However... how do I balance this (correct) thesis against the potential for some arm of the government to step in by summer and literally buy up toxic mortgage paper directly? This is the conundrum and why this market is even harder than it appears. If the free markets were allowed to reign I would have 1 very clear strategy but with all the King's Horses (and Men) working to interfere it clouds things up. Here is some "reality" of just how quickly the vintages of Alt A mortgages from 2005-2007 (the worse era of reckless lending) are degrading. Keep in mind these are sequential increases, meaning one month over another - the pace is incredible - 2006 and 2007 are just horror shows. Frankly, it is degrading quicker than even I thought. (Is this anywhere in the mainstream financial press or are we too busy high fiving the fact we are going to overload Fannie and Freddie with mortgages?)
- Delinquencies on alt-A mortgages pooled into securities between 2005 and 2007 continue to rise, Standard & Poor's said in a report released Wednesday. Mortgage-backed securities are pools of mortgages combined and sold to investors. Alt-A mortgages are loans given to customers with minor credit problems or who do not have enough documentation to receive a traditional, prime loan.
- For securities rated by S&P in 2005, 11.7 percent of current outstanding balances were delinquent in February, a 6.4 percent increase from the previous month.
- About 15.9 percent of securities rated in 2006 were delinquent in February, a 9.7 percent increase from January.
- Delinquencies for securities rated in 2007 increased 14.3 percent in February to about 10.2 percent.
- S&P said seriously delinquent loans -- loans at least 90 days past due, in foreclosure or homes owned by banks -- continued to rise in February for all three vintages as well, with 2006 deals performing the worst. About 10 percent of 2006 loan volume was seriously delinquent at the end of February
Folks what this means is 2007 paper in the Alt A arena (that includes the whole year including Q4 2007 which is not even half a year old), is already delinquent to the tune of 1 in 10 mortgages! The oldest mortgages in this group are .75 years to 1.25 year old. And already a 10% failure rate. Scary. Scary. Scary.
BUT what do you do when the government will eventually be buying all this paper ? (since it is such a BARGAIN and it is only trading low due to inefficient markets not that its purely junk <---Kool Aid arguement) You my taxpayer friends will be paying for the losses, but the markets will scream higher when this day does come as their hands will be washed of this nuclear waste... tough from an investing point to bet either way. But after reading this story today, I am going to need to drink a gallon of Kool Aid to keep the faith. Hell, I might need to take a bath in it...
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Speaking of Ultrashort Financial (SKF) I took another gander at it's weightings and it's become a bit less attractive as the underlying financial index has changed the weighting as Citigroup has imploded. Last I looked in September [Adding to my Ultrashort Financial Today] I wrote
The top 5 holdings make up 40% of the index, these names are: Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Wachovia (WB)
I don't have the exact weightings in the old post but I do remember I loved the fact Citigroup was the top dog (literally). But now? They've dropped Citigroup to only a 5% weighting. Darn.
Just so I have a historical record in the blog the top 5 now are
Bank of America 7.1%
JPMorgan 5.6%
Citigroup 5.6%
American International Group 5.0%
Wells Fargo 3.7%
It is too bad... of the top 5, Bank of America has the Countrywide (CFC) acquisition to deal with, but based on the Bear Stearns deal they can probably go to the government behind closed doors and say, look we will walk away from this deal unless tax payers guarantee all losses - you did it for Bear, we want the same deal for saving 20% of the mortgage market. Paulson will say, sounds great to me! JPMorgan just stole Bear Stearns and its losses are going to be paid by you, the taxpayer, - so they are golden. And I like Wells Fargo as an operator (except the fact it is so focused on CA). So that leaves only 2 dogs in the top 5. Bummer. And then Goldman Sachs (GS) who is running this country behind the scenes is #6, and US Bankcorp which is actually a great bank is #9. So this makes this index less attractive than it used to be, that's for sure.
Long Ultrashort Financial in fund and personal account
