Posted on 12/08/2007 3:40:32 PM PST by frithguild
THE VULTURES ARE circling. And that's a good thing.
On Wall Street, vultures don't go after dead things. They go after things that are alive and very cheap. And right now, they're going after troubled financial stocks in a big way, which means it's time to move in.
I was way too early when I said in this column on Oct. 26 that it was time for bottom-fishing in the financial sector. Those stocks are off about 6% since I said that. But now it's time. The vultures have arrived.
Investing billions of dollars, they're taking large equity stakes in companies whose capital structures have been wrecked by losses in subprime-mortgage securities. They wouldn't be doing this if they didn't believe two things. First, that there are no further shoes to drop — the losses already announced pretty fully take account of the risks. Second, that the companies that took the losses are solid, durable franchises well worth investing in, despite their misadventures in subprime.
The first vulture landed on Tuesday of last week, the morning after the horrific panic selloff on Monday, Nov. 26. The vulture was the Abu Dhabi Investment Authority, which on that day announced its $7 billion capital infusion in troubled megabank Citigroup (C: 34.31, -0.04, -0.11%).
Then two days later Freddie Mac (FRE: 35.54, -1.56, -4.20%), the mortgage finance institution, got a capital infusion by selling $6 billion of preferred stock to the public. The vultures had to get in line for that one — the offering was way oversubscribed.
The same day, the giant hedge fund Citadel announced a $2.5 billion capital infusion for E*Trade (ETFC: 4.13, +0.01, +0.24%), the online broker and bank. With the way this deal was structured, analysts were able to start figuring out just what the vultures are thinking busted subprime mortgages are worth at this point. The answer: about 27 cents on the dollar.
Then on Friday, Morgan Stanley (MS: 51.69, +0.11, +0.21%) announced an investment of about $400 million to acquire an 80% stake in 11,000 homesites being developed by the troubled home builder Lennar (LEN: 18.32, -0.41, -2.18%). With this deal, analysts were able to start figuring out what the vultures are thinking undeveloped real estate is worth in light of massive unsold inventories of new homes. The answer: about 40 cents on the dollar.
Say what you want about how horrible it is that some mortgage securities have lost 73% of their value, and that raw real estate has lost 60%. That's a big improvement over the state of affairs of one month ago, when you couldn't sell mortgages or real estate at all. Now there's a price. And it's not zero.
Yesterday the biggest vulture deal of all happened. The White House, the Treasury Department and the Department of Housing announced an agreement by a consortium of lenders, investors and mortgage servicers to create a program to offer relief to as many as 1.2 million homeowners caught in unsustainable subprime mortgage obligations.
You might say that's nothing but charity — not a vulture deal at all. But that's not the right way to think about it. Believe me, the lenders, investors and mortgage servicers aren't giving away a thing. They're doing this because they think they're picking up a bargain. At least compared to their next best alternative, which is awful.
Sure, they could throw hundreds of thousands of subprime borrowers out of their homes when they can't make their payments. Those homes would sit empty for months with no one taking care of them, until eventually they were sold at steep discounts to other vultures.
Or, instead, something could be worked out. By agreeing to temporarily freeze the interest rate on thousands of subprime mortgages, the consortium figures that the borrowers will have time to get back on their feet — and maybe eventually sell the home or refinance the mortgage on more favorable terms, all while occupying the home and taking care of it.
It's the same kind of deal you might work out with an individual homeowner who got into payment trouble. This just extends that deal to many thousands of homeowners who are all in the same situation at the same time. It's a classic business efficiency theory — "economies of scale."
A political side note, if I may. You may be wondering how a libertarian like me could speak so highly of this deal, given that it was put together by the federal government. Actually, it wasn't. The government helped get it organized, and is trying to help out with various forms of tax relief and other programs. But the heart of it is the private sector acting in its own selfish interest.
The vultures are just getting started. Every day, talking to my institutional investor clients, I'm hearing of more and more vulture deals that are in the works, but that the public doesn't know about yet. You will soon.
The fact that all these deals are taking place says that the assets that have been thought to be most at risk during the credit crisis of the last six months have finally hit rock bottom. And that, in turn, says some very positive things about the economy and the stock market in general.
First, the economy was threatened by an open-ended credit crunch in which a general loss of confidence might have meant that no one would be willing to lend anyone else any money. You can't run a modern economy without lending. It would have been a disaster.
But it would have been a logical response to a situation in which the value of existing debt completely collapsed — or couldn't be valued at all. The vultures have come in and set a floor for the value of existing debt. Now the uncertainty has been resolved as to where that floor is, and it's all upside from there.
Second, the fact that so many vultures have so much money to pull off these deals speaks volumes about the fundamental health and strength of the economy and world financial system. Most credit crises — and all recessions — occur because there isn't enough money around, because the Federal Reserve has kept interest rates too high for too long and drained liquidity from the system. That is not the case today — just the opposite.
The world is awash in liquidity, and the Fed just keeps creating more and more of it. There's more to come next week when the Fed will surely cut interest rates again. That liquidity is what gives the vultures their wings.
You can be a vulture, too, you know. Just buy stocks.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.
I wish I had a nickel for every “sure thing” investment I heard from the “experts”. You can get better results by using tarot cards or reading tea leaves.
I only read the headline, not the article. I know what to do. The “Financials” are going down, big time. Unfortunately, they’re going to take everyone else down with them.
That would make you a rich person.
I saw it on a late night "infomercial" just the other day...
You need to REACT!!
Save yourself before it's too late! /s
Thing is, the subprime lending/borrowing debacle isn’t the only spectre haunting financials. The real turd in the punchbowl is all the derivatives and hedge fund crapola out there, and the commercial paper market locking up.
Oh, I'm so gullible to savvy talk.
Importers and merchants are further prosecuting their War On Christmas by screeching against the funds rate cut.
;-)
He's wrong about that, but Luskin always has to be wrong about something.
I’ll pass. That is almost as bad as goldman sachs telling everyone to short gold. No conflict of interest there.
After that we’ll have a credit card crunch.
Actually Cars I think
You could very well be right. Either way, the referee will never announce a TKO.
“After that we’ll have a credit card crunch.”
.........that’s the one that scares me...a bank can forclose on a house or repo a car......but unsecured credit card debt?....ouch!
Exactly what I was thinking. We’re up sewage creek with no paddle. And I don’t really think we’ve seen the real mess in this subprime business. Trillions in derivatives still out there waiting to implode (explode).
What it means is that the banksters and their shills in government are desperately trying to hook the few solvent "marks" remaining before the stuff really hits the fan.
We haven't even yet wrung out the excesses of the homebuilding bubble itself inasmuch as no NYSE-listed builder has gone BK. Therefore it's way too early to say that the year-plus inventory, the two million vacant houses in the country, the multi-neighborhood developments abandoned halfway through construction, are anywhere near being priced low enough that these conditions can begin to reverse.
I don't agree, the rate cuts are only delaying the drop, and there is not to much further they can go with that.
I would still be wait and see, except in the futures markets.
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