Tuesday, March 9, 2010

What are You Interested In?

My last post was covered by Seeking Alpha and between the comments there and here it seems many think I am an upset doom and gloomer that sits in a closet all night holding my gold and silver close and waiting for the end of the world. Anyone that knows me in the least would find this very funny, but I thought a quick post to cover where I stand on things is needed.

What are You Interested In?
As a scientist I tend to think in structured facts and rely on hard data to form opinions. My writing here over the years I think reflects this. In any experiment you need to limit the variable and simplify where possible to get the best information. Perhaps that way of thinking does not work so well in a system like economics which relies heavily on several variables that are purely psychological in nature. You cannot model a mindset no matter how many times people will try.

The example I will use tonight is the "recovery" in housing and how this feeds into the banking system renaissance. Have the underlying structural issues been resolved and a workable base been established?

The bull case says yes very loud. You can read about it everywhere.

Last night I wrote that not much has changed in a year for the banking system, only that the attention paid to issues has gone away. Am I wrong? Am I a perennial downer?

Market Ticker pulls up a long list of RMBS loans initiated in the 2006-2007 time frame form such winners as Countrywide Financial (Now Bank of America) and JP Morgan. Here is the post and the table:
A Random Look at RMBS and the Economy
The post shows a pretty bad lot of loans with many holding 60 plus day delinquencies at over 40%.

Karl notes:
Folks, this is endemic through the financial system. The best performing issue in that list has a 60% delinquency rate of 35.8% and a material number of them have more than half the loans in hard default.

Every home equity line behind an underwater first that is also not being paid is worth zero. There is no recovery. This is not like most bonds, where there is a meaningful recovery percentage after the default happens. This is subordinated debt that is worth exactly bupkis if the senior lien cannot be fully satisfied from a foreclosure on the property.

These bonds are literally everywhere. They're in pension funds. They're on bank balance sheets. They're held by The Fed through the garbage Fannie and Freddie paper they bought. Foreign governments and foreign banks hold them.

Yet we have banks that are carrying very similar portfolios of loans on their books - second liens, either home equity or "silent seconds" used to get around various ratio requirements such as PMI on loan origination, and essentially none of them are being carried at anywhere close to these levels of loss.

So that guy is crazy you say?

Diana Olick of CNBC is pretty level headed and maybe the best reporter CNBC has. In her post Mortgage Principal Writedown Won't Save Housing Mrs. Olick notes the following:
I agree and disagree with that statement: I agree that temporary modifications (even though the Treasury calls them permanent) are going to keep some borrowers in their homes for a while, but are really just prolonging the agony. I disagree that principal reductions will create truly sustainable mortgages.

The problem is prices. Home prices have fallen so far in the hardest hit areas, the areas where the bulk of the troubled loans are, that banks would have to write down principal 30 to 50 percent to put borrowers back in the green. Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they'd all be insolvent.

Another crazy person.

These data points explain the following:
-Banks are super slow to start foreclosures to limit the pain on their books which would be triggered by proceeding. As of now foreclosures ar at all time highs even with the banks dragging their feet.
-The "hold until it's par" plan which is government policy assumes these things are coming back near par at some point. If soon the banks will hold the loans, if not soon the FED will hold them.

Bad debts piled up and crippled the credit markets last year. What has changed other than nobody talks about it anymore? While I could perhaps be swayed that the FED/Treasury needed to step in and do something, I fail to see how cooking books and colluding with banks to play games fits the bill. But I am so negative.

Have a good night.


Stagflationary Mark said...

"Bad debts piled up and crippled the credit markets last year. What has changed other than nobody talks about it anymore?"

So much has changed! My dad told me a joke many years ago that will demonstrate my point.

The Commander says, "I've got some great news for you men. You've mentioned that you'd really like a change of underwear. Your requests did not fall on deaf ears. Today is indeed the day."

The men cheer! Hurray! Hurray!

The Commander then says, "Frank, you'll be swapping underwear with Bill. Ted, you'll be swapping underwear with Joe. Sam, ..."


GawainsGhost said...

Yes, well, isn't creative financing great?

To me this whole thing is mind boggling. What really gets me is all these economists and experts who say no one saw the financial meltdown coming or no one could have predicted it. Oh, please. The whole sordid scene was easily foreseeable and utterly predictable.

And it's only going to get worse, it really is. The reason why is jobs, or the lack thereof.

Here's an interesting book on the subject.


It shows how free trade hollows out the economies of the countries which adopt it. That's exactly what happened in America. We exported jobs to import cheap goods. Those jobs are not coming back, and wages have been stagnant for years.

I blame the Baby Boomers. They're the ones who embraced and implemented the policies that have brought this country to the brink of ruin.

S. Gompers said...

The baby boomers have had a strong hand in these affairs, and there is nothing wrong with being prepared...

getyourselfconnected said...

Been a little ill for a few days but seem to be on the mend. Had a workout tonight so I must be doing better. Now I get the dentist tomorrow, exciting! At least friday is my birthday!

TomOfTheNorth said...


Congrats on attaining #84 on Gongol's Biz Econ Blogs!


getyourselfconnected said...

Hey Tom,
I had not checked that for a while! In the top 100. If I could get a little better maybe a top 50 spot is possible, you never know!

GawainsGhost said...

Gloom and doom, or gloomer and doomer?

Ha! Actually I don't think you're either, GYC. I think you're rather funny. And you have good taste in music, even though you are overly fond of 80s hair bands and have an inexplicable dislike for the band that shall remain unnamed (the only band to sell over a billion records). I would recommend a certain Birthday song by unsaid band, but I don't want to invoke your ire.

Anyway, there was an interesting article in the newspaper this morning about the local real estate market. It's in the dumps.

Typical gloom and doom reporting. Only 137 homes sold in McAllen in January. That's a pretty low number. I know for a fact that at least 5 of those sales were ours, so divide the remainder by 800 realtors and you'll get an idea of how dismal the situation is.

The reporter interviewed the head of the board, whom I happen to know, and she talked about how bad things were. The tax credit for home buyers expires at the end of April, right before the summer buying season, credit is hard to come by (almost all sales are FHA financing), and FHA is tightening its standards so that buyers whose credit score is below 580 will have to put 10% down.

Oh, yeah, that'll drive sales up. The reporter should have interviewed me. Our houses sell. Everyone wants a repo these days, and my mother cornered the market 25 years ago. Fannie is offering special financing with as little as 3% down. Freddie is offering 2-year home warranties. AHMSI (formerly Option One) is offering reasonable financing through Prospect Mortgage.

I've put a sign in a yard and driven back to the office, only to find a full list price offer on my desk. That house sold in half a day! We've listed several properties that received multiple offers in one week. So business is good for us. It's owner-occupiers who are having a hard time selling their houses, usually because they overvalue the homes, price them too high and refuse to negotiate.

This is the problem. Repo sales are driving the market and bringing prices down. Home owners who want to sell their houses don't want to accept this reality.

It's the same in all areas of the economy. Banks don't want to write down losses. Unions don't want to take pay cuts. The government keeps wasting money to prop up the illusion of prosperity. And financial reporters are clueless to it all.

Deflation is real. It's here and happening now. I guess that makes me negative too. But then I'm the only one making money in this market.

Anonymous said...

"Deflation is real. It's here and happening now. I guess that makes me negative too. But then I'm the only one making money in this market."

Right right. The people who went all in to the stock market last year are taking a bath right now...

getyourselfconnected said...

I think Gawains was refering to the housing market where he operates, not all markets all over the place.

Since you offered and you are anon, care to elighten us with your market trades going back to last March? I am sure you both sold at 5% near the all time tops in the indices and bought "ALL IN" at the very bottom last March. If you would like to detail what stocks on what dates and in what amounts you made your moves I will republish them in tonights blog post. Better yet, how about targets (upside of course) for the S&P and the Nasdaq for the enxt 6 months so I could try out your strategy?

Until then you are like Barry Ritholtz and Calculated Risk; They went All IN yet do not say when, on what, or in what amounts. Sure thing. Come to think of it I went all in at S&P 500 at 666 but forgot to mention it. Oh yeah, I am rich now! LOL.

up 70% after going down 70% does not get you even.

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