Thursday, August 7, 2008

GTT asked me to repost this GSE secret ....

so I hear and obey. Pillage at your own leisure fellas.

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I will share one more secret with you all.

Do you remember 2002-2005?

When refinancing was heavy? When rates were low?

A mortgage investor like Freddie and Fannie would lose a lot of money from mortgages prepaying EARLY (due to incessant repeat cashouts and declining rates) if they don't hedge.

So they hedge using CHEAP options on interest rates. in other words, OUT OF THE MONEY options.

Including these and still Not-marking to market, Freddie Mac already in their own words, negative capital.

There's 1 - 2 yrs life left on these options, and they're still out of the money for both FRE, and more so for FNM.

Combined, these are "valued" at $20B+ when by admission, their book value is negative including that +$20B.

How much confidence do you have, that these options will be in the money and realize the value of that $20B, given your own experience trading out of the money option?

Given that house prices are not controllable variables, do you think the government would relinguish the last thing they control, interest rate?

Or even if they do, have you seen that mortgage rates are taking a life on their own, that they continually going up just from risk based pricing.

Hehehehheh. $20B just from NON-MORTGAGE book in these GSEs, going poof in a year or so.

And how's the prime book losses pal? I really want to keep the story about prime defaults as a turkey for y'all before I go for winter vacation.

3 comments:

Penn said...

MTG, I asked this in the last post. Will you be giving any kind of intimation when you go heavily short?

MTGSPY said...

i may never have a chance penn, cuz what I do is always scaling in. So it could be just 20-25% in and the plunge happens. In May - July, everyone was trying to play bull in June and someone (was it you) made a point about my continued bearishness. At the time, I was in 40%, but then again would it be different if I was 40% in for the entire duration or 80% in for half the duration (by being stupid and afraid of my own shadow and cover)?

Having said that I haven't taken anything in financials, 25% in tech, 40% in retail (OSTK), and 100% in UYM shorts with various targets that I mentioned every now and then here.

I think I will scale into financials maybe today after FNM's conference call. These buttholes are 100% certified liars and may still fooled a lot of people so why give away a better entry price is my reason.

Penn said...

Thanks MTG, that helps. I am trying to doing the same thing and scaling in. I have to rebuild my position in UYM though, got out after the last plunge and looking for a bounce to reshort.

I am not worried about shorts. I am just going to hold them. I wanted to get my timing right in options and thus wanted your opinion.

When you enter Financial shorts, will you be speculating with Options? If yes, how far our do you generally purchase them?