First Marblehead (FMD)

FMD missed Q3 earnings estimates the other day, but their results were actually very strong. The reason the company missed was because management proactively increased the prepayment assumption to 8% from 7%, thus reducing earnings by $16 million. The initial reaction by investors, of course, was to panic once again. Forget that the company still increased earnings by 21% and revenue by 20% while the stock sold for a ridiculously cheap 9 times earnings!

After listening to the replay of the conference 3 times, I continue to be highly bullish on the name. Management actually states on the call that prepayments have gone down and stabilized, but they are worried that if the inverted yield curve persists, the prepayments will go up based on history. While I appauld the proactive and conservative approach, the other side of me thinks that they are being overly cautious. I don't think that it's necessarily the inverted yield curve that causes prepayment activity, but rather very low long-term rates, and the latest inversion was caused by short-term rates spiking higher not long-term rates falling.

I have a lot more to say about FMD and other things but I'm very pressed for time so good-bye for now.