patrick.net

I've made over $30,000 short selling LEND Accredited Home Lenders. There is still a lot of room for that stock to fall especially if like me you believe they won't even exist in 6 months. If people had listened to me 2 months ago they could have done the same. It is a nice cheap stock, and it has a nice range of volatility.

Patrick, you may want to add a disclaimer.

BTW, Patrick, you may want to use some software to simulate the payoff of various strategies under different assumptions. Simply buying PUTs may or may not be the best way.

Not investment advice, options involve risks.

This is my favorite topic. Lots of put options we can explore other than CFC. Based my observation elsewhere, the first ones to go are obviously banks and lending companies, the next to go are some shaky developers in weaker financial positions, then big-ticket item purchase (think Ford, GM), along with furniture retailers. BIG, DISCRETIONARY spending will be the next shorting targets.

But before I begin, let me copy something from the TOL message board:

Stages of a Bear Market in Real Estate

1st Stage is the almost complete drying up of sales as buyers refuse to pay up and as the number of real buyers (as apart from shoppers) dwindles. At the same time sellers, still caught up in the rising expectation hype, not only refuse to lower their prices but actually raise them, having gotten used to houses being sold above their asking price.

2nd Stage There is a dramatic increase in the number of foreclosures. This begins in the last stages of the boom, but dramatically increases as the homeowners who cannot meet their obligations, can no longer refinance at lower interest rates while extracting money to meet their obligations. As prices begin to first stabilize and then turn down, they can no longer sell their home for any price that even remotely approaches their outstanding mortgages and are left with no other choice but to mail their keys back to the mortgage holders.

3rd Stage One by one, the sub-prime mortgage brokers shut their doors and go bankrupt, but that is not the end of it. The brokers and banks that have packaged these junk mortgages and sold them off to the public and institutions such as insurance companies and pension funds have also securitized them and thus far, we have not yet seen the carnage that will occur as $1.3 trillion of junk bonds comes home to roost. As in every bubble that bursts (as they all must eventually do), the BANKS are always left holding the bag. At least until the Government (read Public) bails them out.

Federal bank regulators using their Moral Suasion" have asked lenders to be more cautious when making the high-risk loans and scrutinizing borrower's ability to repay them; thus marking the end to undocumented loans. The banks have now "locked the barn door" after all the horses (read Money) have gone, drastically tightening up lending standards, making sure that their wishful game plan can't possibly materialize. The final nail in the coffin came last Tuesday when giant Freddie Mac said it will no longer buy sub-prime home mortgages it deems most vulnerable to default or foreclosure. Where will all the new buyers come from to support a resumed housing boom and more importantly, where will they get their financing from?

4th Stage Layoffs and drastically reduced earnings and salaries; first due to the sharply reduced construction followed closely by a reduction in all of the auxiliary industries, ranging from real estate agents and mortgage brokers to furniture and landscaping. So far, this stage remains hidden as it is masked by the backward looking unemployment and economic numbers being reported. I expect that it will be a shocker when next quarter's numbers are reported..

5th Stage Economic recession (if we are lucky). By next quarter, as the economic numbers begin to reveal the truth as to what is really going on in the economy is the time when we will be facing our greatest danger. What type of legislation will Congress propose and will the President have the guts to veto it? There is no question that Bernanke, like Greenspan before him, will rush to the rescue with the FED's liquidity hose, but this time it won't work. There is already too much liquidity in the system. Especially under conditions of tightened lending standards. What happens to all that take-over money under the new lending standards?

HISTORY REPEATS

Although history always repeats, it never does so in an identical fashion, thus it only ends up being recognizable long after the fact. The first causality will be to exacerbate the crash of the real estate market; then comes the imploding of the stock and bond markets. We are about to witness the Laws of Supply & Demand in action. Balance of payment deficits of an unprecedented magnitude have resulted in credit induced economic over heating on a global scale. There is a limit to how much money created out of thin air can keep the US and world economy going.

Sorry about the double-post –I didn’t see Patrick’s new thread until after the fact.

RE: HISTORY REPEATS

I am reading this book:

Why History Repeats

http://www.amazon.com/Why-History-Repeats-Theresa-Mcdevitt/dp/0866905561

Just be careful of companies that are healthy enough to weather the storm. If they survive, and alter their business model, then the stock will be underpriced and the market will force it up quickly. My best guess is the subprime meltdown will be quite quick. Some of these lenders that have reported their first quarterly loss, will be nailed when they report a consecutive quarterly loss because they stand the chance of losing their lines of credit which is their operating capital. We are getting ready to finish a quarter this month, so stand back and watch the mushroom cloud.

I thought history never exactly repeats itself, but occasionally it rhymes?

I thought history never exactly repeats itself, but occasionally it rhymes?

It rhymes when planets align.

Thanks Peter P, I added a disclaimer.

Hmmm, HARM started a new topic already. No matter, we can talk here for a day and then when there's a good big point to make, I'll create a new thread.

Patrick

This bubble rhymes with 1990 but the biggest difference is that the recession caused the downturn and prices were out of line but not as much as now. This time the housing crunch is pulling an otherwise healthy economy (albeit propped up by the housing ATMs) but a stark difference is the abundance of money still available. That is why you are not going to see a significant rise in interest rates because dwindling demand of qualified buyers causes an oversupply of money chasing after them.

So ... apart from LEND which one is worth investigating ? CFC might prove to me more stable. And for NEW, NFI it's way too late to make serious money.

The builders are quite high compared to their 52 week lows. So there might be some opportunities.

Anyone has decent suggestions for investigation ? Not investment advice of course.

I just liked LEND because I knew the company had basically built its ENTIRE business model on subprime. I had a girl in one of my MBA classes who kept touting how inovative they were for going after that market. I used to roll my eyes even though she was hot. She looked just like Sharon 'Boomer' from the new Battlestar Galactica.

WSM and ETH are my favorites, both furniture retailers targeting the upper-class wannabes, flat for the last few years, at historical high level, lots of room to tank.

OO, are you thinking that just in general high end items are going to suffer, or are you attributing a slowdown specifically to high end furniture tied to housing?

The reason I ask is because I am frankly torn between thinking the housing bust will cause a huge recession, or if it will remain contained. The reason for my indecisiveness is because the US is no longer the world leader in international finance, and there are more variables at work than just the multiplier effect of lost construction jobs. Though our silly 'service based' economy couldn't sustain itself on its own. After a while of having China make everything for us, and we just sell real estate and loans to each other the house of cards seems shaky.

I am thinking of specific ancillary industries revolving around real estate. I will stay away from the truly high-end consumer items which may be very resilient.

Take Japan and HK's realty bust for example, furniture shops closed down left and right, but sale of LV bags stayed very resilient. High-end cosmetics sales went up. The reason is because lots of FBs had to move back to stay with their parents, so their disposable income actually went up. In Japan, even higher-end vehicle sales went up in the recession years.

But when you move back with parents, it's very unlikely that you can find enough room for big chunky furniture :-)

I don't think that the housing bust will be contained, but certain industries will be harder hit than others, and we are talking about best bust for the same put option buck here right?

I am just interested in looking at the industries that will be f*cked the most.

OO

WSM doesn't have LEAPS available :-( Maybe this will be my first short.

I have family (family in-laws, actually) in the furniture business, and a housing crash is not something they're looking forward to. Probably looking for a public company that deals almost exclusively with mid-high end stuff is what you're going to want to look for. IKEA might take it in the shorts a little bit, but people will be thinking 'cheaper is better' if they can't avoid buying furniture.

Warren, I come across that too, I have to call my Scottrade office directly sometimes and they are always able to fill over the phone. Also, it is hit and miss on the internet, I sometimes do a few smaller amounts. Short orders are good for the day only with Scottrade anyway, so I find more success trying early in the morning.

I wouldn't gamble with something like this unless it was money I could afford to lose; it only makes you a speculator since it's not a sure thing. You have been wise enough to wait this out; why would you want to gamble with what you gained by not buying into the bubble. It would be a damn shame to put a significant amount of your money into a deal like this and lose it just when prices on houses finally come down to what you consider affordable.

Allah, you are right, it is stupid to gamble, and speculate. In my case I was following this since Patrick first started his site. I had modeled the entire scenario and saw that we were right each step of the way. I believed so much in my judgment, and had the gains from selling at the peak that I firmly believed if I was wrong I genuinely deserved to lose my investment. Gambling is stupid, proceeding when you don't know what you are doing is just as stupid, but the way you get rich in this society is to see something that others don't and go for it.

I think a less risky approach would be to watch for stable, large cap banks like Wells Fargo or Citi that get undeservedly beaten up for their relatively tiny portfolios of subprime loans. I'm a a value investor myself, and I prefer to be long. I'm watching the homebuilders now. Probably around next year I will pick a builder or two that I think will be long-term industry winners. I also have my eye on natural resource REITs, because nobody is buying their lands for developments, and the world will always need timber and minerals. Possibly I will diversify soon into European stocks, as I expect the pound and Euro to climb in strength vs. a weakened U.S. dollar.

Not investment advice.

I don't think anyone should bet the farm on shorts or options. It is just some fun money that I set aside for betting on the trends, if I win, I reward myself with an extended vacation, and if I lose, no big deal.

I don't think anyone should bet his entire portfolio on another company going under. But doing a bit of short-term trades based on your judgment of the market is not immoral nor detrimental to one's financial position.

not investment advice.

Btw, Patrick --nice graphic!

OK, LEND went to 5 something a share. I am out. I made $25,000 just today, and a whole bunch more over the long haul. I'd say that party is now over, and I without giving specific advice am not encouraging further shorting of this stock.

Patient, I didn't do puts. I just sold 4,000 shares short. I've been playing around with it for a few months. Today's profit was actually a portion of the big picture. I knew the overall trend was down to eventually $10/share was my target. I was stunned this morning when it was in the 5's. I then bought to cover all of them, then called Scottrade and asked them to send a check. I'm in a very good mood today.

Patient, I'm out, but I believe the builders are still high. Me personally, I'm not going to mess around with it, since stock trading is not my core competency, but I have been tracking them and it does seem like they are starting to get hit hard. KBH was in the 50s and now in the 40s. A delayed recovery will definitely impact their value short term, what I don't like about shorting the builders is that the market is always forward looking so if a builder looks like they will survive I expect their stock price will immediately jump back up based on projected future earnings.