SHartwell

14 Comments

    • Are Homebuilders Ready for Another Drop? [view article]
      The author makes much of the fact that a stock that goes down can always go down some more. He says that you can't like a stock just becasue the share price has fallen. How true.

      He then bashes XHB and PHM primarily because they have gone up.

      This is the other edge of the same sword. While it's pointed out that a stock that's gone down 80% can still be cut in half, the author neglects to point out that a stock that's doubled can always double again. And again. In both cases, however, the sword the analyst is using is the sword of fools.

      Yes, homebuilding still faces hurdles. But, with the Fannie and Freddie takeovers, 30-year mortgage rates have gone from 6.40% to 5.80% - an astounding 10% increase in affordabilty in just one month.

      Oil prices have dropped from nearly $150 to $100, freeing up disposable income to potential home buyers.

      And, while existing home inventories so far remain stubbornly high, we are finally building new homes at a rate much less than the annual demand increase from our ever-growing population. So new home inventories have declined, and declined dramatically.

      We're certainly not out of the woods yet, but with valuations in most cases well below (written down) book values, and with most of these companies now cash-flow-positive, the 'cost of waiting' is low.

      This is unlike many of the financials now going under. They needed capital, desperately. Here the 'cost of waiting' was much, much higher. Indeed, the market won't let them wait it out - hence bankruptcy.       Sep 15 10:57 AM
    • Second Quarter Earnings Expectations [view article]
      Where the information comes from:

      Analysts write research reports in which they forecast earnings.

      Companies (like Thomson and Reuters) then average these forecasts to get an average expectation for each company.

      Companies like Bespoke then add up all the forecasts for companies in a particular sector to get "expected" earnings.

      You, too, can see all these forecasts. Go to Yahoo finance, enter a ticker, and then click on "Analyst Estimates" on the left-hand side of the screen.

      Lest the analysts be tempted to goose the forecasts for favorite companies, other firms (like StarMine) follow each analysts' estimates over time and rate their accuracy.
      Jul 07 07:52 PM
    • The WSJ Is Wrong on the Housing Crisis [view article]
      "Existing Inventories" is a difficult concept.

      Suppose I'm in Chicago and want to move to Denver. I put my home on the market (that's 1 home in existing inventories). But I ask too much and it doesn't sell. And I won't buy a house in Denver until my Chicago home sells.

      Jim lives in Denver and wants to move to Miami. He puts his house on the market (that's 2 homes in inventory). It's ideal for me, but I won't buy it because my house hasn't sold.

      Sallie lives in Miami and wants to move to Chicago. She puts her home on the market (that's 3). It's ideal for Jim, but he's not biting because I haven't bought his house.

      This situation creates an "existing inventory" of three houses for sale. Months of inventory looks even worse, because homes aren't being sold at a very fast pace.

      But then I finally get realistic I finally get realistic about price and sell to Sallie. I buy Jim's house. Jim buy's Sallie's house. POOF! The "existing inventory" is gone - without any need for household formation...

      Because of this, many people focus on the number of vacent houses. This number looks big (all time high, they say), until you realize that it's been on an uptrend for 40 years - and it really isn't that much more than it was 1, 2 and 5 years ago.

      The builders are currently building at a rate much lower than household formation, whereas the problem was created when they built at a rate much higher than household formation. This will eventually work itself out - just like any commodity cycle.

      The investment decision rests on just how long you think this will take...       May 09 04:27 PM
    • Vikram Pandit, 'COO' of Citigroup [view article]
      Agreed as well. Give Pandit some time. At least he's smart enough not to make rash decisions.

      As for the "shoulder-to-shou... comment, there was one person in the WSJ article who clearly wasn't on board with the new team, and that was Krawchek.

      Some sour grapes that her star keeps falling might be expected, but when she goes that public against the new leader that quickly, it's time to push the eject button - that kind of open dissention in the ranks is just too counter-productive for this new of a leadership.

      The best signal that Pandit could give to the rest of management is to fire her and the "sacred cow tradition" that she represents at Citi.       May 06 02:52 PM
    • The Worst Is Over ... Again ... And Again ... [view article]
      OK Negative Carry, what's YOUR logic? Apr 30 04:58 PM
    • It's Now 'Official': Ethanol Is a Scam [view article]
      OK, forget the hype on the deforestation of the world. While it may or may not be true, you don't have to go there to demonstrate corn ethanol is dumb, and hurting America.

      A simple energy balance shows that it takes almost as much energy to produce corn ethanol as is in the product. When you produce a gallon of corn ethanol, you use around 0.85 gallons of "ethanol equivalent" energy. So the "gain" from all that work is virtually zero.

      Some of the energy use comes from the fuel for the tractors (etc.), and the energy to run the ethanol plant. In theory you could use the ethanol produced to run the tractor and the plant. But the rest comes from the energy to produce fertilizer. And this you can't get (easily or efficiently) from ethanol.

      What's the main raw material for fertilizer? Natural gas. And what region is the biggest fertiliaer producer because of their huge natural gas reserves? The Middle East. Yes, there is natural gas in America, but if we divert this to fertilizer production all our home heating bills will jump just like our food prices already have.

      So promoting ethanol production is merely promoting America's dependence on Middle Eastern natural gas instead of our dependence on Middle Eastern oil.

      All with virtually no 'gain' here at home.       Apr 11 12:42 AM
    • Is Thornburg Mortgage Common Really Worth $3.88B? [view article]
      Historical 5-year ARM to 5-year treasury spread has been 125 basis points. Today it's 309 basis points. Great for spread business companies.

      If you assume the repo portfolio recovers (which everyone is implicitly assuming), the $1.2 billion in new debt can be levered up in a great spread environment. So earnings of $0.09 per share are difficult to reach, but not ludicurous.

      This said, I still don't see much upside in TMA from here, particularly with the share overhang.

      Apr 10 04:27 PM
    • Is Thornburg Mortgage Common Really Worth $3.88B? [view article]
      Good analysis, and one with which I generally agree. However, let's be "Pollyanna-ish&qu... for a moment...

      TMA earned roughtly $280 million in 2005. This divided by 3.1 billion shares is roughly $0.09 per share. There may be upside to this number, as many of TMA's competitors are gone and spreads have widened. (yes, there is now the interest on the new debt, but if markets recover this is also capital that can be put to good use).

      $0.09 times a P/E of 15 is $1.35. Not too far off the current share price. So shareholders are clearly being hugely optimistic (unjustifiably so in my opinion), but they may not be downright delusional...
      Apr 09 12:45 PM
    • Haven't We Heard this Market Song Before? [view article]
      Hardnosed: Unfortunatly, common shareholders have been placed in "checkmate".

      If you vote "no", the company files for bankruptcy and - the way the deal docs are written - the new investors walk away with the whole company and common holders get nothing.

      If you vote "yes", you get a small slice of the new company.

      This was basically a bankruptcy - but much faster, without all the messy paperwork and legal fees, and with a net result that gets the shareholder more than they otherwise would have had.

      Don't blame the new investors - they just took advantage of the situation (I'm not one of them, unfortunately). Instead blame the "brilliant" management that tried to finance a long-term obligation (the mortgages) with short-term funding (the repo) and got caught with their shorts down.

      So the only reason to vote "no" here is because you're mad (justifiably, in my view) and you're willing to forgoe that last $1.20 per share to express your frustration.

      Apr 03 11:50 AM
    • Haven't We Heard this Market Song Before? [view article]
      Sorry folks, this deal is done. The reason JPM renegotiated the Bear deal is because they messed up the original documents. Unless you find a similar mistake the the TMA documents there's nothing you can do about it (and even then you'd have to foot the bill for a lawsuit).

      So the choices are to vote for the share increase, in which case the shares are worth the diluted amount (around $1 by my very rough estimates) or vote against and have the company declare bankruptcy - in which case you'll get zilch.

      In bankruptcy you'll get nothing because of the clever way the docs have been structured. TMA has an unrealized loss of around $1.5 billion on its repo position (hence the current book value of 8 cents per share, pro forma).

      The hope is that the repo position recovers in the coming year - in which case the diluted common will have a book value of around $0.55 (by my rough calcs). But if you don't vote for the new shares, the deal has all the repo recovery going to the new bond investors - and hence you're right back to 8 cents (at best) - before the costs of bankruptcy.

      Bear was in a similar postion. The market value of their $30 billion mortgage book collapsed, and on a mark-to-market basis their book value of $80 rapidly approached zero. Had the Fed not stepped in, they would have declared bankruptcy. The Fed bought the book at a knock-down price (hence Ben's comments today that they might make money on the deal). While it hasn't been disclosed, I suspect that post this transaction Bear's book value wasn't far off the $10 price. Another reason for bumping it from $2.

      Had the Fed (or somebody else) stepped in and bought TMA's mortgage book at a similar price, the company would have been bankrupt and the common would have been worth zero. And the new buyer would have received the potential upside of the prices returning to reality.

      The way this deal is structured, you've got a shot at some of the upside, as long as you play ball and vote for the share increase. Hence the shot at a book value of $0.55, with more profits to come after that. So it's not a great deal relative to where the stock used to trade, but it's actually a pretty good alternative to bankruptcy.

      As for Cayne's $61 million (and much though I dislike the guy based on what I've read), keep in mind that it was less the 10% of what his shares were worth at their peak last year (6%, actually).

      TMA's peak last year was $24. 6% of TMA's peak price of $24 is $1.44 - which is about where we are now on TMA and surprisingly close to the discount Cayne got.

      Whether he should have ever been paid the shares in the first place is a different discussion...

      Apr 02 06:39 PM
    • Will Thornburg's New Scheme Avert Bankruptcy? [view article]
      Sorry, but in my opinion your current shares of TMA aren't worth much.

      According to the press release, current shareholders will own a scant 5.5% of the new company's common (post the issue of around 1.5 billion new shares at $0.01 per share).

      So even if the company goes back to its "old" value of $14.00 per share, the value of YOUR stock is $14.00 * 0.055 = $0.77 per share. And this is if everything goes absolutely great.

      In light of this I'm very curious as to why people are presently paying $1.45 per share. I just can't do the math to get there...
      Apr 01 04:01 PM
    • If Thornburg Gets Its Funding, I'll Take Preferred Over Equity [view article]
      First, given the no news and approaching deadline, the likelihood of bankruptcy has risen substantially today (in my view). This makes me very leery of the prefs.

      I think owning the common at this price is nuts.

      Even if the deal goes through, the common will (again in my view) get killed. There are 172 million shares outstanding. The new noteholders get warrants equal to 90% of the common shares. This means 1.548 billion (that's BILLION) new shares at $0.01 each.

      Post this issue, and assuming that the balance sheet recovers to end-07 levels (there's currently a $1.5 billion hole on the repos), this still leaves a book value on the common of $0.55. So even assuming the deal goes through, your still paying nearly 3 times a "I hope it gets back there" book value.

      Finally, IF the deal goes through, what's the first thing a warrant holder is going to do? Short the common to lock in the profit! (They can't legally do this before the deal.) With warrents equaling 9x the number of ordinary shares outstanding, i don't want to stand in front of that train.       Mar 27 03:06 PM
    • Thornburg's a Huge Bargain After Monday's Crash [view article]
      TMA is getting margin calls because the market price of their holdings has been hit - hard. In setting these prices, the market might be stupid. Indeed, with the defalut rate on the mortgages themselves as low as it is, the indication is that the market IS stupid (or that either the default rates will soar). The buyers of TMA are all clearly betting that the market will eventually realize that the default assumptions presently implied by Alt-A pricing are way too pessimistic.

      But this isn't the whole story. The main risk TMA investors are isn't whether or not the market is valuing the Alf-A loans correctly. Instead, it's whether the lenders will force TMA to sell these loans at the currently depressed prices due to the company's inability to meet the margin calls. If this happens, the money is lost - even if Alt-A prices do eventually recover.

      In rough terms, TMA has $2.0 billion in equity. $825 million is preferred, leaving $1.175 in common equity. If TMA is forced to get out of its $11.5 billion reverse repos at a 10% loss, you're wiped out. This might not happen, but there's a huge risk that it does - even if the prices at which the Alt-A assets are liquidated are "stupid".

      So Jack, you might only care about the DEFAULT rate, but the investor who benefits from that low default rate may well be the hedge fund who picks up the asset at a fire-sale price when TMA is forced to sell (as opposed to you).

      And to those "if they can't make it" investors: Yes, TMA has a great portfolio of loans. But their huge leverage and asset/liability mismatch make this company effectively the classic "short puts" investment. 10 out of 11 years, shorting puts looks like a great return strategy. In the 11th year you get completely wiped out. This could well be TMA's 11th year.

      Mar 04 02:23 PM
    • Housing Bulls' Indiscriminant Appetite May Cause Heartburn [view article]
      What a load of hogwash by someone trying to talk down a stock they're short.
      Feb 28 03:49 PM
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