Wednesday, February 21, 2007

The Least Helpful Research Report You Will Read Today

The least helpful research report any investor will likely read today comes from the folks at Friedman, Billings, & Ramsey—a firm that hitched its financial star to the sub-prime market and is now experiencing the downside of that affiliation.

FBR, it should be noted, helped manage equity offerings for New Century Financial, a company that was, until last night, the Poster Child of the sub-prime lending debacle now unfolding across this highly leveraged land of ours.

What happened last night—specifically, four seconds after the market closed—was that Novastar Financial took New Century’s crown by announcing one of the most horrific operational 180’s in Wall Street history.

Novastar, it should be noted, is structured as a Real Estate Investment Trust, and as such paid out its earnings to until-recently happy shareholders who were woefully oblivious to the Ponzi-like nature of Novastar’s earnings stream.

The earnings stream itself depended on the company’s ability to package and sell sub-prime loans into a marketplace eager for yield, allowing Novastar to book largely non-cash gains up front on those sales as income, and to pay out that income to those formerly happy shareholders as dividends.

Unfortunately, given the non-cash nature of the up-front gains on those mortgage packages, and the Ponzi-like need to keep amassing—and selling—more sub-prime mortgages, Novastar borrowed money to pay the dividend income to those formerly happy shareholders.

A lot of money.

In fact, from 2001 until last year Novastar shelled out over $500 million in dividends to those formerly happy shareholders, while its debt went up by four billion dollars.

Which is why last night’s disclosure—that the company as a REIT wouldn’t likely generate any taxable earnings through 2011—shouldn’t have been much of a shock to anybody who even casually read the newspapers lately.

But it was, apparently, to the folks at FBR.

For this morning their analysts downgraded Novastar's stock from “Market Perform” to “Underperform,” and cut their price target from $27 per share to $10 per share.

Unfortunately for those formerly happy Novastar shareholders—whose ranks used to include much of the “Naked Short-selling Conspiracy Theory” crowd with whom Patrick Byrne associates and from whom he apparently derived his most bizarre notions regarding naked shorting by hedge funds—Novastar’s stock closed last night at $17.56 and looks to open closer to $11 a share this morning.

Seems the shorts were right all along.

Also seems the FBR report announcing their downgrade and $17 per share price target reduction will almost certainly be the least helpful research report anybody will read this morning.

Jeff Matthews
I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


whydibuy said...

Another ex of internet blogs such as The Housing Bubble who have been way ahead of the curve on issues like the subprime fraudfest. How wall street can act like its a surprise is beyond me. According to the blogs, we may be in for several more blowups of hedge funds, banks and mortgage originators. Of course its not a total surprise as evidenced by the huge short interest in junk like NFI. Checking that short interest number on a stock I'm looking at is one of the first things I do. Shorts tend to be better aware of trouble so when I see a large short interest, I stay away. I find they're right more often than they're wrong.

Sam Antar said...

To Securities Analysts:

During my years at Crazy Eddie, I found that auditors and securities analysts often did not know how to ask proper questions. When they did ask the right questions, they did not know how to formulate the proper follow up questions and were often too trusting of the answers they received.

Good questioning will create at times irritable behavior from company management. However, you are not doing your job to be in their good graces. Your job is to obtain not readily apparent facts and analyze them properly.

Be careful of those in management who choose to spin information. Be careful of those who deflect from the real issues. Be careful of those who too often accentuate the positive and spin the negative. Be careful of those who blame others. Be careful of those who choose to intimidate you.


Sam E. Antar (former Crazy CFO & convicted felon)

PS: Jeff, when will they ever learn?

todd shriber said...

Deutsche Bank only downgraded to hold. What's holding them back? (pun intended) - todd shriber

jmf said...

hello from germany

here are some quotes from the managing director for asset-backed securities research michael youngblood. from june 2006!!!!!!!!!

Youngblood thinks residential real estate is a lot stronger than most people suspect

• Housing prices will rise in each of the next four quarters, but by progressively slower rates year over year: 7.1% in 2Q 2006; 5.7% in 3Q 2006; 4.4% in 4Q 2006 and 3.5% in 1Q 2007.

• MSAs with fastest year-over-year gains in 1Q 2006 will continue to rise. Those cities include Phoenix, Az (34% expected rise in 1Q 2007) and Naples, Fla. (51% expected rise in 1Q 2007).

• California market will have continued rising house prices with a median year-over-year rate of 24.1% in 1Q 2007.

he is really funny......

Unknown said...

Here are some of my personal experiences with NFI and its supporters (

No doubt the truth will eventually come out. You'd also think that the SEC would spend more time monitoring Yahoo Finance message boards and websites put up by investors than simply scrutinizing Wall Street...

Sam Antar said...

To Contrarian:

You wrote:
"You'd also think that the SEC would spend more time monitoring Yahoo Finance message boards and websites put up by investors than simply scrutinizing Wall Street..."

My response:
The SEC is beginning to watch the message boards in a big way, especially how certain companies use them to spread deceit and lies.


Sam E. Antar (former Crazy Eddie CFO & convicted felon)