Merrill, Wunderlich, Credit Suisse, Citi, Stern Agee, KBW, JMP, and Jeffries.  No doubt I’ve left one or two out.  A special thanks to readers who forwarded reports.  Keep ’em coming.

Not since Friedman Billings and Ramsey shocked the equity world by being number one IPO underwriter (virtually all mREITs)  has there been as much interest in the sector.

Before summarizing my thoughts on the several dozen equity research pieces I’ve read and handful of calls I’ve listened in on, I’d like to reiterate the basic economics of this business and the state of the financial union.

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An Alternative Economic Outlook

November 8, 2010

The current prevailing view now is that we are entering a long period of slow economic growth. This view holds that we can expect very slow growth barely exceeding population growth for an indefinitely long period.

It could turn out that way, but it is at least as likely that it does not.

I see no reason why we have to have a Japan style malaise. The slow growth period we are experiencing now is proportional to the magnitude of the original insult in 2008 and to the policy response that leveled the valley and peak. Because of the policy response it is not easy to “read” the middle and end game of this most severe recession. My best guess is that it will be another two years before things return to a normal and higher growth rate.

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Trading Notes

November 8, 2010

Before posting some longer pieces, I thought I’d update people on some things I’m looking at or doing.  As always, I am not providing investment advice.  In fact, a couple of these ideas have been money-losers lately, much to my chagrin.

Still, I think it helps to look at unusually high option premia, parabolic stock price movements, and macro hedges when we get markets that seem to be detaching themselves from the real economy.

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