Real investors rarely take daily stock movements seriously. What a stock does from day to day, month to month, even year to year, is at the mercy of emotional investors with serious short-term vision problems. Rationality is sometimes thrown out the window.
But this week, Thornburg Mortgage (NYSE: TMA) quadrupled in price, essentially doubling in value in two separate trading sessions. This is a big, big deal and a serious move for a company like Thornburg, with a market cap approaching $500 million. This isn't a Vegas-style penny stock.
What lies behind the two-day super surge?
The good, the bad, the worse
Thornburg is a good company focused on a horrible product in an even uglier industry -- jumbo mortgages (greater than $417,000) that can't be sold to Fannie Mae (NYSE: FNM) or Freddie Mac (NYSE: FRE).
Although it deals with products that, as we've seen lately, haven't held their merit, Thornburg claims it has done well over the years, considering the clients it dealt with, at keeping loans as conservative as possible. In a housing market that seems to crater deeper by the day, Thornburg says the credit performance of its loans ranks among the best in the industry.
Nonetheless, Thornburg relies on two factors outside its control: leverage from other financial institutions and a debt market gone haywire trying to provide market prices on its investments. As the market for anything that smelled like mortgage products came to a halt, the value of Thornburg's assets -- quality aside -- came crashing down. And since it used leverage to finance those assets, Thornburg's bankers lined up at the door demanding their money back.
Thornburg has a hard time selling its assets in the open market to raise cash -- the market for mortgage-backed securities has been in hibernation for months. The situation amounts to screaming "Fire!" in a crowded theater: Decent quality assets, no market to sell them in, and crowds of bankers with their hands out. Did I hear someone humming Taps?
As time ran out and margin calls couldn't be met, the rumors started about that word that makes every struggling company tremble: bankruptcy.
Do I hear the cavalry? All that changed Tuesday when the Federal Reserve agreed to take on $200 billion in mortgage debt, adding liquidity to a frozen debt market. That changes everything for Thornburg. If it can begin selling assets, it shouldn't have a problem raising ample cash to shore up its balance sheet and meet margin calls from JPMorgan (NYSE: JPM) and Morgan Stanley (NYSE: MS), among others. Stand down, grim reaper.
Cats aren't the only ones with nine lives
In any market shakeout, the strongest of the strong survive and perform well in the ensuing less-competitive market. Amazon.com and eBay proved the strength of their business models after the dot-com bust, going on to dominate a market cluttered with gravestones.
This credit crunch is likely far from over, but looking into who might make it out alive is a good idea. With the recent change of events, Thornburg could make that list.
Of course, Thornburg has a way to go. On Tuesday, it restated fourth-quarter net income, reversing what was once $0.33 per share in earnings into a loss of $4.74 per share. That's a pretty hefty about-face, and highlights just how out of whack the mortgage industry has become.
Truth be told, the recent turmoil will make a sizable dent in Thornburg's ability to create shareholder value. Being forced to sell assets at a serious discount will certainly hamper its future earnings power. Even after the market recovers, it will likely be drastically smaller in years to come.
A new shot at life
But with Fed chief Ben Bernanke now on its side, Thornburg will likely live to see another day. With shares still sitting about 70% below where they started the year -- even before today's dip -- there's still room for big gains in time.
Thornburg has dodged serious bullets in the past few days. It, and other conservative mortgage players such as Annaly Capital (NYSE: NLY), now have a new shot. For once, at last, good news in an industry loaded with fear.
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