Sell: PMI Group, Inc.


We took a short position (PMI LEAPs) in February, 2007, when the stock was trading around $47.  A bit too early then, but the company is still expensive now and insider sales are very high.  The real estate carnage is only gaining steam, and if you look at historical payout ratios for PMI, this stock has a ways to go down.

PMI Group sees U.S. Mortgage Insurance Loss $450-550 Million

July 31, 2007 — LONDON (MarketWatch) — Financial services provider, The PMI Group Inc. said that it is now expecting total incurred losses for its U.S. Mortgage insurance operations of between $450 million and $550 million in 2007. The expense ratio for the firm’s U.S. mortgage insurance operations is expected at between 20% and 23%, while the pretax yield for the consolidated investment portfolio is expected at between 5.0% and 5.5%. Expenses related to stock options and share-based compensation is forecast at between $13 million to $15 million after tax.


U.S. Foreclosure Filings Surge

July 30, 2007 — LOS ANGELES (AP) — The number of U.S. homes facing foreclosure surged 58 percent in the first six months of the year, the latest sign of mounting problems in the mortgage industry, a data firm said Monday.

In all, 573,397 properties across the nation reported some sort of foreclosure activity in the first half of this year, including receiving notices of default, auction sale notices or being repossessed by lenders, Irvine-based RealtyTrac Inc. said.That was 58 percent higher than the 363,672 properties in the first six months of 2006 and 32 percent higher than the 433,504 in the last six months of 2006.

“We could easily surpass 2 million foreclosure filings by the end of the year, which would represent a year-over-year increase of over 65 percent,” said RealtyTrac CEO James J. Saccacio.

Chinese Lost $0.54 Billion in One Month on Blackstone Investment

Blackstone share slump costs China $540 million

But investment in Blackstone wasn’t just about returns, analysts say

July 30, 2007 — HONG KONG (MarketWatch) — Blackstone Group L.P.’s slumping share price isn’t likely what Beijing had in mind when it pumped $3 billion into the leveraged buyout firm last month.

Since its June debut Blackstone has tumbled 21%, making it the worst-performing initial public offering among deals worth $500 million or more this year.

China, which bought a 10% stake in Blackstone at a 4.5% discount, has seen the value of its investment plunge 18% in 24 trading days. Those losses tally $540 million, averaging about $22.5 million each trading day.

“There are some red faces in Beijing, everybody expected that they had hit the jackpot and the share would skyrocket,” said Francis Lun, general manager at Fulbright Securities in Hong Kong. “I think it was really quite a shock.”

Blackstone shares, along with brokerage and financial stocks, suffered sharp declines during the past week as investors fled from riskier investments amid growing concerns over U.S. credit and housing markets.

New York-based Blackstone, led by high profile CEO Stephen Schwarzman, ranked as the world’s most prominent private equity firm ahead of its June 21 IPO. Blackstone reported $640 million in net income in the first quarter of 2007, or about half of what it made in all of 2006, according to Barron’s.

Analysts said Beijing isn’t likely to be too upset over the loss as Blackstone is viewed as a long term holding.

“Obviously it’s not the best timing but I don’t think that is going to change China’s strategy there,” said Dong Tao, chief China economist for Credit Suisse in Hong Kong. 

“If they had put money into a CDO (collateralized debt obligation) they would have lost money too.”

Tao added China faces a difficult time in finding ways to channel its growing $1.3 trillion stockpile of foreign exchange holdings.

“New money keeps coming in and they need to do something for the long term,” Tao said. China purchased its stake in Blackstone through a state-investment body.

Others said China was parking cash in Blackstone for reasons other than financial gain.

“China is prepared to spend some money to get some knowledge,” said Fraser Howie, a Hong Kong-based investment banker and co-author of Privatizing China.

“They bought into this deal to some extent to get Blackstone as a strategic partner… and get some access to that talent which they can use domestically or possibly overseas.”

He added officials in Beijing, stung by the losses, might be less willing to pull the trigger on future deals with leveraged buyout firms.

“I don’t think they are upset or angry but what I think they may need to do and what it will force them to do is to get better management and risk control,” Howie said.

Fulbright’s Lun added that China’s track record in investment hasn’t been all that bad compared to sovereign funds operated by Singapore and Dubai which paid dearly for some recent infrastructure and port investments.

Strong Buy: Long-term Natural Gas

Woodside in $12b Gas Project

July 28, 2007 – (Sydney Morning Herald) – WOODSIDE Petroleum has committed itself to building one of the most expensive developments in the history of the Australian resources sector after its board gave the go-ahead for its $12 billion Pluto liquefied natural gas project on Friday.

The final capital cost figure – on par with the original North-West Shelf development in the 1980s – was significantly higher than Woodside’s earlier estimate of $6 billion to $10 million.

“The costs are an eye-opener,” Woodside chief executive Don Voelte admitted.

Woodside will initially build one production train based on a resource of 5 trillion cubic feet of gas in its Pluto and Xena fields.

But it eventually plans to build up to two more trains and possibly a domestic gas facility to help improve the project’s returns.

Some analysts questioned whether the first train would deliver a high return on the huge investment, but Mr Voelte said: “I don’t spend $11 billion unless I get a damn good return on it.”

He was referring to the $11.2 billion investment announced on Friday in addition to $800 million that has already been spent on the project. Mr Voelte attributed the capital cost rise to a shortage of skilled labour and the rising cost of offshore equipment.

The first train will produce 4.3 million tonnes a year starting in late 2010, although it has a capacity to produce up to 4.8 million tonnes. Up to 3.75 million tonnes a year have already been contracted to Tokyo Gas and Kansai Electric on 15-year sales agreements. Mr Voelte said the remaining gas might be sold on the spot market.

“We’re already getting people knocking on our doors,” he said. “Although we don’t plan to sell [the uncontracted gas] beforehand, you never know what happens in this crazy world.”

Woodside noted the proximity of other uncommercialised gasfields in the same region offshore Western Australia.

The company plans to operate its onshore plant as an open-access facility for Woodside and third-party gas.

IAG Asset Management portfolio manager Alan Martin said Pluto could be another North-West Shelf in the making.

“They’re not going to stop with just this one phase,” he said. “You can be assured of that. There’s a lot of gas in adjacent blocks that needs a processing centre.”

Mr Voelte said there was also potential for Woodside to make more discoveries on its own exploration blocks adjacent to the Pluto and Xena fields.

“Pluto opens up a whole suite of opportunities out there,” he said.

He added Woodside was still conducting earlier-stage work on its other LNG projects, including Browse and Sunrise.

Woodside shares closed $1.43 lower at $43.01 on Friday.

Strong Sell: Rating Agencies

As posted previously, we have been monitoring rating agency stocks and the sector is still a strong sell. With the abrupt drop off in debt securitizations, rating agencies will get hammered. This is from Moody’s 2006 annual report:

Approximately 80% of Moody’s revenue in 2006 was derived from ratings, a significant portion of which was related to the issuance of credit-sensitive securities in the global capital markets. The Company anticipates that a substantial part of its business will continue to be dependent on the number and dollar volume of debt securities issued in the capital markets. Therefore, the Company’s results could be adversely affected by a reduction in the level of debt issuance.

Let’s take a closer look at Moody’s recent revenue growth. In 2002, prior to the huge wave of debt securitizations, Moody’s revenue was $1.0 billion with net income of $289 million. By 2006, revenue had doubled to $2.0 billion and profits jumped to $754 million. Certainly, there is the risk that the Fed drops interest rates to keep this crack-up boom running along, however, it is doubtful that the easy debt securitization days are over for CMBS and LBO financings alike. Full disclosure: we own 2009 put LEAPs on MCO.

Mortgage Delinquencies Seen Peaking in 2008

Who writes this kind of stuff?  Just six months ago, similar “economists” had predicted a housing bottom that would end in 2007.  While it would seem that we are just starting to see the real effects of this crack-up liquidity boom, who knows when it will bottom?  These types of “economists” should be shot.   

NEW YORK (Reuters) – The credit quality of U.S. mortgages is set to weaken substantially through the remainder of 2007 and well into next year, with delinquencies peaking in mid-2008, Moody’s said on Thursday.

Delinquencies will peak at 3.6 percent of all mortgage debt outstanding in the summer of 2008, up from 2.9 percent in this year’s first quarter, according to the study by the consulting firm based in West Chester, Pennsylvania.

“This will result in substantial financial damage,” Mark Zandi, chief economist of Moody’s, said during a teleconference after the release of the study.

Read full article…

Oil Majors See Decline in Production

Even at top, Exxon Mobil feels earnings pinch 

No. 1 oil company sees profit, production fall; Shell earnings rise despite drop in output

July 26 (Houston Chronicle) – Even the oil industry’s mightiest can be humbled in a world with diminishing access to oil and ever-increasing costs of getting it.

Investors roughed up Exxon Mobil Corp. on Thursday when the world’s biggest oil company fell short of Wall Street expectations for the first time in six quarters, with a 1 percent drop in profits and production.

Shares fell nearly 5 percent to close at $88.23 in higher-than-average trading volume on the New York Stock Exchange. Shares have traded between $63.87 and $93.62 in the last year.

Other oil majors have reported second-quarter production declines as well. Royal Dutch Shell, the world’s No. 2 oil company, reported a 2 percent production fall Thursday, but high refining margins pushed overall results 18 percent higher.

BP and ConocoPhillips reported production declines of 5 percent and 10 percent, respectively, earlier this week. ConocoPhillips’ income fell 94 percent because of a one-time $4.5 billion write-off of operations in Venezuela, while BP’s profits rose a modest 1.5 percent.

Chevron Corp. is slated to report second-quarter results today.

Read full article…