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Shorting subprime: MBS, REITs, title companies, home builders,etc

Pinnacle

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Logic tells me that most of the fortunes may have already been made here (a hedge fund manager named J??? Paulson made $1.5 billion this summer short selling subprime credit). What do you all think of this? Can it still be done? Should it still be attempted if you know what you're doing and can tolerate the risk and complexity? This whole "meltdown" has me all excited, but all anxious at the same time. The RE sector I focus on is SFH's right now as part of my short term investment strategy. I was originally skeptical of the plausibility of this being as big a disaster as the media describes, but I've already come across my considerable share of for sale signs, defaulted mortgages, tenant vacancies, etc. I'm also affected as a consumer in that I'm trying to rebuild my credit right now so I can acquire the capital to buy all this cheap real estate everywhere. Times like these are an investor's dream, as you all know. Is it a wise move for me to delve into cram sessions on advanced stock investing so that I can take advantage of this window while it's open? It's late for me to be asking, but I need to know if it's TOO late for me to be acting.

What do you all think?

Kimberland, if you're reading this, do you do short selling?
 

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Re: Shorting subprime: MBS, REITs, title companies, home builders

I think you'd be kinda late to the party -- I was making posts about shorting subprime 6 months ago.
 

Edge

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Re: Shorting subprime: MBS, REITs, title companies, home builders

I don't know if it is too late to short these or not, but I certainly don't think there is much upside to them in the short term. Just remember, something doesn't have to go up or down to make money, using options, sideways can be a profitable direction.

Example: XHB the homebuilder ETF is currently trading at 22.59. I could currently sell the Nov 24/25 call spread for .25. I would be risking .75 to make .25 and there is 18 days left on that contract.

If XHB closed at $24.00 or lower, I would make 25% on my money. Doesn't matter if XHB goes all the way down to 0, as long as it is below 24.00 on expiration, I would make 25%. The breakeven on this position would be XHB closing at $24.25 and if it closed anywhere above $24.25, i'd be in a losing position.

Not a recommendation, just a trade i've been keeping my eye on.

Edge
 

kidgas

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Re: Shorting subprime: MBS, REITs, title companies, home builders

Consider a collar on one of your favorite stocks. That way you can make money if the stock goes up, down, or sideways. As Edge implies, options can be very useful. Regardless of what you do, you need to comfortable with your system.
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

the first couple of homebuilders announced BK this past week... I think there are more to come...
 

Edge

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Re: Shorting subprime: MBS, REITs, title companies, home builders

the first couple of homebuilders announced BK this past week... I think there are more to come...
I've been watching XHB waiting for the opportunity where I feel like the bad news is priced in. Looks like the 50ma has been acting as resistance for the past 3 months. If we get some more bad news shakeout (maybe the announcement of a big builder going BK) followed by a bounce that closes above the 50ma, I am going to change my shift from bearish to neutral and start looking to sell some puts or put spreads.
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

Right now I'd look for banks/companies that have extremely strong balance sheets and finances and have shown restraint in participating in the orgy.
Or those that have a great business model and whose subprime woes are fully written off the books and are overdiscounted in the market. Like Buffett bought a ton of Wells Fargo during the 1990 recession?
Of course... banking got a lot more complicated in the last 10 years or so... So housing might be easier to analyse by comparison.
Like E-trade bank? Buying low is a very prudent way to make money in stocks, but I think we have time before we start seeing a bottom. Same thing, Edge... we have time before plunging into home builders. I could be wrong about the technicals, but strategically, there is still a lot of risk that has not been accounted for at this time.

Bear, you probably need inside information if you find strong financials who haven't sugarcoated their sheets... besides, the debt ratings are so full of shit it stinks as soon as you open their PDF files.

we ain't seen nothin` yet in the financials...
 
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Pinnacle

Pinnacle

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Re: Shorting subprime: MBS, REITs, title companies, home builders

I actually find considerable plausibility in GreatBear's recommendation. I watched a nightly business report on public tv recently where they interviewed the CEO of a bank in Connecticut or someplace in New England that allegedly refused to participate in the sub-prime lending craze. They ONLY underwrote prime mortgages. They had reported a considerable (though not large) gain in their portfolios and showed good cash flows.

I believe they are out there, but just as with boom markets where bad deals can be hard to find for many, the profitable ones in this market will require extra digging.
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

there should be some quality companies out there.
absolutely. I just think the risk is too deep in builders and financials at this juncture... a lot of the info has yet to be divulged and all the trends are still going south... just too much compelling info for me to stay clear... I used to hold a significant amount of NFI for a couple of years and when the crap started hitting the fan, it came as a shock because all of the investors assumed everything was in the open with the quarterly and monthly filings... lesson learned - never trust management (especially wall street financials who have no problem blowing 10k on a lunch) and dont fight the tape/trend...

there are other areas that have significantly less risk at this juncture.
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

another point - strong regional banks still rely on overnight funds... their spreads are still razor thin... until rates start going up again, their earning might plateau as a result... unless they have a good and different biz model...

gotta run... good day, all.
 

Edge

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Re: Shorting subprime: MBS, REITs, title companies, home builders

I couldn't stare at that premium any longer with the selling over the past couple of days. I pulled the trigger and sold XHB (Homebuilders ETF) Dec 15 puts for .25.

If the carnage continues, i'll have it put to me at a cost basis of $14.75 and i'll immediately sell some call premium against it. I'm assuming ATM call premium would be about .40, that would lower my cost basis to 14.35, which is 20% lower than where it is trading right now.

If it doesn't trade below $15.00 before 12/21, I make 12% ROIC in 1 month.

I'm very comfortable with my risk:reward on this trade, I won't sweat being "naked" this premium because I don't mind owning this stock at a $14.35 cost basis as beaten down as it is. I don't care if the stock goes up or down, the premium 20% out of the money gives me the edge I need to make money either way. As long as this downtrend channel continues to pump premium in these puts, i'll continue this type of trade into Jan and Feb expiration cycle also.
 

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kimberland

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Re: Shorting subprime: MBS, REITs, title companies, home builders

Kimberland, if you're reading this, do you do short selling?
Sorry, Pinnacle, I somehow missed this thread.
No I don't normally short sell
(the few times I've tried it,
I've had my head handed to me).

I'm actually buying.
Bought Citigroup (yes, gasp, gasp)
though I don't think it is at the bottom yet.
You see, I'm Cdn so the exchange is working quite nicely for me
and I'm a longer term investor.
Not a trader.
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

unfortunately, the lending/rating crisis is spilling over into the rest of the markets and up till now, the financials and their much anticipated doom (or at least I expected) were rather isolated.... will confess that I never expected this amount of carnage and I never in a million years expected the elite of lenders being associated with the high risk exposure

anything associated with banks, homebuilding and mortgages is just way too early to get into... with the exception of agency rated MBS trading below their book values... probably play a quick trade with mortgage backs going into the upcoming rate cut, but long term will still be as fugly as it gets for an economy unless other countries start buying our assets in a big way... but folks, that just won't happen for as long as the real estate assets and their values are still inaccurately rated... all faith has been lost in its system and anything remotely rated below an A is selling for peanuts! even US Treasurer is concerned about liquidity in statements made yesterday.

a lot of other opportunities without nearly the multitude of risks associated with the financials... just playing with fire at this juncture especially now that new home-sale reports are coming out showing highest days on market inventory in 20 years... and that's only with the mortgage liquidity drying up just in the past several months!!! imagine a year or two down the road....

I won't recommend any specific companies that make good shorts at this juncture since a lot of the air has already popped... however, there are some lenders out there still trading at significant premiums to their books and their parties are gonna end badly

good luck
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

C might not be bad... $150+ billion market cap though... It'd have to buy another country in Africa before it can double its market cap
Just kidding.
probably 2 of the sharpest people in the biz got chased out of town wearing the scarlet letter was probably be looked back upon as one of the down turning moments in Citi's history...

I forsee C selling divisions to make up for lost volume.
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

we ain't seen nothin` yet in the financials...
Fannie and Freddie hitting the fan on all cylinders.... need to do shelf offerings of preferreds just to stay alive.

This is their one chance... if they can't raise enough cash now, they will never get another shot at catching the life jacket again.
 

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Re: Shorting subprime: MBS, REITs, title companies, home builders

kimberland said:
No I don't normally short sell
One of my favorite bullish buy signals...when kimber goes short! I'm still killing the TSX from your last tip. ;)
 

kimberland

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Re: Shorting subprime: MBS, REITs, title companies, home builders

One of my favorite bullish buy signals...when kimber goes short! I'm still killing the TSX from your last tip. ;)
Too true...
LOL
One of my buddies always asks what I'm buying.
He knows that the next day,
the stock will plummet
so he shorts it.
I'm happy to say that I helped finance his house
and am now working on his early retirement.

For example:
I bought more Arctic Glacier (AG.UN-T) at $11.73 this week.
The next day it dropped to $11.40.

I bought Citigroup at $37.
What is it now $30?

Jeepers, if I got some of my plays perfectly "right",
I'd be a billionaire.
 

Jonleehacker

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Re: Shorting subprime: MBS, REITs, title companies, home builders

One of my buddies always asks what I'm buying.
He knows that the next day,
the stock will plummet
so he shorts it.
LOL Kimber.

I was once so frustrated with my picks that I went on the bullboards and offered to sell as a sure-fire way to get the stock price to turn around (I was accepting sponsorship, of course!). Knowing that the moment I sold, the price would inevitably rise.

I just finished reading the latest version of Van Tharp's excellent book "Trade Your Way to Financial Freedom" and one line was very memorable:

"You don't trade the market, you trade your beliefs"

I know part of me thinks that every time I buy a stock it will go down, and it is worth it for me to consider the effect this could have on my picks!
 

kimberland

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Re: Shorting subprime: MBS, REITs, title companies, home builders

Well, I keep thinking that the odds are going to kick in.
I'm going to be right one of these days
(as I've warned my friend but he just laughs).

I buy when I think its a good price.
Over a year or two, I do okay
(which is why I'm in the place I am)
but over a week... not so good.
I'm not a day trader.
 

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Re: Shorting subprime: MBS, REITs, title companies, home builders

intresting enough, i read in forbes 400 today one of the guys made the list after shorting subprimes last summer!
 
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Pinnacle

Pinnacle

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Re: Shorting subprime: MBS, REITs, title companies, home builders

intresting enough, i read in forbes 400 today one of the guys made the list after shorting subprimes last summer!

I mentioned him when I opened up this thread, LightHouse. His name is John Paulson, a hedge fund manager. He netted $1.5 billion...and it was this past summer, if I'm not mistaken. I would love to know if he just stuck with the financial powerhouses, or if he included home building stocks and others as well. That's why it seems the air has been sucked out of the action, a huge chunk of the money to have been made went to Paulson. My guess is that he was already a billionaire, or close to it. He can't have made that money to be the bulk of his net worth if he is already a hedge fund manager. You may have noticed that this year, it took a minimum net worth of $1.3 billion to make the list.
 

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randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

My predictions about subprime and the financials have been right on the money. Hopefully others have listened.

Gotta have this one time to pat myself on the back... ;-)
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

wow, see K-Hov's earnings???

we still haven't seen the bottom... as a long term investor, I view the risk in this sector dramatically outweighing the rewards.

Regards,

R


U.S. Home Prices Fell 6.1% in October, Index Shows (Update2)
2007-12-26 09:28 (New York)


(Adds economist comment in fourth paragraph.)

By Joe Richter and Courtney Schlisserman
Dec. 26 (Bloomberg) -- Home prices in 20 U.S. metropolitan
areas fell in October by the most in at least six years, a
private survey showed today.
Property values fell 6.1 percent from October 2006, more
than forecast, after dropping 4.9 percent in September,
according to the S&P/Case-Shiller home-price index. The decrease
was the biggest since the group started keeping year-over-year
records in 2001. The index has fallen every month this year.
Prices will probably remain under pressure as the jump in
foreclosures puts even more homes on the market just as stricter
lending rules make it harder for buyers to find financing.
Declining values make it harder for owners to tap home equity
for extra cash, posing a risk to consumer spending.
``With supply overhang enormous and mortgage financing
tougher to obtain, home prices are going to decline considerably
further in the quarters ahead,'' said Joshua Shapiro, chief U.S.
economist at Maria Fiorini Ramirez Inc., a New York forecasting
firm.
Compared with a month earlier, home prices dropped 1.4
percent, the biggest one-month decline since records began. The
figures aren't seasonally adjusted, so economists prefer to
focus on the year-over-year change.
The median forecast of 12 economists surveyed by Bloomberg
News projected a 5.7 percent decline.

Broad Decline

The index is a composite of transactions in 20 metropolitan
areas. Seventeen cities showed a year-over-year decline in
prices, led by 12 percent slumps in Miami and Tampa, Florida.
Three, including Charlotte, North Carolina, Seattle and
Portland, Oregon, showed an increase from a year earlier.
All 20 areas covered showed a drop in prices compared with
September.
``The current state of the single-family housing market
remains grim,'' Robert Shiller, chief economist at MacroMarkets
LLC and a professor at Yale University, said in a statement.
Shiller and Karl Case, an economics professor at Wellesley
College, created the home-price index based on research from the
1980s.
A report on Nov. 21 from the National Association of
Realtors showed home prices fell in one third of U.S. cities
last quarter.
The housing market may continue to weaken as an increase in
foreclosures adds to a glut of unsold homes on the market,
spurring sellers to cut prices, economists said.

Sales Report

Figures this week from the Commerce Department may show new
homes sold at an annual rate of 718,000 in November, down from
October's 728,000 rate, based on the median estimate of
economists surveyed by Bloomberg News.
Sales of new houses probably will fall 8.9 percent in 2008
after a 25 percent drop this year, according to a Dec. 13
forecast from Fannie Mae, the largest mortgage buyer.
``The market is too challenging to make predictions for
fiscal 2008,'' Ara Hovnanian, chief executive officer of
Hovnanian Enterprises Inc., said on a conference call on Dec.
19. ``It will be a difficult year.'' The Red Bank, New Jersey-
based company reported a net loss of $467 million for the three
months ended Oct. 31.
Residential investment has subtracted from economic growth
for the past seven quarters. Home building dropped at a 20.5
percent annual pace in the third quarter, the most since 1991.
The S&P/Case-Shiller index and another by the Office of
Federal Housing Enterprise Oversight track the same home over
time and more accurately reflect price trends, economists said.
Price gauges from the Commerce Department and the Realtors
group can be influenced by changes in the types of homes sold.
Higher sales of cheaper homes relative to more-expensive
properties will bias the figures down.

--Editor: Carlos Torres
 

Edge

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Re: Shorting subprime: MBS, REITs, title companies, home builders

The hombuilders ETF (XHB) is up about 25% off its low of 2008. I am seeing the case for getting short again. I'm going to look to sell some OTM calls on any strength, probably the March 25 for about $0.40 if I can get it.
 

Edge

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Re: Shorting subprime: MBS, REITs, title companies, home builders

http://stockcharts.com/h-sc/ui?s=&p=D&yr=1&mn=0&dy=0&id=p83004556303
10 year yields are up despite Fed's worry over the economy and promise of further rates to cut. Spreads on commercial paper are widening too.
Yes, it appears Bernanke and his printing and comments can only hurt the markets now.

I can't take credit for the picture, but it looks like the fed is toothless.
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

It appears that joe6pack is ignoring the financial sector in the markets... too many failed muni auctions speaks volumes about confidence level.

many more writedowns among big houses and banks are to come and once this stops, then we can focus on the rest of the market, but until the financials settle, we will be seeing significant downward pressure. The financial markets really need to stabalize before any clarity can surface.

PS. I read today that subprime mortgages had 11.2% default rate in November and vast majority of ARM re-sets have yet to kick in! Banks/lenders haven't had the ramrod shoved down their throats yet.

PSS. if home prices decline another 10% in USA, that means that 30% of mortgages will be upside down.

PSSS. I still contend that gold will hit 2000 and I have been pounding the table since 600. We are at 945 as of tonight. We are on our way... buckle up.
 

Edge

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Re: Shorting subprime: MBS, REITs, title companies, home builders

There are still a lot of short position holders on the homebuilders and some are due to report earnings this week. IF there happines to be some decent news, there could be a short covering rally. I am still bearish on the sector, but if there is a hint of good news, might have to put on a different hat for about a week or so.
 

Edge

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Re: Shorting subprime: MBS, REITs, title companies, home builders

Homebuilders ETF (XHB) is up 35% now from the low of year. Isn't inventory still growing? Aren't builders still building? Isn't credit still getting tighter?

I don't currently have position on XHB, but I do have a short position (put calendar spread) on IYR (Dow Jones US Real Estate Index). If XHB falls below $21ish support and closes with 50ma below the 200ma, i'll be looking for a short postion on this index also, probably a short vertical call spread.

Anyone else have any thoughts on this sector? I understand there are a number of REITs that have been on a tear also.
 

randallg99

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Re: Shorting subprime: MBS, REITs, title companies, home builders

Anyone else have any thoughts on this sector? I understand there are a number of REITs that have been on a tear also.
Here is what I see and this is strictly objective and without hard data-

the markets are very forward looking which at this time is very promising since there appears to be light at the end of the tunnel, but the 64k question is how long is the tunnel from where we are to the end? Everyone I speak with is still foaming at the mouths waiting for the slaughter which apparently has not come yet...

Now that I am personally in the market for a new home for myself and family, I was told of 2 different builders who need to sell lots or they will be bk... my offers will be justified at 33% of the ludicrous prices they paid.

A close friend who owns 1mil sq feet commercial RE and I eat lunch together weekly and he is very concerned and believes the shoe has yet to drop in the residential sector and at that time, the carnage could very well spill deeply into the commercial spaces.

Keep in mind that retail vacancies are starting to climb and that has a large correlation with home building vs. consumer spending...

yes, inventory is up, prices are down but most importantly- banks are ferociously tough and approval rates are minimal. The Fed bailouts in the mortgage sector/banking industry have not helped the retail customer at this time. Until this very fact changes, we will see more pressure on builders profits.

Could you imagine what would happen to car dealerships if banks stopped making auto loans (on a different tangent- auto loan defaults are at multi year high)

Also, keep in mind, it actually costs less to build a home today than just a few years ago... a lot of hype regarding coppers (despite me being a vicious metal bug) expense made people think the home prices were going to jump through the roof (but didnt realize the copper costs didnt even amount to 1% of the entire project) Lumber has been in low demand and accordingly, its pricing is much lower today than just a couple of years ago....

now that it costs less to build a house, less to buy a lot, less to buy materials and little demand for the product and little demand for the labor...then there is little need for the mass home builder...

That all said, many of the builders have apparently written off their losses already which makes their future potential that much stronger however, it will be a while yet before real profits start showing. IMO.

I dont think you are referring to Mortgage Back Security REITs when you mention that REITs are on a tear... I dont typically invest in Brick and Mortar REITs so I cant answer your question.
 

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