Sunday, March 4, 2007

Subprime Hell - Abandon All Hope, Ye Who Enter Here

Yes, subprime has become the Dante's Inferno of the markets. There is nothing Devine or comedic about what's going on.

Just a few random thoughts and basic charts on some subprime related pure plays and related stocks that I'm going to be keeping a close eye on. My site is not set up for live trades and I will be pouncing on opportunities as they arise; there are many candidates for consideration. While we're in the midst of a downside money make opportunity that doesn't come along every day, it's still a situation that's fraught with great risk, especially when there are trading days, as there were even at the end of the week last week with the TRIN can fly to dizzying heights in the morning as fear dominated, but then be followed a few hours later by 1000+ plus NYSE ticks on bursts of buying. This is not throw short money at anything that moves and put it on auto pilot - not by any stretch of the imagination.

By the way, hat tip to Howard Lindzon for the earlier mention about the stuff the blog here has been covering concerning subprime.

-The first area that I am going to be looking at... The enablers, or those big firms involved in "warehouse" lending to these subprime companies that are going under:

-Bear Stearns (BSC) chief among them not only because they're knee deep in mortgage originations by way of their Encore purchase last fall, but also because of their horrid analyst upgrade of New Century (NEW) last week.

-Merrill (MER), Morgan Stanley (MS), Deutsche Bank (DB), Barclays. All made heavy investments last year in mortgage origination. Broker dealer index, by the way, on the cusp of breaking its 200 day moving average.

Of course, the Merrill's and the Morgan's of the world are not going the way of New Century, but it looks like there could be further difficulty. Chart above shows XBD is not shy about breaking 200 dma.

I really despise Countrywide (CFC)... tons of insider selling and they've already been throwing out bad news about rising deliquencies. The company sounds like half-man/half fly saying, "short me now, short me now... help me, help me".

Come on folks, I am literally half blind from retinopathy, but even I can see $34 on the CFC chart as intermediate support waiting to be broken... then $32 as a huge area of support in the near term.

What is going on with H&R Block? Their Option One lending arm is supposed to sold by the end of the 1st quarter... tick, tick, tick, tick, tick, tick, tick, (I hope the RIAA doesn't sue me for stealing the lyrics from the 60 Minutes theme). Here's what's intriguing: Since the 1st quarter ends after the expiration of the March options, April options open interest shows huge put bets waiting for bad news. Open interest has hit 38,000 on the HRB April put side vs about 28,000 on the call side. Block is aiming to sell Option One for over $1 bln (Here's reaction to that price from a long time reader). I'd say that given the impairment problems of GM's ResCap, Block is up a less than sweet smelling creek without a paddle. Option1 is a huge problem for Block since it's carried on its books for, you guessed, $1.3 bln; selling it for less will mean a big loss and eventual share dilution, or worse. I believe Henry Bloch is still alive - poor guy, seeing his company pummeled.

Wells Fargo (WFC) and Washington Mutual (WM) are far more diversified lender, but have balance sheet exposure to subprime, alt-a, jumnos, etc. WM's chart is especially lousy looking: A few more thoughts about the financials with my Wall Street preview later on Sunday.


jim r said...


great thoughts, thanks. the other thing that MSM is not reporting re this is that major money center banks have exposure here bec of their lending to hedge funds which have subprime paper as collateral, etc.

Sally said...

May I ask what must be a very naive question (because I haven't read anyone else asking it)-- how much will this implosion affect money market funds?
I ask because I've noticed in my MMF prospectus a lot of MBS as well as paper from the houses you listed.
Thank you.

Jim K said...

Jim R... thanks. Later I will take a look at money centers. They are of course a lot broader in scope, but it was interesting that Moody's upgraded debt of JP Morgan Chase among others stating that they're too big to fail - that the gov't will bail them out. Huh? I'm still digging into that report.

Sally, question is not naive and I don't have an answer. This stuff is so gummed up into everything that it's hard to know at this point what exactly will and will not impacted.

Jason said...

HSBC and more write-offs:

HSBC will take a charge of $11 billion to cover the bad debts seen by its acquired Household division in the U.S., according to reports from the Sunday Times and Sunday Telegraph newspapers. HSBC reports its annual results on Monday. The bank recently issued its first profit warning over mounting bad debts in the U.S

moc said...

Whilst looking for financial firms to short I did consider CFC and did see the insider transactions. The accumulated size of the sales is indeed shocking. However, upon further inspection of Yahoo's insider report I see that most of the recent insider sales were simply option exercise followed by sale of the security.

Of course the options are a method of employee compensation, and the sale of securities that are thus obtained shouldn't count as much of a vote of no confidence in the company's stock because the employee never elected to buy the stock in the first place and may simply want to diversify or otherwise spend his stock appreciation as if it were salary.

Jim K said...

MOC... good points! thanks