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Politics : Welcome to Slider's Dugout -- Ignore unavailable to you. Want to Upgrade?

To: sandiegobear who wrote (447)	8/22/2005 3:33:12 PM
From: SliderOnTheBlack	Respond to of 50653

sandiegobear re: NFI/SubPrimes and "earnings".... I hear what you're saying regarding NFI...but, in my opinion regarding the SubPrime Lenders - the key concept to keep in mind is that earnings based on "gain on sale" accounting and prepayment & deliquency assumptions that always seem to be more optimistic than market realities...are NOT the same as "earnings" in other Sectors. We also shouldn't ignore, or discount what is occurring with Fannie Mae in the shadows...this has great implications for the sector and any shakeout in the capital markets will especially affect those lenders with Mortgage REIT business models. In the late 1990's the shakeout in the Bond Market that led to the disappearnce of Cityscape...that was the then darling and Top Pick by none other than Michael Price of the Fidelity Magaellan Fund... to the Bankruptcies of many other SubPrimes that were earning +$2ish per share and trading at low PE's...that blew up; to Sector Leaders like the Money Store - that if I recall correctly; was merged into 1st Union...a decision they regret...and was eventually folded. To Conseco snapping up GreenTree Financial - another EARNINGS Machine (on paper)that ultimately led to the Bankruptcy of Conseco...Earnings then - were not all they seemed & imho, nothing much has changed today. Due to the generosity of gain on sale acounting, the ability to "game" the market via too rosy early-payoff and deliquency assumptions and merely the degree of Financial Engineering that exists in the Sector... all is NEVER what it seems on the earnings front. The Hedge Funds that attack the SubPrimes are a pretty savvy lot... imho, you will NOT see 30%+ Short Positions build up without good cause and "DeathWatch" expectations... It was a major shakeout in the Bond Market that triggered the collapse of the Sector in the 1990's...and given the Global Imbalances in the Financial Markets, a volatile Interest Rate Environment, Global Currency rebalancing and an EXPONENTIAL increase in the Derivative Market.... it's a scary place to be long in my opinion. Supposedly bulletproof plays like NLY which was touted by the likes of James Grant to James Cramer... have proven that there is significant downside and RISK in this Sector and with the recent inflation numbers ticking up and the Fed still raising Rates... NOT a place I want to be long and I think we've got a pretty good risk:reward environment for those on the Short side as long as the Fed is hiking rates. And given the relative lack of performance history of many of these new Loan Products... especially if we see a US Recession, let alone the Bubble's in the Hot Housing Markets getting popped... it could get real ugly...