A Short Update on My Four Short Ideas

by: Greg Weston

So far I have written four “Short Ideas” for Seeking Alpha, and my track record has been stellar.

My article on Crystal River (CRZ) was submitted when the stock was around 3.5, and as I write it is now at 2.18, down nearly 40%. In it I predicted that the company would in Q2 write down its book value from $5.33 per share in Q1 to either 2.38 or 2.44 per share in Q2, depending on whether there was a second write down on a defaulted junior loan to a Portland condo development.

As it turned out, the company reported book value of $2.46 per share, so I was off by just 2 to 8 cents in my estimate of a massive write down of almost $3 per share. Importantly, I predicted that this write-down would cause the company to be in default on certain loans by causing its equity to decrease below $100 million, which is what happened. It will be interesting to see what actions CRZ’s creditors will take now that it is in default on its loan. I also predicted the company would “drastically cut (for the second time) its regular dividend, if not suspend it entirely.” Recently the company announced that it is cutting its dividend from 30 cents to 10 cents. My prediction of a suspension or drastic cut was accurate. You heard it here on Seeking Alpha first.

Though CRZ reports book value at almost the exact level I predicted, it is important to realize that my prediction was using CRZ’s accounting methods, which do not write down all of its assets to market value. At my market value estimates for all of its assets, CRZ is completely worthless.

My prediction of Redwood Trust’s (NYSE:RWT) write-down was also on the money. I made my prediction of Q2 write-downs a few days before the quarter was even over, but I was still correct that RWT would be forced to report a substantial write-down.

Specifically, I predicted an $82 million write-down of assets, and the company reported a $60 million mark to market write-down. RWT stockholders took a write-down of their own. When I submitted my article RWT was around 30, now it is around 20.8, a decline of more than 30%. During the same period the S&P 500 increased by a little under 1%.

Right now FirstFed Financial (FED) is at 8.9, down from 15.5 when I submitted my FirstFed Financial article. In my article I listed 9 reasons why shorting FED was a wise play, noting that “FED would need to fall another 50% from current prices to reach the same relative valuation of these two negative-amortization peers.” Those peers are Downey Financial (NYSE:DSL) and Bank United (BKUNA).

The stock hasn’t quite dropped 50% since late June when I wrote my article, but its 42% drop so far is pretty close.

Lastly, Maguire Properties (NYSE:MPG-OLD) has fallen only slightly since my article appeared on Sunday. This surprises me, because of all the companies I’ve covered, MPG may be the worse.

If the company valued its assets fairly, it would report book value of well under $0.00 per share, perhaps as low as -$10 per share. Its stock should be trading near 0 right now. As I noted in my article, the company has been burning cash at an incredible rate each and every quarter, and recently had to take out a $20 million loan at 13%, a rate befitting a credit card for someone with really bad credit.

This presents an incredible opportunity for patient short sellers, as the company’s demise becomes more certain each quarter as it loans mature and it is unable to renew accept on ruinous terms. As for MPG longs, all I can think is that they are still holding on with the desperate hope that a buyout will somehow happen. It won’t. Two years ago the buy-out rumors had substance to them, but now there are no “next suckers” left to buy a company with negative book value and extremely heavy exposure to Orange County office buildings.

With all of these companies, things are only getting worse from the time I wrote my article. Recently JP Morgan announced that it was going to write down the value of its mortgage portfolio by another 1.5 billion after Merrill Lynch sold its similar portfolio of toxic mortgage securities for 22 cents on the dollar.

RWT and CRZ are loaded to the gills with these same types of toxic mortgage bonds. FED is full foreclosed and delinquent mortgages, especially “liar loans” and the option-ARMs that are quickly turning out to be even worse than subprime mortgages. These are the mortgages that back many toxic mortgage bonds. And most of MPG’s portfolio was financed with low-interest loans that banks were only able to make because they could package them into mortgage securities. Those loans are steadily maturing, and MPG already in April showed that it did not have the ability to refinance its loans as they mature at anything close to the favorable terms that it originally took them out at.

Disclosure: Author is short MPG, RWT, CRZ, DSL, BKUNA, and FED