Lessons From WCI’s Bankrupcy

I just found out from The Declining Market that Florida luxury Condo builder, WCI Communities filed Chapter 11.

Over a year ago I shorted the stock at $17. Then that jackass Carl Icahn went and put in a bid to buy the company at $22.50 a share, in order to “unlock the hidden value” of WCI’s assets. That’s when I closed my position at a loss. Apparently, there is no hidden value in the assets and WCI’s stock is now completely worthless!

Sadly, I didn’t have the fortitude or the conviction to hold my position and I cried uncle at the first sign of trouble. That same scenario was repeated when I shorted Countrywide last April. The stock went up 10% and I closed my short position. Then it went straight down!

Right now, I’m short Capital One Financial (COF). But instead of entering my position fully, I decided to venture in slowly and buy more if it goes up. I’ve entered a 50% position so far and I’m hoping it goes higher so I can short at a higher price.

I’m convinced that if people can’t pay their mortgages, then they’re sure not going to be paying the credit cards. However, there’s a chance I might be early, so I should be willing to set a wider stop-loss and be willing to hold my position for 6 months.

On my short positions, I usually set a 10% stop loss, because there is an inherent bullishness to stock prices. This bullishness does not come from my expectation of a continued rise the profitability of stocks, but rather due to inflation. Inflation causes price increases, which leads to slightly higher profits, which leads to slightly higher stocks prices!

One lesson we should all take from WCI’s bankruptcy is that even rich people make mistakes. Carl Icahn was wrong about WCI – there simply wasn’t an value to be had from its assets. Billionaire Jerry Lewis also made a mistake in buying a large chunk of Bear Stearns early this year at nearly $80/share. I was soon sold for only a couple of bucks a share to J P Morgan.

Don’t blindly buy a stock just because some famous investor is buying it!

Should You Believe Incompetent CEOs?

After leading the company’s stock price down 60% in a year, Freddie Mac‘s CEO, Richard Syron, is doing the rounds trying to prop up the stock with feel-good stories. He tried to reassure investors that the worst is in the past and that the future will be brighter than ever.

According to Forbes,

Syron reiterated previous expectations, saying the company expects revenue growth of 15 percent to 20 percent this year, but expects to see losses from bad mortgages rise to as much as $6 billion this year.

“Weakening housing prices and housing activity have led to a punishing deterioration of credit which has hurt our results, along with those of other market participants,” Syron said.

However, the company is well-suited to ride out the housing bust because the home loans that Freddie Mac holds or guarantees are far less risky than those held by other lenders, he said.

Forgive my skepticism, but isn’t this exactly what Countrywide’s CEO Angelo Mozillo said in the beginning of last year when he was dumping stock hand over fist while claiming that CFC would be taking market share from the other lenders that were going out of business.

Anyway, I think its a good omen – I shorted Freddie Mac (FRE) and Fannie Mae (FNM) today at the open. So far I’m pretty happy with the result. FNM was down ~8% and FRE was down ~2.5%. Like I said yesterday, I wouldn’t be surprized to see these stocks in the low single digits in a year. [Note: this is not a stock recommendation – always do your own due diligence]

Time To Go Long The Dollar – 2

This post is a follow-up from a previous post about Going Long The Dollar. There were some valid arguments for being bullish on the dollar, however, based on yesterday’s economic news, they no longer sound very convincing.

The jobless claims came out and the national unemployment rate is now at 5.5% (and this is after the bogus birth-death model numbers that are used to under-represent the actual unemployment figures).

Oil prices shot up 8.4% to $139/barrrel, marking the highest ever one day gain for oil prices. This occurred after the U.S. dollar nosedived on speculation that the European Central Bank would raise its key lending rate and on worries that a bigger-than-expected spike in unemployment meant the U.S. economy was far weaker than feared.

I actually had taken a small position in RYBSX, but I closed it for a small loss after hearing Friday’s news.

It’s much easier to predict long term trends rather than short-term trends. In the long term, I still think the Dollar is going down, so there’s no point buying RYBSX – might as well just stick to my Australian Currency shares ETF that has done so well for me. I continue to believe that we’re going to see stagflation and have been investing accordingly. I think it commodities like gold and foreign currencies will continue to do well.

I also think it’s much easier to make money on sure things like Countrywide(CFC) and WCI Communities (WCI) going bankrupt. (Disclaimer: even though my direction for the CFC and WCI trades was correct, I was just a few weeks early and still lost money!). I’ve been harboring suspcions about Fannie Mae(FNM) and Freddie Mac(FRE) going bankrupt. Not wanting to get in to early, I’ve missed the major decline in both stocks, but there seems like theres still a bit of downward movement. Let’s see how that pans out.

After Sub-prime, Is Commercial Property Next?

Based on my own experiences of being allowed to borrow 40 times my annual income to purchase investment property, I knew the real estate party was going to end badly for many borrowers, banks and eventually tax-payers. I had tried  shorting Countrywide, which was the largest lender of mortgages, last year when the stock was trading at around $36. Unfortunately, I was a little early and closing my position at $39 incurring a substantial loss. If I had held on to my position, with Countrywide currently trading in $6-$7 range, I would’ve have been handsomely rewarded.

Hopefully, I’ll have the fortitude to hold onto my positions next time. Right now I think the Commercial real estate is the next bubble to burst.

Easy liquidity and the willingness of investors to settle for low rates of return have squeezed the margins on commercial properties over the past few years. Commercial construction has been on  tear and new malls have sprung up all over the place. There’s also been a contraction in commercial liquidity owing to the sub-prime fiasco. Added to that is the slow-down in consumer spending which will affect the bottom line of retailers and the amount their willing to spend on employees and rent.

I’m currently short Simon Properties (SPG), which gets 25% of its income from retail malls in California and Florida and the Dow Jones Real Estate Index (IYR). Lets see if I can hold on to these positions during the coming few months which will probably be quite volatile.

Top Performing Funds of 2007

According to Morningstar, here’s the top ten performing mutual funds of 2007

1. Direxion Commodity Bull  2X Inv (DXCLX) : 87.6%

2. Direxion Latin America Bull 2X Inv (DXZLX): 83.7%

3. CGM Focus (CGMFX):  79.9%

4. AIM China A (AACFX): 74.9%

5. Nationwide China Opportunities A (GOPAX): 74%

6. Matthews China (MCHFX): 70.1%

7. Profunds Ultra Emerging Markets (UUPIX): 70.1%

8. T. Rowe Price New Asia (PRASX): 66.4%

9. Guinness Atkinson China & Hong Kong (ICHKX): 65.1%

10. Matthews India (MINDX): 64.1%

Unfortunately I didn’t own any of them. Recently, I did jump in CGMFX though, and hopefully it’ll keep up its momentum. A large part of its returns came from shorting Countrywide CFC. I hope they exited the position. Today Bank of America (BAC) announced they would be acquiring CFC. The stock was 50%+ on the news!