How did this come up?--a blogger on Real Money (a site on which RS used to write) mentioned how correct RS was. I did a search and came up with this post (of mine!) on Tim Knight's blog dated April, 2007. Now think about how long it took for all of this to unfold. That is the lesson that I've learned from all of this. I hope you don't mind my printing regurgitating this--but I think I made some valid points worth considering.
Tradeitlikeitis: I don't really know much. I had some puts on MTG, but I closed them (for a gain) because it was holding up so well. They report tomorrow. My gut tells me that the news probability is 75% bad v. 25% good; but my gut and how the market chooses to react are syncopated in a way that gets my toes stepped and takes money out of my pocket. Though I've seen just recently some press saying that investors have over-reacted and MTG should fare better. Maybe they are smarter than I; maybe not. I did take my money and ran! I've learned to take my profits early on puts! I'm sure that I left money on the table.
At-risk banks: WB--they bought Golden West, and GW had LOTs of ARMS. WFC--subprime and 20% exposure to mortgage loans. I have OCT 35 puts on them. Of course, I expected these issues to mature sooner. Hell I had puts on WFC and BAC back in Sept/Nov 06 and somebody in Jan. I should learn that waiting for problems to come to fruition is like being a wine master. You have to let the vinification process unfold. (I've decided that it is categorically false that the market can see these things with any prescience. They need a shovel (f adjective omitted).)
I still think that LEND has some problems. They bought Aames, and Aames had a bunch of these loans as well. There have been no 4th quarter reports with Aames and Lend together--and of course, that small matter of the auditors resigning (though it has been filled now).
Here's my greatest problem--to me these issues seem so apparent, and if it were true that the 'market' reflects all known info (and I do NOT believe that it does) then these stocks ought not fall any lower. Personally, I do not think that the market has a clue--which is why AHM dropped like a rock.
Now...keep in mind AXA and HIG all have been involved in these issuances as well. Haven't heard about that in the press have ya? So look for insurance companies (remember, they are hungry for yield) to have some surprises from the credit spreads widening. Also of interest, HIG as of their last filing had investments in 2x as many hedge funds as they did last report (2006 v 2005). So think about how cozy all of the financial institutions (banks, brokers, insurance companies) are with hedge funds. We may end up with something that rhymes with muster duck. I have some HIG puts, but they are making me cry.
Richard Suttemeier has been steadfast in his warnings about banks. See, the topic du juour is
these mortgage loans. What's going to happen to these local (even national) contractors? Who do you think is holding some contractor loans that are going to not find a seat when the music stops?
And if some bankruptcy judge in New Century case yanks the loans 'sold' to the respective REITs out [go read one of those bond prospectus--very clear warning in all of them that this can happen, though to my knowledge I'm the only person (amateur at that) yammerin about it] then the bond market is going to either explode or implode; I'm not sure which.
So, if we are to treat this like vinification: we have picked the grapes and squished them between our toes and are in the fermentation process. We still have a long way to go before we see what actually gets put in the barrel. We all have a front row seat.
But, these are some things to keep in mind. Sorry to be so long winded!