This company is done. It doesn't matter that the PPS went up today. It doesn't matter that it may go up tomorrow. It does not matter that NFI got a cash injection from MM and Jefferies. It certainly does not matter that in the
wake of other lender implosions NFI may now have a bigger share of the market.
Because none of these events changes the fundamental, ineluctable problem with NFI's business model: the market for its product has disappeared. Demand for mortgages has disappeared for a number of reasons. People cannot afford mortgages as easily at today's rates as they could before. The marginal customers who could get mortgages a year ago are effectively no longer qualified because no one is willing to invest in the kind of risky mortgages that these people need. And finally, people just don't want mortgages as much as they did a year ago, because people think real estate prices are going to decline, and in that kind of market adding debt to your investment just leverages your losses.
No one knows precisely when these conditions will change, but change sure won't come this year. It probably won't happen until next year, and even then debtinvestors are likely to be much more conservative with residential mortgages. I.e., even if the market returns, NFI's niche will be gone for at least the next several years. In the meantime, NFI will continue to get margin calls (just as it did in Q1) and will be required to invest ever more capital in its loans at the time of origination (just as it was in Q1).
This is a problem for NFI b/c NFI CANNOT SURVIVE THAT LONG WITH ITS BALANCE SHEET unless it gets regular equity infusions. And no one is going to be willing to give it regular equity infusions just to allow it to meet its margin calls on an ever more worthless loan portfolio. That's just throwing good equity down the rabbit hole, and it makes no economic sense. NFI has to spend so much cash just to survive that it would make more sense to shutter the business and reopen a new one in a few years when the good ol' days of cheap money return.
(to be continued...)
You actually spent that much time writing that nonsense? If you really don't have a grasp on what the issues are you should consider not posting such BS. Just lets people know how ill informed you really are.
>> It doesn't matter that the PPS went up today. It doesn't matter that it may go up tomorrow.
It does matter. If it goes up $10 tomorrow, a lot of longs will sell (including me), and a lot of shorts will short more. Sounds like a win-win, doesn't it?
NFI is a trading stock. Not too many people will hold it long term. If you did short it long term, you certainly got a strong stomach.
Nice analysis, thorough and well-written. Much appreciated.
However, my money says your conclusion is incorrect.
Novastar will survive and eventually (months to years) be worth many times what it is trading at today, for the following reasons:
1) The U.S. housing market is going to continue to generate new sales. People will sell and buy houses; and the fact that interest rates are higher and some people unwisely got into adjustable-rate mortgages that they shouldn't have will just mean that there is a new supply-demand equilibrium point. So, house prices will decline in many markets -- actually, they already have -- and people will still be buying houses. The vast majority of those will still need mortgage financing. Novastar is well-positioned to serve a good portion of that market, and much of its competition is being winnowed out as we speak.
2) Novastar management has been through similar, even worse, conditions before; in fact, twice before. They saw this coming, and did what they had to do to prepare to weather the storm. They have already adjusted their lending standards so that the loans they originate will retain their value. These guys are not stupid nor inexperienced. They have already adapted, months ahead of their foolish competitors who refused to do so and have now gone out of business.
3) J/MM want to own as much as possible for a going concern, not for a former operation. They stand to gain much more by Novastar's continuing profitable operation than by, as you suggest, shutting the thing down and starting a new one in a few years. There's a lot more infrastructure in place here than necessarily meets the eye. Its not that easy to start up again. And why in the world would they put even $1M into an operation they didn't expect to survive... certainly not $50M. Even for J/MM, somebody's annual bonus is going to suffer mightily if that kind of investment goes south. Not gonna happen.
At least you are talking good sense... but I disagree with your conclusion, strongly enough to have plenty of skin in the game.
Lets talk again in a few months. Thats how long it'll take for this to sort itself out and conclusions to be reachable.
Basic premise is flawed....demand is not gone....economy in general is healthy; full employment, rising wages, consumer confidence at all time high, home prices stable to slightly declining. It's not a demand issue, it's a liquidity issue...fairly narrow in scope. An environment with fewer competitors and potentially lower rates will go a long way towards curing many of NFI's more serious ills.