Saturday, October 18, 2008

Thinking of buying a Foreclosure? WAIT!

Good afternoon Everyone!

I hope everybody is having a great weekend! I can imagine many potential homebuyers are probably thinking about sticking your toe in the water and seeing whats out there now that our country is littered with foreclosures.

Before you decide to do this take a look at the the number of Countrywide foreclosures that are available:

My Take:

As you can see, we had a dropoff in April/May as the "early idiots" decided to jump in and gobble up foreclosures as soon as they became available.

I warned everyone back in March that this was a horrible idea. Most of these buyers bought these foreclosures at 15-30% discounts. The same homes in the bubble areas are probably down another 20-30% since then as the foreclosures continue to pile up.

I mean look at the huge jump on that chart in the last month as lending standards have tightened. The financial crisis has forced the banks to hoard cash and play defense. Bill Gates would probably have a tough time qualifying to buy right now.

Housing cycles are much different from any other normal business cycle. They take years to play out. It took 7 years for home prices to get back to even following the 1991 housing bust.

I expect it may take well over a decade for prices to recover from this cycle because the lending was much so much more irresponsible and full of fraud.

Bottom Line

There is no rush to run out and buy a foreclosure right now. The more foreclosures that are out there, the cheaper prices will get because the banks will be more desperate to get rid of them.

You need to at least wait until the number of foreclosures have peaked before trying to negotiate with a bank on buying a foreclosure. I don't expect this peek anytime soon. The number of foreclosures should to continue to soar as we head into a deep recession and unemployment continues to rise.

Bottom line here is please be patient. Home prices won't be going up for years which gives you plenty of time to get a house at a great price. This is one of the biggest financial decisions you will ever make in your life.

Its better to be a little late here than too early. If you don't believe me, ask one of those suckers that bought a foreclosure back in April.

Buyers remorse is a terrible feeling.

Friday, October 17, 2008

Treasury Auctions Soar

Good Evening Everyone!

Sorry I am late today. I have lots going on over the next week so I might not be able to hop on here too much.

I picked this interesting report up on government treasury issuances:

My Take:

I guess after you have just spent over a trillion dollars bailing out Wall St, you need to raise some cash.

As you can see, the Government is raising money via selling treasuries at nearly three times the pace they were a few years ago.

Now the feds will try to spin it by saying that they need to do these auctions because they need to satisfy the strong demand for treasuries as the stock markets continues to collapse. That may be partly true, but I think the real reason is because the Treasury needs cash badly in order to fund the bailouts.

If they were doing it for demand reasons, then why the big sudden spike in Sept/Oct? Stocks have been plummeting for the whole year. If these auctions were done because people were running out of stocks and into treasuries, then why the sudden spike in the the last 6 weeks?

If this rise was based on a rotation into treasuries, this chart should show a slow gradual rise throughout the year instead of a giant spike.

The spike "coincidentally" occurred right as the bailouts were announced. Coincedence huh?..Yeah right. I think this demand argument is a crock and nothing but a smoke screen.

The real reason for the auctions is we need to fund the bailout of the criminals. My question here is why in the hell do foreign central bankers continue to fund our corrupt government by buying treasuries? We can't consume anymore. We are now nothing but a country of debt slaves.

China would be better off keeping that money at home and using it to fund their country as the whole world falls into a deep recession. China should be marketing their toys to the billions of Chinese rather than focusing on a US consumer thats drowning and debt.

Countries are going to start needing cash to to take care of its people as the whole world gets swallowed up by this black hole of debt. When this happens, demand for treasuries is going to fall off a cliff. 10% interest rates are right around the corner when this happens.

Think about it. Why buy the the paper of a government that's going to eventually default on itself. Its obvious we can't control ourselves. I mean look at this sickening news story from the UK today:

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40.4bn), a substantial proportion of which is expected to be paid in bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup will pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted widespread criticism. The government cash has been poured in on the condition that excessive executive pay will be curbed.

Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased today when Germany's Deutsche Bank said many of its leading traders would join chief executive Josef Ackermann in waiving millions of euro in annual payouts.

In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.

At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP MorganChase $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the amount accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of September by 3% to $3.7bn.

Days before it collapsed into bankruptcy protection a month ago Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m. None of the banks the Guardian contacted wished to comment on the record about their pay plans."

Final Take:

Its obvious these crooks have an addiction to money. If this story doesn't anger you I don't know what will. German executives have suffered a "come to Jesus" moment and agreed to walk away from these pay packages.

Our crooked bankers continue to take the money and run. Lehman was paying out bonuses right up until the day the declared BK. How do they have the nerve to take this money after destroying the economy? They have successfully conned every American into borrow themselves into oblivion and now they want to get rewarded for it! This behaviour is sick! Their obsession with money is beyond belief.

What in the hell has happened to this country? Is this what capitalism is? Commit fraud and then pay yourself 10's of billions of dollars as a reward? I feel like I am watching an episode of the Sopranos when I watch these bankers operate.

Bottom Line:

We have a long ways to go before this all gets straightened out. I am sure all of you saw that Warren Buffet announced that he is buying American stocks today! Uhhh..Haven't we seen this move before?

The same thing was attempted in 1929:

"John D Rockefeller announced he was buying common stocks. The exchange declared a holiday to help the sleepless floor clerks rest and then climb through the mountains of unfilled orders. But the market fell and fell again. And in the middle of November the deluge hit rock bottom. In two weeks, thirty billion dollars no longer existed on paper or in life - which was just about the money the United States had spent to fight the First World War. "

Continue to keep an eye on treasuries and the credit markets. Things have loosened up slightly. The problem is they need loosen up dramatically.

If this credit loosening stalls, investors will get spooked. Be very careful trading right now. I haven't taken anymore positions until the picture becomes more clear.

Thursday, October 16, 2008

Mortgage Rates continue to Surge

Good Afternoon

I am actually happy to see an up day in the market! At the rate the market was going, the whole nation would have needed Prozac by the end of the week. Expect large moves up or down with the VIX this high. I expect this volatility to be around for awhile so get used to it!

Things were pretty quiet today on the news front. Interest rates continue to surge:

We are starting to creep up to dangerous levels here folks. If we get above 7%, the housing market is going to implode. Thanks for the bailouts Mr. Paulson! You have somehow found another way to further hurt the taxpayers as you continue to bailout your banking buddies.

In fact, last week was the largest weekly rise in mortgage rates in 21 years!:

"NEW YORK, Oct 16, 2008 /PRNewswire-FirstCall via COMTEX/ -- Mortgage rates soared this week, with the average 30-year fixed mortgage rate jumping more than one-half percentage point to 6.74 percent. According to's weekly national survey, the average 30-year fixed mortgage has an average of 0.42 discount and origination points.

The average 15-year fixed rate mortgage climbed to 6.40 percent, while the average jumbo 30-year fixed rate rose to 7.87 percent. Adjustable mortgage rates were sharply higher also, with the average 1-year ARM now 6.32 percent and the average 5/1 ARM skyrocketing to 6.61 percent.

Mortgage rates posted the biggest one week increase since April 1987, soaring as credit fears reached a fever pitch. In addition, yields on benchmark 10-year Treasury notes climbed as investors worried about the additional supply of government debt resulting from billions of dollars in various rescue packages. Mortgage rates move in relation to Treasury yields, but at a spread -- or markup -- over the risk-free government debt. The intensifying credit crunch and the government guarantees on bank debt drove up the spread between mortgage bonds and benchmark Treasuries. But since Treasury yields climbed from 3.5 percent to over 4 percent over the previous week, mortgage borrowers had two factors working against them.

This sharp increase in mortgage rates over the past week has a direct impact on a homebuyer's affordability. At last week's rate of 6.20 percent, a $200,000 loan carried a monthly payment of $1,224.94. This week, with the average rate at 6.74 percent, the monthly payment on a $200,000 loan is $1,295.87."

My take:

Thanks to Paulson and his cronies, it now costs you an additional $70 a month this week to buy a $200,000 house versus last week.

If you got a mortgage on $600k bubble McMansion today, it now costs you an additional $210 a month than it did last Thursday.

Of course, we all know that no one could qualify for a loan on that same McMansion last week. This rise in rates just widens the affordability gap.

This reality is giving homebuilders a heart attack.

"Oct. 16 (Bloomberg) -- Confidence among U.S. homebuilders slid in October to the lowest level since record-keeping began in 1985, a sign the crisis in credit markets may deepen the worst housing recession in a generation.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 14, less than forecast, from 17 in September, the Washington-based association said today. A reading less than 50 means most respondents view conditions as poor."

Final take:

14 on an index that considers anything under 50 to be poor. How pathetic. Maybe the homebuilders need that Prozac right now!

Remember folks, the housing crisis is what got us into this mess. Its also represents the largest portion of debt that is held on our banks balance sheets. If housing continues to deteriorate, the banks balance sheets will as well.

My concern here is as housing prices continue to come down, more and more buyers are going to decide to walk away from their homes. Many are already deeply underwater, and there will be a tipping point where a homeowner realizes his house may never be worth what he paid for it. When this realization hits, many are going to walk away.

Think about it, if a homeowner is eating baked potatoes every night for dinner so he can pay his mortgage, why wouldn't he/she decide to say "**** it" and walk. This is what I would do. Many financial planners are going to advising their clients to do the same thing.

Why be a debt slave and live like a homeless person to pay back a 30 year mortgage on an asset that's going to lose money? Most struggling homeowners have bigger things to worry about. Whats more important: Sending your kids to college or paying back a 30 year bubble loan on a worthless investment?

Don't get me wrong, is it nice to own your own house and raise a family? Of course, but not when it ruins the quality of you and your families life. Many of these debt slaves will never be able to pay for their daughters wedding if they decide to pay off these home loans.

Bottom Line:

If mortgage rates keep rising and homeowners continue to get deeper and deeper underwater, J6P is going to rethink his decision on paying the mortgage. This will result in another leg down in the stock market.

The nice thing about walking away if you are a homebuyer is you are sticking it to the pigs on Wall St who got you into this mess in the first place!

Wednesday, October 15, 2008

Stocks Collapse/10-Year Rises

Good Afternoon Folks!

Take a bow Mr. Paulson. The market just loved your bailout: For 1 Day! Stocks are plunging today as retail sales fell off a cliff, and long term treasury yields continue to rise. The Fed's beige book should be out before I finish this so I will update it if its out before I finish this post.

Ok, lets start with retail sales:

"Oct. 15 (Bloomberg) -- The eroding U.S. economy drove retail sales into their longest slump in at least 16 years, even before this month's market collapse signaled a deepening recession.

Consumer purchases fell 1.2 percent in September, extending the decline to three straight months, the first time that's happened since comparable records began in 1992, Commerce Department figures showed today. In another sign of weakening demand, prices paid to U.S.
producers fell last month on lower fuel costs.

The median forecast of 75 economists surveyed projected purchases would drop 0.7 percent following a previously reported 0.3 percent decline the prior month.

``I don't think things can get much worse,'' said Brian Bethune, chief financial economist at Global Insight Inc. in Lexington, Massachusetts. ``September was a terrible month in terms of the overall situation, in both sales and production. The fourth quarter is guaranteed to be a terrible quarter.''

Quick Take:

Welcome to the 2008 recession ladies and gentleman. These numbers are terrible. It looks like there will be a lot of Scrooges this Christmas as the consumer goes down the toilet. Expect the 4th quarter to be even worse as the consumer folds like a tent. All indications so far in October show that things are continuing to slow.


The shipping industry reported that world trade is slowing as the credit market remains locked. The shipping industry reports traders are seeing letters of credit dry up and are afraid to let ships leave port according to Bloomberg:

"Oct. 15 (Bloomberg) -- Pacific Basin Shipping Ltd., Hong Kong's biggest dry-bulk carrier, and Precious Shipping Pcl. said demand for moving coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads.

``Letters of credit and the credit lines for trade currently are frozen,'' Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company, said in Singapore yesterday. ``Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay.''

The lack of letters of credit, in which banks guarantee payment for merchandise, could become a ``big issue'' for world trade, according to Klaus Nyborg, Deputy Chief Executive Officer at Pacific Basin. Tighter credit has contributed to this year's 80 percent drop in the Baltic Dry Index, a measure of commodity-shipping costs. About 90 percent of world trade moves by sea."

Quick Take:

I thought banks were going to start lending again after getting hundreds of billions in bailouts from the worlds central bankers? Word is the banks are hoarding this money and stuffing it in treasuries and fixing their balance sheets instead of using it for lending.

This is bad news folks. If world trade slows considerably, all hell is going to break loose. The repercussions would be devastating to countries all over the world. Trading is imperitave to keeping the world economies going. 90% of trade moves by sea folks!

10-year Note

I may make this a permanent part of my blog. The 10-year is basically flat today which is bad considering we are down almost 6% in equities today. Money should be flying into these bonds as a flight to safety trade. Not today! Demand continues to be weak here despite the selloff because of the The Treasury's out of control spending via bailouts.

This is bad folks! If the credit markets don't loosen up, ships filled with worldwide goods are going to end up stuck in ports around the world. The Libor rate continues to stay elevated despite the massive stimulus injected by the worlds central bankers. Credit remains harder to find than a guy in LA that hasn't slept with Brittany Spears!

Bottom Line:

It looks like we may retest the lows set last week in the near future. We are halfway there so far in the last two trading sessions. I sold my TWM(no sense in trying to be a pig) that I picked up yesterday.

I am going to buy some Puts on TLT(long term treasuries) as soon as the VIX drops back down. I think treasuries eventually will turn into toilet paper down the road. We have spent way beyond our means as a government, and its going to take trillions more in spending to get us out of this mess. This is very bearish for treasuries. This is a long term trade that will take months to play out.

I plan on staying in cash for awhile at these levels. I still have my bearish long term hedges on. The next question we need to ask ourselves is how much of the recession is priced in here? For now I will be a spectator. Expect the volatility to continue.

BTW, there was nothing earth shattering in the beige book. The Fed basically said the economy sucks. Tell me something I don't know!

If treasuries continue to fight the Fed and take rates higher, the shorts will go back on. More confirmation is needed before taking any additional positions.

Stay tuned!

Tuesday, October 14, 2008

Mortgage Rates Soar as the Bond Market Awakens

Good Afternoon Folks!

Been a busy week. Sorry I couldn't hop on sooner. Well, well, well, lets take a look at mortgage rates from since Paulson began his spending binge:

Quick Take:

Think the bond market likes the bailout? Treasuries were down even further today, so expect mortgage rates to rise further tomorrow. As I have explained before, when the yields rise on treasuries, so do mortgage rates.

These are the "unintended consequences" that Paulson and Bernanke refuse to consider when they decide to spend hundreds of billion of dollars via bailouts. Both of these clowns should be replaced. They are a disgrace. The $250 billion that Paulson gave to the banks today was sickening.

This was basically a $250 billion handout. The US taxpayers got no common or preferred stock in return for bailing them out. England got it right this weekend when they gave their taxpayers both common and preferred stock in addition to forcing the banks to eliminate all of their dividends. As a result, the Brits taxpayers now have a chance to get their money bank in the future when the banks recover. The US taxpayer gets stuck holding the bag as our pigmen laugh all the way to the bank.

Paulson is a crook and a sham and should be removed. The arrogance of the pigmen and the government in the handling of this situation is really beyond belief. I am flabbergasted. When this fails, expect pitchforks and torches in DC.

I wonder what Paulson is going to do now that mortgage rates are starting to soar as the bond market tells him to pound sand?

The housing market is what put us into this mess, and his spending solution has resulted in making housing even MORE unaffordable. Paulsons bailouts are actually making the problem he is trying to solve WORSE. Nice job there Skeletor. The only winners here are Paulsons banking buddies who walk away with another $250 billion of our money.

The rise in mortgage rates will continue to put further pressure on housing prices. This will result in further pressure on the banks, and a deeper recession. Paulson needs to realize that we can't reflate the bubble by throwing money at this problem. There are repercussions when you spend like Paris Hilton in a Saks Fifth Ave.

Here is another unintended consequence:

"Oct. 14 (Bloomberg) -- Yields on Fannie Mae and Freddie Mac corporate debt rose to records relative to Treasuries as the government said it would guarantee borrowing by banks, providing bond buyers with competing U.S.-backed investments.

The difference between yields on Washington-based Fannie's five-year debt and similar-maturity Treasuries rose 15.8 basis points to 118.2 basis points as of 3:35 p.m. in New York, according to data complied by Bloomberg.

As part of U.S. plans announced today to halt a credit freeze, the Federal Deposit Insurance Corp. will fully guarantee newly issued, senior unsecured debt from some banks. The bank notes initially will probably carry yields greater than those on Fannie and Freddie's $1.7 trillion of debt, reducing demand for so-called agency bonds, said Jim Vogel, an analyst at FTN Financial Group.

Investors may also be concerned that an increase in supply of Fannie and Freddie debt may hit the market, following reports that the U.S. has directed the companies to buy $40 billion a month of subprime and Alt-A mortgage securities, Cloud said.

The difference between yields on McLean, Virginia-based Freddie's five-year debt and similar-maturity Treasuries rose 18.1 basis points to 124.2 basis points."

Final Take:

Gee, Why are Fannie spreads continuing to widen after the mother of all bailouts? If we just finished guaranteeing every debt in America, spreads should be coming in shouldn't they?

The answer here is investors aren't buying it. There is only so much money to go around unless you print folks. When its all said and done, The government simply won't have the money to absorb all of the additional consumer and bank losses that will continue to add up as the recession deepens. Don't think the bond market doesn't understand this.

This is why treasury demand is dropping, and spreads are widening or holding firm in many areas of the credit market. If spreads continue to not respond to this massive financial stimulus, equities are going to tumble.

Lets not forget about the rapidly vanishing economy on top of the credit problem. Take a look at Pepsi and Microsoft today:

"Oct. 14 (Bloomberg) -- U.S. stocks fell a day after the market's biggest rally since the 1930s as a worsening outlook for earnings forced investors to look beyond a $2 trillion global push to rescue banks.

PepsiCo Inc. lost 12 percent, the most since 1982, after lowering its profit forecast as customers cut back on snacks and soft drinks. Microsoft Corp. and Intel Corp. slid more than 5 percent as analysts said demand for computers is slowing."

Pepsi was an eye opener! It looks like the consumer can't even to afford to buy a bottle of cola now let alone a house!

Bottom Line:

Stocks retreated after an insane bounce yesterday. I put a little short on TWM this morning and held it through the close. I am still remaining relatively flat as a board from a trading perspective. (CHK) is one long I am keeping my eye on although I haven't pulled the trigger. This is a nice energy play and its behaving nicely this week.

I see nothing bullish about the economy folks. The jump in mortgage rates is very alarming. I simply see now way out of this mess. Its going to take a lot of pain and sacrifice for this country to get through this, and the quicker Paulson accepts this the better. These bailouts do nothing but prolong the agony. I would prefer to rip the band aid off all at once and get it over with versus sitting here and suffering.

The bond market was fairly well behaved today considering the news. However, the long term trend on treasury demand is declining. Bond market moves don't all take place in one day. I focus more on trends here versus one day moves unless they are huge like the one I showed you last week.

This drop in treasuries does not bode well for the housing market folks. Treasuries down=yields up=higher mortgage rates. Remember this equation if you are house shopping.

There are two areas to focus on short term: The credit markets, and corporate earnings. If the credit market continues to be locked up, the market is going to suffer.

Monday, October 13, 2008

Market Surges on Bailout News

Good Afternoon Everyone!

The market continues to amaze me. I expected a big bounce today but this is ridiculous. Stocks were up 10% today after the European bailout was announced. The Treasury is expected to announce a similar plan tomorrow.

I would take today's moonshot with a grain of salt. Tomorrow is what we need to focus on because the bond market opens back up. One thing is for sure, the next few days are not a good time to be short. The bulls should have control short term if the bond market behaves.

Now this is a big if. All of these bailouts are just find and dandy, but the problem is they need to be paid for. Keep a close eye on treasury yields tomorrow, especially the 10-year. The bond market controls long term rates, and if they don't like government spending on the bailouts, yields will rise. Lets see where these are tomorrow.

Euribor Hardly Budges

Overnight lending rates between the banks must come down in response to this massive stimulus by the world's central bankers. If these do not come down tomorrow we are in deep trouble folks! So far the Euribor lending rates have barely come in at all:

Current Euribor ratesperiod 10-13-2008 10-10-2008 10-09-2008
1 month 5.024% 5.118% 5.126%
3 months 5.318% 5.381% 5.393%
6 months 5.367% 5.431% 5.448%
12 months 5.425% 5.489% 5.512%

The reason we dropped like a rock last week was because the commercial credit markets were frozen as Euribor rates soared. As you can see above, so far the bailout hasn't done squat to lower lending rates. I am very concerned that these rates have barely come in at all after the largest global bailout in history! If the central bankers can't stimulate lending after flooding the global system with cash, then what will?

Bottom Line:

The market has turned into a speculative casino. I did not like the price action today. These extreme moves are not the signs of a market recovery. Its a sign of complete chaos.

The worlds central bankers just took their best shot at ending the financial crisis. There are no weapons left in their arsenal. If the lending rates continue to stay high and the banks continue to hoard cash, we are going to fold like a tent. The second threat here is the bond market. If they decide to have a temper tantrum, demand for treasuries will drop which sends yields higher.

It will be critical to see how these two threats digest all of the stimulus that was just thrown into the system. It will take some time for this all to play out. The bond market will want to see exactly how much capital is thrown into the banks. They will also be looking at how the TARP(housing bailout) is being used and to what extent.

The Euribor so far doesn't seem impressed with the bailouts. Consider this to be a red flag. The commercial markets must get unclogged, and the banks must start lending to one another. If this rate continues to stay high, we will be back in the dumps very quickly.

As for the equities, today's monster rally looked overdone. This muddied the waters short term. If the move up was more orderly today, I would have said that the short term looked rather bullish for equities.

However, the violence of the move combined with all of the data that must be absorbed by the market makes tomorrow a good day to watch rather than participate. Lets see what the bond boys and Euribor have to say tomorrow. This should give us a better idea as to where we are headed.

Stay tuned!

Sunday, October 12, 2008

The Real Housing Bailout

Just a quick note today.

The taxpayers were all robbed once again over the weekend as the Feds ordered Fannie and Freddie to start buying $40 billion a month of bad loans:

"Oct. 11 (Bloomberg) -- Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program."

My Take:

Here it is folks, the backdoor bailout! What a waste of money this is. This one could could cost us almost $500 billion annually as the government continues to try and sweep this nightmare underneath a rug.

My question here is what price is Fannie going to pay for these worthless assets? You can guarantee that Fannie will overpay for these subprime sandwiches on purpose in an attempt to re-capitalize the banks.

Fannie and Freddie going forward will be nothing but garbage dumps for toxic assets.

All of this spending by the government will result in dire consequences down the road. The risk of the USA defaulting on its own debt just rose considerably.

I guess if we go down, we plan on doing it in flames!