Saturday, April 5, 2008
I have tried to warn all of you that the housing crisis is over/market bottom callers should be ignored because they have an agenda. The following from FT explains why:
Take financial talking-heads with a grain of salt
By Mark Sellers
Published: April 5 2008 04:48 Last updated: April 5 2008 04:48
Everyone acts in his or her self-interest. This is a key facet of humanity, and keeps our society moving forward.
Think about that the next time you make an investment decision. As an investor, it is in your interest for your portfolio to do as well as possible with the least risk possible. Unfortunately, this is not the goal of most of the people you may rely on for news and advice. There are conflicting incentives everywhere in the world of finance.
This is something to keep in mind when you read the newspaper, watch CNBC, or manage your personal finances. Various stock market players have different incentives, none of which is necessarily in your best interest:
Government officials. An elected official’s primary motivation is to be re-elected. Voters don’t tend to re-elect politicians who let the stock market go down. So, government officials have large incentives to prop up markets to the greatest extent possible. Every time you hear an elected (or appointed) official talk about the market, you should take it with a huge grain of salt. These people only want to see stock prices go one way – up – because it’s in their best interest. But it’s not in your best interest unless you’re a short-term investor who only cares about the next year, not the next decade.
It’s not in your best interest because, to juice the markets, politicians like to pump massive amounts of money into the capital markets and bail out bankers who have made dumb decisions. This works in the short term but leads to moral hazard, excessive risk-taking by investors, and inflation – all long-term problems. As an elected official, though, you aren’t worried about long-term problems. You want to get re-elected. You’re worried about the next 12 months, not the next 12 years.
Financial advisers. Many advisers are paid on commission from mutual fund companies into whose funds they place client assets. If you use an adviser who is paid in this manner, watch out. You will be put into funds that are probably not the best choices, simply because the adviser has to earn a living. Since advisers don’t explicitly get paid based on performance, they have no incentive to put you into above-average funds.
You should work with “fee-only” advisers who are paid by the hour.
Stockbrokers. Brokers like you to trade a lot. Some are more unscrupulous than others. Enough said.
CNBC guests. When you see a so-called “expert” voluntarily appear on CNBC, for no payment, ask yourself why this person is appearing on television. The reason is that the person is acting in his own interest. For a money manager, that means generating business for his investment firm. A manager will go on TV and attempt to sound as intelligent as possible so viewers will think he’s smart, and invest in his fund. A second, more insidious reason a money manager might appear on TV is so he can pump his own stocks, thereby getting a short-term bounce in the share price – at which time he may be selling shares to you, the viewer. A third reason is vanity; people like seeing themselves on TV.
Financial news media. If you work for a financial broadcaster such as CNBC, you want the market to go up. This is because, in bull markets, more people are interested in stocks, so ratings are higher. The financial news media have an inherent bias toward bullishness because their executives know this is good for business. A subtle push from the top can taint the coverage of an entire news organisation.
Investment newsletters. Good investment ideas don’t happen on a schedule, and may not last long. But that doesn’t matter to newsletters; they require a certain number of investment ideas to write about every week. You can see the incentive for them occasionally to publish stale, or inferior ideas, that fill space. So my advice would be not to take newsletter stock recommendations too seriously.
Wall Street analysts. Don’t believe anything you hear from a stock analyst. Most are honest and competent, and some aren’t, but you don’t know which are which. Gather your own data, make your own decisions. If you are incapable of doing that, either use a service free of conflicts of interest such as Morningstar.com or Value Line, or don’t invest directly in the stock market.
Hedge fund managers turned journalists. The reasons for a hedge fund manager to write for a newspaper such as the Financial Times are the same as those for a money manager who appears on CNBC, with the added possible reason that maybe the manager enjoys writing once in a while.
And that’s partially the case with me. But after writing for this publication for two years, I have decided that I no longer want to write in a public forum for non-clients because it’s not in my best interest to do so. I’m not trying to raise capital, I don’t feel comfortable appearing to be pumping up my own stocks, and I have no desire for fame or to see my name in print any more. So this will be my last article. Thanks to all of you who have read my columns and written to me.
Here is the link if you want to pass it around.
He rode around selling houses in a Bentley once owned by Mike Tyson and a pimped out golf cart. The Mike Tyson car is so fitting. A piece from the article:
"In a cobalt blue Bentley that he bragged once belonged to boxer Mike Tyson, Marty Donovan looked the part of a superstar real estate agent.
And he was. The Chicago native racked up dozens of home sales between 2004 and 2007, most in a single neighborhood, Clearwater's Island Estates. His $40-million in annual sales placed him at the top of heap.
"I was living in la-la land in Island Estates," Donovan says now. "I even did tours in a pimped-out golf cart. People loved it. It was island living."
Island living isn't so sweet anymore. And a lot of residents single out Donovan's business dealings for ruining their neighborhood.
Of the 36 houses in some stage of foreclosure in Island Estates, at least a quarter were owned, listed or handled by the 44-year-old Realtor"
So how did this piece of slime run up prices:
"When critics describe Donovan's prominent role in inflating property values — and abetting their subsequent collapse — they point to the Realtor's unusual shopping spree in the spring and summer of 2006.
A typical purchase was the house at 213 Leeward Island. Listed for $998,000 by an investor who'd bought it two years earlier for $530,000,
The owner got his $998,000. Almost all the rest of the loan money was kicked back to Donovan's business partners, allegedly to make repairs on the house.
But within less than a year, Donovan stopped making monthly payments. Promised renovations never materialized and no one can account for the money supposedly borrowed for that purpose."
What a scumbag. This guy pulled this scam several times on the island. He offered 30% over list for a house promising renovations to simply drive up prices. Guys like this should be thrown in jail. Its amazing to me how greed can make someone so evil and stupid at the same time.
So what did this same house sell for this year after superstar Marty got foreclosed on?
"M&T Bank foreclosed and marked down the house for quick sale this year. The sale price: $451,000."
And how did the rest of his buying spree work out for him?:
An agent with Joanne Hiller & Associates, Donovan left town in December, after the banks initiated foreclosure against all six of his remaining properties, valued at more than $7-million. He's living in Lynchburg, Va., to "clear my head a little bit."
At least his shady purchases caught up with him and justice prevailed. The sad thing is he destroyed many lives in the process:
"Benchmarks set by his sales and purchases inflated residents' property tax bills and polluted real estate data. People confident they were sitting on $1.3-million houses have learned the homes are worth half as much.
Island Estates has been ranked the second worst of 290 neighborhoods inTampa Bay for home devaluation. Sale prices on the island averaged $1.25-million two years ago. Among homes under contract this month, the average price is just $670,000. Many residents blame real estate agent Marty Donovan."
When you do eventually decide to buy a house. Try to use someone that your family knows or comes recommended by a close friend. There are Marty's everywhere. I bet Marty now drives a Ford Focus instead of a Bentley. I hope he learned that being greedy and a scumbag is not the right way to go through life.
Please don't hesitate to comment on any post. I love to talk about the housing disaster and I am sure that you have your own stories about what is going on out there in the housing world.
Lets learn from each other as we navigate through this difficult time of buying a house! After all, its one of the most important decisions that you make in your life. My goal is to educate and protect as many people as possible!!
Thanks again for your support and I look forward to sharing as much information as possible.
Friday, April 4, 2008
" Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages.
The number of borrowers at least 90 days late on their home loans rose to 3.6 percent at the end of December, the highest in at least five years, according to the Mortgage Bankers Association in Washington. That figure, for the first time, is almost double the 2 percent who have been foreclosed on.
``We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said in an interview. ``Looking at the data, we see the problems, but they are probably measurably greater than we think.''
Lenders took an average of 61 days to foreclose on a property last year, up from 37 days in the year earlier, according to RealtyTrac Inc., a foreclosure database in Irvine, California. Sales of foreclosed homes rose 4.4 percent last year at the same time the supply of such homes more than doubled, according to LoanPerformance First American CoreLogic Inc., a real estate data company based in San Francisco."
Oh my God this is crazy!!! Its obvious this meltdown is imploding so fast that the banks do not have the manpower to keep up with the foreclosures. What Mr. Zandi said is dead right. The current data is not accurate and here is the scary part: The foreclosure rates without these homes are already the highest in history!!! Imagine what the inventories would be if they included these squatters.
This time bomb may burst faster then I thought. some more from Bloomberg:
``Excess inventories pose the biggest risk to the market,'' Michelle Meyer and Ethan Harris, New York-based economists at Lehman Brothers Holdings Inc., wrote in a report last month. ``As long as inventories are high, home prices will fall.''
With home sales dropping and national inventories rising, the lenders have another reason to delay foreclosures, said Howard Fishman, a real estate investor based in Minneapolis.
``What are the banks going to do?'' Fishman said. ``They don't want the house. They have a mortgage for $1 million and the house is worth $750,000.''
Inventories kill prices. This is why you should not be buying foreclosures in Cali and Florida right now. Some areas have years of inventory and prices will continue to fall.
Of course the idiot housing speculator Mr. Fishman has it all wrong. What are the banks going to do Mr. Fishman? There are going to grab your house and dump it as soon as they can catch up to you. Its a $750,000 asset that you are not paying the mortgage on!!! I am sure they would prefer to have $750,000 in cash versus having a million dollar loan they are not getting paid on. What a moron.
Now if homeowners start doing the following then all hell could break loose:
"Borrowers in California who fight foreclosure can stretch the process to 18 months, said Cameron Pannabecker, chapter president of the California Association of Mortgage Brokers and president of Cal-Pro Mortgage Inc. in Stockton.
That doesn't take into account the woman he knows who hasn't made a mortgage payment in eight months and hasn't heard from her lender, Pannabecker said.
``Now she's afraid to mail in a payment for fear it'll come to somebody's attention,'' he said."
This is the banks worst nightmare. What if people who can afford their mortgage just stop paying? Maybe homeowners with prime loans will get tired of watching their neighbors live for free and decide they want their handout too.
Bottom line is this is nowhere near the time to buy a house!!! Let all of this play out. Its already gotten ugly. My guess is the housing crisis going to rapidly get a lot worse and prices are going to begin to free fall. Get some popcorn and watch the implosion. Its right around the corner.
The chance of another .50 Fed rate cut rose to 50% in the bond market versus 30% before the jobs report was released.
This is not good folks. If the Fed is forced to cut rates again then we run a serious risk of having massive inflation in this country. We are getting to the point where another Fed rate cut could PANIC the market versus helping it because people are starting to sense that the economy is falling apart.
How will all of this all effect housing? It will put further pressure on prices because increased unemployment shrinks the pool of buyers even further. The risk of inflation from Fed rate cuts will further dilute potential home buyer incomes thus allowing for less money to spend towards a house.
Fed rate cuts have not been helping the economy or the stock market as seen below. This graph shows you that the market reacts with short term euphoria, but then quickly realizes the fundamentals of our problems have not changed also realizing this puts pressure on inflation.
The housing time bomb took another step forward today. I wonder how all of those bottom callers are feeling after seeing the jobs data today? you think maybe they lost a little confidence??? Expect the stock market to head lower and start pricing in the reality that we are in a recession. Three straight months of job declines almost always signals a recession. If the numbers continue to deteriorate then equities could fall through the bottom set in January which was around 11,600 on the DOW.
The market also will start realizing that the Fed may only have one more cut before they are forced to stop and possibly raise rates in order to control inflation. This means the Fed could be a headwind going forward instead of a tailwind. This is going to end ugly ladies and gentleman. Mark my words.
Thursday, April 3, 2008
I want to pull some pieces from the article and comment on them. Sweden had the exact same crisis in the early 1990's as the USA TODAY explains:
IMPORTANT NOTE: Before the government intervention, look what happened to housing prices in Sweden:
"By late 1991 there were indications that two of Sweden's major banks had exhausted their capital reserves and were barreling toward bankruptcy. Property prices, which once seemed capable only of rising, plunged by 50% in 18 months.
"In the early 1990s, a massive Swedish real estate bubble burst, littering the Nordic economy with broken finance companies, failing businesses and jobless workers. It was the first systemic banking crisis in an industrialized country since the 1930s and it saw the Swedish economy actually shrink for three straight years — something that hasn't happened in the United States since the rapid demobilization after World War II.
The Swedish and American crises share many traits: Both followed periods of financial deregulation, and both featured newly daring banks relying upon bookkeeping maneuvers to take on unsustainable amounts of debt. Happily, despite economic conditions that were far worse than in the USA today — and unlike a similar episode in Japan — Sweden quickly recovered."
WOW sound familiar? So what did they do to fix it? Nationalized their banks and used taxpayer money to work there way out of it as explained here:
"Yet, it did so in a manner that would be highly controversial in the United States. Sweden used taxpayer money — and lots of it — to rebuild its wounded banks. "In Sweden's case, the solution ultimately ended up on the government's balance sheet. … The government ended up recapitalizing the system," says economist David Rosenberg of Merrill Lynch. "There's a lesson here."
Sweden's successful crisis management may offer a road map for U.S. officials. But the Swedish cleanup wasn't cheap. It cost the public an estimated 6% of annual economic output; an equivalent bill for the U.S. today would be nearly $850 billion. And Sweden was able to implement a free-spending government rescue only because of a broad political consensus that is difficult to imagine amid the hyper-partisan atmosphere of a U.S. presidential election year."
Now this bailout would infuriate most Americans, however Sweden was smart and added a little twist:
Fearing that a collapse of the banking sector would capsize the economy, the Swedish government in September 1992 issued a blanket guarantee of all of the banks' obligations. Depositors, lenders and trading partners would be protected from loss. But to avoid encouraging financially risky behavior in the future, shareholders were made to suffer. In return for public money, the government received equity in the banks while the existing owners saw their stakes reduced.
Such a guarantee makes the government a part-owner of the country's major financial institutions. In Sweden, for example, at the height of the crisis, the government held 22% of the banking system. When the crisis eased and banks returned to profitability, the Swedish taxpayer shared in the gains.
I love this. There are many lessons we can learn here. The first one is Sweden couldn't start to recover until housing prices dropped 50%. I have repeatedly said that we need a 50% drop in the US in the bubble areas before we can start to recover. There is no other way to start the healing process without this.
Another lesson: What the government did here, and I have yet to hear this in Washington, is take ownership of the banks to teach them a lesson. So when the profits started back up on the recovery, the taxpayers were rewarded. This is how you prevent future bubbles. You punish the banks for bad behaviour. This was a brilliant idea!!
Now the big question. Are we already copying Sweden???
I think so. Fanny and Freddie have done about 75% of all home loans the last few months versus 36% during the boom.
Then I look at the Bear Stearns deal. This looks to be right out of the Swedish playbook. One of the Feds own consultants from the article thinks we have already begun to nationalize:
"Bear Stearns looks, to my mind, exactly out of the book how Sweden handled the banking crisis," he says.
Edward Kane, a Boston College finance professor, says the Fed's decision to facilitate the sale by backing $29 billion worth of Bear Stearns' assets is the first sign of what amounts to a government takeover of the financial system. "They've implicitly provided guarantees to any number of these firms. There is a nationalization (occurring). It is implicit and unacknowledged," says Kane, who has consulted for the Fed, the International Monetary Fund and foreign central banks."
"Kane says the U.S. government should embrace the Swedish remedy and issue a formal guarantee of the country's financial institutions, so that taxpayers can benefit from any rebound. "To get the upside, we have to make it explicit. … The public is owed a better description of what's going on than they're getting," he says"
I agree. Why should we let Wall St. keep all of the profits during the recovery? When we have a massive collapse like Sweden did and everyone is crushed by losing 50% equity in their homes, make the banks feel the same pain. Let the Fed takeover a piece of the investment banks and allow the taxpayers to share in the profits when the next housing cycle starts!!!
Its time Wall St. learned a lesson. This is the best answer I have seen to the housing problem. It will be painful as housing drops but at least taxpayers could get something back when we recover. I realize this would be more difficult to pull off because we have so many banks but I think we all know the small handful that should be nationalized.
I think this is a great idea. Solutions like this need to be pushed. Pass it on.
Its obvious we ran this pyramid scheme up to the point where we cannot afford to live. Look at the headlines today on Bloomberg. First the consumer:
"Consumers fell behind on car, credit-card and home-equity loans at the highest level in 15 years during the fourth quarter, another sign the U.S. economy is slowing, according to an American Bankers Association survey.
``It's an indication of the degree of stress consumers are facing right now,'' said Nigel Gault, director of U.S. research at Lexington, Massachusetts-based Global Insight Inc. ``People overextended themselves, they took out loans they thought weren't a problem as long as house prices kept rising.''
Another big headline today from Bloomberg on jobs:
"Claims for unemployment benefits unexpectedly jumped last week, reinforcing speculation the economy is shrinking.
The Labor Department said the number of Americans filing first-time unemployment benefit claims rose to 407,000 last week, the most since September 2005."
This data shows you that the consumer is in deep trouble. Our ridiculously high mortgage payments are forcing us to stop spending which is killing the economy. As housing prices drop the banks out of fear and insolvency issues are starting to take away our home equity lines of credit which is putting even more pressure on the consumer. This is taking its toll on the economy which is forcing companies to layoff. Fewer jobs combined with a broke consumer is a recipe for a nasty recession.
There is only one way to fix this. Housing must get back to affordability. This means about a 50% drop in the bubble areas and less in others depending on the market. Wall St. and Washington don't want to hear this because its going to be very painful.
One of the quotes that I keep hearing out of DC and Wall St. is "We need to put a floor in housing in order to get things stabilized" You cannot put a floor in housing when people can't afford the house. No piece of legislation is going to fix this unless it forces housing prices down! The only floor that will hold is when houses come down 50% and get back in line with historical incomes!
Wall St. and Washington don't want to hear this because Wall St. will be forced to record its biggest losses in history and many will be forced out of business. Washington DC doesn't want to hear this because they will have to end up bailing out Wall St. which creates a political disaster for them because the American people will be outraged.
As a result, we have to listen to Paulson and Bernanke on TV on a daily basis telling us that they are working on the problems and our economy is strong! There is nothing to work on. Let capitalism run its course and these problems will fix themselves.
I have the answer for this problem when I post tonight. There is a small country that had a housing bubble and fixed it in three years. I think you will find it very interesting. Take a minute to check it out tonight.
Wednesday, April 2, 2008
" Companies should use market prices to value assets, even when markets are less liquid than normal -- "unless those prices are the result of a forced liquidation or distressed sale."
"Ay Caramba!" as Bart Simpson might say. This lets everybody off the hook.
These days, when it comes to a CDO or anything that's not an off-the-rack security, the holder is apt to contend that any sale is "a forced liquidation or distressed sale." That means those assets shouldn't be marked to market, but marked to model or, as some cynics say, marked to myth."
This made me sick after I read it. The SEC is basically allowing these banks to hold onto assets if selling them during times of distress lowers the value of them. This is ridiculous and will only make things worse!!! There is zero trust right now in the markets and accounting rules like this will just allow these shady shenanigans to continue!!!
Right now there is ZERO trust in the markets. Banks refuse to lend to each other because they don't trust the banks they are lending to because they don't know how much bad debt they have on their books. TRANSPARENCY is needed to regain the trust in the markets. Accounting rules like this ensure that the credit markets will continue to stay frozen because it will continue to allow banks to hide their bad debts. This transient, shady, shadow accounting needs to stop NOW!!
Who is to say these assets will be worth more down the road. They will only become more distressed by holding onto them because the credit crisis will only deepen because people don't trust the system. This will make these assets worth less.
There is this little country called Japan that allowed their banks to hide all of their bad debts during a housing bubble. The result of this was a decline in their stock market from 38,000 points down to 13000 over 10 years. Housing prices are currently about the same as they were in 1989 when Japan's housing bubble popped. If we continue to copy Japan then there is no doubt that we will see the exact same results here.
I thought our government would be smart enough to learn from other countries mistakes. I wanted to post the ending of this commentary for those who did not click on the story because it is VERY important to understand what is happening here:
"The markets seemed to say the worst is over. Surely, after UBS' monster writedown, that should be it. And Lehman's financing indicates banks can readily refill the coffers drained by credit losses.
But to Bank of America's credit analyst Jeffrey Rosenberg, the market's response represented the proverbial victory of hope over experience. Weren't Citigroup's losses suppose to mark the nadir? Or was it Merrill's writeoffs? Or the Bear Stearns debacle?
Or perhaps it was the license given by the SEC not to mark to market anything in a distressed sale.
For the moment, these developments have jolted the market from what Market Semiotics' Woody Dorsey called their "double purgation lows" resulting from massive negativity about financials. Shorting financials had gotten to be a rather crowded trade, as had being long commodities and Treasuries and short the dollar. All those positions reversed dramatically in Tuesday's trade.
But beyond the market's sugar rush, the medium-term implications are less positive.
"The SEC's actions [on SFAS 157] seem to create a safe harbor for those institutions that would choose to obscure their exposures," writes Joshua Rosner of Graham Fisher & Co. In other words, it provides a pass-fail option where the students can argue that nobody deserves an F.
But there are consequences for institutional investors' not owning up to the value of what they own.
"A failure of institutions to rectify opacity will propel us further down the road toward a Japanese-style 'lost decade,'" Rosner contends."
Everyone needs to realize what is going on here. Our economy is being destroyed right in front of our eyes as they save Wall St. at the expense of the taxpayers. We need to start calling out our regulators when they make rule changes like this that allow for more secrecy.
The Fed and Congress need to do just enough to keep the financial markets from failing. I understand that things need to be done to keep the markets stable but there is a line at which you need to say enough is enough. Make the financials mark to market and let the weaker firms fail. I am really disappointed by this decision because this just delays the inevitable. WE are the ones that will have to pay for this mess. The longer we hide these bad assets the more it will cost to dig out of. Housing will never come back until this is fixed.
We have proof that hiding losses and delaying pain only makes it worse down the road! Make sure you let your politicians know during this election year that saving Wall St. instead of fixing the markets and helping distressed Americans is wrong and you won't stand for it. There is a petition on here that will make your voice heard if you care to sign.
``It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,'' Bernanke said in testimony to Congress's Joint Economic Committee today."
I was wondering if he would use the R word. He decided to tap dance around it. This is as close as the Fed has come to admitting that we are in a recession. What I found more interesting were his comments on where the US economy will be heading into 2009. He still thinks the economy should level out in the second half of 2008 with the stimulus package although he sounded less optimistic then his previous testimony. However, he seemed to hedge his bet on his 2009 forecast with this statement:
"While the Fed expects the economy to return to its long-term growth pace in 2009, ``in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside,'' he said.
A take from one Wachovia economist on the speech:
``This is a much more pessimistic assessment of the economy than what the Fed had three months ago or six months ago,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who previously worked as a senior economist in Congress. ``Certainly, the Fed and the capital markets have been surprised the economy has slowed so quickly.''
The Fed usually tries to paint a rosy picture when they sit in front of Congress. I have predicted that this recession will be a long one. Bloomberg reported yesterday that the banking sector could show losses for the next 10 quarters. I believe it would be hard to call a
"bottom" like the pundits have this week when even the Fed says this crisis could spread into 2009. The speed of this slowdown looks to have surprised the Fed.
Bernanke said housing continues to be the big drag on the economy. He also seems concerned about inflation:
"Bernanke said that inflation ``has also been a source of concern,'' with higher commodity prices and the weaker dollar. At the same time, he said the Fed expects inflation to ``moderate in coming quarters,'' echoing the FOMC statement. A ``leveling out'' of commodity prices and slower global growth will help, Bernanke said."
Well Ben maybe if you hadn't slashed interest rates so fast this wouldn't be a problem. Obviously the Fed sees tough times ahead and have admitted for the first time that they are not as confident about 2009. Take yesterdays rally with a grain of salt. The issues we face from housing and struggling banks will take years to straighten out IMO.
Tuesday, April 1, 2008
One interesting trend thats being discussed today is the fact that the Dow has moved up more then 350 points the last three Tuesdays only to give it back the last couple times. Will this move be different?
The way I see it this market is being driven based on wild speculation driven by shorts, hedge funds, and fund managers rattled by a bad 1st quarter..
I expect a lot of today's move was a short covering rally. UBS's Art Cashin has repeatedly said this is the weakest group of shorts he has seen in his 40 years of trading. The shorts seem to be covering with any hint of a rally. This propels the market even higher.
The most frightening part of these rallies is that many people seem to be buying based on pure speculation that the financials have bottomed when there is ZERO data that the credit crisis is over.
CNBC had their typical pump monkey analysts on calling bottoms all day today. Their reasoning as to why this is the bottom seems to be all based on speculation and history versus fundamentals. Making assumptions in the middle of a huge financial crisis is similiar to taking your money to a casino and putting $100 on red in Roulette. Its pure gambling.
My question to these genius bottom callers is this. We have never seen a credit crisis like this so how can you speculate as to how this will end? Remember when you ASSUME you make an *** out of U and ME.
The market is looking more and more ridiculous everyday. Wait for the fundamentals before jumping back into the markets and let these stock pumpers call their bottoms. Remember, they were calling bottoms the last few Tuesdays and look how well those worked out.
We are still right in the middle of this crisis no matter how LOUD Wall St. yells that its over. They are screaming "bottom" because there is a crisis of confidence on Wall St. and they need you to keep investing in order to make money. They call bottoms out of self interest. Tune out CNBS and be very cautious until Congress regulates the pigmen and you have transparency in the financials. Take a trip to Las Vegas if you want to gamble.
"Banks' earnings have been hit for the past three quarters by the turmoil in the credit markets, the report said. In total, the crisis may last for eight to 10 quarters, exceeding the six- quarter duration of the Asia crisis and bailout of LTCM in 1997- 8, and the seven-quarter fallout from the bursting of the dot- com bubble, the report said."
This will make this worst crisis since the 1070's according to Bloomberg. I predict that it will take years to work this out. It took a decade of stagflation and inflation to get through the 1970's crisis. We are watching almost unprecedented losses here folks.
Lets take a look at the losses from Bloomberg:
"Zurich-based UBS AG today posted an additional $19 billion of writedowns and said it would seek $15.1 billion in a rights offering to replenish capital. Deutsche Bank AG, Germany's biggest bank, also said today it expects to book about 2.5 billion euros ($3.9 billion) in write downs for the quarter.
Separately, Merrill Lynch & Co. and Citigroup Inc. had their first-quarter earnings estimates cut by Goldman Sachs Group Inc., which said the two banks may post $14 billion in writedowns on assets linked to collateralized debt obligations."
The UBS lost is stunning and cost the banks chairman Marcel Ospel his job. UBS did announce that they raised $15 billion in capital which should help the stock. Citi's write down is expected to be $11 billion.
What is the result of all of these troubles?
"Banks' revenue from their credit businesses may drop as much as 60 percent, the analysts said, and the firms will have to provide more transparency to investors who buy their loans. At the same time, regulators will push the industry to retain more capital as a cushion, hurting banks' return on equity in the long-term, the group added."
Bottom line is the banks should dramatically reduce lending as they try to reserve capital to stay solvent. Expect the next 2-1/2 years to be full of consistent quarterly bank announcements of losses.
This will destroy the housing market because lending standards will tighten as banks start hoarding cash in order to stay solvent. This is a crisis that may take a decade to fix. The reckless lending will stop and housing prices will fall as the banks lose revenues and become more regulated.
Monday, March 31, 2008
"Terms of the offering include a coupon payment of 7 percent to 7.5 percent. The conversion premium will be 30 to 35 percent above the current stock price, according to people familiar with the offering who declined to be identified."
Lehman just yesterday was defending itself saying that everything is fine and claimed that they had a VERY STRONG cash position. I have quickly learned during my investment career that when a financial starts to vehemently deny that there is anything wrong is when you should be most afraid. Bear Stearns was on CNBC saying everything was fine 2 days before it blew up.
I loved the quote coming out of Lehman explaining why they did this $3 billion offering:
"We still maintain that we don't need capital, but we've realized that perception is the dominant issue in today's markets,'' Chief Financial Officer Erin Callan said in an interview. ``This is an endorsement of our balance sheet by investors.''
Well if you didn't need the money then why did you dilute your share price and borrow it at at a rate of 7% plus? Remember they also have access to the $200 billion at the Fed discount window. Why wouldn't they simply use the discount window? The terms are at a much better rate then the terms they agreed to today.
They also failed to say that the deal is totally sold. They claim to have the deal almost completely sold.
I don't know what Lehman's status is, but these are not the type of actions you like to see ONE day after you said that your cash position is solid. Its a pretty logical conclusion that they needed the money based on the terms of the deal. It will be interesting to see how this plays out.
There was a Sotheby's property auction of 99 "luxury" properties in the Ft. Lauderdale area. So how did things go?
Well lets look at some excerpts from the article and see how the bidding went:
"The first property out of the gate was not a good omen: the auctioneer tried opening the bidding for 1850 South Treasure Drive in Miami Beach, a waterfront lot, at $1 million.
There was no response.
He then tried to get something started at $500,000, but again, no dice. $250,000? Still dead air. $100,000? Silence. At that point, DeCaro threw in the towel and passed the property by."
"And so it went for the majority of the properties on the block.
A six-bedroom, six-bath home in Fort Lauderdale's Coral Ridge County Club previously listed at $5.9 million couldn't fetch a bid for $3.5 million. A 3,100-square-foot penthouse on Williams Island in Aventura was listed for $5.6 million and did not even get anyone willing to start bidding at $2.5 million.
A riverfront property with deep water and 255 feet of contiguous waterfront had been priced at $2.5 million; it heard crickets at $1 million before being passed by."
"What started out as a packed house gradually diminished as the event went on. About half the seats were empty after about an hour, and the crowd had whittled down to about a quarter of its original size as the event came to a close."
In the end 67 of the 99 properties failed to be sold. Some condo's went for 250,000k that were originallly priced at 600k.
What was one brokers conclusion?
"This was a disaster," said Fort Lauderdale broker Paul Merlesena as he stood near the door following the auction. "They're basically going to have to give them away now."
I think this is a perfect example as to why you need to stay away from these auction/REO type sales for now. Who knows what the market price is for these properties when they could not even get bids with price reductions as high as 90 PERCENT!
Until market prices have been established in an area it would be crazy to try and set the bottom yourself. Remeber the Detroit example from yesterday. Who knows how low these prices will go. There still is no established bottom.
Use Florida as a prelude of what is to come in the other bubble areas.
Florida is a distressed market where prices are finally capitulating. California, Nevada, and Arizona are not as distressed YET but will end up in similiar situations. This is why those bus tours in California showing foreclosed properties at 10-25% price drops are a joke. Let these other markets get as distressed as Florida and you will start hearing the crickets at the auctions just like they did this weekend in Ft. Lauderdale.
Sunday, March 30, 2008
The reason why you need to wait on buying foreclosures is because many of the banks have only marked them down 10-25%. Many are buying thinking they will be able to flip them for a quick profit. This will turn out to be a fools game. Foreclosures will continue to dramatically rise as the housing crisis deepens and another $460 billion of subprime resets in 2008.
Banks will be forced to start pricing more aggressively as they hold onto more properties because it ties up their capital. They need to sell these homes to free up cash. The more properties they hold, the more they will have to move in order to keep their capital ratios in tact. When this tidal wave of foreclosures hits, the banks will be forced to sell homes for whatever they can get for them in order to stay solvent.
I wouldn't even look if they are offering you a 20% discount. Buying a foreclosure right now in a bubble area would be like buying a house in 2005/06.
I expect you will see foreclosures at least 50% off on average and even more if its a condo or an area that has huge inventories. If you waited this long to buy a home you can wait another year. Look at Detroit. I am sure the speculators there have been buying "foreclosures" all the way down to 30K. If you live in California or Florida don't be the sucker buying at the foreclosure "peak". Take a ride on the foreclosure bus tour in 2009/2010. You will be glad that you waited.
Before I discuss the Fed I wanted to share a chart I picked up from Barron's. I was talking about "selling on the rallies" Friday as we enter a bear market. The chart above illustrates that since Jan. this has been a smart strategy. During bear market rallies, people tend to sell at a certain level because they are not confident that the market will be moving higher. This level now seems to be 12,750.
I wanted to share a great commentary by Bill Fleckenstein . Bill recently wrote a book on Greenspan and has great insight on how damaging the Fed and its "bubble policies" can be to our economy.
I thought his take on Bear Stearns was very insightful:
"However, the important yet subtle point in the current saga is that the "system" has devolved to the point where Bear Stearns, teetering on the edge of bankruptcy, was in effect able to tell the Fed: You can't hurt us anymore, but we can hurt you if the deal collapses, so we demand more money. (Which Bear got a week ago, when JPMorgan Chase (JPM, news, msgs) raised its takeover bid.) Meanwhile, the bondholders (lenders) were made whole -- as the Fed, through its assumption of debt, coughed up roughly $250 per BSC share."
I thought this was a great take on the Bear Stearns debacle. This explains why the offer by JP Morgan was raised to $10 a share. More from Fleckie:
"Under the current Fed chairman, the central bank's modus operandi has changed. Not only has the Bernanke Fed strayed far from its long history of supplying liquidity to just AAA government credits, but, via JPMorgan, it is basically setting up an LLC (a limited-liability corporation, similar to a special-purpose investment vehicle) to hold the dreck that almost ruined Bear Stearns.
It's a structure similar to the off-balance-sheet financial instruments that caused so much pain for so many other financial institutions in the first place.
Sadly, as my friend Jim Grant put it to me recently, the speculators have gained control at the expense of the savers. It's a variation of what I said last week: that the prudent are bailing out the reckless. The Fed seems under the impression that its role is to act as enabler-in-chief. As such, the Fed is an abomination."
The Fed is clearly setting a dangerous precedent. The Fed was not designed to act as an enabler by bailing out reckless behaviour. They are becoming reckless themselves by trying to save everyone.
They do not have the money to do this. Their reserves are $800 billion and half of this has already been deployed getting us out of this crisis. This behaviour increases the risk of the Fed being forced to inflate out of this mess by printing more money thus leaving our dollar worthless. This would be the only way the Fed could continue this policy IMO.
If we inflate out of this then be prepared to pay $20 for a loaf of bread. The Fed down the road would then be forced to raise interest rates up to 15% or so to stop the inflation which would destroy the value of all assets like housing. This is the worst case scenario. The Fed is now at a tipping point where they need to decide if they are going to let the financials that made mistakes fail or print more money and inflate out of this. Lets hope that they make the prudent decision and allow the speculators to fail. The bubbles need to stop.
As Fleckie explains:
"A good start to preventing future bubbles would be to abolish the Fed. Or, at a minimum, to clarify its mandate. The Fed's No. 1 goal should be price stability, and it should be forced to stop its practice of interest-rate targeting. That is the flawed policy that got us to here.
But until the economy gets bad enough to force such a change, anyone with an ounce of common sense and decency will be forced to endure being routinely nauseated, at the very least."
Its obvious the Fed needs a complete overhaul. Hopefully this will happen before we have a systemic failure.