The Credit Crisis Financial Stocks Short Journal

I am surprised (and disappointed) that they did not dilute by a greater amount.

However I agree that a lot of things have been taken away from common and (junior) preferred stockholders:

* voting rights
* dividends
* priority if GSEs fail (i.e., preferred stock is junior to the new senior preferred)

Also:

* Likely removal from S&P 500 (I would be surprised if they are still in the index after the end of September)

* Lost amongst the news of the bailout is the detail in the New York Times about dubious accounting at FRE. They failed to report some losses, instead waiting to report them later this year or in early 2009.

In the premarket it looks like the stocks will open at 1.50 to 1.70. To me I think FRE should be "valued" lower than FNM. So maybe there is potential here to short FRE / long FNM for a pair trade, if an outright short in FRE is considered too risky.


Quote from Daal:

The fnm fre market got it what it deserved. They behaved like a drunk smiling morons in the face of total armageddon

If you think about the things that gives value of common shares(claims of profits like dividends, indirect dividends like stock buybacks, potential profitable merger of takeover) they were all removed in a single move.
I'm actually quite surprised the warrants are only for a 80% stake, some are saying they did this in order to get the management to cooperate

Worse than those factors is the agreement that the gses are not shareholder oriented anymore, this means low return on equity lower leverage IF they return to profitability one day, this largely removes the 'hope factor'.
PLUS the preferred stock suffered a 'event of default' in 5 years they will be able to reclaim some of the unpaid dividends through warrants, this will dillute the shares even more.

So if fnm and fre only open down like 50-60% I think I will add some more.
Also a 'lawsuit short squeeze' could occur, bill miller will claim paulson and co said they had enough capital, I dont think the saga is totally over

Too bad I will lose some money in WB and WM today but I own a canadian lender(QCC in the nyse, but I own the canandian shares) so on the net this will be a big day because I concentrated my position trades in the gses

If caught the move congratulate yourself! This was my best trade of the year and I think I ought to reward myself for all the +20% days
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Which month puts do you have?

I have September puts, so I can only hold the remainder for a little longer


Quote from Cutten:

FNM/FRE are trading about $1.60 in premarket. I'm exiting 2/3 of my puts on the open, and will hold the rest for a move towards $0 in the coming weeks/months.
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I'm in a similar place to you Daal, making a huge amount on FRE and FNM today, but giving a little of it back on other financial shorts.

The US government's interference over the last 13 months, particularly relating to BSC, FRE and FNM makes me realise that it is getting to a situation where it's dangerous to be short an equity index or specific sector.

It's probably best to just focus on shorting specific troubled companies.

I'm mainly looking at WM, GM, F and SIRI.

Interesting with everything that is up huge, but SIRI is only up 3 cents.

I must confess that I am a little concerned about shorting GM and F given the possibility that taxpayer money will be used to bail out GM and F, without punishing shareholders.



Quote from Daal:


So if fnm and fre only open down like 50-60% I think I will add some more.
Also a 'lawsuit short squeeze' could occur, bill miller will claim paulson and co said they had enough capital, I dont think the saga is totally over

Too bad I will lose some money in WB and WM today but I own a canadian lender(QCC in the nyse, but I own the canandian shares) so on the net this will be a big day because I concentrated my position trades in the gses

If caught the move congratulate yourself! This was my best trade of the year and I think I ought to reward myself for all the +20% days
More...
 
If there is one thing that can prevent this reflexive housing collapse it's a treasury backed fnm fre. they are not necessary thinking about profitability specially now so they can just expand their balance sheet as much as they want, in fact in a deflationary spiral the fed could also get involved and monetize agency debt

Gross suggests this new move removes 3-4% of the ultimate price decline by making homes more affordable, maculey suggests it removes tail risk of a ultra collapse, treasury now has a panic button they can press.
I'm worried the market will just run with these possibilities and the 'worst is over' will return. I'm not about to stand in front of this train, +6% in the bank etf yesterday. as a result I covered a good chunk of WM and WB yesterday at the open, I still hold some to keep me interested.
I think they will go lower but I'm making a risky bet that I can outperform a short and hold by trying to time the market and shorting them higher. so far it has not worked but it looks like the ingredients for this run to continue are there. the brokers report next week, unless they drop a bomb, the rally should continue
 
The regional bank holders ETF (RKH) broke out of a 2 month range on huge volume yesterday. It is now up 46% since the July lows. This is what (intermediate term) bottoms look like.

I've got a couple of short regional banks and most of them are deep in the red. The only bright spot (for me) is MBHI which had exposure to GSE preferreds.
 
For what it's worth, I think that WM is in far worse shape than WB.

The newish CEO of WB bought a lot of shares in the low to mid teens in July. Also the chart of WB looks much prettier than that of WM.

Although WB also has a big pay-option ARM portfolio, there are some things that we know about WM that are specific to that company.

Eg. The OTS news yesterday, the GimmeCredit report in July about the beginnings of a run on the bank, the large premium for WM CDS.

I think it's possible that the July low for WB holds for many months.

Whereas I'm doubtful WM can survive in its current form. I think the best case for shareholders is a take-under.


Quote from Daal:

If there is one thing that can prevent this reflexive housing collapse it's a treasury backed fnm fre. they are not necessary thinking about profitability specially now so they can just expand their balance sheet as much as they want, in fact in a deflationary spiral the fed could also get involved and monetize agency debt

Gross suggests this new move removes 3-4% of the ultimate price decline by making homes more affordable, maculey suggests it removes tail risk of a ultra collapse, treasury now has a panic button they can press.
I'm worried the market will just run with these possibilities and the 'worst is over' will return. I'm not about to stand in front of this train, +6% in the bank etf yesterday. as a result I covered a good chunk of WM and WB yesterday at the open, I still hold some to keep me interested.
I think they will go lower but I'm making a risky bet that I can outperform a short and hold by trying to time the market and shorting them higher. so far it has not worked but it looks like the ingredients for this run to continue are there. the brokers report next week, unless they drop a bomb, the rally should continue
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I decided to reduce my shorts then SP has the worst day it had in a long-time and LEH plummets, nice.
I'm going to have to stick with my gut here, I think LEH will lie and send this market higher
Take a look at the gse rates
http://www.bloomberg.com/apps/quote?ticker=MTGEFNCL:IND

also I don't to pull an ospraie or pickens and stay with the same trade too long expecting 'it will continue' forever

I was quite long energy stocks in march and was doing well, when they started to crash I thought they would come back and the trend 'would continue'. Luckly I got out before any serious damage at a small profit but I should have protected my positions better

I once thought the 'jim rogers way' of entering the trade and not getting out no matter what was a great idea.
But now I believe trying to trade around the moves when it becames too crowded its better. I'm amazed how people on cnbc are so 'sure' that no matter what is done financials can't rally, people are thinking shorting them is a slam dunk and this after one of the most profitable shorting periods we had in a long time, reminds me of brazilian stock investors gaining huge amounts over the years and still wanted more this year, now they are down a lot

If financials rally from here for a few weeks it wouldn't be the first time the market decided to ignore fundamentals
KBE, XHB and to some extend XLF still show an uptrend since july 15, this dip could get bought like the other ones did or we could just stay in a range
 
Took a small long postion on LEH here. avg price around $4.2, downside should be $1-$2 in the event of a Paulson Bernanke bazooka. upside probably as high as $10, the bazooka has created a new fundamental, now sell offs will be massive when companies are too big to fail.
But I think this smells like the fnm fre lows that were followed by huge rallies, the market just need an excuse or a deal(rumor is the fed will finance the LBO)
No stops, will ride till there something happens
 
I will take a near total writeoff on my leh shares
I would have laid 10-1 leh would not have been allowed to fail on friday, this is unthinkable. the fed and treasury had bailed out the markets everytime so far, fed cuts, liquidity facilities, backstops, equity infusions, they always stepped in without fail

The market will price in the fact that the government is saying they will not pickup the check, so the $1-$2T in losses will fall on themselves. LEH bonds are not worth much, so now financials dont have preferreds to raise equity but should have a harder time to raise bonds as well

Good thing that I'm long fed funds futures, I'm trying to make up my mind on whether the fed will cut tomorrow, I dont think they will because it would make the moral hazzard message be lost since they would have bail the market out again. but they should strip out all the 'inflation' worries. we will see how bad the day goes then I will decide if its prudent to fade the market perception of cuts or to go along with it

If the vix shots through the moon I will cover WB as well and get out of everything
 
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