Saturday, April 12, 2008

Peter Schiff Editorial

I thought this was a great editorial by Peter Schiff, chief global strategist for Euro Pacific Capital. The Fed is making some reckless decisions that could result in dire consequences:

Brother Can You Spare 10 Grand?
Peter Schiff
The grainy footage of Great Depression soup lines and Hoovervilles now in heavy rotation on the major news outlets has been largely counterbalanced by a parade of economists who reassure us that such a protracted downturn is currently inconceivable. Their confidence stems primarily from the belief that government safety nets enacted since the New Deal, together with a Fed chairman who is a self-professed depression buff, will prevent a replay of the 1930s. As usual, this analysis is woefully optimistic and sidewalk pencil sales may in fact be a growth industry.
Although Bernanke may have spent much time studying the Great Depression, his understanding of it is anything but sound. That epic slowdown resulted from a series of policy mistakes, first by the Federal Reserve and then by the Federal Government. Bernanke’s view is that these mistakes were simply not large enough. What the current Fed chairman does not grasp is that the seeds of the Depression were sown during the “roaring” 1920s when the Fed, in an effort to support the British pound, kept interest rates much too low. It was this unnaturally cheap money that fueled a raging stock market bubble. In 1929, when the Fed finally came to its senses and raised rates, the bubble finally popped. In his reading of this history, Bernanke ignores the effects of the overly easy policy and simply lays blame on the tightening.
As the recession progressed, both Hoover and Roosevelt, in politically inspired efforts to ease the pain, repeatedly interfered with free market forces working to correct the imbalances. This ultimately turned what would have been an ordinary, though perhaps severe recession, into what we now call the Great Depression. This time around, the Greenspan/Bernanke Fed blew up even bigger bubbles and both the Fed and the Federal Government now show an even greater commitment in preventing free market forces from rebalancing our economy. As a result, similar to the way that the “War to End all Wars” had to be rechristened after 1939, future historians may need to come up with a new term for the Great Depression.
Rather than acting as safety nets, the programs now being devised by government will act more like snares, further impeding market forces from righting the ship. But for those who insist that a new “New Deal” is needed, it is important to retain a sense of scale. Prior to the massive expansion of Federal programs in 1933, the government was very small relative to the economy of that time. Though I believe that many of the economic policies of the New Deal were unwise and simply prolonged the Depression, at least back then we could afford them. Today of course, the Federal Government is already enormous, and any increase in spending will either have to be financed by further borrowing from abroad or though additional money printing by the Fed.
For his part, Bernanke blames the Depression on the Fed not printing enough money. Had the Fed done precisely what Bernanke now thinks they should have, the Great Depression would have been much worse. Had the Fed tried to re-inflate the stock market bubble or keep it from bursting in the first place, it’s the dollar that would have collapsed, and Depression-era America would have looked liked Weimar Republic Germany. As bad as the Great Depression was, hyperinflation would have made it even worse.
The good news is that there is still time to alter course and steer clear of both hyper-inflation and depression. The bad news is that if we remain on our current course that is precisely where we will end up. Our days of dominating the global economy are clearly coming to an end. The only question is will we follow the path of Great Britain or Argentina?
April 11, 2008

Realtors: Worse then a Used Car Saleman

If you are forced to buy a house right now make sure you find a quality realtor who knows what the heck he/she is doing.

Many Realtors got into the housing game because all you needed was a pulse to sell a house from 2003-2006. Most of these newbies will not survive going forward because you actually have to know what you are doing right now in order to sell a property.

Pricing and realizing the market has dropped are now critical to finding a buyer and most of the realtors don't get it. I read a local article yesterday in the Baltimore Sun about the housing market and I am amazed at the stupidity of some of the realtors out there.

One of my favorite realtor quotes from the article:

"Tina Marine, a Realtor with Coldwell Banker in Annapolis, said she is seeing "tremendous traffic" at open houses. But buyers just keep looking and looking. "There's lots of activity, but we haven't seen it yet translate to sales," said Marine. "I think buyers are confused. They just don't know what end is up."

My take:

Ok Tina let me explain something to you. There is tremendous demand to buy houses AT AFFORDABLE PRICES. Buyers are not confused and they know what end is up. They simply don't want to buy a house that they know will drop in value because its inflated.

Buyers also realize that they cannot qualify financially to buy many of these houses they are looking at anymore because lending standards have tightened. The whole "we see tremendous demand so you better put a bid in" is a common line that buyers should ignore.

When you are buying a house approach it like you do when you are buying a used car. Be very skeptical about what they are telling you and question them when something doesn't make sense. Realtors are desperate right now and this makes them dangerous.

Buying a house is one of the biggest decisions you will make in your life. Find a realtor you can trust so you don't end up buying a "lemon" house.

Realtors need to understand that housing has to get back realistic pricing. Buyers would then BUY and not look. The realtors also must make sellers realize that they need to lower prices if they want to sell their house. They need to stop taking the listings if the seller wants to price their house at 2005 prices.

One of the big problems right now is some sellers cannot lower prices because they cannot break even on what they paid for it as the Sun explains:

"But plenty of sellers do not want - or cannot afford - to lower their prices to interest buyers, agents say. With 19,000 properties on the market in the metropolitan area, it would take 10 months to move everything at the current pace of sales. That is an improvement over the winter months, but markedly worse than usual for this time of year."

Final Take:

These sellers will eventually get foreclosed on because most Americans have no cash to short sell a house.

So if you are a buyer, this is what you face as you head into the real estate marketplace. You have desperate realtors, sellers that can't afford to sell, and houses that cost too much.

My advice? Keep renting and let the sellers who can't afford to sell get foreclosed on. Prices will only be going down further as a result of this. The housing time bomb has not yet erupted. Now is not the time to buy.

Friday, April 11, 2008

Consumer confidence plummets/Inflation rises

TGIF. I bet many on Wall St. are saying this today after today's slaughter. I would like to talk some more about the stock market and I apologize to all that are looking for more housing related information.

I think its extremely important right now to understand what is going on on Wall St. because it explains why housing is dead and going to get worse.

You are about to see the perfect storm hit Wall St. over the next few weeks. Next week is all about earnings and the estimates seem to be way too high because the data on the economy keeps getting worse.

Bloomberg reported new data on consumer sentiment and inflation. A few quotes on both from the article followed by my take:

The Consumer:

"Confidence among U.S. consumers fell to a 26-year low after employers fired workers and gasoline prices surged, threatening the spending that accounts for more than two thirds of the economy.
The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2 this month, the weakest level since 1982, when the jobless rate approached 11 percent, the worst since the Great Depression. In other figures released today, the Labor Department reported that the cost of imported goods climbed 14.8 percent in March from a year ago, led by oil. "

``The consumer's feeling increasingly hemmed in,'' said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts. ``They've got higher energy bills, higher gasoline bills, higher food bills and obviously the employment markets are nowhere near as strong as they were.''

Inflation prices on Imports:

"Import prices rose 2.8 percent in March after a 0.2 percent gain the prior month, the Labor Department said. Expenses excluding fuels jumped 0.9 percent, the most since records began in 2001.
Import Prices
Import prices were forecast to rise 2 percent, according to the median estimate of 52 economists in a Bloomberg News survey.
``People will be a little less confident about the inflation outlook now than they were before the report,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who had forecast a 2.6 percent gain. ``The Fed's going to ease, but they'd feel better about it if these numbers had come in lower. The risk remains that higher import and commodity prices may get passed on to the consumer.''

My take:

These numbers were way worse then I was expecting. I have talked a lot about the consumer and the fact that they are feeling like they did in 1982 is mind boggling. This was about the same time mortgage rates and unemployment were running in double digits.

Think about the things that have happened from 1982 up until today. We have had the '87 market crash, the early 90's housing bubble, the late 90's tech bubble, and 9/11 and yet we feel worse now then we did during any of those times. It blows you away when you put this in perspective. If you think that the stock market and housing has bottomed you better rethink your position.

As you know, the consumer is 70% of the economy and if they are feeling this bad then have most likely stopped buying. GE said in their earnings that the credit crunch really hit them hard in late March. I am starting to believe that this is when the consumer really hit the brakes. The unemployment rate rose to 5.1% around the same time and when people don't have jobs they don't spend. If this is the case, then earnings expectations are way too high and this will put immense pressure on equities.

Now lets discuss this inflation on imports. This is big because the cost of products we are importing from Chindia and other countries is rapidly rising. This is bad in a couple ways. First its taking more money out of the pockets of consumers and secondly it puts the Fed in a box.

The Fed is slowly getting into a position where they still need to cut rates, but at the same time they realize if they cut rates they risk killing the dollar and causing massive inflation.

If imports continue to rise faster then the Fed wants then the rate cutting might be over. In fact they might lean more towards raising rates to save the dollar.

Put yourself in Ben Bernanke's shoes and you have these two choices. Cut rates and try and save your insolvent financial institutions or raise or hold rates to save the dollar and help the consumer. Tough choice isn't it? The Fed will become helpless in the very near future because they won't really be able to do much with rates. Why?

Because they risk a financial collapse with either choice. Cut rates and you risk losing the consumer to inflation. Raise rates and you potentially lose most of your financial institutions and you destroy the housing market and the economy.

The bottom line:

The way I see it? Insolvent banks, rising inflation, a powerless Fed, and a weak consumer equals the perfect storm for the stock market.

I think the bottom callers on CNBC might be changing their attitudes in the coming weeks. Time will tell.

GE: Swing and a Huge Miss/Shocks Wall St.

General Electric shocked Wall St. this morning by reporting a huge drop in earnings. This was the first time GE reported a drop in quartely profit since 2003. CEO Jeffrey Immelt had recently said that earnings were "in the bag" for 2008. A quote from Bloomberg:

"General Electric's miss came without warning as it was forced to reduce the value of some securities in the last two weeks of March as capital markets seized, Immelt said. That also prevented GE from selling some finance assets. GE put its U.S. credit card business and Japanese consumer finance units up for sale last year. The health-care unit also trailed expectations.
Profit from continuing operations dropped to $4.36 billion, or 44 cents a share, from $4.93 billion, or 48 cents, a year ago. Revenue rose 8 percent to $42.2 billion.
The stock dropped in early U.S. trading to as low as $32.81 from yesterday's New York Stock Exchange close of $36.75. The shares had fallen less than 1 percent this year compared with a 7.3 percent decline in the Standard & Poor's 500 index.

``This is one of the biggest misses that GE's had in quite some time,'' said Nicholas Heymann, an analyst with Sterne Agee & Leach Inc. in an interview today. ``The pressure is on like it's never been on before for all senior management at GE.''

My take:

Should we be surprised? Ben Bernanke told everyone this week that we have just gone through the biggest financial crisis in 50 years. People in the financial markets were "shocked" by the news saying that "GE never misses". In a normal market I would be shocked if they missed as well. THESE ARE NOT NORMAL TIMES!

Everyone on Wall St. thinks that the Fed can "save the day" by cutting rates and "bailing out" Bear Stearns. People need to realize that you can't start the debt party again by flushing the financial system with liquidity. Bailing out Bear Stearns does not fix the problem!

Most Americans are in financial distress right now and there is no doubt that the economy is going to suffer because of this. Wages are flat and the consumer is buckling under the pressure of higher gas prices, ridiculous mortgage payments, and inflation that's increasing the costs of all consumer goods.

Everyone needs to put the Fed's moves into perspective. All the Fed did was try to make more money available for people to borrow. The problem is the American consumer has no desire to borrow more money because they are tapped out. The Fed CANNOT make people borrow this money and as a result the economy will suffer.

When you have a once in a generation financial crisis you should expect the unexpected. The credit crunch destroyed GE this quarter and GE "never misses".

Expect the stock market to drop today as everyone begins to realize that the credit crunch is going to take its toll on corporate earnings this quarter. This news will also rattle the confidence of Wall St. going forward into future quarters.

General Electric shocked the street and Wall St. does not like to be surprised.

Thursday, April 10, 2008

Retail "Fail" Day-Don't Believe the Hype

Well the market jumped today based on solid earnings from Walmart and Costco. However, the rest of the retail performance was horrendous. Bloomberg had a nice recap on the performance of the retailers for the quarter. Some quotes from Bloomberg on the retail numbers from some of the analysts:

``The economic environment continues to be challenging here, with slowing employment trends, higher energy and food prices and declining values for homes,'' Steven Baumgarten, an analyst at PNC Capital Advisors in Philadelphia, said in an interview. PNC manages $76 billion in assets, including Wal- Mart shares."

``Consumers are growing increasingly wary about their jobs, about the economy and are strictly spending on non- discretionary items,'' Ken Perkins, president of Swampscott, Massachusetts-based Retail Metrics LLC, said in an interview on Bloomberg Radio. "

Some individual store performances for the quarter

Limited Brands posted an 8 percent same-store sales drop, greater than the 7.7 percent decline analysts expected.

Gap, the largest U.S. apparel chain, said sales plunged 18 percent, led by a 27 percent decline at its Old Navy chain. Analysts expected a 7.8 percent drop.

Teen retailer Abercrombie & Fitch Co. said sales retreated 10 percent. American Eagle said same-store revenue dropped 12 percent and cut its first-quarter forecast to as little as 18 cents a share from as much as 27 cents.

Nordstrom Inc. missed analysts' estimates with a 9.1 percent deceleration. Saks Inc. said sales declined 2.9 percent. Analysts expected them to rise by that amount.

My take:

As I write this it looks like stocks are selling off at the close. They should be because these retail numbers are awful. Folks, you do NOT want WalMart and Costco leading the retailers. These places are where people shop when they are squeezed. When you are short on cash you go to Costco and buy a 30 pack of toilet paper to save a few bucks.

Some things that caught my eye from this report. Look at the Gap results! They led the way with a 20% drop. God that's ugly. I am not surprised that a store like this is getting hit the hardest during this recession. This is your typical middle class retailer and their customers were the ones hurt most by the housing crisis.

I also noticed some of the high end retailers missed(Nordstroms, Saks). These retailers usually perform well in recessions because the wealthy have money in a good or bad economies. Maybe some of these high end consumers built a McMansion that they cannot afford?

One of my theories about this business cycle is everyone spent way over their head including the wealthy! In the bubblelands of California and Florida, an average house during the housing bubble went for $600,000-$900,000 in a decent suburb. A nice house for a wealthy family was over $1 million on the low end and went up from there.

That $15,000 monthly mortgage payment will crimp any ones style unless you are Tom Cruise pulling in $25 million a movie. The housing bubble effected every ones judgement at all income levels. People paid for houses that they couldn't afford figuring they could just sell to the next sucker at a big profit if things got a little tight financially.

Well when housing prices couldn't rise anymore and the music stopped, the last ones that bought in 2005/06 were caught holding the bag. These bagholders include people that are stuck in $200,000 homes as well as people stuck in $4 million dollar homes.

As these bagholders struggle to stay afloat by raiding their 401k's to make mortgage payments, expect them to continue buying in bulk at Walmart and Costco so they have the money to make next month's mortgage.

Walmart should thank Wall St. for being so greedy. Its been great for business.

Wednesday, April 9, 2008

Stock Market Alert: Three Reasons to be Worried

Well it was another red day in the markets as the Dow lost another 49 points. What concerned me more today was the news. I will link the three articles below with a quote from each and then give you my take:

1. UPS misses earnings and cuts outlook.

"UPS pared its per-share profitforecast yesterday to as low as 86 cents from 94 cents to 98 cents as fuel costs rose and a sagging economy weighed on premium-priced air shipments to consumers.

Consumer spending, which accounts for more than two-thirds of the economy, will rise at an average annual pace of 0.5 percent in the first half of the year, the survey showed. That would be the smallest two-quarter gain since it dropped in the six months that ended March 1991."

2. Libor continues to rise as banks refuse to lend to each other.

"Money markets in the US and Europe are signalling renewed fears about the financial strength of banks, with key confidence barometers almost returning to the levels that preceded the collapse of Bear Stearns.

In the US on Wednesday, that spread rose rose 2bp to 77.5bp. The difference had climbed above 80bp on concerns about Bear, then fell back to 60bp in mid-March after the investment bank was sold to JPMorgan Chase."

3. Wall St.'s Banks may have to cut 35% of jobs.

"April 9 (Bloomberg) -- Kenneth Moelis, the former president of UBS AG's investment bank, said Wall Street firms may have to eliminate as much as 35 percent of employees as leveraged lending dwindles and the pace of mergers and acquisitions slows.
``The Street got staffed up to support what was a slight bubble in M&A,'' Moelis, 49, said in an interview on Bloomberg Television today. ``You're going to see a significant retrenchment.''

My take:

Lets start with UPS. This is pretty simple. UPS is a bell weather for looking at how the consumer is doing. When people buy UPS has more packages to ship. Its a pretty direct correlation. As you can see the expectations is .5 growth over the first 6 months which would be the worst since 1991! This is 70% of the economy! The UPS news took its toll on the consumer companies like retailers today. If the consumer continues to struggle then this economy is going nowhere and the stock market will nosedive.

The Libor story. This is the overnight lending rate that banks use to lend to each other. Its back up to where it was before Bear Stearns got bailed out. The banks continue to not to lend to each other because they don't trust each other's balance sheets and they are not confident they will get paid back. The banks are basically scared ***less right now.

This fear will eventually will get passed on to us in the form of higher mortgage rates. RIGHT NOW, THE BANKS HAVE ZERO DESIRE TO LEND MUCH MONEY BECAUSE OF INSOLVENCY ISSUES. They are broke and CANNOT lend like they did during the housing bubble. This will eventually crush the housing market.

So far the Fed rate cuts have kept interest rates at decent levels which has allowed us to avoid the credit crunch for the most part. However, as this fear among the banks continues to rise, it will eventually push mortgage rates through the roof. They have to pass this pressure on to us at some point by rising rates. If you think housing prices are falling fast now, wait until rates are at 7-8%!!!

This is where we are heading. Remember the 13% interest rates on mortgages in the early 80's?? Don't think it can't happen again.

The third story gives you an idea of how difficult things will be for the investment banks going forward. I think I have been hard enough on them today. This story confirms what I discussed this morning.


Take financials and the consumer out of the economy and you will have a stock market at much lower levels. We are far from the bottom and I see no end in sight right now. Continue to stay defensive and do not be surprised if there is a market event in the next few weeks. The market will eventually cave from all of these combined pressures.

The Investment Banks's Business Model is Broken

As the housing crisis deepens and it seems like the news can't get any worse, the contrarian side of me started to think about the next cycle and I asked myself one question. Has the bad news been priced into the financials?

The talking heads on CNBC shout on a daily basis that the financials and the market has hit a bottom and we need to get into equities. I came to a different conclusion after looking at history. From an equities standpoint, we are now down only 12% or so from the market highs last summer on the DOW. The average drop during a recession is 28%. This is going to be an above average recession so I can't even think we are close to a bottom until I see us down at least 28% on the DOW.

I then looked at the investment banks and started to analyze where they made their money during the past bull market cycle. What I found was a large percentage of their profits was securatizing AAA mortgage debt and selling it off to people all over the world. Well this game is completely over. Some firms have layed off everyone involved in this.

Another big profit maker for the investment banks was consulting on private equity buyouts. Well now that there are no credit markets, there is no money to finance these deals so this money maker has also come to a complete hault. Private equity is bailing out of these deals like Clear Channel as fast as they can because borrowing money got too expensive because the banks have no desire to lend after absorbing staggering losses in housing. The bank are currently focused on simply trying to survive and stay solvent.

Because of these troubles, the consulting fees on buyouts for the investment banks are now greatly diminished. The third area of big profit for the IB's is mergers and acquisitions. The M&A game has slowed down to a snails pace as the economy slows and businesses aren't nearly as profitable thus less desirable. As explained above, you also have the issue of expensive borrowing costs. There will still be action here but it will be greatly diminished.

So bottom line is the IB's have lost three of their most lucrative businesses. The way I see it these firms need to now reinvent themselves and restructure. They face a long period of massive drops in profits as they continue to take writedowns and have no new revenue streams to make up for these losses. They can't trade themselves into profits every quarter like Goldman did when they shorted subprime. This was a one time event. We are in a flat to down market so the trading the firms money will not be as lucrative. The brokerage area should still be strong IF people still want to trade in the market.

Looking at the low trading volumes the past few days the brokerage profits look to be average going forward. This is why they go on CNBC and pump stocks! Bear markets tend to have low volumes because there simply isn't a big appetite to buy equities. People tend to sit on the sidelines and wait for the shoes to drop.

So in conclusion, I see a long protracted period where the investment banks struggle and I don't think their stock prices have reflected this. Meredith Whitney who is a rising star based on her negative calls in financials explains it best as to why the financials will continue to struggle:

"Whitney pointed out that Wall Street firms were now brutally exposed to the whims of the ratings companies: Every time Moody's Investors Service and Standard & Poor's downgrade subprime mortgages, the Wall Street banks that own them are required to reserve more capital against the securities -- which both raises their cost of capital and dilutes the value of their existing shares.

" another is her argument that Wall Street firms will drift to their tangible book value -- or what you'd get for them if you sold them off, position by position. Several (Citigroup is still the prime example) still have huge amounts of goodwill built into their share price. Goodwill, Whitney argues, will vanish."

Goodwill based on past performance is not a fundamental reason to buy a stock. Enron performed well for a while too.

Overall, exposure to downgrades combined with already bloated prices due to goodwill does not bode well for these companies going forward. Until housing stabilizes, and Wall St. can find its next game, expect these stocks to struggle.

Tuesday, April 8, 2008

Housing losses expected to reach $1 Trillion/Washington Mutual cuts its dividend

Hello all! Today was a very bearish news day in the markets. Washington Mutual(WAMU) was able to raise $7 billion in new capital but had to cut its dividend and there seems to be new concerns around its alt-A loans. From Yahoo Biz:

"The $7 billion infusion is more than what many analysts have deemed adequate to cover losses this year, Hindman said -- even in the most pessimistic scenarios.

But some analysts think a rise in alt-A defaults may still be coming, since they became popular relatively late in the mortgage boom. Last month, Fitch Ratings put $160 billion of alt-a mortgage-backed securities on review.

"That's really sort of an enigma," Hindman said. While companies are disclosing more about what types of mortgages they hold, he said it's hard to predict when that boot might drop for WaMu -- if at all.

Victoria Wagner, a credit analyst at S&P, said the TPG-led investment should be enough to keep WaMu going into next year. But she noted that the company holds a high concentration of mortgages in California, one of the hardest-hit housing markets."

My take:

I have been discussing these alt-A "liar" loans for a few months now. This is the next shoe to drop and I predict the default rates of alt-A's will rival the default rates on subprime. These were the favorite loans of the speculators because most of them were done with zero money down and no documentation. The speculators were also able to do several of these at once. Expect these loans to start folding like tents as these homes don't sell and these speculators run out of cash and start defaulting.

Other alt-A's will fold because people simply bought a house that they cannot afford.

The fact that a lot of Washington Mutual's loan portfolio is in California is a very bad sign. We all know how bad that market is. Put WAMU on your potential "run on the bank" list. If this is your bank I might suggest moving your money elsewhere or at least keep the balance below 100k because the FDIC will only insure up to $100,000.


Well we are now up to $1 trillion dollars in expected losses from the housing crisis according to the International Monetary Fund. This number is rising faster then the number of times Paris Hilton changes boyfriends. We started at $200 billion and now we are at $1trillion. Unbelievable. Here is how the IMF got to this number:

"Falling U.S. house prices and rising delinquencies may lead to $565 billion in residential mortgage-market losses, the IMF said in its annual Global Financial Stability report, released today in Washington. Total losses, including those tied to commercial real estate, may reach $945 billion, the fund said. The fund also saw as much as $90 billion in further losses from potential downgrades of bond insurance companies.

The forecast signals the worst of the credit crunch may be yet to come, because banks and securities firms so far have posted $232 billion in asset writedowns and credit losses. Policy makers, concerned that lenders' deteriorating balance sheets will hobble economic growth, are pushing companies to raise capital.

``The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,'' the report said. The fund warned of the risk of ``a serious funding and confidence crisis that threatens to continue for a significant period.''

My Take:

Notice the IMF warned that the worst is yet to come and a serious funding crisis threatens to continue for a significant period. Remember those bottom callers on CNBC? This is why you need to ignore them.

The fragile balance sheets of banks like WAMU will end up effecting the mortgage market. There is simply very little money available for lending unless your credit is spectacular. This will continue to force housing prices down. Housing is now in a vicious spiral because the banks have no money to lend, the buyers then can't buy, inventories then continue to increase which kills pricing power. I didn't even include the foreclosure problem which exacerbates the spiral.

Get a bag of popcorn, and sit back and relax as your dream house keeps dropping in price as a result of this housing spiral. I wouldn't even be looking at houses right now let alone buying.

Buying New Homes too early in California

Good morning. I found this article amusing. I have tried to warn everyone about buying too early as we try to find a bottom in housing.

The time to buy anything, whether it be stocks or homes, is when no one wants to buy them. Trying to set a bottom by buying when the effects of a credit crunch have not been fully priced in is a fools game in housing.

The bigger the bubble the longer it takes for them to unwind because bubbles are very psychological. If you look at history like the tech bubble, the mania and excitement of making easy money can be addictive and when a bubble pops, it takes months or even years for fundamentals to set in and bring prices back to the norm.

The fundamentals in housing are easy. On average, a house should cost about 3 times your income. Now I realize this seems impossible when you look at the MLS but this is where we are heading wether the sellers like it or not. The banks are broke and the old school lending standards of 20% down and excellent credit will be the rule going forward.

It might take some time but our banks are in deep trouble financially and they will be forced to go back to these lending standards.. The Bank of Japan is already calling for a US federal bailout of the US banks if the private sector cannot save them.

Dont be the buyers like these in Fresno. From Bloomberg:

"Rick Sibulboro pumped his fist in the air enthusiastically. He and his wife, Girlie Sibulboro, had just scored a brand-new home with three bedrooms and three baths next to a lake and waterfalls. The cost: $226,000 -- a far cry from the original price of $359,000.
"We were ready to go up to $250,000,"
said Rick Sibulboro, a retired Navy chief petty officer who lives in Davis. "See my notes? It says, 'To die for.' "

"Lisa Magee jumped up and down, squealing, after her father-in-law bought the home for $320,000. (Its original price was $484,000.)
"Oh, I'm shaking," she said afterward"

My final take:

Lisa may be "shaking" two years from now when the same house next door sells for $200,000 two years from now. Do not get involved with these auctions right now!! It is way too early.

You want to be buying when people are saying they will never buy another house again. They were bidding up these homes over the asking price at this auction. I can almost guarentee that most of these purchases will turn out to be bad decisions two years from now. Inflation pressures and higher interest rates are going to push home prices down further. Remember housing prices are falling at the fasest rate in history according to the Case-Shiller index!

PLEASE be patient. The auctions in '09 will be much cheaper. The whole housing ponzi game is over. If you don't believe me then just look at Bear Stearns who was the number two player in the housing game. Look at the stock prices of Countrywide and Washington Mutual. The business model of real estate is broken. Let housing prices reflect this before buying.

Monday, April 7, 2008

Mortgage Panic Spreads Across England

Happy Monday everyone. Good luck to all of the Kansas/Memphis fans tonight.

Well things in the financial markets are deteriorating at lightning speed as this massive worldwide debt bubble forces the credit crunch to deepen. The weight of this bubble is taking a tremendous toll on housing.

Bloomberg reported today that a massive panic has spread throughout England as the banks continue to raise rates on mortgages making housing virtually unaffordable for most of the Brits. From Bloomberg:

``This is a panic,'' said Nigel Welch, 54, director of mortgage broker TS Mackenzie in London's fashionable Islington neighborhood. ``Mortgages are more expensive and harder to get. I've had to turn away some people that I know won't find the loan that they need.''

"The mortgage market has tightened this month as banks scramble to conserve cash and stem a credit binge that fueled the country's decade-long housing boom. The number of home-loan products on offer declined by 21 percent in the past two weeks to 4,499 on April 4, says Moneyfacts Group, a financial Web site. "

My take:

Take a very close look at this crisis because you will be seeing it in the USA very soon. Let me explain, England's version of the Fed never dropped rates as their housing bubble inflated because they were worried about inflation. Notice the recent strength of the Euro/Pound versus our dollar.

They kept their rates at 5% which is actually the responsible thing to do for the long term because inflation can destroy an economy because it sucks your citizens wallet dry. The US Fed decided to slash rates as soon as we saw our bubble inflate which is why gas is now $3.40 a gallon and rising along with everything else we use everyday.

OK, So you have high rates to begin with in England. Compound this with the fact that the banks in Europe have been forced to hoard cash because they bought tens billions of dollars of our subprime "AAA" bad debt they have had to writedown as losses.

On top of this, they have had to cope with a huge housing bubble in England and the rest of Europe along with additional bad loans they made in the USA. The result is you have banks in Europe that are bordering on insolvency(see Northern Rock) and have ZERO desire to lend thus higher mortgage rates.

How high are rates? Take a look at the example from the article:

"`Horrible Shock'
``This has been a horrible shock,'' said Sue Freeman, 43, a health researcher living in North London. She comes off a five- year mortgage rate of 4.65 percent next month and her lender wouldn't offer a new deal below 7 percent. ``I went into panic mode. I thought we'll never be able to afford a mortgage again.''

In closing:

So there you go. Poor Sue went from a 4.65% up tp 7%. Expect the same thing to happen here only in reverse!

Here is how it will play out in the USA. Inflation will start to get out of control (it already has,
been to the grocery store lately?) which will eventually force the Fed to raise rates. Our banks(which are also in shambles) will then be forced to raise rates and the result will be a panic similiar to the UK.

Housing will get destroyed when this happens. Millions of people will be priced out of the market when rates rise to these levels. Prices are already falling in the USA at record levels. Expect this to accelerate when the Fed HAS to raise rates in order to control inflation and protect our dollar.

I advise you to watch the UK and keep an eye on how this all plays out. I expect prices over there to freefall even if they decide to lower rates. The banks need cash right now and cutting rates doesn't matter. Stay tuned.

Housing Crisis Spreads into the McMansions

Many people thought subprime was "contained" thinking it was a pocket of high risk mortgages that were used by lifelong renters to buy homes. Well its now apparent that people making $300,000 got sucked into the same subprime loans that the family making $30,000 used to buy a home for the first time. It was just on a larger scale.

An article in Reuters reported a great example today of how the housing bust is hitting even the million dollar housing areas like Louden County Va.

An excerpt:

"Poor people weren't the only ones who took out risky, high-interest loans during the housing boom. The sharp increase in housing costs -- and the desire to live in brand-new, spacious houses with modern features -- led many affluent buyers to take out loans they couldn't afford.

"People had in their head, 'I need a mud room, I need giant columns, I need a media room, and I'm going to do anything to get it,'" said Robert Lang, co-director of Virginia Tech's Metropolitan Institute, a research organization that focuses on real estate and development.
The crisis has hit especially hard here in Loudoun County, Virginia, where upscale developments have supplanted horse farms over the past fifteen years.

About an hour's drive from Washington, Loudoun is one of the nation's most affluent counties, with a median household income of $98,000, more than double the national figure."

Between 1990 and 2005, the county's population tripled to 272,000. Many of those moving here relied on risky, high-interest loans to buy the house of their dreams.
"People pushed the limits to be able to buy. They couldn't afford to buy there otherwise," said Virginia Tech consumer-affairs professor Irene Leach."

My take:

This just shows you that the housing crisis will hit buyers from all different income levels. McMansion home buyers made the same mistakes that poorer first time buyers did. They just did it on a grander scale. They took out loans that they could never pay back. 16% of the loans in 2005 were high interest, subprime type loans on these palaces.

The mania here amazes me. BTW who decided that they HAD to have a "mud room" I think I can survive living without one. My prediction is in the future many of these mansions will end up being turned into duplexes that people can actually afford.

So whats the situation in Louden County as housing collapses?:

"Now the bill has come due. One out of every 69 households in the county was in foreclosure in the last three months of 2008, well above the national average of one filing for every 555 households, according to RealtyTrac.

Most of these have been concentrated in the county's poorer neighborhoods, but local realtor Danilo Bogdanovic says he is increasingly seeing more foreclosures on properties worth more than $800,000 as affluent borrowers burn through savings in a vain attempt to stay in houses they can't afford.

"They've just prolonged the pain," Bogdanovic said. "I don't think they're immune to it."
At the end of 2007, 20 of the 25 houses for sale for more than $850,000 in Loudoun County appeared to be foreclosures, according to Tony Arko, his partner.

My take:

Ok, these stats amazed me. So first these "highly educated " affluent buyers took out stupid loans that they could not afford. Then these educated buyers decided to burn through their savings in order to keep the house. What sense does this make? NONE

Burning through your savings will not assure that you will pay off the loan. It will only assure that you end up BROKE!!!

The smartest thing to do after you realized you can't afford the house, as any financial planner will tell you, is sell the house even at a small loss or walk away from it and take the credit hit if the loss is too large and you can't afford to short sell it. People with solid incomes will easily get their credit back after 5-7 years if they walk away.

The other stat that amazed me is 80% of the homes for sale in Loudon over $850,000 for are in foreclosure. To make matters worse they are still building in this area so the sellers trying to get out are competing against new homes.

When this is all said and done the housing time bomb will end up effecting all types of homeowners in all types of neighborhoods. Foreclosures effect neighborhood values when they are sold at a 50% discount. How do you think the affluent homeowners who can afford these homes feel when they see a McMansion for sale next door at half the price? I bet they are sick to their stomach.

Sunday, April 6, 2008

Peter Schiff on the Economy and the Dollar

Just a quick note tonight. I always think education on why this whole debt bubble popped is important and Peter Schiff, Chief Strategist for Euro Pacific Capitol, is one of the best in terms of explaining it. He called this debacle about two years ago and is a regular analysts on The Fox News Channel. You tube is not downloading tonight so here is the link on a recent interview he did. The Fed can intervene as much as it wants but in the end they are going to just delay the problem and make it worse.

Lenders Looked the other way on Liar Loans

I read a great piece in the NY times today about how the lack of due diligence by the lenders due to pure greed put buyers into liar loans(loans where income was not verified, many were known as alt-A loans) that they could not afford. This could trigger the next wave of lawsuits as the blame game starts on how the housing bubble got so out of control. The banks are trying to keep this debacle quiet.

The NY Times explains:

"WE’VE all heard a great deal in recent months about the greedy borrowers who caused the subprime mortgage calamity. Hordes of them duped unsuspecting lenders, don’t you know, by falsifying their incomes on loan documents. Now those loans are in default and the rapacious borrowers have moved on with their riches.

People who make these claims, with a straight face no less, overlook a crucial fact. Almost all mortgage applicants had to sign a document allowing lenders to verify their incomes with the Internal Revenue Service. At least 90 percent of borrowers had to sign, seal and deliver this form, known as a 4506T, industry experts say. This includes the so-called stated income mortgages, affectionately known as “liar loans.”

So while borrowers may have misrepresented their incomes, either on their own or at the urging of their mortgage brokers, lenders had the tools to identify these fibs before making the loans. All they had to do was ask the I.R.S. The fact that in most cases they apparently didn’t do so puts the lie to the idea that cagey borrowers duped unsuspecting lenders to secure on loans that are now — surprise! — failing.

My take:

Ok so the perception out there is people got greedy and lied about incomes and bought homes that they could not afford. The reality is the banks could have EASILY stopped this by using form 4506t to verify incomes through the IRS. 90% of people signed the document to allow the lenders to check their incomes through this form.

Mike Summers had a company that he marketed to lenders that would check incomes via this IRS form for a only a $20 dollar charge. Sounds like a no brainer as a lender to spend $20 bucks for verification when you are lending someone $500,000 right? Wrong as the NY Times explains:

"Mr. Summers said Ameriquest and other prospective clients used lame reasons for turning him down. Submitting the forms was too costly, they said ($20 per loan, on average), or too time-consuming (the information came back to the lender in about one business day).

In 2006, the I.R.S. made it even easier for lenders to verify borrowers’ incomes by automating its systems, Mr. Summers said. The turnaround time under the new system fell significantly.

Still, the tool remained unused. When a customer signed up for Veri-tax’s service, it was typically to spot-check the quality of loans after they were made, Mr. Summers said.
“My estimate was between 3 and 5 percent of all the loans that were funded in 2006 were executed with a 4506,” Mr. Summers said. “They just turned a blind eye, saying, ‘Everything is going to be fine.’ ”

My take:

This is greed in its purest form by the lenders. Only 3-5% would spend the $20 to verify income. $20 dollars when you are making thousands on a deal is nothing! This is how things got out of control folks. Lenders simply turned there heads to the income verifications because the fees were too lucrative.

Now the million dollar question. Do the borrowers have a legitimate lawsuit against the lenders claiming that the lender did not do their due-diligence in terms of protecting the home buyer from taking on a loan that the lender knew they couldn't afford?

The next question is since the lenders are almost all out of business. Does this make the investment banks and banks responsible for this lack of due diligence in terms of protecting the buyer from themselves?

Many lawsuits could result from this as the Times explains:

"Can investors stuck with losses on these loans sue to recover their investments based on this due-diligence failure? After all, mortgage originators made representations and warranties to investors that the quality of these loans was good when it clearly was not. And they made these representations knowing that they had not bothered to conduct quick and easy borrower-income checks.

“Investors hoping to put back the loans for deficient underwriting under reps and warranties would end up going back to the originators,” said Josh Rosner, an analyst at Graham Fisher & Company and an authority on mortgage-backed securities. “Given that many of these lenders are out of business, ultimately this could come back to the bank or investment bank.”

“The general view is this should not be talked about out loud,” Mr. Rosner added.

Wall Street will certainly battle forcefully against such lawsuits, if investors bring them. But its role as one of the great enablers in this mortgage debacle is something that even Wall Street can’t deny."

My take:

It looks like the great enablers have a huge battle on their hands that nobody wants to talk about. Imagine the legal fees that these banks could potentially face. The housing crisis continues to get more ugly by the day.