Financial Reality

Blog Moved

2006-05-09T08:27:00.000-07:00

This blog has been moved to Financial Reality. Our own website so we can do more than just blog.

Yup, Refi Is Still The Way Of Life

2006-05-02T13:27:00.000-07:00

"In the first quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review.This percentage is up from the fourth quarter of 2005, when the share of refinanced loans that took cash out was a revised 81 percent, and is the highest since the third quarter of 1990, the mortgage giant said.

"The share of all mortgages that were for refinance fell slightly in the first quarter of 2006 to 44 percent from 45 percent in the fourth quarter of 2005. Over

that same period interest rates on all mortgages increased between 0.02 and 0.25 percent," said Frank Nothaft, Freddie Mac vice president and chief economist.

"Almost no one is refinancing to reduce their interest rate in today's environment. In fact, the first quarter of 2006 is the first time in 20 quarters in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers," Nothaft said.< One reason why homeowners may be willing to increase the mortgage rate on their first-lien mortgage is because interest rates on most home equity lines of credit have been pushed up again as the Fed increased short-term interest rates in January and March, which in turn pushed up the prime rate, Nothaft said. Home-equity loans are typically linked to the prime rate, which currently is at 7.75 percent, and many home equity loans have rates that are 1 percent or more above the prime rate, Nothaft said. In contrast, the average rate on 30-year fixed-rate mortgages is presently near 6.5 percent, Nothaft said."

Inman News

Watching The Dollar

2006-05-02T07:12:00.000-07:00

I've often thought, and previously mentioned, that it is not unlikely that we will have a dollar crisis to bring an end to this nonsense.

The last few days, have certainly weakened the Fed's credibility. Yesterday's episode of Maria Bartiromo relaying Bernanke's dinner party remarks set a new low, both for Fedspeak and for market idiocy in listening. Individually these things don't mean much, but over time they have a corrosive effect as market participants cast a wary eye over the Emperor's new clothes.

The dollar was down again today. CAD went through 0.90. DX is in the 85s. How low can it go? Well no real panic until it gows through 80, I think.

The Bubble Lives

2006-05-02T07:07:00.000-07:00

Couple of interesting data points. Pending home sales today (NAR) was down over last year, but only 6%. Really in the noise. No bubble burst there. The BEA's report yesterday implied an estimate of $300 billion increase in mortgage debt outstanding in Q1 (an annual rate of increase of about 13%). So at any rate the home ATM has slowed a bit, but it is still pumping out a huge amount of money to support the overspent consumer.

Caution Is Setting In

2006-04-27T09:52:00.000-07:00

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

2006-04-26T12:26:00.000-07:00

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

2006-04-26T06:52:00.000-07:00

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...

2006-04-25T07:19:00.000-07:00

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

2006-04-24T20:31:00.000-07:00

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

2006-04-23T10:51:00.000-07:00

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

2006-04-21T06:09:00.000-07:00

"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

2006-04-20T09:30:00.000-07:00

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

2006-04-18T15:38:00.000-07:00

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

2006-04-17T10:44:00.000-07:00

"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

2006-04-17T07:28:00.000-07:00

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

2006-04-11T19:11:00.000-07:00

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

2006-04-11T13:15:00.000-07:00

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?

2006-04-10T20:03:00.000-07:00

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

2006-04-06T16:52:00.000-07:00

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

2006-04-05T08:48:00.000-07:00

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

2006-04-04T11:10:00.000-07:00

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

2006-04-04T10:55:00.000-07:00

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

Rich Dad Loves Crashes

2006-04-04T07:58:00.000-07:00

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

2006-04-02T08:46:00.000-07:00

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

Right Here In River City

2006-03-30T15:36:00.000-08:00

Sure smells like trouble. Precious metals soaring, oil likewise now back around $67, bond yields (and therefore conventional mortgage rates) marching up every day, US dollar falling against other major currencies.

Of course it is also the end of the quarter and the program traders are busy with their characteristic manipulations to jam the market and optimize their bonuses. As Bill Fleckenstein plaintively asks every quarter as this charade goes on: "Where is the SEC?" (Answer: so long as the market goes up, they look the other way). But when this pressure stops as they have to return the borrowed money, what then?

I think I hear trombones.

More On Toxic Loans

2006-03-29T16:37:00.000-08:00

The Office of the Comptroller of the Currency recently issued a proposal for new guidance on "nontraditional" mortgages, e.g. Option-ARMS. Interagency Guidance on Nontraditional Mortgage Products

The response in the attached link is well worth a read: Comments from Michael S. Blomquist (PDF)

ADB warns on dollar

2006-03-29T16:25:00.000-08:00

The buy programs were busy today as the mutual fraudsters commenced the quarter-end jam job to make their returns look better. Gold and energy were strong, though. This reflects the ongoing weakness of the dollar and most paper currencies against "real stuff". Competitive devaluation is next, as the Asian Development Bank issued an official warning today:

"Asian countries need to prepare for a possible sharp fall in the dollar and should allow their currencies to appreciate collectively if that happens, a senior Asian Development Bank official said Tuesday.

"Any shock hitting the U.S. economy or the global market may change investors' perceptions, given the existing global current account imbalance," Masahiro Kawai, the bank's head of regional economic integration, said at a news conference.

"Our suggestion to Asian countries is, don't take this continuous financing of the U.S. current account deficit as given. If something happens, then East Asian economies have to be prepared."

International Herald Tribune

The curse of ETFs

2006-03-27T19:59:00.000-08:00

Many observers have noted the dramatic increase of program trading and the decrease of volatility on the last three years. And also the ability of the program traders such as Goldman to make huge profits on a flat market.

In my view, this phenomenon is a result of the popularity of Exchange Traded Funds (ETFs). It used to be that program arbitrage trading was done with index futures on one side of the trade and stocks on the other. But this was clumsy because the futures expired only quarterly. ETFs, on the other hand, are a gift to the arbitrage trader. Because they can be shorted anytime (uptick rule does not apply), and are not in the indexes, and are optionable, you can do pretty much anything. Basic idea would be to short the ETF and go long the components. This will pump the index, so you would have bought calls on the index. Unlike with the futures, you can then deliver the shares of the components to the ETF sponsor anytime and receive ETF shares to cover your short position without having any trades go through the exchange. Buy programs are of course favored because the uptick rule does apply to the component stocks, so you don't want to be shorting them.

These strategies appear to provide excellent low-risk profits at the expense of everyone else.

The Kondratieff cycle revisited

2006-03-27T19:52:00.000-08:00

I posted this graph on the blog for the first time in August of 2004. I thought it was worth revisiting in the context of the China-bashing that is now going on, led by Sen. Schumer et al. Notice that with gold now in the $560s we are well down the devaluation path against real goods, and Schumer now wants to break the yuan peg so that the dollar can be devalued against the yuan. That's competitive devaluation. He is threatening a 27.5% tariff on imported Chinese goods. That's on the chart too.

Soon as the housing bubble bursts, consumtion declines and we get to the part about plant closings and debt defaults. It is a long way down from here.

Wouldn't it be nice if GWB were competent?

2006-03-27T19:43:00.000-08:00

Steve Roach of Morgan Stanley writes "For me, the highlight of the annual China Development Forum always comes at the end of the gathering -- the traditional meeting with the Premier. Sometimes this exchange is tightly scripted, but at other times, it offers considerable food for thought. This was one of the latter examples. In a free-wheeling response to intense questioning from the assembled group of outside experts, Premier Wen Jiabao left little doubt of the strong resolve of the Chinese leadership in facing a series of daunting challenges in the years ahead."

Can you imagine George Bush being capable of conducting an unrehearsed and freewheeling discussion session with a group of financiers and economists?

So long and thanks for all the fish

2006-03-27T07:55:00.000-08:00

OK this isn't financial. This is scary. It turns out that the answer to life, the universe, and everything may in fact be 42.

Seed

Tiptoeing for the exits

2006-03-26T10:36:00.000-08:00

The following from Jon Lansner's blog at the Orange County Register, giving a bubble update:

"Mid-March: Prices +9.6%; volume -21.6%

Forget the first two months of the year. They're wacky. It's now prime shopping season. And the first peek -- fresh stats from DataQuick -- shows if the current trends hold, March will be be the fifth straight month of year-over-year sales declines and the worst one-year drop since October 2004. For 22 business days ended March 15:

	Median price	Change from '05	Volume	Change from '05
Resale houses	$698,000	+14.1%	1,847	-26.9%
Resale condos	$469,000	+13.0%	912	-28.1%
New residences*	$649,500	-21.2%	531	+33.4%
All homes	$627,000	+9.6%	3,290	-21.6%

*-Homes, condos and apartment conversions"

This clearly shows how the builders - "New residences" line - are the first to adjust prices in the downturn. As professionals, they are saying "Feet, don't fail me now" while the amateurs are clinging to their high prices - and not selling. See Real Estate Prices for the original discussion of this tendency.

Red sky at morning, sailors take warning

2006-03-24T14:14:00.000-08:00

New home sales were down substantially this morning. If this is anything other than a blip, then it is very likely that we are going onto recession. This blog shows the history. Judge for yourself.

Real Estate Sales Obfuscation

2006-03-24T07:19:00.000-08:00

Today, new home sales were reported down 10.5%. Which seems not inconsistent with the anecdotal data flowing in. Yesterday, existing home sales were reported (by the NAR, National Association of Realtors) to be up 5.2%. Somewhere, there is a large inconsistency. Other bloggers - Mish, Russwinter have analyzed the NAR numbers in detail to show how unlikely they are (to be true, that is).

The NAR, usually in the form of David Lereah, its chief economist, has repeatedly shown that it will say anything in pursuit of boosting the real estate market and the perceived interests of its members.

Fidelity doesn't give a damn

2006-03-23T19:40:00.000-08:00

Fidelity Investments announced that a laptop belonging to one of its employees had been stolen, and that the laptop contained personal details, including names, addresses, birthdates, SSNs and account details for about 196,000 current and past Hewlett-Packard employees. Including my wife.

While (irresponsibly) understating the risk, Fidelity's response was to send out a letter with a promo code for Equifax's credit monitoring service (which Equifax would no doubt have gladly given for free as a marketing program). The letter basically said, well, we screwed up, but it is your problem. Not even any specifics about how they were going to prevent a recurrence.

We now have to monitor our credit and are at major risk for having my wife's identity stolen by, say, a child pornographer. Too bad, sez Fido. Could be nothing bad will happen, sez Fido. Yeah right.

This kind of occurrence indicates a total failure of any internal controls over data that may exist. They have no business lugging personal data around on laptops that will be stolen, sooner or later. Arrogance and indifference to their customers. I'm out of there.

Is that a lot?

2006-03-23T09:52:00.000-08:00

RealtyTrac™ (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its February 2006 Monthly U.S. Foreclosure Market Report, which shows 117,259 properties nationwide entered some stage of foreclosure in February, a 13 percent increase from the previous month and a 68 percent increase from February 2005. The report shows a February national foreclosure rate of one new foreclosure for every 986 U.S. households.

Needless to say, this is not a good sign for the property market. If you haven't sold yet, you had better hurry. You have missed the peak, most likely, but there is still demand out there.

Whither the dollar?

2006-03-23T07:38:00.000-08:00

The US dollar is moving under two conflicting pressures: rising interest rates make dollar assets more attractive, but the endless supply from Mr. Bernanke's printing press makes the dollar less attractive.

US interest rates are higher than those of any of its major trade partners (except China, but of course the yuan is dollar-pegged so China is part of the dollar zone for all practical purposes). But so does the supply of dollars. When the Fed stops raising rates, then the dollar will stumble and fall. This will increase domestic inflation significantly (as is usual when the Fed stops raising rates, paradoxically enough).

Runaway Inflation

2006-03-19T15:16:00.000-08:00

A stark account of daily life in Zimbabwe, where inflation is rapidly approaching levels last seen in the Germany during the Weimar Republic. Incomes have fallen dramatically and the government pays its bills by printing money. There is a very real chance that the US will go down this path. Although I think that the deflation resulting from the bursting of the credit bubble will trump the Fed's printing efforts, this is what you get from central banks: Zimbabwe - Bacon For A House

Don't read the article and think "Oh, it couldn't happen here". Oh yes it could. The US government sector is so overcommitted to future payments it will not see any way out but to print money.

The Definitive Summary

2006-03-19T05:53:00.000-08:00

Paul Kasriel of Northern Trust writes the definitive indictment on overspending. 2005 Flow-of-Funds Data - I Report, You Decide

I find that article frankly terrifying. I really cannot grasp the magnitude of the disaster that is staring us in the face.

For the sake of even-handedness

2006-03-18T09:03:00.000-08:00

A fellow blogger debunks the bubble: There is no housing bubble

Toxic Loans

2006-03-17T12:35:00.000-08:00

“Countrywide Financial Corporation is filing this Current Report on Form 8-K to provide a summary of pay-option loans held for investment at December 31, 2005.”

Total pay-option loan portfolio

2004..$4,701,795,000

2005..$26,122,952,000

Accumulated negative amortization (from original loan balance)

2004..$29,000

2005..$74,815,000"

These, of course, are the option-ARM loans where most interest need not be paid and is added to the loan balance. It is, however, taken into income by the lender. How much of that $75 million will ever be paid? My guess is not much. We'll see.

Move Along, Nothing To See Here

2006-03-17T09:22:00.000-08:00

Chrysler, DaimlerChrysler's North American arm, has unleashed a fresh barrage of discounts and other incentives to push up retail sales and reduce inventories in the ferociously competitive US car market.

The new perks, which apply to most Chrysler models, include interest-free financing for up to six years, no principal payments for six months, and free holidays for top-performing sales staff at Chrysler dealerships.

The carmaker is also paying dealers $1,000 per vehicle on all models if they meet their allotted offtake, even if the cars then remain unsold.

Real Estate Prices

2006-03-16T02:25:00.000-08:00

Overview

When people are asked to justify their belief that real estate prices can only increase monotonically, they generally intone something to the effect of “Well, they aren't making any more of it” along with “People want to live here” or “People are moving here all the time” and so forth. The implication is that demand is always increasing and the supply is fixed, therefore price will increase to match demand to supply or something similar. They then change the subject, satisfied that the matter has been adequately discussed.

Let's try to think about real estate prices, specifically SFR (Single Family Residential) prices, a little more coherently. First of all, let us take as a given that some areas are more desirable places to live than others. Accordingly, a beachfront home in Newport Beach, for example, is likely to command a higher price than a recently-vacated crack house in gang territory. However, at any given price level in either case we need a supply of people willing and able to pay that price, sufficient to buy the houses coming on the market. If that supply of purchasers fall short, either price levels will decline until equilibrium between buyers and sellers is reached once more, or houses will remain unsold. Sellers often choose to let their properties remain unsold rather than lower their asking prices and so the inventory of houses for sale climbs. Some sell, of course, but others do not as the general price level is too high for the market at that time. The result can look like the following (From the Naples Sun-Times, 3/14/2006):

“In February 2006 there were 5,417 single family homes listed for sale in the Sunshine Multiple Listing Service (MLS) of the Naples Area Board of Realtors, of which 204 sold. There were 5, 289 condos/coops for sale, of which 179 sold.

Let's do the math: 5,417 plus 5,289 equals 10,706. Divide that by 383, which is the number of homes that sold (204 plus 179). What do you get? 27.95? That means that in February there was a 28-month supply of homes for sale. In other words, if no other homes came on the market, it would take 28 months for all homes listed for sale to be sold. “

Even in the most desirable areas, there are always people who need to sell their properties. Changes in their financial circumstances, marriages, divorces, births, deaths, job changes, etc. all provide a steady stream of sellers. Some, but not all, will be buyers elsewhere. The converse applies equally if there are more willing and able buyers than there are houses for sale. Then prices rise, either raised by the sellers asking higher prices, or by the buyers themselves outbidding one another.

Looked at from this point of view, the price of property is established by the balance between buyers and sellers. More buyers than sellers means shrinking or very small inventories and often multiple bids over the asking price, driving up prices; more sellers than buyers means growing or large inventories of unsold properties and, eventually, reduced prices as sellers cave in to reality.

So to assess local markets, we need to understand the factors driving the numbers of buyers and properties available for sale.

Properties available for sale

There are four main sources of properties for sale.

The first is the normal turnover discussed above as people who own houses go through various life changes and need to sell their houses. While there are obviously local variations, generally speaking the law of large numbers operates here to provide a steady stream of resales.

The second source is negative economic adjustments that force property owners to sell because they can no longer afford the expense of owning the property. These can take the form of economic issues affecting a significant part of an area's population – for example, the defense cutbacks in California on the 1980s or the present woes of the auto industry in Michigan. But they can also take the form of expense pressures that affect groups of property owners – upwards adjustments in payments on Adjustable Rate Mortgage (ARM) debt, insurance premiums (Florida, Louisiana) and taxes (lots of places). A rising trend in foreclosures and preforeclosures is often a symptom of these adjustments.

The third is speculation – people who own houses that they are not living in. Either they moved and kept the old house, bought a second house or are in the “flipping” business. In some areas, such as Miami and Phoenix, it is estimated that the majority of new properties in the last few years have been bought by speculators. Since they don't live in them, these houses can be quickly available for sale.

The fourth is new construction. Some areas are fully built out – there is no vacant land for new construction – but many are not and developers provide a large percentage of the houses available for sale. These properties are generally sold directly by the builder and therefore do not appear in MLS inventories, making it more difficult to measure inventory levels. Builders typically commit to construction projects long in advance and have a tendency to overbuild when the cycle turns down. Then they can be a major pressure on prices because, as professionals, they are much quicker to adjust prices than the amateurs who dominate the resale market..

Buyers

In order for a sale to occur, a buyer must be both willing and able. Willing buyers come from two main sources:

Need-based buyers. Folks who are simply looking for a place to live.Either first-time buyers or moving from one house to another, this is the long-term reliable source of buying.
Greed-based buyers. Speculators. Folks who are looking to buy a house with the expectation of reselling it for a profit.These buyers fall away when prices are declining – they are momentum buyers who buy because they see prices rising and they believe that market conditions are such that they will continnue to do so. They are not investors, not in the SFR market, because that is almost never a profitable proposition without relying on price inflation.

Able buyers are those with sufficient financial resources to fund the transaction. This means cash or credit, usually a combination of the two. Credit is assessed using the time-honored three C's of credit - Character, Capacity and Collateral. These days character means one thing - FICO score. Capacity, the ability to service the debt, means income in relation to payments, often referred to as DTI (Debt To Income). Collateral means the value of the house relative to the amount of credit extended, often referred to as LTV (Loan To Value).

Traditionally, the yardstick of capacity (or the converse, affordability) has been the purchase of a house using a conventional, fixed-rate, 30-year mortgage with a 33% DTI and an 80% LTV (20% down payment). In the press, it is usual to publish an affordability index which shows the percentage of houses that a family with the median income could afford to buy, given this traditional yardstick. These affordability numbers, which for example currently show San Diego at 2% affordability, are today misleading because the mortgage industry has aggressively sought to expand their customer base to potential buyers who could not qualify with the traditional yardstick.

The recent rapid rise in house prices has resulted from a substantial expansion in the number of able and willing buyers. The Federal Reserve drastically reduced short-term interest rates, down to 1% in 2003. This allowed lower mortgage payments for a given principal amount, especially for ARMs users whose payments are tied to short term rates, expanding the number of buyers at all price levels. The efforts of mortgage lenders increased the number of able buyers at virtually all price levels by means of “creative” credit terms, easing their requirements along all dimensions of credit criteria:

Accepting more subprime borrowers (those with poorer credit histories and therefore lower FICO scores).
Reducing payments – ARMs, interest-only mortgages, option-ARMS and other negative amortization loans.
Encouraging income overstatement – allowing buyers to state their income without subsequent verification by the lender, so called “stated-income”, “low-doc” and no-doc” loans.
Allowing higher payments in relation to income – accepting borrowers who are committing 55% or even more of their income to mortgage payments, in comparison to the traditional 33%.
Overestimating LTV – inflating appraisals by pressuring appraisers to “hit the number”.
Eliminating the requirement for downpayments by financing 100% of value or, even worse, using so-called "piggyback" loans where the 20% downpayment is financed by a HELOC (Home Equity Line Of Credit), thereby avoiding the need for PMI (Private Mortgage Insurance)

Lenders have accepted a much higher level of credit risk as a result of these easy credit terms. In a rising market, where the value of their collateral increases on a daily basis, this probably represents a modest financial impact. In a falling market, this level of credit risk is an unprecedented situation with potentially huge risks to the liquidity and even solvency of lenders.

Able buyers also, if they are need-based, have to sell the house in which they are presently living. In rising markets, buyers will not worry too much about this – they'll sometimes even become speculators and hold on to their previous house. In falling markets, this becomes a big concern and can prevent transactions from closing because buyers are not willing to become speculators with their old house.

Outlook

Using these sources of buying and selling, we can do at least a qualitative analysis of any real estate market area. Overall, it seems that the buyer pool can be expected to shrink and the number of units for sale can be expected to increase. Some of the factors at work on the property for sale side include:

A recent study by First American Real Estate Solutions, a unit of title insurer First American Corp., projected that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans.
Large numbers of units owned by speculators in markets such as Phoenix, where a recent analysis showed that nearly 50% of the units listed for sale on the MLS were vacant, implying speculation.
Overbuilding by developers. Nationwide, the number of houses being constructed substantially exceeds the rate of net new household formation.

On the buying side, similarly we see negative factors operating to reduce the size of the prospective buyer pool:

Lenders are being forced by regulators to tighten credit terms in order to reduce financial risk. This especially affects marginal buyers, such as those using the exotic “option-ARM” mortgages.
The Federal Reserve continues to raise short-term interest rates, increasing ARM mortgage payments at any given price level.
Price momentum is slowing or even turning negative, causing speculative demand to dry up.

Looking at these factors, we can see that markets where developers and speculators have been most active are likely to be most vulnerable. Miami, Phoenix, San Diego, Las Vegas and Sacramento would be examples of this situation.

However, even “built-out” markets such as the San Francisco Bay Area are vulnerable to the effects of interest rate increases and tightened credit terms. The big question, of course, is how much prices will move in response to these changes. All one can say with confidence at this point is that the likelihood of significant further appreciation is very low, since it is hard to see how the pool of able buyers will be further expanded without significant increases in family income, which so far have not been forthcoming.

Federal Reserve Board Governor Donald Kohn said today, in a speech: "All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions."

Does she or doesn't she?

2006-03-15T05:33:00.000-08:00

Nobody knows for sure. Whether the Fed is done raising rates or not, that is the question. Probably not, in my opinion, but the press seems obsessed with this question in the belief that the sheeple want to be told that there will be a huge rally when the rate-raising cycle ends. This in complete disregard for history - previous cycles have not generated such an outcome - and in complete disregard for the implications. Which are that, when the Fed stops, it will be because of a weakening economy. Then, the Fed will very soon be easing again in what is likely to be vain attempt to stop the juggernaut.

Fluctuat nec mergitur

2006-03-12T05:35:00.000-08:00

Well back in Nanny Cay with decent wireless. The WiFi booster on he boat works like a champ, highly recommended. We were able to check email via an access point in Trellis Bay while anchored at Marina Cay, probably over a mile.

We didn't go to Sint Maarten in the end, the weather wasn't real encouraging for a sail and no-one was keen on powering for 90 miles. So we hung out in the BVI, visiting Anegada for the first time in a while as well as the other usual spots.

Looks like the hot money has been piling out of oil and gas just like it did last year at this time. I expect prices will recover nicely as summer approaches. I was early in adding to my position by buying Encana(ECA), but I also did some Suncor(SU) and that seems better. The NDX doesn't seem to be able to mount any kind of rally. I guess the downtrend in Google isn't helping, nor is Intel.

More and more inventory piling up in the housing market as the usual pattern shows up - folks are unwilling to lower prices, so volume drops. All the coming ARM adjustments, to say nothing of overcommitted speculators, will lead to forced sales in due course which will break the logjam.

Of course the big deal while we were off cruising was the announcement of the end of quantitative easing in Japan. Watch for liquidity growth to slow, because the ability to borrow at near-zero interest rates in yen has been a primary source of bubble fuel.

The general consensus is that Bennie will keep hiking at least once more (except for Jim Grant, who says he's done). Most folks I read are expecting a celebratory rally when Bennie says he's done, which they will short. Too pat, I say. I think the selling starts before then and the rally will be from lower levels.

We'll see.

Banana Peel

2006-02-28T12:40:00.000-08:00

Well the bulls took a bit of a setback today. Economic data was weak, and then the CFO of Google pointed out that trees don't grow to the sky. This was at least a temporary shock, although the dip in Google was bought aggressively, presumably by folks who believe that trees are different now and we don't need the space elevator after all.

Are we finally starting down? At least we seem to have stopped going up, which is of course a prerequisite. And the housing sales data certianly seem to be particularly weak, not a good sign gor the legions of flippers and Option-ARM mortgagors out there, gambling on continued inflation in house prices. BTW, one thing I particularly dislike is the marketing spin that refers to houses as "homes". Home is where the heart is, and cannot be bought and sold. A house may be a home, but a home may be a house, an apartment, a tent, a boat, anywhere where someone dwells in their particular version of home.

Oh well, I'm in Nanny Cay waiting for friends to arrive and then we're off to Sint Maarten to watch the Heineken Regatta and perhaps perform a bit of quality control on the sponsor's product.

What happens next

2006-02-25T11:19:00.000-08:00

Phase 1. Growth in consumption is curtailed as the consumer credit expansion due to housing slows. Employment is under pressure, as are wages and salaries, due to competitive pressure from the vast labor pool in China, India and Pakistan. "Core" inflation remains subdued. Headline inflation is significantly higher, as food and energy (and industrial commodity) prices continue to increase.

Phase 2. Mortgage defaults begin to rise significantly. Housing prices in the bubble areas are now off 25-30% from their peaks, but volume is very light and inventories are huge. The Fed begins to reduce interest rates. Bernanke opens with a big 1-2% reduction. The dollar declines against commodities. The yuan is allowed to rise significantly, as is the yen. Consumer prices begin to rise at a 10-15% annual rate, but incomes barely budge. Unemployment rises. Stagflation.

Phase 3. The housing market goes into full panic mode and major lenders are in trouble as defaults are widespread. Bernanke adopts Zero Interest Rate Policy (ZIRP), as the Bank of Japan did. The dollar goes into freefall and consumer prices soar, although unemployment continues to rise. Real family income has fallen by 50% from 2001.

Phase 4. Deflation and depression.

Pulling in the horns

2006-02-24T10:37:00.000-08:00

We owned shares in a couple of Canadian energy companies (Centurion and Transglobe) that have done well and have good prospects, but whose focus is in the Middle East (Egypt and Yemen, principally). I sold them today and reinvested the proceeds in Suncor. I think the political stability of Canada (and the reserve life of the tar sands) which Suncor offers outweighs the exploration and development prospects of the other companies.

We're now positioned pretty much exclusively in stocks the bulk of whose assets are in more politically stable areas - companies like Encana, Canadian Natural Resources, Suncor, Cameco and so forth.

Danger, Will Robinson

2006-02-23T14:37:00.000-08:00

Watch out for lurching robots.

"But signs of a real unwinding of the so-called carry trade have gained strength in recent days and weeks, hinting that the currency markets could be on the verge of something big. First there was the now-familiar dump of New Zealand dollars. Then there was this week's spectacular crash in the super-high-yielding Icelandic krona. And with talk of Japanese tightening gathering steam, some analysts are warning market participants against complacency in the weeks ahead.

"Once we do see a wholesale position unwinding, it has the potential to be quite a sharp move," said Ian Stannard, a currency strategist at BNP Paribas in London."

High-Yield Forex Jitters Point To Mkt Shift Risk

Family Income Declines

2006-02-23T14:34:00.000-08:00

"WASHINGTON - Income growth stumbled at the family doorstep in 2004, new government figures show, declining by 2.3 percent after adjustment for inflation.

The Federal Reserve also reported Thursday that net worth grew, although at a slower pace than in 2001, the previous year for which the comparison was made.

The drop in inflation-adjusted incomes left the average family income at $70,700 in 2004. The median, or point where half the families earned more and half less, did rise slightly in 2004 after adjusting for inflation to $43,200, up 1.6 percent from the 2001 level."

MSNBC

The Great Jobs Hoax

2006-02-22T11:46:00.000-08:00

The Bush administration continues to report job growth numbers typically around 200,000 per month and tout an unemployment rate in the vicinity of 5%.

The truth is the job numbers are mostly made up out of whole cloth by the "birth-death" model and the unemployment rate ignores a drastic shrinkage in the workforce participation rate as people who cannot find jobs finally stop looking.

Every year, the BLS quietly resets its numbers to "wash-out" the spurious adjustments that they put in during the year. If they didn't do this, total employment numbers would start to become absurd quite quickly. Even economists would realise something was wrong. Fortunately they do release these adjustments, which this year reveal that over the last five years, a measly 1.04 million net new private sector jobs have been created, way short of the 7 million needed to keep up with population growth. (Note: Data retrieved from BLS total private employment table, go to the site and use the "Most Frequently Requested")

The labor force participation rate has fallen every year since 2000 except 2005 when it was essentially flat.

Looking into the detail, the picture is worse. For example, manufacturing lost 2.9 million jobs and of course many of the new jobs are related to the housing bubble and have already begun to disappear.

US Foreclosures Up 45%

2006-02-21T11:48:00.000-08:00

"From Inman News: the January foreclosure statistics. "About 103,540 properties nationwide entered some stage of foreclosure in January, a 27 percent increase from the previous month and a 45 percent increase from January 2005, according to RealtyTrac. 'This is the first time since we introduced the report in January of 2005 that we've seen back-to-back months with increases of more than 20 percent,' said James J. Saccacio."

Fear or Greed?

2006-02-21T07:19:00.000-08:00

Many writers are picking up on the speculators as the driving force behind the housing bubble. Financial writers often do this, blaming avaricious speculators for price movements, a recent example being the rise in energy prices. But you have to look to the fundamental demand, without which speculators cannot survive. I believe the housing bubble is more about fear than avarice. In the case of many buyers, the fear of being "left behind", of being "locked out" of home ownership. Otherwise rational people seem to have bought in to the meme that says owning is always good. Certainly there are also speculators who prey on these folks, who seem to have been willing to pay nonsensical prices because of their fear. But without the primal fear, the speculation would not have been successful.

They really don't ever learn

2006-02-20T18:22:00.000-08:00

"Day-trading is great because everyone is equal, even housewives," said Mrs. Yamamoto, an energetic woman in her late 30's who declined to reveal her exact age or to document her trading profits. "Success or failure depends entirely on how clever you are, and nothing else."

In Japan, Day-Trading Like It's 1999

"Ekaterina Glover, 23, a Phoenix resident, said she has been reading books about real estate investing and realized that many mentioned Phoenix. She dreams of getting rich in real estate. "I do not have a stable job history or a credit history," she said. "But if you're enthusiastic and happy to learn, you can make it.""

Housing 'fix, flip' crowd fired up

Words fail me.

Sacramento Slam

2006-02-20T18:17:00.000-08:00

Sacramento currently has about an 8.5 month inventory on MLS.

D.R. Horton is cutting new home prices by 22.5% to over 30% to "move 'em out". Hope you're not trying to flip one you bought at the old price.

Mish: Horton slashes prices in Sacramento

The Tax System Explained

2006-02-20T18:01:00.000-08:00

The TAX system Explained IN SIMPLE TERMS!

Sometimes politicians, journalists and others exclaim; “It's just a tax cut for the rich!” and it is just accepted to be fact. But what does that really mean? Just in case you are not completely clear on this issue, I hope the following will help. Please read it carefully.

Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

“Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20.” Dinner for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still eat for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to eat their meal.

So, the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now paid $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings)
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”
“Yeah, that's right,” exclaimed the fifth man. “I only saved a dollar, too. It's unfair that he got ten times more than me!”
“That's true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn't get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start eating overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D
Professor of Economics
University of Georgia

Over The Falls

2006-02-20T06:55:00.000-08:00

According to the NAR (National Association of Realtors), pending home sales, i.e. housing units under contract but not yet closed, fell 22.5% nationally from November to December of 2005, down 6.6% year over year. Compared to June, the peak month of 2005, pending sales were down 49% (although only 10% after seasonal adjustment).

Month to month changes by region:

Northeast down 25.1%
Midwest down 27.2%
South down 14.7%
West down 28.7%

Year to year changes by region:

Northeast down 13%
Midwest down 10.8%
South down 3.7%
West down 15.1%

Broken Window Part Deux

2006-02-18T07:34:00.000-08:00

I was listening to the radio this morning with one ear when the "Market Minute" came up. I was astonished to hear that CBS Marketwatch economist Irwin Kellner stated that the huge snowstorm that swept through the Northeast US over the last few days was a good thing for the economy. How can this be, I thought? Plants and offices were closed, travel plans were dislocated or cancelled, much production of goods and services must have been lost. Mr. Kellner went on to say that the storm "gave people a chance to go out and buy the winter gear - clothing, snow blowers and so forth - which the warm January had allowed them not to buy". And I realized, oh here we go again, the hoary old broken window fallacy. Of course, he went on to preach the boom that would result from the post-Katrina rebuilding and so forth. Nothing new here - completely wrong, of course, but old stuff. If it is so good to rebuild, why don't we have a random dynamiting program that will destroy a city every weekend?

The whole Keynesian emphasis on consumption as the indicator of economic health is, of course, the same fallacy.

New feature

2006-02-17T10:09:00.000-08:00

I've added a new list to the blog, below the links to other blogs which I think are worth reading, there's now a list of "Heroes". These are people of public stature and credibility who have put it at risk by publishing their honest views of the crazy economic "smoke and mirrors" that are currently the party line.

The Overspent American

2006-02-17T09:44:00.000-08:00

According to Paul Kasriel's analysis - American's Debt: Worse Than You Think - the household savings rate is actually -5.2%.

"According to Kasriel's calculation, last year Americans spent approximately $472 billion more than they earned after taxes -- a negative savings rate of 5.2 percent. That spending is double the previous year -- and a record high.

Going back to 1929, Kasriel found just a dozen years in which households spent more than they earned by his calculation. Two were during the Great Depression. Three were in the decade following World War II, when consumers unleashed pent-up savings accumulated during the war (when there was little available to consume). The other seven years of negative savings have occurred since 1999.

"What's amazing is that my generation, the rapidly aging Baby Boomers, are entering their prime saving years," Kasriel says. Most of the Boomers, representing nearly a quarter of the population, are in their peak earning years (42 to 60). Many are becoming empty nesters, so their expenses should be declining. They already own the durable goods one acquires in the early stages of adult life. "But however you slice or dice it, we aren't saving," Kasriel says."

Paul Kasriel is the Chief Economist for Northern Trust.

Mortgage reset

2006-02-17T06:25:00.000-08:00

Some excellent discussion at the FB site :

"2years at 1% neg-am and say LIBOR plus 2% resetting today would go to 7.095%. But it would also be on 111% of the initial loan and would be on a 28 year repayment schedule. $100k borrowed thus would go from $85 to$761. Of course you actually borrowed $500k; so expect to go from $425 to $3805. If like most you’ve accrued enough equity to re-fi a fixed 30 would still be $3,400, if you qualify otherwise. Let’s face it this can’t happen. The FB is going to look at $555k debt on a house he thinks is worth $650k and he’s going to try to cash out and go small. They are ALL going to try to cash out and go small. Watch for a crush at the exits."

Housing Bubble Casualty

PPI

2006-02-17T06:09:00.000-08:00

Big number on PPI this morning, headline up 0.3% in January, while core rose 0.4%, the biggest gain in a year. December was also adjusted upwards. This is a +5.7% year-over-year gain, as the big number in core PPI shows that higher energy and commodity prices are finally working their way through the "pipeline".

Either Bernanke is going to have to do some big rate raising or he will have a lot of explaining to do. The end game is beginning, methinks.

Impact of the housing bubble

2006-02-16T15:57:00.000-08:00

It looks like home equity "extraction" in 2005 totalled some $900 billion based on the latest data from the Fed (through third quarter). This amounts to about $8,300 per US household. Given average household income of $45,000 or so, this means that the housing bubble artificially boosted household income by nearly 20%.

It doesn't take a genius to see the consequences of eliminating this stimulus.

Peak Oil last December?

2006-02-15T23:50:00.000-08:00

According to Princeton professor Kenneth S. Deffeyes, world oil production peaked December 16, 2005.

The Race to the Bottom may be underway

2006-02-15T19:32:00.000-08:00

California Notices of Mortgage Default % change Q4-2005 versus Q4-2004:

Orange County +34.2%

San Diego County +34.5%

Riverside County +43.1%

He shoots, he scores...

2006-02-15T11:18:00.000-08:00

Seattle Post-Intelligencer

Entitled to rely on appreciation?

2006-02-12T20:17:00.000-08:00

""Let me protect my clients from any mistaken impression that their foreclosures or bankruptcies indicate that they are at fault or that they are somehow irresponsible," says Bebber. "These hard-working families bought their homes believing that they would increase in value. Instead, the values have plummeted -- not because of anything my clients did or did not do.""

So it is responsible to take on debt that you are unable to pay except by serial refinancing or flipping of an appreciating home? Housebuyers are entitled to appreciation and it must be someone else's fault if it doesn't happen? Give me a break.

Foreclosing on the American Dream

Money magazine

2006-02-09T18:03:00.000-08:00

I picked up a copy of Money magazine a couple of days ago, complete with a section of advice to a variety of families profiled. The advice was courtesy of various "financial planners".

I thought the advice showed a stunning lack of knowledge of the basics of finance and a complete disdain for risk and risk analysis.

For example, a family whose principal asset was a house in a bubble area, that at least theoretically had appreciated fourfold, was advised to take a huge ($500K) new ARM on the property and invest the proceeds in the stock market, because of anticipated softness in the real estate market. Just a couple of points - well, OK, three;

Firstly, what makes them think that the return on the stock market, purchased at these overvalued levels, will exceed the interest paid on the loan? Remember that only the first $100K is wholly tax deductible (assuming they haven't used that up already), the rest only to the extent of investment income which will likely be small given current dividend yields. Dr. Hussman (operator of the Hussman funds, with the best risk-adjusted performance in the fund universe) observes: "Presently, the likely range of S&P 500 annual total returns for the coming decade is in the 2-3% range based on average and median scenarios, with outside possibilities as low as -3% in the very bearish case and still less than 8% in the very bullish case." The Likely Range of Market Returns in the Coming Decade

Secondly, what about the issue of portfolio risk? Housing and the stock market have been highly correlated - it makes no sense to borrow against housing to fund a correlated investment in stocks, all you are doing is increasing leverage (and risk). Haven't these folks heard of MPT (Modern Portfolio Theory)? As an example, a commodity fund investment would be a much lower risk choice because it is uncorrelated and would lower overall portfolio volatility - risk.

Thirdly, how are they going to service the additional debt? They already have outstanding credit card and HELOC debt, indicating that they are unable to meet their expenses from current income. The additional $250K in debt will cost them some $12,000 a year which it appears they don't have.

Any kind of adverse move in the markets will put these poor folks in BK if they take this advice. My advice? Sell and rent. Even in today's slow market surely they can price aggressively to sell and even then take out the $500K tax free after paying off all the debt. Put the proceeds in TIPS and wait for a better opportunity to move into equities.

The other pieces showed equivalent blithe ignorance and irresponsible lack of concern for portfolio risk. Of course, we will never hear about these families again in the pages of Money magazine. So I guess it doesn't matter.

Kawaii

2006-02-09T10:42:00.000-08:00

Jump now

2006-02-08T21:57:00.000-08:00

This is a train wreck of gargantuan proportions. Read in conjunction with The death of savings, which is another view of the same thing.

Easy Al's flood of cheap money has driven the economy completely off the rails, with the complicity of Wall Street. The average Goldman Sachs employee made half a million dollars last year. Easy Al is incompetent, but Wall Street could have and should have raised the alarm. Instead they held their collective noses and continuously invented new ways to sell garbage credits.

The train is in mid-air, the crash is inevitable. There is no hope. Sauve qui peut.

Northern Trust

Deutsche gets it right - again!

2006-02-08T21:44:00.000-08:00

"LONDON (Dow Jones)--Deutsche Bank AG (DB), the world's biggest foreign-exchange bank by market share, has completed a review of its electronic currency trading business that has led it to turn away $1 trillion in annual volume, or 10% of its overall flows.

Through much of 2005, the bank weeded out certain types of high-speed predatory counterparties and convinced them either to change the way they trade or take their business elsewhere."

Deutsche Bank Tackles Forex Speed Freaks

How about someone showing the same kind of leadership in cleaning up the stock market from the "high speed predators?" - before they ruin the stock market as they are well on their way to doing.

Savings? What Savings?

2006-02-08T08:23:00.000-08:00

From Ben Stein:

"I can summarize the shape of the U.S. economy by telling an anecdote. One of my closest friends is a lovely 45-year-old woman whom I will call Vivian. She has a good job in real estate, a lovely rented apartment in a city in California, a sweet little car, and elegant clothing. She earns about $75,000 a year.

A few days ago, I asked her if she had considered variable annuities, bought with a very sharp eye on fees, for her retirement portfolio. She looked shocked and asked, "What retirement portfolio? Do I look that old?"

"No," I answered. "You look shockingly youthful. But what are you doing about your retirement?"

"Well, nothing," she said. "I don't even have any money in my savings account and barely any in my checking account."

"Do you have a 401(k)? Or maybe a pension? Or IRAs?"

"No," she said defiantly.

"Well," I asked, "with all due respect, how are you going to provide for your retirement?"

"I don't know," she said.

"I think you should try to save maybe $500 a month starting right now in a very carefully chosen variable annuity, or else in a broad index fund I will help you choose," I told her.

"I can't," she said. "I don't have the money. Besides, $500 a month is nothing. It wouldn't amount to a thing. I might as well spend it at Nordstrom's."

I took out my calculator and punched some buttons. "I beg your pardon," said I, "but if you save $500 a month and earn an average of 8.5 percent on it for the next 20 years, you'll have $316,000 by the time you're 65. It's not a lot, but it's a lot more than nothing, which is what you have now."

She stared at me incredulously. "Do you think I'm going to work another 20 years?" she asked. "No way."

"Well, then what are you going to live on when you stop work?"

"Social Security," she answered.

"That won't kick in until you're 66 or 67," I said, "and it won't be more than a pittance by then."

"I'm leaving,' she said. "There's a sale at Nordstrom's. I have to buy something to distract myself from what you've been telling me.""

Living Hand to Mouth -- and Barely Getting By

Interesting day

2006-02-07T13:18:00.000-08:00

The Wall Street boyz had a concerted slam on gold and energy today to try to shake out the latecomers and weak hands. With some success, I would say.

But more interesting was the warning of declining sales from Toll Brothers, one of the leaders of the house building industry and often considered a bellwether. This is their second warning and forecast reduction, indicating that the new house market is slowing rapdily.

Me first

2006-02-06T10:39:00.000-08:00

A couple of interesting observations this morning.

One from Robert Ward in the SF Chron "The sad aspect is there are plenty of Americans who will drive monster vehicles and who couldn't care less about our fuel reserves, our gridlocked commutes, and our glutted environment. The urge to be "looked up at" and even feared on the roadway is just too strong for innumerable Americans with low self-esteem. What's truly abysmal here, besides the creation of a NASCAR-mentality regarding driving in America, is because of the monster vehicle drivers, the rest of us have to pay the upcoming regular and supreme price."

One must observe, however, that this problem will be self-correcting. These folks will be walking soon.

And another from Forbes: "The combined compensation for the heads of America's biggest 500 companies increased by 54% in 2004. Harvard professor Lucian Bebchuk's calculations show that the top five executives now collect 10% of the average firms net income, double the percentage a decade ago."

That's just straightforward fingers in the till, as far as I am concerned. Outrageous.

Short memories

2006-02-05T08:38:00.000-08:00

THE DAY LOS ANGELES'S BUBBLE BURST

By BENJAMIN STEIN ; BENJAMIN STEIN'S LATEST BOOK IS ''FINANCIAL PASSAGES.''

Published: December 8, 1984

My pal Jerry P. just bought a condominium in Century City, in Beverly Hills, for 60 percent of what it sold for in 1980. Down the street from me here in the Hollywood hills, four houses have been on the market since 1981. The asking prices now are about one-third less than they were three years ago. Up and down Sunset Boulevard in West Hollywood, apartment houses that were converted to condos lie empty, boarded up, not one unit sold, in bankruptcy, with banks holding title.

The Southern California residential real estate boom began in about 1974. It was not just a boom. It was a superboom, with miserable bungalows in Santa Monica running up from $40,000 in 1974 to $400,000 by 1980. Two-story colonials in Beverly Hills went from $200,000 to $800,000 and then over a million. One-bedroom condos in Hollywood were built and sold for $100,000 - what a house in Beverly Hills had been five years before. Every day, home buyers would look at the prices and say, ''It can't go on.'' But every day, for five years, it did go on. Middle-class families were priced out of the market, and the brokers said, ''But the rich will always be able to buy.'' Ordinary rich people were squeezed out of the market in some areas, but the brokers said, ''Never mind, the music business people will buy anything.'' The music business fell into a depression in 1979, and the brokers said, ''The foreigners are buying. Compared with Paris or Teheran, real estate in Holmby Hills is a bargain.''

Everyone wanted to get in to the game, get the down payment on a house, somehow struggle with the payments for a year, then sell out and get rich quick. Inflation pushed housing prices into the stratosphere. But even when inflation stopped, brokers said, ''The prices have nothing to do with inflation. Everyone on earth wants to live in L.A. The price will go up forever here, no matter what else happens in the rest of the country.''

Then the music stopped, some afternoon in 1980. As if a spell had fallen over the city, suddenly things began to stay on the market for three months, six months, a year, two years. Buyers disappeared. Asking prices stayed high, but nothing sold.

The great Southern California real estate boom was over. Prices had gotten so high that they could no longer be justified by inflationary expectations, or the influx of foreigners, or the climate, or for any other reason.

Now, four years later, those brokers who are still in the game tell sellers to expect that their houses will be on the market for two years. Other brokers have sold their BMW's and are now working as ''financial planners'' or public-relations people, dreaming of the days when they worked for 6 percent of infinity.

New York Times Archives

Baaa!

2006-02-03T15:05:00.000-08:00

CNBC has a daily "Mad Money" show where an overstimulated host, James Cramer, pumps various stocks, leading to feeding frenzies from the sheeple who somehow think that following his advice will lead on to riches.

Last Friday, Cramer hysterically promoted NMT Medical (NMTI), a cardio implant company, saying it was going to $100. The stock was trading at $17.

NMTI rocketed up 28% on Monday as the sheeple piled in, jamming the trading volume on the stock up to ten times its normal level.

However, another stock also rocketed. After Cramer pumped NMTI, another stock, NMT, a Nuveen closed-end municipal bond fund, ran up from $15 to $22 in the next 30 seconds on apparent panic buying. Nearly 125,000 shares were traded after-hours on an obscure bond fund with an average daily volume of 3,500 shares. Seem likely that not only was there no diligence, there was no spelling and some of Cramer's followers mistakenly typed NMT instead of NMTI.

Of course the stock promptly fell back as the morons realized their mistake, hopefully duly chastized by their losses.

Aliens Invade Hamptons

2006-02-02T11:27:00.000-08:00

"In the Hamptons, the up to $750,000 market is the new entry level for home buying. Even local landscapers who are not yet legal can find that kind of money." That would be the standard terms and conditions: 100% financing, no-doc stated income option ARM.

Bubblicious: Real Estate in SoHo and The Hamptons

Arms, and the man I sing

2006-02-02T09:41:00.000-08:00

Option ARMs finally making the news

"The other thing I will add about these loans, is that they are the highest paying loans available for loan officers and brokers. Every lender is different, but it was pretty standard that if the loan officer 'sold' the borrower in the 3yr pre-pay, then they would get 3 rebate points on the back of the loan. This means the lender would pay the broker 15,000 on a 500k loan."

Dear Diary

2006-02-01T16:26:00.000-08:00

The disadvantage of a blog like this is its uncaring reminder of the past. Specifically, the housing bubble is still with us to a considerable extent and yet there are many signs and portents of the end recorded in this blog (such as Pulte's Las Vegas price reductions) that date back to the fall of 2004.

Clear message: it takes more than a couple of swallows to make a spring.

If I write it down I might even remember that.

The Death of Savings

2006-02-01T11:03:00.000-08:00

Excellent charts and commentary from this month's edition of Contrary Investor, illustrating the death of savings and the staggering debt load now borne by US consumers.

"It's a clear fact that back in the early 1950's, many folks had the depression and its financial effects on their families very fresh in their minds. Having watched their indebted neighbors or loved ones basically financially wiped out, the aversion to leverage was incredible. In the early 1950's, in aggregate, household liabilities could have been extinguished with available household total liquidity in a ratio of over two and one half to one. ... At the end of 3Q 2005, household cash/liquidity as a percentage of liabilities stood at the lowest number on record in this Fed sponsored data series. And of course at present, we have just appointed a Fed Chairman who sincerely believes the 1930's depression could have been avoided entirely had the Fed simply printed enormous amounts of money. Of course implicit in that thinking is that the depression could have been avoided had households just borrowed enormous sums of this newly printed money. (It's just a shame that Bernanke does not follow through in his academic conviction and tell us just how the banks at the time would have been more than happy to lend huge sums of money into an economy characterized by a 25% unemployment rate.) It's our view that the chart below chronicles polar opposites in terms of societal acceptance of leverage."

Slip slidin' away

2006-02-01T07:10:00.000-08:00

The ISM manufacturing index was weak again this morning at 54.8% vs. 55.6% in December (although putting three significant digits on a sentiment poll like this is ludicrous). Of course, it should be no surprise that manufacturing is leaking offshore. The pending home sales index also declined, to the surprise of every four-year-old in the audience.

These trends will continue to pressure incomes and spending. How much more can the debt-laden consumer carry?

Doesn't matter. The humping and pumping to jam up the indexes after the Google shock last night has already begun.

Step down to the ninth circle, Mr. Greenspan

2006-01-31T16:14:00.000-08:00

Today was Alan Greenspan's last day as Chairman of the Federal Reserve. The consequences of the massive credit expansion that he engineered will haunt the US and the world for many years to come. The second Great Depression is already beginning as the credit bubble begins to burst in the housing market. The tales of fraudulent and risky lending practices are legion, I won't repeat them here. But the consequence will be irreparable damage to the credit system, which will lead to depression as, unlike Japan, the US cannot export its way back to health. Ben Bernanke will undoubtedly reduce interest rates to zero at some time in the future. It will not work any better here than it did in Japan.

(In Dante's inferno, the ninth circle is reserved for traitors who betray their fellows)

Also today the Google speculative fever may be cooled a little, as the company missed analyst's earnings estimates by a country mile. At one point the stock was down 15% or more after hours. Doubtless the dip-buyers will step in, but the damage is done.

Fluctuat Nec Mergitur

2006-01-31T06:08:00.000-08:00

Sales of Pleasure Boats Buoyed by Soaring Home Values

"As his 3-year-old son grabbed the helm of an 18-foot sports cruiser, David Yates checked out the power boat's plush white leather seats.

Yates didn't know whether he'd buy this particular boat, which had a list price of $21,000, but he was pretty sure of one thing: He wouldn't be at the Los Angeles Boat Show if not for the housing market.

"We couldn't have afforded to come here before, but now that my house has doubled in value, we have an opportunity to take out a second mortgage," said the 48-year-old Burbank resident, who is a manager for a cabinet manufacturer. "At least we're in reach of being able to buy a boat.""

Snorting bulls

2006-01-30T16:54:00.000-08:00

From a (normally) reliable source, but unverified: "The DJIA closed below its December low last week. Such an event normally negates any "January Effect." Historically, when the DJIA has a January close below the lowest tick of December, a correction of at least 10% is seen later in the year. In terms of trading days, we are currently also witnessing the second longest run in the market without a minimum 10% correction. These two signs of extreme bullishness are telling us a significant decline in stocks is overdue."

Bursting bubbles

2006-01-30T14:12:00.000-08:00

How do you know there's a bubble?

Oft-maligned Fed Chairman Greenspan was widely maligned once again for observing that you only know that there was a bubble in retrospect - when it bursts.

But he was perfectly correct.

The violent price action of a bursting bubble is the clue. Is the housing bubble really a bubble? We'll soon see.

Every real estate industry spokesman is busy inventing a new lexicon - "stabilizing", "tempering", "levelling-out" and so forth. But the cake was taken by the guy interviewed on Bubblevision this morning who had taken advantage of Centex's $100,000-off 12-hour sale on new houses. He had, therefore, "instant equity". What doesn't he understand about markets? When he hit the offer, that was probably the high tick for a while. It makes as much sense as the signs advertising "Below Market".

Got gas?

2006-01-29T07:21:00.000-08:00

Last week I bought a bunch of Encana Corp., the largest Canadian natural gas producer. Natural gas prices are way down as a result of the mild weather so far this winter, depressing Encana's share price. Encana peaked near CAD 70/share at the peak in natural gas prices, and is selling now in the CAD 54 range. I had owned it for some time and sold it last summer, largely because it had gained so much it didn't seem reasonable that the gains could continue. Not smart, but at current prices I get a do-over.

Natural gas isn't just a winter story anymore. I thought this was a good opportunity to increase my exposure to a fundamentally strong supply/demand situation. The supply of natural gas in North America is declining due to depletion, most new power plants in the US burn natural gas for environmental reasons, and more Canadian gas will be needed to "liberate" the oil from the Athabasca tar sands. We'll see.

Some faces of negative savings

2006-01-27T18:02:00.000-08:00

Piggy banks endangered: Few saving for retirement

More on Bifurcation

2006-01-27T11:03:00.000-08:00

In a WSJ article titled "We Must Change Policy Direction", ex-Treasury Secretary (and Wall Street Master of the Universe) Robert Rubin argues that "the longer-term underpinnings of our economy are unsound at a time of historic competitive change in the global economy."

He focuses in particular on the growing bifurcation between the rich and the poor that I have previously discussed;

"The seeming inertial tendency of our economy toward less and less broad-based participation is startling and too little discussed. Median real wages, household incomes and family incomes have increased relatively little over the last 30 years, except during the last five years of the '90s. Thus, a study showed that in 1979 it took 44 people with average earnings in the bottom half of the population to equal each person in the top 0.1 of 1%, while in 2001, the last year in that study, that number was 160. Our economy is not working for too many of our people, and that is a problem for all of us."

"Our strategy should reaffirm market-based economics as the most effective organizing principle for economic activity, while recognizing the critical role of government in providing the many requisites for economic success that markets, by their very nature, will not provide."

"Broad participation in economic well-being and growth is critical, both as a fundamental value and to realize our economic potential. Enabling all citizens to obtain adequate housing, nutrition, education, health care and much else will best promote productivity. Broad-based participation is also the best antidote to protectionism, and to pressures for undue restrictions on our economic flexibility and immigration. For these same reasons, measures to increase security for the growing number of people dislocated in our rapidly changing economy may well be wise economically. This can be done without creating the rigidities and excessive social benefits that have led to chronically slow growth and high unemployment in Continental Europe."

Support our troops

2006-01-25T19:20:00.000-08:00

"WASHINGTON (AP) - Most military reservists who left their civilian jobs to fight in Iraq or Afghanistan made more money there than in their regular jobs, according to a study that contradicts the notion that citizen soldiers lose money when they go to war."

Sacramento Bee

Maybe it really is over

2006-01-25T07:13:00.000-08:00

"WASHINGTON (MarketWatch) -- Sales of existing homes in the United States fell 5.7% in December to a seasonally adjusted annual rate of 6.60 million, the lowest in nearly two years, the National Association of Realtors reported Wednesday. Sales were much weaker than the 6.89 million expected by economists. Sales have fallen three months in a row. "Speculators are pulling out," said David Lereah, chief economist for the realtor group. Inventories of unsold homes fell 4.4% to 2.80 million in December, a 5.1-month supply."

You want to be an "investor?"

2006-01-24T16:15:00.000-08:00

Some of the big differences between the housing market and the stock market are:

- Leverage. The housing market uses substantial leverage, the stock market does not. The credit required to support that leverage may not always be readily available.
- Liquidity. In general, the stock market remains liquid. Illiquidity (aka "crash") is a very rare event. In housing, illiquidity is routine. It may take a huge price reduction to move a house quickly when inventories are high.
- Carry. Stocks generally have a low carry, other than cost of money there's nothing. Houses are high maintenance, apart from the cost of money they must be insured and kept in good repair and may be heavily taxed. Some stocks pay dividends, some houses have rental income which in both cases mitigates the carry. Single family housing at current prices general still have a carry cost even with rentals, as do stocks because most dividends are low.
- Transaction costs. With 6% commissions to the MLS cartel, to say nothing of title insurance, appraisal fees, transfer taxes, etc., housing has huge transaction costs. This discourages trading, of course, as does the often-poor liquidity.
- Security of title. Housing may be seized at any time by the local authority, on a whim. While compensation is required to be paid, it is generally inadequate. Stocks can only be seized through legal process.

And folks still want to speculate in the housing market?

Rich Dad Wisdom

2006-01-24T07:45:00.000-08:00

From Robert Kiyosaki: "In early summer of 2005, I sent a warning to the Rich Dad community that the real estate market was cooling down. After all, we know that all booms go bust eventually, and every party comes to an end.

While many readers thanked me for the words of caution, many others sent me hate mail. An angry real estate broker called me and said, "Are you trying to ruin my business?"

The angry readers should draw insight from something Warren Buffett said: "For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for someone else."

The sage of Omaha sums up pithily: "The dumbest reason in the world to buy a stock is because it's going up."

Personally, I would say, "The dumbest reason to buy anything is because the price is going up." Yet that's what people do when they invest. They generally don't buy high-priced things when they shop."

Smart Investing Amidst Real Estate Mania

Consensus

2006-01-23T14:11:00.000-08:00

World of Steve Quayle

That makes it OK, then.

2006-01-23T10:34:00.000-08:00

"Ameriquest Mortgage Co. has finalized a $325 million settlement of allegations that it deceived borrowers, falsified loan documents and pressured appraisers to overstate home values, the Los Angeles Times reported Saturday."

"Settling the case also is expected to clear the way for Ameriquest's founder, Los Angeles billionaire Roland E. Arnall, to become the U.S. ambassador to the Netherlands, reports said."

Inman News

Wishful thinking

2006-01-22T15:14:00.000-08:00

Good article in the Chicago Trib highlights the plight of US manufacturing workers.

"We're in a cycle right now where corporations have the advantage, and unions don't," he said. "But soon the cycle will change."

Not while Chinese manufacturing workers cost 1/33 of a US manufacturing worker. Even at PPP (Purchasing Power Parity), about 1/23 of a US manufacturing worker.

Lowball!

2006-01-22T12:15:00.000-08:00

The anecdotal evidence from this weekend's reading is compelling. The housing bubble really is bursting. Now a "bubble" is really an emotional thing - a mania, a crowd madness - where fundamentals are forgotten and huge risks are thoughtlessly taken. What now remains to be seen is how deep the trough that follows the crest will be, both in terms of emotion and prices.

The real estate industry is shamelessly pumping the idea that it is just a "flattening" in prices, that appreciation will merely slow, there is nothing to be worried about, this is just a temporary glitch in the 20%+ appreciation to which every real estate speculator is entitled.

One of the better real estate bubble blogs features a sampling of "lowballs" - situations unheard of in the bubble era where someone goes in with a "lowball" offer, well below the asking price, which is accepted. This is a sample from the most recent list:

MLS# 2107679 - Chatham, NJ
List Price $1,325,000 (Reduced from $1,490,000)
Sales Price $1,000,000 (23.53% Lowball!)
$490,000 off Original List Price

MLS# 2096978 - North Arlington, NJ
List Price $390,000
Sales Price $300,000 (23.08% Lowball!)

MLS# 2083944 - Mount Arlington, NJ
List Price $1,200,000 (Reduced from $1,600,000)
Sales Price $950,000 (20.83% Lowball!)
$650,000 off Original List Price

These are folks pushing the "GMTFO" button - probably wisely. These buyers, who are attempting to catch a falling knife, will probably suffer worse. But it is interesting and telling.

OPEC reserves

2006-01-20T20:59:00.000-08:00

The price of oil rose today. The popular press blamed unrest in Nigeria and craziness in Iran. However, the real reason may be that Matt Simmon's view that OPEC reserves are way overstated got some support today when it was reported that Kuwait's actual reserves were half what it had publicly reported to OPEC (for purposes of quota allocation).

Steve Roach Explains It All

2006-01-20T20:55:00.000-08:00

An excellent summary and prognosis. The Irony Of Complacency

In hoc signum ...

2006-01-20T15:03:00.000-08:00

Signs of a bursting bubble. From Bubblemeter Blog.

Healthcare running amok

2006-01-20T11:27:00.000-08:00

Associated Press: "States now spend more on health care for the poor than they do on elementary and secondary education, a policy group said Thursday in its annual review of efforts to deal with the growing problem of the uninsured."