Friday, October 31, 2008

BOO: The Insanity Continues!

Good Afternoon Folks!

Not much to say today other than fear continues to dominate the market. Watching the last hour before the close is like watching the ball bounce around on a roulette wheel. Will it be black or red? Who knows!

I don't think anyone has a clue which direction the market will break at the end of each day. We rise and fall hundreds of points every few minutes. Anyone that went long Thursday or today was sweating bullets near the close as we dropped two hundred points around 3:30 before bouncing back 100 right at the bell. Those on the short side have been sweating bullets all week after taking big losses!

This results in high volatility because there is a ton of fear selling from each side. Many of the bulls and bears prefer to sell on Friday because neither side knows what potential ghosts or goblins could be released from a news perspective over the weekend. In this type of market, holding over a weekend can be suicide!

One thing that was interesting today was JP Morgan announcing they are going to start modifying mortgages:

"Oct. 31 (Bloomberg) -- JPMorgan Chase & Co., the largest U.S. bank by market value, plans to modify terms on $110 billion of mortgages and forgo foreclosure proceedings on all real-estate loans while the changes are implemented in the next 90 days.

The offer extends to customers of Washington Mutual Inc., the savings and loan JPMorgan agreed to buy last month, the New York-based bank said today in a statement. Loan modifications may include interest-rate or principal reductions. The bank said it will establish 24 regional counseling centers to provide face-to- face help in areas with high delinquency rates.

The JP Morgan program is expected to help 400,000 families with $70 billion in loans in the next two years, JP Morgan said. The company said an additional 250,000 families with $40 billion in mortgages have already been helped under existing loan- modification programs.

The programs are aimed only at homeowners who ``show a willingness to pay,'' the bank said. ``Customers should continue to make mortgage payments to reflect their intent to honor their commitments.''

JP Morgan said it will also donate or offer a ``substantial discount'' on 500 homes to community groups in order to stabilize local markets. "

Final Take:

If this doesn't have disaster written all over it than I don't know what does! Why would anyone pay their mortgage regardless of whether they can afford it or not? If I overpaid for a $600,000 McMansion, I would be the first guy calling JP Morgan to get my bailout.

I'll "show a willingness to pay" JP! Just drop my mortgage by 200,000k. This is going to be a disaster for the banks if they decide to go down this road. Where do they draw the line in terms of who gets a modification and who doesn't?

If you are struggling to pay your mortgage, I would be taking advantage of this immediately whether your loan is with JP Morgan or not. My guess here is there is some serious political pressure being put on these banks to "lighten the load" for homeowners by the Treasury.

Washington is now deeply worried about torches and pitchforks. Homeowners are ANGRY as they watch Wall St get bailed out while they continue to struggle.

Bottom Line:

Folks, this whole nightmare is starting to unwind at a frantic pace. The government is trying to juggle too many balls at once as it tries to prevent a multi trillion dollar debt bubble from unwinding.

This is a house of cards that is about to come tumbling down. The government does NOT have the money to prevent this unwind from happening! They are going to end up defaulting on themselves if they continue this bailout mentality.

The Treasury announced this week that they are going to be forced to run $2 trillion in treasury auctions in order to try and pay for this fiasco. You can be sure that the demand for all of these new treasuries is going to be tepid at best. Yields will have to be raised in order to get it all sold. We all know what that does to lending rates. To the moon Alice!

I mean think about it, why would you risk buying the debt of a nation that is filled with a bunch of consumers that have no savings and are in debt up to their eyeball?.The T-bills will get sold but it will be at a price.

When these yields go through the roof, expect equities to swirl down the toilet bowl.

As for the market short term, good luck! My advice is to avoid it unless you have a very strong stomach. The bounce this week looks tired but we have the election on Tuesday. There is a lot of debate as to what happens to equities depending on who wins.

You would think an heavy taxing Obama victory would be bad for equities, but Wall St seems to be pulling for him so I wouldn't take that bet.

I plan on taking a breather here and hold onto my current positions until the election shakes out.

In terms of trades I hedged myself a bit today. I picked up some UYG and sold some of my short 2x inverses. I am still hedged to the short side but more protected from volatility. I also picked up some SRS today. This has pulled way back from its highs and I think commercial real estate is going to get killed during this downturn.

Happy Halloween!


Anonymous said...

And now the government is working on a $600billion plan to guarantee mortgages and protect them from foreclosure. I am starting to think of only sending half of my mortgage payment and telling my mortgage company(Countrywide) that it is all I can afford. I won't lose my house and maybe I can get 40-50k knocked off my mortgage. My credit rating will take a hit but it may be worth it.

Jeff said...


Go for it.

The last thing they want is to have go into foreclosure where it will then sit empty until they sell it at a 40-50% loss.

Before its sold at foreclosure they run the risk of squatters coming in and destroying the place. The bank also has to pay to maintain the property until its sold.

It would be much more sensible for them to simply drop your mortgage by 50-100k and avoid having to go through all of the above.

IF your credit rating is under 700 then its a no brainer. Lending standards have gotten so tight that you can't get a loan if you are in the 600's anymore.

Thats an automatic walk away in my book. Homeowners will get their credit rating back in 7 years or so.

Quality of life is too important in my book. WHy live with the weight of a mortgage payment that takes 50% of your take home pay.

The banks are under a tremendous amount of pressure here. Take advantage of it.

Good luck

waubay said...


It is a sorry state of affairs when being irresponsible makes a weird kind of financial sense.

Wonder what is going to happen to these banks when people who can and are currently paying their mortgages realize the points that you laid out.

I am sure there are plenty of people who would trade 7 years of bad credit for $100k+. Most would probably do it for $50k or less. Especially when they are in virtually no danger of losing their house.

Looks like a deep, dark, bottomless pit for the housing market.

Jeff said...



I don't see the housing market getting cleaned up anytime soon.

I agree with you, we have a lot of dark and gloomy days ahead of us. I think most homeowners are going to threaten to walk before this crisis is over.

Most of the borrowers of this bubble money do not have the ability to pay it back so the only answer is default.

The banks are caught between a rock and a hard place. Thats why I think they will cave and renegotiate the loan amount.

This is what happens when the line "moral hazard" is crossed.

ZMonet said...

Will these renegotiated loan amounts be reflected in the value of the house (i.e., somehow be counted as a sale, creating a comp) or will these be stealth? Obviously one would bring prices down more quickly than the other.

Jeff said...


It would automatically be reflected in home values.

Once they start renegotiating these loans, any good realtor is going to be able to access that information.

This is a big problem for the banks.


Imagine being a neighbor to someone whose loan gets renegotiated down 50-100k. Would you still pay your mortgage at the higher price after the guy next door get bailed out?

I wouldn't. The home values in the whole neighborhood all just got clipped by 50-100k if its one of those cookie cutter deleopments.

Why would anyone on the block continue to pay? This is the "moral hazard" that lies ahead.

This is goign to absolutely cripple the banks and home prices.

Sit back and relax if you are looking for a home. This Tsunami of renogiated loans will force housing prices to plummet back to earth.

Now is nowhere near the time to buy.

This is why

ZMonet said...

Thanks Jeff. I'm looking, but nowhere close to buying as I have another year and a half left on my current lease.

While I agree with you that all these workouts will be played up in the media and therefore hit the conscience of J6P, I don't think it will play out on such a micro level. I don't think most people go through the trouble or even know how to look up how much of a mortgage people have on their homes. How would you even be alerted that your neighbor got a workout? I'm also wondering if they could somehow structure it so that the loan forgiveness would not need to be recorded -- although I just don't know how possible that would be.

Jeff said...


Your welcome!

How would the neighborhood know that a loan was modified?

Oh thats an easy one. People talk and so do realtors.

The foregiveness will be recorded. Buying a house is a 30 year marriage. IF the realtor doesn't know than the appraiser will.

Banks won't want to lend 600k for a house when they realize the house next door was modified to 400k.

Its a virtual guarantee that everyone will know when a loan was modified.

Keep renting Zmon!