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Mark L Schemper

Tuesday, October 21, 2008

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.

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Thursday, February 22, 2007

An Overdue Update - Spam, VIX, and Vegas

The spam drought subsided as quickly as it came, and the portfolio now "boasts" five names. Things were actually looking surprisingly rosy over the holiday weekend, with CHFR showing some big gains on Friday (perhaps as a result of their incessant barrage of email?). But Tuesday proved to be another story as CHFR lost nearly 40% of its value on heavy selling. As Mr. Altucher put it in Wednesday's Blog Watch, things are "starting to get ugly."

The VIX remains unusually low, despite yesterday's and today's selloffs. This is driving some eager would-be short sellers absolutely crazy, and has others wondering if the market is redefining what measurement quantifies "low" volatility. And the subprime arena seems to have no bottom in sight after Novastar (NFI) dragged the entire sector even lower yesterday. I'm beginning to think the entry point on most of these names is Never. Or at least a long, long while from now.

The Canned Meat P/L Sheet will not be updated for Friday's close, as I will not have access to the Web after 11am. Vegas is beckoning (again), and who am I to argue with Vegas!

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Friday, February 9, 2007

Playing Catch-Up - Geographic Bias, Subprimes, and Super Bowl XLI

It's been a long while since I've posted. With school and work and weddings and whatnot, I just haven't had enough time to sit down and write. Which is strange, since I should be waxing endlessly about the recovery of crude oil. I was noting today, as crude danced above the 60 mark, that it seems the Fear that subsided in an Eastern US Warm Front just weeks ago has returned. Not only is it cold outside the NYMEX, but we may be on the verge of military conflict (read: WAR) with OPEC member Iran. And there is major unrest, rebel kidnappings, and general unruliness in Number Five Oil Supplier Nigeria. "Oh, the Horror," the cry comes from the NYMEX. Nevermind these conditions were completely foreseeable when it was still balmy in NYC. No, life was just peachy then. Not even a rocket fired into the US Embassy in Athens could spark a Fear rally. But things matter now. NYMEX traders are citing them. Throw in a refinery fire in California - which is surprisingly far from the NYMEX - and the Fear is Back.

My favorite lab experiment, the Subprime Sector, took a ValuJet DC9-esque nosedive yesterday on very bad outlooks from both HSBC (HBC) and the riskiest of the lab rats, New Century (NEW). The selloff continued today. You can read my sentiments and the sentiment of at least one other in the Comments thread in the post below.

Finally, the Super Bowl. Yes, one aspect of this game was predictable: Rex Grossman would commit multiple Foul-Ups which would cost the Best Defense in the League the Title. Many people saw this coming. What wasn't predicted - well, at least not predicted by statistics and probability - was the winning square for the final score of the annual Super Bowl Squares Office Pool. A 7/9 square has a historic probability of hitting on the final score .78% of the time; this makes it a loser, unlike 7/0 and last year's final, 1/0. However, it was observed by Yours Truly that during the 2006 season, the 7/9 came up in 2.25% of the final scores. This is significantly higher - nearly three times - than the historic rate, and moderately higher than the 1/0 that took the prize last year. This may be worth investigating, on a geek-hobby level, of course. And most likely after I complete my degree.

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Friday, January 26, 2007

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

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Thursday, January 11, 2007

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.

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Wednesday, December 13, 2006

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.

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