Call it Sub Prime Crisis, but when mortgage financiers Freddie Mac and Fannie Mae show signs of distress, the entire US housing market is in trouble. Freddie dropped $2 billion in losses in the last quarter, which is scary – as they hold over $700 billion in mortgage assets, at last some of which are of dubious quality..
So I’ve been betting on the housing crisis occurring for a while now. I first shorted Equity Residential (EQR) back in August last year, when it was about $45, and continued to pile on as it rose.
It’s been a nice ride – I moved into buying put options earlier this year, and so have magnified my gains. EQR represents about a fifth of my overall realised and unrealised portfolio return this year.
But I missed the best opportunity – eTrade, it appears that those high interest earning accounts where I can put my trading cash were actually driven by mortgage backed securities. That is, eTrade and eTrade Bank own a ton of dodgy mortgages, and those securities have started to default. They released the news to the market the other day, and their share price crashed.
Now I’ve always been a fan of eTrade, and believe their messages saying that investor’s money is safe. I also believe that their fundamental business model is strong. So why not make some more money by buying some eTrade?
I put in an order to buy ETFC at market open at a limit of just over $5, but chickened out a little and halved the order size 2 minutes before open. However, the original order went through and the price promptly plummeted again down to somewhere in the $3 range:
Once again I backed myself, and bought a bunch more eTrade shares at around the $3.40 mark.
And what do you know – on Friday is emerges that eTrade is retaining investment bankers to look at a possible sale. The market reacted by sending the shares zooming up again, and so not only have I cleared out the loss, but I also made a tidy 40% profit on the shares I bought at the bottom.
Lance Wiggs 