Click on the link and enjoy! Great advice on investing in a bear market. According to Barron'e sit in cash and buy bonds.
http://link.brightcove.com/services/link/bcpid452319854/bctid1631265801
Saturday, July 5, 2008
Friday, July 4, 2008
Reuters: Housing Market Losses are Accelerating
Happy July 4th!
Well its time for a housing post. Its been awhile so I thought I would update where we are in the current the housing market.
How do I say this? Ummmm housing sucks right now and its getting worse.
Reuters is reporting that the housing market is detiorating rapidly, and the analysts are expecting a housing depression if we fall into a recession.
"NEW YORK (Reuters) - An even gloomier scenario may be in store for an already ailing U.S. housing market if the overall economy slips into a recession, according to UBS Securities analysts.
Falling home prices, soaring foreclosures at a time of tighter lending and rising unemployment are all weighing heavily on an already troubled housing sector, the analysts said during a conference call late on Wednesday.
"The housing market has been in a recession for the past year and once the overall economy slips into a recession, which it probably will, the housing market will probably be in a depression," said Tom Zimmerman, head of ABS, mortgage research at UBS Securities.
Lack of funding is the biggest problem facing the housing market right now, according to the analysts, with subprime and Alt-A securitized markets shutting down and banks being forced to cut their mortgage lending dramatically due to capital constraints. So-called Alt-A loans are made to borrowers with less than prime credit ratings but who are above subprime.
"The housing market, in terms of housing finance, is really in a disaster situation right now and I see no change in that very quickly," said Zimmerman. "That's why our view of the housing market is very bleak and probably will remain that way for some time until there's some government intervention."
"Home prices, which had been falling at a reasonable pace over recent years, have accelerated since late last year.
"We were declining at an annualized rate of about 5 to 6 percent but prices starting dropping very rapidly and we're now at a 20 percent annualized rate. That's the mode we're in right now," he said.
The firm expects losses generated by exposure to securitized HELOCs to reach 18 percent for 2006 vintages and 32 percent for 2007 securities.
According to UBS, 62 percent of HELOC securities are owned by commercial banks, 16 percent by savings institutions, 9 percent by credit unions and 8 percent by finance firms. ABS issuers own a smaller 5 percent."
Final Take:
No analysis needed here. Its obviuos business is Booming. NOT!
The most alarming part of this article is how the losses are accelerating. Housing is now dropping at an annualized rate of 20% versus the 5-6% seen when this bubble started bursting. Analysts are expecting a housing DEPRESSION if the economy goes into recession.
6 consecutive months of job losses pretty mucch confirms that we are in a recession now or will be in the very near future.
Housing will fall into a depression because everything that could go wrong is occuring. Higher mortgage rates, tougher lending standards, banks that have no capital to lend, rising inflation, and most impotantly ridiculously high housing prices.
People cannot access the money to buy housing at the current prices. This is why housing prices are now dropping at a 20% annualized rate!!!
Notice that HELOC losses are expected to be at 32% for anything done in 2007. This will devastate bank earnings as people continue to default on their loans
Bottom Line:
Its obvious we are watching a classic bubble thats in the middle of bursting. The Housing Time Bomb has officially exploded. The big question now is how bad will it get?
I will say it again. Now is not the time to buy a house!!!
Well its time for a housing post. Its been awhile so I thought I would update where we are in the current the housing market.
How do I say this? Ummmm housing sucks right now and its getting worse.
Reuters is reporting that the housing market is detiorating rapidly, and the analysts are expecting a housing depression if we fall into a recession.
"NEW YORK (Reuters) - An even gloomier scenario may be in store for an already ailing U.S. housing market if the overall economy slips into a recession, according to UBS Securities analysts.
Falling home prices, soaring foreclosures at a time of tighter lending and rising unemployment are all weighing heavily on an already troubled housing sector, the analysts said during a conference call late on Wednesday.
"The housing market has been in a recession for the past year and once the overall economy slips into a recession, which it probably will, the housing market will probably be in a depression," said Tom Zimmerman, head of ABS, mortgage research at UBS Securities.
Lack of funding is the biggest problem facing the housing market right now, according to the analysts, with subprime and Alt-A securitized markets shutting down and banks being forced to cut their mortgage lending dramatically due to capital constraints. So-called Alt-A loans are made to borrowers with less than prime credit ratings but who are above subprime.
"The housing market, in terms of housing finance, is really in a disaster situation right now and I see no change in that very quickly," said Zimmerman. "That's why our view of the housing market is very bleak and probably will remain that way for some time until there's some government intervention."
"Home prices, which had been falling at a reasonable pace over recent years, have accelerated since late last year.
"We were declining at an annualized rate of about 5 to 6 percent but prices starting dropping very rapidly and we're now at a 20 percent annualized rate. That's the mode we're in right now," he said.
The firm expects losses generated by exposure to securitized HELOCs to reach 18 percent for 2006 vintages and 32 percent for 2007 securities.
According to UBS, 62 percent of HELOC securities are owned by commercial banks, 16 percent by savings institutions, 9 percent by credit unions and 8 percent by finance firms. ABS issuers own a smaller 5 percent."
Final Take:
No analysis needed here. Its obviuos business is Booming. NOT!
The most alarming part of this article is how the losses are accelerating. Housing is now dropping at an annualized rate of 20% versus the 5-6% seen when this bubble started bursting. Analysts are expecting a housing DEPRESSION if the economy goes into recession.
6 consecutive months of job losses pretty mucch confirms that we are in a recession now or will be in the very near future.
Housing will fall into a depression because everything that could go wrong is occuring. Higher mortgage rates, tougher lending standards, banks that have no capital to lend, rising inflation, and most impotantly ridiculously high housing prices.
People cannot access the money to buy housing at the current prices. This is why housing prices are now dropping at a 20% annualized rate!!!
Notice that HELOC losses are expected to be at 32% for anything done in 2007. This will devastate bank earnings as people continue to default on their loans
Bottom Line:
Its obvious we are watching a classic bubble thats in the middle of bursting. The Housing Time Bomb has officially exploded. The big question now is how bad will it get?
I will say it again. Now is not the time to buy a house!!!
Thursday, July 3, 2008
ECB's Trichet's Head Fake/Market Summary
The market was mixed today as the DOW seemed to breath a sigh of relief that the jobs report was just bad instead of hideous.
The economy lost another 62,000 jobs last month. this was the sixth consecutive month of job losses.
Here is the data from Bloomberg
"July 3 (Bloomberg) -- U.S. employers cut jobs for a sixth straight month and service industries shrank in June, signaling that the economic slowdown may deepen as the impact of federal tax rebates fades.
Payrolls fell by 62,000 after a 62,000 drop in May that was greater than first reported, the Labor Department said today in Washington. The unemployment rate held at 5.5 percent after soaring the most in two decades in May. The Institute for Supply Management's non-manufacturing index sank to a five-month low.
Falling employment, along with record gasoline prices and tumbling home values, may cause consumers to tighten their budgets after spending the more than $100 billion of tax rebates. The longest string of payroll declines since the economy was pulling out of the last recession indicates limited scope for a Federal Reserve interest-rate increase this quarter."
Quick Take:
Many people feared that we could have seen a six figure job loss print today. The markets rose on the 62k loss but lets get real folks, this is not good news. The unemployment rate remained unchanged at 5.5%.
Government hiring was plus 29,000. When are they going to realize that we need to stop spending money as we head into a recession? My taxes are high enough. I am already paying to bail out Wall St. and it bothers me when I see DC's payroll rise each month.
ISM worse than expected(same link)
"The Tempe, Arizona-based ISM said its index of non- manufacturing businesses, which make up almost 90 percent of the economy, decreased to 48.2, the lowest since January, from 51.7 in May. A reading of 50 is the dividing line between growth and contraction. The median projection was for a decline to 51."
Recession here we come! Whats frightening here is we contracted in June while the government was in the middle dropping money out of helicopters in the form of stimulus checks.
Whats this number going to look like when the checks stop with $145 oil? Yikes!
The Trichet "Head Fake"
Explaining todays trading action is very easy. Trichet was expected to raise rates a 1.4 point and warn of higher inflation and the potential of more rate hikes. Trichet pulled the trigger but did a head fake on further rate hikes.
"July 3 (Bloomberg) -- European Central Bank President Jean- Claude Trichet played down prospects of further interest-rate increases, saying the quarter-point move today will help bring inflation back below 2 percent.
``Today's decision will contribute to achieving our objective,'' Trichet said at a press conference in Frankfurt after the ECB raised its benchmark lending rate to 4.25 percent. Trichet said he has ``no bias'' on further moves.
The euro slumped against the dollar and European government bonds rose after Trichet's remarks. The ECB is weighing the risk that higher rates will exacerbate an economic slowdown against the danger that the fastest inflation in 16 years will feed into wages and prices.
Trichet ``suggested they currently have no plans to raise interest rates again,'' said Dario Perkins, an economist at ABN Amro NV in London. ``Of course, that doesn't rule out further moves. It will depend on what happens to inflation and, more importantly, inflation expectations.''
My Take
So today's trade in the market was easy. Trichet's cut was baked in the cake but his softer language on further cuts was a bit of a surprise. As a result, the US dollar strengthened, oil then dropped, and stocks popped a bit.
Bottom Line:
The market was very worried today that there would be horrible news on the employment and interest rate front.
This didn't materialize. Things were just "bad" not "horrible". Needless to say, the problems in our economy still persist and should continue to weigh on the markets.
At least everyone can relax for the 4th! I will be around for the 4th so I may find a nugget or two to post on here over the next few days.
Have a great holiday.
The economy lost another 62,000 jobs last month. this was the sixth consecutive month of job losses.
Here is the data from Bloomberg
"July 3 (Bloomberg) -- U.S. employers cut jobs for a sixth straight month and service industries shrank in June, signaling that the economic slowdown may deepen as the impact of federal tax rebates fades.
Payrolls fell by 62,000 after a 62,000 drop in May that was greater than first reported, the Labor Department said today in Washington. The unemployment rate held at 5.5 percent after soaring the most in two decades in May. The Institute for Supply Management's non-manufacturing index sank to a five-month low.
Falling employment, along with record gasoline prices and tumbling home values, may cause consumers to tighten their budgets after spending the more than $100 billion of tax rebates. The longest string of payroll declines since the economy was pulling out of the last recession indicates limited scope for a Federal Reserve interest-rate increase this quarter."
Quick Take:
Many people feared that we could have seen a six figure job loss print today. The markets rose on the 62k loss but lets get real folks, this is not good news. The unemployment rate remained unchanged at 5.5%.
Government hiring was plus 29,000. When are they going to realize that we need to stop spending money as we head into a recession? My taxes are high enough. I am already paying to bail out Wall St. and it bothers me when I see DC's payroll rise each month.
ISM worse than expected(same link)
"The Tempe, Arizona-based ISM said its index of non- manufacturing businesses, which make up almost 90 percent of the economy, decreased to 48.2, the lowest since January, from 51.7 in May. A reading of 50 is the dividing line between growth and contraction. The median projection was for a decline to 51."
Recession here we come! Whats frightening here is we contracted in June while the government was in the middle dropping money out of helicopters in the form of stimulus checks.
Whats this number going to look like when the checks stop with $145 oil? Yikes!
The Trichet "Head Fake"
Explaining todays trading action is very easy. Trichet was expected to raise rates a 1.4 point and warn of higher inflation and the potential of more rate hikes. Trichet pulled the trigger but did a head fake on further rate hikes.
"July 3 (Bloomberg) -- European Central Bank President Jean- Claude Trichet played down prospects of further interest-rate increases, saying the quarter-point move today will help bring inflation back below 2 percent.
``Today's decision will contribute to achieving our objective,'' Trichet said at a press conference in Frankfurt after the ECB raised its benchmark lending rate to 4.25 percent. Trichet said he has ``no bias'' on further moves.
The euro slumped against the dollar and European government bonds rose after Trichet's remarks. The ECB is weighing the risk that higher rates will exacerbate an economic slowdown against the danger that the fastest inflation in 16 years will feed into wages and prices.
Trichet ``suggested they currently have no plans to raise interest rates again,'' said Dario Perkins, an economist at ABN Amro NV in London. ``Of course, that doesn't rule out further moves. It will depend on what happens to inflation and, more importantly, inflation expectations.''
My Take
So today's trade in the market was easy. Trichet's cut was baked in the cake but his softer language on further cuts was a bit of a surprise. As a result, the US dollar strengthened, oil then dropped, and stocks popped a bit.
Bottom Line:
The market was very worried today that there would be horrible news on the employment and interest rate front.
This didn't materialize. Things were just "bad" not "horrible". Needless to say, the problems in our economy still persist and should continue to weigh on the markets.
At least everyone can relax for the 4th! I will be around for the 4th so I may find a nugget or two to post on here over the next few days.
Have a great holiday.
Wednesday, July 2, 2008
Hyperinflationary Depression?
The video below was on Bloomberg TV a couple days ago. All I can say is things are bad when the "hyperinflation" story goes mainstream.
I am a deflationist and disagree with the "hyper inflationary" monetary theory, but I think its important for all of us to see both sides of the bear case.
I believe the government will pay off its debts and we will avoid this type of horrific collapse. It may take us a decade to dig out of this disaster but it can be done.
If hyperinflation does happen, our lives will never be the same and our government will risk being overthrown.
Lets hope the powers that be are smart enough to deleverage everything down to affordable levels via deflation versus destroying the currency and trying to inflate out of it.
Deflation may cause a severe recession but it beats the alternative. Imagine saving all of your life and having it be worth nothing more than a few loaves of bread due to a worthless currency.
This is what hyperinflation does. It destroys everything in its path and creates chaos and political instability.
Germany went the hyper inflationary route in the 30's and ended up with Hitler.
A few years ago, many would have believed this guy belonged in a straight jacket. Today, this analyst is on Bloomberg. Amazing isn't it?
Lets hope whats described below never happens!
I am a deflationist and disagree with the "hyper inflationary" monetary theory, but I think its important for all of us to see both sides of the bear case.
I believe the government will pay off its debts and we will avoid this type of horrific collapse. It may take us a decade to dig out of this disaster but it can be done.
If hyperinflation does happen, our lives will never be the same and our government will risk being overthrown.
Lets hope the powers that be are smart enough to deleverage everything down to affordable levels via deflation versus destroying the currency and trying to inflate out of it.
Deflation may cause a severe recession but it beats the alternative. Imagine saving all of your life and having it be worth nothing more than a few loaves of bread due to a worthless currency.
This is what hyperinflation does. It destroys everything in its path and creates chaos and political instability.
Germany went the hyper inflationary route in the 30's and ended up with Hitler.
A few years ago, many would have believed this guy belonged in a straight jacket. Today, this analyst is on Bloomberg. Amazing isn't it?
Lets hope whats described below never happens!
Market Update 7/2
Good Evening!
Well the fireworks came a little early this holiday weekend. everything I was worried about this morning pretty much came to fruition.
I knew if those oil inventories were light, oil was going to the moon. As you can see here, this is exactly what happened.
Combine this along with a warning of a potential Bankruptcy of an American icon(GM) and you set yourself up for one hell of an ugly day.
As I was explaining yesterday, its not going to take much for stocks to dive with the new sell on any bad news psychology that now dominates the market.
Tomorrow is a short session but it will be action packed!
The jobs number comes out and the ECB votes on interest rates. Oil could go to the moon if the the ECB raises rates and warns that there may be more to come.
You could also see the dollar crash on a strong ECB statement on inflation. We are right at the all time lows versus the Euro as it stands.
If the jobs report is bad, its going to put furthur pressure on the dollar because the speculators and currency traders know the Fed will be hesitant to raise rates as the economy weakens.
The Fed almost never raises rates heading into a weak economy. Oil could see $150 tomorrow if the ECB and jobs reports both are negative on the dollar.
A crash on the dollar would force the Fed to take action and raise rates. The fun would really begin if this scenario comes to fruition. It will be time to buy a gun and some gold if we start raising rates heading into this deep recession.
If the jobs number is over 100,000 then you could see a big selloff. Who wants to hold stocks over a long weekend when a shoe could drop at any second?
Long day today. Sorry for the short update. I will have a more detailed update tomorrow. There is a lot going on behind the scenes. The Lehman situation is getting very interesting. The US/Euro 10 year spread is also widening. I will explain why this is dangerous tomorrow.
Well the fireworks came a little early this holiday weekend. everything I was worried about this morning pretty much came to fruition.
I knew if those oil inventories were light, oil was going to the moon. As you can see here, this is exactly what happened.
Combine this along with a warning of a potential Bankruptcy of an American icon(GM) and you set yourself up for one hell of an ugly day.
As I was explaining yesterday, its not going to take much for stocks to dive with the new sell on any bad news psychology that now dominates the market.
Tomorrow is a short session but it will be action packed!
The jobs number comes out and the ECB votes on interest rates. Oil could go to the moon if the the ECB raises rates and warns that there may be more to come.
You could also see the dollar crash on a strong ECB statement on inflation. We are right at the all time lows versus the Euro as it stands.
If the jobs report is bad, its going to put furthur pressure on the dollar because the speculators and currency traders know the Fed will be hesitant to raise rates as the economy weakens.
The Fed almost never raises rates heading into a weak economy. Oil could see $150 tomorrow if the ECB and jobs reports both are negative on the dollar.
A crash on the dollar would force the Fed to take action and raise rates. The fun would really begin if this scenario comes to fruition. It will be time to buy a gun and some gold if we start raising rates heading into this deep recession.
If the jobs number is over 100,000 then you could see a big selloff. Who wants to hold stocks over a long weekend when a shoe could drop at any second?
Long day today. Sorry for the short update. I will have a more detailed update tomorrow. There is a lot going on behind the scenes. The Lehman situation is getting very interesting. The US/Euro 10 year spread is also widening. I will explain why this is dangerous tomorrow.
ADP jobs report -79k/Home equity loan delinquency rates rise to highest levels since 1987
Just a few blurbs before I head out the door. Many are calling for a bounce over the next few days because we are way oversold. I am sorry folks but I just don't see it. Lets take a look at some of the news that came out this morning.
ADP: Payrolls Decreased by 79,000
Here is the Link
July 2 (Bloomberg) -- Companies in the U.S. cut an estimated 79,000 jobs in June, a private survey based on payroll data showed.
The decrease was larger than forecast and followed a revised gain of 25,000 for the prior month that was less than previously estimated, the report from ADP Employer Services showed. Last month's drop was ADP's largest since November 2002."
Quick Take:
This number the last several months has been way too bullish versus the actual jobs number thats reported tomorrow. I expect that jobs number to be horrific.
ADP also revised their numbers down to plus 25,000 in May. So lets revert back to May. ADP shows a rise in May when the unemployment rate rose from 5% up to 5.5% which was one of the biggest rises in decades.
Now ADP shows a 79,000 drop in payrolls in Jube which was the biggest drop since 2002. Can you imagine what tomorrows jobs report is going to look like? Its going to be ugly folks.
Overdue Home-Equity Credit Lines Rise Most Since 1987, ABA Says
Here is the story from Bloomberg:
"July 2 (Bloomberg) -- Consumers fell behind on loans secured by their homes at the fastest pace in two decades in the first quarter, signaling deeper distress in the U.S. economy, the American Bankers Association reported.
Home-equity lines of credit at least 30 days past due rose 14 basis points to 1.1 percent of accounts for the quarter, the Washington-based group said today in a statement. Delinquent credit-card accounts increased 13 basis points to 4.51 percent, the highest level since 2006.
``People are looking for any source of funds to pay their daily expenses,'' Carol Kaplan, spokeswoman for the bankers' group, said yesterday in an interview. ``It's a sign of the overall condition of the economy that people are having trouble making their payments.''
Consumers squeezed by higher food and fuel prices are tapping revolving credit lines to stay afloat as the economy slows.
The rise in delinquent home-equity accounts was the biggest since the ABA began collecting data in 1987, Kaplan said. It was also the highest in 11 years. Delinquencies often don't peak until late in an economic slowdown"
Quick Take:
Ok so here we are with delinquencies hitting all time highs since they began collecting data. This is supposed to happen late into an economic slowdown according to Kaplan.
So basically we are seeing all time highs in delinquencies at a time when we haven't even fallen into an official recession yet!
Bottom Line:
I continue to be flabbergasted at the speed of which this is all happening. Consumers are folding like tents on their loans at a time when unemployment, inflation, and interest rates are rising.
This is nothing but a recipe for disaster. I will be on later with a recap. Oil inventories are out later this morning. If there are some suprises there we could see a selloff.
ADP: Payrolls Decreased by 79,000
Here is the Link
July 2 (Bloomberg) -- Companies in the U.S. cut an estimated 79,000 jobs in June, a private survey based on payroll data showed.
The decrease was larger than forecast and followed a revised gain of 25,000 for the prior month that was less than previously estimated, the report from ADP Employer Services showed. Last month's drop was ADP's largest since November 2002."
Quick Take:
This number the last several months has been way too bullish versus the actual jobs number thats reported tomorrow. I expect that jobs number to be horrific.
ADP also revised their numbers down to plus 25,000 in May. So lets revert back to May. ADP shows a rise in May when the unemployment rate rose from 5% up to 5.5% which was one of the biggest rises in decades.
Now ADP shows a 79,000 drop in payrolls in Jube which was the biggest drop since 2002. Can you imagine what tomorrows jobs report is going to look like? Its going to be ugly folks.
Overdue Home-Equity Credit Lines Rise Most Since 1987, ABA Says
Here is the story from Bloomberg:
"July 2 (Bloomberg) -- Consumers fell behind on loans secured by their homes at the fastest pace in two decades in the first quarter, signaling deeper distress in the U.S. economy, the American Bankers Association reported.
Home-equity lines of credit at least 30 days past due rose 14 basis points to 1.1 percent of accounts for the quarter, the Washington-based group said today in a statement. Delinquent credit-card accounts increased 13 basis points to 4.51 percent, the highest level since 2006.
``People are looking for any source of funds to pay their daily expenses,'' Carol Kaplan, spokeswoman for the bankers' group, said yesterday in an interview. ``It's a sign of the overall condition of the economy that people are having trouble making their payments.''
Consumers squeezed by higher food and fuel prices are tapping revolving credit lines to stay afloat as the economy slows.
The rise in delinquent home-equity accounts was the biggest since the ABA began collecting data in 1987, Kaplan said. It was also the highest in 11 years. Delinquencies often don't peak until late in an economic slowdown"
Quick Take:
Ok so here we are with delinquencies hitting all time highs since they began collecting data. This is supposed to happen late into an economic slowdown according to Kaplan.
So basically we are seeing all time highs in delinquencies at a time when we haven't even fallen into an official recession yet!
Bottom Line:
I continue to be flabbergasted at the speed of which this is all happening. Consumers are folding like tents on their loans at a time when unemployment, inflation, and interest rates are rising.
This is nothing but a recipe for disaster. I will be on later with a recap. Oil inventories are out later this morning. If there are some suprises there we could see a selloff.
Tuesday, July 1, 2008
Psychology Switch? The Financials May Never Be The Same
I want to talk a little about the market today before I get into a great piece I read from Satyajit Das.
I found the trading today to be strange. I have been waiting for a bit of a bounce the last couple of days because we are so oversold short term. In fact, CNBC reported that yesterday the oversold indicators were the highest they have been since 2002 which was the start the start of the housing bubble bull market.
So technically we are very oversold. You then follow this up with better than expected news and upgrades described below:
From Bloomberg
"GM, the largest U.S. automaker, jumped the most in more than two weeks and led the Dow Jones Industrial Average's rebound from an almost 167-point drop earlier in the day.
American Express Co. posted its best gain since May on UBS AG's upgrade of the biggest U.S. credit-card company.
CIT Group Inc. jumped the most since March after selling its mortgage businesses to Lone Star Funds and Berkshire Hathaway Inc.
Lehman Brothers Holdings Inc. advanced $1.15, or 5.8 percent, to $20.96. Morgan Stanley said the fourth-largest U.S. securities firm has sufficient cash and rated the stock ``overweight'' in new coverage
ISM Surprise
Stocks climbed briefly in the morning after the Institute for Supply Management's factory index rose to 50.2 from 49.6 in May, topping economists' forecasts. A reading of 50 is the dividing line between expansion and contraction."
Quick Take:
So as these stories came out throughout the day, you got to be feeling pretty damn good if your a bull. Better than expected news in manufacturing, upgrades in financials, GM suprises to the upside, and we are extremely oversold. You put this all together and they have to be thinking I need to put money to work because this should be a 300 point day for the bulls.
So what did we end up with? Up 32 points on the DOW. Thats got to be pretty discouraging for the cheerleaders. If this is the best they can do on a positive news day, whats going to happen when the next shoe drops from this financial crisis?
I wouldn't be surprised if many bulls lost hope today. Its not gonna get any better than this from a news perspective over the next year. 3 years ago I guarantee you that stocks would have soared on a day like today.
Its obvious the bears are in charge of this market. The psychology in today's stock market is to now sell the crap out of stocks on bad news and ignore the good news. This is a 180 degree switch in psychology boys and girls. Take note of it.
U or V shaped Recovery for Financials? How about an L shaped recovery?
This is what Satyajit Das is proposing. For those who don't know Mr. Das, he is a derivatives expert and very well known. He has been tough on the banks for what he calls "shadow banking" practices. I recommend everyone reads this whole piece.
Take a look at the IB's Level 3 assets verus capital. These numbers are staggering. Some of Mr. Das's conclusions:
"Structured finance has contributed strongly to earnings in recent years. Securitisation, including CDO activity, has been a major growth area. Volumes have collapsed. As at end June 2008, US ABS issuance (US$106 billion) is 73% lower than that in 2007. Home Equity ABS issuance (US$303 million) is 99.8% lower than 2007 (US$198 billion). Year-to-date CDO issuance (US$14 billion) is down 93.8% from 2007 (US$225 billion).
Higher costs will also increase limiting earning recovery. Bank funding costs have increased. Most firms have been forced to issue substantial amounts of term debt to fund assets returning to balance sheet and protect against liquidity risk. To the extent, that these costs cannot be passed through to borrowers, the higher funding costs will affect future funding.
Banks have issued high cost equity to re-capitalise their balance sheets. Hybrid capital issues paying between 7.00% and 11.00 % pa will be drag on future earnings. Highly dilutionary equity issues (often at a discount to a share price that had fallen significantly) will impede earnings per share growth and return on capital.
Investors are looking for a rapid recovery in bank earnings. Earnings may recover but the “gilded age” of bank profits may be difficult to recapture.
Glamorous banks reliant on “voodoo banking” may find it difficult to achieve the high performance of the “go-go” years.
Will the recovery in bank stocks take the form of “V” or “U”? It may be a “L”. With the Northern Rock and Bear Stearns bailouts, central banks and governments have signaled that major banks are “too big to fail”. This is a necessary but not sufficient condition for recovery of bank earnings and stock prices. The recovery might take the form of a “L” (Kirsten ITC font) – note the small upturn at the far right of the flat bottom."
Quick Take:
You must read the whole article to appreciate it. I now realize why Morgan Stanley's debt may be downgraded by Moody's. Things are not good when Morgans level 3 assets are $73 billion and their capital base is $31 billion. That's means there Level 3 assets are 231% of capital. This is worse than Lehman whose level 3 assets were 187% of their actual capital(not that this is impressive).
If These level 3 assets shift down in value to any large extent, many of these IB's are insolvent. This article is frightening to say the least. According to Mr. Das, the numbers are only getting worse as the credit crunch deepens.
The boom days of the pigmen are over. Post regulation they will be taking $100 checks and opening new deposit accounts for elderly hoping to grow their earnings a little each year. Its going to take a long time for the pigmen to get their mojo back.
The financials may never be the same.
I found the trading today to be strange. I have been waiting for a bit of a bounce the last couple of days because we are so oversold short term. In fact, CNBC reported that yesterday the oversold indicators were the highest they have been since 2002 which was the start the start of the housing bubble bull market.
So technically we are very oversold. You then follow this up with better than expected news and upgrades described below:
From Bloomberg
"GM, the largest U.S. automaker, jumped the most in more than two weeks and led the Dow Jones Industrial Average's rebound from an almost 167-point drop earlier in the day.
American Express Co. posted its best gain since May on UBS AG's upgrade of the biggest U.S. credit-card company.
CIT Group Inc. jumped the most since March after selling its mortgage businesses to Lone Star Funds and Berkshire Hathaway Inc.
Lehman Brothers Holdings Inc. advanced $1.15, or 5.8 percent, to $20.96. Morgan Stanley said the fourth-largest U.S. securities firm has sufficient cash and rated the stock ``overweight'' in new coverage
ISM Surprise
Stocks climbed briefly in the morning after the Institute for Supply Management's factory index rose to 50.2 from 49.6 in May, topping economists' forecasts. A reading of 50 is the dividing line between expansion and contraction."
Quick Take:
So as these stories came out throughout the day, you got to be feeling pretty damn good if your a bull. Better than expected news in manufacturing, upgrades in financials, GM suprises to the upside, and we are extremely oversold. You put this all together and they have to be thinking I need to put money to work because this should be a 300 point day for the bulls.
So what did we end up with? Up 32 points on the DOW. Thats got to be pretty discouraging for the cheerleaders. If this is the best they can do on a positive news day, whats going to happen when the next shoe drops from this financial crisis?
I wouldn't be surprised if many bulls lost hope today. Its not gonna get any better than this from a news perspective over the next year. 3 years ago I guarantee you that stocks would have soared on a day like today.
Its obvious the bears are in charge of this market. The psychology in today's stock market is to now sell the crap out of stocks on bad news and ignore the good news. This is a 180 degree switch in psychology boys and girls. Take note of it.
U or V shaped Recovery for Financials? How about an L shaped recovery?
This is what Satyajit Das is proposing. For those who don't know Mr. Das, he is a derivatives expert and very well known. He has been tough on the banks for what he calls "shadow banking" practices. I recommend everyone reads this whole piece.
Take a look at the IB's Level 3 assets verus capital. These numbers are staggering. Some of Mr. Das's conclusions:
"Structured finance has contributed strongly to earnings in recent years. Securitisation, including CDO activity, has been a major growth area. Volumes have collapsed. As at end June 2008, US ABS issuance (US$106 billion) is 73% lower than that in 2007. Home Equity ABS issuance (US$303 million) is 99.8% lower than 2007 (US$198 billion). Year-to-date CDO issuance (US$14 billion) is down 93.8% from 2007 (US$225 billion).
Higher costs will also increase limiting earning recovery. Bank funding costs have increased. Most firms have been forced to issue substantial amounts of term debt to fund assets returning to balance sheet and protect against liquidity risk. To the extent, that these costs cannot be passed through to borrowers, the higher funding costs will affect future funding.
Banks have issued high cost equity to re-capitalise their balance sheets. Hybrid capital issues paying between 7.00% and 11.00 % pa will be drag on future earnings. Highly dilutionary equity issues (often at a discount to a share price that had fallen significantly) will impede earnings per share growth and return on capital.
Investors are looking for a rapid recovery in bank earnings. Earnings may recover but the “gilded age” of bank profits may be difficult to recapture.
Glamorous banks reliant on “voodoo banking” may find it difficult to achieve the high performance of the “go-go” years.
Will the recovery in bank stocks take the form of “V” or “U”? It may be a “L”. With the Northern Rock and Bear Stearns bailouts, central banks and governments have signaled that major banks are “too big to fail”. This is a necessary but not sufficient condition for recovery of bank earnings and stock prices. The recovery might take the form of a “L” (Kirsten ITC font) – note the small upturn at the far right of the flat bottom."
Quick Take:
You must read the whole article to appreciate it. I now realize why Morgan Stanley's debt may be downgraded by Moody's. Things are not good when Morgans level 3 assets are $73 billion and their capital base is $31 billion. That's means there Level 3 assets are 231% of capital. This is worse than Lehman whose level 3 assets were 187% of their actual capital(not that this is impressive).
If These level 3 assets shift down in value to any large extent, many of these IB's are insolvent. This article is frightening to say the least. According to Mr. Das, the numbers are only getting worse as the credit crunch deepens.
The boom days of the pigmen are over. Post regulation they will be taking $100 checks and opening new deposit accounts for elderly hoping to grow their earnings a little each year. Its going to take a long time for the pigmen to get their mojo back.
The financials may never be the same.
Monday, June 30, 2008
Bye Bye Lehman?/ Is 2010 The Time to Buy a House?
Rumors are swirling around the street that Lehman is going to get acquired. I have heard the price may be in the $15 area but I have been unable to confirm it. Lehman dropped another 10% in today's trading. Something is up boys and girls.
Bloomberg even reported the news today.
"Lehman Drops to Eight-Year Low on Sale Speculation (Update1)
By Jeff Kearns
June 30 (Bloomberg) -- Lehman Brothers Holdings Inc. fell as much as 11 percent to an eight-year low on speculation the fourth-biggest U.S. securities firm may be sold for less than its market value, traders said.
Lehman lost $2, or 9 percent, to $20.25 as of 3:06 p.m. in New York after earlier declining to $19.81, the lowest since May 2000. Options traders increased bets that Lehman will continue its retreat. The most-active contracts were July $20 puts, which gained 66 percent to $2.13.
``We're hearing that there may be a possibility of Lehman being taken over,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $6 billion in San Antonio. ``There hasn't been any positive news on this firm for the last couple weeks and the value of the deal might not be in the best interest of Lehman shareholders.''
My Take:
The market continues to beat down the financials. Since we are very oversold at these levels, I predict we are about to see some type of "event" in this arena. Something is going down folks. Will that surprise be Lehman? Will WAMU or Indy Mac go under or be acquired? Will MBIA go belly up?
I am not sure what it is, but the daily pounding in the financials means the market is trying to tell us that something big is about to happen.
Avoid all financials. Do not try to bottom feed here. Knife catching has never been very profitable.
Housing a buy in 2010?
Bloomberg even reported the news today.
"Lehman Drops to Eight-Year Low on Sale Speculation (Update1)
By Jeff Kearns
June 30 (Bloomberg) -- Lehman Brothers Holdings Inc. fell as much as 11 percent to an eight-year low on speculation the fourth-biggest U.S. securities firm may be sold for less than its market value, traders said.
Lehman lost $2, or 9 percent, to $20.25 as of 3:06 p.m. in New York after earlier declining to $19.81, the lowest since May 2000. Options traders increased bets that Lehman will continue its retreat. The most-active contracts were July $20 puts, which gained 66 percent to $2.13.
``We're hearing that there may be a possibility of Lehman being taken over,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $6 billion in San Antonio. ``There hasn't been any positive news on this firm for the last couple weeks and the value of the deal might not be in the best interest of Lehman shareholders.''
My Take:
The market continues to beat down the financials. Since we are very oversold at these levels, I predict we are about to see some type of "event" in this arena. Something is going down folks. Will that surprise be Lehman? Will WAMU or Indy Mac go under or be acquired? Will MBIA go belly up?
I am not sure what it is, but the daily pounding in the financials means the market is trying to tell us that something big is about to happen.
Avoid all financials. Do not try to bottom feed here. Knife catching has never been very profitable.
Housing a buy in 2010?
Nadeem from the Market Oracle thinks so:
Nadeem's prediction:
"By the end of 2008, the annual rate of house price falls should slow to about 13%. Whilst it is not possible to forecast a bottom in the US housing market at this stage of the bear market, it is possible to come to the conclusion that most of the decline in nominal house prices is now behind us on the basis of analysis of the continuing decline in real-term house prices which suggests that a stabilising US housing market during late 2009 and 2010 will mask the continuing real terms inflation adjusted fall in the housing market valuations for several more years that will in effect have the impact of eroding all of the gains since the 1989 peak and reducing the gain from the 1994 low from 131% to just 40% by the end of 2010 as the below graph illustrates.
US House Prices Forecast Summary - Nominal US House Prices are forecast to fall by 30% from the Mid 2006 peak by the end of 2010, or a further 11% on the decline of 19% to date. US house prices will continue falling in real-terms even if a low in nominal house prices is made by mid 2010."
Quick Take:
I think 30% peak to trough price drops is a little on the light side in the bubble areas. I thought this chart did a great job of showing how severe the housing bubble was in historical terms.(the black line is the housing prices).
Whats depressing here is Nadeem thinks when you include inflation, housing will lose all of its gains from the 1989 peak. That's a 0% return on a 19 year investment.
If you bought at the lows in 1994 after the last bubble busted, your equity would have dropped from a 130% gain in 2006 down to only a 40% gain by 2010 as prices continue to fall and you adjust for inflation.
So lets take a long term look at the real return on housing as an investment including inflation if you bought at the bottom in 1994. a 40% gain over 16 years comes out to about a 2.5% return on your investment which is the historical average in housing.
Getting rich in real estate is nothing but a pipe dream.
So the next time that realtor a tells you "Now is the time to buy! Prices are down!" put a sock in her mouth and tell her to call you in 2010/2011.
You may ask why does the effect of inflation have such a negative effect on your housing investment? Just think, if you own a house that on average is rising in value at 2.5% annually and inflation is running at 5-10% annually, you are essentially losing money on your house each year.
Now is not the time to get into the flipping business!!
Sit back in your rental and relax. It will be a few years until housing will be attractive to own. Please don't ever think of your house as a good investment in the future. Its a place to live. Always remember that unless you like investments that return 2.5% annually.
You can invest in a CD and beat that return.
Sunday, June 29, 2008
New York Times: 5 million Loans expected to be in trouble by year end
Here is some more proof that the debt bubble is imploding. Look at the huge spike in delinquencies below that was published in the New York Times today:
Here is the link to the article. Some highlights:
"As Bill Evolves, Mortgage Debt Is Snowballing
When Congress started fashioning a sweeping rescue package for struggling homeowners earlier this year, 2.6 million loans were in trouble. But the problem has grown considerably in just six months and is continuing to worsen.
More than three million borrowers are in distress, and analysts are forecasting a couple of million more will fall behind on their payments in the coming year as home prices fall further and the economy weakens.
Those stark numbers not only illustrate the challenges for the lawmakers trying to provide some relief to their constituents but also hint at what the next administration will be facing after the election. While the proposed program would help some homeowners, analysts say it would touch only a small fraction of those in trouble — the Congressional Budget Office estimates it would be used by 400,000 borrowers — and would do little to bolster the housing market."
My Take:
Only Congress can find a way to piss away $300 billion dollars. These bailouts will not work because the losses are too large. Its like throwing a pail of water on a 6 alarm fire.
Watching my tax dollars get pissed away on such a stupid bill really annoys me. The sad thing is we will spend billions and possibly trillions trying to "save" the housing market. The reality is the only thing that will save the housing market is to leave it alone and let prices fall back to affordable levels.
What sense does it make to prop home prices up at levels at which no one can afford to buy them? This accomplishes nothing other than delaying the inevitable which is free falling prices due to massive defaults, lack of buyers, massive foreclosures, and tougher lending standards.
I wish this disaster didn't occur during an election year because I think Congress may have taken a different stance and kept their noses out of this bursting debt/housing bubble to a larger extent.
Congress needs to realize that the housing market cannot be saved and it must correct.
Here is the link to the article. Some highlights:
"As Bill Evolves, Mortgage Debt Is Snowballing
When Congress started fashioning a sweeping rescue package for struggling homeowners earlier this year, 2.6 million loans were in trouble. But the problem has grown considerably in just six months and is continuing to worsen.
More than three million borrowers are in distress, and analysts are forecasting a couple of million more will fall behind on their payments in the coming year as home prices fall further and the economy weakens.
Those stark numbers not only illustrate the challenges for the lawmakers trying to provide some relief to their constituents but also hint at what the next administration will be facing after the election. While the proposed program would help some homeowners, analysts say it would touch only a small fraction of those in trouble — the Congressional Budget Office estimates it would be used by 400,000 borrowers — and would do little to bolster the housing market."
My Take:
Only Congress can find a way to piss away $300 billion dollars. These bailouts will not work because the losses are too large. Its like throwing a pail of water on a 6 alarm fire.
Watching my tax dollars get pissed away on such a stupid bill really annoys me. The sad thing is we will spend billions and possibly trillions trying to "save" the housing market. The reality is the only thing that will save the housing market is to leave it alone and let prices fall back to affordable levels.
What sense does it make to prop home prices up at levels at which no one can afford to buy them? This accomplishes nothing other than delaying the inevitable which is free falling prices due to massive defaults, lack of buyers, massive foreclosures, and tougher lending standards.
I wish this disaster didn't occur during an election year because I think Congress may have taken a different stance and kept their noses out of this bursting debt/housing bubble to a larger extent.
Congress needs to realize that the housing market cannot be saved and it must correct.
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