Saturday, March 15, 2008

As Predicted: Mortgage rates are a rising

Well folks I have been warning about this for a few weeks and now we have some great data to back it up. Bloomberg has a great article today discussing the dire financial straits of the banks and its effect on mortgage rates.

Some excerpts:

" Ben S. Bernanke can't
revive the housing market and the banks are no help.
The U.S. Federal
Reserve cut interest rates five times, pumped $200 billion into the financial
system, and yesterday its New York branch provided funds to help rescue Bear
Stearns Cos.
None of that has brought down mortgage rates for residential
borrowers, whose success in refinancing or buying would help bolster the U.S.
economy. The interest rate on a 30-
year fixed-rate mortgage has climbed to 6.37 percent from 5.5 percent since Jan.
24, according to the Mortgage Bankers Association, as financial institutions
try to cover $195 billion in mortgage-related losses and save capital for future
``The mortgage rate isn't down as much as it should be because the
banks are in desperate straits and they need to maintain a larger spread than
they normally would,'' said Alan Nevin, chief
economist with the California Building Industry Association in Sacramento. ``The
banks need to generate income and the easiest way to do that is to broaden the
spread. If they pay 3.5 percent and charge 6 percent, that's a lot of money.''
Over the past 10 years, the average spread between 10-year
U.S. Treasuries and 30-year fixed-rate mortgages
has been 1.75 percent. Last week, the spread was 2.83 percent. That means a
homeowner's mortgage costs are more expensive now than they have been."

My take:

Well my fellow time bombers this is what happens when banks are under capitalized and need money. They widen the spread to make more money on each loan so they are capitalized to weather the next set of write downs. So rates are now up almost .9 percent since Jan. to 6.37!! That will shrink the average buyers pool of houses that they can qualify for. This is after all of the Fed action taken above. Rate cuts and a 200 billion dollar liquidity injection has done nothing. I think its too late for the Fed to really have any effect on the crash of housing.

So what are some other reasons rates are rising? From Bloomberg:

"Investor Trust
The Fed lowered its target for federal funds 13 times from Jan. 3, 2001, to June 25, 2003. After each cut, mortgage costs fell eight times and rose five times, according to North Palm Beach, Florida-based
That has little to do with Fed policy and everything to do with the confidence of investors, who aren't buying securities backed by home loans, said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California, and chairman of the Fisher Center for Real Estate at the University of California, Berkeley.
``No one wants to lend much of anything today,'' Rosen said. ``The secondary market system for many loans has broken down. People don't trust the paper. We have an investor strike going on.''

Remember that little trust word I keep bringing up? Bottom line here is the Fed at this point really can't do anything to save housing because their is no trust between banks, and they are under capitalized. So as a result they will keep raising rates until trust is back and they are in a much stronger cash position. The Bear Stearns debacle will make every bank CEO look at their liquidity and I wouldn't be surprised to see rates go even higher just based on the Bear Streans disaster.

So when you see those Fed cuts don't start cheering. They are having zero effect on mortgage rates. As you can see in 2001-2003 mortgage rates dropped because the banks were loaded with cash and ready to lend. Today you have the banks in the opposite position. M ost are crippled and need to make more profits so they won't drop rates. Instead they are raising rates despite all of the help from the FED.

A little piece of advice if you have Credit card debt See what the 1 year financing charges are on your card for carrying a balance. Some banks are charging up to a 40% annual interest rate charge for an unpaid balance!! Switch cards and get a lower rate for 6 months.

One more piece from the article:

"The median price of an existing home fell 13 percent in January from its peak in July 2006, according to the Chicago- based National Association of Realtors.
``The Fed actions are not going to stop house prices from falling,'' said Morris Davis, a former Fed economist and professor of real estate at the University of Wisconsin- Madison's School of Business. ``In an environment with falling prices and defaults, mortgages are a lot riskier now than three years ago. In an environment where housing prices are falling you should expect spreads to widen.''

Looks like Morris is right in my camp. 13 percent drop from 2 years ago is huge! Thats 60-70k on a 500k house. And its only going to get worse. This data was from the NAR by the way who are the one group you cannot trust when it comes to where housing is going. Its realtor backed and in 2006 declared THERE IS NO HOUSING BUBBLE! As I have said before much of what has been talked about in terms of the housing bubble has been speculative. The data is finally starting to show how bad this situation really is. Banks failing, hedgies failing, and mortgage rates are rising. this will all put furthur downward pressure on housing prices. The time bomb is close. Patience will reap great housing rewards.

Link below:

Friday, March 14, 2008

Bernanke on Housing/ Rollercoaster market

Wow what a day:

It was a Bear Stearns Friday. I have never seen CNBC focus more of their air time on one story in my life then the Bear Stearns shocker today. This is because you need to go back to the 30's and once in the 60's to see any event like it in terms of the size of the bank and the magnitude of what the Fed did. We are heading into waters not seen since these horrible bear markets decades ago.

I expect Bear will be gone by the end of next week if not by the end of the weekend. The banks want to clean this up as fast as they can. Why did Bear go under? The words that no bank ever wants to hear. Bear Stearns had a RUN ON THE BANK. As soon as word got out on the street that certian IB's would no longer counter risk with Bear Stearns , people reacted by pulling money out in Droves. This is kinda like a Northern Rock Deuce except it was an investment bank versus a regular savings bank.

The afterchocks from this should ripple through into next week and it will be interesting to see how Bear Stearns gets broken down and what the Fed does on Tues. Expect a big cut IMO. The Fed will forget about inflation when banks start failing.

Bernanke toughens his rhetoric:

One more quick note. Bernanke toughened up his rhetoric aginst the mortgage industry by eliminating certian loan products like no doc, and significantly increase the regulations in the industry which will thus SIGNIFICANTLY tighten lending standards. what does this mean? IMO Down the road if your loan isn't 3-4 times income with 20% down you can forget it. There will be no way to "SLIP" you through qualified and the banks are in no financial postion or incentive to take these bad loans.

My take here is there are really two stages left for the housing market to go through.

1. The banks have to come CLEAN or risk going insolvent like Bear Stearns because your fellow counterparts don't trust how much bad debt you have and as a result stop trading with you. There are some great banks that can take their hits and carry on. JP Morgan is an example one of them. The question now becomes who is next to open the books or go BK? Thornburg and Carlyle are done. The street doesn't know how much contagion there is.

What this does is create FEAR and a lack of TRUST that can destroy a once functioning credit market. Until trust is restored, this potentially opens a huge can of worms. It could now become a witch hunt by the big banks to find the hedgies that over-leveraged and the weaker banks that didn't control risk. these large Goldman like primary lenders may start calling them out and grabbing their assets in order to increase their own capital because they own a ton of bad debt too. This is how things can spiral out of control when a major event like this happens. Frankly, its a mess.

2. The second stage we need to go through is simple, PRICE DROPS. Most of the realtors still don't understand the reprucussions of whats going on on Wall St. The lending game is now over folks, and it might not ever come back unless we decide to make the same mistakes over again and history has shown that we like to do this(this isn't the first housing bubble). It may be 20 though years until that happens.

It will take a long time because if you think Ben B wants to clean this mess up again you can forget it. I feel bad for the guy. Greenspan left him a housing disaster. Sellers may be holding prices now, but the tougher Ben's retoric is, and as more banks take massive writedowns and then refuse to lend unless old standards are used, this mentality will change. Sellers and builders will realize this quickly when they go 0-20 on loan apps because RISK is back at the bank. Trust me guys, after Bear Stearns today, RISK is BACK.

When this happens the realtors will adjust the market back to price levels where banks are willing to lend, or they can stay in LALA 2005 bubble land and find themselves as a greeter at Home Depot a year later because they didn't sell a house in 2008. This is when the educated buyers will thank themselves for getting educated and not buying at the peak in 2005. The Bear Stearns news was something I honestly never expected to happen this quickly and it has brought us one tick closer to the housing time bomb.

Bear Stearns Shocker

Well inflation came in at 0.0 which was way below expectations. The pre-market stock market flew up 150 points on the futures based on the low inflation #. Then about 10 minutes into the trading day CNBC comes out and reports that Bear Stearns in coordination with the FED gained financing from JP Morgan for 28 days. The initial reaction was positive because many thought Bear Stearns simply got some help from JP morgan.

Now if this was the situation then why did the Fed have to be involved? Why couldn't JP Morgan and Bear Stearns have talked and worked it out themselves? The answer most likely is Bear Stearns became insolvent in a matter of days and went to the Fed and said we are insolvent unless we get some help. The Fed then obviously called JP.

So enter JP Morgan, who after a little push from the Fed decided it was in their own best interest to keep the financial system solvent. This is huge news guys. Bear Stearns is a primary lender and is in the world's top 20 among primary lenders with over 200 billion in loans and risk on their books.

JP Morgan HAD to step in because if they didn't then Bear goes under and Bears assets would then be on sale to the highest bidder. The risk here is all the bad debt that Bear owns then gets priced to market(the wolves would be out picking up scraps) which would force the other IB's to lower the value on the debt that they have on their books. If Bears assets went to market the people like Wilbur Ross and Buffet would be out slopping up A credit and BBB credit for .10 on the dollar. It would have created a financial disaster threatening the solvency of more banks.

The humurous thing in all of this is Bear Stearns CEO was just on CNBC 2 days ago saying that the company was in great financial shape. The frightening thing here is the speed at which this happened. It started with a bank overseas that deciding not to trade anymore with Bear for counter party risk because they didn't trust their books. Goldman did the same thing a few days later and then VOILA INSOLVENCY. It took DAYS.

I expect going forward that you will start seeing primary lenders start to pressure the hedgies lthat bought with great leverage to either pay your margin calls or give us your assets. This happened a few days ago with Carlyle Capital. This could have a huge SNOWBALL effect folks.

As I said this market is very unpredictable and be conservative with your investing. BTW since I started writing this post the DOW has dropped 200 points. I guess Wall St. doesn't like insolvencies.

The ending effect of this is a big negative on the housing market because it will further reduce lending until this crisis is over.

What a start to the day. I have been warning about this kinda thing for weeks. Be careful and safe investing everyone.

Thursday, March 13, 2008

Finally a decent idea from the Government/FHA

Well if you are wondering why the DOW went from 200 down to up 35 it was based on two pieces of news. The S&P announcements that the writedowns are close to being over(HAHAHAH yeah right), and a new government FHA backed mortgage plan for distressed owners.

My take:

Let me preface my opinion on the FHA idea by saying that I think there is very little chance that Wall St. Accepts this deal. If Wall St. does take this deal then we are in much deeper doo doo then any of us know.

"A mortgage bailout plan hatched between Wall Street and Congress is gaining political traction even though it could be on a crash-course with the Bush administration.
The plan would amount to a steroid boost for the Federal Housing Administration, a program conceived to help poor people buy homes that is now being used as a subprime mortgagelifeline.
Both Credit Suisse and Bank of America have mapped out how the FHA could gather up more shaky home loans and Rep. Barney Frank, chairman of the House Financial Services Committee, on Thursday offered legislation to do just that.
Under those plans, the government would take failing mortgages off the hands of investors and write new terms that would prevent foreclosure.
The Frank bill is specifically aimed at borrowers who are distressed because the value of their home has dropped.
His legislation would see lenders write down the mortgage amount in exchange for a government guarantee the new loan would not fail. Lenders who have a choice between seizing a home or taking a hit on the loan amount could find the plan appealing."

My take:

OK so why am I shocked that Wall street is involved in this deal. Here is how this plan would work. The Fed would take on billions in bad debt from the banks and feeds the loans to FHA. The FHA will then analyze what the person in the home can afford and drop the loan value to a point where they can afford it. You need to be living in the house in order to qualify so this takes out the speculators. Sounds like it makes sense right? The problem is why would anyone on Wall St. sell a loan and then take the loan back from the FHA if the loan value is at a HUGE loss because the the FHA has decided this is all they can afford based on their income. Example, Subprimer pays 700,000k in Cali and can only afford 400k. FHA could potentially take the loan down to 400K and sell it to another investor or the same bank.

I love the idea because it will start bringing transparency and trust back to Wall Street. this also is not a bailout and doesn't cost the Fed anything. The fact that Wall Street helped develop this plan tells you what shape the banks are in.

Another thing to think about here is prices are still dropping at the fastest rate in history. Maybe FHA decides to lower the loan amount lower then its worth to protect owners from price drops. Wall St. gets hammered if this goes through but they deserve it. They never should have made the loans in the first place. All things being said if this goes through then expect MAJOR losses on Wall St.

Why would Wall St agree to this? Here is what I think they are saying to themselves: "Well the loan debt we are sitting on may be worthless so I guess a FED gauranteed loan at 50% less is better then ZERO!!! Lets take the deal."

We will see how this develops. Its perfect for the Feds because this costs them nothing. FHA just becomes a holding house until the loan is sold off to investors. It may go down as one more idea that never makes it through congress but this is the first one I like because it squeezes the banks who created this mess. they need to be punished when they get involved with fraudulent behavior.

Investing note:

Because you are hearing FED rumors on a daily basis I wanted reinforce the fact that investing right now is extremely dangerous. You can smell the desperation on both sides of Wall St.and the Government, and new ideas can move the market by 250 points like it did today. This bull move was also helped out by S&P saying that they could see the end of the writedowns for the banks. Yeah right, like they have one ounce of credibility left. Remember these are the same guys that told you your subprime bond was AAA rated. Notice they forgot to include thethe Alt-A and Prime loans that are going down as I have previously described. Forget to include those eh?? This is the why I continue to preach fixed income investment.

You really need to look at fixed income during these times like these. If you go into CD's, treasuries or bonds for one year then maybe your return is 4% with almost zero risk to the downside. If the market goes up the average 10% then you have lost 6% on your investments for one year. Now lets look at the alternative. If you throw your money into equities your return could be 10% at best in this type of market with a downside risk of 30% or more depending on how this mess gets worked out.

I am usually a bull and in stocks. There are times however that you need to take a breather from equities when common sense is telling you things are not right. I learned from the tech bubble that going to fixed income is smart when there are big threats to the economy. If you don't have DANGER WARNING lights ringing in your head right now then you never will. This housing time bomb will go down as one of the biggest debacles in the history of our economy.

One quick story and I will call it a night. Many wonder how the great Kennedy family made their huge fortune. During The Great Depression as stocks peaked one of the Kennedy's listened to his shoe shiner talking about the stocks he bought(just remember the busboy that owned in 1999 before it went to zero) and Kennedy said to himself is he is buying then who is left to buy? He then went to his broker and shorted the stock market as it crashed down 80%. This is how much of their fortune was made. FHA story S&P Joke of a story

Foreclosures filings rise 60% in February/ Defaults double from a year ago

Good morning everyone. Well I have several topics to discuss today but I wanted to start with the Realty Trac data. Foreclosures rose 60% and defaults doubled versus 1 year ago. 223,000 houses are now in some stage of default. I guess HOPE NOW isn't working so well. Banks are instead saying pay or get out.

Some comments from the article:

``This is continuing to worsen,'' Susan Wachter,
professor of real estate at the University of Pennsylvania's Wharton School in
Philadelphia, said in an interview. ``It tells us that we are not at a bottom.''
About $460 billion of adjustable-rate mortgages are scheduled to reset this
year and another $420 billion will rise in 2011, according to New York-based
analysts at Citigroup Inc. Homeowners faced higher payments as fourth-quarter
home prices fell 8.9 percent, the biggest drop in 20 years as measured by the S&P/Case- Shiller
home price index.
``With declining prices, there is a pervasive problem of
not being able to refinance or sell,'' Wachter said in an interview. ``I'm very
Foreclosure filings are likely to be ``explosive'' in May and
June as more payments jump, after remaining at current levels this month and
next, Rick Sharga, executive vice president of RealtyTrac, said in an interview.
There may be between 750,000 and 1 million bank repossessions in 2008. Bank
seizures rose 110 percent in February from a year ago, he said.
``We're in a vicious cycle,'' Sharga said. ``We've got depreciating
home values and loans resetting at an outstanding volume just as banks are
retrenching. Even people who want to buy a home now are having trouble getting a

My take:

This is slowly becoming the perfect storm. You have an additional $460 billion resetting loans which are mostly subprime. The only way for these owners to save their house is to refinance and the banks have raised lending standards so most of these people cannot do so. Making the problem worse is the fact that the banks are fighting to stay solvent and raising interest rates. This is why this spring foreclosure rates are expected to be explosive in the spring. Remember, the subprime resets aren't done resetting until the end of 2008.

Another thing Susan brings up and is rarely talked about is there are another $420 billion resetting in 2011. These are the five year ARMS that people jumped into during the boom. This will be another huge hit to housing 3 years from now. Anyone thinking this market is going to recover anytime soon should reconsider their position. Remember housing recoveries take 8-10 years. I think this one will take longer and it might be more then a 15-20 years until you see houses back at these levels if ever.

Sharga sums up the problem in one quote:

`Vicious Cycle'
``We're in a vicious cycle,'' Sharga said. ``We've got depreciating home values and loans resetting at an outstanding volume just as banks are retrenching. Even people who want to buy a home now are having trouble getting a mortgage.''

Sharga hits the nail on the head. the banks are in deep trouble and don't have the resources to help distressed buyers.

Some Market notes:

Carlyle Capital's mortgage bond fund defaulted and failed to cover margin calls. This has shaken the markets this morning. Carlyle was leveraged 30-1 in this fund and when you are that leveraged and AAA bonds start dropping in value it doesn't take much for you to be way underwater and insolvent. The fund is trading down 95% today. Whats interesting is the lenders decided to take the money thats left in the fund rather then give Carlyle time to see if their bonds might come back in value. What does this say about mortgage backed bonds and the confidence in the credit markets that they will come back in value??

The fact that the lenders grabbed whats left rather then wait and give Carlyle a chance to come back tells you that they do not believe in these bonds anymore.

A Carlyle senior advisor describes the troubles below:

"The fund's losses were caused by ``excessive leverage,'' said Arthur Levitt, a senior Carlyle adviser, in a Bloomberg Radio interview today. ``This did not affect the overall Carlyle enterprise,'' said Levitt, former chairman of the Securities and Exchange Commission and a board member of Bloomberg LP, the parent of Bloomberg News.
`Single Fund'
``This was a single fund, and I suspect as this plays out, you are going to see a lot of other private-equity companies, a lot of banks, going down the same road,'' he said."

Not a very rosey picture.

Hank Paulson also was on CNBC today talking about regulating the mortgage industry and he pleaded with the banks to increase their capital and lower their dividends. I suspect they will let housing bottom out before the mortgage regulation happens but the result of this is we will never see the fraud that we saw in housing from 2000-2006. That is why buying now at even prices that are at a 10% discount is a bad idea. You are still buying at housing bubble levels. Once the government regulates the cost of a house will drop because the fraud of the lenders, appraisers, banks will all be gone.

Regarding his comments on the banks he doesn't sound too confident about their solvency. Banks hate to cut the divedend because it sends a bad confidence message to investors. IMO Paulson sees the perfect storm coming and at this point all he can do is try to control the damage as this housing bubble deflates.

Wednesday, March 12, 2008

Jim Rodgers: Abolish the Fed!!

There was a great interview on CNBC. Jim Rodgers is one of the best advisors out there and called the great bull market commodities run about 10 years ago. I love Jim Rodgers because he is worth a billion dollars and is an independent investor. Why is that important? Because he answers to no one and these are the guys I would rather listen to versus some guest anyalyst on CNBC talking his firms book.

When Jim gets on air he lets it FLY!! Some excerpts:

Rodger's take on The Fed and the 200 billion dollar intervention:

The Federal Reserve announced on Wednesday a rescue package that it would
put around $200 billion into banks and investment houses and allow them to put
up risky home-loan packages as collateral.
Wall Street responded to the news
with the biggest rally of the year, but Rogers reminisced of the 1970s, when the
Fed printed money to avert a recession, boosting inflation and then forcing
interest rates to more than 20 percent to keep a lid on price rises.
"No country in the world has ever succeeded by debasing
its currency," he said. "That's what this man is trying to do. He's trying to
debase the currency as a way to revive America. It has never worked in the long
term or the medium term."

My take:

Did anyone see the dollar today? All time low. The yen/carry trade is now down to $101.20 as we speak and oil hit $110.00. Wiith a recession looming and prices rising oil should be moving DOWN as demand decreases. The problem is with all of the liquidity from the Fed they are killing the dollar and this has become more of a currency trade based on Euro strength when it is priced in US dollar.

Rodger's take: Fannie is in trouble and expect some Investment banks to fail:

"What is Bernanke going to do? Get in his helicopter and fly around the world and collect rents? That's absurd," Rogers said.

A recession may be a good way to clean up the economy, while trying to prevent one may cost more and actually worsen the recession, Rogers said. Also, investment banks should be allowed to fail.
"Listen, investment banks have been going bankrupt since the beginning of time. If people make mistakes -- if you bail out every investment bank that gets in trouble, that's not capitalism, that's socialism for the rich," he said.
The weakest financial institution is Fannie Mae, in Rogers' opinion, "but all of them have problems."

He said he had a short position on all investment banks and is buying agricultural commodities such as cotton, wheat, coffee and sugar and was also buying the Chinese yuan and the Japanese yen.
"Buy agriculture. Agriculture is one of the few places where you're going to make a fortune in the next years," Rogers said.

My take:

How can you doubt this thinking? He has been dead right and talking about this for a couple years now. The Fed has about $800 billion dollars in cash to inject liquidity into the credit markets. So they have taken 25% of their allocated resources and put together this collateral/MBS deal. It took the bond market one day to figure this plan wasn't going to work. The DOW started up 140 points and then rolled over neagative as the dollar keepd free falling. The dollar CRASHED to all time lows forcing commodities higher.

Remember if you listen to Doug Kass, this is a 6 trillion dollar problem that the FED is trying to fix with 800 billion dollars. the Fed WILL NOT destroy itself in order to save the banks. Expect some failures and more pain in the financial sector is the oncoming weeks.

What Ben needs to do is let capitalism do its job of cleaning out the dirty laundry. Let some banks fail and then we can move on. The MORE we fight this problem with liquidity the worse inflation will get and we will need a Paul Volker like Fed to raise rates to 20% from 6% to clean up this mess.

What do you think 10-20% interest rates will do for housing as people try to qualify for loans. A six figure income will qualify for $100,000-$150,000 dollar house. A time bomb like KABOOM. Housing hasn't even gotten half way towards the bottom and this continuing intervention is giving us more pain and prolonging the problem.

We are heading towards a housing disaster worse then 1990 and possibly the worst since The Great Depression. Cash will be king when Fed rates rise to control inflation. The smart people will invest in fixed income and dividend yield stocks or CD's and be able to possibly even pay cash for a house if you have 80-100,000 grand in many markets when this is all said and done.. The data keeps getting worse folks. Be afraid.

Link below:

Billionaire Wilbur Ross expects Many Bank failures

I want to thank
"Barry Ritholtz's Big Picture" for this great WSJ link.

Well the market rallied strong yesterday up 400 plus points which was its biggest move in 5 years. One of the things that I like to do on a big bull rally is watch the bulls reaction and listen to their expectations going forward. I watched Jim Cramer for example. I also listened to many anlysts on CNBC and read some research reports.

I was expecting to hear cheers of joy and the Fed had saved the day!!!. I predicted the biggest permabull of them all Jim Cramer to be screaming like a madman saying that we found a bottom and the Fed would save the market!!!

To my surprise I heard none of this. Cramer complained that the FED should be buying 200 billion of these mortgage assets not just allow institutions to borrow against them using them as collateral. He had 3 people during his lighting round ask about three banks including Wachovia and his advice was to sell all of them into the rally. He said if the rally carried into today sell some more of the same stocks. He then went on to say until housing gets straightened out this is not the time to be buying financials.

Then I listened to the above video from Wilbur Ross and his reaction to the 200 billion dollar Fed action taken yesterday and his comments on wether he thinks banks will fail. His take: Expect bank failures aka 1990/91. 1000 BANKS failed during this time. He expects mostly local and regional failures. His take on th $200 billion dollar Fed collateral move is also dicussed without much adulation.

So the bull reaction to this move is from what I can tell is this: The market was oversold and this was for the most part a short covering rally. Most bulls were advising clients to sell into the rallies.

Bear Stearns continues to take heat about their solvency because their main business model was securitizing this triple a paper that now no one wants to touch. I expect them to get bought.

Doug Kass. One of the brightest on the had this analysis:

• The Fed's initiative is a good "first step" but small (and too late!)
compared to the magnitude of the credit problem. The $200 billion Term
Securities Lending Facility (TSLF) pales in comparison to the $6.0 trillion in
agency (and non-agency) markets. Moreover, the need for such a large and
innovative rescue plan further underscores the lack of validity inherent in the
ratings agencies' analysis of risk (and AAA ratings!).

• The Fed's recent moves of slashing interest rates between scheduled meetings and the large TSLF suggest that the credit problem could be larger than most recognize. This is especially the case at primary dealers, such as Bear Stearns (BSC), which are facing a tsunami of financial problems

• Bear market rallies are sharp, as short-covering is spirited. The role of short-covering in Tuesday's broad move cannot be precisely determined, but undoubtedly, it played a role. This is especially true as negativity had recently grown and markets were increasingly oversold. That said, every rally of the last 10 months has proven to be an opportunity to sell. The burden of proof remains on the shoulders of the bulls until proven otherwise. In light of the above circumstances, my market rating moves this morning to 5-5, as I am now firmly a market agnostic with no convictions whatsoever, waiting for my right pitch. Quite frankly, sometimes it is best to admit some confusion and to avoid conviction because I'm stuck in the middle with you.

My bottom line:

Don't get too excited about yesterday. This was a band-aid by the Fed(zero liquidity) that forced a short covering rally. Bear markets are often like chainsaws. Quick Bull rallies followed by big drops as housing, recession fears, and bank failures will continue to haunt the market. Expect a ton of volatility. We could move higher with some follow through from the big rally yesterday. Rally or no rally Stay mostly in cash and sit on the sidelines. The housing time bomb is about a done deal. The Fed will continue to be creative but they simply don't have the assets to fix this problem. Remember if it comes down to them or the banks becoming insolvent who will the Feds choose? Themselves. When the bulls can't get excited from a 400 point day I think it says something...BOOO YAAAAH

Tuesday, March 11, 2008

Fed sets up 200 billion dollar Treasury Security Lending Facility

Hey guys. Been a busy week but wanted to quickly comment on this. The FED has setup this facility in a move to try and loosen up the credit markets especially in the mortgage markets by allowing institutions to be able to dump some of their AAA and other bad paper onto the Fed for 28 days.

My take:

The FED is buying bad paper short term in a desperate move in order to shore up the credit markets. The dollar is strengthening today because it might signal that the Fed may stop cutting(since it wasn't working anyway) and start looking at other ways to cure the crisis.

This 200 billion dollar band-aid will just delay the inevitable blowup of the banks. This is a TRILLION dollar problem. This move is nothing more then trying to shore up a leak in a dam that is about to burst. The marked cheered the move but I can't understand why. I guess they cheered all of these other bogus plans like HOPE NOW so I should have expected this reaction.

I don't expect the stock market early morning rally to hold because once the market digests this, they will realize it will be just another idea that doesn't cure the bigger problem. Just like the HOPE NOW inititive, 5 year freezes on subprime teaser rates, and the FED rate cuts haven't worked.

What I find interesting is the strengthening of the dollar in reaction to this news. Maybe $108.00 oil made them realize they are looking over the edge of a cliff if they continue to cut rates and the dollar weakens anymore.

DOW is up 200. It will be interesting to see where we end the day. Nothing has changed folks. The FED and market will try everything to keep this bull market going. Until houses become affordable again these moves are nothing but "window dressing". 70% of this economy is the consumer.

Until the consumer has money in their pockets to spend, this market isn't going anywhere long term. Unaffordable housing, inflation hitting all foods and goods like $108.00 oil will continue to paralyze the consumer and thus the market. Until this changes, stay defensive and realize that nothing has changed fundamentally in the markets. We are still in real bad shape.

Link below:

Monday, March 10, 2008

The market continues to slide

Just a few comments on the markets today:

It is becoming increasingly more obvious that we are now in a bear market. The market is acting very bearish. Lower highs followed by lower lows. We broke key support levels today by falling under 11,800 on the DOW.

Why is this important? Because many buyers that came in and bought at these support levels in Jan. are now in the red which usually triggers more selling. Some of this selling is triggered via computers as soon as we fall through these support levels.

Many rumors spook the markets daily right now. Today it was Bear Stearns having solvency issues which were strongly denied by the company. Goldman Sachs reported that the FED may do an emergency cut of 100 basis points. If this happens guys its NOT a good sign. It probably means someones in trouble and they are cutting in order to keep the markets stabilized.

We all need to start realizing that the FED cuts have and will continue to do nothing for the markets and will not lower mortgage rates. The issues of this market are ones of fear and lack of trust between banks. Since the FED has slashed rates from 5.25% down to 3% what has happened to mortgage rates? They have gone UP! What has happened to the stock market? Its gone DOWN.

This idea that the FED can save the markets and lower interest rates worked in a healthier market but it will not work now because it doesn't address our current troubles in the market. People have borrowed up to their eyeballs and the greed and corruptness of Wall St. hit a level never seen before. The ONLY way things get back to normal is trust is restored and the market corrects to where houses are affordable and the banks have transparent books with credible ratings agencies to rate debt.

Remember folks, Japan took rates to ZERO and housing has not moved higher for 20 years. We have better policy than Japan so expect better results but there is much more pain to come. Until we let this 20 year debt binge digest expect the market to go sideways or lower and housing to fall dramatically until people can afford to buy one and the bank is willing to lend you the money.

The times are a changing. Buy some fixed income and get ready to watch the bear replace the bull. If you feel compelled to invest I would buy some reverse income ETF funds like (QID), SDS, SKF which short different sectors in the markets. This is a much safer way to go short because you don't need to cover. I STRONGLY advise that this is a small percentage of your portfolio. CASH will be KING very soon as the money supply shrinks and deflation hits. Inflation rules for now. Deflation will rear its ugly head later.

Prime lons are next/Fannie's new game

Happy Monday everybody. One of the guys on the street that I love to read is Bill Fleckenstein of Fleckenstein Capital. I wanted to comment on a column he wrote over the weekend titled "Next shoe to drop: Prime mortgages". As usual you can find the link at the bottom.

I have been blogging recently about how the banks pulling back on lending is one of the major issues facing housing and the fact that the money supply is drying up which will put severe pressure on housing prices because their simply isn't enough money supply out there to keep prices going higher. Bill reiterated my feelings in his column this week noted below:

"According to a friend I've dubbed the "Lord of the Dark Matter," credit is
rapidly being withdrawn across a broad spectrum -- especially for the major
brokers, giants like Goldman Sachs (GS, news, msgs)
and Citigroup (C, news, msgs),
which have served as enormous financial intermediaries. This is now raising the
costs for nearly all credit-oriented hedge funds. And, my friend said, the pace
of massive de-leveraging could accelerate further. That in all likelihood would
feed on itself."

As you can see the word on the street is the big boys are pulling away from credit availability and when they stop the money flow and start to de-leverage the housing game will come to a screeching halt. I had noted Citi's announcement last week of cutting mortgage lending by 50% taking $45 billion dollars out of the housing game. These slash of money supply is what will ignite the time bomb. Bill further goes on to talk about how this will effect alt-A and eventually PRIME loans:

"I believe the next area of the credit sector to implode will likely be Alt-A -- loans granted to people who didn't want to document their income, also known as liar loans -- which will help illuminate the fact that our mortgage problems were never just subprime. Rather, they sprang from one big credit bubble, thanks to which mortgages were handed out to anyone who could fog a mirror. Most people took on more than they should have. (Some are now walking away from their obligations, a development recently highlighted in the media.)
In time, it will be clear that prime mortgages are also vulnerable.
"You can almost draw (the credit unwind) out in a diagram," said a managing director at the Economic Outlook Group in Princeton, N.J. "With home prices going down, consumers cut back on spending. If consumers cut back on spending, the economy weakens further. If the economy weakens further, fewer people are able to afford mortgages, so home foreclosures increase."

You see as Bill explains this all becomes a vicous cycle that feeds on itself. People in all loan categories stretched to buy houses they couldn't afford. Once the 15-20% annual increase in home prices stopped and started dropping, the economy started to have trouble which puts enourmous pressure on homeowners to continue making their payments. The fact that 58% of foreclosures in the 4th quarter being alt-A/prime loans means its already starting to show up in the numbers.

Bill then talked about Fannie Mae's new tricks:

"Knowing the complete scope of this credit disaster is impossible because of the absurdly pliable accounting treatment accorded to financial institutions.
Case in point: Fannie Mae (FNM, news, msgs). Before excerpting one of the relevant passages from the company's latest quarterly financial report, let me cut to the chase with this explanation from a friend: "They take a delinquent mortgage loan and replace the delinquent part with an unsecured loan in order to circumvent the buybacks and mark-to-market consequences." That is the reality.

Here is how Fannie goes at lengths to sugarcoat it:
"We recently introduced a new HomeSaver Advance initiative, which is a loss mitigation tool that we began implementing in the first quarter of 2008. HomeSaver Advance provides qualified borrowers with an unsecured personal loan in an amount equal to all past due payments relating to their mortgage loan, allowing borrowers to cure their payment defaults under mortgage loans without requiring modification of their mortgage loans. By permitting qualified borrowers to cure their payment defaults without requiring that we purchase the loans from the MBS (mortgage-backed security) trusts in order to modify the loans, this loss mitigation tool may reduce the number of delinquent mortgage loans that we purchase from MBS trusts in the future and the fair value losses we record in connection with those purchases."

This type of stuff reminds me of the Enron like accounting we saw after they were exposed and torn down. As these foreclosures mount Fannie will only be able to play these games for so long before it blows up in their face.

It will be an interesting week on the stock market. Rumors are already flying that mighty Goldman Sachs might miss their earnings for 4th quarter. I guess you can't trade yourself to profit every quarter when you have billions of bad loans on your books. Time will tell.

Link below:

Sunday, March 9, 2008

Shades of the 1987 Crash?

US Fed pins economic hopes on $200bn liquidity boost

By Ambrose Evans-Pritchard
Last Updated: 12:03am GMT 09/03/2008
Recession and fears of a crash force US central bank to bolster the credit markets again, reports Ambrose Evans-Pritchard
The Federal Reserve has again been forced to step in to alleviate extreme stress in the US credit markets, pledging $200bn (£100bn) of emergency liquidity for the banking system.

The move culminates a dramatic week that saw yield spreads on Fannie Mae and Freddie Mac agency bonds surge to the highest levels in over 20 years. A panic flight to safety across the credit universe briefly drove the yield on 2-year US Treasury notes below 1.5pc, a sign that investors may be battening down the hatches for a violent storm.

The Fed said the fresh money was needed to "address heightened liquidity pressures in the term funding markets". A tentative rebound on Wall Street ran out of steam in late trading as shares slid perilously close to the January lows, deemed key support levels by technical traders. The Dow Jones index tumbled 202 points at 11,833 in late trading. Grim jobs data released by the Labour Department showed that employers had cut the workforce by 63,000 in February, the sharpest drop since the dot com bust. "A decline of that magnitude screams recession," said Paul Ashworth, US strategist for Capital Economics.

My take:

This is from the Telegraph in the UK. Well it looks as if we are in recession. Goldman Sachs says it is a forgone conclusion. A negative jobs report almost always is a signal that we are in one. As you can see money is flying out of the credit markets and housing and flocking to treasuries to the point where the FED has to inject money in order to to keep the credit markets alive. 2 year treasuries are usually around 3%. They are now at 1.5%. this shows you the fear that is out there.

Now as I read on here is the 1987 comparison:

"The Bernanke circle is now deeply worried about a systemic crisis, fearing that
the "financial accelerator" may have set off a downward spiral that could prove
hard to stop.
The Fed is now starkly at odds with the European Central Bank,
which has held rates steady at 4pc since the credit crunch hit in August.
officials say privately that they are shocked by the ECB's complacency given
that Italy is falling into recession, while Spain and Ireland face property
The transatlantic rift is eerily similar to the disputes leading up
to the Black Monday stock market crash in October 1987
. Traders say the discord
has begun to infect market confidence:

I have been warning for a week that a time bomb is about to explode and it could happen very soon. The quote above is a major problem. We are cutting rates as Europe is holding rates to fight inflation(which is their mandate). As a result our dollar is getting pummeled and hitting all time lows. It now takes $1.54 US to equal one Euro. This disconnect is putting even more pressure on our problems because other countries aren't complying with our rate cutting.

This could blowup our economy because inflation is already getting out of control and the its going to get worse because Ben has to keep cutting in order to save the banks. Usually as our economy deflates inflation decreases because their is less demand for things like oil because people cut back on their usage. With rising demand from India and China combined with Europe not dropping rates inflation is persistent and rising. Short term its only going to get worse with more rate cuts.

So now we have a situation where housing is deflating, the economy is facing a major recession , and inflation and getting worse because of the European bank/world demand issues. This is a recipe for disaster. I really don't see Ben getting out of this one without a major blowup of the economy. The only answer is some type of collapse and reset of the whole system.

How does this translate to housing? Well there are many risks. Inflation means people spend more on necessities which means they have less income to buy a house. The FED may be forced to Raise rates after they lower them short term in order to fight inflation which will reduce the amount of money people can borrow.

Banks are losing billions and lending at a dramatically reduced rate becasue of losses and fear which will tighten lending standards and make loans very very difficult to get. This is the spiral that Ben Bernanke worries about. Oce it gets going its hard to stop and it feeds on itself.

What then happens to housing? KABOOM!

Link below:


Countrywide is Probed by the FBI for Possible Fraud

"Countrywide Is Probed by FBI for Possible Fraud, Person Says
By Robert
Schmidt and David Mildenberg
March 9 (Bloomberg) -- Countrywide Financial
, the largest U.S. mortgage lender, is under investigation by the
Federal Bureau of Investigation for possible securities fraud, according to a
person familiar with the probe.
Investigators are focusing on whether
Countrywide officials misrepresented the company's financial position and
the quality of its mortgage loans in securities filings, the person, who
declined to be identified because he wasn't authorized to speak about the probe,
said yesterday. He described the inquiry, reported earlier by the Wall Street
Journal, as preliminary.
Countrywide is among at least 14 companies that the
FBI is checking for possible accounting violations related to the subprime
lending crisis, including mortgage lenders, housing developers and Wall Street
firms that package loans as securities. The FBI announced the review in January
without identifying any of the companies."

My take:

Well the blame game has already started. I expected this but I am surprised this has started when prices are down only 15% nationally. Usually the government doesn't get involved until all of the damage has been done. We are still in the early stages of this crisis. This is further proof that people are realizing that housing is turning out to be a big "scam" versus a boom to the economy. So just like Enron and MCI Worldcom, Countrywide because of their size will likely become the poster child for one of the biggest financial frauds in the history of the US.

There was something in this article that actually was more disturbing to me then the FBI starting a probe on Countrywide:

"Forty-two percent of new foreclosures in the fourth quarter were people with adjustable-rate subprime mortgages, given to borrowers with limited or tainted credit records, according to the report."

So why is this bad? 42% of foreclosures in the fourth quarter were subprime mortgages. I expected this number to be high. What is scary is that 58% were NOT subprime loans.

Remember a year ago the experts said this problem was contained to subprime. When more then half of your foreclosures are not subprime it means that all loans are in trouble. Prime, alt-A, everything. This is why we are in such trouble folks. As I have said before my worst case scenario for the housing problem is that all loans will begin to start having trouble.

When 58% of the loans that are going bad are considered to be good loans it means we have a national crisis. Whats becoming increasingly obvious is eveyone in the US made the same mistakes in terms of buying an unaffordable house. What many on Wall St. thought was the poor people that couldn't afford a house during normal times now could because of subprime loans, and this would would be the one area that housing might have a problem with foreclosures. This is why it was expected that this crisis was contained.

What we are no learning is people who made $300,000 made the same stupid mistakes as the subprime folks did. They went out and bought a $1.5 million dollar home when they should have bought something for around 900k which is 3 times income. The rich made the same mistakes as the poor, they bought houses that they couldn't AFFORD. The 58% foreclosure rates on prime loans confirms this. As a result this will be a national crisis that hits all neighborhoods regardless of income.

Perhaps this is why JP Morgan raised their expectations of houses dropping in value from 25% nationally to 30% nationally. This is going to be a pain full process to watch these houses drop. With the news this weekend of 325 billion dollar margin calls and predictions of 30% reductions in housing getting pasted all over the Internet and newspapers tells me that reality is setting in.

Expect losses in the market this week.

Stocks have only dropped about 15% so far as we enter this recession. The average drop in stocks is 28% during your average recession. What I see is developing is a severe recession and a chance of depression if the government does not take the right actions and address this problem correctly. As a result of this you could see stocks do worse then the average 28% drop during an average recession when this is all said and done. This may end up being the mother of all recessions. I hope we can avoid a depression. I will discuss more on what needs to be done to correct this problem later.

Link for Bloomberg article: