So HSBC is getting a lot of attention today because of problems in the sub-prime lending area (someone correct me but didn't they buy Household a while back?). I wrote negatively about HSBC a couple of years ago because I did not see how a zillion very small accounts in China could be very profitable. I have never been a fan of sub-prime lenders because of the blowups that come along every now and then. While I would not call HBC's stock a blow up the action in New Century (NEW) is a blow up. Novastar (NFI) is another one capable of blowing up now and then and is down 10% today.
I wrote about the mortgage REITs here in 2004; never been a fan. For disclosure one client asked me to buy NEW a while back, I could not talk him out of it but I sold it today at the opening print.
A question came in asking whether increased ETF issuance will mean less people owning individual shares resulting in less shareholder activism and knowledge. My initial reaction would be to wonder whether ETFs take more from the traditional mutual fund business as opposed to individual stocks. While I suppose it is possible that there could be less activism I have to say this is low on the list of things I care about. If the management of a stock I owned started really screwing up I would just sell. I don't have the time or the inclination to solve problems of this nature.
Another question came in about how to find assets that have low correlations to each other in the context of portfolio construction. Part of the equation is history, living it or reading it. I talk about using PortfolioScience.com which has a free seven day trial (I do not get paid for mentioning them and I have to pay for my subscription). The folks at SPDR have a correlation calculator too. Each one seems to have their own quirks.
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5 comments:
I think most money managers have your attitude about shareholder activism. But big investors, (funds, pensions, hedge funds etc) can afford to take a different attitude. That group owns enough shares to make a difference and can negotiate directly with management if their gripes are serious enough.
And the advent of ETF's isn't causing these types to own fewer shares. So I can't imagine ETF's having a significant impact on activism.
For those of us involved with residential and light commercial real estate, the subprime mortgage mess has been well known.I wrote about it several times many months ago. My observation has been that appraisers will comp (compare value) a property any way you request.Appraising real estate, like forgery and prostitution, is an art, not a science. Mortgage brokers are compensated in large part on the size of the loan. They will massage credit scores and other financial information to get the buyer into as large a loan as possible.
Example:
One neat trick that is played time and again is to arrange, say, a $200,000.00 mortgage on a home actually worth $150,000.00, then add $50,000.00 in repairs on the HUD form, Line 504.The buyer receives $50,000.00 cash back at closing. The money is never used for the phantom repairs. The seller, just happy to be rid of the house, doesn't object.
The appraiser valued the house at $200,000.00 using "selective" comps. Then, the buyer blows through the money, misses a few payments and the property goes to foreclosure, where the lender can't extract any value close to the $200,000.00 loan.
The point being, lenders are not minding their store. They just bundle suspect mortgages to the next lender or investor up the food chain, and the last one holding the bag looses (when the loans default).
Ponzi is smiling.
Those of us using transparency and playing by the rules grimace.
What "t" said: Everyone who's been involved with residential mortgage REITs knew about this and at this point it is only the stupid money getting hurt.
Subprime mortgages have always been a tarpit. The fact that the subprime circus has made MREITs not involved in subprime (i.e agency, Alt-A, and commercial mortgage) very cheap has been very nice and very lucrative.
The total return on some mortgage REITs such as RAIT Investment Trust (RAS) have been most impressive.
When other smaller subprime mortgage lenders like FICC/ECR etc were getting hammered on FPD/EPDs it was only matter of time before it would flow up the chain.
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Good answer, Tom. G., so then we don't need to worry too much about the individual securities, just the managment of the various open, closed, and indexed funds we own.
Which we need to do through due diligence when buying them anyway.
As to Roger's comments about selling individual stocks should the management mess up too often, I would say this is the strongest form of activism clearly aimed at the specific security. So we know when we buy any fund of securities active fund managers can either sell or agitate for change with more considerably power than most individuals.
Indexes (etf or indexed mutual funds) have a seond tier of this "discipline: applied based on market cap, or dividiends, or however it is structured. Less immediate, specific feedback to management, perhaps, but still there.
My comment was probably dumb, but on the theory of the more moving parts...the more that can go wrong,
still something I plan to pay more attention to.
The fear that ETFs would reduce shareholder activism is a non-starter. There's no shareholder activism to begin with.
Most activist shareholders, as others have mentioned, are big fund holders, hedgetarians, billionaire octogenarians, and so forth. The average Joe or Jane has no clout whether they own 100 shares of GE or 100 shares of an ETF that includes GE.
Take the new FIG (Fortress) issue today. They floated a whopping 8% of the equity. The top execs hold 77% and Nomura in Japan holds another 13%.
Like so many other "public" companies, FIG is public in name only. The public has no power, no board representation, no voting rights. The company will do what is in the best interests of top management and their financial counterparts. The public will either like it or sell.
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