Monday, July 30, 2007

Department of Falling Knives

First. I have no position in RAIT Financial Trust. Secondly, like a moth to a proverbial flame, I have a morbid fascination with stocks, that on no news, lose most of their market value over the course of less than half a year. This interest is further heightened when investors far more clever than yours truly appear on their shareholder reg with >5% positions in the common.

Mortgage REITs have, in a nutshell, been obliterated. Whether this is justified or not will only be revealed to the masses in hindsight, though my gut believes its overdone. Some like Annaly (according to Jim Cramer according MacroMan) have been trumpeting their distaste for paper of dubious pedigree (and ratings), and despite their high overt leverage, claim they will profit as a result sub-prime fallout. Others like Thornburg, (also with high overt leverage) claim they are nonetheless conservative and that investors should fear not. Still others, like RAS pictured right) with ostensibly less explicit leverage than the others in the sector have (1) pre-announced to allay fears, (2) maintained their dividend, and (3) announced stock buybacks, all admirable attempts to instill confidence in what appears to to be a sinking and rudderless ship. Not that the markets care. But short-interests have increased to more than 10,000,000 as of mid-June (>15% of the float) and undoubtedly has risen further to-date (judging by the price action). And by way of disclosure, I too, have been short, (though will undoubtedly have covered by the time you read this, and so am now financially disinterested. Enough if enough (at least for this basically information-less investor).

More often than not, short-sellers and the price-action are right in the intermediate and longer frames. "Loose lips sink ships" is certainly valid for stock prices when materially non-public bad news is work. But, to insure maximum mind-f*#k, it sometimes isn't, and in such cases, the markets get it very very VERY wrong. Like in the case of Tesoro in Sept 2002. Not only wasn't it bankrupt, but holders and contrarians would see it increase more than 60-fold from less than a dollar to more than 60. "Once in a lifetime", some other bloggers might suggest.

So today, even though I do not believe RAS is anywhere near a 60-bagger, I wonder aloud: have mortgage spreads widened enough? Is RAS's implicit leverage multiples of its explicit leverage (with the people that know their true leverage shorting them to oblivion?)? Do they have "the old maid"? Is this move predominantly driven by short-sellers, no longer encumbered by Reg-SHO?? I am reserving judgement, but I am, it must be said, intrigued, as the move accelerates into the end of the calendar month. Can this knife be one that could safely be caught, at least for a trade? A least that what Leon Cooperman appears to be thinking...


Anonymous said...

Question is who is going to catch it with you if you were to speculate on misunderstanding, results and covering.

"Cassandra" said...

I do not think I understand your observation/point. Please elucidate.

Taking a stab, Omega/Cooperman caught a 5% chunk (where previous there was none). For a nice tradeable bounce, (having excused myself in advance for my ignorance) shorts need only decelerate, for Knife Catchers of The World to take unite in a consensus that "the worst is over", triggering what might be a frenzied scramble for cover. Of course, if mortgage spreads continue to widen, and/or if RAIT proves directly or indirectly exposed to toxic shite now worthless in sufficient quantities, then they may be insolvent, so may the cookie crumble. My interest was piqued by Omega taking a swing here and now...

Anonymous said...

Seems thay have had a chunk since the merger with Taberna in whom they had 5+%. Where do you get an increase in holdings?

They were in Jan in the BBB and below area, and their biz seems to be borrowing via CDOs etc and then investing in same.

"Cassandra" said...

2:30pm on Tuesday:

Dear Anonymous,

@ $8.76 - nearly - 50% from your comment one can only say marvel at what is either (1) material non-public information leakage (2) the fear and feedback loop it creates, (3) the elimiination of reg SHO

Only RWT seems to sympathise. NLY AHR CT NCT NRF SFI TMO are all behaving better