Why I'm Cynical About Thornburg Mortgage

I cannot understand the logic behind the current high price of Thornburg Mortgage (TMA). Five days ago I stated this, as comments to other blogs, on this site.

At the time, it was $1.38, and it has now sunk to $1.07 (as of market close today).

I will try to place my sell recommendation into the context of the current dilution of shares:

Private equity injected $1.3 billion, to keep the company afloat, and in return will receive warrants for $2.75 Billion (actual cost 1c each, $27.5 million). Now at the time of this article, the value of these warrants is in excess of $3 billion.

Let us assume that the Private Equity boys are money-grabbing sharks: What is their likely course of action?

1. Sell their warrants ASAP, making a paper profit of close to $1.5 billion (average selling price $1), and still receive a 12% pa rate of interest on their $1.3 billion investment (secured on TMA’s entire loan portfolio)
2. Hold the stock, wait years for the recovery in mortgages, and pump in funds, as necessary, to loan out.

I know what option I would choose (number 1), as any rational investor would do. The risk/reward balance is skewed to such a degree in favour of cashing out, that only people who invest using their hearts, rather than their heads, will hold the stock.

It is interesting to note the stock movement of TMA over the last 5 days. It would appear that the stock drifts lower each day, until large buy orders arrive in the last 30 minutes of trading, in an attempt to prop up the price. Now I’m not saying that the Private Equity boys are manipulating the market (to keep the share price up, until they have liquidated their positions), it may be a complete coincidence. But regardless of any manipulation, or not, the shares are rolling down a hill; I suggest you get off before they reach the cliff.

Disclosure: None

Comments

[venividivici:]

So much of what happens in the American finanacial system is casino like. It's all cooked in favour of those running the show. No sensible investor would be involved in a stock like Thornburg at this stage.

2008 Apr 16 06:53 AM

[Fraley1:]

Do more research on TMA. Is is a stock to hold on to. It will pay off. We are in rough times. Calm down!

2008 Apr 16 08:10 AM

[fxtrader07:]

Hey Fraley, oh yeah? It#s high risk and at best dead money for years to come. Heck, you will be better off a few years from now investing even in any of the big moneycenter banks or IBs (which will probably be all rather bad investments with mediocre returns). the only ones that will make money on TMA are these private equity guys and current mgmt. all former shareholders got absolutely screwed and killed. maybe some lawyer can get some money back for you but i doubt. shareholders probably would have been better off in a outright liquidation of the company.
as things stand, the company will be dead when the bonds mature. smart guys will have collected nice amounts, mgmt has kept jobs for another few years and you will have lost not only money but valuable time. go figure

2008 Apr 16 08:51 AM

[chui:]

private equity strategy much like PIPEs of .com era.

2008 Apr 16 09:51 AM

[$TRILLION D...:]

EXACTLY RIGHT ON! LOOK BACK TO 1998, 1987. THEY DID THE SAME THINGS WITH THE CMOS, FUTURES, PUTS, AND SO FORTH....WHY IS MICHAEL MILKEN THE ONLY ONE GOING TO JAIL......GET READY, COMMERCIAL LOANS NEXT, STAGFLATION IS HERE, THEN CREDIT CARDS....AS SOON AS THE FED RATE RAISES TO CONTROL INFLATION, WELL YOU KNOW THE REST..... I am looking at wheat futures, Silver, and Brazilian Real. Also, possibly coffee, orange Juice, Walmart, Costco... GOLD IS MOVING BUT RISKY AT $935.00. It could go to $1800.00. I am betting on them switching to wheat for ethanol because of the corn removal has pounded food prices, and the starvation and revolution has begun in some small third world countries, i.e. Haiti... There will be one more crash in the next 2 weeks which will alow you to get in low, and then sell off quickly on the upswing...After that.....Down, Down...

2008 Apr 16 12:01 PM