Rate Freeze Plan Came During a Brain Freeze

Today is one of those days that you learn something so infuriating and maddening that you feel you need to take a "timeout" and try to compose yourself. I will stipulate upfront that I am as fed (pun intended) up with the housing implosion situation's proposed remedy as is possible. My patience level is at zero, and my disgust meter is pegged over red line.

Rate Freeze Plan Came During a Brain Freeze
Where to start? I guess with the headline and snippets (from WSJ):
U.S., Banks Near A Plan to Freeze Subprime Rates
By DEBORAH SOLOMON and MICHAEL M. PHILLIPS
November 30, 2007; Page A1
WASHINGTON -- The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.
Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.
Many subprime loans carry a low "teaser" interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower's payment by several hundred dollars a month.
First off, details are still "being worked out"? But the total package will be ready for announcement next week? Someone rushing a bit?
Second, I do not know where the writer got their figures, but whoever heard of a 7-8% introductory "teaser rate" in the last 4 years? I have never seen an ad or commercial advertising "start at a low 8%". The teaser programs I have seen were in the realm of 2-4% starting rate with the fully indexed rate jumping to 8-10%. That's is a huge difference and it seems the article is trying to lay ground work along the lines that the jump is even close in number. The problem right now is not an extra 2% on a mortgage, its an extra 5% that foolish people thought would never happen.
"Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it's better to get some interest than none at all.
At a meeting at the Treasury Department yesterday, coalition members told Mr. Paulson and other regulators that they are on track to announce the new industry guidelines by year's end, according to a senior Treasury official. Among those attending were representatives of Wells Fargo, Washington Mutual, Citigroup and the American Securitization Forum, a group whose members issue, buy and rate securities backed by bundles of mortgages.
"There has been a convergence of thought on this," said William Ruberry, spokesman for the Office of Thrift Supervision, which is also involved in the discussions."
Well I for one will sleep so much better tonight knowing the same imbeciles that brought this mess in the first place now have a "convergence of thought". You cannot make up comedy like this, it can only come naturally.
"Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help."
The sheer lunacy of the three group model is astounding. If you can pay more than some other fool, you will. If you cannot pay at all, bye bye. If you can pay at the low teaser rate, it will be fixed for maybe 5 years at that rate. Again, too funny. Who decides who can pay what? If I could pay more, I would now start to fall behind or some enact some financial distress to qualify for the freeze program!

Read the few articles out about this plan for yourself. There should be a few problems that jump right out at you that somehow the planners either did not see or think are not problems that are too bad.

Market for Adjustable Rate Loans Effectively Finished Immediately
If the government can step in and reset securities when they want to, there are two problems:

• No investor group will ever (I mean Never) buy any product related in any way to adjustable mortgages. This will kill off a huge swath of entry buyers, and the housing market will rapidly collapse due to lack of funding
• I woke in what I thought was the US, but as the day wore on I realised the Ruskies had won the cold war and we are communists.

Banks and Lenders are OK with Taking Massive Losses? Try Again!

Implicit with this plan is that the losses from the modified loans can be taken by the banks. That's a good one. The government obviously has some kind of major bailout plan for the lenders and holders of the fantasy paper. Where's that money going to come from? Printing presses of course! What that means for foreign investment and the dollar is probably not good long term. And again, this will stop mortgage lending almost immediately to all but the most qualified buyers.

Revenge of the Monthly Payment Mindset

This is the most important thing that jumped out at me thinking about this dumb move. We have gone over the "monthly payment" mindset that is the US consumer. The US consumer is also a jealous, competitive type to boot. Consider the following example that I have used before:

• Person A-has a frozen teaser rate of 4% on a $300K home. The mortgage is $1200 monthly.
• Person B-looking to buy a home. Due to new high lending qualifications and higher rates charged by the banks due to losses, his rate will be 8%. To buy the home at $300k, his payment will be an astounding $2400!!!!!

Now who in their right mind is going to rush up to the buying window with that ridiculous deal? The prospective buyer should only pay the same amount, and that means the new home price just became $150k. A 50% decline in an instant. If you are considering buying a home, and considering paying through the roof for the foolishness of others, you deserve your fleecing. With the Internet and all the information available, I envision people are going to be doing this kind of math and reaching the same conclusion.

Folks, we have reached a point now where things are going on that are so reckless and so ill conceived that something needs to be done. A poll on CNBC is showing over 80% of respondents are against any type of freeze program! Why is it so hard for all involved to simply see what needs to happen, and let it happen? The world will not end. The galaxy will continue to rotate. The grunions will continue their yearly spawning run. What's the big F##ing deal with a housing bust?

The only answer I can seem to find that makes sense is that the powers that be know the charade of the banking system requires the concept of "suspension of disbelief", and the housing bust will serve as the pin to pop the illusion. The Freeze program is outrageous and requires a total immersion in fantasy to even consider. The fact that the government, the banks, and the FED all support this plan says so much about how sorry this country has become in short order. Sorry for the especially nasty tone tonight, but I am disappointed and angry that it has come to this.

It is Friday, and I did not receive any rock blogging ideas in the comments, so I guess its my choice!

I am a slave to 80's glam rock. I love it and I am not ashamed!

Dokken "Alone Again Without You" amazing vocals, great power ballad:

Cinderella with "Nobody's Fool", fitting for today's news!

Poison with "Fallen Angel" the guitar solo is one of the best in all of Glam rock:

Have a good night!

Thursday Quick Hits

I arrived home a little late as a "DNA manipulation malfunction" demanded an repeated experiment. I am also planning on watching the Green Bay vs. Dallas game in a bit, so this will be a short post.

Best Of the Web Today
The blogroll on the left are the sites that I read on a daily basis. All are excellent, and there are many more out there that I often read. Tonight I will point out the most thought provoking posts I saw today, and you dear reader can try them out for content if interested:

• Market Ticker-Karl Denninger does not post as often as he used to, but when he does it is an important read. His rhetoric is a bit over the top at times, but that is symbolic of his passion for the topic. He is also honestly trying to help the average joe or jane as well. Tonight's post is a beauty, and I recommend it: http://market-ticker.denninger.net/2007/11/something-evil-this-way-comes-part-deux.html
• Minyanville-Probably my favorite stop every day. Plenty of great stuff to read through today.
• Calculated Risk-Tanta and CR provide the best and most knowledgeable intra day analysis of financial ongoings. The comment section is also top notch.
• Mish at Global Economic Analysis-The best Macro analysis that I can find. Today he is on fire so just scroll down for a bit.

There are so many others, but I imagine most readers are like me and have a job, a home life, some personal interests, and the need for some sleep at some point!

Sentiment Does Not Rule The Universe

The market action over the past few days has been pretty wild. I have tried to catch some CNBC as well as read through some message boards (I know they are both mostly useless) to try and get a feel for things. What I have seen is that most market commentators and participants are right now building a case for stocks and the economy in terms of sentiment, not fundamentals. What I mean by this is that instead of trying to look at things through a lens of hard data, recommendations and predictions are made based on the old trick of trying to be contrarian. If the financials are being sold hard, now MUST be a great time to buy because sentiment is so strong against them. Home builders are a strong play because they are beaten down, so a turnaround is at hand.

The problem with this kind of analysis was born in the go go boom times of the Nasdaq bubble. Any dip was bought hard. Any move against any sector was a strong entry point. Like the US military, traders are armed and ready to fight the last war. This time it is different, but not in the way they think. The banks and lenders are in serious trouble. The problems they face right now are so bad and structural that a new valuation metric will have to be figured out. This is not a dip. This is not a sentiment graph that says there are too many bears so buy, buy, buy. This is a acceptance of a change in reality for the banking industry. The process has just started. If you cannot recognize the difference, you are going to lose.

There are too many technical traders out there right now. Bottom calling is for fools and the fools that follow them. The "don't fight the FED" line is only useful in "normal" economic conditions. There is nothing normal about the current mortgage, derivative, SIV, and commercial paper maelstrom. Look at any headline concerning bank loses and housing prices and all the stories will read the same. The common theme is "never before in history", "worst/largest ever recorded", "first time since THE GREAT DEPRESSION", etc. See what I mean? There is nothing anyone has a working model for going on right now. I am with Market Ticker when he suggests now is a good time for the small guy to sit it out. I do not mean stop following the financial world, I love it too much. I mean if you have a brokerage account that you like to use, maybe its time to take some off the table, pare risk, etc. I do not offer investment advice here, but that is my plan of action going forward.

Thanks to all that left comments (Kevin and Debbie, thanks!) on the last post. I do appreciate it.

Remember, Friday night is rock blogging night, so use the comments for any requests.

Have a good night.

WTF Wednesday

I just bought the Comcast NFL Network. It is $4.99 for 3 months, then $7.99 if you keep it after that. It comes bundled in a Sports Package that includes soccer and speedvision. I do not really care for any of that, but I really want to see the HUGE game tomorrow night between the Green Bay Packers and the Dallas Cowboys. Does Brett Favre have a big game left? I believe he does, and the game tomorrow night promises to be a great one. So $15 for one game? I did it. Stinks it's not free though.

WTF Wednesday
Today was one of those days that I got to look at the market from a distance. First, I was in meetings all morning, and second my computer was being upgraded the rest of the day. I had no real time information about where the markets were or what was going on until the ride home. The local news read off the closing numbers, and I shut it off before I heard any analysis so I could think about what may have caused the ripper today. Here's what crossed my mind as possible causes:

• Existing home sales posted some wonderful number (it would be revised away later, but hey)
• Some weird country invested some amount in Countrywide
• Some FED head went out and stated more rate cuts on the way
• Another Warren Buffet rumor

That's a list of my usual suspects. I came home, ordered comcast NFL network, and then hit the headlines:

AP

Stocks Soar Along With Hope for Rate Cut Wednesday November 28, 5:42 pm ET By Madlen Read, AP Business Writer
Stocks Soar, Dow Gets Biggest 2-Day Gain in 5 Years As Investors' Hopes Grow for a Rate Cut

Well there you go. A rate cut on the way! Whooppeeee! A rate cut is already priced in by all indicators, and a "forward looking" mechanism like the stock market saw something today that was surprising? Color me unimpressed. I read on:
NEW YORK (AP) -- "Wall Street barreled higher Wednesday for the second day in a row, giving the Dow Jones industrial average its biggest two-day point gain in five years after a Federal Reserve official hinted that the central bank may lower interest rates again.
Investors' renewed hopes for a rate cut added to their relief that companies that made losing bets on subprime mortgages, such as Citigroup Inc. and Freddie Mac, are coming up with ways to raise cash. The market was clearly optimistic that at least some of the damage from the months-long credit crisis was finally being mitigated."

There it was in all its beauty, a hinted rate cut and off to the races. Did the hawkish testimony from two FED heads yesterday really scare anyone? I love the "coming up with ways to raise cash" line as well. I guess selling off 5% of the company is a good thing? Diluting shareholder value is a way to make up for losses? Cutting dividends is a great move? I digress, and move on:
"The market's perception of whether the Fed cuts or not really changes by the day," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "We still have more data to come."
"Plunging oil and gold prices also lifted investors' hopes for a rate cut -- if inflation is in control, policy makers have less reason to keep rates high. The Fed's Beige Book of economic activity around the country said with the economy expanding at a reduced pace, most core prices are stable or down slightly."

Perception changes by the day huh? Ok. I love the "plunging oil and gold" line. Oil goes from $95 a barrel to $90, and Gold moves from around $820 to $800 and that's a huge hit? How come when Oil and Gold are rising, that has no implications for inflation, but when they go down inflation must be moderating? If you can answer that one you are one of the few, the proud, the mentally challenged wall street collective.

What was curious today is that a rate cut was not seen by the dollar or by gold. This is a very recent divergence, and honestly I do not know what to make of it. To borrow a term from the always wonderful Minyanville community "Dollar deflation and asset class (stocks) inflation" has been the standard for a while. Again, the three possibilities are:

• Rate cut(s) already fully reflected in dollar/gold price
• Rate cut(s) are not going to happen on the 11th of December
• Massive manipulation is occurring in the currency/gold markets to set up said cuts

I have a new poll question up which asks you the readers this question, please vote!

As the title of this post clearly states, today was WTF Wednesday. The volatility of this market is extreme right now. No rational participant, thinking clearly saw anything market moving today, yet another massive rally ensued. The market went up because it wants to go up. I know that's simple, but I also think its the plain truth. The end of the year is going to be wild.

On a closing note, I see from the traffic counter that I get quite a few hits here. By all means please leave a comment! I need feedback ti improve the site, and any help is appreciated. Also I am always looking for post ideas, so let me know what topic you find interesting and I will do my best to bring in some content.

Have a good night.

Economic Disconnect - In Real Time

When I started this site my focus was to try and bring to light how out of whack things like home prices, inflation, and stock prices were in relation to true fundamentals as well as the coverage issue of the mainstream media. Over just the last month or so, my job has become super easy as the news and reality have diverged so clearly that it is obvious to even casual observers something is amiss. Today was another banner headline day, so lets have a look.

Citigroup Secures Funding from Someplace You Never Heard Of
Early this morning the buzz was that Citi had secured substantial funding from a quality source. I waited till I had some time to read the news and here it was:
AP
Stocks Higher After Citi Secures Capital
Tuesday November 27, 5:42 pm ET By Joe Bel Bruno, AP Business Writer
Wall Street Advances After Abu Dhabi Agrees to $7.5 Billion Investment in Citigroup
NEW YORK (AP) -- Wall Street rebounded Tuesday after the Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup Inc. -- a vote of confidence for the nation's largest bank, which has suffered severe losses amid the ongoing crisis in the mortgage market.
The Dow Jones industrials rose more than 200 points in yet another volatile session as investors were hopeful the financial sector can remain healthy despite the ongoing credit crisis. The banking industry has been battered in recent months as defaults on home loans have risen and rendered some mortgage-backed securities essentially worthless.
Major financial institutions, including Citi and its competitors, have had to book some $80 billion of writedowns on those holdings -- a trend that has left the markets nervous about the full extent of the damage from soured loans. Citi's ability to secure a capital injection raised hope others might be able to do the same.
"The Citi deal is certainly a relief after a series of negative news on Monday with respect to the financials," said Todd Salamone, director of trading at Schaeffer's Investment Research. Funds like Abu Dhabi's "that have plenty of cash may be viewed as a potential rescuer given the balance sheet troubles the banks are having. A weak dollar makes it that much more possible."
So there you have it. After banks have written off $80 BILLION in bad loans so far, a healthy $7.5 Billion makes up for it all. In a previous post I went over the "housing losses are a drop in the bucket" argument. If $80-$100 Billion is nothing, $7.5 Billion should not even qualify as a nano drop in the bucket!
Abu Dhabi literally translated means "Father of Gazelle", and I hope they are as fast as Gazelles in hedging their investment. Abu Dhabi is part of the United Arab Emirates, and is generally considered the richest city on earth. That is all fine and dandy, but could Citi not find more mainstream investors for the money? I thought Warren Buffet was going to buy every bank in the world or something? When banks get into trouble in recent history, it seems that some rich nation like Saudi Arabia, or in this case Abu Dhabi, steps up to the plate. I will not comment on the political aspects of such "help" save that when cash is the main help a big favor almost always is expected in return.
So the investment resulted in restoration of confidence for Citi? It says so in the article. Lets take a look and see,
Citigroup (C): last trade 30.32 (-1.24%)
Average Volume (3m): 64,000,000 Today's Volume (3m): 193,100,000
I am not a serious stock trader, nor a fundamental analysis guy, but volume is a metric I do watch. Over 3 times the normal volume was traded and the stock lost another 1.2%. If that's confidence restored in Citi, they should hope people lose confidence again.
The terms of the deal are pretty convoluted as well. Mish has a great rundown on his site of the particulars, but the short version is it smacks of desperation at Citi.

Freddie Mac On the Attack!
Freddie was in the news today as well. Freddie obviously could not locate a bunch of bored oil Barron playboys to invest money in them (question: could they do that if Freddie is US government affiliated? I do not know, leave a comment if you do know) so they did things the old fashioned way:
AP
Freddie Mac to Sell Stock, Cut Dividend
Tuesday November 27, 5:41 pm ET By Marcy Gordon
Freddie Mac Plans to Sell $6 Billion in Stock and Cut Its Dividend in Half to Bolster Finances
Cutting the dividend is a great way to save cash. Issuing even more stock while your stock is rapidly collapsing is another time tested winner. This move makes the Citi deal look pretty good! I wonder what id happening to senior citizen accounts lately. Poor rates of return on fixed income investments for over 4 years, and now dividend yielding stocks are cutting left and right. That's going to be a lot of angry elderly voters come the election.

FED Will Not Cut Rates (WINK, WINK)
Great headlines all over the place today. Check out this howler:
Reuters
Fed officials lean toward no "holiday" rate cut
Tuesday November 27, 5:25 pm ET By Ros Krasny
CHICAGO (Reuters) - Two Federal Reserve Bank officials hinted strongly on Tuesday that they would not support an interest rate cut in December, contending that the Fed has provided enough insurance against financial turmoil and would risk opening the door to higher inflation.
"In some circumstances, lowering interest rates may prolong the painful process of price discovery," he said in a speech to the Rochester University Simon Graduate School of Business.
You know for a fact that the FED is going to cut rates when they trot out a member and he actually makes a good case to not cut them. The FED is trying to "manage expectations" and by that I mean they want a big bang for the rate cut buck. The FED is helped by a story like this running on reuters. The FED will cut on the 11th, no doubt about it. Whether it is 25bps or 50bps is the only game right now.

Consumer Confidence numbers were lower than expected. Ho Hum. Home prices showed their single biggest drop since the GREAT DEPRESSION as well today. Again, a yawner. The market keeps putting on a show in the face of truly severe events. In a previous post I postulated that all market participants are holding their collective breath until the new year. After a day of headlines like today, I feel even more confident that 2008 will be very interesting indeed.

Have a good night.

Credit Gone Wild

That was a tough game last night for the Patriots. The Eagles had a wonderful game plan and executed it extremely well. I wonder how many more times Donovan McNabb will get hurt, miss some games, and the team will look the best it ever has before he gets pulled finally. The Patriots were not very sharp, but still managed a win against a team playing their best game of the last 3 years. Pretty scary.

Credit Gone Wild
There were two articles today that basically crystallize what has been going on in the mortgage arena over the past 4 years. While I try to provide commentary and original content as much as possible, the two stories need to be read on their own. I strongly urge all readers to check out the full posts.

Story One: Perfect example of how far and deep the mortgage mess reached to find people to loan money to: http://blownmortgage.com/2007/11/26/why-2011-might-not-even-be-the-end/
Blown Mortgage does a wonderful job of exposing how a FICO score means nothing when you are not looking at a person's overall financial picture.

Story Two: Rampant fraud and a virtual cash machine in use in California:
http://www.irvinehousingblog.com/2007/11/26/rudolph-the-red-nosed-reindeer/
Irvine Housing Blog really hits it out of the park. How banks were extending crazy HELOC loans like this is beyond understanding.

Reading the two articles above is very illuminating. I can accept the argument that there are a bunch of people that were mislead and/or tricked into risky mortgage products. I even have some empathy for those folks. The problem is that a ton of people getting into the housing market during the boom knew exactly what they were doing. They used leverage and financial vehicles offered by lenders to live the high life and get their hands on obscene amounts of cash. The problem with any kind of bailout proposal or loan modification scheme is that it will be difficult to isolate who deserves help and who deserves prison time. In the end, it is the responsibility of the lenders to make sound judgements about loans. That judgement took a back seat to profit chasing. I think the best thing to do right now is for someone like Ron Paul, at the next meeting with Boom Boom Bernanke, to go over the above stories line by line. I would love to see that, even if I have to watch CSPAN. If Bernanke or Paulson were confronted with these two clear examples of bank foolishness, it would be interesting to see their response.

Fraud and loaning money to someone that has no income to support paying it back was the backbone of the housing boom. The unsustainability of that is now clear. Stories of poor souls that were duped into whatever problems they have takes a back seat to the sheer bravado and corruption of the entire process.

Sorry, not much of a post tonight. I think the stories above will satisfy any one's financial appetite for the night. I will include a funny picture though:

Have a good night.

The US Consumer - Priced To Perfection

I am waiting for the New England Patriots versus the Philadelphia Eagles game tonight. Hard to picture it now, but just a few years ago, tonight's game was the Superbowl match up. I fully expect an ugly beating of another team by the Patriots as they continue their merciless charge towards history. Also back to work tomorrow, ouchie. Monday after a holiday is so tough, that 5am wake up is gonna hurt tomorrow.

Note to All Subprime Borrowers - NO Insurance for YOU!
Came across this nugget via the Implode-o-Meter and Housing Wire:

AIG Changes MI Eligibility Rules; Will Exclude Majority of Subprime Borrowers
by Paul Jackson
November 23, 2007
"From the update, it appears that anyone with a FICO below 575 will be wholly ineligible for mortgage insurance, while anyone under 620 FICO won’t be eligible for mortgage insurance unless they put up at least 5 percent in a down payment. I’ve checked the rate sheets of other mortgage insurers and don’t see anything similar in terms of existing or updated eligibility; most still show the availability of MI for borrowers under 620 at all LTV amounts."
AIG is in so much trouble they are just not going to do insurance packages for "subprime" borrowers anymore. I do not imagine it will take long for the other mortgage insurers to make a similar move. What will that do to the entry level home buyer market? It's not going to help it that's for sure! Imagine having to put 5% down to get into a home, Oh the humanity! This development should illustrate why anyone thinking about a housing turnaround is smoking the wacky tobaccy. This is pretty big news.

The US Consumer - Priced to Perfection
The following concept is one I touched upon a while back. I wanted to explore this idea a little further.
All the headlines and news was about the "amazing" start to the shopping season. Unlike many observers, I fully expect blow out numbers this season. It has long been a core belief here at Economic Disconnect that consumers will spend until they are forced to stop. In this way, looking at home prices, unemployment, and other indicators is a waste of time. As long as the consumer has access to any avenue of credit, they will use it.
From Yahoo finance today:
AP
Retailers Buoyed by Strong Holiday Start
Sunday November 25, 4:57 pm ET By Anne D'Innocenzio, AP Business Writer
Retailers Have a Strong Start to the Holiday Shopping Season, but Shoppers Need to Keep Buying
"The nation's shoppers set aside worries about higher gas prices and a slumping housing market and proved their resilience over the Thanksgiving weekend, giving what the nation's merchants wished for -- a strong start to the holiday shopping season."
"The bargains are better this year, a lot better," said Theresa Calib, of Houston, Texas, who was at the local Greenspoint mall Saturday. "We always know what we want to get, and we get it." She noted she took advantage of Foot Locker Inc.'s two pairs for $89 sale."
"Lavielle noted that the turnout Friday was better than a year ago, and customer flow was steady throughout the weekend. Both Kmart and Sears sold out a significant inventory of its flat-panel TVs. Other hot items were Global Positioning System receivers, game consoles like the hard-to-find Nintendo Wii, and digital cameras."
Hard to even begin with this piece.
First off, note the headline "Need to keep buying". The US consumer must consume at an all out rate just to keep the retailers afloat. The often used term "resilience" was also offered in regards to the US consumer. If journalism existed anymore in the world, the article should have asked "In the face of high gas prices and depreciating home values, should the consumer be "resilient" or should they try and get their finances in order?"
And here lies the problem. With real world inflation running high and home prices taking a dive, spending should be going down. Not staying the same. Not going up. The negative savings rate the US has been running is not a sign of resilience, but one of total denial of economic reality. In older times, when the economic prospects of the average person went down, they reigned in spending. Not anymore. With access to a multitude of credit lines and serial refinance opportunities, spending never dies.
This brings me to a concept I came up with a while back in regards to the US consumer. Nobody actually "buys" anything anymore. Everything is financed. "Homeowners" of the past few years now see that they in fact own nothing but a debt. Pay cash for an automobile? Funny. Most people roll car balances forward every few years into a new car, with balances ballooning every time. Electronics and furniture are also financed. I could go on, but the point is clear; In order to support rampant spending on things one cannot buy, the US consumer stretches out their every penny of purchasing power through financing. This is the culture of "monthly minimum payment." The consumer spends not only everything they have on hand, but commits every pay increase in the future towards paying for their ongoing debt. This is a key point. When you finance everything right down to your gas and groceries, the escalation of debt makes everything two to three times more expensive. The US consumer in their current state are priced to perfection in that every single penny they make currently and in the future is already earmarked. That is why the consumer is resilient. When you do not actually have to buy anything with cash savings, you can pile on debt almost indefinitely and maintain purchasing levels.
Now you may be wondering what can possibly stop this freight train of consumer spending. I wish I knew. I am beginning to think that with the massive losses in the mortgage arena, banks and lenders are going to have to limit lending going forward. If this results in an actual reduction in credit available to the consumer, there could be problems. With the FED poised to again lower rates and continue fueling false money demand, I don't think the spigot will be turned off. And there is no way the consumer will reduce spending, not if they are at all able to get credit.

Phantom Insurance Is a Wild Card
With AIG probably exiting the mortgage insurance business for subprime borrowers, we get a hint at what could bring the whole game down. Right now there are many insurance companies that have agreements with mortgage lenders, credit card companies, furniture chains, auto dealers, etc. Insurance by nature operates under extremely thin margins. The first problem is obviously going to be a collapse in mortgage insurance. These companies are not even close to being able to pay out the money promised as home prices collapse and foreclosures soar. They are an industry that used their smart alek "models" to predict possible losses. Those models do not conform to current market reality. The next big problem will be with credit card losses. Again, the policies cannot be paid if losses are outside the historical models. This is THE wild card for the US economy. If lending institutions cannot pretend that they are covered anymore, lending is going to dry up real fast. Without access to credit, the US consumer simply cannot buy anything short of a bag of chips. That is the irony. Right now consumer spending is still growing, but the consumer cannot actually buy anything at all. They have no real cash. They still have credit though, and it remains to be seen how long that is the case.

Have a good night.

Waiting To Exhale

While I love having a mini vacation (Wednesday-Sunday this week) its always hard when a vacation does not start on a Monday for me. I feel all out of sorts when things start off on a Wednesday! I was actually looking for the football game listings this morning, but its only Saturday.

Salvage Operations Hitting a Snag
Here in the greater Boston area, the radio is inundated with ads offering help to those people that have exploding ARMS that need to refinance. Because this state is a nanny state, all kinds of money has been set aside to help people hang on to the "American Dream". So how is the salvage operation going? The website Boston.com had a truly hilarious piece on the 21st that I just came across tonight. I whole heartedly recommend reading the entire piece:
http://www.boston.com/business/personalfinance/articles/2007/11/21/refinancing_programs_omit_many_borrowers/

Here are some choice bits:
"Eight states including Massachusetts have pledged almost $900 million this year to help borrowers replace unaffordable mortgages, but the states collectively have refinanced fewer than 100 people, a Globe survey found
In Massachusetts, where the Patrick administration introduced a $250 million program in July as a "big piece" of its efforts to limit foreclosures, not a single loan has been refinanced."
Wowza! Not much relief there. Why the low number?:
"The vast majority of the applicants aren't eligible for refinancing. They have either fallen too far behind on their payments, have badly damaged credit, or simply owe more on their loans than the value of their homes, making refinancing effectively impossible."
"A leading advocacy group said the programs simply aren't able to help most borrowers. "They're very well intentioned," said David Berenbaum of the National Community Reinvestment Coalition, "but these new products aren't fitting the needs of the consumers we see."
The products are not fitting the needs of the consumers huh David Berenbaum? The only product that will save most consumers at this point is a winning lotto ticket or a major inheritance.
"It was a great program for somebody who was thinking ahead," said Tonna Phelps, director of Single Family Housing at the Maryland Department of Housing and Community Development. "The problem is that people aren't thinking ahead, so now we have to go back to the drawing board."
I am about overwhelmed at the shear honesty of this piece. I will try and get it some more press. Rarely in the current mess will you get to read a story so brutally clear as this one.

All the talk about freezing rates before resets, expanding FHA loans, and working with lenders to stop foreclosures is just smoke. Nothing can be done to save prospective flippers and pie in the sky dreams of big profits in real estate. Sadly the best option for most people is to lose the home and begin to start over. Allowing oneself to become chained to a losing bet for the next decade is simply not smart financial advice.
I wonder who is actually looking to buy right now? While home sales have collapsed, they are still running over the historical sales rates. Anyone out there know somebody looking to buy? If you do, direct them to this blog. I would appreciate it if that person could leave a comment which details the thought process at this point.

Waiting to Exhale
While watching the financial TV shows today, I was struck with the tongue in cheek bullish commentators. Today was the first time I saw many "experts" give a bullish argument and actually smirk and smile while they did it. It seems even those folks know the jig is up. A few guys even were honest and said to the effect "hey I am here to be bullish, what do you want?".
With all the headlines and news surrounding the housing collapse, I always wonder why things are not so much worse off. My theory is that there has been a unified front consisting of the FED, the banks, the lenders, the economists, and related market participants to hold on for 2007 no matter what. The hope was that this issue would have some kind of resolution going into 2008. There will not be. I will not go over all the specifics, we have discussed them plenty of times. The take home point is that there was a concerted effort to stem any panic during 2007. All the participants took a big breathe and held it from around May 2007 until now. They are now turning blue and on the verge of passing out. I think that January is going to see some MAJOR events in the banking and credit arena. Everyone was stalling for time, and in a way I guess I can understand that effort. Time is up soon, and things will move quickly when they do.

December Ideas
The FED is going to cut rates on the 11th. Anyone that argues otherwise is simply trying to be funny. Whether or not the cuts will accomplish anything useful is debatable, but that they will cut is not. I was kicking myself for not selling my mining shares (gold and silver) during the last run up. I think we get one more good run leading up to the FED meeting, and a little more after. I know a bunch of readers here are very long gold and silver. I will reiterate my personal position one more time: When the market turns south for real, gold and silver are going to get clobbered. On a Macro view, that makes no sense, but when does the market make any sense? Banks and governments are going to sell what they can to raise cash, and gold's store of value works against it in that way in that atmosphere. Of course I could be dead wrong, and this is not investment advice in any way. I am just sharing my thoughts on the matter.

Saturday Rock Blogging!
Dire Straits with "Sultans of Swing". That's some serious guitar work!


"The Night They Drove Old Dixie Down" from Joan Baez. Great song from a wacko lefty:


Ozzy with "Mr. Crowley". If you have ever seen an Ozzy concert, the intro organ music is amazing!:


Have a good night.

How Many Drops in a Bucket Anyway?

I trust all had a nice Thanksgiving holiday. This last segment of the year leading up to Christmas is always a strange time. Time seems to both fly by and move at a crawl. My cloning group tends to slow down quite a bit this time of year. Motivation for work around year's end is a commodity in short supply!
This shortened week certainly was filled with drama and headlines. Next week may be very interesting indeed.

The Never ending Search for the Elusive Bottom
I caught a bit of CNBC today, and as usual it was a comedy show. The "up" day today was wildly celebrated. Never mind that the volume traded today was so low that no real market direction could be inferred, the good old folks at CNBC were out "bottom searching" once again. Now I am not against bottom searching in general (especially if the bottoms belong to Kim Kardashian, Beyonce, or Angelina Jolie!), but we are still in the infancy of the mortgage and housing blow up. The "bottom" for various sectors is like one of those elusive and secretive animals in the Amazon. Researchers try to capture a night vision photo of the species for years, but no confirmed sightings have been documented.
The depth of the residential real estate loan debacle is only now just starting to be seen. Fake appraisals, non existent loan qualification guidelines, and an entire class of people whose only reason for a home purchase was indeed the "American Dream", the one where you get rich by doing nothing. All of this dirty laundry must come out in the wash. As a way to monitor the situation, I suggest checking out this site: http://www.brokeruniverse.com/grapevine/
On that site you will see that shady loans, no documentation loans, serial refinance loans, and poor credit loans are still alive and well. Whatever lending rules have been toughened up, the folks on that board are not seeing it. When BrokerUniverse's grapevine goes silent, perhaps we may be approaching a bottom. Until then, no freaking way.

How Many Drops in a Bucket Anyway?
All day today I heard that the losses in the mortgage arena are a "drop in the bucket" in relation to the US economy. Maybe they are. The problem is that we have no idea how much the losses are at this point, and anyone trumpeting that the losses are insignificant have ZERO credibility. I propose we petition all the FED and government officials as well as the market commentators to give us a number where the losses do become significant. 100 Billion, 500 Billion? How much is significant? If the losses so far are so minuscule, why all the rate cut and save the banks rhetoric? If the problems are so well contained, why not let things be? Its disingenuous to have a position that, at the same time, contends things are just fine but a major bailout is needed.
Here is some bucket humor:

The point I am trying to make is that there is literally a sea of home owners across the US right now that have no intention of holding on to a losing asset. The purpose of the home purchase was easy money through refinancing and a pot of gold after a sale. That's over. Finished. While the average American is pretty much a fool about things financial, they are quick to run from a waste of their time. Paying property taxes, upkeep costs, and a monster mortgage loses its appeal when you have no jackpot waiting for you. I do not think the overall market understands yet just how quick folks are going to bail on losing properties. Before long, I think they will.

Enough Doom and Gloom, its Friday! I am all out of whack due to the holiday schedule. It does not feel like Friday at all. For comic relief, here is a totally hilarious clip from the movie "Clerks" where we meet a russian metal singer wannabee:



Watching this car crash footage on an icy street holds so many parallels to the current financial situation, I offer it without comment:



A throwback to the original "Transformers", Optimus Prime vs. Megatron. "One shall stand, one shall fall."



Have a good night.

3 Days of Mayhem

My last poll which questioned whether companies would push out a bunch of bad news during this holiday shortened week has closed. All votes were for the affirmative. Hard to argue with the sane minds that read this blog, as this week was chock full of rancid news and developments. I am going to post tonight, and then probably nothing until Saturday. I will try to make it a good one.

If You Don't Like the Game, Pick up Your Ball and Go Home
A recurring theme in the mortgage market mess is that the cut rate prices that are being offered for mortgage related assets are simply wrong. The argument is that prices right now are driven by fear and irrationality, not the fundamental asset worth. Things are accelerating to such a degree, the European Covered Bond Council has suspended trading in inter-bank market-making in covered bonds until Monday, Nov. 26! Full article: http://www.reuters.com/article/bondsNews/idUSL2120255420071121?pageNumber=1&virtualBrandChannel=0&sp=true
Fun excerpts:
"The move is a sign of the stress in the covered bond market, which is dominated by German institutions that have almost a trillion euros of covered bonds outstanding."
At least they have an idea how big the market is!
"Due to general market conditions and the specific mechanics of the inter-dealer market making it even seems possible that inter-dealer market making will not be resumed this year."
In all the instances when trading of anything has been suspended, it has not been my experience that things go well when trading reopens.
"It's good for the market," said Christoph Anhamm, head of ABS and covered bond research at ABN AMRO in Frankfurt. "It gives the market time to think."
We have a winner for incredulous quote of the week, and Mr. Christoph Anhamm can collect his prize when available.
When home prices were running wild and demand for mortgage paper was sky high did anyone stop the market from going up to give the market time to think? I didn't think so. The housing bubble was inflating wildly and no one wanted to think about what the fundamental values were then, now all this drama on the way down.
Is this a big story? Sadly, I am no expert on European market dynamics, but it does seem to be a major tectonic shift. The take home point is that bankers all over the world do not like the prices that are on the table for the real estate assets they have, and in Europe they are simply taking their ball and going home until years end. Just like children.

Everyone Wants to Live in California! We have the Sun, the Sea, and Frozen Teaser Rates!
In yet another move to stem foreclosures, the rocket scientists in California have conspired with some mortgage lenders to fix adjustable rate loans at low initial rates:
California lenders agree to freeze rates
By Kevin Yamamura and Jim Wasserman - Sacramento Bee
In an unprecedented move designed to save thousands of California homeowners from foreclosure, Gov. Arnold Schwarzenegger announced a deal Tuesday with four mortgage lenders to freeze adjustable interest rates for some of the state's highest-risk borrowers.
The state's agreement with Countrywide Financial Corp., GMAC Mortgage, Litton Loan Servicing and HomeEq Servicing covers more than 25 percent of California's subprime mortgage loans, which generally involve homebuyers with weak credit and require periodic increases in payments after initial low-teaser rates.
The deal brokered by Schwarzenegger requires lenders to freeze low interest rates for subprime homeowners who reside in their property.
Once again, what do you expect from children? People in California took out risky adjustable rate loans. Those loans are resetting higher. People cannot pay. Foreclosure follows. Anything hard to follow there? Again the theme of "real estate assets are not properly valued" comes up. The market has turned and will no longer support ever rising property values. People that had bet that prices would rise forever are now in trouble. Instead of a day of reckoning however, we get a plan to delay the price discovery of both the homes and the loans as far out as 5 years! I guess it is different in California!
In a related news item, the same lenders above are working to find ways to keep "homeowners" from facing foreclosure through loan modifications: http://today.reuters.com/news/articleinvesting.aspx?type=bondsNews&storyID=2007-11-21T015013Z_01_N20634427_RTRIDST_0_MORTGAGES-CALIFORNIA.XML
The lenders must try and figure out who can pay what and for how long. Never mind the logistics of trying to modify loans that have been sliced and diced and sold all over the world. The problems assocaited with such silliniess are too many to mention, but there are two major problems that I think have not been considered:

• Fixed Teaser Rate Price Equals Fixed Regular Rate Price- If Joe Smith is a trouble homeowner and has his rate set at 3% for a $300k home, he is paying $900 for his mortgage. Along comes a new buyer, Joe Jones, with strong credit, some cash to put down, and full documentation for the new loan. His new fixed rate is 6.5%. For the $300k home his mortgage will be $1950! For the same home?! Now what fool is going to line up for that deal? At a 6.5% rate, Joe Jones should not pay any more than $150k for the home, so that the mortgages equal out. So if people can use their head in California (a BIG if) price reductions should be 50% instantaneously. So much for saving housing.
• The FED Will Have to Make up the Difference Twice?-Now if you believe that these loans can in some way be reworked, there must be a horrendous loss for the banks somewhere in the process. We, being adults, know that those losses will probably be paid for by the US government through seen and unseen channels. My question is now this: Seeing that the US taxpayer is already footing the bill for the mortgage bailout, will the "homeowners" that stay with their new low fixed teaser rate still be granted the mortgage interest tax deduction? It would seem to me to be a double bailout on the taxpayer bill to first give cash to struggling banks that lost money due to foolish loans, and then give a nice tax break to the same people that took out those loans! The interest rate deduction must be withdrawn from any household using this bailout process.

I have a new poll which asks the question about the tax break withdrawal, please vote!

There has been a deluge of news this week, and I encourage everyone to spend a little of your time off this week sifting through the news. Just a little though, financial concerns should not be your focus as we start the holiday season. I would direct your attention to good food, frosty alcoholic beverage of your choice, and sports.

A note of thanks to all readers of this blog. I appreciate all the comments that are left. I am glad that some of the garbage I write resonates and helps people think about what is going on in the financial world. Come by often!

Have a nice Holiday, and as always, a good night!

Fantasy Land No Longer Accepting Reservations

My poll question on bad news dropping this week was meant as a joke. Thanks to Freddie Mac and ACA Financial Guaranty Corp it seems what is usually a quiet week has erupted in fireworks! We still have Wednesday to boot!

Fantasy Land No Longer Accepting Reservations
The shear velocity of the collapse of the mortgage industry is breathtaking even for someone like myself that predicted the event years ago. For a specific rundown on the big news today, I direct you to the fine blogs on the blogroll or Yahoo Finance to get caught up. I want to spend some time trying to send a wake up call to any and all that can be reached.

At this point in the housing bubble collapse, here is a summary of the situation as it stands in reality:

• Home prices have declined by a substantial margin. Home prices will continue to decline, especially in formerly "hot" markets, for the next 2 years at least.


• Home prices skyrocketed without respect for income, employment, or demographics. It is time to stop thinking any of those factors will halt the skid on the downside.


• Mortgage lenders (CFC, FNM, FRE, etc) never were properly capitalized for anything other than optimal housing markets. Not one bank is going to be able to cover the losses from soured loans.


• Mortgage insurers (ACA, PMI, etc) were phantom insurers and they simply cannot provide any relief for the situation.


• FED rate cuts cannot do anything to stop this process. The FED cannot "save" housing. The only implement the FED has is rate cuts, and given the inflation and dollar problems right now they should not even bother. The LIBOR rate has fully decoupled from the FED rate now anyway, and thus mortgages are not getting any cheaper.

That's reality. It is now Grown Up time folks. Enough with the "its just subprime" malarkey. Stop the "its a one time write down" gibberish. Cut the "FED to the rescue" farce. End the pretending that "the market is pricing all this stuff in and looking ahead" optimism. The US faces a systemic banking crisis due to the incomprehensible losses already incurred from bad loans. The losses are going to continue. We need to have a national discussion right now about the following:

• How much money is going to be lost?


• How bad is the damage to the system?


• What is the hit to the Taxpayer?


• How can this be stopped in the future?

We need serious people right now that can take on these issues. Sadly we do not have them. The action in Gold and the Dollar seem to predict some serious FED rate cuts. (I had opined that they were both being manipulated down before some kind of calamity, and now I am starting to think I was right) Rate cuts cannot help anything, and the destruction of the dollar and personal savings should not be policy to save banks. Reap what you sow. Leverage, derivatives, and lending run wild has its price. Its time to pay up.

If you pay taxes this should matter to you. If you have money in any US bank this should matter to you. If you own a home this should matter to you. If you reside here on Earth this should matter to you.

Is the world going to end? Eventually the Sun will go supernova, so yes it will. The US will not collapse due to this. People are not going to starve. A recession is not going to cause civil war. Lets stop pretending that it will. The FED seems so bent on preventing a recession and trying to prop up home prices, they seem willing to destroy the currency to do it. Lets try to force the powers that be to take a step back and take a deep breathe. Things will have to be painful and time will be needed to repair the damage done. We cannot allow fear and banking financial interests to be serviced at any cost. The children of Wall Street have misbehaved, and it is time for punishment. Lets hope we can stand the crying.

By all means, leave some comments and discuss the situation. Email links and news to people you know so they may start to see the problems. We are at the edge here.

Have a good night.

The Daggers Come Out

I will be honest, the Patriots are so dominant and scary that the games are becoming pretty boring to watch. I am a die hard football fan, but the serious clobbering of teams means the game is over in 10 minutes, and that is no where near enough beer drinking time! Maybe the Steeler game in a few weeks will be a good one. Maybe not!

If Subprime is so Small, What's all the Fuss? Leverage!
"Give me a place to stand, and I shall move the world"-Archimedes
The Great philosopher and scientist Archimedes believed that a lever could be set up in such a way as to move the world.


His theory is premised upon the concept of Leverage. Leverage, in the financial sense, is defined by Wikipedia as: "In finance, leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity." There are quite a few pundits out there (Realtors, mortgage bankers, and especially Ben Stein) that contend that loan defaults are such a small percentage of outstanding loans, no serious issue will come of them. That would absolutely be true if banks only loaned money that they actually had on hand. Due to the wonders of fractional reserve banking that is not the case. Ever wonder how Fannie Mae can fund a Trillion dollars in mortgages even though the market cap of the company is around 37 Billion dollars? Leverage my friend. Barry Ritholtz over at The Big Picture had a great post on this a little while back:
http://bigpicture.typepad.com/comments/2007/11/the-big-threat.html
The problem with the housing bubble unwinding is that banks are so heavily leveraged any losses immediately put them at risk of insolvency. They simply do not have the capital to cover losses that are leveraged up 10 or 20 to 1. Add in the financial magic of derivatives, and now you get an idea why the markets are rightly worried. The financials as a sector are getting creamed, and will continue to be brought down. How much money could be lost? I have no idea, and sadly the banks do not really know yet either.

Daggers Come Out
The Goldman Sachs downgrade to outright "sell" of Citigroup was a new and stunning development in the soap opera of banking. Goldman analysts think Citi has another 15 Billion dollar writedown coming up next quarter. How is that possible when all the losses were written down last quarter you ask? Its called reality. While the feel good story of a one quarter anomaly was all the rage, the reality is that losses are going to continue, and Goldman has voted Citi off the island.

What is strange is why Goldman would make a move like this? Usually the banking clan is a tight knit group. As almost all the banks have used the same methods to destroy the banking system, the Goldman downgrade stands out. Is Goldman immune to the kinds of losses the other brokerages and banks are seeing? I can easily imagine a scenario where Goldman has positioned itself as a strong short in the banking arena, and is now lowering the boom. I did not see press releases and Citi officials going out and disputing the Goldman estimates. I wonder if Goldman was part of the talks to build the SIV superfund, saw how deep the problems where going to be, and ran away screaming.

Goldman's move is akin to sticking a dagger in the back of the banks. At a time when confidence is at extreme lows, this really hurts. I am hoping to see all the dirty laundry start to come out now. Does Citi know anything about Goldman worth reporting? How about Merrill Lynch? There is nothing like a good cat fight, and this may be the start of a good one. Perhaps tempers and distrust will cool off over the holiday week? If not, this could be a real fun show!

FED Rate Cut Now a Market Expectation
One more tidbit from Reuters News:
US RATE FUTURES-Jump; Dec Fed ease fully priced
Futures fully price a one-quarter point rate cut from the Federal Reserve on Dec 11, up from as low as 72 percent earlier in the day and 90 percent indicated on Friday.
Poor Boom Boom Bernanke! The FED has actually made an effort to mention inflation and commodity price spikes, and still the market wants another hit from the easy money bong! We all know how important "market expectations" are to the FED. The Dollar seems to have stabilized. Gold is taking a beating not seen since The Buffalo Bills were in Superbowls. Those two markers either say "No Cut for You!" or they portend serious and diabolical market manipulation. Guess we will have to wait for December 11th. I think a cut is all but guaranteed for what its worth.

Christmas List
I am a Star Wars Nut and I am not ashamed! On the list this year is the Darth Tyrannus (Count Dooku) lightsaber hilt. The gentle curve of the hilt is meant to increase leverage in lightsabe duels when using Form II technique, the elegant form of Makashi combat. I want one.




Have a good night!

Slow Sunday

It is a very slow Sunday in the Financial world. The short week before Thanksgiving is pretty bare for data points. I have a new poll up on whether companies with bad news might try to use the quiet week to keep under the radar. Please vote!
For anyone interested, my name is not Ted. Sorry for any confusion.
The Fannie Mae Fuzzy Math vs. Fuzzy Reporting boondoggle is still a hot topic over at Calculated Risk. I have nothing else to add except that Fannie Mae really needs better communication skills if it is going to buy all the US mortgages going forward!

I am waiting for the New England Patriots game versus the Buffalo Bills tonight. I remember when Buffalo was the AFC king and they would routinely smash the Pats. Things have changed.

Taiwan Needs to Get Better at Reporting Inflation
I came across this funny piece today:
AP
Inflation, Economy Stir Taiwan Protests
Saturday November 17, 2:12 am ET By Annie Huang, Associated Press Writer
Inflation, Economic Hardship Stir Protests in Taiwan Ahead of Elections
Excerpt:
"Prices of everything from soybean oil to flour to scallions have skyrocketed," said Tsai Hui-ming. "I have to offer discounts because many customers complain they haven't had a pay raise for years and can hardly afford the bare necessities."
Inflation -- fanned by soaring prices for fuel and other commodities -- has become a hot political issue in Taiwan, as the island moves toward legislative elections in January 2008 and a presidential poll two months later.
A number of disgruntled consumers have taken their complaints directly to their leaders, telling President Chen Shui-bian that they can barely make ends meet. The problem exploded late last week when an unemployed man interrupted Chen while he was making a speech at the opening of a trade show in Taipei.
The man, identifying himself only as Charlie, shouted: "People can hardly make a living!"
He sparked what the media have dubbed the "Charlie syndrome," a reference to disgruntled people who are typically reserved and respectful toward their government leaders now lashing out during their public appearances.

Obviously Taiwan has not mastered the old "Inflation, Ex Inflation" game that the US government is so very good at! The "Charlie Syndrome" moniker is almost too funny!

I can understand some of the bogus maneuvering that is done when computing inflation here. I understand that food and energy are highly volatile. What I do not understand is that those prices have been in a long term uptrend. Those pressures have existed for over 2 years now. There needs to be some correction factor to take into account macro changes in inflation costs. Of course that will never happen, not when the FED desperately needs room to cut rates in December. Maybe Paulson can visit Taiwan and teach them a better way to tell old Charlie that the inflation he sees is all in his head.

Gold and Silver on the Ropes?
Gold and Silver took quite a pounding last week. I was surprised. I expected metals to take a good hit, but in the context of a seriously declining stock market. I am not a technical master, but $750 for gold looks like good support. There has been some ink about the FED standing pat on rates in December. Talk of a "strong dollar" was also making the rounds. Seems like we will have to wait until the December FED meeting to make a call on the metals. Should be interesting. Macro wise my feeling is still strong for gold and silver, until a general stock meltdown occurs, then stay away.

Christmas List!
Started working on my Christmas list today. Basic stuff like books, DVD's, CD's, and the like. I would love to add another sword to my collection. While I collect fully functional (ie REAL) swords, I absolutely want the Conan the Barbarian sword from the movie. I finally found a gorgeous replica: http://tins.stores.yahoo.net/coatsw.html
Here's a look

What an amazing piece! The runic symbols look great! I am totally getting this sword. I will have to ship it to a friend in New Hampshire as here in Massachusetts we are not allowed to receive dangerous weapons in the mail! Too Funny!
Remember all you bunker filled with gold and guns folks:

• Gold can only be traded with someone that wants it
• Guns need allot of care, cleaning, and maintenance to function well
• Ammo can degrade and it gets used up

Several high carbon steel blades made by fine craftsmen can go along way. Easily tradeable, and excellent for defense. Perhaps even a vintage Samurai Katana? There is no finer weapon in the world than a true folded steel Katana. I suggest getting a couple, but they are not cheap!

Have a good night.

"Normal Demand": I do not think that means what you think it means!

I keep seeing a scene from the movie "The Princes Bride" in my head whenever I hear homebuilders and mortgage lenders say that things will turn around when "Demand Returns to Normal". The scene is when the mastermind of kidnapping the princess keeps using the word "inconceivable" through the process of being chased by the dread Pirate Roberts. Finally, Indigo says to the man "I do not think that word (inconceivable) means what you think it means!"

It Depends on What Your Definition of Normal Is
Countrywide Financial, Lennar, Toll Brothers, and the like currently operate under the assumption that demand for residential real estate is under pressure right now, but that within a year or so demand will return to the levels seen in 2003-2005. Maybe not those levels, but close. The homebuilders especially need this to happen as they have built so many homes the absorption rate for the products needs to be high to clear out the enormous inventory they hold.

There lies the problem. Home demand was artificially inflated due to low rates and a hot market psychology. The fundamentals have been hashed out enough times to not go over all the same stuff. The very definition of "Normal Demand" is vastly different for those on the selling end of real estate and mortgages.

Consider the current market realities:

• Mortgage lending now requiring some documentation as well as some money down
• Evaporated home equity for buyers of the last 3 years in most hot markets
• Credit appetite for mortgages restricted going forward
• The "bigger penis" competiton as it relates to price paid for a home now over
• Flopping flippers and ghost towns of empty homes

Market psychology is a powerful thing. On the way up and on the way down. The belief that real estate demand will return to levels anywhere near what was seen in the hot times is lunacy.

The astonishing part of all this to me is that you do not even have to go that far back in time to see a bubble bust. Yes, the Nasdaq Tech wreck of 2000 comes to mind, but that was with equities. I mean the real esate crash of 1989-1993. I was a young man of 13 years old in 1989, but I can relate my family experience of the bubble bursting in the late eighties in the greater Boston metro area. Consider this example:

1989-Two family home in a north of Boston city. Assessed at $200,000. Home was put on the market and there was high buyer interest. Never mind the asbestos siding. Never mind the slumping roof. Never mind the flooded basement. 12 offers came in within a week. My mother decided to stay put after a divorce had just become final for "stability".

1992-Same house. My mother would like to start fresh somehwere else. She does not read the financial papers or followed economic matters. Home assessed at $80,000. Not one prospective buyer in 3 months. Finally one intersted party offers $70,000. We stay put.

Thats the reality of a market swing. The home was sold in 1998 for $90,000. Thats what can happen. Consider that the late eighties bubble was NO WHERE near the size of the current one and you can see why the optimism of the real esate industry is foolish.

Demand is returning to "normal". When lending is sound and home prices are dictated by fundamentals there is a natural equilibrium of supply and demand. "Normal" will be defined very differently by those in need of rampant real estate speculation. The sooner the entities involved reconcile this fact, the sooner we can smash the Economic Disconnect as it relates to real estate.

Enough serious stuff, Its Saturday!

Don't know why but I had Kenny Rogers and John Denver on my mind all day.

Kenny Rogers with "Ruby":

John Denver with "Country Roads":


Have a good night!

Admission of Guilt

Information has become available and I need to put out a retraction from my post last night relating to the accounting changes at Fannie Mae. Tanta over at Calculated Risk does an amazing piece on how the Fannie numbers were not "cooked" as much as presented in a different way from previous filings. Here is the post, its a long one, but a great read:
http://calculatedrisk.blogspot.com/2007/11/fannie-maes-credit-loss-ratio-fuzzy.html

I was guilty of using reporting that was not thoroughly researched by myself. I have time and skill limitations when its comes to deep financial accounting reporting, and I hope dear readers you understand that limitation. The problem with writing in real time on the web is illustrated by this example. I admit my mistake.
Having said that, I still have problems with Fannie Mae. I will reprint the comment I left at Calculated Risk here:
Tanta,
Excellent piece as usual. I admit I am one in the "blogosphere" that posted on the story yesterday evening. Thank you for the detailed analysis. I am not sufficiently skilled in matters of finance (I am only a DNA Molecular Biologist!) to go through all the details of the Fannie accounting changes. I clearly ,missed the subtlety of the change. The burden of proof is on Fannie to be believable and I think that there are still a few points that are troubling:
1. With FNM's failure to produce filings over the years, is now a great time to roll out new "presentation" parameters?
2. Not having information on cure rates for loans looked terrible to all traders and analysts
3. If management of the single largest lending entity in the world cannot communicate clearly what is going on, what is going on?
You are correct that this instance shows the trouble with writing in real time without thorough analysis, and I thank you for your herculean effort.

Tanta has a reply to my comment up already, all I can say is OUCHIE!
In the future I will try my best to not "jump the shark" on financial disclosures until the things can be thoroughly de convoluted enough for a moron to process. The great thing about getting information and news in the Internet age is that you can go around the world of expertise and get your own answers and compare logic. Do not always assume the source you are reading is absolutely correct.

Sorry folks. I feel I let you down.

You Cannot Make This Stuff Up

Hello all loyal readers. I was away from the blog for a couple of days due to unforeseen circumstances. I know all 3-8 of you out there cannot wait for my latest post, so I will try extra hard to entertain and inform this evening. Its been quite the week for all kinds of financial news. The rumored FED rate cut for Thursday never materialized, and the DOW slowly melted down after Wednesday's rally with the Financials being especially weak. Seems like some folks got suckered there! Gold and Silver took a terrific beating as well this week. With so much to cover, I recommend Calculated Risk and Mish's site for a full weeks rundown. I will post tonight on what I feel was the theme of the week from my point of view.

Dangerous Precedent
News hit the wires on Wednesday that a GE run money market fund was going to "break the buck" as its called. Great roundup here: http://globaleconomicanalysis.blogspot.com/2007/11/ges-enhanced-cash-fund-breaks-buck.html
What is extremely important here is that the "well contained" subprime losses in the mortgage markets are now even threatening the most basic of financial instruments. If one cannot even trust the banks to keep a money market fund from losing money, what does that imply for confidence? While that certainly applies to the average guy on the street, more damaging is if trust erodes between large institutions. The US debt and credit economy simply cannot afford any deceleration in money and credit. The event will be seen in future times as a watershed moment.

You Cannot Make This Stuff Up
Suppose, like me, you are on the bearish side as it pertains to the US economy and especially to the housing market. As more and more information and data comes forward a definite set of problems become clear. Even so, the banking system and the stock market seem impervious to the enormity of the losses involved. While there is a certain amount of the Economic Disconnect that can be explained away by shear stupidity of market participants, I cannot help but think that there is an elaborate cover up going on to try and buy time for the banks to recover. The FED, the banks, wall street, and the government all are involved in this delay game. Some might say I am paranoid. Some might call me a conspiracy nut. I will remove the tin foil from my head long enough to present exhibit A; Fannie Mae and the old switcheroo.

AP
Fannie Under Fire Over Accounting Change
Friday November 16, 6:56 pm ET By Marcy Gordon, AP Business Writer
Fannie Again Draws Scrutiny, Defends New Calculation for Potential Loan Losses As Stock Sinks
Full article: http://biz.yahoo.com/ap/071116/fannie_mae_accounting.html?.v=12
Key info point one:
"Using the new method, Fannie reported a so-called "annualized credit-loss ratio" of 4 basis points for the first nine months of this year, meaning the value of four out of every 1,000 mortgages it owns declined during that period. The Fortune article pointed out that under the old method, the credit-loss ratio for that period would have been 7.5 basis points -- far exceeding Fannie's forecasts on the $2.4 trillion worth of mortgages it owns."

Damning key info point two:
In Friday's conference call, Chief Financial Officer Stephen Swad said some of the $670 million in provisions for credit losses on soured home loans that Fannie wrote off in the third quarter likely would be recovered.
"We book what we book under (generally accepted accounting principles) and we provide this disclosure to help you understand it," Swad said.
Several analysts asked the executives in the conference call why the company couldn't disclose what proportion of high-risk mortgages it is able to refinance into fixed-rate loans and save from default.
"The problem is that we don't have the underlying information," said Credit Suisse analyst Moshe Orenbuch.

Case closed. There is absolutely no defending the move by Fannie. The "new" calculations can only be explained as a price discovery delay device. That's it. That's all. A company that has not even produced financial statements in 2 years simply cannot be trusted. Some key questions Fannie MUST answer right away:

• Does the "New Math" use historical models that are not applicable to the current market conditions or is the new math reflecting current trends in foreclosures and defaults? (You already know the answer to this one!)
• Is Fannie expecting that past due loans can be brought current based on the same historical rates that have no basis in the current market? (What do you think?)
• Can the models and projections in use for the assumptions Fannie is making be made available for review by outsiders? (Care to Guess?)

So there you have it. Fannie is changing its own accounting rules. Fannie says they will make a ton of loans that are failing become full performing. They just cannot say how many or how they expect that to be so. Glad this puppy is backed by the US government!

Seriously folks, you cannot make this stuff up anymore. The Fannie situation is an abject disaster. No amount of window dressing can change that.

Future Changes for the Overall Good

In the future here are some new accounting changes we can look forward to:

• Realising that home owners equivalent rent is not the best measure of inflation as it relates to housing, the FED will now base housing inflation numbers on the Case-Shiller housing index. The FED will compare home prices on that scale with mid 2006 as the start point. Clearly then, there has been no inflation, and actual deflation in housing prices, and the CPI runs negative going forward! Amazing!
• The FED acknowledges that food and fuel prices are indeed a component of inflation, but they introduce a new correction factor that takes into account that as the price goes up for these items, you appreciate them more, so the real gain in prices is minimal! Again, no inflation even with food and energy thrown in!
• Bank losses related to mortgage defaults are no longer "losses" but a charitable write off trying to help the average US citizen achieve the dream of home ownership.

Well, maybe not the last one.

Credibility of the credit markets took a tremendous hit this week. Between the FED, Fannie, and the ratings agencies there is not one shred of evidence that any of them can be believed or trusted. What happens when an economy built on debt and a silly fractional reserve banking system cannot convince the US consumer that all is what it seems? I'm not sure, but I doubt its going to be pretty.

Have a good night.

Thursday Might Be Interesting

I was very busy most of the day, and when I finally could sit down and check on the market fireworks were in full effect! The DOW closed up about 2.5% and the Nasdaq shot up a cool 3.5%! Quite a rally. On days when I cannot see any news or read any headlines, it is always interesting to go over the final wrap-up and see what was perceived as a catalyst.

Bank of America and Goldman Sachs: Rays of Sunshine
Bank of America was out today with just a 3 Billion dollar writeoff. Such a minuscule amount is nothing compared to the whoppers that have been showing up from some other firms. CEO Joe Price was at an investor conference had this to say: http://www.forbes.com/2007/11/13/investment-bank-writedowns-markets-equity-cx_ra_1113markets43.html?partner=yahootix
Excerpt:
"Price said Bank of America has approximately $11.7 billion in subprime exposure in its CDO’s, with $9.8 billion in liquidity support and $1.9 billion in cash positions. Its loss estimates will not be updated before the announcement of fourth-quarter results in early January."

So 3 Billion dollar write down out of 11.7 Billion in subslime CDO exposure? That's a 25% move down that BAC is expecting. Special notice should be paid to the fact that no additional information will be provided on the CDO's until next year. Seems to me like BAC is stalling for time.
Goldman Sachs came out and said they are not taking any write downs, thank you very much. They even said they are actively shorting mortgage backed securities, a theme I have opined on in the past. I wonder when a savvy bank is going to start selling this stuff real cheap in small amounts while they short the heck out of it and make a bundle. As far as Level III assets at Goldman:
"Blankfein (CEO)also said Goldman is comfortable standing behind its valuations for some $50 billion of risky and illiquid assets that it holds. They include private-equity, real-estate and leveraged-buyout loans.
"We are confident that we know how to evaluate these assets," Blankfein told his audience at the conference, which was sponsored by Merrill Lynch."
Well I for one am glad he is so confident!

FED Surprise Scheduled for Thursday Afternoon
While the BAC and Goldman news could have been a catalyst for the markets firing up the ion drives and going up, by far the most talked about possibility I came across was a surprise FED rate cut of 50 basis points scheduled for Thursday afternoon. This tidbit was running rampant on all the stock message boards I follow, and it made its way into some small outlets. I could not find any mainstream media reporting the rumor, which makes me think it just might be true. Last time the FED telegraphed the move to major banks, and the mainstream media was on it as well. I think the FED would want this one kept quiet. If the FEC is going to cut rates, the Dollar (75.8 on index) and Gold (about $800) had no idea or do not believe that to be the case. If you are a conspiracy nut, here's one:
The FED in concert with some central banks and the US banks were aggressively selling gold and buying dollars over the past few day. As the dollar went up a bit, and gold went down pretty hard a rate cut may not cause a currency panic! Hows that for conspiracy!

I doubt that's the case but the rumor is prevalent enough to make Thursday afternoon interesting to watch. If the rate cut does not show up, what happens to the market?
In short (pun intended) I could not find a real solid reason for the jump today. Nothing on a Macro scale was changed today. The market wanted to go up and it did. Thursday will be the day to watch this week.

I have a new poll up as to whether the cut will happen, please vote! I know Kevin and AnonG will!

Have a good night.