-- Posted Wednesday, 16 January 2008 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Wednesday, January 16, 2008
“Phenomenally accurate forecasts”
We’ve always maintained that debt deflation would provide few opportunities to get rich and that, moreover, it is likely to challenge even financial geniuses to hold onto a fraction of their current net worth. Indeed, the housing collapse that is now sucking the U.S. economy into a deflationary black hole is not going to work like the dot-com boom in reverse, nor will pessimists who are willing to put their money where their mouths are make untold billions as the U.S. economy collapses.
Now, one might think that any such precipitous change in the economy would produce at least a few big winners who had the guts to bet heavily against the consensus. While this will always be true to an extent, it is unlikely that those betting the “don’t pass” line this time around will get anything like the spectacular odds that were available in the days when corporate insiders and their investment bankers could buy vast quantities of dot-com start-up shares for mere pennies. We had a high school chum who did this, and the 600,000 shares he held in the company he’d helped start got bid up to $116 apiece at the height of the boom, in 2000. Such stories were all too common before the tech bubble burst, but we can see in retrospect that it was the kind of boom that might not recur in five lifetimes.
No Longer a Short
And that is why we should assume that hedge fund manager John Paulson will prove to be a rare exception by having made an estimated $3-$4 billion for himself betting on a drop in housing values. His story was recounted in a front-page article yesterday in the Wall Street Journal. The headline said he earned this sum betting big on a drop in housing values, but it would be more accurate to say that he bet against the mortgage paper underlying the homes. Specifically, Paulson shorted the ABX, an index that reflects the value of a basket of subprime mortgages. The index, first offered in July 2006, fell initially from 100 to around 60 but has since crashed to the low 20s. Paulson cleaned up, but we would surmise that the ABX is no longer a great short -- not valued at 20, it isn’t. For at that price, to make losers of mortgage bulls, foreclosures would have to reach 100% and the underlying properties fall in value to 1960s prices.
So don’t expect to be reading about more John Paulsons, because he alone appears to have picked the ripest, juiciest, lowest-hanging fruit we’re going to see as a result of the mortgage bust. Paulson made his bets when ebullience still reigned in the housing market, but all the ebullience that’s left, such as it is, would probably pass unnoticed at a funeral. Dot-com billionaires were a dime a dozen for a short while, but housing-bust billionaires like Paulson are going to be as rare as raucous anecdotes heard in the Titanic’s lifeboats. To repeat: For investors, the deflationary collapse that lies ahead will not be plunderable, like some kind of dot-com boom in reverse. Forget about leveraging the downside here, because surviving it will be challenging enough.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Wednesday, 16 January 2008 | Digg This Article | Source: GoldSeek.com
