Profit Opportunity #1

[lendingbubblecontinues]

I have said some stupid things myself in forums, probably due to my own frustrations with the confusion of having both smart and dumb money in the market.

Last thing I need is an enemy, so please accept my sincerest apologies if I have ever offended anyone.

I do believe that I shall have no more need to post in these forums for quite a long time.

[anxvariety]

saiine offered up his brother in laws restaurant in Cardiff/Solana beach… that’s a pretty central location and would allow some people from North County (like me) to make it.. The food is also really good there.

RightSide, your posts sounds as thought you’re vindictively contrarian.. but this board is pretty much a place where alot of contrarian investor and real estate shorts like to hang out so I doubt you’ll get much of a fight..

[powayseller]

RightSide needs this LEND trade to work out, to counteract for the $500K he’s going to lose on the purchase of his $1 million home.

[Bugs]

Offhand I’d say this would be a good time to go to our respective corners and not come back out until we have something of substance to add.

[RightSide]

Your apology is accepted bubble, thank you.

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.

[PD]

I think an investment club would be interesting. I went short last week for the first time. I’m short two homebuilders and a lender.

[Anonymous]

Chris Johnston

Thanks for going out there and throwing out a trade you are in live. I do it everyday in my business, and always get comments. So kudos to you.

LEND has very low debt ratios, very strong earnings trend the last couple of years. Also, the seasonal trend has been for a rally into the end of the year on this stock from here. These in general would be reasons to buy a pullback. The price/sales ratios is 1.91 which is not as high as I would like for a short, but iteast over 1. Forward p/e is 5.57, very low. This is typical for oil companies and home stocks.

In general most of those reasons, except price/sales ratio ( under 1.0 is best for longs) would be reasons to buy this stock on a pullback.

Most of us are very bearish on RE overall, so maybe that trend makes this trade work. But, in general, it does not meet my parameters for a short. I would prefer a p/sales ratio of 5 or so, higher debt, and dropping earnings. Then a rally against the downtrend in price as a short entry point. Maybe this stock will set up that way in the future.

Good luck right side – I will always pull for someone who has the nerve to throw something like that out there. However, this is not a trade for me based on what I stated above.

[powayseller]

I tried to get some feedback for you, since I don’t know the first thing about shorting. I asked Bill Fleckenstein, and will report back tomorrow if he answer the question about shorting LEND.

This is what Fleck had to say in today’s column about shorting.

BILL;

‘NEW’S STOCK SEEMS VULNERABLE GIVEN THE REAL ESTATE STOCKS DECLINE. DO YOU SEE THIS AS A GOOD SHORT CANDIDATE? I SEEM TO RECALL YOU WERE NEGATIVE ON THE STOCK IN THE PAST. THANKS
• I’m short it— it should be a disaster, but it’s a tricky stock to be short.

have you gone max short then? or are you wating for the failing rally you are talking about? I want to get short too.
• Max short? Nope— not until after the Fed stops and tells everyone. Until then, I’m selectively short… and happy being so.

Here’s what my brother, a former Wall Street securities lawyer, said about the question:
packaging things up as MBSs does not solve a lender’s problem – they typically have to retain a risk by offering to buy back non-performing loans from the pool. One would have to look at their MBS prospectus and see if the settlor has to guarantee payments or liquidity.

Rightside, I wish you all the best in your trading. Hopefully this works out for you.

[Lickitysplit]

If you want something done….

For those of us (myself included) who aren’t yet savvy enough to understand the innerworkings of shorting a stock:

The Basics of Shorting Stock

[barnaby33]

I would be interested in joining a small group to pool some money for two reasons. One it actually motivates me to do real research and two I think face to face interaction avoids alot of the extremist viewpoints that anonymity affords.

Which brokerages allow you to short stocks? I use TD Ameritrade(formerly waterhouse). Shorting with them is not easy. Either you already have to be long, or you have to call into their trading desk and ask if the brokerage has shares you can short. This makes shorting very hard because on a day to day basis you can’t tell what will be available, and its a bit counter-intuitive. If the stock were going to decline, or a large group of people thought it would, why would the brokerage buy shares and then lend them to you to short?

Josh

[Anonymous]

Shorting is very easy with Fidelity. I am surprised it is not just as easy with all the major on-line brokers. For any shorting, you need to have a margin account established number one. Next, since shorting is done on margin, you need to have some quantity of equity in the account to cover the margin. Onde this is established, the process is simple.

I am amazed that you have to call the broker to find out how many shares are available to short, this should be available to you on-line. With Fidelity online, just select “sell short” and select the stock symbol and it automatically pops up a screen that tells you exactly how many shares (if any) are available to short.

[powayseller]

I got a response back from Bill Fleckenstein.

What do you think are the drawbacks, if any, of shorting LEND now?
• …that you could get squeezed hard in a rally.

[lostkitty]

Lickitysplit –

Thank you for that link to the Basics of Shorting Stock!

MUCH appreciated.

[powayseller]

The link failed to explain the dangers of shorting. You can get caught in a short squeeze:

A situation in which the price of the stock rises and investors who sold short rush to buy it to cover their short position and cut their losses. As the price of the stock increases, more short sellers feel compelled to cover their positions.

You can lose many times your initial investment. Many times.

The risk of shorting is that you can be early in assessing the loss of a company. The markets may take many more months to price in the loss that will eventually take place. Rallies can happen before the big loss.

Small players can get run over by the pros in a short squeeze. Shorting is for the pros!

[Anonymous]

Well I’m no pro and I’m making a killing shorting homebuilders, and I expect to make a LOT more with the Puts. The short squeeze is not nearly as dangerous as you make it out to be. Yes it can make you nervous at times, but it only causes short term spikes. As long as you don’t overdue it on the shorts to leave a nice buffer for these spikes, you are fine.

I’m not into day trading like a lot of these yahoos. But again their games only cause short lived spikes. As long as you go in it for the long run and leave some buffer you can’t go wrong. I said it once and I’ll say it again. Does anyone on this blog truly believe that TOL or KBH stock has any chance of being worth more in two years than it is today? Of course not!

So don’t be so conservative Poway, you’ve gotta have several hundred Gs banked after selling your house. Why not pull a little of that out from under your mattress and make some real money?

[Author]

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