The meltdown of the subprime mortgage sector is entering a new phase. Today's announcement of big credit losses at HSBC (NYSE: HBC) and New Century Financial's (NYSE: NEW) expectation that 2007 loan production will drop 20% versus its earlier view and the restatement of its financial results have slammed stocks in this sector.
Subprime mortgages were made to buyers with weak credit during the recently reversing real estate boom. I've warned about its dangers beginning last October here, here, here, here, and here. Many of these posts addressed a way to profit from the subprime collapse -- by shorting shares of NovaStar Financial Inc. (NYSE: NFI). This trade would have earned a 38% return since December 18.
As of 11:50 am, here was some of today's carnage:
- NEW - 28.4%
- NFI - 12.8%
- HSBC - 2.5%
It does not feel like we've hit bottom yet. What do you think?
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in New Century, HSBC or NovaStar.