Wall Street West—Judging From Short Traders, Imperial in for Longer Fall

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With the benefit of hindsight, the key clue turned out to be the huge short position in the stock of Torrance-based Imperial Credit Industries Inc., the diversified business lender.

Shareholders in struggling Imperial Credit have watched as their stock tumbled from more than $27 a share in 1997, to under $1.50 in recent trading.

And yet on Oct. 16, there was still a huge, 600,000-share short position in the stock. The position was unsettling given that an investor might well wonder why short-traders hadn’t already collected their winnings and gone home by now.

(Short traders place financial bets that a stock price will go down, not up. They borrow and sell a stock, hoping to buy it back and return it later at a lower price).

Several weeks ago, I asked Imperial Credit Chairman Wayne Snavely, via e-mail, about the large short position. He replied directly and honestly, if obliquely, that short-traders were happy enough not “to cover” their positions, which means to buy back shares and return them to original owners.

In other words, they were sticking with their positions meaning the shorts were betting Imperial stock would get even sicklier. The shorts bet right, as it turned out. Snavely issued another bombshell announcement last week, this time to the effect that Imperial Credit would take a $25 million write-down for bad loans and leases, another $3 million for problem assets, and $7 million to settle litigation. He also said the third quarter ended Sept. 30 would be another money-loser.

It was the second such announcement in recent weeks. On Aug. 18, Imperial Credit had dramatically restated earnings (which became losses) for the second quarter ended June 30, after an FDIC audit forced it to declare an unexpected $56.1 million write-down on suspect loans. That event turned the second quarter into a money-loser.

The recent announcements come after two years of financial setbacks, mostly after Imperial Credit ventured into consumer lending, in particular the sub-prime auto lending market. The lender has since retreated to its roots in business lending.

In trading after last week’s news, Imperial Credit stock sank toward $1 a share.

Safer Havens

Some investors are moving assets to the safe and sure, if Payden & Rygel’s year-old GNMA fund is any indicator. Starting from scratch, the fund now boasts of $100 million in assets.

The acronym GNMA refers to the Government National Mortgage Association, often called “Ginnie Mae.” GNMA issues mortgage-backed securities guaranteed by the U.S. government. As of last week, GNMAs were yielding about 150 basis points (1.5 percent) higher than similar-maturity U.S. Treasuries.

David Ballantine, Payden & Rygel’s GNMA portfolio manager, calls those securities “a very reasonable, liquid option to U.S. Treasuries.” The downside is that homeowners can prepay (usually by refinancing) their mortgages, if interest rates plunge. That curbs capital appreciation in GNMA bonds, when interest rates go down.

However, Ballantine said he has enough flexibility to move a portion of his fund assets (up to about one-third) into U.S. Treasuries and capture such appreciation, although, of course, Ballantine must do that before rates decline.

And everyone knows how such efforts to predict interest rates have flummoxed many.

In any event, Ballantine foresees stable interest rates ahead. “That’s a pretty good environment for Ginnie Maes,” he said.

If Ballantine is right, more investors may find themselves looking into GNMAs in the future. With the U.S. government projected by some experts to run large surpluses for the next 15 years, some market watchers are predicting that U.S. Treasuries may actually become scarce while GNMA notes may become a favored alternative for credit risk-averse investors.

Investor Therapy

Investors in a gloomy mood may want to talk with Robert Gipson, president of the Alpha Analytics Investment Group LLC money management shop in Century City. He is an unabashed optimist about the future of the American economy and Wall Street.

The heartening improvements seen in the productivity of American workers in the last few years are just the first of several generations of productivity surges yet to come, says Gipson.

Many economists attribute recent productivity gains to the widening and improved use of better computers in U.S. commerce. Indeed, Gipson believes the Internet and high-speed data transmissions will continue to boost productivity. In the process, large companies will be able to more efficiently operate, source vendors, and even transport goods thanks to information readily available or transmittable through the Web.

Also under his vision, inflation will be kept in check, partially as a result of the productivity gains. And in happy news for Washington, D.C., the continued roll of the U.S. economy will keep tax revenues fat, maintaining a federal budget surplus and thus help restrain interest rates.

What about current market shakiness? “If you can find a value stock selling for half of what it used to, that is often a good time to buy,” said Gipson.

“Right now, there are some pre-election market jitters. The market doesn’t like uncertainty,” Gipson said, advising investors to look for a post-election rally.

Name Change

TMCT Ventures, the Santa Monica-based venture capital fund started with $550 million from the Chandler family trusts and the old Times Mirror Co., has adopted the name “Rustic Canyon Ventures,” said Rene LaBran, managing director.

It seems too many people kept thinking that Times Mirror money ran the show, when in fact Chandler money makes up the lion’s share of the venture fund, according to La Bran.

And anyway, the old Times Mirror stake is now owned by Chicago-based Tribune Co.

Rustic Canyon Partners operates the fund, so it made sense to take that name, said LaBran.

If UC Berkeley grad LaBran is any indication, you have to be a tough cookie to be in the venture business now. After declaring the current IPO market “not feasible,” she rather cooly relates that very few, if any, of the 38 portfolio companies that Rustic Canyon has financed are profitable. In fact, those companies have been told to cut their “burn rates” to lengthen survival times.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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