WCI

I covered my puts on WCI today. Carl Icahn put in a bid for $22 a share when it was trading at $19.80 yesterday. So in today’s market where every was down, WCI was up 15%!!

I had enough second guessing the home builders. The real action was in the Lending stocks and I missed most that action. Anyway, CountryWide’s CEO was on CNBC today, lying about how great business was for home builders and that his company would do well by taking market share from all the sub-prime lenders. I was thinking of shorting the stock last week and I didn’t and its down 10% since then. I think this subprime malaise will spread to the prime lenders eventually.

Anyway I bought some June puts. Hopefully they’ll pan out. If they lose 50% of their value I’ll close them out. I’ll keep you posted.

The stock market suffered the biggest loss today since the terrorist attacks on September 11th 2001.

They were allegedly caused by profit taking in China caused by the governments comments on cracking down on the rampant stock speculation taking place and by Greenspan’s comments on the US facing a mild recession later this year. Even Oil and Gold were down today. So was every other sector!

The only green mark in portfolio was URPIX which was up 7% today, but I didn’t own enough to offset my losses. Still, the losses are to be expected and a 30% cushion still isn’t bad. Hopefully WCI will drop even further and I can actually profit from my remaining puts (which are currently underwater)

I did use the drop in GDX (gold mining ETF) to sell some March puts. If they expire worthless, then I’ll have made some money and if they don’t I’ll own some GDX shares for less than what I sold them during the last options expiration period.

Wonder how long and severe this correction will last?

Since WCI was up sharply, I closed out the January $20 Puts. There’s only 2 months left and like someone famously said, “Markets can remain irrational longer than you can remain solvent”. Better to take a small loss now than a bigger loss later on.

I still think the underlying fundamentals are bad so I’ll keep my other Puts and bear Calls in place. I think I should’ve entered into Spreads instead of just selling out of the money naked Calls. That would’ve reduced the premium I collected but it would’ve limited my losses. Of course, I could still implement that strategy, but its going to be a bit more expensive since my out of the money Calls are now in the money.

I expect the stock to wind down a bit going into the long weekend. I might close out some of the March positions at that time.

On the bright side, the in the money naked Puts I sold for a Junior Mining stock will be expiring worthless today!

OUCH! Yesterday WCI was up over 10% on twice the normal volume. About 5 million shares traded hands at about $17.5 which makes it nearly $100 million dollars worth. I was wondering who was buying up so much of this crap, and then I find out today thats its Bill Gates. His charity indiscriminately bought several builders stocks. This is a great time for the insiders to bail on the stock!

I was wondering whether to bail on the stock[close my short option positions] and eat my some small losses or to ride it out and incur either smaller losses or maybe much larger ones. However looking at the MACD it seems that just over $18 was the short term peak and its due for a pullback, which might offer a better place to exit. I could get more puts at this juncture but I’d rather just bail.
No point letting my ego get in the way.

If anyone can provide a better technical analysis on WCI, I’d love to hear it!

In a previous post on WCI, I had mentioned that I had sold some March 2007 Calls.

When you sell a call and you own the underlying stock, its called selling (or writing) covered calls. In my case, where I don’t own the underlying stock, its called selling naked calls. I gave someone the right to purchase a stock from me at a certain price at a certain date in the future and in return I collected a small premium. [That’s right, I don’t own the stock yet I sold the option on it and collected some money. Makes me feel like I’m in the insurance biz!]

There is unlimited risk in selling naked calls (or puts). If the stock rises beyond my strike price [which is $17.50 in the case of WCI] I stand to lose the amount that it rises minus 17.50 minus the premium I collected up front.

When I entered the position last Friday, the stock was trading around $15. So it would have to jump 16.5% before being “in-the-money”. I collected a premium of $1.45 per share or $145 per contract. So the stock would have to be over $18.95 before I would start losing money. If the stock closes below $17.50 on expiration, the option expires worthless and I keep all the collected premium. If however it closes at say $18, then I don’t have to buy the stock at $18 and deliver it to the buyer. I just close the position before then and pay him the difference of $0.50 per share or $50 per contract. So even though the stock closed above $17.50, I’d still make $145-$50 = $95 per contract.

There are also commissions to be factored in. Interactive Brokers is amongst the cheapest[and most difficult to use] and charges $0.75 per contract.

The stock was down 4.5% today on no news so hopefully it’ll continue its slide into BK. The puts I had bought last month are now up 22%!!! The calls I sold on Friday have decreased in value and if I wanted to, I could close my position by buying them back at $1.25 per share or a 13.75% profit per contract.

I also sold some naked puts on a junior mining stock. I think it might move higher in the near future, however I don’t have any money to invest right now, and I’m not a big fan of buying on margin. Its trading at $11.25/share so buying 500 shares would run me around $5625. So I sold some puts with the Nov 06 expiration at $10 strike price and collected $35 per contract. The options expire in about 3 weeks. If the stock does nothing, I keep the premium. If it goes up, I still made my premium on them. If it drops, it would have to drop nearly 14% before I start losing money. But I was willing to buy them at this price anyway, so at least I curtailed my loss upfront!

[NOTE] Naked Option trading involves significant risk of capital. Victor Niederhoffer, a UC, Berkley professor and hedge fund manager lost 20 years worth of profits in 1 year through over-leveraging in naked option trades. Only gamble with risk capital when selling naked options. This is an extreme form of gambling. Do not take it lightly!

Apparently some builders are so desperate, they’ve started suing buyers who are walking away from their deposits. Several of my friends have received letters stating that the builder will be suing them for damages and for fraud. Of course, the builders are just shaking the tree trying to see if anyone will buckle and send them some money. They must be really hurting!!!!

I’ve been bearish on WCI [which builds condos in southern California} for several weeks now and RealEstateJournal.com has an article on it.

Investors Struggle With Aftermath Of Condo-Investing Fever

By Amy Hoak
From MarketWatch

People camped out for the chance to buy a unit in Radius, a condominium development in Hollywood, Fla. The building’s 285 units sold out in just over 10 hours — half a year before construction was even set to start.

But that was in the summer of 2004, when the red-hot condo market was peaking and money could be made by investing in condos expected to quickly appreciate. Units were often on the market for resale as soon as they were completed. It’s a much riskier proposition to flip a condo in some of today’s cooling markets. “You see some of these communities that investors purchased…there are no lights on at night,” said Bill Donges, chief executive officer of Lane Company, developer of Radius, which is scheduled for completion in the spring.

The lack of post-dusk illumination in some South Florida condo communities is a sign that many buyers never planned to move into the units they bought, he said. Their plans now: sweat.

According to the National Association of Realtors, inventory of existing condos and co-op homes rose to about an 8.6-month supply in August. The national median sales price for the housing type settled at $223,200 in August, down 2.4% from $228,800 a year ago.

“The market is clearly oversupplied in many places,” said David Seiders, chief economist for the National Association of Home Builders. “The key symptom of that has been on the price front. Prices have taken a hit.”

Not wonderful news for those who have invested in condominium units with the intent to sell them quickly — and are still holding them. According to NAR data, 31% of investment purchases made between 2002 and 2005 were condos.

But it may not be time to jump off the condo’s balcony just yet. There still are investors entering some markets with the intent of purchasing one or more units and holding them for a few years. Some are encouraged by increased demand for rentals in certain areas and betting that long-term appreciation won’t skip a beat.

Seiders put it this way: “If you’re in it for the (short-term) price appreciation then you want to get out,” he said. “If you’re an investor wanting to rent them over time, you don’t necessarily want to get out of the investment.”

Get out while the getting is good

Patience is a virtue not all condo investors have in abundance. The National Association of Home Builders is noticing increased reports of sale cancellations, meaning buyers are backing out before closing, Seiders said. “In that case, all you’re losing is the deposit,” he said.

In South Florida, Mark Zilbert has another way to help condo speculators in their hour of distress. Zilbert owns a real estate brokerage and also helps link up condo buyers and sellers through the Web site CondoFlip.com.

A new feature on the site is a slate of panic buttons for investors worried that they won’t be able to unload their properties: One button for those who aim to sell their condos for a profit, another for those who are willing to break even and another for those who are willing to lose money in order to get out of the deal.

After sellers decide which camp they fit into, they can be connected with buyers interested in relieving them of their burdensome investment.

Of course, another highly publicized way of generating buyer interest without cutting the actual asking price is to offer incentives to sweeten the deal. Incentives can include in-unit amenities or the covering of closing costs.

Adjust your thinking — and your financing

Investors who can afford to wait out the storm, however, could benefit in the long run.

“There are a lot of unique proprieties that would be a shame to sell out,” Donges said. “In the long run, a lot of these properties are going to have value.”

It’s also important to note that conditions vary from market to market. For example, while the South Florida condo market may be iffy, conditions in some Texas markets are going strong, said Jim Fite, president of Century 21 Judge Fite Co., based in Dallas.

“We have a very robust environment for investors right now in all segments of the market,” he said. Investors have shifted focus from places such as Phoenix and Las Vegas to some parts of Texas, where rental values are more attractive, he said.

Chicago has a “normal to healthy” investor market, said Chris Kenny, chief financial officer for Palladian Development. “The difference in this market — it’s not a flipping market,” he said. Instead, investors will typically hold on to a property for about three years.

Those who do change their course to incorporate a hold strategy also might want to rethink their financing, said Lucy Duni, director of consumer education for TransUnion’s credit-information site, TrueCredit.com. In the recent past, condo investors often took out 1-, 3- or 5-year adjustable rate mortgages because the intent was to make a big profit in the short term.

If the adjustable loan is about to reset, investors might want to think about locking down a fixed rate. “If they’re in an ARM, it might be time to think about refinancing,” Duni said.

Becoming a landlord

Investors going into hold mode may decide to rent their units as a way to cover costs. In markets with low apartment vacancies and increasing rents, the move is an especially attractive way to bide time.

“Because of the fact that the market is softening, a lot more people are making decisions to rent because they don’t see themselves getting what they anticipated for the sale,” said Patrick Roberts, a real estate agent with 773 Realty Inc. in Chicago.

Even some builders are taking note of the current rental fundamentals; Donges said Lane Company’s focus is shifting back from condo building to apartment building.

But there’s some work involved in being a landlord. The first hurdle: setting the rent.

A fair amount of owners know how to set an acceptable price, Roberts said, but others ask for a couple hundred dollars more than comparable properties in the area. Incorrect pricing causes the rental to sit vacant for months, resulting in lost cash flow.

Condo owners have to accept that they won’t get all their mortgage payments, taxes and assessments covered in the rent, Roberts said.

There’s also some effort required to find the best tenants, he said. Credit checks on potential tenants are wise, he said, and sometimes condo associations will require criminal background checks as well. Some associations will also have restrictions on how many renters can occupy a building; owners should make sure they can rent the unit before proceeding.

Or, in some cases, it’s possible to hire a firm to do the landlord work.

In Chicago, a new business was created to manage condo owners’ property for them, performing such tasks as finding tenants and collecting rents.

The service, CRS, helps the owners of condos converted by American Invsco, said Michael Zink, one of CRS’ developers. Its success is prompting it to expand.

In some situations, condo owners who use CRS are guaranteed a rent check every month — even if the unit is unoccupied, he said. CRS’ cut is a 10% commission based on the lease value from the rental transaction. If the condo owner chooses its rental guarantee program, CRS is paid a fee instead, Zink said.

“At this point in the market, what we really are is more of a safety valve or a way for people to weather the current situation,” Zink said. “We can mitigate loss in this period of recovery.”

As I’ve posted several times before, I’m bearish on a stock WCI.

Today it finally showed some weakness and was down over 3% on a day when the Dow and Nasdaq were up. Hopefully it’ll continue its downward trend and I can make some money on my puts. Some of the Canadian Royalty Trusts that I picked up last week were up today too. Natural Gas is back above $6/MCF which bodes well for their dividends.

Happy Friday Everyone!

The following is a press release from Moody’s Investors Service:

Moody’s Lowers Ratings Of Wci Communities; Outlook
Negative

Approximately $650 Million of Debt Securities Affected

New York, October 06, 2006 — Moody’s lowered the ratings of WCI Communities, Inc. (“WCI”), including its corporate family rating to Ba3 from Ba2 and the ratings on its senior subordinated notes to B1 from Ba3. This concludes the review that was commenced on July 24, 2006. The ratings outlook is negative.

Lots of reasons why ….
Followed by the conclusion

Going forward, the ratings could be reduced again if the company were unwilling or unable to reduce debt leverage at year end to the mid-to-high 50% range, if earnings turned sharply negative, or if covenant compliance became problematic. The ratings outlook could stabilize if the company were to place greater emphasis on building liquidity and reducing outstanding debt, were to stay profitable in the coming quarters, and were able to meet its debt covenant tests with some headroom.

The following ratings were affected:

Corporate family rating changed to Ba3 from Ba2

Probability of default rating changed to Ba3 from Ba2

Senior sub debt ratings changed to B1 from Ba3

LGD (Loss-given-default) assessment and rate on the
senior sub debt unchanged at LGD5, 81%.

You guys know I’m negative on this stock through my previous posts & entertaining outlook on analysts covering WCI.

Now I’m not one to make merry of one’s misfortune, but I’ll definitely try and make a buck off it!

I’ve been buying long-term puts on a Florida condo & home builder called WCI and ever since then the stock has been up 20%. Finally after about 3 weeks they’ve warned the 3rd Quarter profits will not meet expectations. Hopefully the stock won’t bounce on this news!!!

the homebuilder was hit by a larger-than-expected spate of defaults. About 80 homes valued at $48 million failed to close during the quarter.

WCI also raised its tower default rate to 4%, about double its usual average, after experiencing higher-than-normal defaults at one of its towers in northwest Florida.

New orders for homes and condos are projected to plummet 80% below the total reported in the same quarter a year ago. The 60%-to-65% drop “in the value and number of traditional home new orders” reflects the summer sales slump compared to the 40.5% to 43.5% year-over-year new order shortfall from the second quarter of this year.

Despite this poor performance and probable industry-wide decline the CEO sounded very optimistic.

“With the current slowdown in demand, we believe we own sufficient land to support our operations through the foreseeable future. We have concluded that it is more prudent at this juncture to apply our cash flow from operations primarily towards debt reduction and stock repurchases,” Starkey added.

You’re bleeding cash, suffering losses and you “claim” you’re going to buy back stock. Yeah right, I’ll believe it when I see it! Especially since insiders have been selling millions of dollars worth of stock in the past 12 months.

And their SEC fillings show that their stock repurchase program is more of an option speculation.

In connection with its previously announced common stock repurchase program, WCI Communities, Inc. (the “Company”) entered into an agreement with Citibank, N.A. on September 15, 2006 pursuant to which the Company may enter into a series of capped one-year call option transactions with Citibank, N.A. (“Citibank”) with respect to up to 5,000,000 shares of its common stock. The Company has agreed to pay Citibank. approximately $25 million if the capped call option contracts are established for the entire 5,000,000 shares. Any option payment will be accounted for as a reduction to shareholders’ equity.

Sounds like one bad move after another.