Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
Slow-Motion Train Wreck Picks Up Speed by Sandra Ward
Summary: Barron's interviews Sy Jacobs, founder and investment manager of Jacobs Asset Management, whose annual returns have averaged 16.4% since the fund's inception in 1995. Jacobs predicted the subprime breakdown in 2005, and cautions that subprime problems are not contained, and will strike all credit classes. His longs and shorts:
- NovaStar Financial (NFI) and New Century Financial (PINK:NEWC.PK) -- he's still short. Jacobs expects Fremont General (FMT) to be flayed by regulators due to its lax standards and incompetence.
- Bankrate (NYSE:RATE) -- short. Its client base of mortgage brokers and backers are rapidly disappearing.
- Credit-rating agencies like Moody's (NYSE:MCO) and McGraw-Hill (MHP) [owner of Standard & Poor] have high collateralized debt obligations, residential mortgage-backed securities and subprime holdings that account for 30-40% of their operating profits. Congress could come down hard on agencies who should have been more vigilant.
- He's long on financials that are sensitive to short-term interest rates but not to credit, because he believes the Fed will start cutting rates as the housing crisis deepens. One example: Annaly Capital Management (NYSE:NLY).
- Residential mortgage REIT Anworth Mortgage (NYSE:ANH) should rise from $9 to $16 as funding costs shrink while ARM assets rise.
- Opteum (OPX) -- ALT-A fears have made this stock oversold. Book value is $7.85/share, while shares are at $4.50. Citibank (NYSE:C) took a 7.5% stake for 150% of book at year-end 2006.
- Origen Financial (OTCPK:ORGN) -- the only remaining player in manufactured-housing finance. With the end of the housing boom and a possible decline in home ownership, manufactured housing should benefit.