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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (19381)	12/22/2004 9:43:15 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

RodgerRafter on NFI I hadn't been following them, but a quick glance at the numbers shows they are typical for the sector: Novastar's Revenues 2001: $118 M 2002: $198 M 2003: $383 M 2004: $470 M for just the first 3 quarters. Novastar's Earings: 2001: $27 M 2002: $49 M 2003: $175 M 2004: $91 M for just the first 3 quarters. Earnings appear to have already peaked for most of the sector, even though revenues have been rising throughout. The actual peak has varied from Q4 '03 to Q3 '04 for the high risk loan companies I've looked at. I expect that has to do largely with increasing numbers of bad loans, although tougher competition for originations and the rise in the Fed Funds rate have to hurt too. You don't get such extreme growth without taking on some extreme risk, especially in a sector where the competition is willing to create beasts like 125% equity loans and no paper loans. Since it usually takes awhile for loans to go bad (no matter how foolish the loans are), the peak period of defaults should probably come a few years after their peak period of new originations. Since revenues from new loans were rising faster than old loans were going bad, it made these companies look highly proftiable. Now we're probably just seeing the begining of a long downhill slide. Odds are, as more loans go bad, the risks inherent in their business will catch up with them and eventually take them down. Not that the execs really care about that. They get to keep the million dollar salaries they've been collecting as well as their options profits no matter what happens to shareholders: finance.yahoo.com Novastar mentioned difficulty unloading a "lower gain related to our latest securitization" which may be the result of fallout from Fannie's troubles. With Fannie furiously unloading mortgage backed securities on the market to get their reserves balances in order, it's harder for banks to unload new loans on the GSEs and harder for MBS sellers to find a market for their ticking time bombs. Foreign holdings of Federal Agency debt (mostly FNM and FRE MBSs, I believe) have risen by over $21.7 Billion from 11/11 to 12/16, which I suspect is a sign of the desperate need for buyers. That's up from a pace of about $750 million per week for the prior 45 weeks.