.comment-link {margin-left:.6em;}

Thursday, August 16, 2007

more thoughts

I've been waiting for the current sub-prime meltdown for years. So have a lot of other people. There are various flavors of what people have been expecting, but it's essentially all about too much liquidity, too much credit, risk and reward failing to fall in the same place. We've heard the stories about horrible lending practices. At one point I bought some put options on Fannie Mae. They expired worthless.

If I had "stayed out of the pool" until this all unfolded, I'd have a lot less money today.

I had owned Nicholas Financial (NICK) years ago and made very good money on it. In this post in March of this year, I noted that...
And NICK (sec) is doing fine: after the subprime panic clears up, they'll look very good, in my opinion.
NICK is down right now because of sub-prime issues (it is, after all, a sub-prime lender). I suspect that it's probably a very good investment right now. If I had to pick another investment, that's the first place I'd look.

Back in April 2006, I noted here that...
Fears of NICK as a sub-prime lender will continue until there's a major downturn in sub-prime lenders and that will hold the price down, no doubt.
I was explaining to someone my casual theory that during bull markets, stock prices drop fast and go up slowly. In bear markets the prices rise fast and drop slowly. This is just based on casual observation; it's probably wrong. I think it's somehow connected to the saying that the bull market ends when the last bear is gored while a bear market ends when the last bull is mauled. Or the more common saying that in a bull market, stock prices climb a wall of worry.

In a bull market, the money is not yet fully invested. In a bear market the money is not yet fully on the sidelines.

In a big long secular bull market, the money hasn't yet all been created. And I believe that's the case today.

Getting back to the whole sub-prime meltdown thing, a lot of people have been expecting this. And I wonder if a lot of money has been parked outside the markets waiting for it to happen. Jim Cramer, my favorite contra-indicator on macro stuff, claimed in no uncertain terms that it's armageddon. I don't automatically assume that Cramer is wrong, but I think in this case he is. It may look like armageddon from inside Wall Street, but I don't see this causing Great Depression II. From what I understand about Great Depression I, it was caused by what today would be considered monumental stupidity: of course that's going to be the result. The causes of the sub-prime mess today will seem like monumental stupidity to the general financial community decades from now (today is just looks like garden variety stupidity).

So I'm wondering if the impact of the sub-prime mess happening is that it finally resolves the issue and stocks like NICK will get recognized for the cash they generate instead of the fear that was overhanging them. And I'm wondering if this will prove true for a lot of other stocks as well. Will this clear the air finally?

If we don't get armageddon and this turns out to be just another ordinary crisis, then perhaps a lot of bears are going to be gored.

UPDATE next day:
CXTI found a new CFO. That was fast, it was an internal promotion. That explains the 15% gain in the stock, I suppose.
Qiyou Li (Jeff) was appointed as CFO of the Registrant on August 15, 2007. From September 2005, to the present, Mr.Li has been the financial controller of Expert Network (Shenzhen) Co. Ltd., the Registrant’s wholly owned subsidiary, and was responsible for all financial, accounting and internal auditing. From October 1999 through September 2005, Mr. Li was the financial manager of ZhongQi Power Technology Company, where he was responsible for the establishing and maintaining the budget for the headquarters and for seven subsidiaries. Mr. Li holds a Bachelor degree from University of Jiangxi Finance and Economics.

Hopefully by now Jeff is aware of his new position in the company. Seems like it might have been a bit rushed in order to avoid a continued stock meltdown.

I think what might have changed is -- our entire economy. The subprime stuff is just good headlines. The real problem -- which is less exciting -- is simply the fact that home prices will no longer be rising yearly and in fact may stay flat or contract for years.

Since the entire economy - consumer spending especially - was fueled by home prices -- the U.S. economy has now fundamentally changed. It will be anemic for years.

Subprime resets are less than 20% done. So expect more pain there.

You may do well though with these .ob picks that could rise -- especially the China stuff. CXTI - for example. But it won't be the same for a good long while.

The American consumer is really finished, even though making that call has been forever wrong.
In other words, "This time it's different."
Bruce a few years ago you were following BRSI. I have a lot of background in the unmanned aircraft world and think that BRSI has a bright future in that market if not in the GA and small jet market. Have you continued to follow them? Do you think it is just a very long-term play and not something you are interested in investing in with your investing timeframe? And BTW thanks for all the excellent posts.
No, I don't follow them, but I just now went back and looked at the latest 10-Q. The problem is, I have no way of knowing what will happen in the future with them. I've experienced situations where a company I had direct contact with seemed really wonderful only to go nowhere. A lot of times respectable businesses aren't very good investments.
I appreciate your comments on NICK as I am a long term owner of the stock. I agree with your thesis that the end of the super easy money era is good for NICK. Clearly, some of the excess liquidity sloshing around made its way into subprime auto. One way to see that is in the narrowing of the discount on the paper NICK purchases from dealers. I believe the recent lack of growth in the portfolio is evidence of the same thing. Some see that lack of growth as weakness but I see it as a plus, i.e. they have maintained underwriting discipline while others have not. Still, I'm not really optimistic about the stock performance in the near term because I think the odds favor further slowing of growth or recession. If that happens the performance of NICK's loan portfolio is bound to continue to deteriorate. In the end though, I think they will do well.

I noticed from the rb mb that you've invested in cxti. It is highly unlikely that all of the state of affairs can be good: Feinberg selling at a loss, CFO going on ugly terms, a CEO who has become a deaf/mute and a 10 k way overdue.

What is your opinion of the situation? From your experience, do you think cxti can return to its year high? I certainly appreciate your insight.
many thanks, alda
Obviously there are issues at CXTI. It's very rare to find a good investment that doesn't have issues.

As I had written in the message board, it looks to me that Feinberg is puking up shares involuntarily rather than dumping the stock by choice. He's been selling bits and pieces over time. I have to think it's due to hedge fund redemptions.

More than just the CFO going, is both the CFO and COO leaving.

I'm not surprised that the 10-Q is late. They probably need to sift through a lot of stuff. Maybe they had to drag in the auditors.

My opinion is that the business still seems quite good. I didn't buy any more when it dropped to $1.60, but I gave it some serious thought.

I have no idea what will happen going forward. I'm still fully invested, but I recognize that all sorts of things can happen.
Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?