The down side of high yield-- lower lows for sub-prime lenders

New Century, or symbol: NEW, the company who's head of IR/PR called me to tell me that she was shocked, shocked, to think that gambling was going on with there mortgage pools, dropped another 50% this morning, which I kind of suspected would happen at 3am when the Asian markets were dumping. I would be happy to take her call today to follow up about what percentage of their pools were funky paper, since she told me it was a very small percentage and that I was factually wrong about NEW a few months back, about the time Businessweek did a front page story about sub-prime lending, and Barrons explored the calls, puts and longs of investing in NEW. I left a message last week to ask if they were going to cut their yield, which seems necessary; but they never called back.

If you've been following the knitting we do here at Theyieldhoe.com, you know the time to load the boat with Put contracts (maybe the LEAPS in 2008's) was last week, along with the Puts on a few other companies with Sub-prime loan portfolios that were underwritten by 23 year old "rock star" brokers over the last few years. Is anyone sick of the adjective "rock-star" yet? Maybe we will be when the mortgage companies finish their dance of the falling knifes.

The good news is, many of them are no doubt riding in Lexis in heated seats; the bad news is, a lot of people will be moving out of the homes that were bought with these adjustable mortgages, which were syndicated and sold around the world as high yielding, scecuritized paper.

Speaking of hell, what the hell does the underlying business have to do with anything, right?

Thus, today is a great day to look at what some of this Sub-prime toilet paper stocks did in the market, and how their Puts are trading, which are the equivalent of a short sale for those who are new to the great game. Here is the spreadsheet I am maintaining to show the gains or losses on "the down side of high yield" so to speak, including NEW, Indymac and LEND.

• http://spreadsheets.google.com/pub?key=p_T48-HYs1wuXfatni6GLZw

If I have the time, I'll included Countrywide, and HSBC (love that theme song on there TV commercials, don't you? But maybe it they'll have to pick something even more blue and melancholic after this quarter and next).

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"

Buying Buy Write Closed End Funds Right

Over the last few years (say 2) new closed end funds have popped up, featuring what appears to be an organized way to scalp call option premiums and earn some wopping, juicey, outsized, almost TGTBT yields. By scalping call option premiums, I mean that these "Buy-Write" funds invest in securities, and then sell call options that offer a way of collecting rent on their holdings. Apart from their great yields, they are exchange traded, offer diversification and unlike ETF, active management.

The premium offers downside protection offsetting a loss in the event of a stock's decline; it offers free rent if the stock stays put, not moving either way up to options experation day; and it offers an additional bump beyond the take out price if the stock is called away at a strike price that is higher than the purchase price. If the stocks are bought at a discount (which is not unheard of when a manager steps in to VWAP 300,000 shares), and call write premiums are sold on days when the stock enjoys higher days. While this could be more of an imagined method than how they skin the cat, it looks like there is a method to their high yield deal madness.

Sure, it's an old options trader's trick, but these are new products and the question remains whether they can keep kicking off out sized yields in all market conditions (if premiums reel in, then one imagines that the rent on their holdings won't stay high for long). So when looking at these fund's manager, the Butch and Sundance test are in order, wherein the investor continues to ask him or herself, "who are those guys?"

These closed end fund have been rolled out by some of the biggest investment management marketing machines on earth, including new jacks Blackstone and Blackrock (Merrill, Lunch), Fiduciary/Claymore, Madison, Madison/Claymore, and old salt Eaton Vance, all still "Made in the USA", as well as those managers that are now owned by giant, overseas (European) parent companies (Insurance), including Pimco, Nicholas Appelgate, and ING. The yields on these Buy-Write Strategy funds appear to range from the very high 7%s to over 10%.

And now, the symbols, with yields as of today, and Bollinger Band Rating (B+ for a what looks like a buy nearing the bottom of its trading range; B for a reversion to a mean, back "in the middle"; and B- for ripe, nearing a top of its trading range):

• BEP--10.60%, B
  
• PGP--7.80, B-
  
• RCC--10.40%,B
  
• NAI--31.80%, B+
  
• NFJ-- N/A
  
• MCN--8.80%, B-
  
• MSP--8.80%, B-
  
• IGD--8.80%, B
  
• FFA--8.70%, B
  
• HCE--8.80%, B
  
• BEO--N/A
• ETW-9.10%, B-
  
• ETV--9.50%, B-
  
• ETB--8.70%, B-
  
• EOS--8.50%, B-
  
• EOI--8.00%, B-
  
• DPD--8.60%, B-
  
• BWC--7.80%, B
  
• BDJ--8.10%, B-
  
• ECV--10.60%, B
  
• EEF--10.10%, B+
  

These option trading, arb funds hold the promise of large returns, while the sun shines. The question remains, what happens when the premiums on the calls they sell are less bloated? (Do your Due)

There are High Yield Municipal Funds, and Then There is Boston's Colonial Outfit-- CXE

Colonial High Income Municipal Trust, or CXE is a closed end municipal bond fund that is currently kicking off over 10%, which is looking fairly TGTBT*. That's 10 percent-- BEFORE TAXES, making the tax equivalent yield, well... pretty absurd, like one of Bill Gate's giant dividends for the faithful. Except, CXE pays monthly, for you fans of compounding interest.

It's trading at a -2% discount to it's Net Asset Value (NAV). It's leverage is 37.16 right now, which offers additional bang for the buck, but not more than seems right.

It's summary is as follows:

• Colonial High Income Municipal Trust is a diversified, closed-end, management investment company. Co.'s investment goal is to provide high current income, generally exempt from federal income taxes. Co.'s secondary investment goal is to seek total return. As of Nov 30 2003, Co. had total assets of $327,187,015 and an investment portfolio of $320,292,808.

You'll find a fact sheet, as of November 06, about the fund in slow acting .pdf file form on the website of its manager (Columbia Management, a unit of Bank of America), here

It shows an pretty even breakdown of AAA (22%), BBB (23%) and Non-rated paper (33%), which may be a little less funky than you'd think for a fund yielding so much. It's holdings are about 80 percent uninsured. And duration looks to be split down the middle. .However, it's holdings are not on the fact sheet.

It's been around since 1989, is managed by CFA, Maureen Newman; and has some major institutional holders of small bits and pieces.

We're still trying to fully understand why CXE is offering its free lunch, but the technicals appear attractive right now, as the Dow rallies, with Goldman pumping the Dow transports, perhaps in an effort to help "show" follow-through. CXE's MACD, which is a measure of moving averages for various time frames and how they meet and diverge, indicates the begining of a bullshit trend.

So, if you are taking some profits off the table from last year for the tax advantages of waiting until after the 1st, CXE could just be a good place to part the cash until something else comes along. But stay tuned (did we mention that we are still trying to find CXE's holdings listed somewhere online).


*TGTBT is short for "To Good To Be True", and is a service mark of Theyieldhoe.com.

EGLE, a Slow Boat to China Kicking Off 11%

Early on I realized two of the great icons of America, apple pie and motherhood, were the worst experiences in the world. Apple pie has fat, cholesterol and too many calories. A good mother is to be revered, loved and admired. At least one out of five is a good mother. I think I make myself clear.

--Seth Glickenhaus

This guy is no jackass. But it is important to start from the begining, and long before:

• Warren Buffet finished his Master's Degree with Benjamin Graham
  
• Wall Street Wizards made Time Magazine covers in the 1960's, or
  
• Ivan Boseky was on top of the world in the 80's, or
• Dan Dorfman's noontime reports on CNBC in the 90's, or
• Jim Cramer's Home Gamer, Mad Money syndrome,

Seth Glickenhaus was hitting tripples and smaking home runs in the equity markets like Babe Ruth. Maybe better.

In fact, long before Jim Cramer got his first wedgy, Glickenhaus began the longest unbroken record of beating the benchmark of any professional investment manager on record. Now, we don't know if that is strictly true, but everyone says so, which makes him a living legand.

He was out there banging the drum for PGH a few years back, which kicks off a massive yield from its natural gas sales, and is worth a look; but more recently he got behind a shipping company called Eagle Bulk Shipping, which does a lot of trade in China, complete with modern boats that unload before they ever get to the docks. What's more, they stand by a policy of paying high yields to investors, which is our kind of special situation. The yield on EGLE is massive (11.70 today), and looks almost TGTBT. Almost, were it not Seth Glickenhaus who has been talking the smack.

By some apperances, it looks just plain good, but will it remain so, even if their slow boat to China gets even slower, as Americans slow down their hand over fist buying of products made there.

If you're into the cold comfort of Wall Street analysts, Cantor, Fitzgerald cut wind today, which was printed as the following:

09:44 am Eagle Bulk Shipping: Cantor Fitzgerald upgrades Hold to Buy. Target $18 to $21. Cantor Fitzgerald upgrades EGLE to Buy from Hold and raises their tgt to $21 from $18 noting the co announced that it secured three attractive long-term charters at rates above current charter rates. The firm also raised their rate renewal expectations for other contracts ending in 2007 given the ongoing strength in the dry bulk market.The firm says the co has secured roughly 93% of its 2007 fleet operating days, which should provide visibility to Eagle Bulk's revenue stream and support the co's high dividend payout policy.

How is it trading? It's Bollinger Bands are outside it's price right now, and its MACD moving averages suggest a buy. Stay tuned, we will.