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From The Trading Turret
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From: R.A. Christy
Editor, ‘From the Trading Turret’
President/CEO, Christy Investment Group
http://www.christyinvestments.com
Date: August 1, 2007
Current Field Position:
DEFENSE
Bullish Percent NYSE: Os @ 50%
Bullish Percent OTC: Os @ 44%
Bullish Percent Option: Xs @ 50%
This week’s comment …
Sectors
Last time, I mentioned that 5 sectors of
the 40 sectors that I follow were positive. I mentioned 4 of them. Sorry
about that – I left out telephones. After Monday’s action, SEMIS AND
SOFTWAR, are the only 2 sectors that are still favorable.
Capital Preservation is the watch-word of
the day. I’ve got a bad feeling about this.
I don’t even know where to begin. The
talking heads declared the correction over on Friday. It looks more like
a dead cat bounce to me. On July 19th, we notched an all-time
high for the Dow. A mere seven trading days later, we’re 800 points
lower. The bubbly at CNBC hasn’t even lost its fizz yet and this
hangover is a doozy.
For those that were in the market in
1987, the lesson of the day was this: mortgage backed derivatives are
nothing more than toxic waste. It was a painful lesson for many. In
1998, another generation was treated to the same lesson when John
Merewether’s LTCM hedge fund blew up. (Long Term Capital Management).
Today, the lesson is this – what happens
when you take toxic waste, leverage it about 50:1and have interest rates
creep up on you? Just ask the folks at Bear Stearns. The crap blows up
because there is no sell side. When everybody on the trading desk owns
what you own AND it blows up, there are NO buyers for the stuff.
Last time, I said that this is just the
tip of the iceberg. There isn’t a soul alive that would bet his life as
to exactly how these pools of mortgages are actually valued. All of the
MBA speak won’t get it right. It’s a smoke and mirrors game. Back in the
early 1980s, I used to trade discounted Ginny Mae pools (GMNA). Interest
rates were falling and people were re-financing at a rapid clip. I kept
one eye on LIBOR and the other on my realtor. When the realtor thought
rates were headed up, I booked the profits and made the switch to stocks
and haven’t looked back. All I knew was this – the average new mortgage
at the time was a 30 year instrument, it had an average life of 12 years
and a theoretical life of seven years because the average homeowner
moved every 4 years. When the interest rates shot up in the early 80s,
the current pools went to a huge discount. We were buying them for 40-50
cents on the dollar. When Paul Volker cut the rates, they plummeted.
Over the course of a couple of years, rates fell from 15% to 7-8%. Not
only did we get the rise in price when the rates fell, we got back 100
cents on the dollar when the older mortgages were replaced with new
ones.
Not one to confuse brains for a once in a
lifetime opportunity, I jumped to another trading desk. The bottom line
is this – I traded the stuff and I had absolutely no clue as to how it
was actually priced and valued. AND – I didn’t know anyone who did.
Congress is making some noise about
looking into this. Why? I guess they’ll try and pin it on Bush or
Cheney. I’m not holding my breath. Whatever happened to reading the fine
print and accepting responsibility for your actions?
Without being overly cynical –
Homeowner A has a house that they want to
sell. Homebuyer B shows up and says that they want to buy it. Can they
afford it? Most likely the answer is NO. Will they make a down payment?
In most cases, the answer is no. If they do, it will be the absolute
minimum.
Homebuyer B simply can’t afford this
house and should step back and evaluate what they really can afford.
In walks Mr. Sub-Prime Lender who says
that he can get them into the house of their dreams. Owning a home is a
right and this house is right for them. He takes down their financials
and miraculously gets them qualified for the mortgage. Never mind that
most of the numbers are blatant lies and complete fabrications.
Homebuyer B is so happy that they sign the papers with a nod and wink
because they are ecstatic that they found someone who was creative and
willing to work with them to get them into their dream home? I forgot to
mention that the papers are in legalese and even the author doesn’t have
a clue as to their exact meaning. It doesn’t matter because Homeowner B
hasn’t read them anyway.
Lost in the confusion is the reality that
Homeowner B can barely make the payments with initial interest rate
which is bogus (translation – substantially less than the current market
rate). After the initial term, the rate adjusts to reflect current
market conditions. Unbeknownst to Homebuyer B, this means that there is
a likelihood that their house payment may go up substantially.
Rates rise and now Homebuyer B is in a
pickle. They can’t make their monthly payments and fall behind. After
several months of this, the lender has no other option than to foreclose
on the property. Sad but true.
CNN shows up and films the eviction which
depicts the proud homeowner being moved out into the street. Blame is
assessed and it’s reported that Bush and Cheney have masterminded the
fall the middle class. Congress, not to be outdone, is riding to the
rescue. They want to hold hearings and get to the bottom of the mess.
Who’s to blame?
There’s plenty to go around. Like I said,
this is just the tip of the iceberg.
That’s about it. The portfolio is holding
steady and some stops may come into play today or tomorrow. The short
side of the portfolio is helping, but I’m not happy with it. I’ll talk
about this next time.
RA Christy
P.S. Please fee
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R.A. Christy is a professional stock
trader, money manager and author. Mr. Christy is the President CEO of
Christy Investment Group, Ltd., a registered investment advisory firm.
He is also the Managing Partner and Portfolio Manager of Plato Advisors,
LLC. At the time of publication, Mr. Christy may from time to time write
about stocks in which he, Christy Investment Group Ltd or Plato Advisors
LLC has a position. In such cases, appropriate disclosure is made.
Under no circumstances does the information in this column represent a
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