Monday, June 25, 2007
Sifting Through The Mortgage-Related Wreckage
Those seeking buying opportunities in mortgage-related securities or interest-sensitive assets will have plenty of opportunities (and a considerable amount of time) to dip in and go long again. Although this first phase of the liquidation process is almost over, the spillover from this meltdown seems likely to endure for years. And as long as it didn't come as a complete surprise, investors ought to step back and let the leveraged longs wreak some havoc with each others' portfolios as they crowd the exits. In a single-digit return world for stocks (and bonds), it will take some time to unwind the same positions that accounted for a good part of the extraordinary returns of the broker dealers, private equity honchos, and the rest of the masters of the universe on their way to ungodly prosperity and riches. Unfortunately greed isn't only the provenance of the chosen few who attended Harvard and Wharton. Those doubling down on real estate properties on the gold coast of NJ and elsehere will soon also see margin calls on their properties, as rental income falls just a bit short of making the grade. Any doubt, one should look at HOV, LEN and other homebuilders to see what is in store for property values. In the real world of investing for value, there are pockets of opportunities at modest risk which could provide 10% to 15% average annual returns over time (five years), absent a cataclysmic collapse in financial assets and the dollar. Contrary to conventional views, the GSEs (FNM, FRE)may offer the best all around return among financial stocks, a view I presented back in January.