"Foreclosure Dogs" - Surely the End is Near?

Congratulations to the New England Patriots! 16-0. Pretty amazing. Hats off to the NY Giants as well as they played their best game of the last 2 years. Playoffs are upon us and I love the NFL playoffs.
More snow is coming for Massachusetts tonight. Seriously, this has got to stop. The wife and I are already getting out late March vacation plans started. We usually visit the Sandals Resort, the royal bohemian the last 3 years. Has anyone here tried other Sandals Resorts? If so please leave a comment about which one you tried and your personal experience.

"Foreclosure Dogs" - Surely the End is Near?
In the latest sign that the end of the world is at hand, I found this news piece while looking over a local news website today. The Boston.com website was describing a large increase in the number of pets left at local shelters lately, and then they cite a news item from Columbus Ohio that is too amazing to miss:
Foreclosure pets
Housing meltdown hits dog shelter
Saturday, December 22, 2007 3:00 AM
By Barbara Carmen
THE COLUMBUS DISPATCH
First, Charity Mead lost her job; then her home; and then, in September, her dogs. That's when she started to cry.
"It took me a good month to stop crying over Rocky and Precious," Mead said. "I made my husband take them to the dog shelter. I couldn't bring myself to do it. It was like giving up one of your kids.
"But I didn't have anywhere to keep them."
As a pet owner struggling in a bad economy, Mead is not alone.
Nearly 20 percent of the 182 people who deposited dogs at the Franklin County Dog Shelter by mid-month said they were being evicted, as were the Meads.
"There's even a national term for it: 'foreclosure dogs,' " said the shelter's director, Lisa Wahoff. "We started seeing it more about 18 months ago, people writing 'foreclosure' or 'financial reasons' on their surrender forms."
The number of foreclosures filed in Franklin County is rising by about 2,200 a year. Last year, it jumped to 8,875.
Last week, the shelter on Alum Creek Drive recorded its own record number: 360 dogs in a building meant to hold 250. About half are economic orphans.
County Commissioner Mary Jo Kilroy said foreclosure dogs tell the bigger story. "That's an incredible marker when you're giving up a member of your family," she said.
In December 2005, when foreclosures were lower in the county, only 12 owners surrendered their dogs. Last December, 209 were turned in, 28 of which came during the four days before Christmas.
Many owners are tearful as they say goodbye. Others stoically pull their pets from their children's arms in the shelter lobby.
"If you're going to go into foreclosure, call the shelter early so you can get your ducks in a row," Wahoff said. "Don't wait. We can help."
Full Article: http://www.dispatch.com/live/content/local_news/stories/2007/12/22/DOGOUT.ART_ART_12-22-07_A1_GU8RQJ6.html

This story is both sad and telling. Not only is the wave of "subprime" home buyers over the last 3-4 years totally ignorant and foolishly speculative, they cannot even properly take care of pets as well. Care to take a guess at how well the children of such people are faring?

Perhaps Treasury Secretary Paulson can start a new plan called "Hope Now For Pets" where foreclosures can be delayed until suitable housing for the mutts can be found. I probably should not have written that, as we are in an election cycle!

Seriously, this piece highlights the number one reason why the housing bust is going to be bigger and longer than anybody is thinking. You cannot assume anything about the current crop of upside down mortgage holders. Maybe most will hang on. More likely most will talk a walk. If you are so financially stretched as to not even be able to properly care for your pet, I fail to see any reason why a credit rating or a bankruptcy will bother you. This is a key point. Using historical models of borrower behavior during a market downturn is fatally flawed because the new age borrower is a different animal. This is why analysts and commentators are continually stunned at how fast and deep this bust is proceeding. It is indeed "different this time", but not in a good way.

I have a new poll up tonight, please vote!

Have a good night.

Debt Revolt - Could It Happen? What If It Did?

The New England Patriots look to make history tonight. One game stands between them and a perfect regular season record. Not since the 1972 Miami Dolphins went undefeated has the NFL had this occurrence. Is this amazing? It certainly is in the modern era. "Parody" is a key term in the NFL and it makes it extremely difficult to have a consistent winning team. I have already heard that the Patriots will be undefeated, but that their schedule was weak. That is pure fantasy. A look at the teams they have beaten this year is a roll call of most playoff teams. The Patriots have soundly beaten:

• San Diego Chargers, 38-14. This beating was the reason for the start of the Charger poor run which they have turned around.
• Cleveland Browns, 34-14. A young, talented, almost playoff team.
• Dallas Cowboys, 48-27. The best team in the NFC crushed on the road.
• Washington Redskins, 52-7. A probable playoff team, the Redskins have been serious trouble for every team they have played, except one!
• Indianapolis Colts, 24-20. A tough, gritty win on the road against the defending super bowl champions and the second best team in the league. A great win.
• Pittsburgh Steelers, 34-13. A dominating win against the leagues best defense.

So clearly the Patriots have taken and beaten all comers. Does it matter? Not if they lose in the playoffs! History only remembers the final trophy holder. With that said, it is still a worthy accomplishment by the New England team and I salute them. Of course, they could always lose the game tonight and this is all for nothing, but I think they will pull one more out. The only thing that stands between the Pats and another title is the looming rematch against the Colts which may take place in poor weather. That game is a huge one.

Karl Denninger's 2008 Outlook Post

Market Ticker has his 2008 review and forecast up tonight. The post is excellent as usual, but it takes some time to read. I recommend setting aside a few moments to fully understand the great explanation Karl provides of the current mess. Here is the link: http://market-ticker.denninger.net/2007/12/year-in-review-and-look-ahead.html

In the Hyperinflation vs. Deflation debate, Denninger comes down strongly in favor of Deflation. His reasoning is extremely hard to argue with. The prospects for Gold and mining stocks may not be what you think they are, so pay special attention to that section.

Of course, I cannot compete with such a post so my own humble prediction post will come another night!

Debt Revolt - Could It Happen? What If It Did?

I am going to skip the headline type content and instead put out a theoretical idea I have been kicking around for a while. Let's try to flesh it out and start a discussion.

It is well known and documented that a large part of the country is populated by people with less than stellar financial knowledge. These masses have absorbed the "use debt to live like a king" mentality. They use multiple credit cards, rolling car loans, and trick mortgages with home equity extractions to live far beyond their means. How large is this contingent? I have no idea. It is probably smaller than I would guess, but possibly 10-15% of adults over the age of 25 operate this way. With their entire money input accounted for, they save nothing and rely on low interest rates and new credit streams to play the monthly payment game.

But something is amiss. Home prices are falling and will continue to do so. Wages, stagnant for the last 5 years now may even go down or disappear when unemployment goes up. New credit streams may be nonexistent, or so expensive that they are not feasible. Without the ATM of home appreciation and without low interest credit cards this consumer may FINALLY look at the pile of debt they have amassed and come to a profound conclusion.

The conclusion? Screw It!

The type of person that lives this way is gullible to start with. They have bought into this debt bomb idea and were promised all the way that things will eventually work out for them. That is becoming a real problem for all but the most silly to recognize right now. Faced with a pile of debt for things that have nowhere near the value expected, why not just default on the lot of it?

One argument I hear is that there is a stigma attached to bankruptcy. I have been told that losing a home to foreclosure is an embarrassment. I think bankers must start those rumors. The type of people I am discussing knew they were gambling financially, in fact, they sought it out. The bet has gone bad now and I do not see any reason why they will stick things out and try to repay. If I was a financial advisor to someone in this spot I would counsel defaulting on all debts.

So if there is no shame (everyone is in the same boat) and no stigma (it's the smart thing to do!) then what could stop it from cascading? Laws that keep debt on the books and attempts to recover losses by creditors would be a problem. Wage attachments could also be an issue. The problem I see is that the sheer numbers involved here would make chasing defaulters impossible. Think about it. If after 2008 every "homeowner" that was 20% or more underwater on their mortgage defaulted, just what in the world do you think the banks can do? At that point the banks would be fighting for life and looking to the government for help, not chasing joe smoe for his mortgage payment. Likewise for credit cards. Imagine car repossessions in the millions! It is just not feasible.

I do not think we are anywhere near this kind of event. I have just been thinking about it over the last week. The question boiled down is this:

• If US consumers that are up to the ears in debt make a decision to let it all go and try to start over 1) What would things look like? and 2) What could stop them?

Hopefully this idea will catch on and a real debate can be started. Use the comments section and by all means try and link this question anywhere else you may read. I think it is an interesting mental exercise.

For some fun stuff on Saturday Night!

I love the whistle song from Gheorghe Zamfir in the film "Kill Bill Volume I". Very good tune used at great points throughout the film:

Christmas Opossums?

moar funny pictures

Remember the film "The Birds"?

moar funny pictures

Have a good night.

New Home Sales - Runaway Train Never Coming Back

Heading into the final weekend of my vacation. I always start to miss the work day routine after more than 4 days off. Today does not even feel like a Friday. I like my job and I actually look forward to going back to work. If you cannot say the same, that stinks. But we all have to do what we have to until we can do what we want to, you know?

Buffet Effectively Finishes Major Insurers
Mish over at his site has been covering the saga of MBIA and Ambac, two major bond insurance companies that are looking at serious problems. All the talk on the message boards for both MBI and ABK over the past few days has been buyout and takeover rumors. The stocks of both were moving higher in anticipation of some event. Today that event occurred, from Yahoo Finance:
AP
Berkshire Hathaway Opening Bond Insurer
Friday December 28, 4:48 pm ET
By Stephen Bernard, AP Business Writer
Berkshire Hathaway Opening Bond Insurance Business, Buys Insurance Unit From ING
NEW YORK (AP) -- Town governments, school districts and other municipalities looking to borrow money got a new option Friday when trying to insure their bonds: billionaire investor Warren Buffett.
Buffett's formation of a bond insurance company provided some validation to an industry that has been battered by fears of collapse in recent weeks.
"If I was thinking of investing in financial guarantors, this would give me comfort," said Donald Light, a senior analyst with Celent. Light owns Berkshire Hathaway shares.
Though analysts said the move by Buffett provides a stamp of approval for the broader business model, which has recently come under fire, shares of Buffett's newest competitors were hammered Friday.
"Any capital new to the space for reinsurance would be a net positive," said Steve Stelmach, an analyst with Friedman, Billings, Ramsey & Co., in an interview. But if Buffett "uses capital simply as competition, it is a negative," Stelmach said.
MBIA Inc. fell 15.9 percent to close at $18.74 Friday, while Ambac fell 13.8 percent to $25.12. Earlier in the session, MBIA shares hit a 52-week low of $18.43. (No misprint!)
The New York Insurance Department expedited the licensing for Berkshire Hathaway Assurance Corp. The state's insurance superintendent, in a statement, said the state was doing what it could to help insurers win regulatory approvals needed to keep their businesses going.
I feel kind of sorrow for the guys playing the MBI/ABK stocks over the past week. They were correct in thinking there was going to be an event that would move the stock, they were just hopelessly wrong about what was going to happen.

I am no expert in this area, for that I direct you to Mish's site. I include this piece here to highlight the credit crunch mentality we are seeing. Nobody believes that poorly capitalized companies like MBI and ABK can make good on their insurance policies. This is killing the market for insurance of all kinds of paper, especially for municipal bonds. I am not one of these people that thinks everything Buffet does is absolute gold, but the man is usually very good a research and avoiding bad situations. He looked over the field and say the best way to grab a major share of the market was to start fresh. MBI and ABK are basically toast now. Anyone with a brain will go for the Buffet backed insurance over the crap those companies are offering. It will be interesting to see how far into 2008 MBI and ABK make it.

New Home Sales - Runaway Train Never Coming Back
To nobodies surprise that reads this site and many others, new home sales were reported today for November, and they were even weaker than expected. Here is the headline and story:
AP
Home Sales Plunge, Feed Recession Fears
Friday December 28, 4:52 pm ET
By Jeannine Aversa, AP Economics Writer
New-Home Sales Plunge to Lowest Level in More Than 12 Years, Heighten Recession Fears
WASHINGTON (AP) -- The housing market plunged deeper into despair last month, with sales of new homes plummeting to their lowest level in more than 12 years.
The slump worsened even more than most analysts expected, heightening fears that the country might be thrust into a recession.
New-home sales tumbled 9 percent in November from October to a seasonally adjusted annual sales pace of 647,000, the Commerce Department reported Friday. That was the worst sales pace since April 1995.
"It was ugly," declared Richard Yamarone, economist at Argus Research. "It is the one sector of the economy that doesn't show any signs of life. It doesn't look like there is any resuscitation in store for housing over the next year," he said.
The housing picture turned out to be more grim than most anticipated. Many economists were predicting sales to decline by 1.8 percent to a pace of 715,000.
Over the last 12 months, new-home sales nationwide have tumbled by 34.4 percent, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.
"I think you can classify what we are seeing in the housing market as a crash," said Mark Zandi, chief economist at Moody's Economy.com. "Sales and home prices are in a free fall. The downturn is intensifying."
I have to hand it to the mainstream media. Their ability to make bad news seem like heaven is only matched by how terrible they make news sound when they want to. For some reason the larger than expected sales plunge was deemed worrisome enough to actually make a pretty scary news item and include doom and gloom commentary form some market observers.

So what does this all mean? Even in the face of massive discounts and free extras, new home sales are still spiralling down. We have covered all the reasons before, but does this process relate to the ever feared recession talk? The wonderful blog Calculated Risk had put together a great chart showing new home sales vs. recessions for the last 30 plus years. (reprinted here with emailed permission)

A great chart with all kinds of information. I spent awhile looking it over and here are my observations:

• The last big bust in the late 80's to early 90's showed very little in the way of new home sales being abnormally high before the crash. Maybe more existing homes were moved in that time.
• The thing that stands out strongly to me is the amazing cyclic nature of the sales versus recession.
• The MAJOR problem area is at the January 2002 data set. The business led recession of 2001 SHOULD have made a dent in home sales, but they instead never corrected and resumed an upward run. A MAJOR upward run.
• The new home sales of the 2003-2005 years were about 40% higher than at any time in history that the chart covers.

I recommend spending some time with this chart, as it has plenty to offer. Clearly new home sales will need to fall into the historical 400k range to signal a bottom. The problem is the false high demand that precluded a prior correction will also have to be atoned for, so the time spent at a 400-500k sales level may be prolonged.

This information really illustrates what I have said was the amazing front loading of demand for homes into a small time span. I will more clearly go over years and numbers in my 2008 prediction post (its coming I promise) but I can say now that sales will reach about 450k in 2008 and may need to stay there for 3 years to compensate for the artificial sales made during the 2003-2005 time frame.

Ok, enough. Its Friday night and we need the rock music!

From the title of this post, Soul Asylum with "Runaway Train". The words are very fitting for the mess that is housing!

A local band Dropkick Murphys with "Shipping Up to Boston", as seen in the film "The Departed":

Found a great tribute video to the unforgettable Randy Rhoads. Please enjoy the song "Diary of a Madman". The beginning of the song highlights Rhoads' special blend of classical guitar mastery that he works into full metal. Truly a great loss:

Have a good night.

With Friends Like Goldman Sachs, Who Needs Enemies?

Went out and saw the new Will Smith film "I am Legend". I was not sure what to expect. It was a pretty good film overall. The isolation and routine coping mechanisms that the lead character had developed were very interesting. Not a top 10 film, but a solid film. Then there was a small ice storm up here in Massachusetts. Always fun.

Sallie Mae Doubling Down on a Losing Bet
I had to read, reread, and then reread this piece a few times because I just could not believe how funny it was. Sallie Mae, while not a mortgage paper player, is of interest to Me because it is a loan company. All companies that are in the business of lending (auto, school, credit cards, etc) are on watch to gauge how rough the credit crunch is. A few posts back the conference call with SLM CEO Albert Lord was covered in all its hilarity. Today we get some more great material, from Yahoo Finance (by Forbes.com):
Sallie Mae's Sophomoric Deal
Andrew Farrell, 12.27.07, 4:05 PM ET
College students could learn a lesson on the evils of gambling from student lender SLM, which bet its stock would rise and undertook a complicated financing deal with Citigroup based on that premise. As any follower of financial markets knows, SLM, better known as Sallie Mae, has been diving since a planned acquisition of the company fell apart earlier this year, and now it will have to sell new shares cheaply so it can buy the old ones back expensively.
Sallie said late Wednesday it will sell about 70 million shares of common stock for $1.5 billion. It will also sell 1 million shares of preferred stock for $1.0 billion. The preferred stock will convert into an unspecified number of common shares in 2010.
Sallie Mae will use about $2.0 billion of the proceeds from the selling of its shares to buy back other of its own shares from Citigroup division Citibank. Sallie Mae sold Citigroup its shares previously under a forward contract.
In an equity forward contract, an issuer, like Sallie Mae, sells securities to a buyer like Citigroup for the current stock price. The issuer agrees to repurchase the shares for a greater amount in the future. In essence, it’s a cheap way to borrow money as long as the company's share price goes up. If the share price falls, however, it means the issuer must overpay to buy back the shares.
Unfortunately for Sallie Mae, its stock has dropped sharply this year Shares of SLM have plummeted 57.8% during 2007.
Sallie Mae will need to purchase the shares back from Citigroup for more than twice the current market price, an average of $45.25. (Close 12/27 at $19.65)
During a contentious conference call earlier this month, SLM Chief Executive Albert Lord raised the possibility the company will sell more shares.
Sorry for the long article insert, but it was worth the read! So Sallie has to buy back shares from Citi for $45, while they are currently priced at around $20! Those equity forward contracts are great ways to get financing huh?
I wonder who in their right mind is going to step up to the plate and buy a bunch of new shares of SLM after learning about this calamity. After losing their bet with the forward contract, Sallie is now going to double down their position by issuing large amounts of stock at whatever price it may fetch. It may be interesting to note that the CEO Mr. Lord, while executing the forward contract that implied he thought the share price would go up, was voting with his feet and selling massive amounts of options up and until the most recent news. Too funny. You almost cannot make any of this up anymore.

With Friends Like Goldman Sachs, Who Needs Enemies?
The firm Goldman Sachs has been an interesting player during the current debacle. While most firms were taking massive writedowns and doing the walk of subprime shame, GS was immune. News came out that GS had even been shorting a bunch of mortgage paper positions held by various banks while their values crumbled. I am all for that by the way, and I had covered that exact idea a while back on this blog.
So from the SLM news above you may think Citi was in a good spot. They were going to get paid by SLM and they also received a cash infusion form some country. Plenty of analysts and commentators were praising Citi for their moves to shore up their position. Along comes Goldman Sachs today and they unleash this whopper:
AP
Citi May Write Down $18.7B, Analysts Say
Thursday December 27, 4:39 pm ET
By Madlen Read, AP Business Writer
Citi May Write Down $18.7B, Goldman Analysts Say, Which Could Force Bank to Slash Dividend
NEW YORK (AP) -- When Citigroup warned in early November that it was likely to write down its portfolio by $8 billion to $11 billion in the fourth quarter because of exposure to bad loans, investors recoiled at the size of the losses. Some now say those early estimates appear drastically understated.
Citigroup Inc. could write off as much as $18.7 billion in the fourth quarter, wrote Goldman analysts William F. Tanona, Betsy Miller and Neil C. Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40 percent.
Citi has about $55 billion in exposure to subprime mortgages, about $43 billion of which are collateralized debt obligations, or CDOs, that have mortgages underlying them.
"We still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets," the Goldman analysts wrote.
Already, Citi has been propped up by a $7.5 billion investment from the Abu Dhabi Investment Authority, a sovereign wealth fund that in late November bought a 4.9 percent stake in the bank.
But if Citi must write down the value of its portfolio by more than it estimated back in early November -- a distinct possibility, given the lack of improvement in the tight credit markets -- Goldman analysts said the bank may need to raise an extra $5 billion to $10 billion in cash.
HAHAHAHA! Goldman lowers the boom on Citi. I have to give credit here. While the ratings agencies like Moody's, Fitch, and S&P play the game of "we won't lower your rating if you are still open, we will wait till the doors are locked to drop ratings" Goldman is coming out swinging in regards to the bank prospects.

This brings up a key point. Why is GS so hot to put out these kinds of reports? I mean, if they are right obviously they are in a great spot. I mean something more along the lines of burning bridges and fostering bad blood. The banks are all linked and constantly do each other's business. While certainly each bank is it's own entity with it's own interests, they all depend on each other for all kinds of deals. For Goldman to continue to make waves among the banks, they must be pretty sure of two things:

1. They are correct in their reading of the situation
2. They will not require, in the near term, any special treatment from sister banks

If they are sure about points 1 & 2 the relative performance of GS will be very interesting to see going forward.

Still Not getting IT

I know, I should not watch CNBC! They trotted out a bunch of people all day long that are sure home demand will pick right up in 2008, maybe late in the year, and all will be fine. It is very annoying to listen to these fools and the have the hosts ask not even one question about how that occurrence will happen. Here is what any "rebound in 2008" type person must answer before their opinion can even be taken seriously:

• With major lenders like CFC and IndyMac now requiring FULL DOCUMENTATION, as well as 5% DOWN by how much does that kill off potential demand?
• Lending standards are going to keep getting more restrictive, so what pool of buyers can replace the loads of subprime borrowers from the last 4 years?
• Lawsuits over restructuring, hidden losses, REO's through the roof, foreclosures still rising, and possible capital problems at banks will cause home loans to go a) UP b) DOWN?

Until one of these clowns can answer at least one of the above without invoking Unicorns and magic wands, they should just shut up. Seriously, it's fine to be wrong but at least try and pretend you have any idea what the deal is.

New poll up tonight about the Goldman playbook, please vote!

Have a good night.

If Everything is so Wonderful, Why are You Sweating?

Welcome back! I trust everyone had a great holiday. Just a few days to go until 2008 is started. Does anyone else have the problem of writing checks with the incorrect year besides me? It takes me into mid February until I finally get the new year thing set into my head. Maybe I am just strange.

Disappointing Christmas Gift
I had asked for, and received the book "The Great Crash" by John Kenneth Galbraith for Christmas. I read half of it yesterday, and the other half today. I constantly see this book recommended as a commentary on the 1929 stock market crash and ensuing Great Depression. The book was written in 1954, and the new copy I have has a new foreword written in 1997. I was very disappointed by the book. First off it was boring. Now most financial books tend to be boring by nature, but I mean this thing was a sleeper. You would think the most amazing market crash ever would be exciting stuff, but not in this book.
Second, the analysis was very simplistic. Perhaps it was as easy as "Speculation was to high and when it stopped things went bad" which was the basic take home point of the book. There was some market psychology analysis, but not much. Lastly, the book offers no real information about the great depression save that the author seems to think there was no major reason for it. Again, a disappointment. I do not recommend the book to anyone.

If Everything is so Wonderful, Why are You Sweating?
When I have days off my guilty pleasure is watching CNBC on TV. As we have discussed, the problem with all things financial is the glacial pace at which things occur. It is fun to watch CNBC and see the analysts and commentators try and make every little piece of news into a market moving event. I do not really blame them, they need to earn their paycheck by providing content, so it is not anything sinister.

The talk today was mostly about the Case-Shiller home price index, which was ugly, and the meaning of it all. For those that may have missed the index news, here is a recap via Yahoo Finance:
AP
October Home Prices Post Record Decline
Wednesday December 26, 2:59 pm ET
By Stephen Bernard, AP Business Writer
S&P: US Home Prices Fall by a Record in October for 23rd Straight Month of Deceleration
NEW YORK (AP) -- U.S. home prices fell in October for the 10th consecutive month, posting their largest drop since early 1991, according to a key index released Wednesday.
The record 6.7 percent slide in the Standard & Poor's/Case-Shiller home price index also marked the 23rd consecutive month that prices either fell or grew more slowly than the month prior.
No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim," said Robert Shiller, who helped create the index, in a statement.
The previous record decline was 6.3 percent, recorded in April 1991. The index tracks prices of existing single-family homes in 10 metropolitan areas.
It is considered a strong measure of home prices because it examines price changes of the same property over time, instead of calculating a median price of homes sold during the month.
Home prices could fall another 10 percent over the next 12 to 18 months before bottoming out, said Patrick Newport, an economist with financial consultancy Global Insight, in an interview.
Newport said four of the largest groups currently trying to sell homes -- banks holding foreclosed properties, homebuilders, speculators and unemployed consumers -- are typically flexible about lowering house prices because they need to get rid of the property.
Sales of homes will likely start to rebound late in 2008, with price appreciation to follow, Newport said.
So there you have it. Record price drops. A couple of things stand out to me from this article. First, the piece highlights a real problem that has been glossed over and that fact is that there indeed was a prior real estate boom and bust. The late 80's to early 90's bust was huge. While the parrots at the NAR like to say "real estate never goes down" you don't even have to go that far back to see a time when it did. The market mania that was home buying has always blown my mind because not only was there a very big bust in REAL ESTATE not that long ago, we were coming off a immense STOCK MARKET collapse in 2000-2001 as well. Speculation was clearly a loser in 2001, and yet home speculation took off on the dust of the Nasdaq collapse. You can lead a horse to water and all that.

Second the article quotes Mr. Patrick Newport (from Global Insight). The guy is all over the place. First he says prices could fall 10% over the next year to year and a half before the always watched for bottom occurs. Then he says sales will pick up, get this, in late 2008 and price appreciation will follow. On what basis does he make such a call? What factors is he considering that warrant that kind of prediction? We don't know. What we do know is that any real estate advice sold by Global Insight should be taken very lightly!

Which brings me to tonight's main point. Everyone and their brother is out running around screaming that things are wonderful and this is all overblown. Take a look at the list below which is just a small sampling of things seen and heard on mainstream media today. Note the beginning of the statement and compare with the end:

• FED "Auctions" of capital now will run as long as needed. This is strong news because it means plenty of money available to banks that desperately need capital.
• Foreign cash infusions are a great move by the banks because this way the banks can set terms that they can live with.
• Home prices falling around 10% is no big deal after several years of double digit growth, unless you are a recent buyer.
• Retail sales are down, but they are higher than the most bleak projections made.

You get the idea. When all news is bullish and strong, you are closer to a market top than a bottom. If things are so good and the mortgage mess is so contained, and the consumer is still pumped on steroids, and so on then why is everyone sweating?

The debt based US economy needs one thing and one thing only to keep chugging along. That one thing is positive psychology. There is no amount of debt that will stop a consumer from spending if they can play the monthly payment game. As long as sentiment is positive, hanging on will be done. The actions of the FED and the general language of "remain calm" by the business sector clearly shows that the worry is about perception. Any fundamental look at income versus spending, or debt load versus repayment shows clearly that the US consumer is tapped out. Every trick known, as well as some new tricks, will be tried in an effort to keep public perception positive. Will it work? I am not sure, but my answer to that question will be covered in the "2008 Predictions" post later in the week.

Financial Sector Stocks - Strong Buy?

I try to stay away from stock specific commentary here, but I kept hearing ALL DAY LONG that the financials are a screaming buy at current levels. Are they? The truth is I don't know. There is still no transparency in regards to what kinds of crap paper most banks hold. Writedowns have been huge, but are they done yet? Again, no idea. I have two major questions, and the answers to them really make my mind up about banking shares:

• If home prices continue to fall and foreclosures continue to accelerate, is a big bank a good place to be?
• If commercial real estate, which has begun to show some strain, adds to the problems for the banks are they really a good buy here?

My answers are both NO. The real pain in housing is just starting and the commercial lending problems have not even entered into the discussion as of yet. Let foreign countries buy all the shares they want. Let the FED take as much phantom capital as collateral as they want. Until the true exposure of the banks is known with some kind of certainty, they are all strong sells in my book.

On another stock note, both GG and PAAS broke out today. KGC as well. Gold and silver seems to have turned a corner here. We will have to wait for a real trading week's action to be sure, but I am optimistic about miners near term.

Have a good night.

Take A Break - The Markets Will Still Be Here

Just writing a quick word today. Thanks to all that stop by and check this site out. It has been fun and my pleasure to provide some commentary on the comedy that is our financial world.

Take A Break - The Markets Will Still Be Here
I will resume posting on Wednesday this week. I am working on the 2008 prediction post. Prediction posts are the best because it really sets your position to be judged over time. Hopefully it will be helpful.

If anyone still needs a finance fix, the always great Karl Denninger has a good one up today, and he covers gold and miners in some detail:
http://market-ticker.denninger.net/2007/12/merry-grinchmas.html
I will be watching his prediction post very closely when it is up. You should too.

That's it. Have fun and holiday cheer.

Have a good several nights.

Top Five Lists

Finally a day without precipitation up here in Massachusetts. It looks like big time rain for tomorrow however. That should work out just great considering the huge snow piles are everywhere. Hope everyone has their flood insurance up to date.

Boring Saturday
Its pretty quiet on the financial front. Friday's "Santa Claus" rally was the weakest attempt at a bull run that I have seen in many year end sessions. There are still a few days next week for the Street to pump up the markets for year end numbers. There is not much I want to write about this evening, so I will direct you to some of the best commentary on the web if you want red meat!
Karl Denninger has a great wrap of Friday's action. He covers the Friday rally, the myth of bond insurance, and the scam that was the retail sales season. Right to the point as usual:
http://market-ticker.denninger.net/2007/12/do-you-believe-in-santa-claus.html

Mish has been all over the insurance issue, and his coverage has been great. Today's post is very good, and he has many prior posts detailing all the drama:
http://globaleconomicanalysis.blogspot.com/2007/12/insurance-from-mbia-and-ambac-worthless.html

An asteroid may hit the planet Mars on January 3oth, and if it does the Mars rovers Spirit and Opportunity will be well positioned to study the impact! This is terribly exciting if you are a space lover:
http://www.space.com/scienceastronomy/ap-071220-asteroid-mars.html

Top Five Lists
Not that anyone out there cares what I like, but I thought I would present a top 5 list for a few categories to highlight some things that I enjoy. Perhaps you may find a last minute Christmas gift idea for that person so hard to buy for.

Top Five Films Not Many People Have Seen

1. Road to Perdition - Tom Hanks gives a great performance. Paul Newman reminds us all that he is a rare talent. The filming and cinematography have no equal in the modern era. Excellent film that few people I run in to have ever seen.
2. Streets of Fire - Michael Pare and Diane Lane in an early career film. Ry Cooder supplied most of the music, and the soundtrack is great. Plenty of action and a little romance to keep the wife/girlfriend interested enough to watch.
3. Berry Gordy's "The Last Dragon" - A film about martial arts that adds enough comedy to be a great film. The lead character is named "Bruce Leeroy"! Good pick for action lovers as hardly anyone has ever seen this film.
4. Session 9 - The first movie that really freaked me out since "The Exorcist". Very creepy and unsettling. Horror and suspense fans will like it, and not many have ever seen it.
5. The Best of Times - Kurt Russel and Robin Williams give just amazing performances in this comedy/tale of redemption. The film is about avenging an old football games loss during a mid life crisis for Williams. I strongly recommend this film.

Top Five Books Not on any Bestseller List

1. Tau Zero by Poul Anderson - Chronicles the travels of the Leonora Christine a star ship that uses a bussard ramjet for propulsion. Explores the concept of Time Dilation and the human stress that it may result in. Great book and not too long.
2. Darth Bane Path of Destruction - Written by Drew Karpyshyn, this book cover the Sith lord Darth Bane. He is responsible for the Sith "Rule of Two" that culminated in the fall of the Republic under Darth Sidious. The writing is wonderful, and the dark side of the force is finally given a thorough detailing. Any Star Wars fan should love it.
3. Lucifer's Hammer by Larry Niven - If an asteroid were to hit earth, this book will tell you all you need to know about what will happen. I also recommend this book for the "gold bunker" crowd as it has all the survival tips you will need in an economic collapse!
4. World War Z by Max Brooks - If Zombies were real and overran the planet, this book covers it all. Told in the perspective of one on one interviews with the survivors of the Zombie War, it really captures your imagination. Chilling tale, but with a story of redemption as well.
5. When Genius Failed: The Rise and Fall of Long-Term Capital Management - Written by Roger Lowenstein, it chronicles the tale of the hedge fund LTCM. Great reading in the current atmosphere! It really shows you how extremely smart and educated men still behave like fools given the chance.

Top Five Odds and Ends

1. A Lightsaber - Whether in blue, green, or sith red, everyone should have a lightsaber replica. I the Darth Vader and Luke Skywalker models. Seriously, everyone really does not own one?
2. A good pair of Scissors - I tell you, a really rugged and sharp pair of scissors is a must have in my house. I use them for everything and cheapo dull scissors are annoying.
3. Lint Roller with many refills - As a long time cat and dog owner, those lint rollers really save me from looking stupid when I go to work. If you have animals, you know black is a color not to buy for clothing. The lint rollers help quite a bit.
4. Good Wiper Blades - If you live in an area that sees some winter weather, do not scrimp on wiper blades. Get a set of triple edge or equivalent with the thick arms. Nothing is more dangerous than not being able to see in bad weather especially at night.
5. A Sense of Humor - While this cannot be bought in stores, with a little help, it often can make an appearance. The daily grind is tough. Jobs can be boring. Every day is not a party! (it took me into my late twenties to figure the last one out). In the face of it all it is important to not take everything so serious that one cannot laugh. We all should lighten up at years end in the least. While the economic issues are exciting and very serious, they should not consume all our thoughts and feelings.
6. Perma link to Economic Disconnect - I know this makes the list 6 in number, but really shouldn't everyone have this site on their favorites tab?!

That's all for tonight. Hope everyone has some fun stuff planned for next week.

Have a good night.

Hurry Nurse, the Patient Needs a Cash Infusion!

I am a steak lover. There is nothing like a great steak period. My favorite is the Ruth's Chris Steakhouse. I have gone to the one in Maui, and many times to the one in Boston. Nothing compares. I will spend over $180 on dinner for two and feel like I robbed them! Last night I went to the Longhorn Steakhouse. I had the prime rib, and it was fantastic. Longhorns is several levels up from the meat you will get at places like Applebee's and Pizzeria Uno. The serving size is immense, and the price was very low for such quality. $60 for a great dinner for two people is a good deal. Longhorns gets the Economic Disconnect recommendation. If you know a steak lover and there is a Longhorn restaurant near you, a gift card is a great idea.

Consumer Continues to Surprise and Spit in the Face of Common Sense
In a previous post I had questioned whether or not there possibly can be a consumer spending recession. I argue that no matter what economic situation occurs, consumers will tap any credit line they can and keep spending. They simply do not know how to do anything else. Today we see it happen again:
AP
Consumer Spending Surges in November
Friday December 21, 5:20 pm ET By Martin Crutsinger, AP Economics Writer
Consumer Spending Surges in November, Reducing Fears of Imminent Recession.
WASHINGTON (AP) -- Consumers put aside worries about slumping home sales and soaring gasoline prices and headed to the malls in November, pushing spending up by the largest amount in 3 1/2 years. The better-than-expected surge lessened fears of an imminent recession.
The Commerce Department reported Friday that consumer spending shot up 1.1 percent last month, nearly triple the October gain. It was the biggest one-month jump since a 1.2 percent rise in May 2004 and was significantly higher than the 0.7 percent gain analysts had expected.
Incomes were also up last month, but the 0.4 percent increase was far below the rise in spending. Consequently, the personal savings rate dipped back into negative territory as households spent savings and borrowed to finance November purchases.
Analysts attributed part of the spending to heavy discounting and longer store hours at the start of the holiday season by retailers worried that the all-important Christmas shopping period may not be as strong this year given the factors weighing on the economy.
Still, the strong November relieved some concerns that a recession might be looming.
"Consumers did their part in November, but we will see whether they are up to it for the full Christmas season and into next year," said Mark Zandi, chief economist at Moody's Economy.com. "Their financial fire power is fading due to the weaker job market, surging gasoline and food prices which cut into their purchasing power and the evaporating housing market."
Another article that captures the sickness that is the US consumer very well. House prices cratering? Gasoline prices high? Food cost more? Heating oil through the roof? Whuppity Doo. The consumer is far too sophisticated to allow such things to alter their spending habits.

I believe there has not been a drop off in spending because for the most part, people do not actually pay for anything they are buying. What do I mean? Glad you asked. In the past things like gas, heating oil, food, and most other things were paid for in cash. When prices went up, you scaled back purchases. Now all items are paid for by credit card. As long as the monthly bill bomb is not too big, most folks have no idea the kind of debt they are collecting. This is a key point. A big payoff of the debt has been through home price equity extraction. That game should be over now. All that's left as a capital reserve may be 401k plans. How far can that go? My guess is about mid year 2008.

I absolutely love the line from Mak Zandi:
"Consumers did their part in November, but we will see whether they are up to it for the full Christmas season and into next year"
That is how the mindless spending masses are viewed on wall street folks. The consumer must do their part and buy tons of crap they don't need to keep America and Wall Street strong. Common sense tells us that spending should be going down. Reality tells us we are stupid. History will judge who is right over the long haul.

Hurry Nurse, the Patient Needs a Cash Infusion!
I was home today and watched some CNBC. The commentators were giddy about all the cash infusions from all over the world for the US banks. It was pure comedy as usual. Today's big news was the Merrill Lynch cash prize win from Singapore. In the past month here are some of the "investments" from helpful foreign countries:

• Citigroup - Abu Dhabi in for 7.5 Billion
• UBS AG - Government of Singapore Investment Corp. invested $9.75 billion
• Merrill - 5 Billion more from Singapore
• Morgan Stanley - China Investment Corp. paid $5 billion

As fast as the banks can lose it, other countries replace it! This is the coolest thing ever! If I was a bank like Bank of America I would lose something like 100 Billion and then see how much I could get for that. I would think Russia or China would be good for at least 80-90 Billion.

Seriously, these events cannot be viewed as positive. When a person loses over 20% of their blood volume, they require a blood transfusion. The term infusion also applies. The key point here is that bleeding must be stopped for a blood infusion to have any effect. If the source of the bleeding is not stopped, the new blood is lost as well. Eventually the bloodbank runs out of blood and the patient dies. Either the investment bankers in those countries know the bleeding has been stopped, or something else is pushing them to flush money down the toilet.

It seems to me that foreign investors are pretty quick to jump in here. With the paltry 20 billion dollar auctions being done by the FED (compare with the 500 Billion the ECB dumped) one cannot but help thinking there is something going on here. It would not shock me to learn in the next week, year, or 5 years from now in Bernanke's new book that the foreign capital flooding the markets is in fact guaranteed by the US Federal Reserve. It both fits and makes sense. maybe I am just a conspiracy nut, but I cannot help but think there may be something to this idea. The FED can sidestep the calls of "moral hazard" and "bailing out lenders" by using the foreign countries as money fronts. We shall see. The new poll asks this question, so please vote!

Super SIV Plan Now Dead; Who Needs it Anyway?

Word came today that the Super SIV fund that was backed by the treasury and several large banks will not get off the ground. In light of the vast oceans of cash that banks have access to through the FED and through foreign countries this makes sense. There is no reason to disclose a banks holding to other banks and possibly the FED now that any collateral can be used at the FED discount window and cash is rolling in from overseas. The banks will be able to delay price discovery for some time if they are able to keep up cash infusions. All the bank deals announced lately and now the death of the Superfund are not independant of each other. It all fits together. It also makes me sick.

Friday night rock blogging time!

I will say it one more time, when I include music here I make no statement about any beliefs a band may have nor commentary on their behavior. I just love rocking tunes!

Rage Against the Machine with their cover of "the Ghost of Tom Joad". There are few bands that can ever match the sheer energy of Rage in a live show, I have seen them twice and they were really something!

A band I really like is Radiohead. "Karma Police" is one of my favorites:

Two tunes from Iron Maiden. First is "Hallowed be thy Name". Lead singer Bruce Dickinson simply has no match when it comes to heavy metal vocals. Both the beginning and end showcase his rare talents:

Not convinced? Check Bruce's solo album song "Tears of the Dragon" for more great vocals:

Have a good night.

Loans Gone Wild - The Frustration is Starting to Show

A slightly better weather day up here in Massachusetts. By days end though, it was raining and that has changed over, yet again, to snow. Tomorrow is my last day of work until January 3rd, so I can do one more day. Last year my wife bought me a wool scarf. I thought it was more of a fashion thing than useful, but let me tell you those things work wonders. Last winter and this winter my trusty scarf helps me stay warm immensely. A great gift idea if you are running behind!

Even More Once in a Lifetime Scenes
Last night I put up a small list of one in a lifetime events going on in the world in general. Today we have another great example. Morgan Stanley reported their WORST quarter ever and will post their first operating loss ever this year. For a firm as old as MS, that is a big news item. Even more troubling is the story behind the company:
Morgan Stanley write-downs grow by $5.7 billion
China sovereign fund invests $5 billion; CEO Mack will forego a bonus
By John Spence, MarketWatch
Last update: 2:42 p.m. EST Dec. 19, 2007
BOSTON (MarketWatch) -- Morgan Stanley said Wednesday it's writing down an additional $5.7 billion of mortgage-related assets, taking the total fourth-quarter loss to nearly $10 billion in the latest sign that the credit crunch is worsening.
On another front, the Wall Street giant joined a string of rivals announcing investments from foreign governments as it unveiled an agreement with a Chinese sovereign fund that will inject $5 billion in fresh capital through equity units with mandatory conversion into common stock.
Morgan Stanley shares rose 3.6% to $49.81 in afternoon trading. The China investment helped buoy the stock, along with hope that the big fourth-quarter write-down may leave fewer nasty surprises for 2008.
Morgan Stanley's management essentially "kitchen-sinked" the quarter, according to analysts at Banc of America Securities.
"The bull case is that the company now has just $1.8 billion in reported net ... subprime exposure, having taken their medicine, and now it can look forward to a clean 2008," they wrote in a report to clients.
"The bear case is that this magnitude of loss impairs investor trust and raises questions about the judgment and competence of the leadership.," the analysts added.
What a mess! By now the numbers are so large and so hard to wrap your head around 10 Billion may seem like no big deal. Maybe it is not, as the stock rose in the face of what the CEO called "embarrassing" earnings. As always, I use this article to show what kind of things to look for and ask yourself when reading any news piece. Based upon my red highlighting, there are a few things that bother me here:

• Another foreign government steps in and provides capital. China in this case. I have written before about the major problem China represents, and how we may have to let Taiwan be destroyed by the Chinese due to how much of our debt they hold. A cash infusion from a COMMUNIST COUNTRY is nothing to be proud of. The selling off of major stakes in a US company is nothing positive.
• Again we are hit with the "worst is over" line. Commentators note that MS has only 1.8 Billion of subprime paper left, so the worst might be over. Wait, that's 1.8 Billion of REPORTED subprime exposure, and that is a big difference. Also, it has been shown beyond all doubt that the mortgage meltdown is affecting all paper, not just subprime. The worst is over? Doubt it.
• Analysts say there is a chance of reduced confidence in management and a possible perception of a lack of competence. You think? I can lose 10 Billion dollars easy, that is why I am not a CEO. It takes real genius to lose that kind of dough! I have every confidence that MS will continue to lose money, so there is no uncertainty there.

Loans Gone Wild - The Frustration is Starting to Show

Folks, we have a rare treat today. There will be very few times that you will get to see how public officials and business leaders really think and feel. Today Sallie Mae, a student loan service company (yes, also backed by the good old USA) reported a truly terrible quarter. The company had a failed buyout a while ago, and of course loan losses are mounting! You didn't think it was just mortgages did you? Anyways, the CEO of SLM, Albert L. Lord, was on the conference call today and lets just say it did not go very well. After a tough session, a lull occurred near the end of the call. Turn up your volumes and listen to the last 40 seconds for pure comedy:

In case it was hard to hear, the direct transcript is Lord saying to the investor relations head named Steve "There's no questions. Let's get the fuck out of here." At least he was honest! This encapsulates the usual problem big CEO's have. They think they know everything and should not be bothered by questions from the peanut gallery. It is always revealing to see such frank moments. Frustration across all lending areas is now showing. I predict conference calls will be listened to in record numbers from now on by people looking for that special "Lord" moment!

You want more problems in the loan repayment area? No problem, coming right up!

Here is a bunch of headlines that should send shivers down the spine of the financial world:

S&P cuts ACA to "CCC" junk, acts on 6 bond insurers-Your Insurance called and said he can't pay you for any of the mortgages you thought were insured. He left no call back number.

D.R. Horton Credit Ratings Cut to Junk Status by Moody's-The bad news is your credit is JUNK, the good news is so is everyone Else's!

S&P Cuts Alt-A Mortgage Bonds; Analysts Warn on Prime-Wait a second! That is not SUBPRIME? What is going on here? I accepted the August is the worst of it baloney, fell for the subprime will drag to the end of 2007, but now the ALT-A and PRIME paper may be no good too? OOHHH the HUMANITY! (Exploding Hindenburg reference)

When loans go wild it is far worse than seeing your daughter (or wife) flashing some strangers with cameras on vacation (girls gone wild). In a debt based economy money velocity is key, and debt must constantly be expanded. Credit expansion gets pretty iffy when you know beyond a shadow of a doubt that it will not ever be paid back. We are getting to that point.

The FED and the ECB can pump whatever amounts of funny money into the system they desire. The problem is that when even funny money cannot be paid back by other funny money things get REAL serious quick. The acceleration of events is amazing given the end of the year timing. Prepare accordingly for 2008.

Wednesday Funny

I propose the mortgage industry start practicing their proverbial death scene, like in the films or plays. Here is some inspiration:

moar funny pictures

Or perhaps waiting for Santa on Christmas is your thing:

moar funny pictures

Thanks for all the comments on last post. I know everyone is pressed for time, but even a few observations and comments really helps me try my best.

Have a good night.

FED Mortgage Guidelines - Stop Laughing!

Do you have all your holiday shopping done? I just received the last 2 things I had ordered today. Only a few days left! Help the economy! Be patriotic! BUY BUY BUY! Just kidding.

Too Many Once in History Occurrences
The financial landscape right now is extremely ugly. The global political scene is not much better. If you go through various news sources and read the headlines there are many leads that start off "first time ever", "largest ever", "never before", and the like. The world is surely very interesting right now, but with so many once in a lifetime occurrences I think things are going to get much worse before they get better. Here are some eye catchers:

• Home prices first dip since GREAT DEPRESSION
• Home starts and completions lowest since 1991 RECESSION
• Home sales showing record DECLINES
• ECB injects 500 BILLION into banking system
• IRAN may have second nuclear plant
• Turkey Bombs Iraq, forgets to warn USA
• US congress at lowest approval level ever recorded
• US president at lowest approval level ever recorded
• Bond and Debt ratings downgraded at record pace
• technical Bear market for banks, lenders, and home builders
• US has negative savings rate, first time since GREAT DEPRESSION
• Foreclosures and home inventory near ALL TIME HIGHS

That is a mere compilation. When the government, the media, or your friends tell you that everything is just pure GOLDILOCKS, try to keep all this in mind. You hearing me Larry Kudlow?

FED Mortgage Guidelines - Stop Laughing!

The FED had a meeting and allowed the press to attend, a rare occurrence itself. The meeting was to approve and present a new set of lending rules aimed at the mortgage industry. The FED is trying to appear on top of things, and the press was invited to try and "get the word out", sort of speak. The FED has been trying lots of things lately to build some kind of confidence in the banking system. Here is what they came up with:

AP Fed Endorses Home Mortgage Plan Tuesday December 18, 4:02 pm ET By Jeannine Aversa, AP Economics Writer
Fed Endorses Plan to Curb Shady Home Lending Practices

WASHINGTON (AP) -- The Federal Reserve moved Tuesday to protect home buyers from dubious lending practices, its most sweeping response to a mortgage meltdown that has forced record numbers of people from their homes. The Fed has been under attack for not doing more to stem the crisis as hundreds of thousands of people lost the roof over their head. The situation raised the odds the country will fall into recession, unhinged Wall Street, racked up multibillion losses for financial companies and resulted in political finger-pointing over who was to blame.
The proposed rules, endorsed by the Federal Reserve Board in a 5-0 vote, would crack down on a range of shady lending practices that has burned many of the nation's riskiest "subprime" borrowers -- those with spotty credit or low incomes -- who have been hardest hit by the housing and credit debacles. The rules also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers. "Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole. They have no place in our mortgage system," Fed Chairman Ben Bernanke said. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," he said. The proposal would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

As a recap, the FED got together and this is what they came up with:

• No more prepayment penalties
• Consider whether borrowers can pay taxes and insurance when calculating loan
• Income verification mandatory
• Consider ability of borrower to repay loan on basis of income, not home value

Can you spot the "shady", "predatory", and "deceptive" tactics that are now abolished? I can, but the problem is not the banks being shady, it is the borrowers! No income verification and calculating mortgage payments without taxes and insurance factored in was the only way to loan money to folks that had no business buying a home. The only thing deceptive here is the cries of injustice from the screwed borrowers and the banks that lent to them. There was nothing secret or predatory here, just collusion between borrowers and banks to play "Don't ask, Don't tell" with regards to home loan qualification.

The FED has made another attempt to restore some market confidence, but I think this release makes things worse. If you are a money manager for a pension fund that bought any of the mortgage related paper, I would imagine you are not overly relieved that now lenders will have to VERIFY INCOMES and LOAN REPAYABLE AMOUNTS. I would think you thought that was being done all along. What a shocker! The FED rules are laughable. With every rate cut, with every special cash injection, and with every retarded set of lending rules the FED only wakes the markets up to the reality of the problems. Between the ECB mega cash party in Europe and the FED having almost daily activities the desperation factor has been multiplied. If the market hates two things it is 1) uncertainty and 2.) certain doom. Again, 2008 promises to be a time of financial reckoning.

Feedback Wanted

I try my absolute best to try and bring entertaining material to this site. Please use the comments section to propose post ideas, ask questions, or start a discussion. I enjoy this blog very much, and I want to make sure anyone that stops by is getting something of value here. So please vote in the polls and leave comments so I know what is working and what is not. Thanks in advance.

Have a good night.

Like a Poor Marksman, You Keep Missing the Target

Total ice bowl up here today. I could not open my trunk because of the layer of ice encrusting my car. Roads were a bit tricky today as well. Luckily, the Infiniti G35x that I drive has a handy "SNOW" button that engages the All Wheel Drive System, so the car was very sure footed. I will never drive a front wheel drive car again.

FED Auction Results: Have to Wait Until Wednesday
The first (of many?) FED auctions of a whopping 20 billion dollars was held today. The results of which will be known on Wednesday. Seeing that the whole point of this exercise was to allow banks to use bogus assets as collateral to very quietly receive "liquidity", the only information that I think will be given out is that the entire 20 billion was lent out. As they say on Minyanville, it is not the news, but the reaction to the news and today the market was down a bit. With all the bellyaching about the auction and lingering whining about the 25bps point cut from last week, I wonder if the market is making too much noise. Friday is one of those "quadruple witching" options expiration days, and maybe Mr Market thinks all the crying will get him a inter meeting rate cut Thursday afternoon? We shall see.

Like a Poor Marksman, You Keep Missing the Target
"You’ve managed to kill everyone else but like a poor marksman, you keep missing the target"-Admiral James Kirk of the USS Enterprise to Khan in Star Trek II The Wrath of Khan

Last night I made the observation that Alan Greenspan was both clueless and insane. He held the title of "Missing the Point Man of the Year" for a short 20 hours. The Title has now been taken over by our very own Treasury Secretary Hanky Panky Paulson. From Bloomberg today:
Paulson Favors Fannie, Freddie Buying Jumbo Mortgages (Update2)
By Kathleen Hays and John Brinsley
Dec. 17 (Bloomberg) -- Treasury Secretary Henry Paulson said Fannie Mae and Freddie Mac, the largest sources of finance for American mortgages, may help ``jump start'' the market for the largest home loans.
Paulson said in an interview today that he favors temporarily allowing the two companies to purchase so-called jumbo loans, which exceed $417,000. He said the proposal should be part of a package of legislative changes governing the two government chartered companies.
The Treasury chief spoke during a tour of three states to discuss the Bush administration's efforts to ease the subprime mortgage crisis. Paulson has come under fire from Democrats in Congress for not acting quickly enough to help Americans at risk of defaulting after home prices slid and borrowing rates jumped.
``We would be for lifting the limits for Freddie and Fannie on a temporary basis,'' Paulson said in Orlando, Florida. ``As I talked to members of Congress, I am hearing less and less resistance to reforming the GSEs.
We're getting very little pushback on this right now because I think given what's happened, everybody understands how important it is,'' Paulson said.
Forget that any "temporary" measure must become permanent unless one wants a problem down the road when the caps are lowered again. Forget that Paulson views the congress' caving in on this idea as a good thing. Desperate measures are seldom good things. Instead focus on the opening paragraph where Hanky says raising the caps would JUMP START the market for the largest homes. It is here that Paulson shows zero understanding of the issue at hand.

The main problem facing the mortgage market right now is not a lack of pure liquidity per say, but a lack of liquidity that will never be paid back! This is the key problem and Paulson misses entirely like a poor marksman. Money can continue to be poured into the banks and poured into mortgages, but lending will not resume under the lax standards that brought this mess down. The ratings agencies will no longer rate crap as gold now that they are being severely pressured. Outside investors are only just now beginning to see how much money they have lost through pension plans, union plans, etc and they are going to avoid toxic mortgage paper for the next 10 years. There is no pent up demand waiting for mortgage cash. There is no backlog of good borrowers that need a mortgage. The only way for any "liquidity injection" plan to work is if the lending standards return to the Bubble standards. I probably should not have written that as Paulson's new plan tomorrow will probably include new lending standards mandated by the Treasury!

The game is up. Investors, creditors, and bagholders are now seeing that they will not be paid back. Raising the caps of Fannie and Freddie will accomplish nothing for the housing market. Paulson MUST know this. So why propose and push for it at all? Sadly I think it is mostly about politics and perception than any real attempt to change things. This is your America folks, it's time for some kind of wholesale changes of leadership.

Insurance is Wonderful, Unless You Need It
Calculated Risk has been collecting headlines concerning the problems in the Bond Insurance arena. I must admit that all the ratings games and alphabet soup of bonds is little hard to follow. I suggest checking in over there daily, especially Friday evenings when things tend to be announced. The take home point is that another shoe to drop in the housing bubble is going to be the insurance companies that have paltry cash on hand insuring MASSIVE amounts of bonds and derivatives that they can never pay the policy's on. Credit crunch and credit deflation are two terms you should come to know well. Check out tonight's post for more info:
http://calculatedrisk.blogspot.com/2007/12/fitch-fgic-on-rating-watch-negative.html

Have a good night.

Alan Greenspan- Shut Up and Go Away

Another bad snow and ice storm up here in Taxachusetts today. I prefer snow during the week so I can take the day off. This weekend storm thing is getting old in a hurry. The New England Patriots are at 14-0, and 2 games away from history. While the Pats have been excellent, if a Indianapolis Colts rematch happens in the AFC title game and the weather is like it was today I have a bad feeling about that game. Have to wait and see.

Alan Greenspan- Shut Up and Go Away
I usually leave the Alan Greenspan related news to the always wonderful Mess that Greenspan Made blog. Since his retirement from the FED Mr. Greenspan has written a book and injected his opinions on just about everything through every avenue possible. The more he speaks, the more I am convinced he is an absolute fool. It is like the really fun uncle you had as a kid. When you were young he seemed so funny and exciting. After you got older you realised that he was a drunk and makes a fool of himself constantly. The new found perception colors your memories of the guy. In the same way, every time Greenspan speaks now he appears as lost and confused by the economic situation as some dolt off the street. The problem is he was HEAD OF THE FEDERAL RESERVE for a long time! It makes sense to me now why the mess in the financial world is so big, this guy was running the show for most of it.

Case in point, today over at Yahoo Finance:
AP
Greenspan: Give Homeowners Financial Aid
Sunday December 16, 5:30 pm ET By Kevin Freking, Associated Press Writer
Former Fed Chief Alan Greenspan Calls for Cash Infusion to Help Struggling Homeowners
WASHINGTON (AP) -- Alan Greenspan, former chairman of the Federal Reserve, suggested Sunday that a tax break or other government financial help for homeowners facing the mortgage crunch would be the best political fix for the economy.
He cautioned against meddling with home prices or interest rates to address the housing problem. Greenspan did not specifically call for a tax cut. Instead, he called for the government to apply money to the severe housing market slump. Such a cash infusion would typically come through a tax break or a new government spending program.
"Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this," Greenspan said during an appearance on ABC's "This Week."
Wowza! Where to begin?
It is past the point of hilarity that Greenspan cautions against using interest rates as a tool to help the housing market. This from the "drop rates to 1% and leave them there for a good long time" former fed head. We know Alan never, ever used interest rates as a bailout and prop up tool for the markets. Not him, no sir. As far as having all this cash lying around, I guess he must mean print a bunch of it. The last time I looked the US was still running a massive deficit, so unless Greenspan has a bunch of cash under the floorboards at the New York FED I have no idea where all this money is coming from. He goes on:
Separately, Greenspan said he is concerned about signs of a resurgence of inflation.
"Core inflation is up. Wholesale prices had their highest increase I think in a generation. That raises the specter of stagflation again," said Greenspan, referring to a simultaneous stagnant economy and upward pressure on prices.
He said the Federal Reserve should "do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer term period."
Greenspan said a large number of people are in major financial stress, even when they've tried exceptionally hard to make their monthly mortgage payment. But some political solutions would only prolong their agony, he said.
"It's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it'll drag this process out indefinitely," said Greenspan, referring to his preference for a cash infusion to help homeowners.
The man that had inflation blinders on for 18 years now sees inflation all around? Is he for real? I promise I am not making this news piece up. I would be hard pressed for comedic material of this quality. Now look at that convoluted sentence in the second paragraph. Did he really say that mumbo jumbo? Lets break it down;

• "do what it has to do to suppress the inflation rates that I see emerging" Do what? raise interest rates? He just said to leave rates alone, now use them to actually target inflation? Alan must have caught himself as he said it, and so the second line comes out:
• "not immediately, but clearly over the intermediate and longer term period" So the FED should not move to fight inflation, that Greenspan says is raging, immediately? how soon then? Over the intermediate and longer time period? What the f%$k does that even mean?

Sir Alan then captures his basic philosophy that he used so well during his tenure at the FED, namely create a short term fiscal problem to provide a quick fix and punt the problem on down the road. I do appreciate his brutal honesty in his closing remarks.

Every time Greenspan speaks, I think people must have a really cold feeling. This was the guy running the show for a long time. He makes no sense. It was probably the ability to communicate through FED press releases and not so much in open question and answer sessions that saved the guy from getting donged a long time ago. I used to wonder how the US got into such a mess, but the recent commentary by Greenspan goes a LONG way towards giving me the answer. The kicker to all of it? Alan hand picked Ben Bernanke to be his successor! HAHAHAHA! I am sure Boom Boom Bernanke is just as great as Greenspan ever was.

2 Minutes to Midnight

Will the markets be able to give the "Christmas Rally"? A while back I would have said there was no way the markets would not close really strong before years end. Events keep happening so fast, that I am no longer sure this week will pass without more horrific news. 2008 is going to be rough no matter what side of any trade or opinion you may be. I had commented before that it feels like most market participants are "holding their breadth" until the new year. I think the holiday break will see some heavy drinking by the boys on Wall Street. I think January the crap is going to hit the fan big time! For a visual, I refer you to the perfect scene from the classic comedy film "Airplane":

Have a good night.

This Just In-Home Prices Have to Fall!

The big snowstorm passed last night. I have to give a tip of the hat to the Massachusetts Highway Department. The heavy snow ended up here around 9pm, and by 6am this morning when I left for work the main highways were in excellent condition. Great job guys! The side roads in Cambridge were another matter entirely! You can't have it all!

This Just In-Home Prices Have to Fall!
The end of the week was very interesting. After a FED rate cut on Tuesday, and an announced plan of lending money through novel channels by central banks the world over on Wednesday, the calls for "more liquidity' were answered in full. I would say somewhere around late Thursday and into today there was a new murmur running through the media and markets. The revelation? The deep insight? the dawning of a new era? All this and more? you bet.

The concept that Home Prices are Too High and Must Come Down is finally being recognized as a certainty. Sound familiar? It should, as I summed up the core of the problem a few posts ago using that exact language. Up until now, all the SIV bailout plans, FED rate cuts, and rate reset freeze plans all were operating under the mistaken assumption that home prices would stay somewhere near where they are now. Perhaps a 10% correction at most. A key feature of all the plans was the idea that maybe a year was needed for things to resume their rocket path towards the heavens.

Calculated Risk has great posts on this changing situation in the following posts:
http://calculatedrisk.blogspot.com/2007/12/more-2008-housing-forecasts.html
http://calculatedrisk.blogspot.com/2007/12/krugman-after-moneys-gone.html
Complete with this wonderful graph:

One look at this graph really tells you all you need to know. It took time for the bubble to grow, and it will take time for it to deflate. The move by Citi to take some SIV's onto their balance sheet can be viewed as a move to start the process of loss management.

What does this all mean? I can think of a few right away:

• Continued extreme pressure on home prices as buyers will be in NO rush
• A return to almost traditional lending requirements
• Massive bank losses
• Psychology change about homes

We have discussed the particulars of all this already. The take home point is that slowly but surely the truth that things got way out of hand in housing is coming to the mainstream line of thought. This will put enormous pressure on banks and lenders to stop the game of "hide the losses until the losses are recovered" and move towards the needed unwinding of the mortgage mess.

This does not mean things are going to get better any time soon. This does not mean the growing acknowledgement of the home price issue will take root. It just means that the solution has been in the very least glimpsed. How the reaction to this reality unfolds is the fun part.

Sorry for the short post, but I am home late. I also wanted to make sure I get some Rock Blogging in to start the Friday night festivities!

Ozzy Osbourne with "Bark at the Moon". Bad video, but great song. Great baseline, rhythm changes and great guitar work highlight the piece:

Queen did all the music for the great movie 'The Highlander". I found a great video montage of all the sword fights set to the song "Gimme the Prize". Too cool:

A newer band you may never have heard is Must. This song is called "Freechild" and the speed changes and vocals are top notch:

Have a good night.