Tuesday, January 09, 2007

Calls of Note Part 6

- Goldman Sachs is very cautious on mortgage insurers saying they believe slowing home prices, continued seasoning of the books, and subprime challenges add risks to the downside. Firm expects to see further challenges in the fourth quarter related to the aforementioned factors but believes the impact will be more noticeable as they move into 2007. Home prices are still in the early stages of a slowdown and blocks in peak loss years still have built-up appreciation. Firm believes the risk reward is particularly unfavorable for MGIC Investment Corp. (NYSE:MTG) and The PMI Group (NYSE:PMI), which are up 7.9% and 7.0%, respectively, over the past month on the heels of Congress passing mortgage insurance tax deductibility into law. They believe MGIC will experience similar challenges to the third quarter, which could lead MGIC to pull back. PMI has not experienced noticeable loss challenges as of yet, but early signs of difficulties could cause the stock to be weak, with the stock now trading at a premium to the group.

Notablecalls: MTG may be a short here as the co is scheduled to report on Jan 11. A smart trading contact pinged me couple of days ago on MTG pointing out negative comments from Lennar (LEN) regarding Florida and California markets. These two markets account for around 20% of MTG's income.

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