As I continue to study for the CFA Level I exam, I am seeing the concepts come alive in this global recession. Granted, it hasn't been 'declared' a recession, but those that know the signals realise it's a full blown recession, possibly a global one.
I'd like to flesh a few things out about Deferred Tax Liabilities.
I'm learning that fnancial analyzers should add continuous DTL's to equity. This assumes continued acquisition of assets, accumulating more DTL's, coupled with constant growth, assuming general inflation.
However, what does this mean?
Deferred Tax Liabilities are essentially taxes owed coming from the difference in taxable income reported to the IRS (tax return use) and pretax income reporting on Financial Statements (investor use).
Why is there a difference? There is a difference because firms may prefer to depreciate their equipment in an accelerated manner when reporting to the IRS. Why? This lowers taxable income, which lowers the tax! Conversely, firms may prefer to depreciate their equipment in a straight-line fashion, which comforts investors and 'smooths' earnings.
When this happens, a Deferred Tax Liability results.
Up until now, we've seen general inflation, market growth, and continued acquisition of products & equipment by corporations. As a result, these DTL's have been disregarded by financial analysts, and have been actually added to stockholder's equity! (eg treat this as the 'bottom line'). So, we practically went from a liability to your asset....interesting accounting move, eh?
Now, it makes sense, assuming efficient markets, and assuming the market is constantly going up.
What happens in a deflationary recession?
...We're about to find out.
What happens to the company's DTL's & balance sheet when Governments increase corporate tax rates in order to pay for deficit spending?
...We're about to find out.
What happens when companies cease their acquisition phase and actually reduce capacity and downsize?
....We're about to find out.
This is where the general principle of continuous DTL's falls apart, I believe. The problem is, no one has talked about it. Companies with large DTL's may find their share prices plumetting after these consequences take affect. This might be next year, or more likely, the year afterwards (taking into account potential increased corporate tax).
What's a financial guy to do? Well, if I was part of a company, I might recommend realising some of the DTL right now somehow. Granted, there may be other ways to offset the potentially increasing DTL, and I simply just don't know them right now. But, it would seem to be a potential issue, one that might merit discussion among financial officers. Balance sheets might appear to have too many liabilities, which could have an adverse affect on solvency ratios...not good at a time when credit is expensive for those with AAA ratings.
That's about all I know right now, future studies might result in me switching my views because of alternative accounting methods that allow further ways to offset increasing DTL's...but that remains to be seen.
Monday, October 6, 2008
Friday, August 8, 2008
Red Flags for a Financial Analyst
As I study for my Level I CFA Exam, I'm reading Financial Statement Analysis by Fridson and Alvarez. Everything I've written below is learned from them, but in my own words...this helps me to understand the information better. Thanks for your patience!
If you're a financial analyst, ploughing through voluminous balance sheets, income & cashflow statements, then you're likely looking for a few handholds. You need to know the key signs of what will be either a positive or oftentimes (in this market) negative analysis report.
One of the red flags that oftentimes preceeds failure to meet future earnings are unrealistic sales increases in the current and/or prior quarters. Oftentimes, managers will incent higher-then-expected sales increases in order to meet a bonus (especially if the bonus is based off Earnings-per-Share rather than shareholder equity). Look for these at the end of the quarterly reporting period. This practice, however, must be 'paid for' in the future, which will likely depress sales, thus further depressing earnings.
Another telltale sign of a company that is on a downward slippery slope is a senior executive resigning. Consider Wachovia Bank's removal of CEO Thompson back in June. This was after several writedowns, due to their deteriorating Option-Arm portfolio (which continues to erode shareholder equity). Additionally, senior execs may resign due to the pressure from the Board to meet quarterly numbers...they may know that this "GAAP-allowable" bending of the numbers may be the straw that breaks the camel's back...so they resign.
Further, and a bit more obvious, is an earnings restatement. Companies oftentimes, as a result of an audit, investigation by the SEC, or new accounting rules will restate their previous earnings even though they deemed those earnings allowable under GAAP standards. What starts to be one inquisitive question by a financial analyst may end up in an entire slew of earnings restatements, thus further eroding shareholder equity.
This one should be obvious, but oftentimes, to investors, it is the reverse. Managers of companies that have been pinpointed by analysts as reporting erroneous figures will often lash back vehemently with a defensive, almost formulaic, statement. They will say their accounting conforms to GAAP, they are meeting their goals, and other various and sundry chants. Consider Freddie Mac's recent statement that they are "well capitalised" even while Treasury Secretary Hank Paulson was working to get Congressional approval to use taxpayers funds to keep Freddie's stock price up by buying as much stock as necessary...and 'unlimited' use of funds! But, some people really are that gullible! Maybe it comes from our motivational speaker culture, us looking in the mirror and telling ourselves we really are that good...
Additionally, when a company delays their earnings reports, that would probably be a good time to short them. Or, at least buy a put or two.
Also, management can play the red herring logical fallacy. They can point to an independent auditor's stamp of approval on their earnings reports. While that can be a check and balance, a savvy investor should not let that satiate them entirely.
Lastly, an increase in working capital can be a bane to a company, but not recognized as such by investors. For instance, if I'm a clothing manufacturer, and I produce a new line of clothing that simply falls flat on its face, chances are that I don't want to write if off and incur a huge loss that quarter, highly increasing the chance I'll miss my quarterly numbers. So, I keep it in inventory, thus delaying the final writeoff...which has to come sooner or later. It costs to keep the product in inventory, this cost is part of my working capital. Alternatively, I could extend credit to non-creditworthy borrowers and delay the amount of time required to collect, extend their payment periods, thus delaying eventual collection. (Freddie Mac just extended their foreclosure procedure from 4 months to 10 months...) As a result, I'm carrying these costs longer, which drains shareholder equity because of the increased working capital.
Those are just a few red flags that should be detected by a knowledge-hungry analyst...not just one who likes to plug in numbers, but one who likes to ask "WHY?".
If you're a financial analyst, ploughing through voluminous balance sheets, income & cashflow statements, then you're likely looking for a few handholds. You need to know the key signs of what will be either a positive or oftentimes (in this market) negative analysis report.
One of the red flags that oftentimes preceeds failure to meet future earnings are unrealistic sales increases in the current and/or prior quarters. Oftentimes, managers will incent higher-then-expected sales increases in order to meet a bonus (especially if the bonus is based off Earnings-per-Share rather than shareholder equity). Look for these at the end of the quarterly reporting period. This practice, however, must be 'paid for' in the future, which will likely depress sales, thus further depressing earnings.
Another telltale sign of a company that is on a downward slippery slope is a senior executive resigning. Consider Wachovia Bank's removal of CEO Thompson back in June. This was after several writedowns, due to their deteriorating Option-Arm portfolio (which continues to erode shareholder equity). Additionally, senior execs may resign due to the pressure from the Board to meet quarterly numbers...they may know that this "GAAP-allowable" bending of the numbers may be the straw that breaks the camel's back...so they resign.
Further, and a bit more obvious, is an earnings restatement. Companies oftentimes, as a result of an audit, investigation by the SEC, or new accounting rules will restate their previous earnings even though they deemed those earnings allowable under GAAP standards. What starts to be one inquisitive question by a financial analyst may end up in an entire slew of earnings restatements, thus further eroding shareholder equity.
This one should be obvious, but oftentimes, to investors, it is the reverse. Managers of companies that have been pinpointed by analysts as reporting erroneous figures will often lash back vehemently with a defensive, almost formulaic, statement. They will say their accounting conforms to GAAP, they are meeting their goals, and other various and sundry chants. Consider Freddie Mac's recent statement that they are "well capitalised" even while Treasury Secretary Hank Paulson was working to get Congressional approval to use taxpayers funds to keep Freddie's stock price up by buying as much stock as necessary...and 'unlimited' use of funds! But, some people really are that gullible! Maybe it comes from our motivational speaker culture, us looking in the mirror and telling ourselves we really are that good...
Additionally, when a company delays their earnings reports, that would probably be a good time to short them. Or, at least buy a put or two.
Also, management can play the red herring logical fallacy. They can point to an independent auditor's stamp of approval on their earnings reports. While that can be a check and balance, a savvy investor should not let that satiate them entirely.
Lastly, an increase in working capital can be a bane to a company, but not recognized as such by investors. For instance, if I'm a clothing manufacturer, and I produce a new line of clothing that simply falls flat on its face, chances are that I don't want to write if off and incur a huge loss that quarter, highly increasing the chance I'll miss my quarterly numbers. So, I keep it in inventory, thus delaying the final writeoff...which has to come sooner or later. It costs to keep the product in inventory, this cost is part of my working capital. Alternatively, I could extend credit to non-creditworthy borrowers and delay the amount of time required to collect, extend their payment periods, thus delaying eventual collection. (Freddie Mac just extended their foreclosure procedure from 4 months to 10 months...) As a result, I'm carrying these costs longer, which drains shareholder equity because of the increased working capital.
Those are just a few red flags that should be detected by a knowledge-hungry analyst...not just one who likes to plug in numbers, but one who likes to ask "WHY?".
Thursday, August 7, 2008
The affects of a credit market on an investor
In this short essay, I present the thesis that our current credit market increases the desire for short term capital gains over gains from income derived of the assets purchased.
What do I mean by this?
I mean that the availability of credit increases the desire for leverage, which further increases the desire to "do deals" and acquire gains from thoses deals. This incentive to 'do deals', I believe, trumps or greatly truncates the desire to purchase an investment and receive gains from the productivity of that asset (i.e. purchasing retail stores and receiving quarterly sales profits).
A credit market increases the highs and the lows of the natural business/economic cycle. In a credit market, there are more eligible buyers. Hence, that means there is more demand. If the supply is constant, and the demand increases, the price increases. This means that the seller receives more gain on the asset they're selling.
Without a credit market, the buyers have to pay cash, or find another manner of exchange. (Note--there is never a total absence of credit...the seller, in this case, could always issue seller financing) If this is the case, without credit, then buyers are fewer and prices are lower...and subject to fewer fluctuations.
Given the above, in a credit market, with more eligible buyers; the more increasing the supply of credit is, the more increasing the buyers (and price) are. That being said, that gives the buyers more of an incentive to "flip" the assets by purchasing it, reconfiguring the furniture, and then selling it again on the open market.
If the buyer purchases the asset in an expanding credit market, there is a solid chance that he doesn't have to do anything to the asset but simply hold on to it while the credit expands. As long as credit expands, buyers expand, and the price rises; this increases his short term capital gains. (This assumes many aspects about the business remain constant, routine maintenance on the asset is done, etc.)
This, therefore, I believe, incents 'doing deals'. There is not the incentive to buy an asset and hold on to it, while receiving income from the productivity of that asset.
As a result, dealmakers arise by the number. Middlemen emerge. Note the abundance of people hopping into the realtor, mortgage broker, title & escrow market during the housing boom in recent years. Now note the absence of such people as delinquincies rise, fears mount, and people look elsewhere for work.
If one were to understand these cycles in credit markets, they would be able to benefit from an expanding credit policy as well as a contracting one. In the expanding policy, they would acquire cash, and in the contracting one, they could just as easily buyback their old assets for likely a price less than they bought it for in the first, with part of the cash acquired from selling those assets to the ones they sold it to in the first place...and they would have cash leftover for other acquisitions depending on whether credit is contracting or expanding.
I know it's not that simple, but it is a simple paradigm.
What do I mean by this?
I mean that the availability of credit increases the desire for leverage, which further increases the desire to "do deals" and acquire gains from thoses deals. This incentive to 'do deals', I believe, trumps or greatly truncates the desire to purchase an investment and receive gains from the productivity of that asset (i.e. purchasing retail stores and receiving quarterly sales profits).
A credit market increases the highs and the lows of the natural business/economic cycle. In a credit market, there are more eligible buyers. Hence, that means there is more demand. If the supply is constant, and the demand increases, the price increases. This means that the seller receives more gain on the asset they're selling.
Without a credit market, the buyers have to pay cash, or find another manner of exchange. (Note--there is never a total absence of credit...the seller, in this case, could always issue seller financing) If this is the case, without credit, then buyers are fewer and prices are lower...and subject to fewer fluctuations.
Given the above, in a credit market, with more eligible buyers; the more increasing the supply of credit is, the more increasing the buyers (and price) are. That being said, that gives the buyers more of an incentive to "flip" the assets by purchasing it, reconfiguring the furniture, and then selling it again on the open market.
If the buyer purchases the asset in an expanding credit market, there is a solid chance that he doesn't have to do anything to the asset but simply hold on to it while the credit expands. As long as credit expands, buyers expand, and the price rises; this increases his short term capital gains. (This assumes many aspects about the business remain constant, routine maintenance on the asset is done, etc.)
This, therefore, I believe, incents 'doing deals'. There is not the incentive to buy an asset and hold on to it, while receiving income from the productivity of that asset.
As a result, dealmakers arise by the number. Middlemen emerge. Note the abundance of people hopping into the realtor, mortgage broker, title & escrow market during the housing boom in recent years. Now note the absence of such people as delinquincies rise, fears mount, and people look elsewhere for work.
If one were to understand these cycles in credit markets, they would be able to benefit from an expanding credit policy as well as a contracting one. In the expanding policy, they would acquire cash, and in the contracting one, they could just as easily buyback their old assets for likely a price less than they bought it for in the first, with part of the cash acquired from selling those assets to the ones they sold it to in the first place...and they would have cash leftover for other acquisitions depending on whether credit is contracting or expanding.
I know it's not that simple, but it is a simple paradigm.
Wednesday, August 6, 2008
Delaying the Bottom
"Any propping up of shaky propositions postpones liquidation and aggravates unsound conditions." -Murray Rothbard
- "President Bush on Wednesday signed into law a sweeping housing bill that aims to boost the struggling housing market and bolster mortgage finance giants Fannie Mae and Freddie Mac." -CNN Money
- "[Treasury Secretary] Paulson is pushing Congress to authorize the Treasury to purchase equity stakes in Fannie Mae and Freddie Mac, which account for about half of the $12 trillion mortgage market, and expand government-backed credit lines to them." -Bloomberg
"The ultimate result of shielding man from the effects of folly is to people the world with fools." -Herbert Spencer
- "The Federal Reserve extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still `fragile.' "-Bloomberg
- "The Federal Reserve extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still `fragile.' Emphasizing the dangers to the economy, the Fed said in its statement that a substantial easing of interest rates in recent months, 'combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.' " -New York Times
"[It is] the most michievous doctrine ever broached in the monetary or banking world in this country; viz. that is the proper function of the Bank of England to keep money available at all times to supply the demands of bankers who have rendered their own [illiquid] assets unavailable." former 19th Century governer, Bank of England
- The British monetary authorities plan to inject liquidity into the country's banks as they seek to restore health to financial institutions battered by the credit crisis...the Bank of England will exchange [liquid] government bonds for [illiquid] mortgage-backed securities...The central bank will hold the illiquid mortgage assets as collateral. -International Herald Tribune
- The actions by the Fed and other central banks are expected to help banks and brokerages temporarily swap their [illiquid] mortgage-backed securities for [liquid] Treasury debt and possibly unclog credit markets, say analysts. -AFP
I wonder what history has to say about our current mortgage crisis?
Monday, July 14, 2008
No one really believes the 'well capitalised' statement anymore
Today was a bad day for financials. So, what else is new, you ask?
WAMU came out with a statement, saying it's "well capitalised". Their stock took a 35% beating today....then rose 10% in extended trading hours after 4pm EST.
National City today said that they maintain one of the highest Tier 1 capital ratios among large banks. (Tier 1, by the way, is basically the cash value of all the company's stock put together) These comments were during the middle of the worst trading day for Nat City ever, with shares dipping down below their June 1984 levels, utlimately losing 15% on the day.
Just 2 months ago, Indymac Bancorp (which has since failed) was "well capitalised".
While the Fed didn't say Fannie Mae and Freddie Mac were 'well capitalised' last week (OFHEO did back in March), they did say they "support them at their current levels". Additionally, Freddie said their capital levels were "strong". Then, a couple days later, into the weekend (so traders couldn't immediately react) the Treasury Secretary Henry Paulson gave these two GSE's an unlimited line of credit to pay their obligations and meet reserve requirements, and sought authorisation from Congree to buy Fannie and Freddie stock, keeping it solvent.
So, the question is, who really believes whom anymore? I'm afraid that all these overstatements of "well capitalised" will affect the same event of the boy who cried wolf. Eventually, a bank will actually be well capitalised, but no one investor will believe them because they will grow accustomed to so much truth-spinning, etc.
What else is new, you ask? Well, who knows, WAMU might actually be well capitalised, but they won't benefit from their comments today. No one is going to believe any financial institution for now.
Those saying otherwise are largely naive, towing the company line and don't have the benefit of being able to think for themselves, or are looking for a sure profit backed by the taxpayer's dime.
WAMU came out with a statement, saying it's "well capitalised". Their stock took a 35% beating today....then rose 10% in extended trading hours after 4pm EST.
National City today said that they maintain one of the highest Tier 1 capital ratios among large banks. (Tier 1, by the way, is basically the cash value of all the company's stock put together) These comments were during the middle of the worst trading day for Nat City ever, with shares dipping down below their June 1984 levels, utlimately losing 15% on the day.
Just 2 months ago, Indymac Bancorp (which has since failed) was "well capitalised".
While the Fed didn't say Fannie Mae and Freddie Mac were 'well capitalised' last week (OFHEO did back in March), they did say they "support them at their current levels". Additionally, Freddie said their capital levels were "strong". Then, a couple days later, into the weekend (so traders couldn't immediately react) the Treasury Secretary Henry Paulson gave these two GSE's an unlimited line of credit to pay their obligations and meet reserve requirements, and sought authorisation from Congree to buy Fannie and Freddie stock, keeping it solvent.
So, the question is, who really believes whom anymore? I'm afraid that all these overstatements of "well capitalised" will affect the same event of the boy who cried wolf. Eventually, a bank will actually be well capitalised, but no one investor will believe them because they will grow accustomed to so much truth-spinning, etc.
What else is new, you ask? Well, who knows, WAMU might actually be well capitalised, but they won't benefit from their comments today. No one is going to believe any financial institution for now.
Those saying otherwise are largely naive, towing the company line and don't have the benefit of being able to think for themselves, or are looking for a sure profit backed by the taxpayer's dime.
Saturday, July 12, 2008
Indymac Bancorp fails. What next?
As many of you already know, and some have followed intensely throughout the week, Indymac Bancorp, headquartered out of Pasadena, CA fail yesterday evening and was received into the arms of the FDIC. There were approximately 1 billion in uninsured deposits, held by 10,000 customers. They will get approximately half back over the weekend, through an advance dividend. The FDIC is working hard to make sure insured deposits are mediated in a timely manner so customers have access to funds immediately.
First, Bear Sterns fails. That didn't affect the day to day activities of, say pulling money out of your ATM card. Now, Indymac fails due to the asinine loans they piled on top. Interestingly enough, Indymac was starting by the same man who founded Countrywide, Angelo Mozilo...the apple doesn't fall to far from the tree now, does it?
But seriously, what next?
I'm sure you've seen the rumours that Fannie Mae and Freddie Mac are insolvent (according to a Fed president's comments a few days ago). Of course, current regulators were quick to counteract these comments, but didn't Democrat Schumer out of New York say that he was 'concerned' about Indymac potentially failing due to their extremely poor lending standards? And, he was dead on target. But, after these comments, fed regulators were quick to tell the democrat to mind his own business, and basically quit trying to warn the public ahead of time.
Ultimately, look for Fanne and Freddie to get a huge accounting standards exemption, so they don't have to fully disclose the entirety of their mortgages on their balance sheet. If this doesn't happen, they will go the way of the Mac.
Additionally, Lehman will likely fail if it doesn't get a generous dosage of Sovereign Wealth Funding...or some more fed stimulization.
After that, it could be Wachovia, if they don't clean up their absurd Option Arm portfolio.
It's going to be bigger than we think, a longer and deeper prolonged pain due to our poor, greedy, and foolish lending practices. The fall will be prolonged and hard. Then, a new set of regulators and lenders will take the reins. Would to God that they actually concern themselves with the validity of their lending standards and the livelihood of their customers.
But we can only wait and watch. What do I know? I don't have any insignia behind my name, like CPA, MBA, JD, BS, etc...
First, Bear Sterns fails. That didn't affect the day to day activities of, say pulling money out of your ATM card. Now, Indymac fails due to the asinine loans they piled on top. Interestingly enough, Indymac was starting by the same man who founded Countrywide, Angelo Mozilo...the apple doesn't fall to far from the tree now, does it?
But seriously, what next?
I'm sure you've seen the rumours that Fannie Mae and Freddie Mac are insolvent (according to a Fed president's comments a few days ago). Of course, current regulators were quick to counteract these comments, but didn't Democrat Schumer out of New York say that he was 'concerned' about Indymac potentially failing due to their extremely poor lending standards? And, he was dead on target. But, after these comments, fed regulators were quick to tell the democrat to mind his own business, and basically quit trying to warn the public ahead of time.
Ultimately, look for Fanne and Freddie to get a huge accounting standards exemption, so they don't have to fully disclose the entirety of their mortgages on their balance sheet. If this doesn't happen, they will go the way of the Mac.
Additionally, Lehman will likely fail if it doesn't get a generous dosage of Sovereign Wealth Funding...or some more fed stimulization.
After that, it could be Wachovia, if they don't clean up their absurd Option Arm portfolio.
It's going to be bigger than we think, a longer and deeper prolonged pain due to our poor, greedy, and foolish lending practices. The fall will be prolonged and hard. Then, a new set of regulators and lenders will take the reins. Would to God that they actually concern themselves with the validity of their lending standards and the livelihood of their customers.
But we can only wait and watch. What do I know? I don't have any insignia behind my name, like CPA, MBA, JD, BS, etc...
Tuesday, July 8, 2008
Do Fannie and Freddie need new capital or not? A strategic look at OFHEO's recent statement...
Recently, shares of Fannie Mae and Freddie Mac took severe hits. Freddie Mac took an 18% hit yesterday, and Fannie Mae a 16% decline, in New York Stock Exchange trading.
Why?
This was due to an analyst at Lehman Brothers who stated that the two mortgage giants may need to raise additinal capital to keep weathering the current credit crisis.
We then got a quick response today from the Office of Federal Housing Enterprise Oversight (OFHEO thereafter). James Lockhart, the director, went on the record as saying, "An accounting principle should not drive a capital decision by a regulator.". Essentially, he is saying that the change of an accounting rule shouldn't drive capital requirement changes at a lending institution. The Lehman analyst was basically saying that Fannie and Freddie would need to put more money in reserve to keep their loans afloat...that is, having another capital raising.
Why?
This was due to an analyst at Lehman Brothers who stated that the two mortgage giants may need to raise additinal capital to keep weathering the current credit crisis.
We then got a quick response today from the Office of Federal Housing Enterprise Oversight (OFHEO thereafter). James Lockhart, the director, went on the record as saying, "An accounting principle should not drive a capital decision by a regulator.". Essentially, he is saying that the change of an accounting rule shouldn't drive capital requirement changes at a lending institution. The Lehman analyst was basically saying that Fannie and Freddie would need to put more money in reserve to keep their loans afloat...that is, having another capital raising.
Here's a chart showing the immediate decline Notice how the shares dropped right after the Lehman analysts comments Monday morning (7/7/08), and then notice how they are struggling to increase after Lockhart's recent statement this morning, Tuesday (7/8/08).
But, isn't something odd here? Why would a government institution make direct comment on a company's stock performance?
Here's why.
Here's why.
Friday, June 27th, Senator Charles Schumer, a Democrat from New York, sent a letter to various federal lending institutions (amongwhich was OFHEO) stating IndyMac Bank "may have serious problems with its current loan holdings, and could face a failure if prescriptive measures are not taken quickly." See here for the full article. Here's the chart.
After the letter, regulators from the Fed came out and slammed the senator, asking him to please--shut up! See here for a good read. Basically, the belief is that Schumer, since he's on the board of the Federal Reserve and knows things not public, let the cat out of the bag in his letter. Interestingly enough, with hindsight being 20/20, Indymac Bank closed down all mortgage operations yesterday and fired more than 50% of it's workforce!
Back to Fannie and Freddie.
So, you see that there is this apparent veil of reality in government regulators ensuring the already-skittish John Q. Investor to keep his capital in these lending institutions. Indymac Bank already accused Schumer of essentially causing a bank run...however this is quickly debunked by looking at their YTD stock performance.
The OFHEO is simply trying to stave off a massive selloff of Fannie and Freddie shares. Will they be successful?
Let's take a look at the 'new accounting rule' that caused such concern with the analyst in the first place.
The 'new accounting rule' is simply a revision of the Financial Accounting Standards Board Rule #140. This revision would include eliminating the QSPE's! Why is this HUGE? For starters, what is a QSPE?
A QSPE is a 'qualified special purpose entity'. Examples of QSPE's are, you guessed it, Fannie Mae and Freddie Mac. Essentially, these companies are able to originate loans and move the assets off their balance sheets, which increases the return on equity and assets. This, in turn, makes investors like their stock due to the ROE and ROA ratios, which pushes the stock price up further and further.
Lehman analyst Bruce Harting also said in his July 7 note that the very size of the impact on Fannie and Freddie probably means they would be exempted from having to comply. "We think it's likely the GSEs will be granted an exemption because a literal interpretation of their minimum capital requirements would suggest that the GSEs would become significantly undercapitalized, and it would be very difficult for them to raise the capital needed," Harting said in his note. (A GSE is a "Government Sponsored Enterprise) Quote taken from this article.
Interesting. Here's the logic. You don't have enough resources to comply, so we won't make you comply...wow. Essentially, Harting is saying that Fannie and Freddie don't have enough reserves...but he's saying it 'without saying it'.
So, I leave you with this.
1. Will regulators continue to try to reassure the public?
2. What should you as an investor do if they do reassure the faith in the system (sell or buy)?
3. Will we see a revision of the current accounting system, but more exemptions for entities
with off balance sheet assets?
What's your action plan?
Thursday, July 3, 2008
10/9/2002 Dow closes at 7286.27
When discerning amidst volumes of information, media, and general punditry we need to remember to use wisdom. Remember the past, let it help you understand the principles of the future.
As we are into our "official bear market" due to the DOW closing down 20% from it's most recent high (in the last 52 weeks), we need to remember where it closed only 6 years ago.
...7286.27...
Isn't it ironic that the DOW closed at that level on Oct. 9th 2002, then reached the most recent all time high last October, 9th 2007? Additionally, Black Monday, the largest percentage drop in the DOW's history was 10/19/87. Lastly, the 2nd and 3rd largest percentage drops in history were 10/28/29 & 10/29/29 respectively. It appears as though October is a volatile month...
The DOW would have to plummet another 36% to reach those levels.
While I'm not saying it's impossible, look at what happened next. We rode the next 6 years on a bull track, topping out in the 14's.
There's still much more of the credit crises to be address. We now are dealing with global inflation. Our currency is needing a good bolstering, but if we do that, we crush a fragile economy. Food & Energy costs are soaring, which is providing an excellent podium for political candidates this Fall. The war question is still out there...dragging on...and on...and on. The commercial real estate markets are signaling an end to the bull as vacancy rates rise, crunching the strip malls. Unemployment rates are stepping up the pace, and the government extends benefits 16 weeks for the unemployed. Acqusition & development on construction permits are virtually nonexistent. In other words, people are cutting back...and well they should.
Our environmental policies will change once enough get hurt by the increasing energy costs. People will get fed up, replacing the current electorate with a different flavor. Bankruptcies, foreclosures, and delinquincies will soar, forcing banks to run dry on reserves, some to implosion, some to receivership under the FDIC, and some to acquisition.
But, in the end, 4 years from now (I believe this will all blow over by 2012), the dust will settle, and the bear will go into hibernation.
Until then, cash is king, shorting stocks are the prince, and options are the aristocracy. The hedge will thicken as the claw trumps the horn...but only for a time.
As we are into our "official bear market" due to the DOW closing down 20% from it's most recent high (in the last 52 weeks), we need to remember where it closed only 6 years ago.
...7286.27...
Isn't it ironic that the DOW closed at that level on Oct. 9th 2002, then reached the most recent all time high last October, 9th 2007? Additionally, Black Monday, the largest percentage drop in the DOW's history was 10/19/87. Lastly, the 2nd and 3rd largest percentage drops in history were 10/28/29 & 10/29/29 respectively. It appears as though October is a volatile month...
The DOW would have to plummet another 36% to reach those levels.
While I'm not saying it's impossible, look at what happened next. We rode the next 6 years on a bull track, topping out in the 14's.
There's still much more of the credit crises to be address. We now are dealing with global inflation. Our currency is needing a good bolstering, but if we do that, we crush a fragile economy. Food & Energy costs are soaring, which is providing an excellent podium for political candidates this Fall. The war question is still out there...dragging on...and on...and on. The commercial real estate markets are signaling an end to the bull as vacancy rates rise, crunching the strip malls. Unemployment rates are stepping up the pace, and the government extends benefits 16 weeks for the unemployed. Acqusition & development on construction permits are virtually nonexistent. In other words, people are cutting back...and well they should.
Our environmental policies will change once enough get hurt by the increasing energy costs. People will get fed up, replacing the current electorate with a different flavor. Bankruptcies, foreclosures, and delinquincies will soar, forcing banks to run dry on reserves, some to implosion, some to receivership under the FDIC, and some to acquisition.
But, in the end, 4 years from now (I believe this will all blow over by 2012), the dust will settle, and the bear will go into hibernation.
Until then, cash is king, shorting stocks are the prince, and options are the aristocracy. The hedge will thicken as the claw trumps the horn...but only for a time.
Tuesday, July 1, 2008
An official bear market?
The Dow is currently trading at 11221.78 (morningish Pacific Time). Should the DOW close down 20% (and it will) or more from its peak in October (Oct 9, 2007: 14,164.53), we will see headlines tonight and tomorrow morning:
"DOW IN OFFICIAL BEAR MARKET"
"Dow Jones Industrial Average confirms Bears over Bulls"
or whatnot...
My question is this. Why does a -20% decrease from a previous high equal a bear market? I don't think you'll see any convinving arguments on why it should rather be -10% or -25% or maybe -16.645%???
Look for the DOW to go down to the mid-10's and even further.
The point here is, folks, not to allow fear tactics to mess with your investor mindset. If they are, take a break before you decide to make any type of trade!
"DOW IN OFFICIAL BEAR MARKET"
"Dow Jones Industrial Average confirms Bears over Bulls"
or whatnot...
My question is this. Why does a -20% decrease from a previous high equal a bear market? I don't think you'll see any convinving arguments on why it should rather be -10% or -25% or maybe -16.645%???
Look for the DOW to go down to the mid-10's and even further.
The point here is, folks, not to allow fear tactics to mess with your investor mindset. If they are, take a break before you decide to make any type of trade!
Monday, June 30, 2008
Inflation & Some Emerging Markets
Have the recent run up in the emerging markets been on easy credit?
Vietnam has experienced a crack-up boom. They are under a grueling 25% inflation currently. The local currency, the dong, has lost 25% against consumer prices. Why? This is largely because of the run-up in food & energy commodity prices. High food prices will harm a people that spend a majority of their income on the basics. Even recently, Ho Chi Minh has banned the importation of gold. The government of Nguyen Tan Dung temporarily withdrew all licenses of gold importers, effectively banning the hedging against inflation with that yellow metal. The stock exchange is down roughly 60% this year.
Here's a brief run down of estimated inflation numbers in Asia. (thanks to Jim Juback at MSN Money)
Fun times?
But, why would this be? Let's think foundationally...what has happened to cause this?
Let's first start with the definition of inflation. Here would be the best source to show you the engagement even over the simple definition of inflation. There are two camps: one says that inflation is an "increase in the money supply" and the other says that inflation is an "increase in consumer prices".
By the way, folks, a consumer price is this: food, real estate, gasoline, natural gas. Basically it's the price of something a consumer uses (i.e. consumes). Make sense?
Back to the inflation definition. I would propose we use the former definition, not the latter. Why? Well, the former is more of a root definition. The latter is merely a product of the former. For instance, if I print more and more money then the price of an item will eventually go up. This is basically the law of supply & demand. If there's an increase in the amount of US Dollars in the market, then the value of that dollar is lessened. For instance, if coffee is selling for $1.00, and there's $1 Million dollars in circulation (yes, this is crazy simplistic) but then there is $2 Million dollars in circulation, then the price of coffee would double due to the devaluation that just happened....basically.
So, inflation is created from an increase in the money supply. Then, consumer prices rise.
Why are the emerging markets racked with inflationary pangs???
What happened in 2002 - 2007? Well, the Fed bottomed out the lending rates, credit became ridiculously easy because borrowers were paying their loans on time, and money gushed forth. The horse and rider were thrown into the sea of money supply. It was amazing! Lenders were accepting 1% payments on debts, and throwing the rest of the bill on top of the overall loan, ensuring certain borrowers would be underwater from the very first payment!! Low-hanging-fruit abounded, and the fruit was tasty. US Debt was bought up by foreign countries, starving for cheap US securities. It was the safest on record, and the cheapest. And did we feed them!
So, that defines the increase in the money supply. Here's a chart I got from the folks at GaveKal. These guys are genius, visit them here. Notice that in 2002 - 2006, the money supply in the US increased at a nice clip. As this cash was bought up by foreign countries, they then experienced incredible gains in their stock markets. (Just look at the ETF: ICHKX and it's gains over those years)
However, now with the money supply decreasing, and lenders fearful of lending, we're now starting to see the rise in consumer prices.
Remember, form 2002 - 2006, we saw the increase in the money supply. Now, we're seeing just the start of the rise in consumer prices...
What will happen as a result? Well, we'll definitely see!
Tuesday, June 17, 2008
Wedding Website
Friends,
Some of you may already know this, but I'm getting married to a woman far above me than I ever could've hoped for!
Visit for details: http://cs01.ewedding.com/v30/?a=augustwedding2008/
Some of you may already know this, but I'm getting married to a woman far above me than I ever could've hoped for!
Visit for details: http://cs01.ewedding.com/v30/?a=augustwedding2008/
Thursday, June 12, 2008
The Fed's next actions
The Fed has lowered rates again and again to induce consumer spending. Obama is saying that consumers need more "cash" in their pockets, and the "affect" of the stimulus checks is not very stimulating at all.
Granted, retail sales were up 1% this month, which is higher than economists expected. But, all that resulted in was an initial bullish push off stocks, with the bearish correction beginning at roughly noontime...during trader's lunchhour.
But is this a real solution? Put cash in consumer's pockets, and encourage them to make that downpayment with their stim-check...but don't worry about the payments! How is this not adding straws to the camel's back? Interestingly enough, most people are saving their stim-checks for a rainy day.
The summertime will show us an increasingly wan US economy...like a frail Victorian lady on a hot, muggy Southern day; the economy won't be able to stand up to much further beatings...and the beatings look like their coming.
We have not even fully dealt with the subprime problem. What about the Option Arm problem on the rise? And, then, what about the effect of potential class-action lawsuits against the banks that funded these loans? House prices haven't even reached their floor of support yet, which (I was told recently) was when the mortgage on a house (assuming 20% down) pays for the rents...in many areas that is a further decling of 10 - 25%.
Given that, will the Fed lower rates again???
Let's think of the rammifications. The Bank of England and the European Central Bank already said they made need to raise rates when they voted recently to keep the rates steady. Read it here. Indonesia may raise rates, read it here. China, India, Singapore are all experiencing inflation at rapid rates. Inflation is global, read it here, here, and here.
So, why does the Fed continue their inflationary policy?
Because consumer spending accounts for more tha 70% of the American Gross Domestic Product. So, why's the Fed lowering rates? To encourage spending!....err....I mean....borrowing! This is because we Americans don't pay cash for things, we charge it!
That mentality needs to change...
And it will; but it's going to be a painful, long, difficult road to hoe. It will mean high Volcker-like interest rates, hard-to-find credit, higher taxes, nasty state and federal budget cuts, Medicare & Social Security overhauls, and a cease to our nation-building policies. Basically, anything to save money.
It will be a good education for the American people. It will humble us, God knows we need it.
Granted, retail sales were up 1% this month, which is higher than economists expected. But, all that resulted in was an initial bullish push off stocks, with the bearish correction beginning at roughly noontime...during trader's lunchhour.
But is this a real solution? Put cash in consumer's pockets, and encourage them to make that downpayment with their stim-check...but don't worry about the payments! How is this not adding straws to the camel's back? Interestingly enough, most people are saving their stim-checks for a rainy day.
The summertime will show us an increasingly wan US economy...like a frail Victorian lady on a hot, muggy Southern day; the economy won't be able to stand up to much further beatings...and the beatings look like their coming.
We have not even fully dealt with the subprime problem. What about the Option Arm problem on the rise? And, then, what about the effect of potential class-action lawsuits against the banks that funded these loans? House prices haven't even reached their floor of support yet, which (I was told recently) was when the mortgage on a house (assuming 20% down) pays for the rents...in many areas that is a further decling of 10 - 25%.
Given that, will the Fed lower rates again???
Let's think of the rammifications. The Bank of England and the European Central Bank already said they made need to raise rates when they voted recently to keep the rates steady. Read it here. Indonesia may raise rates, read it here. China, India, Singapore are all experiencing inflation at rapid rates. Inflation is global, read it here, here, and here.
So, why does the Fed continue their inflationary policy?
Because consumer spending accounts for more tha 70% of the American Gross Domestic Product. So, why's the Fed lowering rates? To encourage spending!....err....I mean....borrowing! This is because we Americans don't pay cash for things, we charge it!
That mentality needs to change...
And it will; but it's going to be a painful, long, difficult road to hoe. It will mean high Volcker-like interest rates, hard-to-find credit, higher taxes, nasty state and federal budget cuts, Medicare & Social Security overhauls, and a cease to our nation-building policies. Basically, anything to save money.
It will be a good education for the American people. It will humble us, God knows we need it.
Monday, June 2, 2008
Short Wachovia Bank
I shorted Wachovia Bank 3 weeks ago, and am up approximately 23% thus far. They furthermore fired their top gun today, and I bought the October 2008 Put Option for Wachovia Bank. I would recommend this, but then I'd have to issue pages and pages of disclaimer saying that I can't be held accountable if you lose all your money...
Cheers!
PS, I was looking around for Irwin Financial Corporation put option chains, but couldn't find any...if you do find one, that might be a viable target.
Cheers!
PS, I was looking around for Irwin Financial Corporation put option chains, but couldn't find any...if you do find one, that might be a viable target.
The Unaccountability of modern Accounting Methods
A large portion of what's going wrong in the financial markets is due to the liberal accounting methods that are legal, but not at all sensical.
For instance, Bloomberg's headline article today, "Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math" shows just one of the ways that modern accounting methods have, essentially, so diluted the truth in balance sheets that investors oftentimes don't even know what they're investing in (e.g. probably why Buffet and Munger like those investments you don't have three zeros after the decimal point). You can read the article here.
Another, for instance, is allowed by GAAP which pertains to those Pick-your-Payment mortgages. This allows for banks to claim, as profit, the negative amortization, which is only paper assets. The mortgage has a 1% payment interest rate, but the balance grows monthly because of the fully indexed rate, which is typically 6 - 8%. The difference between the payment rate (1%) and the fully indexed rate (6 - 8%) is then added on top of the balance monthly...and the lender claims this as profit.
So, how are you to invest your assets then? Whom can you trust? And, even if you can trust your broker, or the mutual fund/ hedge fund manager, do they even know what a tranche is??? Do they even know why mortgage-backed-securities are experiencing the highest defaults ever, and that for a AAA rated security? Why all this mess?
One answer...bad accounting.
I guess honesty is the best policy after all, eh?
For instance, Bloomberg's headline article today, "Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math" shows just one of the ways that modern accounting methods have, essentially, so diluted the truth in balance sheets that investors oftentimes don't even know what they're investing in (e.g. probably why Buffet and Munger like those investments you don't have three zeros after the decimal point). You can read the article here.
Another, for instance, is allowed by GAAP which pertains to those Pick-your-Payment mortgages. This allows for banks to claim, as profit, the negative amortization, which is only paper assets. The mortgage has a 1% payment interest rate, but the balance grows monthly because of the fully indexed rate, which is typically 6 - 8%. The difference between the payment rate (1%) and the fully indexed rate (6 - 8%) is then added on top of the balance monthly...and the lender claims this as profit.
So, how are you to invest your assets then? Whom can you trust? And, even if you can trust your broker, or the mutual fund/ hedge fund manager, do they even know what a tranche is??? Do they even know why mortgage-backed-securities are experiencing the highest defaults ever, and that for a AAA rated security? Why all this mess?
One answer...bad accounting.
I guess honesty is the best policy after all, eh?
Wednesday, May 21, 2008
Recommendation: Buy the Lehman Brothers Jan 40 Put
I expect that Lehman will fall just like Bear Sterns did, with a Fed bailout taking the 'liquidity issue off the table' for them, but still roiling their stock values. Buy and hold the LEH Jan 40 Put. You might lose money, sure, but so far I haven't. With their 1x30 leverage, poor Tier III asset pricing, and exposure to the commercial mortgages & stated-income loans, it looks like a good target!
Of course, I could be wrong!?
Of course, I could be wrong!?
Tuesday, May 20, 2008
Consumer Confidence lowest since the 80's
On May 16th, the numbers came out. Sure enough, consumer confidence is the lowest seen in years, more than 20 years to be exact. ``These are terrible readings,'' Richard Dekaser, chief economist at National City Corp. in Cleveland, said in a Bloomberg Television interview. ``The popular sentiment right now is that the economy is in deep distress and it's looking towards dim prospects going forward.'' Dekaser also called the results "puzzling" as the core inflation registered a mere 0.2 advancement in the month of April according to the Bureau of Labor Statistics here.
This is why the chief economist for National City Corp. called the results "puzzling".
Could it be that the guys at Washington are simply not reporting uncredible numbers? The Bureau of Labor Statistics said "petroleum-based energy fell 1.6 percent" in the month of April. Did you see the cost of gas go down in April, folks? I didn't think so.
Do you really think that we have only experienced the usual 2.3% inflation over the past 12 months? Me neither....but that's what the guv'mint says in its Consumer Price Index report (this reports inflation data month-to-month).
On other (better) news, due to the "low inflation numbers", bonds were snapped up, and as a result home loan mortgage interest rates fell approximately 0.25% on the CPI news.
Could it be that we should be watching what the consumer thinks over what goverment economists tell us what to think? Could it be that the government is simply not telling us the whole story? (They'd never do that!)
We may come to a time, in a short while, where government statistics are loudly contradicted by more objective, third party numbers. And, when that happens, you will wish you owned commodities!
This is why the chief economist for National City Corp. called the results "puzzling".
Could it be that the guys at Washington are simply not reporting uncredible numbers? The Bureau of Labor Statistics said "petroleum-based energy fell 1.6 percent" in the month of April. Did you see the cost of gas go down in April, folks? I didn't think so.
Do you really think that we have only experienced the usual 2.3% inflation over the past 12 months? Me neither....but that's what the guv'mint says in its Consumer Price Index report (this reports inflation data month-to-month).
On other (better) news, due to the "low inflation numbers", bonds were snapped up, and as a result home loan mortgage interest rates fell approximately 0.25% on the CPI news.
Could it be that we should be watching what the consumer thinks over what goverment economists tell us what to think? Could it be that the government is simply not telling us the whole story? (They'd never do that!)
We may come to a time, in a short while, where government statistics are loudly contradicted by more objective, third party numbers. And, when that happens, you will wish you owned commodities!
Monday, May 12, 2008
Where is ROI? (Technical Analysis & Fundamental Analysis: finding ROI in difficult times)
Where is ROI? Where can he be? Has anyone seen him?
I swear I saw him when I was reviewing my investment's last year's performance! But now, all's quiet on the front and ROI is AWOL...hmm.
Have you been feeling a little stressed lately because your Retirement Fund just hasn't passed muster in the last quarter? Do you feel like the price of everything is going up, except for your investments?
Frankly, I'm right there with you and totally understand. I believe that's because there exists a wide misconception among Americans on what is a viable investment. That misconception exists in overanalysis. We love information, we live in an age of free information. And, I believe, that too much information can swing what would be an otherwise credible investment decision into a poorly chosen investment decision.
We believe that the best investments are those that had mutliple technical factors to back them up. For instance, this means that I should be investing in stocks that have bullish Fibonacci indicators; stocks that are not testing any ceilings of resistance but have just bounced off floors of support based upon 25, 50, and even 200 moving day averages; and stocks that conform to a whole set of bullish indicators.
We rely on mounds and mounds of data in order to make an investment decision. Yet, isn't it odd that the S&P 500 Index outperforms over 70% of all mutual fund managers? We rely on computers to calculate all these recent trends, and believe that past performance is an indicator of future performance. (Right! Tell that to people who were bullish on US Financial Stocks in 2008 due t 2006 & 7 performance!)
Is it because we don't really know how to conduct fundamental analysis? We don't really understand how to read a financial statement, and essentially underwrite a company's short-term and long-term debts, assets & liabilities, cashflow, and overall condition?
Is it because we live in an Internet age of immediate gratification, are largely educated off the public dollar at the lowest-cost denominator, and simply either don't know how to analyze fundamentals out of lack of knowledge or just because we're lazy?
Warren Buffet said it best at the Berkshire Hathaway meeting just a couple weeks ago, "We like [investment] ideas you don't have to carry to three decimal places" He goes on to jokingly add, "If someone walked in here and weighed 350 pounds, I might not know he weighed 350 pounds, but I would know he was fat." (thanks to the guys at Agora Financial for this quote)
While I believe that technical analysis defintely does serve a purpose, I also believe that's it's somewhat like removing a mosquito with a rocket-launcher. I vie for a more minimalistic approach, for who's to say which technical tool is the most useful?
Ultimately, I prefer fundamental analysis over technical analysis because it's not so showy, less sexy, has a beergut, and grey hair.
I swear I saw him when I was reviewing my investment's last year's performance! But now, all's quiet on the front and ROI is AWOL...hmm.
Have you been feeling a little stressed lately because your Retirement Fund just hasn't passed muster in the last quarter? Do you feel like the price of everything is going up, except for your investments?
Frankly, I'm right there with you and totally understand. I believe that's because there exists a wide misconception among Americans on what is a viable investment. That misconception exists in overanalysis. We love information, we live in an age of free information. And, I believe, that too much information can swing what would be an otherwise credible investment decision into a poorly chosen investment decision.
We believe that the best investments are those that had mutliple technical factors to back them up. For instance, this means that I should be investing in stocks that have bullish Fibonacci indicators; stocks that are not testing any ceilings of resistance but have just bounced off floors of support based upon 25, 50, and even 200 moving day averages; and stocks that conform to a whole set of bullish indicators.
We rely on mounds and mounds of data in order to make an investment decision. Yet, isn't it odd that the S&P 500 Index outperforms over 70% of all mutual fund managers? We rely on computers to calculate all these recent trends, and believe that past performance is an indicator of future performance. (Right! Tell that to people who were bullish on US Financial Stocks in 2008 due t 2006 & 7 performance!)
Is it because we don't really know how to conduct fundamental analysis? We don't really understand how to read a financial statement, and essentially underwrite a company's short-term and long-term debts, assets & liabilities, cashflow, and overall condition?
Is it because we live in an Internet age of immediate gratification, are largely educated off the public dollar at the lowest-cost denominator, and simply either don't know how to analyze fundamentals out of lack of knowledge or just because we're lazy?
Warren Buffet said it best at the Berkshire Hathaway meeting just a couple weeks ago, "We like [investment] ideas you don't have to carry to three decimal places" He goes on to jokingly add, "If someone walked in here and weighed 350 pounds, I might not know he weighed 350 pounds, but I would know he was fat." (thanks to the guys at Agora Financial for this quote)
While I believe that technical analysis defintely does serve a purpose, I also believe that's it's somewhat like removing a mosquito with a rocket-launcher. I vie for a more minimalistic approach, for who's to say which technical tool is the most useful?
Ultimately, I prefer fundamental analysis over technical analysis because it's not so showy, less sexy, has a beergut, and grey hair.
Saturday, May 10, 2008
Paying at the Pump
Recently, the president of Shell Oil had an interview with CNN where he advocated the US drilling more oil. You can read that interview here.
I don't know how realistic people would have taken someone who were to quip, "$125 barrel oil in 1 year!" back in 2007, but it's here and due to supply and demand, it shows no sign of letting down. The average cost of fuel in the US is 3.62/gallon. I remember when it was 0.79/gallon in 1990's....can it get back to those days? Why not?
The US simply needs to bite the bullet, and drill it's on oil reserves, regardless of where these reserves lie. But, in order to do that, it needs a fundamental shift of idealogy that says you can tap the environment for commodity use. Right now, we dare not tap the Anwar reserves lest it harm the native flora and fauna.
Remember folks, there's two sides to this argument, and both are the extremists. There are those who don't want to use our reserves at all....and we know what that does to a forrest that's not cruised and cleared properly (forrest fires will take care of the forrest if we don't utilize it). The other side are those who wish to clear cut everything and strip the land of all her resources, without thought of the future. Both are wrong, and both mindsets have contributed to where we're at currently.
We need to tap our own oil, not our reserves because that's only a short-term solution. We need a long-term answer to this long-term problem. Granted, it will take about 8 years+ even if we decide today to tap US oil, before we see a reduction at the pump, but at least that's movement in the right direction.
If we keep the same policy we've had for the last 30 years, other nations will surpass America as they use the resources they have in the ground. While this is not a license to use our resources wantonly, it is, however, a desire for wisdom in addressing how we should use the resources God has given us.
I don't know how realistic people would have taken someone who were to quip, "$125 barrel oil in 1 year!" back in 2007, but it's here and due to supply and demand, it shows no sign of letting down. The average cost of fuel in the US is 3.62/gallon. I remember when it was 0.79/gallon in 1990's....can it get back to those days? Why not?
The US simply needs to bite the bullet, and drill it's on oil reserves, regardless of where these reserves lie. But, in order to do that, it needs a fundamental shift of idealogy that says you can tap the environment for commodity use. Right now, we dare not tap the Anwar reserves lest it harm the native flora and fauna.
Remember folks, there's two sides to this argument, and both are the extremists. There are those who don't want to use our reserves at all....and we know what that does to a forrest that's not cruised and cleared properly (forrest fires will take care of the forrest if we don't utilize it). The other side are those who wish to clear cut everything and strip the land of all her resources, without thought of the future. Both are wrong, and both mindsets have contributed to where we're at currently.
We need to tap our own oil, not our reserves because that's only a short-term solution. We need a long-term answer to this long-term problem. Granted, it will take about 8 years+ even if we decide today to tap US oil, before we see a reduction at the pump, but at least that's movement in the right direction.
If we keep the same policy we've had for the last 30 years, other nations will surpass America as they use the resources they have in the ground. While this is not a license to use our resources wantonly, it is, however, a desire for wisdom in addressing how we should use the resources God has given us.
Tuesday, May 6, 2008
Stock Pick "CSX"
I recommend buying CSX Corporation stock due to increasing fuel costs, dollar devaluation, and burgeoning city transit. The fuel costs have manufacturers turning towards rail as the method of choice over trucking for transportation of goods. See here. The devaluation of the dollar means increased exportation, which means increased demand for transportation. And, lastly, cities are looking for ways to cut not only their emissions but also to provide more effective commuter transit. This may offer insight on CSX and commuter transit. And this should help seal the case.
If you have a more bullish appetite, you may want to try purchasing call option contracts on CSX. Just put your stop loss in there sometime, to ensure a profit.
If you have a more bullish appetite, you may want to try purchasing call option contracts on CSX. Just put your stop loss in there sometime, to ensure a profit.
"The Fed" and recent actions
There are very few of us who are not aware that we are in the midst of a full-fledged housing crises, commodity prices are inflating at record paces, and a recession is looming on the horizon. Some of this is arguably caused by the Fed's recent actions, and these actions were taken to avoid a recession and/or repair the housing crises. What have these actions been? Let's look at that.
1. The Federal Reserve has lowered short-term interest rates drastically in the past six months. This has reduced the cost of credit to banks, but they've pocketed the reduced cost as additional profits. See more here.
2. The Fed has reduced reserve requirements for large mortgage buyers Fannie Mae and Freddie Mac. This will increase the money supply by about 200 Billion. See more here.
3. The Fed has accepted illiquid bad debt (mortgage, auto, and credit card) in exchange for liquid Treasury Bills. See more here.
4. The Fed provided the financing for the recent bailout of Bear Stearns to J.P. Morgan. Countrywide is next, I believe, when Bank of America walks away. See more here.
5. The Fed Chairman, Ben Bernanke, has recently acknoledged legislation proposed by House Financial Services Committee Chairman Barney Frank, D-Mass. This legislation will provide 300 Billion in FHA financing for distressed homeowners. See more here.
Given these five items, it's clear to see that the mortgage crises is real and being addressed on all fronts by the Federal Reserve with not only the help of investment banks in the business sector but also Congress in legislative reforms as well as new FHA funding.
These actions, arguably, will not only lead to inflation, but could also give banks the wrong idea that should they mistep in funding poorly structured debt obligations, then they can always get a government bailout, and throw it back on the taxpayer, and pocket the short-term profits. I am pleased, however, to see that Chairman Barney Frank has encouraged these banks (who issued asinine mortgage products in the first place) to write down principal or else....and he means it.
(For those of you who think that executives in these investment banks that issued the debt in the first place are not partially to blame, see here, or try here, or this one is definitely tabletalk, and here's one that'll surely get you going!)
Ultimately, this will be one for the history books. People can blame the Fed all they want, and I myself find quite a few bones to pick. But, it's hard to be proactive in such a situation that Chairman Ben Bernanke has been handed. Sure, there are things that (hindsight will prove) could have been done better. And, there are other things that (again, thanks to hindsight) should be done but won't...but hindsight is always 20/20 and we just don't have that luxury.
History will prove that many of these greedy and selfish bank executives produced these debt obligations only to line their own pockets with a cadre of legal teams backing them.
History will prove that the more complex something is, the less you should invest in it....chances are, the ones who created the debts did so in order to personally profit without thought of the ones buying the debt in the end.
History will prove that the American Executive Board needs to read Proverbs, Ecclesiastes, and the part in Nehemiah where the "banks" were charging usurious interest rates to the locals...and then, reread it all over again.
Lastly, if you feel any anymosity towards the creators of these debt vehicle, remember, whatever you could wish for them pales in comparison with what God has in store.
Cheers, friends.
1. The Federal Reserve has lowered short-term interest rates drastically in the past six months. This has reduced the cost of credit to banks, but they've pocketed the reduced cost as additional profits. See more here.
2. The Fed has reduced reserve requirements for large mortgage buyers Fannie Mae and Freddie Mac. This will increase the money supply by about 200 Billion. See more here.
3. The Fed has accepted illiquid bad debt (mortgage, auto, and credit card) in exchange for liquid Treasury Bills. See more here.
4. The Fed provided the financing for the recent bailout of Bear Stearns to J.P. Morgan. Countrywide is next, I believe, when Bank of America walks away. See more here.
5. The Fed Chairman, Ben Bernanke, has recently acknoledged legislation proposed by House Financial Services Committee Chairman Barney Frank, D-Mass. This legislation will provide 300 Billion in FHA financing for distressed homeowners. See more here.
Given these five items, it's clear to see that the mortgage crises is real and being addressed on all fronts by the Federal Reserve with not only the help of investment banks in the business sector but also Congress in legislative reforms as well as new FHA funding.
These actions, arguably, will not only lead to inflation, but could also give banks the wrong idea that should they mistep in funding poorly structured debt obligations, then they can always get a government bailout, and throw it back on the taxpayer, and pocket the short-term profits. I am pleased, however, to see that Chairman Barney Frank has encouraged these banks (who issued asinine mortgage products in the first place) to write down principal or else....and he means it.
(For those of you who think that executives in these investment banks that issued the debt in the first place are not partially to blame, see here, or try here, or this one is definitely tabletalk, and here's one that'll surely get you going!)
Ultimately, this will be one for the history books. People can blame the Fed all they want, and I myself find quite a few bones to pick. But, it's hard to be proactive in such a situation that Chairman Ben Bernanke has been handed. Sure, there are things that (hindsight will prove) could have been done better. And, there are other things that (again, thanks to hindsight) should be done but won't...but hindsight is always 20/20 and we just don't have that luxury.
History will prove that many of these greedy and selfish bank executives produced these debt obligations only to line their own pockets with a cadre of legal teams backing them.
History will prove that the more complex something is, the less you should invest in it....chances are, the ones who created the debts did so in order to personally profit without thought of the ones buying the debt in the end.
History will prove that the American Executive Board needs to read Proverbs, Ecclesiastes, and the part in Nehemiah where the "banks" were charging usurious interest rates to the locals...and then, reread it all over again.
Lastly, if you feel any anymosity towards the creators of these debt vehicle, remember, whatever you could wish for them pales in comparison with what God has in store.
Cheers, friends.
Saturday, May 3, 2008
The Short Refinance
I want to take a moment to detail, what I believe, is the next "boom" in the industry.
In 2003 - 2004, we had the refinance boom, where everyone was taking advantage of the lowest interest rates seen in 30 years, refinancing into 5/1 ARMs at 3.875% or 30 year fixeds at 5.125%.
Then, in 2005 - 2006, we had the purchase boom, where everyone was selling their home, and buying the new one. House prices screamed 50%, doubling in many cases. Homeowners took out equity in record rates, going to 100% loan to value, and even 125% loan to value, as mortgage lenders like Countrywide and Irwin Home Equity saw no end of the increasing appreciation in sight.
Now, the market has turned. Appreciation becomes depreciation, and the S&P finds itself stating that prices will likely decrease 20% across the board. Some believe prices will go back to their 2004 or 2005 levels, a likely scenario in many places. Homeowners are now faced owing more than their house is worth, and even if they had enough equity to sell in the first place (10% rule of thumb) due to increased supply, homes aren't even selling at their truly appraised value. Many are simply walking away from their homes, figuring that they're saving 50 - 200K in many places (CA, AZ, FL). Others have their subprime mortgage going up to 8% or even 9% in some cases, and find that they can't refinance due to constricting lender guidelines. Credit is simply much, much harder to get than it was even 6 months ago, much more so when they bought their home 2 - 3 years ago.
But, what are homeowners to do?
This is where the short refinance comes in.
There are some out there that know how to negotiate the principal balance of a mortgage down. Banks oftentimes accept this because it costs less than a foreclosure (normally a 40% loss). Typically, these short refinances (akin to short sales) cost the bank 20%, thus saving them 20% in the case of a foreclosure.
What happens is that the homeowner proposes that the bank reduce the amount of the overall liens by 10 - 20%, in some cases 30% where advantageous. Working with a third party negotiator is often best, because it adds a sense of objectivity and professionalism in the transaction. I, myself, act as a negotiator and charge a $500 upfront fee for each property negotiated, regardless of outcome.
Many people do not believe that this is even possible. This is likely because it's such a new concept, and not many people have heard about it. Well, if you'd have told me that your house values would double from 2003 - 2006, I would've thought that was crazy....so I guess it goes both ways. The fact that there is even bailout legislation in the House currently underscores the fact that not only is this possible, but plausible, and is even being done as I write.
Ultimately, it's all about negotiating. If you're the bank, looking to lose 40% due to a possible foreclosure, losing 20% all of a sudden doesn't look to bad.
In 2003 - 2004, we had the refinance boom, where everyone was taking advantage of the lowest interest rates seen in 30 years, refinancing into 5/1 ARMs at 3.875% or 30 year fixeds at 5.125%.
Then, in 2005 - 2006, we had the purchase boom, where everyone was selling their home, and buying the new one. House prices screamed 50%, doubling in many cases. Homeowners took out equity in record rates, going to 100% loan to value, and even 125% loan to value, as mortgage lenders like Countrywide and Irwin Home Equity saw no end of the increasing appreciation in sight.
Now, the market has turned. Appreciation becomes depreciation, and the S&P finds itself stating that prices will likely decrease 20% across the board. Some believe prices will go back to their 2004 or 2005 levels, a likely scenario in many places. Homeowners are now faced owing more than their house is worth, and even if they had enough equity to sell in the first place (10% rule of thumb) due to increased supply, homes aren't even selling at their truly appraised value. Many are simply walking away from their homes, figuring that they're saving 50 - 200K in many places (CA, AZ, FL). Others have their subprime mortgage going up to 8% or even 9% in some cases, and find that they can't refinance due to constricting lender guidelines. Credit is simply much, much harder to get than it was even 6 months ago, much more so when they bought their home 2 - 3 years ago.
But, what are homeowners to do?
This is where the short refinance comes in.
There are some out there that know how to negotiate the principal balance of a mortgage down. Banks oftentimes accept this because it costs less than a foreclosure (normally a 40% loss). Typically, these short refinances (akin to short sales) cost the bank 20%, thus saving them 20% in the case of a foreclosure.
What happens is that the homeowner proposes that the bank reduce the amount of the overall liens by 10 - 20%, in some cases 30% where advantageous. Working with a third party negotiator is often best, because it adds a sense of objectivity and professionalism in the transaction. I, myself, act as a negotiator and charge a $500 upfront fee for each property negotiated, regardless of outcome.
Many people do not believe that this is even possible. This is likely because it's such a new concept, and not many people have heard about it. Well, if you'd have told me that your house values would double from 2003 - 2006, I would've thought that was crazy....so I guess it goes both ways. The fact that there is even bailout legislation in the House currently underscores the fact that not only is this possible, but plausible, and is even being done as I write.
Ultimately, it's all about negotiating. If you're the bank, looking to lose 40% due to a possible foreclosure, losing 20% all of a sudden doesn't look to bad.
Wednesday, April 30, 2008
Fed Cuts Funds Rate another 0.25%...what does this mean?
As some of you know, and many will increasingly come to know, the Federal Reserve Bank has cut the Funds rate another 0.25%, to bring the benchmark interest rate to 2.0%.
For those of you with Lines of Credit, congratulations, your rate just dropped 0.25%.
But, for those of you with inflationary concerns, are we seeing higher inflation as a result? Well, after the Fed funds rate was cut, the bonds rallied hard from previous days sell offs, to close up 44 basis points.
What does this mean? This means that interest rates have gotten better by 0.125% and might improve another 0.125% if the rally continues; but more importantly, this means investor confidence might be back!
Why? Well, 6 out of the last 6 times the Fed cut the funds rate, bonds had sold off sharply, worsening at least 25 basis points each time by the end of that day's trading. Ultimately, home loan rates worsened 0.125-0.25% as a result of the preceding selloffs. So, let me get this straight, the Fed lowers the funds rate and home loan rates go up? Illogical? Maybe not, because investors feared that the Fed was stoking the fires of inflation with each subsequent ratecut, and the allusion to further ratecuts in the Fed Policy Statement (this comes out with the report).
So why the change all of a sudden? How come the bonds worsened each of the last 6 times the Funds rate was cut until today? Well, that's the million dollar question.
Personally, I believe that investor confidence has returned, however feeble it may be for now, and they understand this 0.25% cut as the last ratecut (for now) which means that the Fed can now turn to fight inflation. Also, banks have aggressively been working on improving the quality of their balance sheets (e.g. It's gotten harder to get a home loan). And, bond rating companies have started actually rating mortgage-backed-securities more accurately. All that, I believe, answers why the bonds improved after the Fed ratecut decision today.
Cheers!
For those of you with Lines of Credit, congratulations, your rate just dropped 0.25%.
But, for those of you with inflationary concerns, are we seeing higher inflation as a result? Well, after the Fed funds rate was cut, the bonds rallied hard from previous days sell offs, to close up 44 basis points.
What does this mean? This means that interest rates have gotten better by 0.125% and might improve another 0.125% if the rally continues; but more importantly, this means investor confidence might be back!
Why? Well, 6 out of the last 6 times the Fed cut the funds rate, bonds had sold off sharply, worsening at least 25 basis points each time by the end of that day's trading. Ultimately, home loan rates worsened 0.125-0.25% as a result of the preceding selloffs. So, let me get this straight, the Fed lowers the funds rate and home loan rates go up? Illogical? Maybe not, because investors feared that the Fed was stoking the fires of inflation with each subsequent ratecut, and the allusion to further ratecuts in the Fed Policy Statement (this comes out with the report).
So why the change all of a sudden? How come the bonds worsened each of the last 6 times the Funds rate was cut until today? Well, that's the million dollar question.
Personally, I believe that investor confidence has returned, however feeble it may be for now, and they understand this 0.25% cut as the last ratecut (for now) which means that the Fed can now turn to fight inflation. Also, banks have aggressively been working on improving the quality of their balance sheets (e.g. It's gotten harder to get a home loan). And, bond rating companies have started actually rating mortgage-backed-securities more accurately. All that, I believe, answers why the bonds improved after the Fed ratecut decision today.
Cheers!
Wednesday, March 26, 2008
What is the value of YOUR money?
Ok, so everyone pretty much understands the US currency system, and what backs the value of that currency. Let me recap with a brief history.
The US used to back its currency by gold. Then, the Federal Reserve backed the currency by printed notes, fiat currency. These notes are called Treasury Bills and are sold to other countries. Many countries buy our treasury bills because the United States has never defaulted on its debt...in other words, it's a guaranteed investment.....
.........that is, until now.
Until recently, the Federal Reserve Bank has held its assets in treasury bills. These are very safe investments, returning an expected interest rate, albeit low, but still expected and safe.
Recently, just in the past week, the Fed has decided to trade Treasuries for bad mortgage backed security debt....to the tune of about $200 Billion. That's $200,000,000,000.00... What does this mean? Well, it means that the Fed now holds mortgages comprised of the following:
low credit scores, zero downpayment, underwater mortgages, adjustable rate mortgages, mortgages that are 30 days late or even in foreclosure. Fun times eh!
So, that means that we've gone from holding Treasuries, which could be printed at whim to now holding a lot of bad US Mortgage Debt. How safe is your dollar? I feel for those on fixed income, or those who have their investments in bonds "because its AAA rated by Fitch and Moody's and...well....it's a bond, bonds are safe!!" ........heheh, really, eh? safe? Ok, you go ahead and think that, I'll go long on commodities and developing countries stocks.
Cheers!
The US used to back its currency by gold. Then, the Federal Reserve backed the currency by printed notes, fiat currency. These notes are called Treasury Bills and are sold to other countries. Many countries buy our treasury bills because the United States has never defaulted on its debt...in other words, it's a guaranteed investment.....
.........that is, until now.
Until recently, the Federal Reserve Bank has held its assets in treasury bills. These are very safe investments, returning an expected interest rate, albeit low, but still expected and safe.
Recently, just in the past week, the Fed has decided to trade Treasuries for bad mortgage backed security debt....to the tune of about $200 Billion. That's $200,000,000,000.00... What does this mean? Well, it means that the Fed now holds mortgages comprised of the following:
low credit scores, zero downpayment, underwater mortgages, adjustable rate mortgages, mortgages that are 30 days late or even in foreclosure. Fun times eh!
So, that means that we've gone from holding Treasuries, which could be printed at whim to now holding a lot of bad US Mortgage Debt. How safe is your dollar? I feel for those on fixed income, or those who have their investments in bonds "because its AAA rated by Fitch and Moody's and...well....it's a bond, bonds are safe!!" ........heheh, really, eh? safe? Ok, you go ahead and think that, I'll go long on commodities and developing countries stocks.
Cheers!
Tuesday, February 19, 2008
Welcome to Inflation folks!
An amazing day for inflation, and welcome to the 70's! The bond market sold off for pretty much the 2nd largest time in history; the 1st time was 1/23/2008, my birthday.
Effectively, we're seeing heavy inflation. The government is now not going to even report the key economic indicators because it has gotten so bad. Stick your investments into commodities, I say...
I'm going to paste an article from M. Ramsey King Securities, Inc. He offers great insight into what is going on.
The King Report
M. Ramsey King Securities, Inc.
Tuesday February 19, 2008 – Issue 3816 “Independent View of the News”
The FT: US banks borrow $50bn via new Fed facility US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks…The use of the Fed’s Term Auction Facility…saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February. http://us.ft.com/ftgateway/superpage.ft?news_id=fto021820081549448926
The supra-inflationary aspects of the revelations that the Fed is pouring enormous amounts of capital into the US financial system and England’s nationalization of Northern Rock have equity markets and commodity markets rallying and bonds declining sharply. Numerous investors and traders believe that horrible news is good news for stocks because the Fed and
other central banks will be forced to pump even more credit into the system. This linear thinking has been inculcated in investor and traders’ psyche over the past two decades. However, those were decades without a global inflationary threat, let alone a global food and energy inflation threat.
Few people, or less, know the magnitude of the problems in the financial system. The NY Times’ Gretchen Morgenson gives some insight into the scope of just one aspect of the mess.
Credit default swaps…insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.
The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.
No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity…
But an inkling of trouble emerged in a recent report from the Office of the Comptroller of the Currency, a federal banking regulator. It warned that a significant increase in trading in swaps during the third quarter of last year “put a strain on processing systems” used by banks to handle these trades and make sure they match up. http://www.nytimes.com/2008/02/17/business/17swap.html?_r=1&th&emc=th&oref=slogin
If you’re not concerned, you’re not ‘doing your work.’
Who has the most CDS exposure? Ms. Morgenson: JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively.
What fallout might occur? Ms. Morgenson: …when Delphi…filed for bankruptcy in October 2005, the credit default swaps on the company’s debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt. Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered…
The Times: The cost of the Northern Rock crisis has reached the equivalent of £3,500 for every taxpayer as experts warned that the nationalisation rescue of the bank was bound to fail.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/19/nrock119.xml
The Third World bailout of leading financial instructions continues. Qatar plans to invest $15B in Credit Suisse over the next year.
Good thing inflation remains ‘well anchored’ according to Bernanke. The FT: Prices for top-quality spring wheat have jumped by 90 per cent in the past month and a half, boosted by a scramble by corporate consumers to secure scarce grain and speculative buying by investors. A surge on Friday in prices for wheat used in bread to an all-time high of $19.88 a bushel – the highest yet paid for any wheat contract and a three-fold increase from a year ago – prompted the US baking industry to call for wheat exports to be curtailed. http://www.ft.com/cms/s/0/bab47e26-dd85-11dc-ad7e-0000779fd2ac.html
China’s inflation surged 7.1%y/y in January, the highest reading in 11 years. Snowstorms were a factor.
The WSJ: Three Asian steelmakers agreed with a leading provider of iron ore on a 65% price increase for iron-ore shipments, reflecting a desire to lock in supplies before they get even more expensive and confidence they will be able to pass the price increase on to their own customers.
Japan's Nippon Steel Corp. and JFE Steel Corp. as well as Posco of South Korea have agreed to pay Brazil's Companhia Vale do Rio Doce , or Vale, 65% more for iron ore to be shipped from April 1. Other global steelmakers, including leading Chinese companies, appear close to accepting a similar increase in iron ore prices for fiscal 2008-09. http://online.wsj.com/article/SB120331883691774781.html?mod=hpp_us_whats_news
Three major food companies, Campbell, J.M. Smucker and Hormel Foods, report costs rose faster than sales in the prior quarter ended in October. AC Nielsen found eight U.S. branded-food companies, including Campbell, raised prices by more than 2%, on average, in the 12 weeks ended Jan. 26.
The NY Times’ Floyd Norris echoes our contention that retail sales data is inflate by the soaring cost of food and energy: Over all, Americans are spending about 13 percent more on food and energy now than a year ago. http://www.nytimes.com/2008/02/16/business/16charts.html?_r=1&oref=slogin
We learned from ‘The Big Picture’ web site that:
Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov/) will be discontinued effective March 1, 2008.
Economic Indicators.gov is brought to you by the Economics and Statistics Administration
at the U.S. Department of Commerce. Our mission is to provide timely access to the daily
releases of key economic indicators from the Bureau of Economic Analysis and the U.S.
Census Bureau. http://www.economicindicators.gov/
Barry Ritholtz: First we heard the bullshit about the costs of reporting M3 -- just before that aspect of money supply went sky high. Now this.
This new development implies (by parallel comparison to M3) that the economy is actually far, far worse than previously believed. The reason citizens should never let their government stop reporting ANY information is that they get to liking it. http://bigpicture.typepad.com/comments/2008/02/wtf-feds-shutti.html
The Reuters/University of Michigan index of consumer sentiment fell to 69.6 in February from 78.4 in January. This is the lowest reading since 1992 – the last full blown recession.
This apparent paradox really is really logical. Detroit metro sales of homes jumped 15% y/y in January. Foreclosures jumped 45.5%. http://www.detnews.com/apps/pbcs.dll/article?AID=/20080215/BIZ/802150373
When severe financial problems appear, it invites scrutiny by regulators that were remiss in their duties. And once the financial problems translate into economic duress, the populace becomes irate. And then politicians and regulators are forced to do the job that they had neglected. And then financial crimes and malfeasance are discovered, reported and prosecuted.
The WSJ (weekend): Democrats' Attacks On Business Heat Up As the Democratic presidential contest moves to the distressed industrial Midwest, Hillary Clinton and Barack Obama have ratcheted up their antitrade, anticorporate rhetoric. http://online.wsj.com/article/SB120312350441273057.html?mod=hpp_us_whats_news
The Telegraph: Germany was gripped by a growing tax scandal on Friday as state prosecutors disclosed that they were investigating "several hundred" people for suspected tax evasion…Klaus Zumwinkel, chief executive of Deutsche Post, parent company of DHL, resigned yesterday, a day after police searched his home and office. http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/16/cndeut116.xml
The Times (UK): Alistair Darling has criticised the huge bonuses being awarded to City executives during a period of economic uncertainty. The Chancellor said that boards should apply the “next-door neighbour test” to judge whether payouts would be regarded as excessive by the average man in the street. “People get fed up if they see others getting great big bonuses and they can’t actually see what they did. It can be extremely frustrating. http://business.timesonline.co.uk/tol/business/money/tax/article3378951.ece
The dollar had its biggest weekly loss this year versus the euro – blame Ben’s dovish braying.
Over the holiday weekend monoline rescue negotiations continued – no word yet.
The WSJ: On Friday, FGIC Corp., holding company for the nation's third-largest bond insurer, told the New York State Insurance Department that in effect it wants to split up the business. The idea would be to create a new company to insure safe municipal bonds and for the existing one to keep responsibility for riskier debt securities already insured, such as those tied to the housing market.
The move may help regulators protect investors who have municipal bonds insured by the firm. But it could also force banks who are large holders of the other securities to take significant losses. Some banks that have been talking with FGIC in recent weeks to bolster the firm were taken aback by the announcement and could yet try to block it, say Wall Street executives.
http://online.wsj.com/article/SB120308290353671507.html?mod=hpp_us_whats_news
There are no painless solutions to the monoline and most other financial problems. Someone must suffer. It’s just a question of whom and how much. And you can be sure US taxpayers will be hit somehow. The Times (UK): Citigroup shuts London fund to withdrawals Citigroup has moved to stop investors withdrawing their money from one of its London-based hedge funds after panic selling that saw investors try to pull out more than 30 per cent of the fund's $500 million (£254.3 million) assets.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3373670.ece
The NY Times: For Edward S. Lampert, it appears the bloom is off the rose at Citigroup. The billionaire investor disclosed on Thursday that he has sold off more than 30 percent of his holdings in the struggling financial giant… http://dealbook.blogs.nytimes.com/2008/02/15/lampert-begins-parting-with-citi/
Platinum is up $50 in overnight trading and now trades above $2113/ounce. We are extremely grateful that inflation remains well anchored.
Today – SPHs are up 14 handles in overnight trading as traders and investors are delighted with the ugly news that appeared over the holiday weekend. If stocks get too jiggy in the morning, we’d look for a reversal in the afternoon. The Nikkei ran to a 166 point gain in its first 16 minutes of trading last night and proceeded to give up 90 points of the gain to end the first session.
Expected economic data: NAHB Housing Market Index 19…Minneapolis Fed Prez Stern speaks on the US economy in MN…After the close HPQ reports earning and guidance…CPI tomorrow – it appears bonds believe it will be worse than the consensus, and well anchored, 0.3% (Core 0.2%).
The NY Post: OBAMA 'ROBBED' IN NY Barack Obama's primary-night results were strikingly
underrecorded in several districts around the city - in some cases leaving him with zero votes when, in fact, he had pulled in hundreds, the Board of Elections said yesterday.
Unofficial primary results gave Obama no votes in nearly 80 districts, including Harlem's 94th and other historically black areas - but many of those initial tallies proved to be wildly off the mark, the board said. In some districts getting a recount, the senator from Illinois is even closer to defeating Hillar Clinton. Initial results in the 94th, for example, showed a 141-0 sweep for Hillary Clinton, but the recount changed the tally to 261-136...Brooklyn City Councilman Charles Barron called the understated figures "outrageous." http://www.nypost.com/seven/02162008/news/regionalnews/obama_robbed_in_ny_97932.htm
NY Mayor Bloomberg, just last week, said the US is starting to resemble a Third World Country.
The NY Times: Kosovo Declares Its Independence From Serbia The province of Kosovo declared independence from Serbia on Sunday, sending tens of thousands of ethnic Albanians streaming through the streets to celebrate what they hoped was the end of a long and bloody struggle for national selfdetermination.. What will Putin do? http://www.nytimes.com/2008/02/18/world/europe/18kosovo.html_r=1&th&emc=th&oref=slogin
CNN: A central passage in the stump speech Barack Obama has been giving in recent days -- aimed at convincing voters that his campaign is not just about lofty rhetoric -- is adapted from Massachusetts Gov. Deval Patrick, Obama's campaign acknowledged over the weekend.
http://www.cnn.com/2008/POLITICS/02/18/obama.patrick/
And we swear that we have heard these key parts of his stump speech elsewhere: ‘I am the light, the way the truth’ or very similar verbiage – and we’re not talking about Oprah!
The Boston Globe: So what did Michelle Obama think of the United States before her husband decided he wanted to run the place? “For the first time in my adult life, I am proud of my country,” she told a Milwaukee crowd today, “because it feels like hope is making a comeback.” (Obama’s Achilles Heel?)
http://www.boston.com/news/politics/politicalintelligence/2008/02/pride_in_the_na.html
Effectively, we're seeing heavy inflation. The government is now not going to even report the key economic indicators because it has gotten so bad. Stick your investments into commodities, I say...
I'm going to paste an article from M. Ramsey King Securities, Inc. He offers great insight into what is going on.
The King Report
M. Ramsey King Securities, Inc.
Tuesday February 19, 2008 – Issue 3816 “Independent View of the News”
The FT: US banks borrow $50bn via new Fed facility US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks…The use of the Fed’s Term Auction Facility…saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February. http://us.ft.com/ftgateway/superpage.ft?news_id=fto021820081549448926
The supra-inflationary aspects of the revelations that the Fed is pouring enormous amounts of capital into the US financial system and England’s nationalization of Northern Rock have equity markets and commodity markets rallying and bonds declining sharply. Numerous investors and traders believe that horrible news is good news for stocks because the Fed and
other central banks will be forced to pump even more credit into the system. This linear thinking has been inculcated in investor and traders’ psyche over the past two decades. However, those were decades without a global inflationary threat, let alone a global food and energy inflation threat.
Few people, or less, know the magnitude of the problems in the financial system. The NY Times’ Gretchen Morgenson gives some insight into the scope of just one aspect of the mess.
Credit default swaps…insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.
The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.
No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity…
But an inkling of trouble emerged in a recent report from the Office of the Comptroller of the Currency, a federal banking regulator. It warned that a significant increase in trading in swaps during the third quarter of last year “put a strain on processing systems” used by banks to handle these trades and make sure they match up. http://www.nytimes.com/2008/02/17/business/17swap.html?_r=1&th&emc=th&oref=slogin
If you’re not concerned, you’re not ‘doing your work.’
Who has the most CDS exposure? Ms. Morgenson: JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively.
What fallout might occur? Ms. Morgenson: …when Delphi…filed for bankruptcy in October 2005, the credit default swaps on the company’s debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt. Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered…
The Times: The cost of the Northern Rock crisis has reached the equivalent of £3,500 for every taxpayer as experts warned that the nationalisation rescue of the bank was bound to fail.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/19/nrock119.xml
The Third World bailout of leading financial instructions continues. Qatar plans to invest $15B in Credit Suisse over the next year.
Good thing inflation remains ‘well anchored’ according to Bernanke. The FT: Prices for top-quality spring wheat have jumped by 90 per cent in the past month and a half, boosted by a scramble by corporate consumers to secure scarce grain and speculative buying by investors. A surge on Friday in prices for wheat used in bread to an all-time high of $19.88 a bushel – the highest yet paid for any wheat contract and a three-fold increase from a year ago – prompted the US baking industry to call for wheat exports to be curtailed. http://www.ft.com/cms/s/0/bab47e26-dd85-11dc-ad7e-0000779fd2ac.html
China’s inflation surged 7.1%y/y in January, the highest reading in 11 years. Snowstorms were a factor.
The WSJ: Three Asian steelmakers agreed with a leading provider of iron ore on a 65% price increase for iron-ore shipments, reflecting a desire to lock in supplies before they get even more expensive and confidence they will be able to pass the price increase on to their own customers.
Japan's Nippon Steel Corp. and JFE Steel Corp. as well as Posco of South Korea have agreed to pay Brazil's Companhia Vale do Rio Doce , or Vale, 65% more for iron ore to be shipped from April 1. Other global steelmakers, including leading Chinese companies, appear close to accepting a similar increase in iron ore prices for fiscal 2008-09. http://online.wsj.com/article/SB120331883691774781.html?mod=hpp_us_whats_news
Three major food companies, Campbell, J.M. Smucker and Hormel Foods, report costs rose faster than sales in the prior quarter ended in October. AC Nielsen found eight U.S. branded-food companies, including Campbell, raised prices by more than 2%, on average, in the 12 weeks ended Jan. 26.
The NY Times’ Floyd Norris echoes our contention that retail sales data is inflate by the soaring cost of food and energy: Over all, Americans are spending about 13 percent more on food and energy now than a year ago. http://www.nytimes.com/2008/02/16/business/16charts.html?_r=1&oref=slogin
We learned from ‘The Big Picture’ web site that:
Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov/) will be discontinued effective March 1, 2008.
Economic Indicators.gov is brought to you by the Economics and Statistics Administration
at the U.S. Department of Commerce. Our mission is to provide timely access to the daily
releases of key economic indicators from the Bureau of Economic Analysis and the U.S.
Census Bureau. http://www.economicindicators.gov/
Barry Ritholtz: First we heard the bullshit about the costs of reporting M3 -- just before that aspect of money supply went sky high. Now this.
This new development implies (by parallel comparison to M3) that the economy is actually far, far worse than previously believed. The reason citizens should never let their government stop reporting ANY information is that they get to liking it. http://bigpicture.typepad.com/comments/2008/02/wtf-feds-shutti.html
The Reuters/University of Michigan index of consumer sentiment fell to 69.6 in February from 78.4 in January. This is the lowest reading since 1992 – the last full blown recession.
This apparent paradox really is really logical. Detroit metro sales of homes jumped 15% y/y in January. Foreclosures jumped 45.5%. http://www.detnews.com/apps/pbcs.dll/article?AID=/20080215/BIZ/802150373
When severe financial problems appear, it invites scrutiny by regulators that were remiss in their duties. And once the financial problems translate into economic duress, the populace becomes irate. And then politicians and regulators are forced to do the job that they had neglected. And then financial crimes and malfeasance are discovered, reported and prosecuted.
The WSJ (weekend): Democrats' Attacks On Business Heat Up As the Democratic presidential contest moves to the distressed industrial Midwest, Hillary Clinton and Barack Obama have ratcheted up their antitrade, anticorporate rhetoric. http://online.wsj.com/article/SB120312350441273057.html?mod=hpp_us_whats_news
The Telegraph: Germany was gripped by a growing tax scandal on Friday as state prosecutors disclosed that they were investigating "several hundred" people for suspected tax evasion…Klaus Zumwinkel, chief executive of Deutsche Post, parent company of DHL, resigned yesterday, a day after police searched his home and office. http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/16/cndeut116.xml
The Times (UK): Alistair Darling has criticised the huge bonuses being awarded to City executives during a period of economic uncertainty. The Chancellor said that boards should apply the “next-door neighbour test” to judge whether payouts would be regarded as excessive by the average man in the street. “People get fed up if they see others getting great big bonuses and they can’t actually see what they did. It can be extremely frustrating. http://business.timesonline.co.uk/tol/business/money/tax/article3378951.ece
The dollar had its biggest weekly loss this year versus the euro – blame Ben’s dovish braying.
Over the holiday weekend monoline rescue negotiations continued – no word yet.
The WSJ: On Friday, FGIC Corp., holding company for the nation's third-largest bond insurer, told the New York State Insurance Department that in effect it wants to split up the business. The idea would be to create a new company to insure safe municipal bonds and for the existing one to keep responsibility for riskier debt securities already insured, such as those tied to the housing market.
The move may help regulators protect investors who have municipal bonds insured by the firm. But it could also force banks who are large holders of the other securities to take significant losses. Some banks that have been talking with FGIC in recent weeks to bolster the firm were taken aback by the announcement and could yet try to block it, say Wall Street executives.
http://online.wsj.com/article/SB120308290353671507.html?mod=hpp_us_whats_news
There are no painless solutions to the monoline and most other financial problems. Someone must suffer. It’s just a question of whom and how much. And you can be sure US taxpayers will be hit somehow. The Times (UK): Citigroup shuts London fund to withdrawals Citigroup has moved to stop investors withdrawing their money from one of its London-based hedge funds after panic selling that saw investors try to pull out more than 30 per cent of the fund's $500 million (£254.3 million) assets.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3373670.ece
The NY Times: For Edward S. Lampert, it appears the bloom is off the rose at Citigroup. The billionaire investor disclosed on Thursday that he has sold off more than 30 percent of his holdings in the struggling financial giant… http://dealbook.blogs.nytimes.com/2008/02/15/lampert-begins-parting-with-citi/
Platinum is up $50 in overnight trading and now trades above $2113/ounce. We are extremely grateful that inflation remains well anchored.
Today – SPHs are up 14 handles in overnight trading as traders and investors are delighted with the ugly news that appeared over the holiday weekend. If stocks get too jiggy in the morning, we’d look for a reversal in the afternoon. The Nikkei ran to a 166 point gain in its first 16 minutes of trading last night and proceeded to give up 90 points of the gain to end the first session.
Expected economic data: NAHB Housing Market Index 19…Minneapolis Fed Prez Stern speaks on the US economy in MN…After the close HPQ reports earning and guidance…CPI tomorrow – it appears bonds believe it will be worse than the consensus, and well anchored, 0.3% (Core 0.2%).
The NY Post: OBAMA 'ROBBED' IN NY Barack Obama's primary-night results were strikingly
underrecorded in several districts around the city - in some cases leaving him with zero votes when, in fact, he had pulled in hundreds, the Board of Elections said yesterday.
Unofficial primary results gave Obama no votes in nearly 80 districts, including Harlem's 94th and other historically black areas - but many of those initial tallies proved to be wildly off the mark, the board said. In some districts getting a recount, the senator from Illinois is even closer to defeating Hillar Clinton. Initial results in the 94th, for example, showed a 141-0 sweep for Hillary Clinton, but the recount changed the tally to 261-136...Brooklyn City Councilman Charles Barron called the understated figures "outrageous." http://www.nypost.com/seven/02162008/news/regionalnews/obama_robbed_in_ny_97932.htm
NY Mayor Bloomberg, just last week, said the US is starting to resemble a Third World Country.
The NY Times: Kosovo Declares Its Independence From Serbia The province of Kosovo declared independence from Serbia on Sunday, sending tens of thousands of ethnic Albanians streaming through the streets to celebrate what they hoped was the end of a long and bloody struggle for national selfdetermination.. What will Putin do? http://www.nytimes.com/2008/02/18/world/europe/18kosovo.html_r=1&th&emc=th&oref=slogin
CNN: A central passage in the stump speech Barack Obama has been giving in recent days -- aimed at convincing voters that his campaign is not just about lofty rhetoric -- is adapted from Massachusetts Gov. Deval Patrick, Obama's campaign acknowledged over the weekend.
http://www.cnn.com/2008/POLITICS/02/18/obama.patrick/
And we swear that we have heard these key parts of his stump speech elsewhere: ‘I am the light, the way the truth’ or very similar verbiage – and we’re not talking about Oprah!
The Boston Globe: So what did Michelle Obama think of the United States before her husband decided he wanted to run the place? “For the first time in my adult life, I am proud of my country,” she told a Milwaukee crowd today, “because it feels like hope is making a comeback.” (Obama’s Achilles Heel?)
http://www.boston.com/news/politics/politicalintelligence/2008/02/pride_in_the_na.html
Tuesday, February 5, 2008
ISM Index Non-Manufacturing numbers
The Institute for Supply Management today came out with numbers that sent stocks plummeting and bonds soaring in the AM. This may be great news for home loan interest rates, but bad news for your stock portfolio.
Essentially, the ISM Index came in at 41.9 in January,from 54.4 the previous month. What does this mean?
The Institute for Supply Management's non-manufacturing index reflects almost 90 percent of the US economy. This is the lowest since October 2001. A reading over 50 signals expansion, but under 50, it signals recession.
"This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.'' (see here)
Numbers came in today at 41.9, signaling a recession. You can actually see the reaction in Asia as the Nikkei stock market is down 557 so far, coming in at 13,187 currently. The ISM shows us that we are gearing towards less growth, with that looming 'R' word on the horizon.
What will the Fed do? Another rate cut? (They only have so many of those) What about beefing up the stimulus package?(Free money....right?)
Consumers are now having to tighten their belts and actually pay as they go...what a concept! We'll see if this has a long-term effect; the consumer entitlement mentality in America is too well-ingrained to be ironed out after an economic hiccup. However, those with cash are going to find some sweet deals (think big, really big). Just hop on craigslist, and type in 'foreclosure' and see what pops up.
Cheers!
Essentially, the ISM Index came in at 41.9 in January,from 54.4 the previous month. What does this mean?
The Institute for Supply Management's non-manufacturing index reflects almost 90 percent of the US economy. This is the lowest since October 2001. A reading over 50 signals expansion, but under 50, it signals recession.
"This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.'' (see here)
Numbers came in today at 41.9, signaling a recession. You can actually see the reaction in Asia as the Nikkei stock market is down 557 so far, coming in at 13,187 currently. The ISM shows us that we are gearing towards less growth, with that looming 'R' word on the horizon.
What will the Fed do? Another rate cut? (They only have so many of those) What about beefing up the stimulus package?(Free money....right?)
Consumers are now having to tighten their belts and actually pay as they go...what a concept! We'll see if this has a long-term effect; the consumer entitlement mentality in America is too well-ingrained to be ironed out after an economic hiccup. However, those with cash are going to find some sweet deals (think big, really big). Just hop on craigslist, and type in 'foreclosure' and see what pops up.
Cheers!
Monday, January 28, 2008
What's up with the Economy?
Well friends, it looks like the battle is underway!
Our beloved federal government is throwing more cash at the recession that most have admitted is either upon us or looming around the corner. Jim Juback, at MSN Money says, "Don't count on a 'normal' recession" citing that recessions post-1983 lasted shorter and were less protracted than 'normal recessions' between 1959 - 1983. He argues for a 12 month long recession with at least a 2% decline in real GDP. What does this mean? Basically, there's -2% expansion for 4 quarters....simply put. (see Jubak's Journal Don't count on a 'normal' recession 1/25/2008)
In a recent issue of Businessweek, Europe reports a housing slump in Britain, and forecasts of a 5.5% profit drop for European companies. It reads, "The subprime crisis has clobbered Europe's financial sector, with banks such as Switzerland's UBS and Britain's Barclays and Royal Bank of Scotland taking huge writedowns in recent months..." (BusinessWeek Behing Market Turmoil, Europe is Weakening 1/24/2008) Essentially, the author says that you can look to the European Central Bank (the Fed's cousin) to start lowering interest rates soon, in order to stave off Euro-style recession.
These are weird times, we've never really seen such interconnectedness among international markets fraught with such issues. For instance, take Ambac Financial and MBIA. These two companies are "AAA" rated bond insurer companies. What does this mean? Basically, these investments are the safest investments possible on the market: hence the triple A rating. A bond insurer is a company that insures public works projects (roads, schools, etc.) against default. Ultimately, if these bond insurance companies are not bailed out, you will see a severe shakeup on the domestic front. There will be fewer government, tax-funded projects. (This can be a good thing depending upon your political viewpoint).
And, beyond all this, you have the housing slump, slouching even further. Even though we are technically not a 'declining market' according to Fannie Mae (nation's largest home mortgage underwriter) it has now come to the Pacific Northwest and the resilient Charlotte, North Carolina. The correction is fully underway now, and in the words of one realtor in Arizona, "For now, people trying to sell homes 'don't seem to have a prayer' in competing with lenders offering foreclosed homes and builders dumping excess inventory". (The Wall Street Journal Housing Slump Starts to Hit Stronger Cities 1/24/2008) The article goes on to report that prices in Seattle will fall further due to all the condominium building downtown (just look out your downtown window and check out all the cranes). Suffice it to say, it's a buyer's market folks! I hope you have your cash on hand! I'm counseling clients to sell only if they have to, and get ready to buy a steal of a deal either at the auction block or through a short-sale 3-9 months from now.
You will also notice that many homebuilder's ratings have been further cut. D.R. Horton has been junk status since November 2007. Meritage, Hovnavian, and M/I Homes have been cut as of 1/17/2008 to junk (that means non-investment) status.
What does all this information mean?
This means that it's a great time to have cash. It's a buyer's market out there, and it can only get better. Long-term investors should be pumping money into good mutual funds, with an allowance for commodities as hedges against inflation. It's a great time to get a 'deal' on a house, and if they don't accept your price....don't buy it! Interest rates are forced low by the Fed's actions, which means you can carry that mortgage at a low rate, in the 5's for a 30 year fixed!
Ultimately, be patient. The economy's not going to totally collapse. We've had this coming a long time, just look at our spending habits as Americans. Be patient, keep investing and diversifying for protection. The stimulus package will likely be shrugged off within a quarter of being implemented, which will likely send commodities soaring.
Pay your mortgage down. Don't sell. Be happy where you are. Work hard and save and we'll see what happens!
Our beloved federal government is throwing more cash at the recession that most have admitted is either upon us or looming around the corner. Jim Juback, at MSN Money says, "Don't count on a 'normal' recession" citing that recessions post-1983 lasted shorter and were less protracted than 'normal recessions' between 1959 - 1983. He argues for a 12 month long recession with at least a 2% decline in real GDP. What does this mean? Basically, there's -2% expansion for 4 quarters....simply put. (see Jubak's Journal Don't count on a 'normal' recession 1/25/2008)
In a recent issue of Businessweek, Europe reports a housing slump in Britain, and forecasts of a 5.5% profit drop for European companies. It reads, "The subprime crisis has clobbered Europe's financial sector, with banks such as Switzerland's UBS and Britain's Barclays and Royal Bank of Scotland taking huge writedowns in recent months..." (BusinessWeek Behing Market Turmoil, Europe is Weakening 1/24/2008) Essentially, the author says that you can look to the European Central Bank (the Fed's cousin) to start lowering interest rates soon, in order to stave off Euro-style recession.
These are weird times, we've never really seen such interconnectedness among international markets fraught with such issues. For instance, take Ambac Financial and MBIA. These two companies are "AAA" rated bond insurer companies. What does this mean? Basically, these investments are the safest investments possible on the market: hence the triple A rating. A bond insurer is a company that insures public works projects (roads, schools, etc.) against default. Ultimately, if these bond insurance companies are not bailed out, you will see a severe shakeup on the domestic front. There will be fewer government, tax-funded projects. (This can be a good thing depending upon your political viewpoint).
And, beyond all this, you have the housing slump, slouching even further. Even though we are technically not a 'declining market' according to Fannie Mae (nation's largest home mortgage underwriter) it has now come to the Pacific Northwest and the resilient Charlotte, North Carolina. The correction is fully underway now, and in the words of one realtor in Arizona, "For now, people trying to sell homes 'don't seem to have a prayer' in competing with lenders offering foreclosed homes and builders dumping excess inventory". (The Wall Street Journal Housing Slump Starts to Hit Stronger Cities 1/24/2008) The article goes on to report that prices in Seattle will fall further due to all the condominium building downtown (just look out your downtown window and check out all the cranes). Suffice it to say, it's a buyer's market folks! I hope you have your cash on hand! I'm counseling clients to sell only if they have to, and get ready to buy a steal of a deal either at the auction block or through a short-sale 3-9 months from now.
You will also notice that many homebuilder's ratings have been further cut. D.R. Horton has been junk status since November 2007. Meritage, Hovnavian, and M/I Homes have been cut as of 1/17/2008 to junk (that means non-investment) status.
What does all this information mean?
This means that it's a great time to have cash. It's a buyer's market out there, and it can only get better. Long-term investors should be pumping money into good mutual funds, with an allowance for commodities as hedges against inflation. It's a great time to get a 'deal' on a house, and if they don't accept your price....don't buy it! Interest rates are forced low by the Fed's actions, which means you can carry that mortgage at a low rate, in the 5's for a 30 year fixed!
Ultimately, be patient. The economy's not going to totally collapse. We've had this coming a long time, just look at our spending habits as Americans. Be patient, keep investing and diversifying for protection. The stimulus package will likely be shrugged off within a quarter of being implemented, which will likely send commodities soaring.
Pay your mortgage down. Don't sell. Be happy where you are. Work hard and save and we'll see what happens!
Wednesday, January 23, 2008
1-23-2008 Historic Day for Interest Rates!!!
Well, what a birthday present. I awoke this morning to see the Dow Jones tanking down to mid-11,000's levels. While that was bad for investors, it was great for interest rates. For instance, interest rates were all the way down to 5% on a 30 year fixed at the lowest point in the day.
Great birthday present right?!?
HA!
If that was all that happened, sure...
At 11am, it all started. That's because it was 2pm Eastern Time, and lenders were starting to reprice their interest rates. The Dow Jones rallied hugely, and ultimately the lender repriced their loans 4 times in 1 single day! (I've never seen that before). This means that if you had 5% on a 30 year fixed this morning, well, after the repricing settled, you were now looking at 5.75% on a 30 year fixed.
This day will go down as a hair-pulling, crazy day. I hope these markets will cool down sometime so we get some normalcy here. Volatility is great, but it sure takes years off your life.
Great birthday present right?!?
HA!
If that was all that happened, sure...
At 11am, it all started. That's because it was 2pm Eastern Time, and lenders were starting to reprice their interest rates. The Dow Jones rallied hugely, and ultimately the lender repriced their loans 4 times in 1 single day! (I've never seen that before). This means that if you had 5% on a 30 year fixed this morning, well, after the repricing settled, you were now looking at 5.75% on a 30 year fixed.
This day will go down as a hair-pulling, crazy day. I hope these markets will cool down sometime so we get some normalcy here. Volatility is great, but it sure takes years off your life.
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