I agree that the shares will probably not have a 50% to 100% type rebound until the Treasury says something. (Alternatively if they fall below $1.50 or so then a 50% plus rebound becomes more likely). However they both rallied about 40% from Wednesday morning to Thursday morning on an intraday basis. Regarding which stock to short, my preference is FRE. In the unlikely situation that there is no Treasury bailout / equity injection, FRE still needs to raise $5.5 billion. I doubt that 5.5 billion capital raising can happen without Government intervention.
Never underestimate investors capacity to be optimistic. I thought the uncertainty of a overnight nationalization would keep the shares depressed but I was wrong. Heck I bet had JPM not bought BSC on that monday one analyst would come out saying 'the stock is cheaper since 199x, fears regarding their liquidity position are overblown, now with access to the fed window they are well-position to withstand the credit turmoil and delivery nice return to shareholders, our price target is now lowered to $40' nevermind that bankruptcy filling could come anyday. Perhaps they havent read what bernanke said in jackson hole 'A statutory resolution regime for nonbanks, besides reducing uncertainty, would also limit moral hazard by allowing the government to resolve failing firms in a way that is orderly but also wipes out equity holders and haircuts some creditors, analogous to what happens when a commercial bank fails.' This latest stock surge will only enbolden perma bull analysts to find reasons to keep recommending it so who knows if the rally will continue. I'm not sure I'm adding yet, I'm waiting for some stabilization on a closing basis. I let the price decline get into my head, my original belief was that the treasury aint doing squat for weeks, I'm now back at the belief. They probably will only inject money when the management throws the towel and cries uncle, right now they are still delusional they can get money from the private market
Not matter what happen to these gse stocks I dont think I will be happy about my trading at the end. Bernanke said in jackson hole recently that equity holders need to be wiped out in a bailout of a non-bank financial. Paulson is reported(CNN) to have pushed for $2 a share on bsc. Housing continues to decline and so does the regulatory capital of these firms, if the regulator says they dont have enough capital its game over because the treasury doesn't have to worry about shareholder lawsuits. Now city analysts says this wont happen this year and they might very well be right but who cares it will happen eventually. 1.5% 'capital' for the biggest bust ever cant last and it won't(it would have already had they kept their accounts like the private sector) This will be maybe the biggest bailout EVER is the market really thinking they wont try to address moral hazard in anyway here?I'm putting the chances of a equity punishment at 90%+, maybe 98%+ if the preferred gets bailout. Yet I can't seem to have the guts to take a big position. Right now I have 5% of my networth shorting them(it got up due the squeeze) I should have at least 10% of my networth there, probably more. But everytime I think about 'going for it' I think 'do you really want to short a low priced stock that could double for silly reasons and cost you tons of money and big psychological pain?do you really want another mbi, you know you will cover at the top' It doesnt help that my health has deteriorated and made more exposed to pain from the upmoves but I need to remain disciplined and do it anyway. I can only blame myself for not having bought tons of long-term puts when the price was $25 Anyway, I'm curious to hear how are you guys deal with all of this
Short squeeze time. I got out of mbi yesterday at the open(had I lacked discipline I would have bigger losses), still holding the puts, I plan to buy 2010 puts and never short the stock again(this volatility is just insane), hard to blame me for not seeing this coming, I argued extensively with MBI bulls and ALL the things that sent this stock higher(possibility of unwiding exposures at lower losses and out of nowhere reinsurance deal), the bulls didnt predict a single one, they just think CDOs and financial losses will be small or months ago they they will keep AAA(yet they will be quick to brag about their unrealized profit). I still stand behind 100% my views. expecting financials to go lower of the coming weeks. september is also the worst month for the stock market, maybe its a coincidence maybe not. FNM and FRE will be below $1 in three months, not covering a single share there(I should be adding...), if they rally I will just take the pain
Personally, I think you will have a few months before FNM will meet its armeggedon as they are not clear as to how much mess they really have on their hands and govt will be looking at ways to siphon off the better "securities'' before they pull the trap door.
The Ospraie fund shutdown reminds me of staying humble yet at the same time you can't be too gunshy otherwise you get no decent returns. The answer for excellent position trading returns must be waiting for those extremely safe investments and careful risk monitoring, but I bet anderson thought it was a guaranteed thing that commodities were going continue to climb. I believe the fnm and fre wipeout positions are as guaranteed as it gets but at the same time I can't get too arrogant take a huge position then wake up with a margin call because the market all the sudden deluded itself that the treasury would bid for the gses. The Ospraie also reminds me the market doesn't hand out money for free for too long. Everytime you are making a killing you should step back and ask yourself whether you should take your positions out yet we see this being ignored over and over again(LTCM, investment banks, housing speculators, tech stock investors). This leads me to decide that I probably wont short financials much after the next vix spike(except select names), there is just too many ways for a capitalist society to invent solutions to its problems. The way I'm trading 'short and let it run' can be quite risky if I'm wrong since the bottom will be followed by vicious and persistent rallies
check out ABH. Worlds largest newsprint producers. Looks like its on the ropes. Lots of debt to be rolled over with few takers. Probably alot more non-financials out there with heavy debt loads waiting to get crushed. Daal nice call on fnm fre btw! Cheers! "This is worse than the S&L crisis. This is the first time - this is the worst credit bubble we've ever had in American history. No - ever in American history have people been able to buy a house with no money down, never. That's never happened anytime in the world. So, we have the worst credit bubble. It's going to take a long time to work its way out. You don't cure a bubble in five or six months... It takes five or six years." Jim Rogers, November 6, 2007
The fnm fre market got it what it deserved. They behaved like a drunk smiling morons in the face of total armageddon If you think about the things that gives value of common shares(claims of profits like dividends, indirect dividends like stock buybacks, potential profitable merger of takeover) they were all removed in a single move. I'm actually quite surprised the warrants are only for a 80% stake, some are saying they did this in order to get the management to cooperate Worse than those factors is the agreement that the gses are not shareholder oriented anymore, this means low return on equity lower leverage IF they return to profitability one day, this largely removes the 'hope factor'. PLUS the preferred stock suffered a 'event of default' in 5 years they will be able to reclaim some of the unpaid dividends through warrants, this will dillute the shares even more. So if fnm and fre only open down like 50-60% I think I will add some more. Also a 'lawsuit short squeeze' could occur, bill miller will claim paulson and co said they had enough capital, I dont think the saga is totally over Too bad I will lose some money in WB and WM today but I own a canadian lender(QCC in the nyse, but I own the canandian shares) so on the net this will be a big day because I concentrated my position trades in the gses If caught the move congratulate yourself! This was my best trade of the year and I think I ought to reward myself for all the +20% days
thanks. could you go in more detail on ABH, like price targets, if you expect bankruptcy etc. I thought about shorting names like GS expecting writedowns but I think its more profitable to go for the $0s. its a bumpy ride but when you a right and keep adding, the winners are just massive. even my poorly timed adds on fre should make money
FNM/FRE are trading about $1.60 in premarket. I'm exiting 2/3 of my puts on the open, and will hold the rest for a move towards $0 in the coming weeks/months.