Home Page : www.otcjournal.com
Email Questions or Comments To:
editor@otcjournal.com
To
OTC Journal Members:
 |
Comments
in the BLOG |
 |
There are three new BLOGs
for your reading enjoyment. eFoodSafety (OTC BB: EFSF), Nighthawk (OTC
BB: NIHK), and Commerce Planet (OTC BB: CPNE) are all the subjects
of new BLOG entries this week. If you have an interest in any or
all of these ideas, please take the time read and share your comments and/or
thoughts- either positive, negative, or neutral.
The BLOG is your opportunity
to ask questions and offer comments. I will make an effort to answer every
legitimate question. If I don't know the answer, I will contact the management
and get the answer. Alternatively, if you have questions you don't want
publicly displayed, you can always email me directly at editor@otcjournal.com.
If you submit a comment or question, it will not appear on the site until
I have responded.
To use the BLOG, simply go
to the home page at www.otcjournal.com
- the BLOG scrolls down from the upper right hand corner. The most
current journal entries appear on the right hand side of you screen. Check
back frequently for updates particularly when stocks are moving to overbought
or oversold levels in volatile markets.
 |
Is It Summer
Already? |
|
Feels like summer in the microcap
world. This is usually our time. Small stocks are trading sideways on no
volume. What's next? If it was summer, I would say we will experience a
month of slowly declining prices on light volume as a few sellers exacerbate
price movement in the absence of buy side volume.
Then, there's the January Effect.
Ever heard the phrase? It refers to the down draft in the previous year's
poor performers during December as investors lock in tax losses. Post new
year, new money swoops in and picks up bargains. In the past 10 years the
January
Effect has been replaced by the Santa Rally- tax losses were
taken in November, and bargain hunters swooped in during December. This
year, it looks like the January effect might actually happen in January.
Those who follow my writings know
there are times when I believe the microcap switch is flipped off, and
times when the microcap switch is flipped on. It seems like an all or none
phenomenon- when the switch is on, people are buying, selling, and trading
in small stocks. When the switch is off, we just don't see the volume levels
required for healthy trading patterns. There doesn't seem to be any "in
between" time.
Right now, the switch is off. Despite
corporate achievements, enthusiasm has waned. I believe it is the result
of headline shock. Everyday, the media chooses to focus on some cataclysmic
event related to sub prime shock. CNBC's David Faber keeps saying "it's
not over yet". Investors in micros are on the sidelines with their hands
deep in their pockets- afraid to get active.
So, is it June or July already? Are
we destined to a couple more months of low volume, slow erosion, or is
the microcap switch ready to flip back on? Let's look at an updated version
of a chart I showed about one month ago.
This is a chart of securities that
are very difficult to track, but are causing the sub prime melt down to
be blown way out of proportion. This chart tracks the price of a portfolio
of AAA mortgages which are not in jeopardy. Note how par value is $100,
and the value of the debt instrument dropped into the high 60's. That's
an enormous drop for a relatively safe bundle of mortgages.
Huge institutions are being forced
to write these portfolios down, generating billions in paper losses where
there really is no loss. Most of these institutions are content to sit
back and "clip their coupons" (collect monthly interest).
Note how the value of those AAA mortgages
has finally started to rise again. Guess what- as bids firm, many of these
behemoth financial services companies will be able to report balance sheet
and earnings gains after these massive write downs. Is it a coincidence
the rise coincides with this past week's renewed strength in the markets?
The Bush Administration estimated
there are 1.5 million sub prime mortgages. I have read estimates more along
the lines of 2 million. Governor Schwarznegger in California estimates
his state's number at about 500,000, which would lead one to believe 2
million is a better estimate.
How big is the problem? Here are
some hard facts:
-
There are 75 million homes owned in
the US
-
40% of those are owned free and clear
(hard to believe for us folks on the coasts)
-
Only 14% of the remaining 60% are considered
sub prime
-
If half go bad, it equates to about
$75 billion of the $10 Trillion mortgage market.
Blown out of proportion? When you look
at those numbers, you bet. When you look at the headlines, you would think
the vast majority of Americans are defaulting on their loans. 75 million
homes owned in the US- probably no more than 1 million mortgages in trouble-
that's 1.3% of a $10 trillion market.
Is the home building industry in
a full blown raging depression? You bet. It's the pendulum swing against
the massive profits developers enjoyed for five years when they were racking
up profits selling homes to people who really couldn't afford them. Paybacks
are a b***h.
Is the rest of the economy suffering?
No- most other industries are healthy across the board- despite dire warnings
that the American consumer is dead thanks to 1. no longer being able to
leverage their home, 2. high gas prices, and 3. low savings rates- the
malls are full and Americans are gobbling up consumer electronics like
crazy (See AAPL- which I recommended at $95 in March- closing in on $200).
David Faber is probably right- there
will be a few more headline shocks out of the sub prime meltdown. The Bush
Administration is stepping in to help. Just this past week, I heard about
1 microcap hedge fund that took a beating in sub prime mortgages and melted
down- causing redemptions in a bunch of other funds where investors could
find liquidity.
The worst if past. As the AAA mortgage
pools find bids, the market will find a bid as well, and stocks will firm.
Here's the point of today's edition-
it's simply too early in the year to be May. There will be another run
in micros. Where there is tax selling, there is opportunity. If one of
your favorites swoons before the end of the year, I believe a very good
two month trade could be in the offing if you have the intestinal fortitude
to act.
|
