How to Make Profit on This Security problem?

[Fern]

Now is the chance for all you e-financial experts to do some good and wow us with your uber-733t financial prediction skillz.

How to profit on these MBS (morgage backed securities)?

My idea:

If the value of the MBS is far lower then the aggregate value of the individual (real estate)assests under the MBS, I say you break 'em up into their indivudla pieces.

Then you can do one of (at least) two things:

1. Strip out the crap properties and re-package the good properties as a certifiably good MBS security. The new bailout plan includes a provision for government insurance of these things, that oughtta restore confidence in them and guarantee their value.

Good properties can be sorted in various classes based on factors such as (1)the loan-to-value ratio (e.g., homes where the outstanding principal is only 60% or less of the homes' appraised value), (2) the owners credit rating, and (3)properties in strong markets (e.g., NOT CA or FL).

2. Contract with a nation-wide R/E brokerage firm and rent and/or sell the individual properties.

This revolves around the concept that the *sum is less than the parts*. Investors like Kirk Kevorkian have made a ton of money doing this.

You buy something *whole* and break it into it's far more valuable parts and sell 'em off.

KK tried to do this with Disney back in the 80's when they ran into trouble (real estate, media content and ntellectual property individully worth far more than the value of the company's stock).

Fern

 

[Fern]

Another way:

Package these things up in money market funds available to the average investor. While we don't have the capital to buy millions/billions worth individually, collectively we could.

Buying these MDS/SIV/CDOs at .20-.30 (or even less in some cases) on the dollar might look pretty good to some of us average investors.

The national forclosure rate looks to be less than 2%, and even forclosed homes have value.

Link

While the national rate of foreclosure had increased by 79 percent in the previous year, it was still only 1.033 percent. Since about 30 percent of all homes are owned mortgage-free, this means that for all the noise about a crisis, only seven-tenths of 1 percent of all homes are in foreclosure.

In the top markets, the average foreclosure rate was somewhat higher, 1.38 percent. And it was up 78 percent over the previous year. But if you ranked the list, only 34 markets had rates above the group average. Fifty-one areas had rates of 1 percent or less.

Foreclosure rates had actually fallen in 14 areas. More important, many areas were rising off a rate that was tiny. The Bethesda, Md., area, to offer the most extreme case, saw foreclosures rise 1,288 percent - to a rate of 0.682 percent

The MSM likes to hype stuff, and they use the percentage increase amounts (e.g., 79%) instead of just saying the national forclosure rates went from .577% to 1.033%.

IMO, this whole mess sems to stem from market irrationality. Given the very small forclosure rate, and knowing that forclosed homes are NOT worthless, writimg down MDS/SIV/CDO's (whatever term you prefer) by 70-80% or more seems highly irrational.

The government's lan should seek to eliminate this irrationality.

Fern

 

[Juddog]

Cliffs?

 

[DaveSimmons]

Repackaging the MBS up into separate good vs. toxic assets is a plausible idea, but if it was that easy you'd think the MBS holders would have tried it themselves.

It makes some sense for a government agency to buy and hold junk assets since they can hold enough of them for the bad and good to even out, and can hold them long enough for the value to recover without answering to shareholders or creditors.

I'm still wary of the bailout since I have no confidence that the government will do what Buffett says is required, buying at market value instead of at inflated corporate-welfare rates.

I'm even less thrilled with the bailout now that it's been larded up with pork, earmarks, and tax cuts without matching spending cuts.

 

[Fern]

Originally posted by: DaveSimmons
Repackaging the MBS up into separate good vs. toxic assets is a plausible idea, but if it was that easy you'd think the MBS holders would have tried it themselves.
-snip-

I don't think it's not been tried because there is so much irrationality in the markets concerning thses things.

I think the new proposal of government insurance for them now makes it totally do-able.

Fern

 

[jonks]

Originally posted by: Juddog
Cliffs?

you don't work in congress do you?

 

[Juddog]

Originally posted by: jonks

Originally posted by: Juddog
Cliffs?

you don't work in congress do you?

Hahah I wish! Heck I would settle for just working the amount of days an average Congressman puts in per year.

 

[alchemize]

Trying to beat the market generally means you lose. There are a lot of people out there just slightly smarter than Dave and Techs trying to make money on these kinds of things, and many of them fail too.

 

[TheSlamma]

Well since most I "told you so" people (Dave and Techs) stop there and can't provide a solution.. how would people like that have the ability to make profit in the situation either?

 

[Fern]

Originally posted by: TheSlamma
Well since most I "told you so" people (Dave and Techs) stop there and can't provide a solution.. how would people like that have the ability to make profit in the situation either?

Knowing where the market is now, then adding to that an ability to see where (and maybe why) it will move next is how to make big bucks.

E.g., Goldman Sachs made killing in the market by short-selling these securities; they preidicted the coming problems like those guys.

Fern

 

[heyheybooboo]

Originally posted by: Fern

Originally posted by: TheSlamma
Well since most I "told you so" people (Dave and Techs) stop there and can't provide a solution.. how would people like that have the ability to make profit in the situation either?

Knowing where the market is now, then adding to that an ability to see where (and maybe why) it will move next is how to make big bucks.

E.g., Goldman Sachs made killing in the market by short-selling these securities; they preidicted the coming problems like those guys.

Fern

Goldman made money shorting the junk they sold.

 

[alchemize]

Originally posted by: Fern

Originally posted by: TheSlamma
Well since most I "told you so" people (Dave and Techs) stop there and can't provide a solution.. how would people like that have the ability to make profit in the situation either?

Knowing where the market is now, then adding to that an ability to see where (and maybe why) it will move next is how to make big bucks.

E.g., Goldman Sachs made killing in the market by short-selling these securities; they preidicted the coming problems like those guys.

Fern

You have to be smart enough to earn, then save a few nickles to rub together too before you can start parlaying them into something

Dave's been happy to mention that the market is rigged anyhow, the whole .com bust was setup to make him lose money in his first attempt at investing

 

[DaveSimmons]

Originally posted by: TheSlamma
Well since most I "told you so" people (Dave and Techs) stop there and can't provide a solution.. how would people like that have the ability to make profit in the situation either?

I don't consider myself knowledgeable enough about mortgage securities to be in the "told you so" camp beyond seeing that the housing bubble would pop just like dot-com. And just because a person can spot a bad solution doesn't mean they have a better one .

I'm still sticking with the strategy I've used for the last 8 years: buy stock index mutual funds (S&P 500, foreign index funds) and hold them forever. Without adding in dividend income my investments from 2001 to mid 2005 are still in the black, after than I'm currently down about 15%. Long term I'm not worried, I can keep holding the funds through either a miracle cure quick fix or a long recession.

I do feel sorry for all the people panic-selling their stocks and moving to CDs or T-bills. They're selling low now and planning to move back into stocks after they recover so they can buy high again.

 

[dmcowen674]

Originally posted by: alchemize

Originally posted by: Fern

Originally posted by: TheSlamma
Well since most I "told you so" people (Dave and Techs) stop there and can't provide a solution.. how would people like that have the ability to make profit in the situation either?

Knowing where the market is now, then adding to that an ability to see where (and maybe why) it will move next is how to make big bucks.

E.g., Goldman Sachs made killing in the market by short-selling these securities; they preidicted the coming problems like those guys.

Fern

You have to be smart enough to earn, then save a few nickles to rub together too before you can start parlaying them into something

Dave's been happy to mention that the market is rigged anyhow, the whole .com bust was setup to make him lose money in his first attempt at investing

That's right.

Only people like Buffett, Fosett etc that can throw billions around like it was pennies can play the monopoly game, all others eat cake.

Imagine of everyone had their retirement caught up in this like Bush tried to push through?