For What It's Worth

I haven't written anything pertaining to investments for quite a while. Then again, I haven't written anything in a while. The purpose of this post is to serve as a mental note to myself. If someone else finds some value in it, consider it a bonus.

Today I allocated 50% of my IRA into equities. The balanced portfolio I maintained in this account was completely liquidated into 100% cash on the week of August 17, 2007, or 14 months ago. Outside of some dubious short-term directional bets and a profitable stint in gold, I've kept 100% of my retirement account in cash, until today. As you can see by the chart, I looked like a complete dolt on the week of October 12, 2007, and I was kicking myself at that time. Obviously, that feeling subsided shortly after.

I used to write posts about now-defunct subprime lenders being on sale given their cheap P/E ratios. That sentiment changed once the shit started hitting the fan in the summer of 2007. I started to reject the overly bullish calls of certain economists (read: Larry Kudlow and his ilk) who proclaimed the subprime lending problem would be limited to the subprime housing market. I saw their claims as spin/damage-control for the idiot President they so adore - they felt Bush was not getting the credit he deserved for the economic expansion - and far from objective analysis. I feared a credit crisis.

My projections differed from what actually played out; I feared a seizure in consumer credit due to careless lending via credit cards, resulting in a recession induced by a sudden drop in consumer spending. I had only been in this industry professionally for two years at this point, and my perspective was skewed toward consumer behavior because I'd been in the consumer market nearly my entire life (I started mowing lawns for money at Age Eight, yo). I didn't realize the extent of the Credit Default Swap market, I could have never predicted a situation where there would be - for a time - no bids in the commercial paper market, and I never thought I'd see negative yields in US government debt. Pure fear and panic. It turned out those unqualified home buyers weren't the only ones borrowing too much. Everyone had too much debt.

So I'm back in equities, half way, and my exposure is entirely in a consumer discretionary ETF. I'm unsure where the market is going from here, but I don't want to completely miss a turnaround. Then again, if another shoe drops - perhaps another exotic instrument like synthetic CDOs will become the next Boogie Man - I don't want to get killed. No one wants to get killed.

Ruminating on the Canned Meat (Spam) Portfolio

April 12 marked the conclusion and "liquidation" of the oh-so-experimental Canned Meat (Spam) portfolio I created on Stockpickr. Two full months of tracking the results of stocks selected via unsolicited emails proved ample time to draw some salty conclusions. While most of the results were predictable, the experiment reinforced some basic assumptions and - not unlike a can of pressed and formed meat - offered a few surprises.

First, the obvious: Investing in - or rather, gambling on - these "companies" is a really poor idea. My diversified portfolio lost 45% in just 2 months. And you thought the 3% you lost on February 27th was bad.

Also obvious: Spam campaigns succeed in pumping the price of the stock - albeit temporarily. Apparently there are still enough foolish and unsophisticated "investors" out there who actually move upon these suggestions. This is frightening, especially when you consider that you share the roads with these people, walk past them in the aisles of the grocery store... perhaps you even let your kids play with theirs. I'll posit these folks are the same type of "investors" who are currently sitting on empty, unsellable condos in Fort Lauderdale and Las Vegas. Not savvy.

Not blatantly obvious, but makes perfect sense: Spam campaigns create temporary liquidity in names that are otherwise dry. Some of the names in my portfolio average a volume of just 100,000 shares traded per day, with most trading significantly less. At the height of the China Fruit (CHFR) campaign, daily volume peaked at 1.65 million shares. This is the crucial second piece necessary for perpetrators to make serious cash on these scams (the first being the artificial price spike). Hey, if you need to dump 750,000 shares, it helps if the volume is there. And as I found early in this observation, the combination of a price spike and high liquidity worked quite well for a major holder of China Fruit.

Now, as far as surprises go, this blew me away. One of the names (CBRP) broke even, while another (ACEN) finished up 47%. While CBRP is now down again, ACEN is up higher than it was when I liquidated. A quick glance at the volume chart suggests that another spam campaign was launched on or about April 5, although I never received any of the emails. The takeaway from this: while not statistically significant, one can casually infer that there is a 1-in-8 chance of making money in this arena. Maybe it's just me, but I'd rather take the 3:2 blackjack at the Tropicana.

The biggest surprise was what stopped happening midway through this project. The once steady flow of unsolicited stock suggestions completely dried up. Indeed, I received my last suggestion on March 9, roughly one month after I created the portfolio. Don't get me wrong. My Inbox is still inundated with crapmail. The difference is that now the spam is exclusively composed of invitations to indulge in life's finer pleasures, such as weight loss products, erectile dysfunction cures, pirated software, and fake designer watches. Could it be that the stock spammers got wind of my portfolio and took me off their list? I highly doubt it. But the stock spam is gone, which suits me just dandy.

Subprimes up on Countrywide Rumor

The Financial Times is reporting a potential alliance or acquisition involving Bank of America (BAC) and mega-subprime Countrywide Financial (CFC). Countrywide is currently up about 10%, and other subprimes - including New Century (NEW) and Accredited Home (LEND) - are up about 2%.

Unnecessary Disclosure: I have no positions in the securities mentioned above

Subprimes are Up

After trending generally lower since my last mention of them, subprime lenders New Century Financial (NEW) and Accredited Home Lenders (LEND) are up sharply today - roughly 5% at the time of publishing. NEW started its ascent on Tuesday, while LEND had been down until today.

No news on the major wires, but I did find this Piper Jaffray release dated January 10, 2007. From "Mortgage Outlook: Only Strong Survive; Environment Should Improve by End '07" by Robert P. Napoli:

"Although industry wide subprime credit statistics will deteriorate, credit trends tend to vary greatly from company to company in the subprime space. The charts below display the static pool delinquency data on securitizations of Accredited Home Lenders (LEND: Market Perform), New Century (NEW: Market Perform), and NovaStar Financial (NFI). Historically, LEND's delinquencies have run significantly lower than the subprime industry average. NEW's delinquency data has been improving with the more recent vintages. We believe that NEW has become a more rationale player over the past year and 'got religion' after a scare in August/September of '05 on narrow spreads on aggressive loan types. Very recently, NEW has also adopted even tighter underwriting standards in response to weakening credit trends and the interagency lending guidelines. We believe that both LEND and NEW will be survivors of the subprime shake-out, for several reasons including the lowest cost to originate, larger capital bases, longer corporate history, better underwriting and collections capabilities and, in part, because they have adjusted their underwriting in response to weakening subprime credit."

The report also mentions that Piper Jaffray is lowering it price targets on both securities, but maintaining coverage due to their survivor instincts.

Not sure if a Kind Word from an under-read analyst was enough to set these in motion. Regardless, their both still incredibly cheap, with Forward P/E Ratio's under 7.

Unnecessary Disclosure: I currently have no positions in the securities mentioned above.

Subprimes: A Steal or a Bust?

Much has been made of the subprime lenders lately, especially on CNBC and in the Wall Street Journal. I started watching two of these mortgage gambles about two weeks ago: New Century (NEW) and Accredited Home (LEND). They're both incredibly cheap, with P/E ratios below 5, which means these potential timebombs could also become acquisition targets for big investment banks with the means to hedge out the risk.

Acquisition isn't the only route to a payout, as these companies may be able to recover on their own. I met with Dr. Ed Yardeni last week, who pointed out that housing busts are traditionally caused by low employment and high interest rates, not negative or stagnant housing prices. Employment numbers are currently fine, and interest rates have dropped to a fourteen month low. This sentiment has been echoed by the always-outspoken Madman of Wall Street, Jim Cramer, over the past week. On both CNBC and his thestreet.com website, Cramer has been adamantly downplaying the doom scenario in the subprime space since the media hype began last week.

Hedge fund manager Doug Kass, a regular contributor to Cramer's The Street website, appeared on CNBC midday today, predicting a hard landing in housing and a bust for subprime lenders. He cited slowdowns in the economy and the markets as just one trigger that could send housing defaults into turbo mode. Just ten minutes later, Cramer was back on the air for his Stop Trading segment. Not only did Cramer disagree with Kass, but he also endorsed LEND. I believe this is the first time Cramer has publicly endorsed any name in the subprime genre. Cramer finished off his prediction in typical fashion with an extremely bullish call: Fed Funds to 2.5%, Dow to 16,000 (although he neglected to give a timeline).

Kass's reversal is completely plausible, with December's market performance showing a weakening in the bullish convictions that have dominated since July. But it's hard to call a housing market crash when we've already witnessed a slowdown and have now seen an increase in mortgage applications. Continued strong employment numbers and the lowering of rates could breathe life back into the housing sector, giving subprimes a chance at market cap redemption. I like these names in a gambling sort of way. I wouldn't put next month's mortgage payment on them - and I wouldn't move in on them for a while - but I'd have no problem allocating one week's worth of lottery tickets on them.

Unnecessary Disclosure: I currently have no position in the names mentioned above.