‘The Industry Is Trading Risk For Convenience’
Some reports from Wall Street and Washington. “Toll Brothers Inc., which earlier this month said its quarterly new-home orders slipped nearly 50% on a slumping housing market, may again reduce its 2006 profit forecast when it reports earnings Tuesday. Analysts will also be looking for details on write-downs Toll said it plans to take for land options it is walking away from.”
“The National Association of Realtors is expected to report existing-home sales Wednesday morning, and economists will be watching median prices to see if they fall from the previous year. That would be the first year-over-year decline in over a decade and would damage buyer sentiment, according to Banc of America Securities analyst Daniel Oppenheim.”
“Also, the analyst sees the supply of existing homes for sale to rise from 6.8 months in June to more than seven months in July. ‘This excess supply will continue to put pressure on home prices,’ Oppenheim said.”
“The Commerce Department on Thursday is slated to release sales of new homes for July, and economists are predicting a 3% decline. Read more on the outlook for July home sales. Oppenheim noted home builders ‘likely limited the decline by increasing incentives or reducing prices.’”
“Lowe’s Cos. shares lost as much as 5.5% Monday after second-quarter earnings that came in below analysts’ average forecast and cut its profit forecast for the full year. ‘Like Home Depot, Lowe’s is experiencing the deceleration in sales that typically follows a slowdown in housing turnover,’ Goldman Sachs analyst Matthew Fassler, who has Lowe’s rated at neutral, wrote in a research note.”
“Delisting is a scary prospect for shareholders. Once stocks are off the major exchanges, they’re usually much less liquid. Fannie Mae, which finances one of every five home loans in the United States, has been out of compliance with New York Stock Exchange listing standards since 2004, the last time it filed a quarterly earnings report. Yet NYSE hasn’t delisted the stock.”
“NYSE deciding it was too big to remove. The Exchange sent a proposal to the Securities and Exchange Commission saying that in very rare circumstances, delisting a company would be ’significantly contrary to the national interest and the interests of public investors, notwithstanding a delay in an annual report filing that extended beyond one year.’ In January, the SEC agreed. Fannie Mae did not immediately return a call seeking comment.”
“While the possibility of delisting is a threat that makes companies take listing requirements seriously, ‘the perception is that if you’re big enough, like so many things, you are more or less in the drivers’ seat,’ said Maureen O’Hara, a professor at Cornell University.”
“Loans requiring no income check have been around for many years, with the initial intention of offering convenience, time savings and financial privacy to self-employed borrowers with high credit quality and large down payments.”
“The desire to simplify and quicken the loan-origination process has led more lenders to extend stated-income loans to borrowers with lower credit scores, higher loan-to-value and debt-to-income ratios than traditionally allowed.”
“‘The industry is trading risk for convenience,’ says Larry Goldstone, at Thornburg Mortgage Inc. in Santa Fe, N.M. ‘That may be mistaken at some point in the future.’”
“In the case of Martha Aikens, when she went to the broker to refinance her home, she had a monthly income of about $1,400, including $800 from Social Security and $600 from working part-time. However, her loan application, prepared by the broker, said she made $7,225 a month, according to the complaint filed on May 16, 2005, against the broker in Cook County, Ill.”
“A month later, through the broker, Aikens received a loan of $149,000 with a monthly tab of roughly $1,029, almost three-quarters of her entire monthly income. She was never able to make a single payment, says Daniel Lindsey, a supervisory attorney. Her lender, Countrywide, filed a foreclosure action against her in January 2004.”
“Standard & Poor’s warned last year that it was observing disturbing numbers of minimum-payment loans being extended to borrowers with sub-par credit profiles. To head off potential problems, the largest mortgage originator in the United States, Countrywide Home Loans, has begun sending out letters to thousands of borrowers who have been making only the minimum payments on the company’s popular PayOption adjustable-rate mortgages.”
“The letters explain that ‘this is an early message to alert you that, based on your current payment trends and potential future interest rate changes, the monthly payment you will be required to pay may increase significantly.’”
“According to the Census Bureau report released Monday, Florida topped the list of the states adding the highest number of housing units, gaining 247,000 homes over the period. Following Florida were California (182,000), Texas (179,000), Georgia (98,000) and Arizona (87,000).”
Regarding FNM, there are exchange laws. Follow them. Delist the shares and go after the SOB’s that caused this mess. None of this back room BS. Time to face the music and get it over with. There were laws passed after Enron, Sarbanes Oxley, It appears to me laws were broken and we should enforce them. Or, get rid of a law if there is going to be special allowances for those politically connected. SOS in my opinion.
There were laws passed after Enron, Sarbanes Oxley, It appears to me laws were broken and we should enforce them.
Crystal clear example of why regulation is a piss poor substitute for personal due-diligence.
You’re ignoring the fact that a lot of people that control the country’s money have no personal due-diligence.
The exchange rules aren’t laws by any measure. Also, the laws passed after Enron (and more importantly the accounting rule changes) are essentially what caught the GSE’s. It’s pretty well known that there were accounting errors, but what other shoe is out there still to fall? It takes a good deal of time to revalue (for a number of prior periods all of the “derivatives” created with the trading a large financial institution does).
FNM is trading for approximately the same price it was in late 1997.
I used to try shorting this stock, but no matter HOW BAD the news, it NEVER breaks. Seems very fishy to me.
Here’s a 10 year chart of the stock:
http://tinyurl.com/ogld9
stock doesn’t go down on potentially awful news (de-listing)?…sounds like a bottom to me.
FNM has the best plunge protection on Wall Street, period, which extends to an exemption from the NYSE rule that says a company will be delisted if it cannot produce financials. FNM is the Ted Williams of the financial world, IMHO, and the big boys on Wall Street and in the govt are helping to forestall release of the truth until they figure out whether cryonics will work on zombie companies…
http://abcnews.go.com/US/story?id=91481&page=1
I think it’s just an exchange rule that is being ignored here, not a legal requirement. Any publicly traded stock stock is required by law to file reports, listed or not, and the SEC is responsible for going after them as I’m sure they are going after Fanny Mae.
The NYSE can choose to delist a stock if it doesn’t meet it’s rules, and FNM is in violation of the rules. I think the reason is to avoid giving a troubled company an aura of respectability that it doesn’t deserve by allowing it to retain it’s listing on the big board. However, I think the NYSE has the option to make exceptions since they created the rules. As big as FNM is I doubt it would be delisted for anything short of declaring bankruptcy.
Flyover- You have been sucked in!
Regarding the loan. I hope these people keep in mind IRS regs only allow a person to deduct interest up to the ORIGINAL loan amount plus $100k. The IRS is currently looking for indiviuals who abuse this. Example- I buy a house for 250k and take on 225k of debt. I then refinance my c/c, boat and target bills and take out 425k (because my house appraised at 425k). SORRY on 325k of debt interest is deductible. YOU ARE SOL! I am sure the brokers are telling people this!
Regarding the loan. I hope these people keep in mind IRS regs only allow a person to deduct interest up to the ORIGINAL loan amount plus $100k. The IRS is currently looking for indiviuals who abuse this. Example- I buy a house for 250k and take on 225k of debt. I then refinance my c/c, boat and target bills and take out 425k (because my house appraised at 425k). SORRY only 325k of debt interest is deductible. YOU ARE SOL! I am sure the brokers are telling people this!
Never knew that. Though the law sounds reasonable.
Excellent point Crispy. I am sure there are many, many people…er…I mean FB’s…who are deducting more than what they are allowed to deduct by law…
Like Johnny Carson would say, “I did not know that.”
I did not know that. It would appear to me that anyone getting a mortgage would violate that reg. A $200k loan at 6% fixed over 30 years ends up paying a total of $431676, over $230k over the original loan. Or am I misunderstanding something here.
Actually up to the current balance on the original purchase money loan + $100K I believe.
Possible solutions;
1. Mandatory counseling on all option arm/ negatively amortized loans.
2. Not allow Fannie Mae and Freddie Mac to purchase loans without showing full income and asset documentation.
3. Through the SEC, not allow mortgage back securities to be sold without fully documented loans.
4. Imposing strict guidelines on federally chartered banks, but have a clause making competition fair on the state level when competing with local laws.
5. Tough federal licensing is needed. Strict licensing requirements in the mortgage origination community need to parallel the securities community such as the series 7. Mortgages are being sold on Wall Street to investors and being sold across state lines to consumers, the federal government needs to take action. The law in California is currently if you broker out loans a real estate license is only needed. If you are employed by a company who is loaning out their own money, i.e a bank or direct lender, NO license is required! Creative actions in the past have included the national speed limit on roads, and drinking age limit, something similar might be needed in the mortgage community.
6. Many problems in the real estate community are associated with inflated appraisals. The appraisals are ordered by mortgage brokers and loan officers. Appraisers should be either federalized or employed by counties/ and or states.
The appraisal industry should mirror the meat inspecting industry. The USDA employs all meat inspectors. If the government is concerned with meat processing plants cutting costs by not keeping their plants clean, then appraisers should not be allowed to be hand picked by mortgage “professionals” whose commissions are on the line.
Excellent suggestions. I’m sure the Fed & Congress will do nothing of the sort, and instead engineer some sort of massive bailout scheme for mortgage lenders & FBs. They will call it something like the “Patriotic Homemoaners Economic Freedom Anti-Terrorism Act” and will be funded by punitively taxing renters and savers, who will be treated like the America-hating bear-zealots they are.
NOT buying an overpriced $hitbox with a neg-am loan will be equated with “aiding and abetting the terrorists”, who want to topple our rock-solid economy and instill needless panic.
Fed/Congress to savers & renters: “You do want America to be strong, don’t you? Then stop complaining and cough up your savings and precious metals! It’s for the greater good.”
It will be the:
Bank Underwriting Loan Loss Safe Housing Insurance Tort
OR:
B.U.L.L.S.H.I.T for short.
Sweet! I expect this to be up for a vote before November elections.
1. Mandatory counseling on all option arm/ negatively amortized loans.
2. Many problems in the real estate community are associated with inflated appraisals. The appraisals are ordered by mortgage brokers and loan officers. Appraisers should be either federalized or employed by counties/ and or states.
The appraisal industry should mirror the meat inspecting industry. The USDA employs all meat inspectors. If the government is concerned with meat processing plants cutting costs by not keeping their plants clean, then appraisers should not be allowed to be hand picked by mortgage “professionals” whose commissions are on the line.
>
Oh and they still are. Buddy tells me he took out a HEL in May. Over the phone. Gave them the zip code, type of house, how long owned. End of interview , loan approved.
What do you think would happen if Fannie got delisted? I think things would seize up faster than you could say “credit default swap”. A lot of mutual frauds are holding FNM paper even though they haven’t coughed up financials - is that a wise decision? The fact that it hasn’t been delisted even with the horrendous accounting, or lack thereof implies that there are really, really big problems.
The fact that it hasn’t been delisted even with the horrendous accounting, or lack thereof implies that there are really, really big problems.
As well as the fact that mutual funds blindly hold it! Where the hell is the fiduciary duty of these mutual funds? What the hell are they being paid to do?
Sorry, too much caffeine right now I think.
And this is why this whole hue and cry of “the poor people can’t manage their own financial investments” drives me batshiat crazy. You think you can’t do better than some stuffed suit who shovels $65M into FNM over morning coffee? He’s quite pleased you think so, and so is the regulator who’s drawing a salary telling FNM they can skip a few years of financial results.
Even the sheep don’t hand you the shears and ask to be fleeced.
Speaking of sheep and fleeces , there’s an old joke:
Why do Scotsman wear Kilts?
Because the sheep can hear zippers.
Alas, no need for the regulators, executives and money managers to bother donning kilts. The shareholders , and the bagholders (read Taxpayers) can hear zippers too , they simply choose not to listen. And so they graze , in this case on HEL-spawned bling and doo-dads, “investments” and advice , until bent over and oblivious , they get their inevitable ..er…ah .. fleecing , we shall call it.
There are many rational people on this blog and I am surprised that they can not see the BS spin on this FNM subject. Have you seen Sarbanes or Oxley say this mess is in clear violation of the law. Do we we need another revolution in this country so that those with politicle connections do not get special consideration?
feep, bro’, I go bat$hit crazy about this finger wagging that comes down on the little folk from on high. That’s how the banks got their bankruptcy legislation. Wish they’d just be honest and say “Ha Ha, we’ve gamed the system and you don’t know the rules”.
The only rules I have difficulty following are the ones I get from the IRS.
I don’t have to pay an accountant every year to file my credit card bills.
Theo-If you were against the pricks at Enron then you have to see this nonsense in the same light! This is corruption at the highest corporate level.
On this blog, I remember rading that FNMA only has exposure to about 20% in sub-prime loans. True? Whatis it now?
THX
So are they going to delist all 80 of the tech companies that will probably report late because of the latest options witch-hunt?
A small-to-medium size company would almost have to crazy to list on a US exchange these days with all of the SOX fallout. No wonder the private equity guys are finding such easy pickings.
This is actually happening: Not listing on the US exchanges. London loves it because we’ve nobbled our competitiveness, and small international companies that in the past would have cried to be listed here are instead just taking London. Or Dublin, or wherever. Sure, there’s not the exposure to capital that a US listing requires, but there is also a lot less exposure to onerous accounting and risk of jail time! One small firm I worked with intimately some years ago has been wanting to delist from the US specifically because the account hassles more than offset the enhanced access to capital.
Another example is a small rural bank (of which my family has owned many shares_. They did a several-hundred-to-one reverse spilt in order to “buy out” the now-fractional shares and thus have the shareholder count below the 300 or so (I can’t remember the exact number) that invoked some of the requirements. I wasn’t at the meetings, but it appeared that the split ratio was set to coincidentally kep the shareholders well below the threshhold.
Strange thing is, they would never state publicly, in writing, why they wanted to do it other than saying “reducing the number of shareholders will reduce costs of accounting and reporting substantially”. Indeed. But then, in a rural and very patriotic state, working diligently (and legally) around the law is not always perceived kindly if it’s done out in the open. Sigh.
Anyway, It just was not worth the aggravation and cost involved in all the new accounting and reporting requirements, nor did the board of directors enjoy the risks entailed now with SOX in case of a mis-step.
I have to think that if I can see first hand a couple of examples around me, there must be a lot more of this going on. Like I said, other (that is, non-US) stock exchange are surely happy for the business that Sarbanes-Oxley will bring them in the long run.
If they don’t meet the eventual filing date they will. They will all get warnings when they miss the first deadline.
Yes, we have rules, regulations and laws that are supposed to prevent this nonsense! Enforce them or get rid of them!
Witch-hunts wouldn’t happen if there weren’t any witches. Eighty companies reporting late because of options back-dating means that eighty companies chose to ignore or break the laws. If the law is not applied uniformly and fairly, then the whole concept of “rule of law” is invalidated, and our nationstates become trumped-up Banana Republics. Although, with everything else going on, maybe this is a foregone conclusion.
Treasurys end higher on hedge-related trades
By Leslie Wines
Last Update: 3:12 PM ET Aug 21, 2006
NEW YORK (MarketWatch) — Treasury prices closed modestly higher Monday, pushing the benchmark yield to a fresh five-month low, as demand for mortgage-backed securities spurred interest in Treasurys as risk hedges. The bond market also drew some support from worrisome developments in the Middle East, on the eve of Iran announcing a formal response to an incentives package to give up uranium enrichment. The 10-year Treasury note rose 5/32 to close at 100-14/32 with a yield
Last: 48.19-0.16-0.33%
2:59pm 08/21/2006
———————————-
Market finally getting nervous about all those MBS’s???
1. Mandatory counseling on all option arm/ negatively amortized loans!!!!!!!!
2. Many problems in the real estate community are associated with inflated appraisals. The appraisals are ordered by mortgage brokers and loan officers. Appraisers should be either federalized or employed by counties/ and or states.
The appraisal industry should mirror the meat inspecting industry. The USDA employs all meat inspectors. If the government is concerned with meat processing plants cutting costs by not keeping their plants clean, then appraisers should not be allowed to be hand picked by mortgage “professionals” whose commissions are on the line.
“That house is choice, but the one across the street is merely select!” - “)
I’m sure a lot of you have been seeing this on Craigslist:
“60 Second Loan Approval! One Page Form, No SS Number Needed!!!”
http://boise.craigslist.org/rfs/196878797.html
fannie- too big to delist and too big to bailout…so far. a bailout of fannie would be historic.
what would happen in the markets all around the world? what would happen to the dollar? fannie has a lot of institutional holders, a flight out of it would probably bring big selling, no?
Although I agree with many that the GSE’s are scams, delsiting them would cause a great amount of panic in the markets. We can debate whether this is necessary or not, but you cannot argue that it would cause a major selloff in equity and bond markets. I might also venture to say that there could be the risk of “default” of the GSE’s and the underlying loans, which amount to trillions of dollars. IMHO, i do not know if the US financial system would buckle. The PTB will never allow this to happen,regardless.
What function does Fannie perform that couldn’t be done by another entity? The generous lobbying of congress perhaps?
Frankly, the private markets seem all too eager to buy up the MBS anyway, so why do we even need those GSEs now that you can chop up the mortgages into pieces small enough? 50 years ago it was novel, now there’s plenty of competition.
If the intent was to free up the banks to make more loans, then the private label MBS do this just fine.
Agree! My goodness, this is absolute nonsense, some people and the markets need to suck it up.
That the PTB won’t allow this to happen shows how much the system is gamed. That’s how Trump managed, he should have been toast long ago, but the lenders were in too deep and worked with him. Long Term Capital Management (Hedge Fund) should have failed, but didn’t because of all the players that were involved. I guess fundamentals are just for the little folk. (Now where’s that Carlton Sheets tape I was listening to?)
Bigdaddy- Suck it up and lets get on with it!
Peter,
1. My name is not Franklin Raines
2. I don’t get the “suck it up’ reply get on with what? delisting FNM..? Ok then what?
3. FNM FHLMC and the other GSE’s are good ideas gone wrong. I would prefer fixing them- as painful as it has to be rather than possibly throwing the markets into turmoil.
4. I stated I AGREE that there is mass corruption- However, the people are corrupt, not the GSE program. Most of us have all used them to purchase a home. We need massive reform, criminal and civil action, and a restructuring.
I think your zeal to delist the company is clouding your thinking. Do you have any idea the trillions of dollars you are talking about or the millions that will be lost? Yes again, they are corrupt. Yes they have not meet the listing requirements. But IMHO a delisting would cause more harm than good.
Bigdaddy-What turmoil? I do not own the stock because I have done due diligence. You have been sucked into the idea that delisting would be a disaster for the markets. I disagree whole heartedly. Now is the time to fish or cut bait! We are either going to respect rules, regulations and or laws or end up as the Roman Empire as a bunch of mamby pambies with no political will to protect our system
Too late.
Under what circumstances WOULD you delist them?
Feepness-They are currently in violation of having been able to present their finanancial statements for 2 years. These guys fudged the numbers for personal gain. When are we the people going to hold people responsible for irresponsible behavior?
Feepness-They are currently in violation of having been able to present their finanancial statements for 2 years. These guys fudged the numbers for personal gain. When are we the people going to hold people responsible for irresponsible behavior?
Dear Peter,
As I wrote some time back, nothing will be done, because Raines is black. Period. He gets a free pass and he knows it. Just like the incompetant “New Orleans is a chocolate town” mayor, the Crack-smoking Washington Mayor, and an endless list of other incompetants and crooks who cannot be punished. I am still waiting to be proved wrong. But i wouldn’t put any money on it.
If you just add an “i” and an “e”, and an “n” to incompetent, you get (I’m) ” income penitent”, as in cash flows negatively. -
Flog me!
OT… CNBC did an interview today with the CEO of Coldwell bankers… No matter how many times he was presented with negative current conditions with the industry he still stated we will have 5% appreciation this year and we have never seen a drop in the national home price appreciation since 1950,,, he might want to come back at the end of the week,,, the numbers this week could be the kick….
—AL
why do people continue to lie about home price appreciation. certain markets, if not all has faced bad times. just one example is bronx, new york in the 70’s. properties were just burning up, so the property owners could just get insurance money for them brick elephants. prices are dropping everywhere (even in non bubble areas) CNBC need to ask this guy the same question in a few months or a year!
They just had another shill on talking about Toll brothers saying the market was fine wealthy boomers bought 40% of the homes last year as investments….AND THE TREND WILL CONTINUE.
Yup, that was his thesis.
Wealthy Boomers will continue to buy 40% of all housing as second home and investment properties.
Genius.
There is a fascinating interplay between share buybacks designed to prop up the share prices of Toll and similar builders, and preposterous fabrications designed to rationalize the ability of these share prices to stay afloat in the face of a steady barrage of worse-than-anticipated results. At some point, the facade will necessarily succumb to capitulation.
The lying about the fact that prices are falling in most places in the US where homes exist will continue until it is so obvious to everyone that to continue to insist otherwise would result in an absolute loss of credibility.
Jim Gillispie CEO, Coldwell-Banker just interviewed on CNBC stated as follows when asked about flippers: ” They only account for 3.7% of the market.” Not a problem. Also said, “Housing has never gone down in the United States,” citing FM statistics. We should also not worry since immigrants coming to this country will also put so much demand out there that we are going to be short inventory. Yeah, 4 families in a house. Who does this guys research? He’s the CEO…. good god.
speaking of immigrants, i was at the in-laws who live in Brooklyn, NYC. the area was heavily russian for the last 10-15 years and now a lot of chineese are moving in. A LOT. And of course they have several generations living in the same home and we saw an old lady who collects everyone’s old bottles to make a nickel a bottle from recycling.
New immigration law: Instant citizen if you buy a boomer’s overpriced house.
“Who does this guys research? He’s the CEO…. good god.”
You obviously don’t know many CEOs! That’s par for the course in my experience. CEO - par for the course - get it?
> Who does this guys research? He’s the CEO…
… and as such is he responsible for promoting his company not the truth. CEO = Cheerleading Everybody Officer
‘Indymac Bank claims 41 Ohio residents agreed to be straw buyers of overvalued properties in Florida as part of a $20 million scheme to defraud the bank.’
‘California-based Indymac alleges in a lawsuit that VP Equity LLC submitted a series of loan applications to finance the purchase of lots in a Panama City, Fla., development, WatersEdge, that were priced at $350,000 to $590,000.’
‘The lawsuit alleges appraisals of the properties were inflated, and that the straw buyers expected to profit from a property-flipping scheme without making loan payments, the Akron, Ohio, Beacon Journal reported.’
‘The suit also names Ohio-based companies..and a Florida appraiser and a Florida law firm said to have handled many of the transactions.’
The lure of easy money really brings out the scum. This is the aftermath of Easy Al in all its glory. When this whole mess becomes evident to all, not just us bloggers, I really hope the press lays blame at his feet instead of kissing them as they usually do.
Thanks for posting this info Ben… Just shows the colusion going on in my neck of the woods… Northwest Florida…
I would say “Daisy Chain” but this time its different, so why bother.
i´ve heard the conference call when they disclosed that.
unbelivable. they now changed their underwriting rules……
Sure was good to see Lowe’s take it dead in the shorts. As the House ATM machine goes out of commission it will be fun to see the free fall in sales of fake wood decking, koi pond building materials and newell posts for deck railings. Now if we can just get those annoying “do it yourself” and flipper shows off TV perhaps America can get back to having weekends that don’t involve renting power equipment!
That’s part of the Home Depot/Lowe’s/Costco Cult! Rather than actually enjoying your weekends out on the deck they brainwash people into thinking that if you’re not doing “home improvements” then you’re missing out on the big housing boom! It’s high time for this aspect of the bubble to die a nice quiet death. Amen.
But not to worry as Lowe’s stated this is only temporary as consumers get accustomed to $3 gas they will be back to buy in 7 or 8 months,,, sure they will…
—AL
But not to worry as Lowe’s stated this is only temporary as consumers get accustomed to $3 gas they will be back to buy in 7 or 8 months,,, sure they will… It’s not all about gas dude…
—AL
“Rather than actually enjoying your weekends out on the deck”
…..but what if you don’t have a deck?….then maybe you need to build one before you can go out and enjoy it.
Sorry DinOR couldn’t resist.
“To head off potential problems, the largest mortgage originator in the United States, Countrywide Home Loans, has begun sending out letters to thousands of borrowers”.
Phew - problem solved, er, I mean potential problem.
Yep, these people will just get scared and dump even more homes on the market for a quick sale. They’ll probably even make a handsome profit and then everything will be fine.
“While the possibility of delisting is a threat that makes companies take listing requirements seriously, ‘the perception is that if you’re big enough, like so many things, you are more or less in the drivers’ seat,’ said Maureen O’Hara, a professor at Cornell University.”
“Too big to fail” rears its ugly head once again.
OT, from salon.com:
The oil bubble
Is it time to bet against the crowd and put some money on the proposition that the price of oil is set to drop? From a peak oil vantage point, that would seem like crazy talk, and from an environmental perspective, flat out suicidal. But if you’re a contrarian looking to pick up some pennies in the market in the short term, it might be hard to resist gambling on black gold losing a bit of its luster. And after ten days of vacation, what better place for How the World Works to get its motor running again than with a quick status check on the fulcrum of the global economy: the price of a barrel of crude?
The theory goes like this: First, there’s the supposition that some portion of the spike in oil prices over the last couple of years is speculator driven. Traders are stockpiling oil for sale to buyers at some later date, hoping that in the intervening period prices will continue to rise. Such speculation naturally pushes the price of oil even higher. This is a classic pattern in markets, going back at least as far as the great tulip mania of the 17th century, and there’s no reason why oil should be any different from any other traded commodity. And as with all bubbles, once traders start thinking that the price might fall, whoooosh — the air rushes out.
In the last week, while How the World Works was pretending that the spot market price for crude had no relevance to life in the woods of southern New Hampshire, much has been made in the press of a report by Sanford Bernstein oil expert Ben Dell that an oil price shift downwards is imminent, in part because the global storage capacity for oil is getting tight. So many traders (and governments) are hoarding oil that we are rapidly approaching a point where there is no more room to put it — one estimate predicts that date could arrive within four to six months. In that scenario, the cost of storage will naturally begin its own rise, encouraging traders to unload their holdings, and thus depressing the price of oil as the market gets glutted with supply.
Plug that in with a highly optimistic report by Cambridge Energy Research Associates (CERA) that predicts production capacity will grow substantially, more than keeping up with demand, over the next five to ten years, and suddenly the recent week-long decline in prices is the start of a medium-term trend, and not a meaningless blip.
Before the peak oilers descend on me, outraged at my falling for CERA’s outrageous optimism, or otherwise relapsing into energy complacency, let me stress that fluctuations in oil prices over the medium-term do not mean that we shouldn’t be ramping up alternative sources of energy, pushing for more energy efficiency and conservation, and commuting to work on our bicycles in the snow while eating energy bars made from locally produced and sustainably farmed ingredients. But a significant drop in the price of oil still has major implications. If the price of crude goes down to $50 dollars a barrel or below, it could ward off a potential recesssion in the United States that might arrive as early as next year, should the housing market continue to decline and energy prices stay high. A $25 dollar a barrel drop in price could also make a huge difference to, say, venture capitalists betting on a new enyzme that will convert plant waste to ethanol at a price competitive with 70 dollar a barrel of oil, but not 50.
And then there’s the rhetorical battle-field. Because you can also bet that energy industry flacks and pundits-for-hire are salivating at the chance to start firing off op-eds like so many howitzer shells as soon as the price of oil bumps down. And every impassioned tirade that uses the current price of oil as evidence for why we must get the government to pour research dollars into cellulosic ethanol or solar power or whatever will just be more grist for their well-lubricated mills.
Even the put-a-happy-face-on-world-oil-markets folks at CERA offer a cautionary warning along these lines. CERA’s stance is that peak oil is nowhere near imminent, and that even if production capacity does finally reach a peak, it won’t be the kind of a peak where an immediate descent follows, but rather, the beginning of an “undulating plateau” in which production and demand swerve back and forth within a narrow range. In their report, the authors write, “this most recent analysis supports our long-held view that the undulating plateau remains beyond the horizon, and this should allow governments time to develop policies to deal with capacity issues. We are currently in a dangerous situation with so many “credible” estimates of the date of peak oil that when the signposts for the undulating plateau finally start to appear they may well be ignored as yet another false indicator.”
In other words, the boy who cried “peak oil” too many times ended up undermining his own village’s attempts to prepare for an age of scarcity. That’s a highly debatable proposition, but if the price of oil does decline steadily over the next year, it’s worth bearing in mind, as we prepare for the backlash.
– Andrew Leonard
‘…when the signposts for the undulating plateau finally start to appear …’
And some would say they’ve all ready come and gone, though a sharp drop in oil prices (based on limited storage capacity) is probably a given. It’s the current shocks that give pause though. Both production AND refining capacity are behind the demand curve now, and I don’t think Chindia is of a mind to accept CERA’s analysis blindly.
If the price of crude goes down to $50 dollars a barrel or below, it could ward off a potential recesssion in the United States that might arrive as early as next year, should the housing market continue to decline and energy prices stay high…
You may have that backwards, a housing induced recession may cause lower oil prices due to reduced demand. China and India are building SPRs as we speak and the US is trying to add another 40 mb to its own SPR. There is no shortage of storage that I’m aware of and world demand keeps increasing. I laugh in advance at anyone who thinks the US can continue to consume 20+ mb/d for much longer.
Chart the price of oil for 5 years, and you’ll see that a drop to $55 does nothing but touch a long term up trend line.
I could agree that the price of oil is set for a retracement and needs to test a bottom somewhere. But bull markets this strong, don’t end right away.
Read about O.C. home prices and sales.
“Foreclosures.com analysis released Monday shows that mortgage defaults in the Chicago metro area rose by 60 percent in the first quarter and were still going up in the second quarter. Alexis McGee, president of Foreclosures.com, said it appears that foreclosure activity is leveling in other Midwestern markets, although Indianapolis had a reported foreclosure rate of 1 in every 101 properties.
Meanwhile in the West, Foreclosures.com is reporting that defaults are on the rise in California, Las Vegas and Phoenix as well. McGee said foreclosure acitivity had increased more than 67 percent year over year at the end of the second quarter in California. She also says that investors who bought more than 25 percent of new homes in Las Vegas and Phoenix are now not able to easily afford the houses due to rising interest rates. Default activity is also high in Colorado, especially in the Denver metro area, with more than 11,300 homes in the pre-foreclosure process in the state, according to Foreclosures.com.
Texas, with 16,965 foreclosure properties, leads the nation for the most properties in default, according to the report. McGee said more than 12,000 homes have been lost this year in foreclosure, as of mid-August.”
“8,500 Florida properties went into foreclosure in June. ”
Wow!!!
$400 billion to re-set? Not to mention the $1 TRILLION waiting in the wings to re-set for the greater fools who, just like those who invested in the tech boom, jumped into the shark infested (for shark infested read: car salesmen realtors/fraudulent mortgage brokers/fake % bank loans/corrupt appraisers) property pool as prices started to peak and are now underwater. The domino’s started to tremble in the last part of 2005 but it takes time for the first domino to fall and start knocking over the others. There is a recession knocking on our door just to make it more interesting. Save your cash if you want to buy property. The end of 2008 give or take 6 months either way will look tempting for property buyers.
Mike- It is 2.7 Trillion to reset in the next 2 years. That is a huge amount of money.
That’s nothing. Mecklenburg county NC (Charlotte) had 8500 foreclosures last year. I’m forecasting 10,000 this year.
Coldwell Banker CEO on Fox News right now trying to spin a rosy picture for the housing industry, “very soft landing”, “5% gains.”
He’s not getting much agreement from the commenting reporters. Even Neil C. is arguing with him.
This guy is on a major SPIN campaign. He was on CNBC talking - never down since 1950 …. boomer…. foreigners…. aliens…
OT- Anybody just catch Chris Thornberg on CNBC going head-to-head with Ron Insana and some RE talking head?
Man, he was the most bearish that I have ever seen him before. He said that things will get much worse over the next couple of years.
Yup,,, this is the official start to the housing BUST,,, the media is coming on strong with the RE downturn. I think everyday CNBC talks about housing.
All you really have to do is try to look at the numbers and place your shoes in many of those people who did purchase in the last couple years,,, Even look at the disciplined buyer, say they sell the last home and profit 200K and buy the next home for 600K so they have a 400K mortgage,,, even if the home drops 15% the equity drops by 90K, this is a psychological effect to the owners no matter how you look at it, even if they have no problem paying. This will cause them to save more and not do any improvements to a falling asset..
—AL
Thornberg has probably seen The Picture all along, but now that he is out from under the thumb of the RE industry donors to the Andersen School Forecast, he has free reign to shoot straight from the hip.
Ah, that should head off any payment problems…
Table 1 needs an ass pounding please…….
FWIW:
Dan Fitzpatrick
Homebuilders Already In The Basement? Not.
8/21/2006 4:13 PM EDT
Seems like all I’ve been hearing about today is that traders are waiting for the housing numbers. I thought the consensus was that this group had bottomed and that they had gone down far enough. With such compelling valuations, how can they do anything but move higher? Am I missing something?
On a more serious note, I just heard that K. Hovnanian walked away from a $15 million deposit on a land deal in Orange County. $15 million here, $15 million there…sooner or later you start talking about a lot of money.
When the folks on the front lines stop walking away from hard money, I’ll get interested in this group. Until then, it’s just a big “yawn”. I think now is not the right time to short or own these puppies because they are caught in a vise between short covering and wishful thinking.
Position: Long just one house in So. Cal…with no “For Sale” sign on the front lawn.
I think I have finally figured out the pattern on these babies.
They run up just PRIOR to bad news on light volume. This is (relatively) quiet and gives room for the inevitable sell-off to not look so bad.
OT but some recent observations…
I was at Lowe’s on Saturday and the place was empty. I used to go there a lot for a weekend side-business I was running, and I always went on Friday because on Saturday’s the place was always such a zoo. I hadn’t been in there in a long time and the difference was really remarkable.
On the other hand, I was talking with a friend of mine owns a Honda car dealership, and he says he has no cars left. Inventory is so tight he has to send people away. He can’t even send them to other dealerships. There simply are no more cars to sell.
Two anecdotal observations IMO, the consumer is pretty much done, and any money they are spending is based on trying to realize future economies - i.e. trading in big SUVs to buy gas-saving Hondas.
I hear you, Ric. Last week, I was in a local bicycle shop on a weekday, and the place was bustling. Granted, I’m in Tucson, where you can ride year ’round, but the amount of business I’ve seen done in the bike shops this year has astounded me.
Locally, there is quite an interest in treating the bicycle like a second car, and keeping the gasoline-consuming car parked in the driveway.
“The National Association of Realtors is expected to report existing-home sales Wednesday morning, and economists will be watching median prices to see if they fall from the previous year. That would be the first year-over-year decline in over a decade and would damage buyer sentiment, according to Banc of America Securities analyst Daniel Oppenheim.”
Talk about your trailing indicator!
“According to the Census Bureau report released Monday, Florida topped the list of the states adding the highest number of housing units, gaining 247,000 homes over the period. Following Florida were California (182,000), Texas (179,000), Georgia (98,000) and Arizona (87,000).”
Well, CONGRATULATIONS, FLORIDA, YOU GLUT YOU! Whoo-hoo! You’ve finally topped California at something! Bring out the noisemakers, Florida, you win the prize for the being the “gluttiest” state!!
Oh, man, what a dubious distinction. And this, on top of all the reports of declining population. BTW, this is news to the “erected” representives.
247,000 isn’t so bad,is it?
After all, 1,000 people a day are moving to Florida, aren’t they?
That’s 365,000 people per year!
What? UHaul rates are higher leaving the state rather than entering it?
School enrollments are down, not up?
But they’re not making any more land in Florida! Where did they find the room to build 247,000 more houses?
Enquiring minds really want to know…..
247,000 isn’t so bad,is it?
After all, 1,000 people a day are moving to Florida, aren’t they?
That’s 365,000 people per year!
What? UHaul rates are higher leaving the state rather than entering it?
School enrollments are down, not up?
But they’re not making any more land in Florida! Where did they find the room to build 247,000 more houses?
Enquiring minds really want to know…..
“The National Association of Realtors is expected to report existing-home sales Wednesday morning, and economists will be watching median prices to see if they fall from the previous year.
- Who would trust these Bast*rds tp tell the truth.
Sobay- Right on!
‘The industry is trading risk for convenience,’ says Larry Goldstone, at Thornburg Mortgage Inc. in Santa Fe, N.M.
Yeah, our risk, their “convenience”.
Curtis G.- Yup, not letting the GSE’s face the music is crime all in itself.
Correct. We should have no GSEs or Fed. Moral hazard and easy money destroys the wealth of many at the benefit of a few.
I’d love to see FNMA delisted. But it’s never going to happen… the bank boys have WAAAAY too many financial instruments tied to FNMA (lots of derivatives contracts). They will do whatever it takes to prevent the delisting.
NH-Renter,
You are probably right. Am afraid this FNM business is just a hot button topic for me. Sorry for all the earlier rants, but, as far as I am concerned, it all stinks.
“Toll Brothers Inc., which earlier this month said its quarterly new-home orders slipped nearly 50% on a slumping housing market, may again reduce its 2006 profit forecast when it reports earnings Tuesday. Analysts will also be looking for details on write-downs Toll said it plans to take for land options it is walking away from.”
I apologize for continuing to drive this point home, but I am not convinced that it has sunk in to all the intelligent readers here:
LAND PURCHASE OPTIONS ARE RISKIER THAN OWNING THE LAND.
Toll (and other builders who followed suit) will likely experience a total loss on many of the call options it owns to purchase land, as they will expire out of the money. Despite the continued effort to muddy the waters by insinuating that options somehow shield the builders from land price risk, the type of options they own actually only protect them from the risk that land prices *increase* too much; in the event of falling prices, options can easily deliver a total loss. I guess this will only become clear to some interested parties in the ugly handwringing phase of the post-bubble crash.
They are riskier with respect to the premium, but typically the premium (even on a long dated option) is a small portion of the price of the land. To give you some idea, a share of EA is currently trading at $50 while 2 year options go for $13.80. The whole premium is at risk, but the overall economic exposure is much smaller in owning an option than buying the land if prices decline substantially.
Options are also difficult for laypeople to value, it’s likely that Toll bought cheap volatility.
“Delisting is a scary prospect for shareholders.”
Scary, but well-deserved. Nobody who is paying attention should be gambling by staying long FNM shares at this stage of the game.