Shorting Home Equity Mezzanine Tranches (2007) [pdf]
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How did that go?
http://www.peterfrase.com/2011/08/the-big-short-germany-and-...
Well, you can test yourself, short ideas are abound in these uncertain market conditions. It's surprisingly hard to have clarity while things are happening, even if they are obvious in hindsight. For example, do you believe you should
1. Short restaurant equipment suppliers because up to 15% of restaurants could go out of business? https://www.presciencepoint.com/research/research-archives/m...
2. Short Chinese tech companies claiming to have exponential growth numbers in the wake of "The China Hustle" and Luckin Coffee? https://citronresearch.com/wp-content/uploads/2020/04/GSX-Te...
3. Short tangentially related healthcare companies trying to cash in on COVID test kits? https://hindenburgresearch.com/scworx-evidence-points-to-its...
I believe at least one of these things will appear extremely obvious in hindsight ("duh, restaurants going out of business was a no-brainer").
More specifically: glacially.
Up until the credit markets froze up, all the information was available, with time to digest and for anyone to act on it.
That's the most interesting thing about this presentation. I'm assuming this or similar was the one dramatized in The Big Short?
It's simply saying that something doesn't add up. Then laying out its case for the numbers that were added.
At a macro level, there isn't much complexity:
(1) Home price appreciation is strongly inversely correlated with default rate.
(2) CDO are created with sharp risk cliffs related to systemic default rate.
(3) Current home price appreciation + observed default rate + CDO pricing does not add up. Ergo, one of those things must be wrong.
Even in the big short, they show the routes different traders took to get short exposure and all took various amounts of heat until it payed off.
Same is true now wrt to corporate bonds (or I should say was true, way more expensive now to short than it was say during the entire time of 2019), one know's they will go tits up, but getting the cheapest exposure will enable to either build the position with minimal/fixed draw down or sweat every bps move against you.
Finally in 2008, these guys booked like $100 million in profits. But it didn’t matter at all cause the dealer side lost $50 billion.
I thought that was one of the most interesting / exciting parts of the book.
The fact that they literally had to go and find people who would sell them insurance on the mortgage backed securities.
"I'm not wrong, I'm just early"... "IT'S THE SAME THING!"
The story obviously works out well for them in the end. But all it would have taken was the market to hold out just a little longer or investors wanting enough of their money back just a little earlier and they would have all taken a bath.
The markets are littered with stories of things that don't make sense, I semi-regularly get motivated to actually put my money where my mouth is. And in the vast majority of cases I end up getting the timing wrong by a month or two, which in the end is still just getting it wrong. There's no reward for being just a little bit wrong. It's also not realistic to look back at historical events and think you'd have been able to predict the timing with the required accuracy if only you had the data.
Obviously yes.
> Short restaurant equipment suppliers because up to 15% of restaurants could go out of business?
Well, maybe not.
Lots of restaurants will go out of business, but if the demand for dining is still there the surviving restaurants will expand absorb it. They will not necessarily reuse old equipment from bankrupt restaurants, they might instead buy new equipment e.g. to make it uniform with the equipment they already have.
As a matter of fact, if the demand persist the increased turmoil in the restaurant businesses can only mean more equipment sales, not less.
Even if you’re right about the outcome, you can still be wiped out If your timing is off!
It's not enough to just be directionally right and even timed correctly - you have to get a good price, too.
One factor in survival of those businesses may be how well they exploit their fallen brethren for their own growth.
Although we're testing more than before, there are still millions (tens of millions?) of people that will need to be tested and a significant fraction will be seniors on Medicare.
That's a lot of money being dangled in front of physicians, laboratories and test manufacturers. When I saw that news the first things I thought was "someone is going to try to get a piece of that any way they can".
[1]https://www.cms.gov/newsroom/press-releases/cms-increases-me...
Find a way short the loans originated by financing companies to pay for restaurant equipment, but ones that that won't be bought by the fed.
It's a Matthew effect. Think of a pareto distribution with a 45deg line bisecting the curve. Everyone on the left hand side grows, and everyone on the tail side is fucked. Only question for a stock is, which side of the curve is it on? The fed is bailing out the banks and the credit markets that have almost all of the exposure to that tail, so don't fight the fed by shorting banks. Auto companies turn low interest rates into higher interest loan collateral with depreciating value, major airlines operate as a corporate welfare programs, so neither of these would be easy choices.
On a normal scale of legitimacy, there is still probably %15 of companies in the market that at varying degrees are based on outright fraud. Find and short that instead of taking flyers.
And this is the real danger, isn't it :)
Gambling against the Fed is tough. Reality can be one thing, but the Fed acts on their own.
As they say, the market can stay irrational longer than you can stay solvent.
I remember back in 2004, some of my colleagues were all chatting about flipping McMansions. My housemates and I threw a party, and some poor half-drunk girl I didn't know was telling me that Warren Buffet was warning about a housing bubble and asking me, a stranger, if she and her boyfriend had made a big mistake in recently buying a house. I felt very uncomfortable on several levels trying to give her comfort. Going to a party without her bf and pouring her heart out while half-drunk to a stranger wasn't the biggest sign of looming trouble. There were long warning signs that things were not going to be alright. Hopefully she and her bf were able to ride out the crash.
So I suppose the context was probably that I had just watched The Big Short and was reading up on the topic some more haha.
https://www.hsgac.senate.gov/imo/media/doc/PSI%20REPORT%20-%...
Yep, there's a reference on page 289.
1119 2/2007 “Shorting Home Equity Mezzanine Tranches,” Deutsche Bank Securities Inc.,
and there was an earlier version, from 2005.
1314 See, e.g., 2/2007 presentation, “Shorting Home Equity Mezzanine Tranches,” prepared by Mr. Lippmann, DBSI_PSI_EMAIL01988773-845
Here is 57 though 2012. If I'm mistaken and this looks like its from one of the books let me know and I'll take it down.
https://send.firefox.com/download/9a64844c1321c00c/#aKJwkyJh...
Thanks for the share that is the subject of the post.
Edit for clarity: Early ones are Buffett Partnership, NOT brk.