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.
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.
Posted by Jeff Matthews at 9:16 AM