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View Full Version : new century's conference call - a laff riot!



jk
03-05-07, 09:19 PM
http://forum.themarkettraders.com/read-m/71/3023/3023#msg-



Finanacial Fantasy Land


<table border="0" cellspacing="0"> <tbody><tr> <td width="100%"> RodgerRafter (http://forum.themarkettraders.com/profile-m/71/21)
March 02, 2007 09:26PM
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After watching in disbelief how long the sub-prime ponzi scheme continued to receive the support of regulators, creditors and investors. It's amazing how rapidly New Century's house of cards has come crashing down. All at once:
Regulators are seeking to stop New Century from performing their primary business.
Creditors are considering cutting off short term credit to the company.
Stock Market Investors are beating the crap out of the stock.
Mortgage Backed Security Investors are beating the crap out of their securitizations.

I seriously doubt NEW will survive this attack from all sides. Just as Enron and World Com crumbled when creditors pulled the plug, so too (I expect) will New Century.

Here's a post I made to the Mish board on the Motley Fool on 2/3/05 about New Century.
If you are a Fool member, the link is: http://boards.fool.com/Message.asp?mid=22012317&sort=whole#22020551

Financial Fantasy Land

I listened to the New Century Financial conference call today, and I'm convinced the executives of that company are from another planet. I think most of the analysts who called in would agree with me. They seem to be from a fantasy world where financial results according to GAAP are all that matters, and to the extent they can manipulate earnings, they are able to manipulate the truth.

When the call started, the stock was already down about 3.7%, having missed their estimates for the first time in ages. As the call went on and one amazing revelation after another came out, the stock kept dropping and now is down about 10%. Among the things that were revealed:

1. They borrow $1 Billion for 1 day every quarter so that they can show that Cash on their balance sheet.

The Billion dollars they borrow for a day is to help them "explain" their financial situation better. If they didn't borrow that money, then people might be confused and think they didn't have that much cash. As we all know, the amount of cash you own is of course equal to the amount of money people are willing to loan you. We should thank them for simplifying their accounting for us by borrowing money they don't really need right now and putting it where we can see it on their balance sheet.


2. They sell mortgages to themselves because they can report higher gains on the sales than if they sold them on the open market.

They were especially proud of becoming a REIT and all the imaginary benefits that bestowed on their results. While selling mortgages from their lending unit to their REIT unit resulted in nice gains on their income statement, the gains weren't taxable because they weren't real. Talk about the best of both worlds!


3. They aren't assuming any losses on certain portions of their loan portfolios now because most defaults occur later in the life of the loans.

The business of profiting from making bad loans depends on lending more money each and every quarter. People don't usually buy homes if they are already in deep financial trouble. It takes them awhile to get in trouble, so new loans rarely default. Therefore, new loans don't need to allow for losses because losses won't happen until the future. Since there's no guarantee there will even be a future, what's the point in allowing for such losses anyway?


4. They lowered their assumptions of future defaults which boosted earnings by 8 cents per share, and they now think $90 Million is enough reserves for future defaults on $19 Billion worth of loans.

Sure, some of their loans are delinquent, and while its nice to report late fees on these loans as profits, some allowance should probably be made for the remote possibility that there is a tiny inkling of a chance that they might <whisper>lose money</whisper> on these a minute faction of these loans, so it wouldn't do too much harm if they reserved a little bit of money for these loans when earnings are good. If they ever have a need, they can lower their assumptions to inflate their earnings, like they did this quarter.

What's that? All you banking analysts don't think they're setting aside enough reserves? By an order of magnitude? Well, let me assure you that their experience during the last 8 years (the greatest housing boom, HELOC expansion and cash out refinancing surge of all time) indicates that loans almost never go bad. All they have to do is rely on past results to indicate what will happen forever into the future. So obviously you are all wrong!


5. They believe that their customers can handle a 34% increase in mortgage fees on their ARMS.

20% of their loans over the past 2 quarters have been interest only, so obviously their customers understand interest. Besides, they have a lot of customers who actually have decent credit ratings. These types of people know how to budget and plan for the future.


6. They believe that housing prices can't go down by 10% and even if they do, their customers won't walk away from loans.

It's never happened before on a national level, and they say that all the talk about a housing bubble is dying down. Besides, they aren't making any more land and housing prices always go up. Plus, once customers learn to account like New Century, nobody will ever have to lose money again!


7. The compression of margins is temporary.

As rising short term rates crashed head long into falling 10-year bond rates, and as increasing competitiveness among mortgage lenders crashed head long into declining demand, margins were squeezed. But relax, this is temporary. It will only last until the weak links are squeezed out of the market. NEW tried to "lead the way" by raising rates higher, but their competitors didn't follow. When they lowered rates back down again, their competitors lowered rates further. Even though demand for loans is still slowing, and the lenders all depend on increasing originations to avoid blowing up their business models, the pressure on margins must decrease!


8. They can hedge away the risk of rising interest rates.

They buy derivatives that pay off if interest rates rise. If rates rise slowly over time, they get clobbered like CFC did. If rates rise rapidly they get to report a nice short term gain, then buy new derivatives at higher prices. If interest rates rise so quickly that their counterparties can't make their payments, then the housing market is doomed anyway, so there's no point in worrying about that single aspect of a meltdown.


In a sense, the views of the NEW executives typifies what is wrong with our entire financial system. Risk has been imagined away, and the resulting imaginary profits are taken as reality. Level upon level of creditors has leveraged themselves into the false reality that will one day come crashing down. We have:

1. Interest rates at suppressed levels because the Fed has injected record amounts of liquidity and foreign central banks have bought treasuries disproportionately to keep their currencies week, while propping up a US Government that is bound for bankruptcy.

2. We have homeowners borrowing more than they can afford at these temporarily reduced adjustable rates who are bound to default once rising payments and their inability to borrow new funds push them past the breaking point.

3. We have crazed mortgage lenders like NEW, CFC, IFC, NFI and others making bad loans at an accelerating rates to stave off the inevitable.

4. We have mutual and pension funds throwing other people's money at the crazed lenders to purchase exploding corporate bonds.

5. We have hedge funds selling derivatives to soak up interest rate risk in search of short term profits and higher NAV based fees.

In short, we have one domino after the next, all lined up ready to topple once the kindness of foreign governments runs out and the unsustainability of our twin deficits comes home to roost and the fantasy world we live in is exposed.

Joe1987
03-05-07, 10:22 PM
The REIT market is feeling the pain. The Wilshire REIT Index closed today 12.9% off of its high from early February. Aaron Krowne mentioned earlier last month in a piece that the subprime price of BBB mortgage backed securities (markit.com) showed an unsettling straight down drop. At that time, the price appeared to be around 87 (ABX-HE-BBB- 06-2). Quite an abrupt decline. Aaron referred to it as "spooky" or something like that. Well, Shaggy, let's grab Scooby and get out of here because the same chart shows what amounts to a dead cat bounce off of 63.16. It's back up to 71 but it will likely not be a lasting recovery.

Many REIT investments, particularly privately traded REIT investments, are held by older, inexperienced investors with little understanding of the inherent risks. They (the private REIT's) are also very illiquid, so when the REIT market tanks to the point when investors want out immediately, and they will, the legal action will begin to fly like the coconut cream in a pie fight in a Marx Brothers movie.

Anybody have a guess when the subprime carnage will spread to the investment grade side? I have not seen any noticeable decline in mutual funds that buy mortgage backed securities.

spunky
03-06-07, 06:41 AM
The REIT market is feeling the pain. The Wilshire REIT Index closed today 12.9% off of its high from early February. Aaron Krowne mentioned earlier last month in a piece that the subprime price of BBB mortgage backed securities (markit.com) showed an unsettling straight down drop. At that time, the price appeared to be around 87 (ABX-HE-BBB- 06-2). Quite an abrupt decline. Aaron referred to it as "spooky" or something like that. Well, Shaggy, let's grab Scooby and get out of here because the same chart shows what amounts to a dead cat bounce off of 63.16. It's back up to 71 but it will likely not be a lasting recovery.

Many REIT investments, particularly privately traded REIT investments, are held by older, inexperienced investors with little understanding of the inherent risks. They (the private REIT's) are also very illiquid, so when the REIT market tanks to the point when investors want out immediately, and they will, the legal action will begin to fly like the coconut cream in a pie fight in a Marx Brothers movie.

Anybody have a guess when the subprime carnage will spread to the investment grade side? I have not seen any noticeable decline in mutual funds that buy mortgage backed securities.


That is the big question. Nobody knows how far this really will reach. How creative ( read spunkster translation of lying captial pigs :mad: ) did these professional business men get ???

jk
03-06-07, 07:23 AM
The REIT market is feeling the pain. The Wilshire REIT Index closed today 12.9% off of its high from early February. Aaron Krowne mentioned earlier last month in a piece that the subprime price of BBB mortgage backed securities (markit.com) showed an unsettling straight down drop. At that time, the price appeared to be around 87 (ABX-HE-BBB- 06-2). Quite an abrupt decline. Aaron referred to it as "spooky" or something like that. Well, Shaggy, let's grab Scooby and get out of here because the same chart shows what amounts to a dead cat bounce off of 63.16. It's back up to 71 but it will likely not be a lasting recovery.

Many REIT investments, particularly privately traded REIT investments, are held by older, inexperienced investors with little understanding of the inherent risks. They (the private REIT's) are also very illiquid, so when the REIT market tanks to the point when investors want out immediately, and they will, the legal action will begin to fly like the coconut cream in a pie fight in a Marx Brothers movie.

Anybody have a guess when the subprime carnage will spread to the investment grade side? I have not seen any noticeable decline in mutual funds that buy mortgage backed securities.

just for fun i went over to morningstar and looked at all the cohen & steer products. i've always had the impression they were a class act in the realty-reit world. for the closed and open end funds for which morningstar provided year to date returns, the only realty fund that was up was asia-pacific realty. otherwise we got:
reit and pfd income -6.4%
Realty shares -1.23%
Instl global realty -1.59
Internatl realty -1.08
Premium income realty 9.73
Qual income realty 7.41
Realty focus 1.9
Reit and utility income 2.66

jk
03-06-07, 05:23 PM
another datapoint from a correspondant at askfleck:

A good friend of mine has been in the seconds mortgage business for ten years. After having grown the business, he was acquired by a major regional bank in the south (probably 7 years ago). He currently runs their seconds department.

I wanted to relay some data that he shared with me over lunch today. I would add that he said the data can be quite erratic.

Year over year # of transactions:

December- Flat
January- down 20%
February- down 40%

Finster
03-06-07, 08:14 PM
just for fun i went over to morningstar and looked at all the cohen & steer products. i've always had the impression they were a class act in the realty-reit world. for the closed and open end funds for which morningstar provided year to date returns, the only realty fund that was up was asia-pacific realty...

I've had a pretty high weighting in REITs since I reentered the market in October 2002. They were the first things I bought. They've done very well, but every investment has its day. Been lightening up pretty aggressively since early January. They could resume their rally, but with the price/dividend ratios getting as high as they are, the odds don't warrant holding large amounts of them.