Friday, May 2, 2008

The secret of Bear market.

1.0, 1.05, 1.1, 1.15, 1.22, 1.28, 1.31, -0.7, -1.35.

That's all the data on past earnings that you have. And the share price is half what it used to be at the peak.

What do you do? :)

Now do you see?


Anonymous said...

A company going BK... short the hole!

Mr Mortgage said...

spy - get in contact with me - idea for you.

A said...

just who is this mystery company that makes for an ideal short candidate ?

MTGSPY said...

First of all, if you look at the pattern that's the last 2 yrs of earnings of most financial companies. So which companies is irrelevant nor am I telling you what it is if it's real and I know which one - life outside jail is priceless. ;)

Now that you see "earnings stream" like that, how much would you like to pay for the business?

You are not sure, because for all you know, it will be negative so long as house price is still going down. And that is a 2 - 4 years down cycle for anyone who remembered 1991. Would anyone last that long?

So naturally, your first move is to look at the currently traded stock price. You are surprised that it's roughly balf the peak price.

What you do at this point if you have money, is realizing that since you can't value it, chances are nobody else can.

Then you find an opportunity because a stock like that is the nuclear core burning in the Bear star. The rallies will be amazing as people look at the peak for guidance what the promise would bring, at any news of "losses flattening". (watch GSE earnings closely for confirmation)

On the other hand, you can switch to sell, when logic comes back and says the equity won't last 3 years of downturn in housing. Watch this _everyday_ if you don't want to get caught in Dec 26-Jan20 type of move.

Arak said...


Are those purported earnings quarterly or yearly?

Gtt said...

Is that Citibank?

MTGSPY said...

Those were by the way, past earnings scaled so that the first one is 1.0. I use that to show by earnings alone you can't determine the value of a company once it has suffered two negative earnings. Because two possibilities: 1. if the trend continues it is worth zero, 2. if it's not, then it's worth what it was in the peak because it can presumably resume growth.

Anyway, let's just focus one step at a time. Focus on FNM tomorrow and FRE next week wednesday.

I say they have decent (70%-80%) chance to beat. So #2 could very well be the theme if that's right.