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"