Wednesday, August 01, 2007

Fear, Panic & Information

Lack of information will magnify the fears, resulting in panic mode action. Adequate information flow should not disturb the fear and panic buttons in investors. Why the jitters? Shares of American Home Mortgage Investment Corp. plunged 90 percent yesterday after the company raised fears it may become insolvent, renewing concern about worsening credit quality in the mortgage market and killing a Wall Street rally. The struggling mortgage lender said its financial backers have essentially pulled the plug. The Wall Street banks that lend American Home Mortgage money for home loans -- which include firms like UBS AG, Bear Stearns Cos., and JPMorgan Chase & Co. - will not extend the company any more money, and some have demanded back the money they have lent. American Home shares, which were halted all day Monday, plummeted when trading finally began at about 2 p.m. EDT and ended the day at US$1.04 a share, down from US$10.47 on Friday before the company first disclosed the depths of its financial woes. Talk about limit down, what limit down,Malaysian shares have it so good.

The Dow Jones industrial average, which had been up as much as 140 points earlier in the day, reversed course after the resumption of trading in the company's stock and then kept falling. It fell 1.1 percent or almost 146 points for the day. American Home Mortgage will probably go bankrupt, or at least be restructured into something leaving very little value for shareholders.

American Home Mortgage said it has over the last three weeks paid "very significant" margin calls, which occur when a lender demands compensation after a borrower's collateral loses value. The company still faces "substantial" unpaid margin calls. We ask ourselves, IS THIS THE FIRST FEW COLLAPSES due to the weak subprime market??? Answer is NO, this echoes reports from a number of other mortgage lenders of late, including New Century Financial Corp., the Irvine, Calif.-based lender that filed for bankruptcy protection earlier this year.

The company failed Monday to deliver US$300 million in mortgages promised to home buyers, and said it expects to be unable to finance US$450 million to US$500 million in additional mortgages Tuesday. The reason American Home Mortgage's lenders are balking is the mortgage loans that act as collateral for the company's credit lines have sunk in value. The market where investors buy mortgage loans has suffered "unprecedented disruption" this year, the company said, and it is having trouble selling its mortgages. Last year, the lender sold two-fifths of its loans to Countrywide Financial Corp., Deutsche Bank AG, and Wells Fargo & Co.

Dozens of mortgage lenders have gone bankrupt this year as more people miss payments on home loans, housing prices sag and skittish investors flee risky mortgage debt. But while most of the bankrupt lenders catered to "subprime" borrowers or borrowers with checkered credit histories, almost none of American Home Mortgage's US$58.9 billion in loans last year were classified as subprime. American Home Mortgage specializes in adjustable-rate mortgages, which carry interest rates that reset according to certain benchmark interest rates. This type of debt has hamstrung a lot of borrowers in the past year because interest rates have jumped.
The company also lends to so-called Alt-A borrowers, or borrowers that cannot document their income. While Alt-A credit is not considered as unreliable as subprime, it is a step down from prime. To me, that is a lot worse than normal subprime when you cannot document your income.

Alliance Bancorp, an Alt-A lender based in Brisbane, Calif., went bankrupt this year. Separately, ratings agency Moody's Investors Service said it is increasing its assumptions for losses on pools of Alt-A loans. As delinquencies in Alt-A debt mount, Moody's said it sees signs that Alt-A loans were underwritten using similar standards to subprime loans.

If these developments are nothing new, are they UNEXPECTED? Please, its been written in the stars already. If you go back a few months to look at the historical developments in subprime, and the downtrend of the US housing market, its there for more than the past 10 months already, its not new. Its a down cycle, yes, and companies affected to fail, yes. Do Americans need to panic??? Do the rest of the world need to panic????? Let's look at the situation, weakening property prices will not affect repayments as much as higher interest rates. The Fed sould be stepping in earlier than first thought to drop at least 25 basis points in interest rate to calm the waters.

I have been advocating calm following the recent jitters because at the end of the day, its the unemployment factor which will enable them to ride out the stormy subprime waters. The jobs market is still very firm, even considering the job losses in the property related sector for the last 10 months. That's very encouraging. The firm employment market is also due to a more robust global economy, particularly Asia, Europe, Latin America, ... well everywhere I guess.

So, don't worry, be happy!


sopskysalat said...


take it that if everyone is as insightful, mkt may stall and boring.

the greed and fear is driving it crazy, only those calm and steady are profiting from it by the side.

can i ask, when you are free, do write something on maybe Futures vs Warrant trading. Although warrant has decay and volatility factors, does it mean it is disadvantagous to the former? Just curious..

CHMOB-1/3 still good catch after recent meltdown? I suppose..
Thanks in advance!

doraiddd said...

I just did the Hank and Ben Show a favor by calling the PPT. Now Semua-nya OK! but locally value cap's numbers seem to have changed... i keep getting connected to either mrcb, time dotcom or equine???? hahahahah....

Salvatore_Dali said...

ch mobile 1 n 3 very good no matter how u cut it.. the fact that they r H shares n not shanghai based gives them a great buffer

hellthy correction said...

with subprimes and the unwinding of yen carrytrades a nagging issue, could we expect a rather uncertain and bumpy ride towards year end for all financial mkts? Or simply because the bulls have gone from euphoria to exhaustion? Has the system with flush liquidity come to a point that there is no sense of valuation anymore (megabucks M&As). Surely the party has to sober down somehow, somewhere, someday.

Meantime, i would just enjoy while the party last.

Jomaropol said...

A cool head in a crazy market, that's what's really needed in a market like this. Great call Salvatore! Yesterday it was all doom and gloom, today it is all squeamish faces. More violatility to follow....

sopskysalat said...


recalling your stock's call from a few bourses, why the 3 stocks each?

did you pick them up from the edge or other sources that interest you?

just curious. tq

Salvatore_Dali said...


the stock picks for malaysia are based on thematics such as idr and oil n gas... for othrs, i have scanned research reports and look for mid sized to small caps which will have higher betas... then a selection of land property exposure in prep for mkt upswing

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