March 03, 2007

Give us your top five housing crash short plays

Here's my five

Countrywide (CFC)
Accredited Home Lenders (LEND)
Fisrt Fed Financial (FED)
Fannie Mae (FNM)
Homebuilders Index (XHB)

Of course, shorting is a very dangerous game - you can lose everything, especially if you take out put options (which I prefer to shorting). But with the writing on the wall, ask yourself, if you're in the market, why not make money off of companies with bad business models or terrible future prospects? Why be long 100% of the time with the rest of the sheeple?

Note: I'm short CFC and LEND today


Joey Wadd said...

wiki version:
Short sellers were blamed (probably erroneously) for the Wall Street Crash of 1929. Regulations governing short selling were implemented in 1929 and in 1940. Political fallout from the 1929 crash led Congress to enact a law banning short sellers from selling shares during a sharp downturn. President Hoover condemned short sellers and even J. Edgar Hoover said he would investigate short sellers for their role in prolonging the Depression. Legislation introduced in 1940 banned mutual funds from short selling (this law was lifted in 1997).

chris g said...

Clever picture --- I'm a little slow so it took me about 5 seconds to figure it out.

The Wall Street Journal came out with an article on Monday titled "Subprime Game's Reckoning Day", where it said "The worst may be yet to come for mortgage lenders. And that could add to investor nervousness." Very timely.

I would also recommend shorting BankUnited (BKUNA), a Florida bank that not only is the largest Alt-A lender, but also they actually want to expand the amount of their Alt-A portfolio! The following is an entry from Herb Greenberg's blog on 2/26/ will see why I recommend shorting it:


BankUnited Financial (bkuna), best known for ARM loans in Florida, apparently has had it with critics. Here's what Raymond James analyst John Pandle, who rates the stock an underperform, told his clients today:

"BankUnited is hosting and analyst/investor meeting today and tomorrow. However, we were not invited to attend and executive management continues to ignore our phone calls and e-mail messages seeking information about several areas where we have fundamental concerns, including rapidly deteriorating asset quality, an acceleration of negative amortization growth on option ARM loans, lower loan sale gains, and subsiding margin expansion."

"Notably, a company representative informed us on Friday that the presentations will not be Webcast. While management's decision to exclude critics and limit access to the information presented may somehow satisfy the letter of the law as it relates to Regulation FD, it certainly violates the spirit of the law, in our view."

A spokeswoman says, "BankUnited does not comment on individuals who provide analyst coverage. BankUnited complies with Reg FD, as well as our other legal obligations, and will continue to do so."

Perhaps, but could it be that BankUnited, whose operations are focused in South Florida -- and could be described as a residential version of Corus (cors), which lends to developers in Florida -- is in denial about the over-building? Or does it really think it won't be hurt by a glut of homes in its primary lending market?

Based on the company's last earnings release,it appears to be a little of both. According to the release:

"We have not changed our goal of growing the company, even though our industry is experiencing a cyclical downturn, particularly in the housing markets, which will cause decreasing asset production and rising levels of non-performing assets. To achieve our goals we are implementing a multi-step program. We will increase assets by entering new markets and creating and refining products. Enhanced asset-retention programs will reduce prepayments. In addition, we will continue to build our Florida franchise through additional branch expansion and growth in our retail and commercial customer bases while maintaining an emphasis on controlling our costs of funds and deposits."

Branch expansion in Florida. Now?

Reminds me of the kinds of things NovaStar (nfi) would say when people would ask how it would avert the sub-prime crunch. Always sounds better on paper.


Anonymous said...

Hi guys, I'm in the UK, didn't Wachovia buy the biggest Californian sub prime lender last year, won't they be affected?, their current share price doesn't appear to suggest it , and have seen no comments about this

Anonymous said...

HE's still sexy as ever

chris g said...

Correction to my previous post: IndyMac Bancorp (NDE) is the largest Alt-A lender, not BankUnited.

anon 3:52 PM:

The company that Wachovia bought is known as Golden West Financial. I expect there would be some effect, but keep in mind that Wachovia is also a very large bank. Supposedly Golden West has specialized in option ARM loans for decades, and supposedly takes very conservative measures to approve borrowers for these loans. However, it is also possible that Wachovia modified these measures, or that this real estate bust is going to have a more devastating impact that previous real estate busts.

The couple who sold Golden West Financial is, in my opinion, the Mark Cuban of the real estate boom (selling near the peak).

chris g said...
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Anonymous said...

Ah yes, the young "Donald".....

squidly66 said...

heres a good.. one google this
..the rules for growing rich david lereah...
he wrote this book at the peak of the dot com era

bozonian said...
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christiangustafson said...


(page 27 of the 10-K):

(5) Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $1.07 billion, $292 million, and $19 million for the years ended December 31, 2006, 2005 and 2004.

I can't wait to see how my puts do this week.

Anonymous said...

Listen Keith.

You have been the most dramatic doomsayer of all, but you know what? It's happening EXACTLY as you said it would.

Now that you know WHAT will happen to the 5th decimal place, tell us, WHEN each step will happen.

Anonymous said...

Short sellers are the white blood cells of the stock market. They clean out the weak and diseased. They are a VITAL function. A stock market without short sellers would become really inflated.

Witness what is happening now. Without short sellers this scandal would continue for more months before the piper was payed, soaking up even more widows' and orphans' money before crashing.

Anonymous said...

Add these to the list as well

Google (GOOG)
Whirlpool (WHR)

And of course all the major home builders. WCI would be my favorite to short at this time, but comes with a risk/rumor of being bought by a bigger fish so a bit of caution there. Because it is a smaller company I think it is a possibility. (I dont care about Toll buying K Hovnanian rumor)

Fremont General (FMT) went the NEW and NFI way, so might be just a little bit late. But RWT (Redwood Trust) is just starting it's decline.

Anonymous said...

Chris G: Nice catch. BankUnited is a big player in the high interest online savings bank arena. Las summer when I was looking for a place to park my saving sI was looking at them. Then BusinessWeek had an article about dangerous mortgage products. They highlighted the "Option ARM" and how unpaid/deferred principle interest is added to the balance of the loan and the bank can claim it as present income. BankUnited was cited as being a bank so heavily into this product's "present income" they would have lost money for the most recent quarter. Adding to that th efact that I just know the Option ARM is not suitable for the majority of Americans I concluded to not open a bank account with BankUnited.

All savers need to be advised that if thye do not want to be pulled down with the rest of the spendthrift lemming to the slaughter then they need to keep their money in stable, safe institutions, like their local plain vanilla FCU.

Anonymous said...
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Anonymous said...

Ok, here is how to track down the bag holders:

So one Hedge Fund up in there has almost 4 million shares of NEW. Nice. New just lost $15 per share, there goes 60 million dollars.

NEW had a market cap of 1.5 billion. Let's see, 3/5 of that just vaporized which is 900 million. That's a lot of bag holders folks.

That doesn't even speak to the bonds that were sold that distributed the ownership (hahaha risk) of the bad loans that NEW wrote. Anyone know how much money was lent through NEW? We can guess that it's already 15% of its value as the house sale prices around where I live (Los Angeles) have dropped 10-15%. That's all a lender will be able to recover from a bad loan and that percentage is getting worse daily.

Anonymous said...

Oh wow. A quick survey of the bag holders reveals Golden Sacks (GS) is a big one. It's up in there in all the taking lenders. If they bought the stocks, they probably bought the bonds too, eh?

Now we know where the average 600,000 bonus PER EMPLOYEE came from.

Time to pay the piper big guy.


Did you see this?

Anonymous said...


Anonymous said...

more fraud in arizona
what a corrupted state no wonder greg lives there

Anonymous said...

word is Bear Dtearns and Morgan Stanley are sitting on a bunch of shaky ground.

Anonymous said...

I'm concerned that Fannie Mae FNM will be rescued by the government. They'll stop trading on it completely (Congress will, in an emergency session) so I'm staying away from the Roosevelt Sacred Cow.

bozonian said...

Oh man, Bloomberg just posting this article. Here's a little teaser:

"March 3 (Bloomberg) -- JPMorgan Chase & Co., Bank of New York Co. and State Street Bank & Trust Co. gained higher credit ratings from Moody's Investors Service Inc., which said the U.S. government would back the banks if they faced default."

Who said anything about default? I thought I was bearish! This is why I'm afraid to short Fannie Mae.

If these banks get government backup, they should make the employees give back their big bonuses from last year. Right. Fat Chance.

Guy Daley said...

CFC for sure. Mozilla is bailing out big time on 2/28 and 3/1/07.

Check it out:

Mort said...

Paulsen isn't at the Treasury because of his integrity and honesty. He is there to make Goldman Sachs rich. The end.

Anonymous said...

Perspective about world savings and what Wachovia bought coming from a mortgage broker in CA.

Before the buyout in the summer of '06 world savings did 99% of there business with neg am loans aka option arms which they call the pick a pay loan.

My insight: When shopping for a borrower for a neg am loan I would take them to World if they had BAD credit and most of there loans are stated income/ stated assets.

The conservativness thast they speak of is LTV, at one point would not go above 75%, then 80% but at one point they allowed piggy backs to 90%... The only conservative portion they have now is that they allow deferal of payment up to 125% of origional balance. They are the most extreme in the business in this regards. Otherwise they were know to fund the lowest credit score with STATED INCOME!!!!!

Anonymous said...

buy gold and silver

put$ said...

FMT is not done yet. See the latest release.

NEW is not done yet. See the latest release. Credit facilties/warehouse lines will stay open as long as they have 2 quarters in which they make $1 yes one dollar. They aren't making $1 so Citigroup is going to save them?

Hopefully they don't drop too quick before my order is filled on Monday morning.

Shakster said...

April 2007 puts Dow Jones
11200 puts are 600.00dollars
12200 puts are 2525.00dollars
with only49 days till expiry,the market will have to stay volatile.
Little too risky here.
May 2007 puts Dow Jones
7700 are 10.00dollars
9000 are 80.00dollars
These may look cheap,and have twice the time to expiree,but to get a 10.00dollar jump on the 9000strike would take an extraordinary slide in the Dow.
A 12200 strike(within4 pts) is 3600dollars.These may look expensive,but these have the advantage of risk control.If the market stays volatile,even to the upside,but generally down,these will jump 400dollars on a 50 pt slide on monday.If the market tames and hovers around it's current area I would exit immediately myself.A wellplaced call could do the trick too,but the scare in psychology is down,so a liquidation order should minimize risk.
So I like puts on the DOW,Nasdaq,S/P500.
Google-They are destined to die anyway,even if the market were still in bulll mode.
That is all I have looked into.
Not investment advice,because the markets are a pure gamble.Get it?
You want investment advice?Get Gold ,and Silver or any thing you can buy ,and keep in your posession,prefferably without receipts,and small enouph to hide.That kinda eliminates houses.

Gregory said...
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ninjaphysics said...

I bought CFC $37.50 July puts for $2 back when it was $40.81.

Also bought FRE $60 April puts a couple months ago around $68 for $1.20

Also holding on to March $40 puts of PMI - mortgage insurance company. These puts are practically worthless unless something drastic happens. But hey if the dow can drop 200 points in 2 minutes who knows?

I lost earlier this year on puts of HOV, BHS, KBH. Made some of it back on RDN. All of the home builder stocks have already taken a big hit (just look at the 12 month chart, they all tanked in the summer) so to short them now may be risky.

I think theres safer bets out there, look for stocks near 52 week highs (like FRE or CFC a few weeks ago)

I wish I had followed this strategy when I jumped on the home builder puts.

Btw I'm doing this all with my borrowed money (faid).. so i'm using faulty loan practices to buy puts on companies which do the same.. ironic eh?

Anonymous said...

The job of Goldman etc, is to make money off the death and carcasses of the Dumb Money.

They are very very good at this. They Know Things We Don't. They Know People We Don't.

Don't ever bet against them.

HB Bear said...

I have a personal philosophy of never owning an individual stock (neither short nor long.)

So, like I posted on my blog, I reduced my percentage of holdings in ETFs from 70 to 40% and also went short on QQQQ. As a dot-bomb survivor, every time I get to feeling down on the market, I short this ETF. So far it's been a great move.

Anonymous said...
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Anonymous said...

Short positions can and absolutely should be protected with stop loss orders. If you short XYZ at
90, set a stop loss buy at
100 or 110. The only downside of this is that if the price gets close to the stop loss, the market traders can see it and will try to manipulate things so that it executes in situations where maybe it would not have. You can always watch the situation and move the stop loss point as necessary.
With the proper stop loss in place, a short position is no more risky than any other stock position because there is a definite limit to your losses.

Anonymous said...

here come the layoffs!

“Construction and real estate layoffs helped push San Diego County’s unemployment rate to its highest point since last July. More significant were the cuts in the real estate industry, continuing a five-month decline. January’s job cutbacks included 2,500 construction workers, 700 real estate workers and 1,100 workers at furniture and home-improvement stores.”

“‘The housing sector is really starting to have an impact on our overall year-to-year job numbers,’ said Alan Gin, economist at the University of San Diego.”

Anonymous said...

I didn't short the house builders. It seemed to me they were so obscenely profitable that even if demand went down, they wouldn't crash.

Plus, they had already taken a big hit in the 3rd quarter of 2006. It seemed to me the lenders would be the ones left holding the bag. They're the ones that invested in the doubly bad asset of "loser debtors" and "declining house values". That's a "bend over for double entry" scenario if I ever saw one.

My temptation to short Goldman stems from exactly what the other poster said, everyone is afraid to do that. That makes their puts cheaper.

But the facts are telling me that Goldman is taking some huge losses in this sell off. And we have seen everyone smile and tell us things are ok, until the last minute then suddenly the floor falls out like an Israeli wedding.

GS holds millions of shares of some of these failing lenders.

All's I want to do is tax GS a bit, before it gets rescued. Nothing wrong with that, right?

Anonymous said...

What scares me about the stocks that have already fallen is the PE ratios of 3, 4 etc make them look really cheap and a lot of stupid money will support them thinking there is a bargain there. It's just one more factor that might limit a bears delight.

I'd like to pick higher PE stocks that investors don't know are really just hollowed out shells, waiting to collapse.

Hugh said...

As the liquidly crunch continues all shaky debt is going to be hit. The problem with any of the mortgage markets is that the Government can come in and bail it out at any time, like others have pointed out.

How about some unsecured sub prime lenders?
WRLD - It offers small loans, credit insurance and ancillary products to individuals with limited access to other sources of consumer credit.

CACC - Since 1972, Credit Acceptance has provided auto loans to consumers, regardless of their credit history.

Warrren Buffett said...

Short everything - this market is going no where but down - even with a couple dead cat bounces along the way.

Londonernow said...

I'd like to be short LEND as well but the short interest is huge and at nearly 50% of free float. There could be one massive bounce in that stock as a result and I would stay away from shorting it right now.

Anonymous said...

Goldman has the protection of the US Treasury and Federal Reserve.

Don't bet against them. Their job is making sure somebody else is the dumb money.

There is going to be some dumb money with people holding the "radioactive hot potatoe".

I'm actually thinking of shorting FIG (fortress), the new hedge fund management which just went IPO.

The managers of the hedge fund are not dumb money. They looted the company clean before the IPO---I think they consider the public shareholders of it as the dumb money.

anon #1111 said...

Too late for FMT, they just got shut down by FDIC.

Hard assets said...

A friend and his girl friend bought a McMansion here in California. When girlfriend saw the market drop like a rock, girlfrind moved out and told my friend he was responsible for the mess.

My friend is trying to sell the place! But no luck!

couponcutter said...


and my QID is locked and loaded.

brokersleaveyoubroke said...

That picture seems to fit with this blog very nicely. Herve was an out of work actor with dim prospects until he got luckey and stumbled into "Fantesy Island". He was on a hit show making great money and he had it made, until one year he decided to ask for an astornomical raise because he felt the show could not survive without him. He was wrong, he was dropped from the show and he died in poverty about ten years later (I think he committed suicide). Greed kills.

FL_Bust said...

I'm Short on CFC, LEND, AHM, RDN, MTG, HBC ...

also as a hedge for my stock I own QID, and thinking of getting ultrashort ETF on real-estate and Financials

Anonymous said...

I can't believe no one has said, da plane, da plane!