Gobbo put in a stunning trade, buying RHG in its darkest hour...

Gobbo put in a stunning trade, buying RHG in its darkest hour (50c to 60c). He made around 100% in a few days and, since then, it's hovered around the $1.00 to $1.10 mark.

Given that I see the Gobster as a classic example of Irrational Exuberance at work (and, therefore, an opportunity to work a profit), I always look at what he's into. I'm going short RHG, so (with that disclosure out of the way), I'll tell you why. It's down to three reasons:-

1. RAMS presently has a market cap of around $355m. Most companies have net assets that either exceed or at least come close to their market cap. So, RAMS investors...what's the net asset value of your company? ...Don't know? Have a look:-



Yes, that's right, punters - it's less than $1m. [How's the comfort level feeling - Uneasy?...or OK? Alright, let's go on.]

2. Those paying attention would have seen that RAMS' main asset ($13.7bn) is "Mortgage Loans". According to Note 10(a) of their accounts, "Mortgages are taken out for a period not exceeding 30 years and regular repayments are required throughout the term." That's great! They will receive an income stream for up to 30 years. But, what about the "liabilities"? Do they also have up to 30 years to pay their debts, or do they have to pay up sooner? Hmmmm....

3. One of the fundamental lesssons taught in banking, investment and insurance is that you should always try and match the maturities of your debts with your liabilities. If you fail to do this, you always run the risk that you will not be able to refinance your debts for a profitable price (or at all).

What does that mean? Let's work through an example. Remember that RAMS has $13.7bn of mortgage loan assets. How does such a business end up with only $955,000 of net assets? Answer: because they have approximately the same amount of liabilities, and here they are:-



Notice the >$6bn of "Secured liqudity notes payable"? They're the ones they recently mentioned, which they can't rollover, hence they've had to rely on their bankers' short-term (180 day) guarantees.

Also, note the $3.7bn of "Warehouse facilities". According to their accounts, these facilities are "rolling" arrangements throught the year.

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So, there's my three points. I think they speak for themselves, but there is one question for which those numbers are begging an answer - how does a company with $1m of capital make a 2007 profit of $15m and achieve a market cap of >$300m? Answer: it relies on business continuing, "As Usual".

Is business continuing as usual? What do you think, when you can't roll over $6bn (or 1,700%) of your net asset value in debts? Is this credit crunch a temporary thing, or something more?

Hard questions for a shareholder to answer.

[BTW, not investment advice - just my opinion. If I'm wrong, tell me where.]