Follow Up on Mortgage Insurer Stocks As Junk Bonds

I've done some further reading on the mortgage insurance situation and it is interesting enough to merit a second post.  The below article is a good overview of the competing interests trying to stake claims in the mortgage insurance arena after 3 of the main players were shut down by regulators in the last few years (one of them, PMI).

http://www.bloomberg.com/news/2012-08-22/arizona-regulator-sues-nmi-showing-watchdog-influence-mortgages.html

Let me give you what I believe are the most salient points:

• The Arizona Department of Insurance, acting as the receiver of the defunct PMI, has sued upstart would-be mortgage insurer NMI Holdings from improperly appropriating PMI assets. The suit could hinder NMI from selling mortgage insurance;

My thought:  former PMI employees are anxious to get back in the business

• Private mortgage insurers, which have lost more than $18 billion since mid-2007, wrote $40.1 billion of coverage last quarter, or almost 10 percent of the $405 billion of new loans.

My thought:  I'm absolutely astounded that the industry wrote more coverage last quarter than the amount of losses suffered during the housing crash

• MGIC’s preliminary ratio of risk relative to capital breached the level some regulators require to write new policies as of June 30, the insurer said Aug. 2.

My thoughts:  MGIC should probably be shut down but is being allowed to continue to operate

• Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co (JPM), private-equity firm Pine Brook and reinsurer PartnerRe Ltd. are among backers of the industry’s other startup, Essent Guaranty Inc. The Radnor, Pennsylvania-based firm raised $600 million in 2009 and 2010 and began writing policies last year, providing 5.3 percent of coverage in the first half of this year.

My thoughts:  Goldman and JP Morgan see an opportunity in mortgage insurance.  The management team at Essent looks like it's been poached from other major mortgage insurers. 

One more thought, not from the article.  There was significant insider buying of shares in August of this year.  See http://seekingalpha.com/article/789171-why-i-bought-mgic-investment-corp-for-a-trade.
 
This is starting to look even more interesting.  I will continue to follow this industry.

Mortgage Insurer Stocks: Like Junk Bonds?

I recently ran across an article which mentioned the private mortgage insurer, MGIC.  I hadn't thought about the company in years.  Not since shorting it in the wake of the financial crisis and watching it pleasantly sink from about $38 to $24 before bailing out.  Only to regret my impatience later when it went nearly to zero.  At the time, although I was a major doomsayer, I did not foresee the complete collapse of the housing market.

Later, when the full scale of the disaster became evident, I was given to making pronouncements like:  "There is no way the mortgage insurers can survive.  Their liabilities are insurmountable."  And then just the other day, I was reminded of these thoughts after not thinking about the private mortgage insurance industry for several years.  My first reaction was "how are these mortgage insurers still in business?"  Some quick research revealed that not all of them are.  PMI, one of the major players, was seized and is now apparently a historical note.  But MGIC and Radian, two other big insurers, have survived.  The following article attempts to detail how this miracle could be:

http://seekingalpha.com/article/862831-radian-group-management-is-misleading-investors

I'm still not convinced but, that being said, if MGIC and Radian have survived the last four years, then it seems to me there are two possibilities.  One, they are getting ready to die, as PMI did last year.  Or two, they can survive anything and may very well run up if the housing market recovers to some degree.  In no way shape or form do I believe the housing market will make a significant recovery any time soon (I'll save my reasons supporting this assertion for another day).  However, the mortgage insurers would benefit from even a minor recovery in the housing market.  The article above details how MGIC is in much better position than Radian.  Some of the commenters believe otherwise.  In any event, if these two are still around, they may survive until the sun shines again...

The Temptations of Brains (Hewlett-Packard)

Hewlett-Packard has taken a beating lately and rightfully so.  It has had a string of leadership issues and a ton of layoffs.  See the link below for a complete condemnation of the company:

http://theforvm.org/diary/m-aurelius/meg-whitman-job-creator

But...

It still has some very good brains left and it seems to recognize that, if it's to survive, the company must focus on R&D.  See below:

http://www.wired.com/wiredenterprise/2012/02/hp_calculator/

And...HP has brains across a range of scientific and engineering disciplines.  And who knows what patents already in the company's trove will prove relevant and valuable?  So, I have to repeat the conclusion I reached in my tech dogs post:  HP might be worth a long term investment at its current price.  Risky but not that risky -- what are the chances the company will be out of business before it experiences a significant rise in stock price?  Fairly low, I would say. 

All HP has to do is have one or two big successes, led by their brains, to rise again.  They are also in volatile businesses in which the company that was dead last 5 years ago can be No. 1 today.   

Corning (GLW): I'll be Watching

There is an interesting article on Corning and its focus on R&D in today's Wired magazine online.  The link follows.  The last time I recall Wired doing a piece like this was on MolyCorp (MCP), miner of rare earth metals.  The MolyCorp article portrayed the company ready to skyrocket because of the scarcity of rare earth metals in the West (as opposed to China) and MCP's purported lock on rare earth metals mining.  MCP did skyrocket -- for about a day.  It then proceeded to lose about half its value in a stunningly short period of time.  Today's Corning article makes a compelling case for the company as the type of R&D focused enterprise worth investing in.  We shall see how the stock performs in the aftermath of this article...


http://www.wired.com/wiredscience/2012/09/ff-corning-gorilla-glass/

The Dangers of Generalizing

This is not strictly a post on investments but more on habits of mind.  An interview with a White, Southern woman who voted twice for George W. Bush and believes that President Obama is Muslim is a cautionary example of drawing conclusions from too little data or, more precisely, stereotyping.  Based on my description, one might expect that the woman in question is voting for Mitt Romney.  Wrong.  She is voting for Obama, despite her views on the President's religion.  Why?  Because she makes $28,000 a year and doesn't like Romney because, in her mind, he was born rich.  The interview with her is here:

http://news.yahoo.com/southern-whites-troubled-romneys-wealth-religion-050312040.html

The lesson obviously applies in a wider context.  Moreover, it confirms my personal belief that Americans are a more complex group than our leaders (and possibly the rest of the world) believe.  The access to internet and media available to all levels of American society will only magnify this effect going forward.  Indeed, the Republicans are running into some difficulty now in trying to appeal to disparate groups in American society.

A Crack in My Love of Google

I regularly tout Google as the long-term winner of our current tech battleground.  There is its search dominance, its ownership of Youtube (one of the most valuable media properties ever created in my opinion), and Android, just to name a few assets.  Not to mention that it's pushing the envelope in server design and snapping up small tech outfits, one of which might turn out to be a goliath.  Yet, there are some cracks in the facade.  Google has shown something of  a disregard for privacy rights and there are comments like these from programmers, which worry me:

"Google does have an office in Manhattan. You should definitely apply there - I don't think it's an interesting company to work for anymore (and their recruiters are second only to Facebook's in how pathetically desperate they seem when they contact me), but the interview process is really fun."

See more of this thread at http://developers.slashdot.org/comments.pl?sid=2357190&cid=36936764

Hmmm... anecdotal but troubling if programmers no longer find Google interesting. 

Tech Dogs, Lessons of the Past, and a Possible Portfolio

Wired magazine recently ran an interesting article on how Apple was derided as a terrible and failing company in 1997:

http://www.wired.com/business/2012/07/not-dead-yet-the-crappy-company-that-could-have-made-you-rich/.

Some of the quotes from that time period about Apple were absolutely damning.  How wrong they were.  So what, you say, it's too late to capitalize on that information?  Yes, but the point of the article is that there are a number of one-time 800 pound gorillas in the tech space that again look like terrible and failing companies:  HP, Nokia, RIMM (Blackberry), and Yahoo.  Why not create a portfolio of them?  Not all of them will likely rise from the ashes but only one has to experience an Apple-like turnaround to carry the day.  If I had to pick the most likely to do it, I'd go HP, Nokia, RIMM and Yahoo in that order.  Why?  Because HP still has a lot of patents and a lot of engineers.  Same for Nokia and Blackberry to some extent but in a more confined space:  mobile (although a good space to be in if you must be confined).  Yahoo lacks truly valuable technology but has brand and users.