I already ate crow on the issue of the portfolio being non-recourse. See my post under "red777aetro... where r u?"
Now - I would like you (as you're very insightful here) to read my post there. I still can't find a reason to cover. And as we've gone back and forth, my profits on the shorts side have continued to increase.
REALLY APPRECIATE your response to the issues I raise in my posting.
Are these concerns about their securities portfolio valid?
And WHAT is the long case here, given my concerns about the damage the holders of 1st and 2nd loss CES will incur?
Nice analysis and I am sure they believe their securities are worth more than the prices they currently have then booked at. Keep in mind that many sellers of securites have been forced to sell them in a very bad market at prices will below the true "economic" value of the security. Just because the "market" values of securities have been crushed because people don't want to own those securities, and the more that people don't want to own them the lower they go, it does not mean that the economic value has declined the same amount. Many of their securities may now have a market value that is sharply lower than a year ago, but those same securities are still going to throw off almost as much cash. Writing the securities down will simply cause RWT to report sharply higher yields on their securities.
"All they had to do to take care of the tax issue was simply increase their reserves for loan losses."
Actually, the tax laws only allow them to deduct actual losses, not reserves, so they would have had to sell something for less than book value to realize an actual loss. But they did not choose to realize any actual losses just to reduce taxable income and thereby obviate the need for the special dividend. That is a tell that they believe their assets are worth book value. Otherwise, they could have generated cash by selling assets at less than book, and saved even more cash because that sale would have reduced taxable income and eliminated the need for the special dividend.
They may be wrong about the value of their assets, but passing up on this opportunity tells me they are pretty convinced they are correct.
I think I read somewhere recently that the loss on prime loans during the Houston meltdown many years ago was 20 basis points. Houston was a long time ago but it was bad, really bad. This one could be worse but keep in mind that the auditors use a reasonable but not excessive standard in evaluating reserves. More than 20 basis points may be excessive by this historical standard
Wrong, Wrong, Wrong. Loan loss provisions or non-cash writedowns of CES are NOT tax deductable. Increasing a loan loass reserve will not eliminate taxable income, only actual charge-offs. Get it right.
You are correct about having to wait until they either take large losses or they don't take losses.
I'm not sure but I don't think loss "reserves" is a tax deductible expense; actual loss experience is taxable however, such as selling a security below your cost basis, or turning a loan that is foreclosed into REO, and then when you sell it at an actual loss. Essentially tax accounting most closely resembles cash accounting.
it seems that RWT's dividend policy consistently applied is to "bank" a substantial portion of next year's regular dividend, usually 3 quarters worth, although this year it looks like nealry next year's entire regular dividend -- that's the accrued taxable income that 90% of whch must be distributed by the next fiscal year (it may be even within 9 months, I don't remember).
but you are correct, they could have sold some securities to realize taxable losses and thus could have sheltered some of taxable income if they wanted to avoid the mandatory income distribution, bu t that's kind of studpid to monetize a loss on a mark where they would probably rather be a buyer, or when they can just as easily raise additional capital if they saw opportunities that they could put the money to work.
management definitely is not super human -- not sure that REIT can actually short the ABX like goldman did.then they would be superhuman.
"The special dividend had to be paid or else they would lose their status as a REIT. REITs must pay 90% of their taxable earnings to shareholders to avoid having to pay tax on those earnings. They did not pay a special dividend to hype the share price, how stupid to even post that, not to mention that such an action would be potentially criminal."
All they had to do to take care of the tax issue was simply increase their reserves for loan losses.
We can argue about something that neither one of us can prove, till we are blue in the face, since these concerns are about future outcomes and the safety of loans neither of us can get close enough to assess. The true information will come out in the next two quarters. My suspicion is that it will be worse than expected. Your wishful thinking seems to indicate it will be better.
Time will tell. Good luck.
"Do you mistrust management across the board or just disagree with their loan loss reserves?"
I am just more than a little skeptical that these guys are as smart as they think they are. I have no doubt that their book of business would be, by far superior to the average financial institution's. I just doubt that theirs will be that much better, especially when it appears that they make quite a bit of their living embracing risk, by buying 1st and 2nd loss bonds. We can talk all we want about them using equity and not using debt leverage, but 1st/2nd loss bonds are leverage, plain and simple. If they are even a little off on their estimates, it is going to hurt them real bad.
I know they foresaw these problems, but hey, I foresaw the tech-wrech, but I still managed to lose a little money on a few names, because nobody could have foreseen how bad it actually got. I think the same thing will play out here.
I agree adjusted book has little value in today's market, but it does provide a fundamental valuation guideline.
There is also the view that the sector a company is in--and whether or not that sector is in favor--determines half the company's value. And there is crowd psychology. Just now, the crowd is avoiding the entire financial sector like the plague, regardless of fundamentals.
I think when the financials come back, they will do so swiftly, just because they are so visible. So while I wish I had shorted RWT at $69, I would have covered long before now and got out or gone long. As it is, I'm about as long as I dare to be, after trying to catch this falling knife--successfully at the moment!
I is pretty clear that your short and want to stay short. So why don't you just stay short and shut up. Mightmercx has answered all your questions. Why don't you agree to disagree. You are making money now. Let's see how you feel in six months to a year. Please stay short. Short more.
Mr. Oddlot39, thanks for your supportive comment about me, but Craig has a valid (but wrong in my opinion) position. No need to get nasty. There is a very good give and take, point and counterpoint going on here unlike most boards which is full of garbage. Let's stay focused on rational comments. Craig has made lots of money on this, I have lost lots of money. I would rather be wrong and wealthy, than smart and broke. Stay positive my friend.
I don't think trying to evaluate the share value is all that useful. I think the current price is the result of the two opposing views.
The 1st view is that RWT is an above average company with the ability to earn a minimum of $3 up to about $6 from its current equity positions in normal times. This view screams that RWT is undervalued.
The 2nd view takes the position that RWT has significantly under reserved itself for losses and will experience significantly more than they even beleive could ever happen from the current environment. In this environment, RWTs equity will be written down so much that they would be lucky to earn even a $1 per share going forward, from the equity they will have left after the carnage is over.
The current adjusted book value has very little relevance in light of the above.