Thursday, August 30, 2007
Tuesday, August 28, 2007
On Market Predictions in the Current Chaotic Environment.
by Richard C. Cook
Global Research, August 28, 2007
No one can predict how deep the decline in Western economies that is underway will go, because there is so little transparent information. Within the U.S., the government is hiding the severity of the crisis in order to prevent a collapse of consumer confidence.
Realize that the problem does not lie on the side of production. Global industry has the capacity to produce a huge quantity of goods and services. There is even a glut in some sectors, such as automobiles, textiles, IT, and other consumer products.
Rather the problem, as with the Great Depression, is that purchasing power at the consumer level is lacking. In the U.S., purchasing power, as measured by M1, is already in a recession-level decline. The causes are the high level of consumer debt, high cumulative levels of taxation on the dwindling middle class, and the tragic erosion of wages and salaries from job outsourcing.
In the absence of purchasing power, the Federal Reserve has chosen the strategy of trying to outrun collapse by creating inflation. This is the meaning of the bail-outs that are going on. It’s an attempt to devalue debt at the macro level. It’s a hidden tax on everyone but the super-rich. Everyone else is poorer today than they were yesterday.
How long this can go on is unpredictable. It’s another bubble following on the housing and asset bubbles that are already bursting on a daily basis before our eyes.
I don’t see any responsible analyst who foresees any better outcome than a recession that would see the DJIA at a level of 8000-8500 within a few months. Again, maybe the Fed’s printing presses can hold this level of decline at bay for a while longer, but I doubt it.
There are major players in the markets who see an even steeper decline coming even sooner. Some say as soon as a month.
There is also a real chance of an eventual depression-level contraction. How much of a chance, I don’t know. This conceivably could lead to a total collapse of consumer markets, economic paralysis, and widespread homelessness and starvation. Yes, even in the U.S. Agribusiness, bio-fuel conversion, seedless mega-farming, the disappearance of family farming, and the recent disastrous weather conditions place everyone at risk.
At some point, the federal government, at a minimum, has to step in with New Deal-type relief measures. Whether the Bush administration has that capability is doubtful. Look at New Orleans. They may even try to cover everything up by starting a war against Iran. Are they that crazy? Who can say?
There are also rumors going around that there are plans to allow the markets to be crashed by a terrorist event so as to divert blame. I have gotten no reliable confirmation of these rumors, though there are parties placing what people in the markets are calling “bin Laden”-type bets similar to, but bigger than, the “puts” that were placed before the original 9/11.
These types of bets have been placed in the U.S., European, and Japanese markets that assume a stock market crash of fifty percent within the next five weeks. A report was just carried, I’m told, on CNBC.
Some have said the culprit may be China, but it makes no sense for the Chinese to crash the markets while holding U.S. dollars. Others say it is hedge funds at work to try to drive down the markets in a self-fulfilling prophecy.
But a fifty percent market decline? That’s just not conceivable. Even the hedge funds do not have that much power. The federal plunge protection team—known as the “men in black” by floor traders—would never allow them to do something so disastrous. This has caused some to speculate that the “men in black” are parties to the bets.
These remarks probably give some indication of the chaos going on right now in the U.S. and world economies. The only real solution is a new world financial system based on the concept of credit as a public utility. This is what should be implemented to replace the present system of institutionalized usury.
Wednesday, August 22, 2007
Below is a dial in number and password for a tape recorded conference call with the Head of Economics at The Wharton School of Business, Dr. Linneman. I’ve heard Dr. Linneman speak twice in person and he is extremely we versed on the global economies. It is certainly worth your time to spend 15-20 minutes of your day listening to this recording, which will surely enlighten you on where we are today, how we arrived here and how long it should take for the sub-prime debacle to correct itself before we can return to more of a normalized market.
To access the recording, please call at any time:
Playback Dial-in: (641) 715-3439
Key Highlights of the Call
Two Main Issues:
- Investors have matched short-term capital against long term assets;
- Markets face the perennial battle of fear vs. greed, and while greed wins in the long term, fear is winning today.
- Poor underwriting, rating agencies failed;
- Only 30% of homebuyers have not locked in long. The losers are the lenders/investors, not the homebuyers;
- The losses are "only $90 billion" a big number but not in percentage terms;
- Margin calls have forced the exaggerated impact in the market.
Historical Perspective: This has happened five times in the past 20 years.
- 1987 - Tax law change - in a strong economy - 18-24 months to recover;
- 1991 - S&L crisis - in a recession - 12-18 months to recover (real estate took longer);
- 1998 - Russian Ruble - in a strong economy - 18-24 months to recover;
- 2001 - 9/11 - in a slowdown - 18-24 months to recover;
- 2007 - Sub-prime - in a strong economy - expect 18-24 months to normalize.
Dr. Linneman anticipates continued economic growth but wider debt spreads and tighter credit standards for 18-24 months. Expect London and NYC to be negatively impacted by rental demand as hedge funds and other financial services companies tighten.
- Keeping interest rates too low for too long in 2003-2004 added artificial fuel to the economy.
- Now rates have been kept too high for too long.
- With inflation at 2.0% - 2.25%, rates should be 4.0% - 4.5%;
- Open market activity is only a band-aid. The Fed needs to ease rates.
- It will take 12-18 months to digest the 400,000-500,000 surplus of homes built.
Real Estate Pricing:
- The REIT market has re-priced; the private market has not;
- Cap rates are about 50 basis points too low. With new credit spreads, cap rates will need to move up about 80 basis points;
- Debt exists but lenders require higher coverage and lower loan-to-value (70-75%);
- Pricing is more reflective of asset "quality" than asset "classes." Regardless of property types, people will now pay more for quality.
- Expect credit to be overpriced for 12-18 months, then normalize.
Tuesday, August 21, 2007
The University of the Pacific in Stockton has a great website, in which the Center produces quarterly economic forecasts of the United States, California and 11 Metropolitan areas from Sacramento to Fresno and San Francisco Bay Area. The Eberhardt School of Business is one of a handful of Business schools producing comprehensive quarterly forecasts of the U.S. economy. In addition, the quarterly metropolitan forecasts cover several regions in California's Central Valley not covered by other forecasts.
This week's Graph of the Week discusses two fundamental factors which determine a household's ability to own a house...
There are two fundamental factors which determine a household’s ability to own a house: the price of the house and income. The price of houses in California has always been among the highest in the nation. Data from the California Association of Realtors (CAR) shows that in 2006, the median price of a single family home in the state was over $556K - more than twice the national average of $221K.
In general, the difference between housing affordability index and home-ownership rate represents the gap between the number of households who can afford a house and the number who actually buy a house. The larger the gap suggests that relatively more households, knowingly or unknowingly, are willing to live beyond their normal means. The larger the gap also suggests the higher likelihood that more households are involved in riskier mortgage loans.
Such large gaps in California and San Joaquin County represent the occurrence of excessive demand for housing in the two regions, which tend to make housing highly over-priced. When the market cools down to get back to normal, more market correction is needed in the regions. This partly explains why in the summer 2007 the state of California and San Joaquin County are among those with the largest proportion of sub-prime mortgage loans and the highest number of foreclosures in the nation.
Friday, August 17, 2007
Thursday, August 16, 2007
This could potentially put the banks in a more tenuous situation (as if they don't need more bad news) that would find a superior lien placed on their assets prior to foreclosure and the potential for the city to take possession of the property.
On another note, this ad in craigslist in Dallas is worth passing along..
Tuesday, August 14, 2007
2. Another hot topic that just came about today is the fact that certain Money Market funds will not honor their redemption values (these are the funds that your brokerage accounts park cash into when they're not placed into securities, bonds, or mutual funds). If the brokerage houses can't guarantee that your cash value will remain positive while you sit out of the market, then why have your money with the brokers at all.
3. Separate topic.. I found a view topics discussed about the advantages of the CCIM network in commercial real estate. One from a blogger that is taking CCIM courses in New Mexico today and is amazed at the few investors that spend the time going through the courses:
Another blog describes the alliance that the CoStar Group and the CCIM network have created to allow CCIM members (yours truly) access to market data developed from CoStar's network of researched and verified commercial listings:
Howdy from my CCIM course in Albuquerque, NM......
Every time I take a CCIM course....I am humbled beyond the point of preference. The CCIM courses remind me how much I do not know. Even though I get up and teach commercial investing to a lot of you....there is a science behind commercial real estate that most investors never see...and do not care to see. It does not surprise me that I am one of a handful of investors in the class full of real estate brokers and agents. If you have any interest as an investor in learning more....I highly recommend attending a CCIM course....www.CCIM.com
The partnership will also enable CCIM members to access CoStar Connect, a service that lets brokers and owners post their own for lease and for sale listings on their own web sites using CoStar's listing information and building photos. CoStar Connect automatically updates and manages customers' online property information.
This deal with CCIM is a big win for CoStar, as competition in the commercial real estate listings space continues to strengthen. CoStar and its nearest competitor, LoopNet, are trying to position themselves as the workflow platform of choice for the industry. Working with CCIM, which is an affiliate of the National Association of Realtors, will definitely help CoStar raise its profile within the industry and offering tools such as CoStar Connect will also help motivate members to regularly utilize that and all of CoStar's features. The alliance undoubtedly expands CoStar's reach--more than 8,700 commercial real estate practitioners hold the CCIM designation.
Monday, August 13, 2007
Another trader friend follows the market much closer than I and clued me into a video series that tracks the S&P as well as a precursor for the market in general (Goldman Sachs). The recent problems with the GS Hedge Funds is one of the stocks that he tracks with the market, a disciple of the video author's company, inthemoneystocks.com.
Unnerved by heavy losses at some of the $1.75 trillion industry's most famous offerings, including AQR Capital Management, Highbridge Capital Management, D.E. Shaw and Goldman Sachs (GS.N: Quote, Profile, Research), many people want out before things get worse.
But exiting can be a difficult process in an industry where managers routinely lock up money for months, if not years, and often require 45 days' advance notice before returning it.
To pull out at the end of the third quarter, investors will have to notify their managers by August 15.
"Everyone always waits until the last second to get out, and (Wednesday) is the last second," said Mike Hennessy, managing director at hedge fund of funds Morgan Creek Capital.
As I pulled up my Monday morning national journal reports, I noticed that commercial foreclosures in North Texas have increased 30% over last year at this time (highest in the Metroplex since 1994). From the article:
Commercial foreclosure postings in North Texas through August have reached their highest level in 13 years as the downturn in the housing market clouds the broader real estate picture.
So far this year, 806 commercial buildings have been listed for the auction block in the Metroplex, according to Foreclosure Listing Service, an Addison-based firm. This year's total is 30% higher than the 621 postings in the same eight-month period last year.Every commercial property category was hit. Retail foreclosure postings are up 42%, apartments are up 37%, office postings are up 36% and industrial postings are up 24%. Postings are up 26% in the miscellaneous category, which includes uses such as restaurants, car washes and day care centers.
Friday, August 10, 2007
Countrywide Financial Corp. today said the market for debt it needs to fund itself is experiencing “unprecedented disruptions” that could impact its future profits and financial condition.
In its second-quarter filing with the SEC, the lender said there is less liquidity in the debt market and greater “risk premiums.” I imagine Countrywide means it may have to pay higher yields on its own debt or produce more collateral, or both. Anyway, the lender said it needs to maintain investment-grade ratings on its debt, and that is not a sure thing.
It also said the market to sell home loans on Wall Street is experiencing “unprecedented disruptions” caused by a drop in investor demand.
To be sure, official quarterly reports with the SEC often contain a lot of ominous-sounding boiler plate language. But using the term “unprecedented disruptions” twice in one filing stands out.
Here’s more from the company:
“While our capital and liquidity positions are currently strong and we believe we have sufficient capacity to hold additional mortgage loans and mortgage backed securities until investor demand improves and yield requirements moderate, our capacity to retain mortgage loans and mortgage backed securities is not unlimited. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have an adverse impact on our future earnings and financial condition.”
Wednesday, August 8, 2007
Yet another fallout from the foreclosure crisis has been large numbers of renters who lose their housing through no fault of their own, said State Sen. Sue Tucker, an Andover Democrat who sponsored the bill. The Senate felt very strongly that tenants deserve some protection.
Tuesday, August 7, 2007
Credit Market Report August 7, 2007 (Requested by a client to forward as a post)
U.S. Treasury prices fell and yields rose as investors pushed money back towards stocks on Monday while the corporate bond market remains stagnant. The Dow Jones Industrial Average posted its largest gain of the year yesterday, helping to erase significant losses incurred last week. Corporate credit markets, notably investment-grade corporate bonds, have ground to halt making it difficult for firms to access capital and leaving investors with little good options. The dry-up in available capital is largely due to an increase in investor risk aversion caused by the problems of the sub-prime mortgage market. For July,
Treasury Rates are as of late-afternoon August 6, 2007 as reported in the Wall Street Journal.
Fixed Rate Indices
Maturity Coupon Yield
Floating Rate Indices
1 Year LIBOR..................................5.11625%
Rates in the London market based on quotations at 16 major banks for August 6, 2007.
Last Effective Change: 6.29.06
10-year SWAP Spreads................................71.3 bps
10-year SWAP Rate......................................5.449
As reported by RBS Greenwich Capital 8.7.2007 8:52 AM EST
Monday, August 6, 2007
Business bankruptcies are up 66% nationwide from the 1Q of 2007 to 1Q of 2006..
The other problem that foreclosed subprime borrowers will feel is the tax consequences of cash received from defaulted equity lines of credit.. forcing more bankruptcies..
"Part of it certainly is a rebound from changes in bankruptcy law," said Daniel North, chief economist with Euler Hermes ACI, a credit insurance company in Owings Mills, Md. The changes attempt to shift filers away from liquidation into repayment plans.
"The other part is a deteriorating economy due to high energy prices, a tightened monetary policy and the housing meltdown," he said. "We're seeing pressure, particularly on suppliers of building materials and anybody who relies on the housing industry."
Locally, the crunch is most obvious in real estate deals and transactions, said Dale Ginter, a bankruptcy attorney with Downey Brand LLP, Sacramento's largest law firm.
"People who were able to refinance or sell their way out can't do it now," he said. "And my guess is it will continue for another year or so."
There's another downside to the housing meltdown that's driving people toward bankruptcy court: Owners with second mortgages who owe more than their home is worth might face income tax consequences from foreclosure. Bankruptcy can wipe out the tax debt.
"People are filing bankruptcy to avoid this nasty, horrible tax," Gibbs said.
Saturday, August 4, 2007
There are "to good to be true" mortgage products (along with lead cyclists) that race out ahead of the peloton pushing the limits of stamina, endurance and fatigue to provide the best investments to the secondary (hedge fund) markets. Then, one of two events occur (and has occurred). Either, the drugs wear off and the sprinter can't sustain the pace, burning out during the race and being overtaken by the peloton; or, the drugs don't wear off and the cyclist wins the race, but skeptical officials (the "market") test the cyclist and discover what looked like incredible production is only an artificially enhanced performance that doesn't have the fundamentals to belong in the race. Either eventuality results in disqualification and the peloton is affected. If you weren't paying attention on Friday (8/3/07), jumbo loan buyers just got affected in the credit race.
Friday saw Wells Fargo Jumbo loans jump in rates from 6.78% to 8.00%, as noted on the Housing Bubble Blog:
One said, “If we are going to see credit tightening in the mortgage lending arena, then how can that not affect the rest of our economy as the FED would have us believe. Take crack away from a crack head, cold turkey and you have a problem on your hands.”The sprinters in the credit race got caught "doping" their loans and the market is now faced with "what to do". The first step is the classic "knee jerk" disqualification of the sprinters, slowing the peloton to a crawl as the market continues to correct itself, exposing these loan products for what they are, doped products sold as derivatives in the secondary markets:
A reply, “I don’t think it is a question of ‘if we are going to see credit tightening in the mortgage lending arena,’ we are seeing it. Just how bad did Alt-A get hurt yesterday? Just grazed, or was yesterday really a gut shot like many people think? How long until conforming follows the same path?”
One pointed out. “Wells Fargo just raised the interest rate on their jumbo mortgage to 8% this morning. Last week the rate was 6.78%. The meltdown is in full swing. Hold on the drop is going to be very steep. Ouch!!!!!!!!!!!!”
As is the case in any housing cycle, the credit peloton ("the pack" of conforming AAA, AA and A loans) will be effected as the market evaluates the pool of "doped" loans and disqualifies them from the race. This credit tightening will effect all buyers' ability to find and obtain credit and all builders' ability to sell inventory.
The highest rated tranches of The ABX Index, credit-default swaps based on bonds consisting of 20 subprime mortgages , for the 07-2, 07-1 and 06-2 series all settled on their lifetime lows again today (as per Markit). These tranches, AAA, AA and A, are the "most secure" investment series of the subprime mortgage derivatives indices. The lower BBB tranches are off their lifetime lows. Source: Markit.
Housing futures and forwards are showing increasing lower housing prices into 2008 and 2009 in all US metro areas. Of note is that the Miami, Las Vegas, San Diego and Los Angeles futures for May 2008 are 5% to 8% lower from spot index.
Timing this cycle is the ultimate question as the credit peloton won't return to a "normal" pace again until the "bad apples" are pulled from race.
Banks and securities firms are trimming loans, especially to companies tied to the mortgage market. But it is a balancing act: Cutting back too far could make matters worse by accelerating corporate bankruptcies and causing more turmoil in financial markets.
Banks facing the prospect of taking on billions of dollars in buyout-related debt are starting to trim lending to companies that need to refinance loans or restructure their balance sheets.
As banks rein in riskier lending, companies could find themselves unable to refinance loans coming due or to overhaul their businesses. Some companies may be forced to seek bankruptcy protection, a development that would exacerbate bond-market turbulence.
Thursday, August 2, 2007
Many Wall Street and global commercial banks and investment banks are currently sitting on billions of dollars of “loans” they never had an intention to keep on their books. Such firms act as the bridge lender between a private equity firm in getting a new deal financed and the ultimate purchaser of the loans, such as hedge funds, retirement funds, wealthy individuals, insurance companies, etc. Many of these ultimate debt buyers are currently telling major banks “Thanks but no thanks…we don’t want any more.” Nobody wants the hot potato.
The ripple in financial markets? The sharp drop in the Dow last week comes to mind. The Dow had its worst week in four years. Scared money goes in search of safety and liquidity. Hence, the sharp rise in U.S. Treasuries last week, with bond prices having their largest gain in 10 months.
Wednesday, August 1, 2007
Here's the short list..
- Do I Have an Entrepreneurial Mindset?
- Do I Have a Passion to Help Others Succeed?
- Do I Have an Internal Personal Belief System That Supports My Success?