I could be early. I usually am. but here are 5 names that are commercial lenders with very little exposure to the residential mess. They tend to hold their loans as opposed to trading, they have been beaten down in price worse than the orioles against texas last week and there is massive insider buying in the shares.All yield well north of 10% at current levels. While continued problems may cause some dividend cuts, I think most of them will continue their payouts at these levels.

CSA-Capital Source

Operates as a commercial lending, investment and asset management company that
focuses on the middle market. The company provides senior and subordinated
commercial loans, invests in real estate, engages in asset management and
servicing activities, and invests in residential mortgage assets.
STARS Ranking: **
2008 EPS estimate $2.37
2007 EPS estimate $1.90
2006 Reported EPS $1.65

Text JER Investors Trust —(S&P) 08-13-07 Sym JRT
JER Investors Trust, Inc. (JERIT) operates as a specialty finance company in
the United States. It acquires and originates commercial real estate
structured finance products.

GSC Investment —(S&P) 07-13-07 Sym GNV
Seeks to generate both current income and capital appreciation through debt
and, to a lesser extent, equity investments, by primarily investing in private
middle market companies. It has elected to be treated as a business
development company under the Investment Company Act

NORTHSTAR REALTY FINANCE —(S&P) 08-09-07 Sym NRF
Operates as an internally-managed commercial real estate company that makes
fixed income, structured finance and net lease investments in real estate
assets. The company intends to qualify as a REIT.
STARS Ranking: ***
2008 EPS estimate $0.93
2007 EPS estimate $0.70

BRT Realty Trust SBI —(S&P) 08-08-07 Sym BRT
BRT Realty Trust operates as a real estate investment trust in the United
States. It primarily engages in originating and holding for investment senior
and junior commercial mortgage loans secured by real property.
Announced 2Q EPS $1.88 vs. $0.48 and 6 mos. EPS $2.91 vs. $1.09. Results
exclude gains of $0.04 for 6 mos. ’07, and $0.04 & $0.03 for 2Q & 6
mos. ’06, from discont. opers. Results for 2Q & 6 mos. ’07 include a
one-time gain of $15.3M from the sale of securities.

Living and speculation, Gonzo style


I find myself in a most unlikely place an a sunny summer Saturday. Home, sitting at the computer after returning from a bookstore run for fresh reading material and the latest financial papers. This is more like my bad weather weekends but I find myself grounded from the world of fast boating. My ribs, the victim of a disastrous albeit temporary defeat in The Great Squirrel War are cracked and I find the idea of bouncing across the bay untenable at this moment. So I here I sit with a stack of books, there are no games on at the moment of interest. We are in the sliding dead end days of summer now for orioles fans, 15 games out of the wildcard, never mind the lead and with the exception of days when Eric Bedard strides to the field in the fashion of young potential god Of the Mound playing nothing even resembling the game of baseball. Preseason football holds no interest, all my fantasy football drafts are complete so I am left with time on my hands to ruminate about the ramifications of everything and nothing. At the moment, my focus is on the book I just completed, The Gonzo Way Bu the wife of The High Priest of gonzo, Anita Thompson

I confess that in my youth I was a great admirer of Hunter Thompson, the great god of gonzo. I stumbled across the good doctor when I was 18 and working my away through life as a traveling salesman of sorts. As I found myself all too many nights in yet another decrepit single sink railroad hotel on the outskirts of some military or small college town, books, my friends from childhood remained one of my favorite refuges from the world. I had a co-worker of a similar literary bent and we read all the stuff young men should read as they attempt to explode onto the worlds stage. Thompson, Kerouac, Ginsberg and of course John d. MacDonald. We toiled long hours each day selling modestly overpriced books to the unsuspecting and unwary and spent our nights, fueled by alcohol and a few select substances of suspect legality in savage pursuit of the lessons and legends of our literary heroes. Thompson was the perfection to which all aspired, and despite failing nightly to achieve the heights the good Doctor soared to, we never stopped trying. As years went by, I read him less and less as the political gulf between out views began to widen and nagging little things like marriage and children began to cut deeply into the available time for soul searching on the highways and in the bar rooms of life. It was clear to me that the reagens policies were working, restoring not just Americas economy but her self confidence and place in the world. Thompson continue to rant and rail against the great motivator’s well as refused to admit the utter failure of the Carter years and I just sort of stopped reading him. Along with jail cells. Illegal smiles, fist fights and Carlos Castaneda, Hunter Thompson became just another memory of a marvelously misspent youth.

When he showed up as an ESPN columnist, I started reading him again. He always was a keen observer of sports and a very astute and calculating bettor, especially of football. I found that I had missed his insights into games and even of life. I had been right about reagen but I had to admit that he had been all too correct about George the Younger and his misadventures with America. We still had some significant differences on the redistribution of wealth but if he could help me find one mispriced line a week I was willing to overlook it. I was shocked and saddened when he killed himself. I felt like an icon of my youth as well as one of the great writers of our day had left the world. It was a hole I suspected we would not see filled anytime soon. It was with some interest that I ordered Anita’s book and looked forward to reading it. It is a slim volume barely more than 100 pages but it is packed with some powerful insights. Anita chose not to write a history, leaving that task to others in the days to come, but focused on some of hunters core beliefs and some of the things she learned from him along the way. I was surprised to discover that many of these have direct application to speculating and living. Although I may not approach them in the same way as Mrs. Thompson some of these questions and insights are worthy of consideration. This is not a book review so much as my own thoughts in response to the questions raised and lessons learned from this little book. They are from both chapter and section titles that struck me as powerful.

Never Stop Learning.

This is chapter one of the book, as it should be. He quest for knowledge is one of the most important facets of a well lived life. I don’t think it matters what knowledge you search for as long as you are searching. We cannot all be looking for the deep hidden meaning of the universe but we can be learning something every day that benefits our live and those around us. A new way to improve your business, a new dish to cook, a new author to read, a new way to look at markets and at stocks. It really doesn’t matter what it is as long as you are learning and continue to seek to learn. The quest for knowledge is the quest for a better life.

Bet with Your head Not With Your heart

This simple sentence can do much to improve my life. Whether it be a stock, a markets, a baseball team or a woman, a judicious use of the brain cells can help prevent a loss. I love the Orioles as you all know. Betting on them would be financial suicide. I love women as well. Bets there have tended to end just as badly when blinded by desire and infatuation it is easy to make bets that have little or no chance of success. Don’t get me wrong. I ll probably continue to do it. But at least I won’t bet on the orioles. Same with stocks and the markets. I have seen all too many people take a round trip in a stock from low to high back to low because they fell in love with it. Use your head. Stocks cannot love you back. Same with particular strategies or methodologies. Markets adapt, so must we(this also goes back to never Stop learning).

It is Wrong When It Stops Being Fun

I think this might be one of the most important sentences in the whole book. Apply it to you job, your trades, where you live, your relationships, anything and see how stunningly true this is. We too often forget that life should be fun. If life was all that serious a venture we wouldn’t be mortal. If you do not love trading you probably should stop. If you cannot find the simple happy things about your partner and you no longer share the joy of being together, you should probably split. If you aren’t happy where you live, you should probably move. Hate your Job? Get a new one. Life is brutishly short no matter how long it my seem when your team is 20 games out, football doesn’t start for three weeks and your ribs are cracked by a vengeful squirrel. It is over far, far too soon. Enjoy every moment you can and when it stops being fun, it is wrong. Time to either make it fun again or move on.

We is the Most Important Word

I am paraphrasing and twisting the book here but remember this not a review just my thoughts and observations from reading it. While at heart a randian and well aware the consequences, success and failures of my own action are my own responsibility, I still feel that we is a huge factor in a life well lived. We. Ourselves and those around us. I am blessed (really I think the only word that fits) to be a part of two unique we’s. first there are those from the speculative word. Hanks to Victors creation of the spec list , I have met many of the greatest minds of our time, not just in financial fields but certainly that is a big part of it. But also men and women who excel in a range of fields, Education, Literature, Psychology, medicine Law, real estate, engineering, biotech, an incredibly wide range of fields. I have learned much from all of them and greatly increased my store of knowledge(again, see Never stop learning)There is a subset of this group, the after dark group that band of brothers, with a few sisters in the mix who roam the land from new York to Chicago, to Lexington, Annapolis and the wilds of Iowa soon talking drinking, playing learning and having fun. It is amazing to me how quickly we became close, the result of a lot of nights we will never remember in the company of those we will never forget. There are too many stories and too many lessons learned to list here but someday I think this a book I shall write. The after dark bunch spread for the Mighty Metropolis of Deltaville to the sunny climes of green bay and I have come to love them all over the years.

There is another we as well, that group of friends here on the island of misspent toys call Kent. I fell into this group a few years back and it has become a big part of my life. It was pointed out to me not long ago by an outside observer that what we have here is pretty unique. Our group ranges from late 20s to early 60s in age with mist in the 30s and 40s. By this time most people have settled down into their lives, have a few work friends, a neighbor or two, maybe some old college buddies they talk to once in a blue. Too have this large a group of individuals who call each other friend, and treat each other that way is unique. It is a wide range of occupations and all of us are reasonably successful(you have to be to pay these bar bills). I was asked if it was a love of boating that created the group. I started to say yes as boating is a central theme in warmer months. But as I though about it, I realized that was wrong it was a love of life that the group shared. Boating sure, but football Sundays around the TV with friends, long conversation about anything and everything, fishing( although not me. Do you know early those fisher types get up? On the weekend yet), steaks on the grill on a lazy Sunday evening, beers on the dock after a long week. We celebrate each other success and share the defeats. Marriages, divorces, births deaths, wins and losses I have seen the Kent Island bunch stand by each other through it all. It is like having an extended family, one that you actually like with no long harbored resentments of who mommy like best or who always got the biggest slice of cake. I consider myself lucky to have fallen in among them.

What is the desired effect.

Thompson liked to ask himself this question before taking action. What is the desired effect of our contemplated action? Outrage,humor,inspire? Why are we doing this? To make money? To have fun? I think this one sentence can greatly improve decision making ability. At least for me.

Would You do It again?

What a great way to review our mistakes and misadventures. Whether it be a bad trade, a failed relationship or just random screw up. Given the same set of circumstances would you make the same decision. If the answer is yes, then move on. The dice, as they sometime will, moved against you. You were true to yourself and played whatever the situation to the best of your ability and knowledge. If however, the answer is no, then there is studying to be done about how we reached the wrong decisions and what changes need to be made or where our knowledge needs to be expanded.

It is The Recovery That Matters

Adversity is like sh*t. It happens. Trades will go against us. Stocks will miss earnings. The upward drift ,in life as markets, will be bumpy. Relationships will fail, love will fade, there will be accidents of floods of reality and emotions. There was no guarantee on your birth certificate and the founding father only promised you the pursuit of happiness, not eternal happiness itself. It is how you deal with it that matters. Victor has long been the shinning example of this to me, dealing with adversity that can break you but he got up plowed on and rose again. We will be knocked down form time to time. But to get up and begin to heal and recover is to m the essence of the pursuit of happiness

Truth is Easier

No need for a lot of commentary here. This is one of life’s great truths that is all to easy to forget at times. Tell the truth, face the truth and let the chips fall where they may.

It Never Got weird Enough For Me

“Reality”, Thompson said in 2002, “is still stranger that anything I could make up” How true it is. Life is weird. But I think weird might be a good thing. I look at some of the weirdness is my own life over recent years. A high school dropout ghost writing two leading investment books. Soft spoken Kentucky drawls. Rib cracking squirrels, my mtv daughter finding and becoming immersed in classic literature and she doesn’t even have to study in school, three blondes in a bar, lets just be friends, Irish bars on 51st and 2nd, the journey to potters patch, whiteouts on rush street. Life is weird. If we live it right, taking intelligent risks in markets, love and life(in my case I may have to go with two out of three. Something about legs and breasts that make me break out in stupidity) facing our fears and overcoming them, daring to be a part of we and life will be weird. And exciting. And interesting. And successful in all the ways that matter. Embrace the weird. The alternative of course is boring normal. Nine to five. Frozen dinner. Spouse who doesn’t like, much les want to sleep with you. Network television. Generic beer. Sorry. Give me the weird. Good friends, good wine, victories and defeats, spoils and scars. I hope that for me, and for you, it never gets weird enough.

lights camera action

Debt crisis. No problem. Contract stock prices by exactly 10%. Inject liquidity and lower the discount rate. Goldman creates a fund to buy the mezzanine loans off the balance sheets of major banks( I m sorry but this begs the question…exactly who is dumb enough to invest in a fund that buys loans in deals that could not get market financing the first time?), open high yield spreads to 400bps over treasuries, leave emerging mkt debt at +250. Crisis over, resume upward march f the market. Seems a little scripted to me. But, for the moment that’s where we are.

No one is talking about all the loans that will not be able to refinance in the year ahead. That’s a lot of paper and a lot of real estate someone is going to have to figure out how to move. As Wilbur Ross noted on CNN.Com:

Now that we have identified the cause of the disease, how severe and how contagious is it? The present $200 billion of delinquencies will grow to $400 billion or $500 billion next year because $570 billion more low, teaser-rate mortgages will reset to market and consume more than 50% of the borrowers’ income. Therefore most of the loans will be foreclosed or restructured. Probably 1.5 million to two million families will lose their homes. Meanwhile, few lenders will put mortgages on the foreclosed houses, so the prices will plummet

No one seems bothered by the fact that junk over treasuries are still low by historical measures, or that in past credit event spreads blew out to well over 1000 bps. No one is bothered that there are still a whole lot of structured debt products out there and no one knows exactly who owns them or what they are worth. Sound the all clear and buy em seems to be the mantra.

I just cannot buy into it. A one-month credit crisis? Are you kidding me? This will continue to have an impact in the stock and real estate markets for a while yet. There are all those loan resets. It will be much harder to do LBO and PE deals with debt as loan underwriting is actually back in vogue and you will have to be able to prove that you can afford to repay the loan. This will be a drag on stock and bond prices. I don’t think the fed can bail the markets out either. After initial skepticism that the fed will lower in September but now I think they might. Certainly the futures market thinks they will. It is not however, to help the markets, but because the economy is slowing. The consumer is slowing down; unemployment will rise with newly unemployed mortgage brokers and processors padding the rolls. The Early September economic releases will bear watching closely. I think the market may be screwed here. If they don’t lower rates, there is a debt problem that the street cannot refinance. If they do, because the economy has weakened, that also bodes ill for stock prices.

I am not a long-term bear. Last Friday I had buy orders loaded up and ready to go as I expected a huge sell off before bernake and Co. stepped in. I was sure we would have a buyable sell off that would create short-term opportunities in stocks. Instead, courtesy of the fed I am still on the sideline. I won what I won here but I cannot bring myself to add at these levels. We need to be lower to reflect the worsening economic conditions and levels of risk that exist in the market and the world.

In running my screens this morning I found nothing new of any real interest. The runs are full of mortgage reits and real estate related companies. Let me stress that I truly believe that these securities will be one of the single great opportunities of a lifetime just like junk bonds in 2001. It’s just too early but companies that have quality real property, reasonably financed and managed are coming down in price. When we get another good sell off and the shares start getting puked at ridiculous prices, I will buy them. Right now, prices are just reasonable.

I remain a buyer of ADPT, ESST, EIHI,BHBC and BERK. They all fall into the too cheap not to own category.I am keeping a ver close eye on a lot of small banks as the prices move down. Small local banks with good management and an indepth knowledge of their market are one of the most fruitful investments you can make, provided you buy them right.Wen prices of the majority of them get under or close to tangible book value it tends to touch off a consolidation wave and strong stock price moves. I am looking for opportunities to sell near term puts in CHIC, BGP,UNM and DDS at good levels. I am still short USNA ( like my gun and my scotch bottle I ll give this one up when they remove my cold dead hands. I am very much of the opinion that the company has zero value), and on any more rally in prices I shall join the esteemed Mr. Crossman in being short the emerging markets buy buying puts and selling call spreads on EEM.

All clear? Not yet

I love the message

the fed has sent to the markets.

do anything you want with shareholders and depositors money, no matter how risky or stupid. there are no consequences because we will bail you out.

carry trade?..go ahead..lever it up ten times. who cares?

loan 500 k to someone with a 500 credit score? Shit..make it 600

buy mortgage bonds with no idea of the actual collateral? we suggest you use borrowed money and buy twice as many.

the poor guy with the 2/28 teaser loan is still screwed but the asshole who sold it to him will find enough liquidity to charge someone else 3 points on the front side of a stupid loan.

do what you want.take any risk no matter how ill thought out or downright stupid. at the end of the day we will save you.

this is like punishing your teenage son for wrecking the family car by giving him the keys to a new camaro and a 12-pack.

random observations


A summer continues to wind its inevitable path to Autumn, the annual NYC trip is behind me, I find it helpful to pause and reflect about the lessons learned as we go move towards September. It has been a go summer so far, lots of boats, bars, baseball and friends to wile away the days and some interesting projects, as well of course the stock market and a growing pile of books to stimulate the mind. The following observations are totally random, likely useless with a high probability of being wrong. But what the hell..I have no intention of buying into this market just yet so this will keep me occupied in the interim.

When boating, even I who never drive due to the previously mentioned total lack of coordination and propensity for instantaneous stupidity, have observed that when running with or against the tide it is a fairly easy thing to keep the boat trimmed out and running smoothly. When, however, it is one of those lovely days when everybody and their cousin decides to go boating and the bay is full of wakes sloshing around that it gets a bit dicey. When you start taking the weaves on the side. From time to time it may even get bumpy enough to cause one to spill their cocktail. This is not fun. So it is with the stock market. Generally speaking markets tend to go along, some ups and downs but generally following the continued upward drift of mankind’s continual industrial, technological and financial progress. There will be dips. As long as they are identified and the factors are largely known and everyone is fairly rational, these dips are buying opportunities to benefit for the continual drift. Occasionally however we get a period where greed has been dominating for too long, there are questionable and unknowable factors that roil the market seas and one spills their proverbial cocktail. In periods such as this, wealth is lost not to be regained. We saw this is the 80s when the nifty fifty imploded dragging the market down to levels it didn’t recover for the better part of the decade. Recently we saw it in the 90s when there were too many tech boats and the water and the wakes crashed prices down to levels that most tech stocks still have not, and likely will never see again. Wealth was destroyed. Quotational loss can be handled as long as the business value remains intact. The real destruction of business value from overpaying relative to value cannot. I fear we may be in such a situation now. There is a lot unknowable about the current liquidity and credit crisis. No one seems to know who holds what and exactly what he or she hold is worth. One real problem is that all the pricing models, particularly in the mortgage backed market factor price appreciation in as a factor. When real estate is flat or declining the models are not accurate.

How can anyone rationally expect a credit boom of six years to end in one month?

From a moral point of view, should the Fed bail out Wall Street and the banks while allowing the consumer to fail?

With signs of inflation already present, wouldn’t an interest rate cut have consequences more serious than the current market dislocation?

Can you have a bear market and still be up for the year?

For the last year or so I have been very cautious. I have limited my buying to stocks and situations that appeared to be trading at rock solid valuations that had a large margin of safety. Silly me. As the quant funds that include these strategies in the mix have had to raise money to fund their debt and mortgage positions have puked these things out, they have gotten ludicrously cheap. Stocks that I valued at 4 now trade at a 1.40. Ones I had at seven are in the threes.

I have gone back and checked my valuations. I find them to be reasonably correct within the scope of my experience. This tells me that we are creating a get rich opportunity that will be even better than the one offered in 2001-02. Things need to shake out more than they have in my opinion but when they do we will be able to buy assets and earnings at ridiculous prices.

Back to school will be very interesting and tell us a lot about the length of this market turmoil. Consumers are being pinched by fuel costs and the newfound inability to take cash out of the family homestead. Many face real refinancing concerns soon. If most of the kids are smartly dressed, we are close to a bottom and price recovery. If we see a lot of hand me downs, buckle up.

I got the first signs of retail panic today with investors calling a little shaky with their statement being down month over month. They hadn’t seen that in a bit and they are getting worried. Not panic yet, and we have no firm wide warnings from the margin department so its not capitulation just yet.

New York is one of my favorite places to visit. Unlike Chicago however where I could see myself living, it’s always sort of a relief to leave there. Especially for my liver. Too may great bars to close together and too many interesting people to drink with.

Every time I think of moving to the Windy City, which is often, I wonder how I will deal with missing the island. It’s like living in a resort all summer long.

I think the more aggressive traders could make a case here for selling short term call credit spreads above the market on some of leading stocks and put credit spreads below on names that you like and pear cheap. If thee market goes up quickly, you end up short high PE stocks. Probably a good idea. If it continues down you ll be buying lower in stocks you like. Might be a good idea as well. If it stays in the middle, you keep the premium. Worth looking into.

As reminded by the summer boating season with all the tank tops, short skirts and bikinis, as well as the upcoming NFL season with all those lovely nearly naked cheerleaders, life is always better with scantily dressed females in attendance.

While no one does know exactly who hold what and what its worth in the mortgage market, it is worth something. This is going to make redwood trust a very interesting investment and some point. Right now their value is a moving target but once the smoke clears, these guys have liquidity and tend to make very good loans that are held rather than traded.

Exactly how did Mattel allow China to ship them toys with lead paint and potentially fatal magnets? Is there no quality control in Toyland?

Speaking of toy, it is always fun to watch someone come to the island of Misfit toys that is Kent Island that has never been there with us before. Most cannot comprehend that we really do live the way some of us do. It really is all resort all the time and we play as hard as we work. The average 2.3 children picket fence suburbanite has a hard time understanding the concept of living life like it was till fun. Our little group of business owners, successful executives and a t least one mid level stockbroker has, to our credit, figured out that life is fun, it was probably always meant to be. Bring on an orange crush and a summer sunset! It is one thing to declare enjoy life as no one gets out of here alive. Very, very few of actually live that way.

What a great time to be a sports fan! The best few months of the year are coming up. The rush for the play-offs in baseball. The Yankees are gaining on the reds ox and the orioles look pretty good under the new manager Dave Trembly. They play like they care. If Andy McPhail is smart enough to keep rising stars Markakis and Roberts, and build a staff around Bedard and Guthrie we will be one big bat away from serious contention in the division. This is the latest in the season I have still been watching and going to orioles games in awhile. Football is fast upon us. The ravens looked as good if not better than last year in last night’s preseason whomping of the Eagles. Several of the rookies looked much better than expected on both sides of the ball. Jared Gaither, the supplemental draft pick at OT looks like the steal of the century. Maryland looks awful so they can only exceed expectations, Navy looks good with a tough schedule and as goes Jimmy Clausssen so goes Notre Dame. Colleges kick off. Play-off runs. The NFL returns. The playoffs and World Series. Gonna be a good few months.

If the stock keeps falling, Charlotte Ruse needs to be bought. They are a cash flow machine with a great balance sheet. No debt. 87 million in cash. Insiders are buying. There is a buyback in place. Intelligent institutions are buying. Might be worth selling the Sep 15 puts if you can get .60 or better and are of an aggressive nature.

It’s bumpy right now. The market is taking waves and wakes on the side. Hold onto your cocktail. Keep the powder dry. This will end at some point. There is no rule that says we have to be fully invested or trade everyday. This type of sell off, where there is a snowball effect from margin calls and babies go flying with the bathwater create opportunities. When the bathwater is gone and the street is just throwing babies, it’s going to be time to make very serious money over the months and years ahead.

Like the Kent island crew and Travis McGee, don’t get so caught up in the little mundane matters of life. Get a cocktail, go watch the sunset. Markets come and go and the drift does always reassert itself. Regardless of stock market swings, there are a lot of opportunities to enjoy life. I suggest you avail yourself of them frequently and soon.