MBS SuperStar Expects 2012 to be Another Banner Year For Mortgages

[BargainValueHunter]

http://online.barrons.com/article/SB50001424052748703679304577108623979477082.html?mod=BOL_hpp_mag#articleTabs_article%3D1

 

In the final four months of 2008, a perilous time that included the spectacular collapse of Lehman Brothers, his fund returned 19%, according to hedge-fund researcher BarclayHedge. (Pine River declined to comment on performance.) In 2009, his fund was up a remarkable 93%. And in 2010 it rose 32%, versus 22% for other mortgage hedge funds and 10.5% for the HFN Hedge Fund Aggregate Index, a benchmark of overall hedge-fund performance.

 

Subprime Mortgage Bonanza...

 

This was the major generator of his 2009 profits, and he expects it to be his strongest play again in 2012. The housing market is stabilizing a bit, he notes, and even under the most grim scenarios the securities should gain, Kuhn says. Subprime MBS are priced at mid-2009 valuations, he says. For example, a typical subprime, non-agency senior security trades at a price of $40, roughly $10 to $15 less than a year ago.

 

"We're seeing a trend that we believe the market has for the most part ignored. Subprime bonds are trading at very deep discounts, because the level of stress investors are assuming for defaults, and the severity of defaults, is excessive," Kuhn says.

[BargainValueHunter]

Gundlach is in...

 

http://online.wsj.com/article/SB10001424052970204331304577144803354669424.html

 

Less than 15% of the private mortgage bonds rated by Moody's Investors Service still carry an investment-grade rating, Baa3 or higher, compared with 53% of commercial-mortgage securities.

 

Without bank participation, confidence wanes, Ms. Tukhin said. "Once that confidence disappears, it doesn't really matter what the fundamentals are, and the fundamentals are not that strong, either."

 

Some investors had hoped the market was on its way to recovery. After crashing in 2008, as borrowers defaulted on mortgages, the market had risen slowly before rallying strongly in late 2010 and early 2011. By February 2011, the ABX was more than twice the levels of mid-2009. But the renaissance was short-lived.

 

Some investors blamed the Federal Reserve for snuffing out the rally. Seeing rising demand for the bonds, the Federal Reserve Bank of New York began shedding some of the $30 billion in mortgage bonds it took on as part of its 2008 bailout of American International Group Inc. But buyers quickly retreated and the Fed stopped selling.

[link01]

This was the major generator of his 2009 profits, and he expects it to be his strongest play again in 2012. The housing market is stabilizing a bit, he notes, and even under the most grim scenarios the securities should gain, Kuhn says. Subprime MBS are priced at mid-2009 valuations, he says. For example, a typical subprime, non-agency senior security trades at a price of $40, roughly $10 to $15 less than a year ago.

 

"We're seeing a trend that we believe the market has for the most part ignored. Subprime bonds are trading at very deep discounts, because the level of stress investors are assuming for defaults, and the severity of defaults, is excessive," Kuhn says.

 

 

i dont know. it sure seems like kuhn is making very specualtive bets here, which is fine if backed up by strong fundamental analysis & conviction. but why doesnt the artcicle specify whether these are leveraged or unleveraged returns? it does matter, after all.

 

gundlachs returns, as i understand it, while less spectacular, are at least unleveraged & with a healthy cash cushion to enhance optionality in the event of extreme moves in subsets of the mbs market relative to others, & is less directional in its bets. it rather seeks low risk adjusted cash flow maximiziation (ie low duration in the present environment) positioning.

 

kuhn leads a mortgage reit called TWO that is leveraged 7 to 1. that hasnt yet exactly shot the lights out. NLY remains the creme de la creme of reits in my book. but even its unlevered returns fall short of gundlachs total return bond fund, imo.