Summary
There are early indications of a bottom forming in the subprime mortgage market, and now is the time to make a lot of money on the next leg. Time to shift from the back foot to the front. Don't be caught in short-squeezes. Place your bets now on the future winners. There will be dramatic rebounds as confidence returns and pricing returns towards equilibrium, as was witnessed with Accredited and Fremont. (Originally submitted March 20th).
Analysis
There are early indications of a bottom forming in the subprime mortgage market.
Fortress bought a $1.7 Bn portfolio. Accredited sold a $2 Bn portfolio at only a 5% discount. And today, Accredited raised $200mm at steep 13% and a 14% warrant dilution, from Farallon, but was rewarded with a 23% jump in its share price. The liquidity crunch appears to be passing. The market is getting comfortable enough to be able to price the default and severity risks; and asset values have fallen to a market clearing level. Thus a base is forming on which confidence can rebuild.
That does not mean that others will not still fall. The jury is still out on New Century, and others. But the general panic is easing. The capital markets are getting comfortable. The contagion will not spread to other sectors. The fears of the GDP hit and recession probabilities will subside. Sure, the adjustment will still have to ripple through the economy. Companies will fall. Arrears, defaults, foreclosures will still rise and hurt. There will be pain for the subprime consumers. Political backlash will at least be talked about. But the forward looking capital markets recognize this and are now willing to put a floor under the values of the perceived winners.
It is completely logical that with the world in general awash with liquidity, that some of that liquidity would be used as a shock absorber to alleviate the squeeze in the subprime sector and contain what could be a more widespread run in a less favorable liquidity environment. The market is functioning and the very quantitative risk calculating hedge funds are rationally pricing the risk and so limiting the panic. Ultimately, this will serve to contain and limit the severity on the other parts of the economy to everyone's benefit.
