Revisiting lenders short…..AHM (American Home Mortgage Investment Corp)

Revisiting lenders short…..AHM (American Home Mortgage Investment Corp)

AP STORY READS LIKES THIS:

The long-expected first sign of cracks in the mortgage loan market may have surfaced this week, as the Mortgage Bankers Association issued their quarterly report on home loan foreclosures.

MBA said Wednesday that loans entering foreclosure during the second quarter rose 29 percent from the first quarter. While analysts have long anticipated an uptick in mortgage defaults, Merrill Lynch analyst Kenneth Bruce said this report may mark the beginning of an era of weaker credit.

Lets make it actionable:

Revisiting the fundamental short on credit lenders as highlighted several times. A short which materialized heavily on HRB’s earnings announcements last month.

NOW….actionable trade with an attractive risk/reward enables us to short AHM.
Assuming that the recent rally in September is not sustainable.

AHM – stock has run up recently from $30-35 range – as October begins, here is a shorting opportunity given the overbought momentum levels. Timely entry point, in a fundamental biased call.

Looking for an attractive risk/reward trade here along with macro declines heading into earnings season. Also, a rising yield can help the case with further econ #’s pending especially this Friday. – Worthwhile, to get ahead of the trade despite attempted recovery.

Other names in that space also worth a consideration but at this point recommending short on AHM – trim candidate for long-term investors. (FED, BKUNA, CFC )

Additional industry perspective:

"This is the first sign of meaningful weakening in the prime mortgage space," Bruce wrote in a note to clients Thursday. "A downturn in credit may be just around the corner."

What does this mean for mortgage lenders? If consumers start defaulting on mortgages, investors who buy mortgages in the secondary market through loan-backed bonds will lose their appetite for risky loans. Mortgage lenders will then either make less profit when they sell their loans through securitizations or be stuck with portfolios of undesirable loans.

MKT THOUGHTS 9-27-2006

Looking at the BKX index - Approaching -May 8th highs - a full recovery from the equity sell-off.
May critical resistance level, given BKX weakness has been an indication for the broader market.
It works key barometer of the market given the dominance of financials in the S&P 500.

Technology :focused on three shorts that offer beta: AMD, NVDA and WFR.- A near-term trade.

Decline in commodities markets has fueled a return back to bonds sparking this near-term rally. A defensive rotation that compiled staples and healthcare to move higher. Nickel for some reason has survived the storm.

Crude Factors

1) Global central bankers are lifting interest rates in unison, and slowly draining global liquidity.

2) Beijing is tightening its grip on the yuan money supply, leading to exaggerated fears of a hard landing for China's economy.

3) Crude oil traders unwound a $15 per barrel Iranian "war premium" after Europe's big-3 signaled a split from the Bush administration's campaign for UN economic sanctions against Iran.

4) Weaker crude oil prices triggered a rout in the gold and silver markets.

Gary Dorsch: http://safehaven.com/article-5916.htm

Crude: Search for Support

Crude: Accumulate closer to 58-60/ in the next two + week.

A sharp decline from 77 to 61 ---clearly catches the attention of both bull and bears. Given a bearish stance on crude, I am glad to see this decline. I must say as a rational investor this downside action is highly surprising.

Near-term recovery pending as stated last week but clearly buyers are stepping away and selling near-term bounces. At this stage, looking for consolidation with worst case scenario of $58.

One has to look at current levels closer to February 2006 and October 2005 levels to get a clearer long-term perspective.

Again crude did go from 20 – 70 and that move is still intact. I wonder if the summer mid-east conflict was a key contributor to a climbing irrational move closer to$77.

Perhaps, $68 is the key resistance level and $58-60 is an area of interest in the next two weeks.

Net/Net: Next two weeks I would stay away from this trade and find further downside extremes. Then one can step in and accmulate or bail out of a trap.

Commodity vs Stocks: 9-20-2006

Oil has declined over 20 % in the summer. Tech and Consumer related names have recovered signifgantly since the July lows. There has been a rotation into technology.

Tech, consumer and financials dominate the US markets and early signs of rotation out of commodities and into stocks.

Chart demonstrates recent sell of in Oil and Gold - and the recent diveragence. Woth a look:

Black: CRB VS SPX Red: Real Price SPX Blue: Real Price CRB Index

Small Cap : Ideas and methodology

Consolidating patterns: TIBX, USTI, CMTL, VSEA, SONS, BRCD, and MDCO.
Questions to ask.
Are we hoping for breakouts? Are these value traps.
Attractive risk/reward: extremes that can be exploited :

Momentum Extremes: CYMI, ATHR, WGO, RATE, BCEN, CENT, ECLP, KYPH, AMMD.
Questions to ask.
After acknowledging oversold weekly momentum; are these names all worth taking the risk/reward

Leadership Momentum: MW and PSSI

Questions to ask.
What are the risks of sticking with momentum names? Any reason

Early rotation to tech:

Further upside move in the markets clearly shown by advancers expanding from 57,318 to 176,522 in CBOE put/call data. Looking for pullbacks this week in tech/retail related themes.

Coming into September, I was looking for further upside move in the VIX - but volatility has been tame in this upside move.

Clearly, the fed speak day will offer further uncertainty and volatility. A decline in VIX from 14-11 is visible in near-term charts.

CHART: Last week clearly tech rally continues exhibited by acceleration in semis. OSX - sluggish performance continues and this inverse correlation is shown in the above charts.
Rotation into tech out of commodity related names.

Decline in crude: a theme which has worked and due for a near-term recovery.

mkt thoughts - ahead of CPI and FED

Broadly speaking: Weekly momentum remains positive from deeply oversold levels. Near-term pullbacks pending but how much downside does the anticipated downside move offer?

Rotation out of defensive themes Since the May's correction, defensive themes have outperformed XLG - (top 50) outperformed most groups in the market by recovering 9% since July 18th low. ` further on Large Cap out performance like the Dow Jones + 7% YTD.
In the past few weeks further confirmation of beta related rally. Further showcased by weakening relative strength iin utilities and Consumer Staples.

Searching overdone themes:

Recovery in Tech and Consumer - Along with other severely underperforming sub-groups. (like homebuilders, retailers etc).

Approaching upcoming 'daily sell' might be an an opportunity to reiterate working themes
Given the abundance of attractive charts, perhaps focusing on established leaders with strong relative strength can identify quality names. For example in technology...DRIV, ATML, ASML, MU, AKAM, WEBX, ORCL, CTSH, and VARI.

Plenty of Econ data approaching along with Fed decisions. And the start of earning season can all create shifts in Macro/broad market behavior. Making sectors themes even more significant.

TIVO: another media / NFL theme

TIVO: continuing on a media theme. Attractive pattern similar to DTV. $6-8 range for many days but a long worth sticking to with an exit at $6. Wheather playing the options market for a tight range in the near-term the bias of an upside move is attractive. Worthwile going long in this range while accumulating on any pullbacks and let the market figure out the rest.



Fool.com---

Go long, TiVo
The new pro football season kicked off on Thursday night. Earlier in the day, I had written about TiVo's (NASDAQ:TIVO)new service for fantasy football junkies. The DVR pioneer had teamed up with Sportsline.com -- a CBS(NYSE:CBS) online property -- to offer stats and other goodies to participants of its fantasy football leagues.

DTV: Direct TV- building stregth.

DTV:

As the NFL season is officially underway; many recognize Direct TV for the Sunday NFL package. Well, chart has built up with a strong relative performance and worth a look in media space.

Breakdown: Break above a multi-year trading range between $14-18. Difficult to find growth especially in small cap. Volume building positively here and despite strong recent price appreciation, - add to pullbacks.

Cable remains a competition but a theme Wall Street neglected and will play catch up to the buyers from earlier this spring.

Net/Net: attractive risk reward on pullbacks closer to 18. - An investment long with an exit around 16.50 with Major support at 14.

JBLU and Crude: Inverse Trade

JBLU: Black; Crude: Blue.

Crude declined in October-Dec in 2004 and 2005 in the last quarter of the year.

At the same time, JBLU rallies higher. Although, early in the fall trade worth a look and accumulate on weakness with exit at 9. Continue to build on strength towards $12-14 level.

Of course JBLU has company specific risk while crude has began its summer correction.

NVDA: near-term short

NVDA: Short closer to the 22 -23 level given a strong run in the near-term. A tech name that offers high beta

• Momentum weakness : following a strong recovery since the summer lows, watch for recovery stalling
• Above both 200 and 50 day mva.
• Rally on weak volume
  

Volatility- worth a look here in September

VIX and VXN : Following turbulent sell off’s in May both volatility indexes continue to decline. This behavior illustrates low implied volatility, creating bargain opportunities in the option markets. (Note: calendar spread might be a timely strategy- will follow up this week- buy longer duration and high volatility with shorter timeframe).

“The last time the absolute pricing of implied volatility was as low as this was in 1993, but interest rates were much lower then, 3% instead of 5%. Since options have been listed, I don't think there's ever been this kind of opportunity on a relative basis between option pricing and interest rates. The bear market was a long time ago -- four years ago -- and the market hasn't had a 10% decline in over three years, and people have gotten a little lazy and forgotten what it's like to have a downturn” – Barrons article.

Jack Dreyfus- Two Rules

JD: I had two rules. One was not to pound the table because if you pound the table and say, “We have to do this or do that,” you put yourself in the position of not being able to retreat because you’re too proud to let go. You have to be able to cut your losses!

The second rule was to treat your investment money as if it is your mother’s money — not someone else’s mother’s money! I thought that if investors thought of it as their mother’s money they would make decisions based on their own best instinct, rather than listen to stock advisors or others.

How to read options values and prices?

How to read options values and prices? September 1, 2006

Unlike stocks, options have an expiration date. Unless a company goes bankrupt or buys back all its stock, the stock investor always has the choice to wait for a price correction. Sometimes that wait represents the triumph of hope over experience, but more on that elsewhere.

That expiration date makes calculating an option’s value more complicated, but also more accessible to some of the powerful statistical tools developed over the last few decades.

Two of the more common methods for evaluating options involve measuring their intrinsic value and their time value.

The ‘intrinsic value’ is the amount by which the option’s strike price is ‘in-the-money’. Strike price is the contractually set price at which the underlying asset would be bought or sold, if the option were exercised. ‘In-the-money’ means the strike price is lower (for a call option) and higher (for a put option) than the current market price.

For call options: IV = Asset Market Price – Call Strike Price

Since options have an expiration date, but are purchased on some prior date their value changes as the expiration date nears. That change in time results in a decay of the value of the option as a trading instrument.

An option with two days remaining is generally worth less than one that gives the investor three months to act. At expiration the option is either in-the-money, in which case profits are possible, or it’s out-of-the-money and the investor incurs a potential loss.

Time value is the amount by which the price of an option exceeds its intrinsic value.

For call options: TV = Call Premium – Intrinsic Value

[For put options:

IV = Put Strike Price – Asset Market Price

TV = Put Premium – Intrinsic Value

Note: The ‘premium’ is simply the cost of the call or put.]

For options that are ‘at-the-money’ (strike price = current price), or ‘out-of-the-money’ (strike price higher/lower (call/put) than current market price) the option has no intrinsic worth at that time. It only acquires value in so far as the market price can change, i.e. it has only time value.

For example, suppose MSFT (Microsoft) has a current market price per share of $27 for a June 30 call. The ‘30′ refers to the strike price, not the expiration date. If the premium is $2, the option is out-of-the-money - since: $27 - ($30 + $2) = -$5.

I.e. if you bought the call and exercised it immediately you’d lose five dollars (plus commission costs).

Since, the option has no intrinsic value (negative intrinsic value isn’t allowed), why would anyone execute such a trade?

Because an out-of-the-money is less expensive than one in the money and the further out-of-the money the cheaper it is. There are many trading strategies that utilize this fact as a hedge or for potential profit. Given a three month period, the market price may well rise to more than cover the premium and produce a profit. That’s what makes option

Timeout Discussion:

Timeout Discussion:

no more ill advised shots: shorting leadership names, speculating heavily, reactionary bets.

Too early to take 3pts....march is not here yet and not playing with the houses money yet so run that motion offense.

avoid turnovers: no need to rush down the court with out a set offense... focus on quarterly bets ....if not sure pass the ball or sit on the sidelines. Very costly.

Stay calm in full court press: see how long the press will last and lets slowly break it up.


Go to the big man inside: focus on large cap less beta names just to be invested and take higher parentage shots.
Focus on defense: gotta play both side of the court...when shots are not falling and you are in a whole you gotta start with strong/focused defense. keeps you in the game.

Sep- market view: Searching for Extremes

Looking to exploit extremes:

Lack of extremes can perhaps explain the challenge of market timing.

Themes and sectors:Tech and Consumer have favorable odds for recovery. Managers "gotta" play these names to get a recovery mileage. And sensible odds/valuation or even oversold plays.As for rate sensitive themes....Banks/Brokers: any upside move should provide advantageous short opportunity:

(BKX- has been working since OCT 05). Not cheap by fundamental standards.
An area of high interest is shorting banks; specifically RKH Index has failed into key rally into key resistance. Tops for the year: May 5 and August 4 again at 155 level.Highly satisfied with mortgage related shorts since this summer:. NEW - short, CFC- weakness, Now brokers like LEH/MS - mortgage exposure can hurt here in the near-term. -- Cover shorts as consensus mania is stepping in.Shorting housing stocks might be overdone from a logical perspective. But psychology little bit left in some areas.NFI- broke down on signifivatn volume, any strength can be shorted. Crude:
USO (crude etf)short on near-term strength. Although, a cycle winner since 2003, further pullbacks are needed.
Interested in a seasonal play -Any upside move caused by hurricane fears can be exploited by shorting further strength above $72.

JBLU- an inverse play of shorting crude. Attractive risk/reward here with a $10 exit.Overdone shorts? / Value Traps:

Certainly not thrilled with the odds of shorting here than homebuilders or some restaurants.Finally, sticking to the game plan of exploiting extremes not much offered on the table. Not many extremes offered in the market place. And sitting on the sidelines appears attractive here for few weeks.
Again, the lack of extremes can perhaps explain the challenge of market timing.

Tech Ideas (pre-labor day week)

MSTR: Following recent recovery to $90- stock is overbought near-term

A short candidate at $90 exit at 92 closer to the 200 day mva. With reward levels 85, best case 80.

Despite price recovery from summer lows, intermediate-term downtrend in tact along with overbought daily momentum.

WFR: Quarterly recovery in recent trading action: (watch near-term behavior as a pullback name for Q$).

Looking for pullbacks at $33- chasing long trade here not timely, but FUNDI- support case. Q4 attractive set up.

NVDA: Like the intermediate-term but near-term short.

Trade: Short for pullbacks from 26-22.

Investment: Following pullbacks add for Q4 recovery corresponding with positive recent fundamentals.

BGC: a rare working momentum stock that has outperformed the market/sector.

Up over 160% since Q4 2006. (a cable play).

Looking for short here after recent highs of 39.50. (exit point)-

Reward: 50 day at 33.- any disappointment in this name is a valuable short play.

Defined exit of 39.50 helps manage the trade.

RBAK- use weakness to add – an idea for Q4.

Shopping for Q4.

Shopping for Q4.

Well, Homebuilders mentioned earlier. A decline in Sep can offer even a bigger recovery.

In the consumer discretionary space, homebuilders are the highest beta space.

Retail: Beaten up summarizes the story in Q2/Q3- but value traps are being set up in areas from stores to restaurants

Deep value search has to be justified with the Macro call. And currently not a timely trading short but a time too look for attempted bottoms or further downside extortion.

Regardless- an area of interest for Q4 rally especially higher beta names.

Follow up on credit shorts---

Credit Related: (Housing related stocks)

Barron’s: An article examining the “overdone” sell-off in housing. I like the discussion but rather wait into Q4. As a bear this sep/early October can be rewarding to short select groups. Although, I agree with waiting for strength in homebuilders give the extreme oversold conditions. Fundamentalists are certainly interested here and given the beta of some names like TOL-a strong recovery can help managers Alpha.

Negative Housing perhaps becoming too fashionable of a story on Wall St.

Homebuilders have corrected since August 2005 and have given up close to 40%+ of their value.

REITS: Mortgage Lenders are vulnerable but a tricky play in finding the right name in the group.

Some brokers have expanded to the mortgage business and remain a question mark.

LEH and BSC- remain shorts to consider on a timely fashion.

I am interested in LEH short in the near-term .