NEW is down a bit, while the overall market is down a lot

NEW has a P/E of 2.27 today, and based on reliable research, NEW appears likely to continue to kick off at least 10 percent, after they they cut the dividend and it reaches equilibrium with the falling price of the stock. That same research indicates that NEW's portfolio of subprime debt amounts to half their portfolio.

The media has been talking about the subprime market all week long, advancing the theory that it will spread to mortgages done the regular way. Retired Fed Chairman Greenspan made the comment that the US could be headed for recession, and today they Chinese A share market (more highly speculative market) fell out, which lead to a broad market decline, as program trades hit stop after stop. It was a 400 point decline on Dow 12,000, which amounts to a nip compared to Dow 1000, but still a sizable move.

The quick glance at the portfolio of high yield stocks we track shows that they hold up well under current market conditions. Low Betas, mean they have the advantage of being out of step with broad declines.

NEW-- When it Rains it Pours, and Look Out Below

Mad Money man put NEW in his "Sell Block" tonight, as did the capable Eugene Burkoveczky, CFA, writing for Investopia called it a dead cat bounce, or wall street slang for a reversal caused by shorts covering a bad position after a massive down draft. It's a classic "good money after bad" situation. Eugene Burkoveczky was however a little sketchy about NEW's portfolio of loans (seems to have talked
to analysts,rather than the company):For market players like New Century,
these developments spell trouble. Not only has it's new mortgage origination business slumped dramatically, but previously written mortgages that it
subsequently sold in to other institutionalinvestors in the form of
securitized subprime loans are now being pushed back onto the
company's books under the terms of repurchase agreements.
How the realized and potential losses associated with
these re-purchased securitized loans have been
accounted for was the basis for of the company's
recent announcement that it would be re-stating
its financials for the last three quarters.
This was the triggering event that
prompted the recent near halving
of the company's market value.
While it's a virtual
certainty that the
company will have
to drastically
slash the
generous
$7.30
dividend it paid in 2006, it's less clear at this point
how much of the firm's net worth could get wiped out
once the final tally of losses is complete. Right
now book value is roughly $33 per share and the
average Street estimate pegs the potential loss
in net worth to be around 20%. And that's
coming analysts who, up until the day
of the re-statement,still regarded
the company as a buy. If their
track record is anything to
go by, then my guess is
that the loan write-offs
could go much higher.
Given the potential
for further negative
surprises, the best
move any investor
can make is to
avoid playing
this "dead cat”
for a bounce.

So NEW is appearing on more and more people's "fool me once" shit list. And maybe it
should be on mine, considering what happened last year when wrote a blurb and a article about potential risks with NEW for an online newspaper. I got a call
from NEW's IR department, and basically made me second guess my instinct,
pull the story and mia culpa. She told me they do not have a lot of
Option ARM loans outstanding, which may be the case, but there
sure was something in their portfolio that repeated on them.
I guess I get the last laugh-- If you believe losting 30
percent is a laughing matter. In NEW's defense, IR did
offer to put me in contact with the CFO, or someone
knowledgable about their portoflio of loans when
ask. I was just too swamped at the time to follow
up and double check. Basically, Reagan was right--
"trust but verify". But what about the trade?At
this point, there is 40 percent yield that
came with the price chop. Like bonds, the
yield moves in the inverse direction,
and the question remains-- if its book
value is about 26 per share after
the hair cut restatements, can
their portfolio of "innovative"
loans kick out enough to keep
the cash stream flowing? It's
a question. But consider this--
NEW has options, which offer
protections and hedging
protection, so maybe
the 40 percent yield,
with puts or calls
written, and stop
loss orders is
enough to
power past
any
losses up until now. If you bought it at 19, along
with a few puts to support the price, you'd be
collecting a big yield as you wait for
the yield to be cut(in Eugene's view).
Place a stop loss order under your
price and keep an eye on it and
I think you could do worse.

If the Fed cuts in an
effort to help home
owners, NEW may
hold on well
enough to
keep you
farting
through
silk,
but owning a couple of 2008 puts,
bought right are likely to ramp
of the "sleep at night
factor"

Your Trading Options On The Third Friday of the Month

Every so often, someone announces a pattern in securities or commodities market data that is worth paying attention to, until that pattern disappears, like Good Humor bars in hell. This happens as Joe Grab a Cup gets sly, and demand outstrips supply of the loophole, trick, or edge. And then, it's yesterday's headline.

Like every trick of the trade, it works until it doesn't. "The Dogs of the Dow" falls into this group of calendar trade tricks. That's where you pick the Dow stock that underpreformed the group, load the boat in Janurary and out pace the other Dow stocks by the end of the year (which is nice for taxes too, if you sell the year later). Or put another way:

Looking for a simple way to select high dividend yield Dow stocks for your investment portfolio? Try Dogs of the Dow. Read on and you will discover a technique that would have given you a 17.7% average annual return since 1973! That's not bad, especially considering that the Dow Jones Industrial Average overall return was 11.9% during that same period. (As reported in U.S.
News & World Report, July 8, 1996)

After the guy (Mike O'Higgins) wrote the book (Dogs of the Dow,1991), and a few brokerage firms put together Unit trusts to scalp the effect (Pru), it mostly dried up a bit.

There is research showing that prices gain the first 4 days of each month (suggesting a good time to sell), and a weekend effect, and a Janurary effect, etc.. But for a much better review of the subject, visit two links: First, Robert Kunkel's article in the Journal of Economics and Finance, Spring 2000, which is (or was) online here. And Second, "The Complete Idiot's Guide to Market Timing", by Scott Barrie, which is online, here.

Nevertheless, there is a "new one", which is not really new if you trade options and have been paying attention at all. What's new is the idea that it is common knowledge now, thanks to John Crudele.

Crudele, writing in the New York Post Biz section, has chosen to do a Ralph Nader on the surge effect that takes place as options expire each month, which amounts to this: the week of options expirations usually (more often than not) amounts to a 100% or more gain in the broad market. He writes:

Bill King of Ramsey King Securities and I noticed this tendency a while ago, so I asked researcher Michael Panzner to run the numbers. Panzner, who has written an upcoming book for publisher Kaplan Business called "Financial Armageddon," was asked to go back only one year in his research, although the trend was noticeable before that.

What we found was that since March 2006, the market 58 percent of the time has rallied at least 100 points during one or more of the five trading days before options and future contracts expire, which happens on the third Friday of every month.

Tuesday's gain was barely triple-digit - just over 102 points with the final push coming during run-off trades after 4 p.m. At its peak on Tuesday the market was up 105 points.

See, here.

At any rate, Crudele's three digit moves put me in mind of the headlines back in the 90's (when TYH was selling securities), and the indexes were said to be making these new massive and shocking moves. "Dow makes a three digit move in one day!", etc. Some of our clients were concerned that this meant much more risk, and so, they would have to check with the wife, or call their CPA, read more about it, or check with their Lexis mechanic. We had no rebuttal for them for a hot second, as the media machine was killing us and causing a panic effect-- dramatic moves show great risks... etc. That's until we began pointing out that a 100 point move on Dow 5000, or 6000 or 7,000 is nothing like a 100 point move on Dow 900, or 800, or 700. It's the percentage that counts. Moreover, if you bought JNJ when the Dow was down there in three point land, you'd be retired and calling us to put standing orders in to buy municipal bonds like Poppy! Sometimes, (3 in 10 times), this rebuttal even worked.

While selling into stregnth always makes sense, and Crudele is the best no-bullshit business reporter we can find out there, a word to the wise may be in order on the options expiration week surge effect: a three digit move is less than 1 percent of Dow 12,000.

NEW Taken Down to Chinatown...

Well, "the gearing issue" has been resolved and the answer to our earlier questions about New Century's mortgage portfolio were answered today, with a sucking sound of a 10 point drop. In fact, we even wrote a report about NEW's portfolio and retracted it after the Investor Relations department came calling to straighten out a few factual errors on our part. Now the chickens are home to roost, and we are well underwater on our earlier call.

Fine.

So, that left The Yield Hoe with a problem, how can you scalp NEW's massive 25%+ TGTBT yield, while protecting yourself from a down draft, by shorting or perhaps using derivatives? Let's say for the sake of saying that theyieldhoe.com took a shot with NEW with say, 200 shares, and at the same time, shorted 2 Jan. 08 calls @ 40 strike price. How much offset would he get (enough to cover the loss?).

Well, you'd be up 67% today, with a gain of about a $200 dollar gain to offset your 2000 to 2500 dollar "loss". So the "gearing" question has been answered. How much of one balances a major move in the other, a subject that 100's of MBAs are sweating out of text books and HP calculators right now in places like Cambridge Mass and Currant Institute in New York.

The Yield Hoe was 10 percent right. We really needed 10 of these, not 2, and in spite of the 67% return from the falling knife, the miss is as good as a mile here.

Puts were clearly the ticket for NEW.

Blackrock's Floating Fund-- FRB

Blackrock's Closed end floating rate fund, symbol FRB, is kicking out an almost TGTBT yield of more than 17 percent. What the hell are these people doing in Plainsboro, NJ, trying to make everyone else on Wall Street look feable? First of all, here's its business description:

Floating Rate Income Strategies Fund II, Inc. operates as a diversified, closed-end management investment company. The fund invests primarily in floating rate debt securities and instruments. Its portfolio includes investments in health care, housing, information technology, leisure, manufacturing, packaging, paper, retail, services, telecommunications, utilities, aerospace and defense, airlines, automotive, cable-U.S, chemicals, consumer non-durables, media, energy, and gaming sectors. Fund Asset Management, L.P. serves as the investment advisor of the fund. Floating Rate Income Strategies Fund II, Inc. is based in Plainsboro, New Jersey.

If you download it's annual report, you'll find that it was trading at an -8 percent discount to its net asset value as of the 3rd Q of last year, which is a good bit of "downside protecting in the event of a broad market decline", as the yield hoe himself used to tell investors. There is comfort in that there are some "Major Holders," including Morgan Stanley, Citi, Wells Fargo. That's something.

Charts and Measures

The price movement shows a recent upturn, but not crossing it's upper band. The P/E, ot the extent it applies here is 16. The hoe has nothing very much more to say about it it at this time, but it's certainly something to start tracking in high yield land, which is another way of saying-- it's 3am and bedtime for Bonzo. FBR's yield compounds monthly by the way...