The New York Times [registration required] reports that American Home Mortgage Investment Corp. (NYSE: AHM) is shutting its doors thanks to the fear of its lenders -- who provide the wholesale money they lend to home buyers -- that they won't get their money back. Doug McIntyre posted about this here. Several of AHM's peers -- IndyMac Bancorp (NYSE: IMB) and Accredited Home Lenders Holding (NASDAQ: LEND) -- are also in rough shape.
Last October, I began looking for ways to profit from the collapse in the housing market. My best idea -- posted in December -- was to short shares of NovaStar Financial (NYSE: NFI) which dropped from $116 to $7.19. This post got the attention of a reporter from NPR's MarketPlace who dropped by my office this week to interview me about where the next opportunities for short profits might lie.
My answer is that I don't know. That's because the hedge funds, endowments, pension funds, and insurance companies that buy the mortgage backed securities (MBS) constructed from the loans that NovaStar and its peers originate are not disclosing the value of their MBS holdings. To identify short selling opportunities, I'd like to know this information because many MBS holders will be wiped out.
And if I knew which publicly-traded MBS investors were most exposed to this toxic waste, I could assess opportunities to profit from shorting their shares. One thing is clear to me -- due to the lack of information, there will be many surprises around the globe.
And those surprises will create unanticipated side effects. That's because if, for example, a hedge fund that has invested 20% of its investors' cash in MBSs sees that value wiped out, its investors will clamor to get out of the fund before they are completely wiped out. If it lets these investors pull out their money -- often investors agree to keep their money locked up for years -- the hedge funds will sell their more liquid holdings -- e.g., stocks -- to come up with the cash to satisfy the exiting investors.
These quick bulk sales will drive down prices. And those price declines will make individual investors feel poorer. People who feel poorer are not likely to spend more money unless they can borrow more. And with credit tightening, those individual investors may find it too costly to borrow more money in order to keep consuming.
Maybe this is why so many Americans feel like the economy is -- or soon will be -- in a recession.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
8-03-2007 @ 11:21AM
irene ansher said...
re: RAIT. although they claim to be in better shape than some in that business, they, too, have lost 2/3 of value (and my net worth in that stock) in a couple of weeks. any thoughts? suggestions? i guess we all have lots of questions. irene