Caution Is Setting In

CNNMoney did an informal online poll as to whether now was a good time to buy a house. Interestingly, 56% answered that it was better to wait.

CNNMoney Poll

Hedging

This term is often used but not understood. Hedging is a technique for removing specific risks from a position by entering an offsetting short position. Most often, it is used to remove market risk - beta - from a stock position, so that the return on the position becomes that of the outperformance of the position (plus the interest on the proceeds of the short), its excess return or alpha. In the trivial case of a perfect hedge, where the hedge is identical to the original asset, then the net position should earn the market risk-free return, typically the T-bill interest rate.

For example, to hedge a stock portfolio one might short the S&P futures, in effect going short the S&P 500 index basket of stocks. The return on this position would then be the risk-free return plus the performance of the portfolio relative to the S&P 500 index.

Mean Reversion

The philosopher Georges Santayana wrote: "Those who cannot remember the past are condemned to repeat it." There is a corollary in the financial markets - those who do remember the past are condemned to frustration and underperformance in manias, like the bubble in which we find ourselves today.

Nassim Taleb's book "Fooled By Randomness" describes this phenomenon, where the short-term success enjoyed by the novices fools them in to believing that they know what they are doing, when in fact they are so incompetent that they cannot recognize their own incompetence.

On The Other Hand...

WASHINGTON (MarketWatch) - Sales of existing homes rose unexpectedly in March by 0.3% to a seasonally adjusted annual rate of 6.92 million, the National Association of Realtors said Tuesday. After five months of declines, existing home sales have risen two months in row, prompting David Lereah, chief economist for the realtors, to say, "This is additional evidence that we're experiencing a soft landing." Economists expected sales to fall to a 6.70 million pace in March. The number of homes for sale rose 7% to a record 3.194 million, representing a 5.5-month supply at the March sales pace, the largest supply since July 1998. Median prices are up 7.4% in the past 12 months to $218,000, the smallest price gain since January 2004.

More Grist For The Housing Mill

UBS decides the landing is going to be hard: "Of late, however, the more rapid rate of decline in demand -- down 21% in eight months -- has led us to rethink our thesis for the near term," she said. "Given tough comparisons and a proliferation in for sale listings in some of the hotter markets, demand has fallen more quickly than we expected." Marketwatch

"ForeclosureS.com, a California based real estate investment advisory firm and nationwide publisher of foreclosure property listings, reported today that foreclosure activity in the first quarter of 2006 increased significantly from the fourth quarter of 2005 in several western and southwestern housing markets.

"The biggest increases were in major urban centers around the West," said ForeclosureS.com president Alexis McGee. "For example, Los Angeles County recorded 6,314 pre-foreclosure filings and foreclosures through March, up from 4,911 in Q4 of 2005, while in San Diego the numbers jumped from 1,565 in Q4 of 2005 to 2,241 in Q1 of 2006." Business Wire

"Investors who sought quick profits buying and selling real estate in the Washington region are in full retreat, dampening demand for homes, most notably for condos. What is becoming apparent, market watchers say, is how big a part speculators played in the region's real estate boom of the past few years. Not just condominiums, but also townhouses and single-family houses, were snapped up by investors using no-money-down financing and non-traditional loans. They helped send prices soaring at unprecedented rates. And now many are trying to sell, or rent at a loss. Some may eventually dump properties at low prices to get rid of them. That could weigh down values for everyone." Washington Post

Irvine, Calif. – April 25, 2006 – RealtyTrac™ (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its 2006 Q1 U.S. Foreclosure Market Report, which showed that 323,102 properties nationwide entered some stage of foreclosure in the first quarter of 2006, a 38 percent increase from the previous quarter and a 72 percent year-over-year increase from the first quarter of 2005. The nation’s quarterly foreclosure rate of one new foreclosure for every 358 U.S. households was higher than in any quarter of last year. RealtyTrac

State Of The Bubble

Where are we in the progress of the housing bubble?

Hard to say. It is clear that sales are down and inventories are rising, especially in the most extreme bubble areas, such as South Florida, Phoenix, Las Vegas, San Diego and so forth. However, there has been little downward movement on prices although the rapid rises seen last year seem to have stopped in most place, although not all. Some areas are still seeing bidding wars and price increases. The first cracks in the bubble occurred in late summer of 2004, with Pulte's drastic price reductions in Las Vegas showing that there were, in fact, limits to the ability to raise prices. What is clear is that new house builders are increasingly cutting prices and adding incentives to move the product. But the less skilled sellers of existing houses are still holding their ground and hoping for higher prices. If not now, in the fall. Or spring 2007. Or whenever.

What we saw in Australia and Britain was an initial drop, then a leveling out in housing. One certainly cannot rule out the same thing here. However, the real issue os not the bottom falling out of the housing market but the end of the "housing ATM" which has been funding consumption for the last few years. This should show up in M2, usually a good indicator for consumer spending. So far (as of the end of March). it has not done so. So I think it is too early to conclude that the housing bubble has burst, although the behavior of the new house builders and the rising inventoriea are a clear warning signal that the end is near.

We will be watching the weekly mortgage purchase index (from the Mortgage Bankers Association) for signs of movement, and also M2 as a leading indicator of consumer spending.

Sweden Ditching Dollar

"NEW YORK (MarketWatch) -- The dollar was lower across the board early Friday after the Swedish Central Bank said it had significantly reduced its holdings of dollars in its foreign exchange reserves. The Riksbank said it cut the share of dollar-denominated assets by 17% to 20% and boosted the euro's share by 13% to 50%."

The dollar losing its status as the reserve currency as we watch.

Jimmy On The Dollar

Jimmy Rogers, in a speech given in Singapore: "The U.S. dollar is in the process of losing its status as the world's reserve currency, sterling went down 80% from top to bottom (when it lost its status as the world's reserve currency), the U.S. dollar's going to go down a lot in the next decade or so."

Clearly this is the case. I don't see any other way that the excess consumption can be curbed. The dollar will go down, but nominal wages will not increase to compensate.

Lee Raymond's extreme CEO greed

Dennis Gartman: "In what must be the singularly worst public relations gambit in history, ExxonMobil announced yesterday that it is giving its outgoing president, Lee Raymond, one of the most generous retirement packages in the history of American business: nearly $400 million, including pension, stock options, a $1 million consulting deal, two years of home security, personal security, a car and driver, and use of a corporate jet for professional purposes. What were Mr. Raymond and the Board thinking when they allowed this sort of retirement package to be granted -- and made public -- at a time when gasoline prices are skyrocketing? We are capitalists here at TGL, and we are far to the right on almost all questions; but for ExxonMobil to grant this sort of package to a mere caretaker, albeit a very excellent one, is beyond reasonableness. The timing could not be worse. The entire oil industry will suffer because of ExxonMobil's public relations idiocy in this matter."

This is the standard CEO greed syndrome. Quite apart from the public relations aspect, this is theft from the shareholders. This man did nothing to deserve this kind of compensation except to be in the right place at the right time. Lucky sperm, indeed. I have no problem with, for example, Larry Ellison's wealth, although personally I dislike him intensely. Without Larry, Oracle wouldn't exist. He built it from scratch and deserves the credit and rewards. Regardless of his personal nastiness. But this jerk at Exxon can make no such claim. He's entitled to a good salary but nothing more. He is abusing his position to make off with the shareholders' money. Like many other CEOs, it must be said. Larry, on the other hand, is the shareholder.

Help Me! - Rhonda

"Rhonda is in a panic.

The two-year introductory rate on her adjustable mortgage is about to expire and send her payments soaring. She thought she could refinance to a more-affordable loan, but the rates she's being quoted are just as high.

"So I then decided I would just sell the house and get out of it," Rhonda wrote in an e-mail. "WRONG! The houses in my area are selling for around $20,000 less than what I owe!""

Rhonda and millions of other morons who have over-borrowed. And are now going to be screaming for someone to bail them out. The negative equity epidemic

Unusual market action

Although the broad indices remain locked in a trading range by the programs, action elsewhere is unusual. Interest rates are rising, both on the short end due to the Fed, but now on the long end as well (the ten-year is over 5%). The dollar is under pressure versus nearly everything, even the euro. June crude is well over $70, gasoline is over $3 in many markets, wholesale unleaded is $2.11. Gold is over $600, with similar moves in other base and precious metals, including of course Dr. Copper.

Market internals for equities are unusual, the so-called "Hindenburg Omen" signal has been occurring recently. This signal has often, but not always, presaged declines. It is based on seeing a simultaneous expansion of both new highs and new lows, supposedly indicating confusion amongst traders as to market direction and therefore loss of momentum.

Rookie Of The Year

We have a rookie Fed Chairman, Ben Bernanke. How about a brief history of rookie seasons for Fed Chairmen?

Marriner Eccles took office Mar 19, 1936. We then had Roosevelt Recession and the S&P lost 54 %.

Thomas McCabe took office April 15, 1948. It was last leg of bear market. S&P lost 21%

William McChesney Martin, Jr. took office April 2, 1951. We had a bond market crisis and the S&P lost 15%.

Arthur Burns took office Feb 1, 1970. It was last leg of bear market. S&P lost 23%.

G. William Miller took office Mar 8, 1978. We had a dollar crisis and the S&P lost 14%.

Paul Volcker took office Aug 6, 1979 and we had "Saturday Night Massacre". S&P lost 10%.

Alan Greenspan took office Aug 11, 1987 and then we had a stock market crash. S&P lost 36%.

Keep The Faith, Baby

Reuters: "Answering audience questions after a speech to the Dallas Friday Group, (Dallas Federal Reserve Bank President Richard) Fisher said the U.S. dollar is a "faith-based currency" dependent on the credibility of a central bank."

If that doesn't scare the daylights out of people, then I don't know what else will.

Who will buy?

The federal government is running a huge deficit, and it will only get larger with the entitlement programs, such as the Medicare drug benefit, that have added to future entitlements. This means that the government will be forced to issue similarly huge amounts of debt to finance these payments. The fundamental question is, who will buy this debt? There are really three possible answers to this question. One is private investors - banks, pension funds, etc. The second answer is foreign central banks. Receiving a steady flow of dollars from the US trade deficit, up to now these have been buying US treasury debt with the flow. The third alternative is the Federal Reserve, who simply prints the money to buy the debt. This is the fundamental question which will drive the economy over the next months and years.

Private investors left the scene some time ago, although the re-introduction of the 30-year bond has enticed some pension funds to return, because the long bond allows them to match the duration of their obligations better than most other fixed-income alternatives. Foreign central banks had been shouldering the bulk of the burden until about a month ago, when their purchases started to fall off. The excessive growth in the US money supply has made many of these banks concerned about the future value of the dollar and so they have grown increasingly reluctant to buy. The last alternative, the Fed, looks to be the buyer of last resort. Of course, the big problem is that Fed monetization of government debt is inflationary. So Mr. Bernanke has to either allow rates to climb now, to make Treasury paper more attractive to private buyers, or expect them to climb more later as his "helicopter money" buys less and less..

Scary Market

Seems like everything except bonds is being bought. Metals, stocks, energy, you name it... Sure smells like inflation fears to me - cash is trash mode. While there are spotty reports of weakness in housing, especially in the primo bubble spots, mortgage lending is strong, probably indicating that buyers are panicking to lock in rates ahead of what they see as more rate increases to come. Chicago Fed President Moskow said a probable slowdown in U.S. housing markets "should be an important factor in bringing growth back to potential" as the Fed has forecast for 2006 and 2007. But if housing remained solid "this would heighten the risk of above-trend GDP growth" and could be inflationary".

Don't tell me we're going to see a summer of raising rates followed by the classic fall panic?

Speculation Runs Wild

According to the National Association of Realtors (NAR), 40% of existing home sales in 2005 were second homes. 28% for investment purposes, and 12% as "vacation homes". Right. Of course, this doesn't account for the folks who held on to their previous home when they moved, or those who just plain lied about the use of their home. Probably the real number of speculative purchases is 50% or more. But that's just speculation :).

This speculative inventory is a huge overhang to the market. Economic pressure - probably even just a hint of falling prices - could bring many of these properties on the market. These amateur speculators will be prone to panic. Sell now!

Wishful Thinking

The Employee Benefit Research Institute has just released its annual survey of the state of employee savings for retirement.

According to the Chicago Tribune "The majority of American workers think they'll be able to retire comfortably, but most aren't saving nearly enough to meet that goal, according to a new study.

The Employee Benefit Research Institute's annual retirement confidence survey, released Tuesday, found that about 68 percent of workers are confident about having adequate funds for a comfortable retirement, up slightly from 65 percent in 2005.

At the same time, more than half of all workers say they've saved less than $25,000 toward retirement, according to the Washington, D.C., based research group. Even among workers 55 and older, more than four in 10 have retirement savings under $25,000.

"`Overconfidence' is the word that comes to mind," said Jack VanDerhei, co-author of the study."

.....

As would be expected, older workers generally have more set aside than younger workers, with 12 percent of those 55 and older reporting account balances of $100,000 to $249,999, and 26 percent with accounts of $250,000 and up."

That, of course, means that most have very little set aside. $250K doesn't get you anywhere, these days.

Best Idea Of The Day

Members of Congress should wear NASCAR-like patches on their persons to show their corporate sponsorships.

Rich Dad Loves Crashes

Robert Kiyosaki (Author of "Rich Dad, Poor Dad"):

"Is there a real estate bubble?" That's the question I'm asked repeatedly. When I reply honestly -- "I hope so" -- my questioners' fear occasionally turns into anger. "You want the market to crash?" asked one young man incredulously, an attendee at the Learning Annex's Real Estate Wealth Expo in Dallas, where I was a featured speaker. "Yes," I replied. "I love market crashes."

Booms, Busts, and Where Opportunities Occur

A Picture Is Worth A Thousand Words

Real home price indexes for the United States 1890-2005 (Shiller 2005), Amsterdam 1628-1973 (Eichholtz 1997) and Norway 1819-1989 (Eitrheim and Erlandsen 2004)

Shiller: Long-Term Perspectives on the Current Boom in Home Prices