To address Rich’s question, why short LEND now and why do I think the lenders have escaped the first downturn that homebuilders have suffered so far…
First off, I think the homebuilders have large liabiliites on their balance sheets that are difficult to offload. Even though they’ve learned from the downturn lastime not to have a lot of housing inventory on hand, they do carry a lot of land and land options on their books that is not liquid and I think will ultimately cause a few of them to go BK.
The lenders on the other hand, including LEND are able to quickly and efficiently package up all their sub-prime loans and off-load them as Mortgage Backed Securities. If LEND had to carry all the loans it made, it would be sunk no question in my mind. IMO this has enabled the lenders to hold up here right now…Ultimately though, with sales dropping like they are, I just don’t see how the lenders are going to keep their business. Where will the loan volume come from?
Here are the facts now:
-Housing sales continue to stall across the nation
-The fed is entering late stages of its tightening cycle.
-Home inventories are skyrocketing
-With declining home equity, the opportunity to squeeze more golden eggs out of the goose is fast coming to an end.
And the biggest timing issue:
-We have about 15 days left in Spring. That means spring has come and there was no spring rally. It seems to me that we are on the verge of negative yoy comps and I think that is going to mark the change in the longer term trend.
…I think the lenders are next in line to see their business killed and I see the potential setup for a really ugly fall this year. I want to be positioned before that happens as I do believe the market is forward looking and now feels like the right time to start my positioning.
Ultimatly, I want to be heavily short lenders, home insurance providers and highly leveraged homebuilders without the capital to withstand a drought.
Personally, I think that there is going to probably be an extrogenous event that causes a nationwide recession and results in a severe downturn in the real estate part of our economy. Everyone looks at the last San Diego bust and says well that was caused by the loss of jobs in the defense industry…yet that really only became apparent after the fact. I looked back over past newspaper clippings and never once did I see a single article talking about how the loss of jobs in defense was going to undue the housing market in southern california.
I think the cause of the next decline will also probably be only apparent after the fact as well, therefore, I think you want to try to position yourself before that happens.
It took me a long time to pull the trigger, but I think the peices are finally starting to come together.
Any thoughts contrary to the above points are more then welcome.
