Centerline Looks Sturdy, Standard Pacific Will Be Further Pressured

Friday morning I decided to use some weakness in Centerline Holding (CHC) shares to cover my small short position at 13.45. After listening to Thursday’s conference call, it appears to me that although the company has a potentially dangerous liquidity position with less than $200 million of liquidity, the fact that much of its portfolio is composed of commercial real estate means that this liquidity crunch will have to endure for quite a lengthy period in order to seriously threaten the company.

Defaults in commercial real estate are still quite low, and with so much pressure on the Fed to cut rates, I doubt that credit will remain tight long enough to change that situation much. Therefore, I thought it best to take a manageable loss of 8.5 percent and live to fight another day.

I have also decided to extend my short in Standard Pacific (SPF) by increasing the position by 50% at 12.10. My reasoning here is that the housing correction is still in full tilt, and I expect the situation to get worse before it gets better. An interview with Bob Toll Thursday on Marketwatch reveals his thoughts that the market has definitely not yet reached a bottom, and with a huge number of ARMs and teaser loans set to reset to higher rates over the next two quarters, defaults rates will most likely spike further in the absence of a significant and quick move from the Fed.

If the default rate spikes again, it will force the liquidation of even more homes, leading to another leg of downward movement on home prices. The situation continues to be the most difficult in the areas where exotic mortgages were most prevalent, especially California. Standard Pacific will therefore continue to get pressured further on home prices, and I expect their quarterly results to show further deterioration from profitability that will spark renewed concerns of the company’s solvency. Although a dramatic rate cut could probably save SPF, I believe that there is at least another leg downward and renewed solvency concerns in the cards before the possibility of a rate cut comes into play, and I am willing to put a bit more money out to bet that SPF comes under further pressure.

Disclosure: Author is short SPF.

CHC vs. SPF 1-yr chart: