December 2, 2006

Bits Bucket And Craigslist Finds For December 2, 2006

Please post off-topic ideas, links and Craigslist finds here.




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161 Comments »

Comment by jmf
2006-12-02 04:48:38

Reality Check / bill gross pimco

The increasing use of leverage, in other words, at least as applied to this particular area, appears to have run out of its magical ability to increase returns. Investment grade corporate spreads therefore are not likely to narrow further.

This is a critical analysis because if extended to other asset markets, it begins to imply that the leverage potency of recent years is reaching a peak, ….. how much leverage can be applied before the chances of losing all your money dominate the outcome?

summary
http://www.immobilienblasen.blogspot.com/

or full from pimco
http://tinyurl.com/yks3fl

have a nice weekend

Comment by Russ Winter
2006-12-02 06:20:39
Comment by GetStucco
2006-12-02 07:12:45

“The technique behind this return is not, in itself, so clever: what a CPDO basically does is collect investors’ cash, leverage up and use the proceeds to write credit default swaps - instruments that offer protection against default. Thus, in its most grossly simplified form, a CPDO is a highly leveraged bet on whether a basket of corporate bonds will default. But the real magic, and its importance for the wider financial world, lies in the credit rating. In the summer, ABN Amro somehow persuaded the agencies to give the CPDO a top-notch rating, thus enabling the scheme to be marketed widely - while also cutting leverage costs.”

Many of the strategies that produce outsized returns in a conundrum-stricken investment universe involve high risk bets that the low recent rate of credit defaults will continue indefinitely. No wonder Geithner is so worried…

Comment by Hoz
2006-12-02 07:48:07

Morning all! So they are trying to call a ratfish a sunfish and expect different results. It is similar to the CPPI, or Constant Proportion Portfolio Insurance (from Wikipedia)
Constant proportion portfolio insurance (CPPI) is a capital guarantee derivative security that embeds a dynamic trading strategy in order to provide participation to the performance of a certain underlying. See also dynamic asset allocation.

In order to be able to guarantee the capital invested, the option writer (option seller) needs to buy a zero coupon bond and use the proceeds to get the exposure he wants. While in the case of a bond+call case, the client would only get the remaining proceeds (or initial cushion) invested in an option, bought once and for all, the CPPI provides leverage through a multiplier. For example, say an investor has a $100 portfolio, a floor of $90 (price of the bond to guarantee his $100 at maturity) and a multiple of 5. Then on day 1, the writer will allocate (5 * ($100 - $90)) = $50 to the risky asset and the remaining $50 to the riskless asset (the bond). The exposure will be revised as the portfolio value changes, i.e. when the risky asset performs and with leverage multiplies by 5 the performance (or vice versa). Same with the bond. These rules are predefined and agreed once and for all during the life of the product.
from my memory: This product accelerated the decline in 1987. Hedged accounts cannot handle a sigma 2 - 3 event.

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Comment by GetStucco
2006-12-02 08:13:18

“This product accelerated the decline in 1987. Hedged accounts cannot handle a sigma 2 - 3 event.”

Hoz — Thanks for the walk down memory lane. Back in 1987, “hedge” referred to portfolio insurance, not overpriced investment advice.

 
Comment by GetStucco
2006-12-02 08:14:37

P.S. The Black Monday crash in October 1987 was more like an 18 sigma event, if I recall correctly…

 
Comment by technovelist
2006-12-02 08:44:06

P.S. The Black Monday crash in October 1987 was more like an 18 sigma event, if I recall correctly…

I believe it was actually 22 std. deviations. But either way, it only goes to show that financial markets don’t follow a standard bell curve. If they did, the universe would end long before such an event had any significant likelihood of occurring.

 
Comment by GetStucco
2006-12-02 08:51:04

Thanks — I was not sure off the top of my head, so I shaded my estimate to the conservative side…

There is a nice graph of that price movement in the Stock and Watson undergraduate econometrics textbook.

 
Comment by Hoz
2006-12-02 09:56:35

I read that the chances of 1987 occurring again were equivalent to waking up one morning with no sun. I think those odds have been greatly shortened.

 
Comment by GetStucco
2006-12-02 10:16:05

“I think those odds have been greatly shortened.”

Interestingly enough, the odds get shorter to the degree that the belief that “it can never happen again” strengthens. Because the Great Conundrum, where risk premiums vanish with the perception that risk has been abolished, gives rise to increasingly foolish risktaking behavior. Thank you, Alan Greenspan, for abolishing normal market corrections.

 
Comment by GetStucco
2006-12-02 10:26:57

“But either way, it only goes to show that financial markets don’t follow a standard bell curve.”

A model which has recently gained popularity replaces the Gaussian distribution (aka bell curve) with a so-called “power law.” In short, 22 sigma events happen more often than the normal distribution allows for, especially when the government-instituted abolishment of risk premiums gives rise to an orgy of speculative debauchery.

http://en.wikipedia.org/wiki/Power_law

 
Comment by downSide
2006-12-02 17:19:25

The problem really is is that financial markets are not complicated enough to model the actual market and the models are fed bad data or the data is not publically available. Who even factors in all the derivative strategies around that are based on complicated formulas and have trillions in notional value.

 
 
 
 
Comment by GetStucco
2006-12-02 07:04:07

“…how much leverage can be applied before the chances of losing all your money dominate the outcome?”

This is what I have been wondering: For how long after Greenspan’s retirement can the Fed push on the stock market’s string before the Greenspan put does not have any effect?

Didn’t Milton Friedman and Robert Lucas try to teach this lession in the 1970s? Relying on the use of money illusion to play fooling games with Asian creditors does not seem like a very promising strategy.

 
Comment by GetStucco
2006-12-02 07:24:47

“I, and I’m sure you as well, am always amazed at the pundits who claim that certain just released information is already “priced in” to the markets. How do they know and who did they ask? Even if they did, would a 54% OJ majority opinion be proof that it was so?”

This pretty well explains the recent uptrend in homebuilder stocks. The same majority of Americans who believe OJ was innocent have been buying them on the belief that all bad news that has ever been or ever will be released is already “priced in.”

Comment by Pallidan
2006-12-02 08:21:34

JMF, Russ, Hoz, & Stucco,

While you folks bring perspective to the big picture, I am breaking ground on the local level. You previously read here about the 5 mortgage fraud loans in Lincoln (Sacramento) totaling $987,000 over the combined market value. The idiot lenders are New Century (2), Alliance Bancorp, Long Beach (WAMU), & First Franklin. I have started the ball rolling with the FBI, DRE, and local police on the mortgage fraud aspect. It is an O.K. response, but it takes 2-3 calls and personal meetings to make them understand what is happening. I talked to a few folks in the home loan industry and they suggested opening a dialogue with the lenders and their fraud division. Today, I am putting all four lenders on notice, sending them a spread sheet, showing their loans and the market values. Hmmm, we shall see what this brings.

By the way, prices continue to deteriorate in this area. All these fraudulent deals were done at $765,000 to $785,000. Market value last month was about $550,000. The latest deals at JTS’ Estates at Lincoln Crossing were done at about $505,000 net to buyer. So New Century is another $45,000 under water from their approved loan amount in October. And now, I have identified 3 more fraudulent loans and another 7 potential deals, which have not closed yet. This shake out is going to get very interesting.

Sincerely, Palladin … “Have pen will write, reads the card of a man, Knight without armor in a savage land….”

Comment by GetStucco
2006-12-02 08:58:55

“I have started the ball rolling with the FBI, DRE, and local police on the mortgage fraud aspect.”

Excellent! And good luck…

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Comment by auger-inn
2006-12-02 09:59:17

Great work and keep us posted!

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Comment by Hoz
2006-12-02 10:05:28

Awesome work! But if the borrowers are paying their loans in a timely fashion, is it fraud?

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Comment by bubbleboi
2006-12-02 10:57:02

There are several potentially fraudulent parties in these transactions. So even if the loan is paid on time, the appraiser might have committed fraud.

 
 
Comment by spike66
2006-12-02 10:15:06

Pallidin,
Wonderful work. Please post updates.

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Comment by Jon
2006-12-02 12:20:37

My guess is that the lenders will write you off as a crank, and not take your market values at face value… I hope I’m wrong, but that’s where I’d put my bets down.

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Comment by Paladin
2006-12-02 12:36:30

Jon, If the lender’s are aware of the mortgage fraud, appraisal fraud, and/or collusion of buyer and seller, and do nothing, then the buyers of the RMBS tranches have a great case for a class action lawsuit and recourse to huge damages. These originating lenders have to make reps and warranties when they put these loans into the securitization pools. If it can be shown they have wilfully disregarded pertinent information calling these loans into question, they will be liable for some serious fraud themselves. I think my next set of e-mails will be to Fortress Investments in NY and other massive RMBS buyers (including some hedge funds), and I will CC the lenders. I can probably put 20 loans in these catagories now and OCRenter showed us a series of 6 or 7 a few months ago. I am sure Ben could start a new HBB Mtg Fraud Gallery and we could all list 20 suspected home loans for the RMBS rating agencies to add to their watch lists.

One way or another, the moronic lenders are going to sit up and take notice of their idiotic lending practices. Can you say Ken Lay (dead) or Jeff Skilling (prison)? This $hit stops now, or we proceed past the FBI, DRE and local DA’s, directly to the SEC. Lender’s are you listening?

Paladin (I spelled it wrong this morning, but Paladin is the name of the gunslinger played by Richard Boone on “Have Gun, Will Travel).

 
Comment by CA renter
2006-12-03 03:16:14

Paladin,
Great idea!!! Please let us know how things are coming along & what does & doesn’t work. I think if more of us did this (and since most of us are market hawks, and probably can spot fraud from a mile away at this point), we could finally bring this credit bubble down.

I think you are on the right track. Since you’ve already put things in motion, it would be a good idea for you to find the ins-and-outs of things, so we aren’t all barking up the wrong trees. Would you mind keeping us informed & letting us know what we can do to help?

Thank you so much for your contribution!!!

 
 
Comment by Chip
2006-12-02 13:09:01

Good for you, Palladin. Once you have a few successes, you might check to see if some hungry Channel 6 investigative reporter wants to pick up on the subject. Keep us posted.

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Comment by Paladin
2006-12-02 13:46:41

Chip & Jon,

Just for you two, here is the e-mail I just sent to Alliance Bancorp. Do you think they will sit up and notice?

Dear Alliance Bancorp rep,

You may be interested in the attached spreadsheet showing multiple loans in Sacramento where the financing exceeds the market values of the homes by over $200,000. The loans are 148% in excess of the most recent sale comps. It is my opinion that you are getting defrauded on these loans. You certainly would not want to knowingly place these loans into an MBS pool if they are overencumbering the value of the asset. This could possibly ruin your reps and warrenties in the business. If you have any questions, please feel free to have your fraud officer call me. I am developing a program to identify these loans and believe there at at least 14 more like them in the Sacramento area.

Sincerely,

John (916) XXX-XXXX (C)

CC: G.F., Fortress Investments RMBS Analyst, San Diego
T. Patton, Esq.

And Chip, there is one “L” in Paladin (I spelled it wrong this morning). My new business cards will read: “Have Pen, Will Write. Wire Paladin, San Francisco”.

I am gonna kick some ass and take some names. This $hit makes me very upset.

 
Comment by Chip
2006-12-03 16:04:28

Good stuff, Paladin. I’m on the east coast and had SEC football to watch last night, so didn’t read your reply until this evening.

 
 
Comment by anon in DC
2006-12-02 20:54:23

That’s very interesting. A lot people here have little faith in the MSM but have you tried contacting Wall Journal?

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Comment by anon in DC
2006-12-02 20:56:24

Wall Street Journal

 
 
Comment by jmf
2006-12-03 03:49:12

thanks!

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Comment by david cee
2006-12-02 09:51:37

GetStucco: I think it’s the HomeBuilders buying back their stock with their own cash, and in cahoots with their friends at the Mutual Funds and CNBC with Pump and Dump Crammer that
is driving up HB stocks into the face of all this bad news. Nothing else makes sense. KB Homes year ended Nov 30, 2006 and I suspect the managers stock options were based on the price of the stock on Dec 1. If I were sitting on a ton of stock options on one hand, and the company had cash reserves, I would certainly want to use the company funds to buy back the stock and drive the price up, just before on cashed in my options.
And if I can get my “inside” buddies to use the cash from their mutual funds to get onboard, we could effectively drive up the stock price.

Comment by GetStucco
2006-12-02 09:55:35

Can’t say for sure, except that I am guessing whoever is buying the stocks is doing it with other peoples’ money.

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Comment by sellnrun
2006-12-02 10:52:28

Speaking of Cramer, yesterday he announced cancellation of his radio program after 6 years. And last night, he made an off-handed comment about needing “more viewers”.

His actions immediately struck me as those of a market bull trying to bow out of the spotlight before the curtain came crashing down on his head. I thought the timing was remarkable given recent economic movements and data. I’ll wager his TV show will be off-air before long.

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Comment by BanteringBear
2006-12-02 11:14:09

“I’ll wager his TV show will be off-air before long.”

A smart bet. I personally don’t know anyone who likes him.

 
Comment by GetStucco
2006-12-02 15:23:59

Maybe he has a future as a Shakespearean actor. He would be a perfect choice for the role of Bottom in a Midsummer Night’s Dream, who (thanks to magic) literally gets turned into an ass.

 
 
 
 
 
Comment by County Boy
2006-12-02 04:54:26

Home sales in Maine drop almost 10 percent for month

Saturday, December 2, 2006

Sales of existing single-family homes in Maine fell in October by 9.88 percent, compared to the same period in 2005, according to the Maine Real Estate Information System.

Realtors sold 1,186 homes, down from last October’s total of 1,316.
The median sales price dipped 1.41 percent, to $192,250.
Nationally, home sales were down 11 percent in October.
According to the National Association of Realtors, the median sales price for those homes dropped to $221,300, a decrease of 3.4 percent from October 2005.

http://business.mainetoday.com/news/061202briefcase.html

Comment by az_lender
2006-12-02 05:57:08

Another note from Maine. From the “Island Advantages” weekly.

“If you happen to have at least $3 million, you place a bid to purchase historic Goose Cove Lodge. … The inn, in its 58th season, rests on 22 acres…and has a significant sand beach.

“The auction has been arranged by Dom and Joanne Parisi, who have owned and operated the inn…for 15 years. Due to…accumulating debt, the Parisis, on and off for the last five years, have tried to sell the property. … They also tried to develop a piece of the property as condominium units three years ago…but were not granted approval… .

“With escalating debt and a sub-par tourist season, the Parisis were forced to file for Chapter 11 bankruptcy protection during the summer …

“The … public auction will allow the Parisis the opportunity to recoup the money owed to their three creditors as well as provide a retirement income for the couple.

” ‘We always just wanted to live here and retire here at the end of our inn-keeping careers,’ explained Joanne.”

***

My comment: The Parisis and their resort are well liked here, and I join the locals in wishing the Parisis a reasonable retirement income. However, as a housing bubble blog poster, all I see is another ludicrous reserve-bid auction planned by people who want to have their cake and eat it too, and who failed to see that basing your retirement on RE investment was a universal fantasy, or I should say, delusion.

Comment by michael
2006-12-02 07:30:31

It seems to me that they tried to run a business over the long haul and perhaps that they provided a very nice service to their customers. But it sounds like they underpriced their product or there wasn’t enough demand for it.

I started seeing a lot of for-sale signs a few
years ago in the beach areas that we like
to spend time at in the summer and it’s
clear to me that many were early in selling. But I guess there was some good sense in
folks that have lived there for quite some
time in selling properties to those that go
up there for vacation or for a weekend break.

 
 
Comment by az_lender
2006-12-02 06:11:38

CountyBoy — I just tried to post a reply that included most of an article from today’s “Island Advantages,” describing the plans of Dom & Joanne Parisi to auction off Goose Cove Lodge. (My post didn’t post, but sometimes they pop through belatedly.?!?!) Anyway it looks like they are planning the auction with a reserve price of $3 million. They and their resort are well liked here, and I join the locals in wishing them a comfortable retirement income. However, it would take a GF to bid that amount. The Parisis have not succeeded in running the inn profitably, and had to file Chapter 11 last summer. Couple of years ago they tried to turn the place into condos, but the town board said no. I think they are extending their pain by trying to have & eat cake.

Comment by County Boy
2006-12-02 06:20:13

Is this the place near Stonington? Very pretty country.

 
 
Comment by Diggs
2006-12-02 06:25:06

I question whether they really sold 1186 homes. Then again, I question everything “they” say.

 
Comment by GetStucco
2006-12-02 07:16:01

There used to be several posters from Maine who always assured us “No bubble here.” I wonder what became of them, as I would be curious about whether they think the drop in home sales and prices is some kind of freak anomaly?

Comment by Portland Mainer
2006-12-02 08:45:32

Prices have retreated and will likely retreat a bit more - particularly where there has been overbuilding and investors - READ: the ski areas, most notably Sunday River.

I’m watching the condo prices there. If the price drops enough I just might buy one.

One thing I’ve noticed is that there are a tremendous amount of quarter shares for sale at the Sunday River ski hotels. I’m tempted, as we like to ski, hike and leaf peep, so we’d get year round use on weekends and some weeks.

On the other hand, the idea of less than full ownership doesn’t quite sit right. Any thoughts on this anyone? We’re in no hurry and I’m thinking late winter 2008 would be a better time to buy than now or Spring 2007.

Comment by GetStucco
2006-12-02 09:30:13

It is probably not a bad idea to start looking, so you have a great idea of the tradeoffs between price and quality once prices become affordable once again… But I would not even begin to contemplate purchasing a home until the inevitable shakeout in subprime credit has run its course.

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Comment by Captain Credit
2006-12-02 09:49:34

But But But!! Prices NEVER go down in Portland!

Comment by Portland Mainer
2006-12-02 10:09:23

They are down 1.41% in the state versus YAG.

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Comment by DC_Too
2006-12-02 07:22:32

I spent Thanksgiving in York County - I’ve no “local knowledge” of the real estate market there at all, but it seemed like there was a “For Sale” sign in front of every third house. Also drove along the coast from Kittery up to Nubble Point light and thereabouts - “For Rent” signs everywhere.

I hadn’t been there in years. I was really struck by the amount of development though. New, oversized houses built virually on top of one another. This in what used to be picturesque coastal Maine. Really very sad.

Comment by bradthemod
2006-12-02 11:03:28

Saw the rent signs all over southern coast in early summer too. That is not good. In one word, it looks bourgeois.

 
 
 
Comment by LipnAZ
2006-12-02 05:35:06

http://www.townhall.com/columnists/LawrenceKudlow/2006/12/02/debunking_krugman%e2%80%99s_recession

Larry Kudlow on Krugman.

“A glaring omission from Krugman’s analysis is the staggering rise in corporate profits. These are the tax-return profits recorded for the IRS, and rest assured that no CFO overestimates them. Corporate pre-tax profits are up a remarkable 31 percent through the third quarter — 25 percent after-tax. Profits are the mother’s milk of business and the economy, and these days we’re talking a serious amount of milk.

A question for Mr. Krugman: When in the history of humankind have we had a recession when business profits are rising by 30 percent?

Profitable U.S. businesses clearly have the resources to grow their operations and continue hiring new workers. This, in turn, is the biggest factor sustaining the historically low 4.4 percent unemployment rate, as well as the strong gains in jobs and consumer incomes. ”

“Markets are better forecasters than economic pundits and the models they cite. Rising stocks — helped along by lower energy prices, spectacular profits, and rock-bottom tax rates on capital — are telling us that a soft-landing growth scenario is in the works for next year. Lower bond rates are saying we can bank on lower inflation and an easier Fed in 2007.”

Question - Is it possible this economy will lead to a soft landing?

Comment by jmf
2006-12-02 05:38:42

question for kudolw….

IN reality, profits for most S.& P. 500 companies are growing much slower than 9.6 percent this quarter. If you stripped out the financial sector, where a profit surge of 32 percent is expected, corporate earnings would be likely to grow by only 3.1 percent……

Comment by CarrieAnn
2006-12-02 06:20:53

I wouldn’t mind a thread discussing what it means for all of us when the financial sector is making such magnificent profits while the remainder of the country slips into stagnation.

Comment by GetStucco
2006-12-02 07:36:05

There is that famous story about the customers’ yachts which pretty well sums it up:

“Where Are the Customers’ Yachts? exposes the folly and hypocrisy of Wall Street in a humorous and entertaining manner. The title refers to a story about a visitor to New York who admired the yachts of the bankers and brokers in New York Harbor. Naively, he asked where all the customers’ yachts were? Of course, none of the customers could afford yachts - even though they dutifully followed the advice of their bankers and brokers. ”

The updated version should add hedge fund analysts to the list of yacht owners who dispense bad advice at a high price to their customers.

http://books.global-investor.com/books/22581.htm?ginPtrCode=11128&identifier=a4af50a2470e23fbe61028c9e161bcd2

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Comment by winjr
2006-12-02 07:37:59

A right-on point, jmf. This is always overlooked. Profits have been great for the debt-shufflers. We’ll see how long that lasts.

Kudlow says: “Profitable U.S. businesses clearly have the resources to grow their operations and continue hiring new workers. This, in turn, is the biggest factor sustaining the historically low 4.4 percent unemployment rate, as well as the strong gains in jobs and consumer incomes. ”

What does Kudlow think? That U.S. Corporations live by the rules of socialism? Their fat bank accounts came directly from our houses. Does Kudlow think they’ll now give it back? They absolutely will not “grow their operations and continue hiring new workers” if it is not almost immediately profitable to do so. They’re retrenching, cutting back on capex and getting ready to ride out the storm.

Strong job gains? That was then, this is now. Let’s see where it goes. Strong income gains? What dope is this guy shooting? Strong for who? For KBH’s CEO who can resign in disgrace and take a 156 mil severance package with him. Must be very reassuring for the nail pounders getting laid off left and right.

A day will come when I will really, really enjoy watching Kudlow’s show.

 
 
Comment by crispy&cole
2006-12-02 05:46:36

You started out by quoting Dumb-Low, this is the real Dumb-Low:

“In 1994, the New York Times published a full-page article, “A Wall Street Star’s Agonizing
Confession,” about Kudlow’s life and addiction to cocaine. He resigned from his $1 million a year
job at Bear Stearns after missing a speaking engagement with some of the firm’s best clients. In
1995 he entered a drug and alcohol treatment program in Minnesota, and two years later
converted to Catholicism. Recently, he has been on the Bush-Cheney transition advisory
committee.”

Comment by LipnAZ
2006-12-02 05:53:23

Crispy,

So he’s wrong because of his association with the White House, or his past illegal use of drugs, or his conversion to Catholicism?

I agree with most on this blog that the economy is going to tank, but surely he has a point. Won’t the financial sector’s profits moderate the recession to a degree?

Comment by crispy&cole
2006-12-02 06:04:48

He always says the same thing (kinda like me - LOL). If he ever changed his tune I would listen to his views.

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Comment by nnvmtgbrkr
2006-12-02 06:57:19

The conversion to Catholicism says it all. If you needed a red flag, you just got one.

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Comment by Paul
2006-12-03 11:19:55

OK, I’ll bite.

what does converting to Catholicism have to do with red flags?

 
 
Comment by GetStucco
2006-12-02 07:40:03

LipnAZ –

How do you think the financial sector’s profits will hold up in the coming wave of foreclosures? Your comment suggests you have been fooled by randomness.

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Comment by LipnAZ
2006-12-02 10:26:01

Well, it really does’t matter what I think because I still have a lot to learn. I read this blog because it’s interesting and informative.

But,– I think the strength of the financial institutions and the Dow will delay and or reduce the recession. I see the weakness of the dollar, but I don’t really see an alternative for all the people and all their money. I mean we are pretty stable compared to all other countries, are we not?

 
 
 
 
Comment by crispy&cole
2006-12-02 05:47:25

OR THIS:

The Housing Bears Are Wrong Again

Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong in predicting sky-high mortgage rates. So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.

http://www.nationalreview.com/kudlow/kudlow200506201040.asp

Comment by crispy&cole
2006-12-02 05:47:47

6-20-05

 
Comment by crispy&cole
2006-12-02 05:48:18

None of this has happened. The Federal Reserve has effectively mopped up excess cash and calmed inflation expectations. That’s why bond rates are hovering around 4 percent, with most mortgage rates about a point higher.

Meanwhile, the homebuilders index has increased 76 percent over the past year, with particularly well-run companies like Toll Brothers up about twice as much. The bubbleheads missed all this because they haven’t done their homework. If they had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades.

Although year-to-date housing starts have kicked up to 2 million, average new construction since the early 1970s has hovered around 1.5 million to 1.75 million new starts per year. During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences. So it should not be shocking that home prices have tended to rise on a steady basis, averaging 6.5 percent price gains over the last 35 years.

Upward price momentum has kicked into higher gear in recent years for two important reasons. First, housing is highly tax-advantaged. The 1997 tax-cut bill — proposed by a Republican Congress and signed into law by a Democrat president, Bill Clinton — permitted the first $500,000 of profits from the sale of a home to be tax-free. This came on top of existing law that permits mortgage expenses to be tax deductible depending on one’s income bracket.

Since 1997 home prices have been increasing at a 6.5 percent pace on a yearly basis, with a 12 percent gain over the past year. In contrast, stock prices have gained only 3 percent yearly during the same period. Simply, real estate has had the tax-advantage over stocks as an investment vehicle. There is no $500,000 per family tax-free capital gain for shares, nor are the borrowing costs for the purchase of stocks tax-deductible.

It appears that the housing lobby in Washington has been more powerful than the securities industry lobby, as the results clearly show.

Homebuilding also faces another obstacle with the effects of price-hiking. Local zoning and environmental regulations have restricted the availability of land on which new residential units can be built. So while housing demands are white hot, the green lobby has cooled down new designs.

None of this is to argue that low mortgage rates haven’t been a plus in the housing picture. Of course they have. But the imbalance between excess demand over limited supply, resulting from tax factors and land-use restrictions, has made home buying even more profitable in recent years than has been the case in the past.

Which leads to a final thought: Why not apply the same tax laws that have benefited home owners to stock market investors and home buyers? If this were to come about, even more wealth would be created in America, leading to even more new business and job creation.

Tax reform to create a level playing field could boost our economy’s potential to grow beyond almost anyone’s wildest dreams. Homeownership, stock ownership, and small business ownership should be taxed at the same minimal rates as they are all key components of economic growth and wealth creation.

Comment by crispy&cole
2006-12-02 05:51:21

HB stocks are down over 50% since this GREAT CALL!

Ignore this Perma-bull!

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Comment by LipnAZ
2006-12-02 06:01:48

OK, OK, I got it.

 
Comment by crispy&cole
2006-12-02 06:02:48

LOL.

 
Comment by DAVID
2006-12-02 09:40:56

Kudlow and Co. are now recommending, for the first time (and you’ve never heard this before, which shows you how desperate the bullish shills is) that it’s okay to load up and to buy stock on margin.

They are further recommending that consumers, already carrying record debt levels, further expand debt levels to buy stock.

This is very irresponsible, and it is dangerous, particularly since Kudlow is so widely listened to by the unwashed. And what evidence does he give? The evidence is that the markets continue to rise despite growing negative economic fundamentals.

Thus, according to Kudlow, we are in a new paradigm. Just as the dot-com bubble pushers claimed that the new Internet paradigm of dramatically reduced cost could sustain dramatically expanded price earnings multiples, more than twice the 50-year market average price earning multiples (we saw anyone that bought into that concept lost their shirts), now there is a new paradigm coming from the White House. This is exactly where it comes from because Kudlow is nothing more than an Bushonian shill.

The new paradigm is that stock prices should move higher because economic fundamentals under the scourge of Bushonomics continue to deteriorate; that, somehow, falling industrial production, falling consumer spending, record debt levels are all good for stocks.

This is the most perverse bullish logic, mixed in with patriotism. It is dangerous.

In fact Larry Kudlow and Co. should be prosecuted for the commission of fraud against the people of the nation. Because that’s what they’re doing.

When you have Larry Kudlow and a gang of retail institutional shills, on CNBC every day, who have a direct financial interest in the markets continuing to go higher, peddling this wanton nonsense to the American people, they are effectively conspiring to defraud the people.

This is the Larry Kudlow Stock Fraud Conspiracy.

 
 
Comment by arlingtonva
2006-12-02 06:07:51

Are tax-advantages, a strong housing lobby and zoning laws going to prevent Brazil, Eastern Europe, India and China from delivering products and services that are cheaper and better because they have a lower cost of living?
There are two bubbles here: the one in housing and the other one is your narrow world view.

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Comment by CarrieAnn
2006-12-02 06:28:46

Kudlow conveniently left out the affordability factor in Crispy&Cole’s above link. His supply and demand arguments didn’t take into consideration the lack of match-up to the buyer’s budget or the fact that the housing bubble is based on a credit bubble….and he accused the bubbleheads of not doing their homework. Tsk! Tsk! (finger wave)

 
Comment by Ben Jones
2006-12-02 06:37:23

‘all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.’

I see this often. First they tell you what other people think and then set out to debunk it. I see opinions on this blog that range all over the economic possiblities. Are the economist at Moodys ‘bubble heads’ when they say prices will fall 10-20% or more in overheated markets?

Personally, the last thing I want is a recession or depression, but these things happen regardless of what anyone ‘wants.’ Keep building straw-men, Kudlow, they are easier to fool.

Comment by DAVID
2006-12-02 10:13:57

Business cycles! I once took an economic class that said economys go through business cycles. Now we just have soft landings.

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Comment by GetStucco
2006-12-02 10:32:32

And lots of media propaganda to help keep the “soft landing” mantra in the publics’ mind.

 
 
 
Comment by arroyogrande
2006-12-02 10:50:19

“So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market”

Dear Larry,

If you are out there, us “bubbleheads” have said that the reduction in consumer spending will happen over *years*, not *minutes*.

Also, it’s really illuminating that you didn’t talk about AFFORDABILITY. But of course, affordability doesn’t enter into the picture, what with job growth and population increases, right? Just like it didn’t matter what price you paid for a stock during the internet boom. After all, it was “The New Economy”.

Take care!

Sincerly, A Housing Bear

 
 
Comment by fatsacca
2006-12-02 06:10:14

Thats all well and good, corporate profits are up. Problem is this; I’m not getting a big chunk of that jackpot. No bonus this year. How great is it Kudlow? Tell me again.

Comment by LipnAZ
2006-12-02 06:16:57

I didn’t say he was great, I basically asked for opinions on what he said.

Comment by Chip
2006-12-02 13:43:06

Lip — I don’t think that was aimed at you. You’ve been polite in presenting your arguments and I don’t think anyone here is trying to shred you, but rather state persuasively their counter-arguments.

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Comment by fatsacca
2006-12-02 15:39:43

Lip - my poorly stated cooment was aimed at that jabbering fool Kudlow and not you. Kudlow’s world is east of the Hudson and south of 110 St. Life might be great for him and the rest of his financial world buddies, but I don’t see it that way here in Hogtown, FL.

 
 
 
Comment by DAVID
2006-12-02 11:12:43

Yeah if corporate profits are up why then don’t they just increase dividends to the shareholders. Oh no better to back date options.

 
 
Comment by jag
2006-12-02 07:09:24

If profit growth is everything then why is there any concern about a “landing”…of any kind? With 30% profits increases, according to Kudlow (of whom I have some regard), it would seem impossible for growth NOT to continue (if not surge).

However, record profits always end, no? Why? Because they are not a perpetual motion machine. In fact, the elements that allow for very high profits (relatively low compensation) sow the seeds of their own destruction as the extraordinary profits encourage more risk, more hiring, at higher rates. Margins then begin to fall as the planned, continous, increases don’t appear with any great consistency.

Feel sorry for Kudlow. I think he’s caught in the same trap as your average real estate agent; he has too much invested in one market direction and has to manipulate data in ever more contorted ways to reach the conclusion he needs.

Silliness like this, from reasonably intelligent people, is a good contrary indicator to me.

 
Comment by Hoz
2006-12-02 08:03:22

The problem IMHO is that Kudlow is assuming that the corporate profits have been invested in continuing growth. The GDP numbers released this last week show that companies are not investing in growth and have been big buyers of their own stocks. In the past, this has been a negative growth indicator.

Comment by Captain Credit
2006-12-02 09:56:59

Kudlow’s outrage lies spewed from his fraudulent show on a DAILY basis does nothing more than perpetuate this hollowed out, empty economy. Time and time again, he floats phoney data and uses strawman arguments to foist the warped agenda on the unsuspecting viewer.

 
 
Comment by david cee
2006-12-02 09:56:54

Hey, Kudlow, weren’t you from the school that quote “As Goes General Motors, So Goes the Economy” Have you checked GM economic health recently? Or is it now “As Goes Toyota, So Goes the Economy”. Spin, Spin, Spin.

Comment by winjr
2006-12-02 10:54:28

Where did I see this? Here? B. Ritholt’z blog? The new equation is:

“As goes Merrill Lynch, so goes the economy”.

 
Comment by Chip
2006-12-02 13:50:47

Speaking of GM’s fortunes, a few weeks ago a neighbor showed up in a new Sequoia. In Florida is it pretty easy to tell if a car is leased and this is a lease. Then I started seeing new Sequoias all over the place. It reminded me of the blizzard of Lincoln Navigators that were leased in 1999. I went to Toyota’s website and, sure enough, found what looked to be a very good lease deal, particularly since it included 12K miles and 15 cents per mile for overage. And there were lots of them available. It looks to me that maybe Toyota read the tea leaves first and decided to flood the below-premium full-size SUV market before Ford or GM can get presumably similar programs rolled out.

 
 
 
Comment by bubbleglum
2006-12-02 05:44:07

M3 at 10+% now!

TinyURL.com/yned7e

Comment by bubbleglum
Comment by tg
2006-12-02 07:20:43

thanks

 
Comment by GetStucco
2006-12-02 10:12:06

This is a classic case of “ignore what they are saying, because what they are doing is speaking so loud:” While the Federal Reserve has been reporting rather flat money supply growth in M2 (blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.

Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives — even the eye popping Art auctions are part of the shift from cash to hard assets. It is just supply and demand — print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.

Its not just the increase in Money Supply that should be concerning to investors — its the misdirection about it. If Money Supply matters so little, as Fed Chair Bernanke has been out explaining to anyone who will listen, why pray tell has the Fed been working those printing presses overtime?

Given M3 increases, its no wonder the European Central Bankers laughed at the suggestion.

~~~

William McChesney Martin, Jr., Fed Chair from April 2, 1951 to January 31, 1970, famously described the role of Central Banks thusly: “The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting.”

It seems the present Fed is not only NOT taking the punch bowl away — they are spiking it with alcohol. I am not looking forward to the hangover that’s to follow . . .

Comment by GetStucco
2006-12-02 10:13:45

(The above is a quote from the bigpicture.typepad.com piece)

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Comment by GetStucco
2006-12-02 08:19:40

Could that be the reason the dollar is dropping like a rock? I guess our foreign creditors are not as foolish as team PPT thought they were…

 
 
Comment by Nikki
2006-12-02 05:45:12

Is this the beginning of the end for the cheap refi from ARM to ARM?
http://tinyurl.com/y6n8sm

” Dec. 1 (Bloomberg) — The mortgage bond market is beginning to buckle under the weight of the worst U.S. housing slump in six years.

Yields on so-called sub-prime mortgage securities rated BBB have risen to 6.52 percent on average from 6.28 percent on Sept. 5, data compiled by Bank of America Corp. show. The yield premium, or spread above the one-month London interbank offered rate, a lending benchmark, rose to a seven-month high of 1.2 percentage points.

About 3.3 percent of the $160 billion in sub-prime loans made this year through July have payments that are more than two months late, the highest ever for mortgages in their first year, according to New York-based Fitch Ratings. Housing starts tumbled in October to an annual rate of 1.486 million, the lowest in more than six years. The economy grew at the slowest pace since 2005 during the third quarter.”

and ” Late payments are accelerating after lenders began to require less documentation for loans and financed more homes without down payments, New York-based Bear Stearns & Co. analyst Gyan Sinha said in a Nov. 14 report.

About 38 percent of the most common sub-prime mortgages this year were for the full value of the home, up from 31 percent in 2005 and 21 percent in 2004, according to Bear Stearns. Sinha said 45.5 percent of the loans this year required ‘low documentation’ of borrower income and net worth, up from 44.5 percent in 2005 and 40.1 percent in 2004.

The data reflect ‘common methods of allowing first-time homebuyers to borrow more than they can afford,’ Sinha said. “

 
Comment by bubbleglum
2006-12-02 05:46:45

Oops, try this.

http://tinyurl.com/yned7e

 
Comment by arlingtonva
2006-12-02 05:57:02

Finance professionals are useful to society because they allocate resources effectively, but if they spend a lot of their time guessing what government will do with inflation aren’t they wasting a lot of time and resources that could better be spent researching companies, etc?
The Fed, by lowering the rates to 1%, has basically left everyone second guessing what they’re next move will be.
Our country and the world deserves a Fed that is more responsible and predictable. Unfortunately, this argument is rarely mentioned or debated in the mainstream press.

Comment by Hoz
2006-12-02 08:13:49

This is the number one topic in the mainstream financial press. But the idea that “Finance professionals are useful to society because they allocate resources effectively…” is moot. IMHO the finance professionals are just to make money for themselves and their owners. They have little if any interest in researching companies unless they can receive a profit. see Merrill Lynch’s recent settlement with regard to internal stock recommendations and what they advised their clients to do - a classic pump and dump.

Comment by GetStucco
2006-12-02 08:26:41

Look what became of the case against Frank Quattrone for another fine example of the limited downside risk taken by bullish analysts who get a bit overzealous…

http://en.wikipedia.org/wiki/Frank_Quattrone

 
 
Comment by Wheatie
2006-12-02 08:33:31

Our country deserves better - dismantle the Fed.

Comment by GetStucco
2006-12-02 08:55:41

They seem to be trying to dismantle themselves these days…

 
Comment by Chip
2006-12-02 14:08:38

“…dismantle the Fed.”

Amen.

 
 
 
Comment by LipnAZ
2006-12-02 06:14:36

http://www.reasonmag.com/news/show/116987.html

Beware the Devil You Don’t Know - Will the Democrats actually be worse?

10 things to expect from the Democratic Congress:

1) Democrats are talking about an increase to $7.25 an hour, and they’re promising to push it through in the first 100 hours.
2) Fully funding” No Child Left Behind
3) “Fixing” the prescription drug benefit.
4) Don’t expect any more progress on free trade.
5) Reinstituting the draft.
6) New chair for the subcommittee on Federal Financial Management, Government Information, and International Security.
7) The next chairman of the Judiciary Committee, Sen. Patrick Leahy (D-Vt.)
8) Democratic Congress will mandate that a quarter of new vehicles sold in the use flexible fuel technology by 2010.
9) Democrats won’t do much of anything in Iraq
10) Finally, hate Republicans if you want, but there’s no one worse for libertarians than Hillary Clinton.

Comment by knockwurst
2006-12-02 06:44:19

Reason Mag predicts the Democrats will institute a draft. If only these pundits were held accountable for all their predictions that don’t come true.

 
Comment by crispy&cole
2006-12-02 06:45:41

Gekko is that you?

Comment by winjr
2006-12-02 07:50:06

LOL!

 
Comment by Captain Credit
2006-12-02 10:00:18

I’m always amazed of the cowardice displayed by the vocal minority of loonies. They come back disguised after their silly theories get sliced and diced.

 
 
Comment by asuwest2
2006-12-02 08:45:47

Yeah, lipinaz– that 7.25 is gonna kill the us economy…just like every increase before did. Yup, of course those CEO bonuses that seem to get larger the more friggin incompetent or thieving the job have no effect. Lemme see…take KBH Ceo’s pkg….156 M /2.10 increase…
Yeah, one guy gets enough bonus to up the minimum for 35000 guys for a year.

Or put another way… averages about 3 1/2 % a year since the last increase. 2004 to 2005 the CEO avg increase was 16 %

NEXT

 
Comment by technovelist
2006-12-02 08:50:08

Finally, hate Republicans if you want, but there’s no one worse for libertarians than Hillary Clinton.

I yield to no one in my abhorrence of Hitlery. But I would take her in a minute over the current gang of criminal and/or idiot “leaders”.

Comment by GetStucco
2006-12-02 09:32:24

You misspelled Hitler. LOL!

Comment by technovelist
2006-12-02 18:46:16

If the Repugnicans put up someone like McCain and the Democraps put up the junior Senator from New York, I’m going to get a bumper sticker that says “Vote for Hitlery: It’s important”.

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Comment by Icouldbewrong40
2006-12-02 09:47:32

10) Finally, hate Republicans if you want, but there’s no one worse for libertarians than Hillary Clinton.

Do your research. George Bush is the worst leader for Libertarians.

Comment by auger-inn
2006-12-02 10:24:20

I’m neither a Hillary fan nor a democrat but holy sh*t, have you ever witnessed a more blatant power grab and consolidation of power than the Bush era? Liberty (as in libertarian)? Ever hear of Posse Comitatus (sp?) or Habeaus Corpus? The friggin retards that are in power now have all but destoyed the constitution and HAVE destroyed the underpinning of the Bill of Rights. Damn man, start reading more and chuck the party line nonsense. Both these groups will sell out their mothers for more power and money.

 
 
Comment by Hoz
2006-12-02 10:32:23

I am still not able to differentiate between Republicans and Democrats. They both agree on the same agenda, the only difference is “How much money to allocate to each item”. Any alternative to the 2 party system is squashed, so we are left with the same garbage from washington. If there is debate about the military, it is whether to fund with 100 billion or 140 billion; if there is debate about healthcare it is how much to fund, not whether it should be universal or not at all. Why are there 2 houses in congress today? We have the technology to have direct personal representation. My concern that the U.S. is moving to a fascist state is being heightened by 1) the American Taliban 2) The ungluing of the U.S. dollar 3) the exorbitant wealth consolidated in few hands 4) the loss of U.S. manufacturing 5) An energy policy based on unreal economics [it currently costs ~$5.00 to make a gallon of biofuel - all subsidized by the government (see ADM)] 6) The republican and democratic parties obfuscating the concerns of most Americans and creating bogus issues in national elections (2004 - abortion, 2006 - illegal immigration - I realize many consider abortion and illegal immigration to be major concerns, but now that elections are over not another word will be said about it) -
I apologize for my rant. As my grandkids say “my bad”

Comment by rms
2006-12-02 11:00:32

“I apologize for my rant.”

Read you loud and clear over here; please continue!

 
Comment by arroyogrande
2006-12-02 11:09:30

“but now that elections are over not another word will be said about it”

Yup, what Hoz said.

Comment by John Law
2006-12-02 12:33:30

“I am still not able to differentiate between Republicans and Democrats.”

when people say this, I immediately stop reading.

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Comment by Mary Lee
2006-12-02 13:13:24

Why? Both are owned by corporate interests, which have nothing in common with working people’s interests…or level playing fields. I expect no one, or no entity, to “give” me anything…. but I do expect that level playing field……whether in the form of tax preferences, or transparency in publicly held companies I’d like to invest in…. or the guvmint staying the hell out of my personal (read: do not effect other) choices… There are few real differences betwixt the two parties… other than my belief the current crop of Repugs appear to be neurotically tortured by sex.

 
Comment by anon in DC
2006-12-02 21:13:13

Mary Lee,

I’m a school teacher soon to retire. Most of my pension is in stocks and bonds. I want corporations to have great profits so I can retire in style. Where you think most people (working people included) invest any savings - retirement and otherwise? The equity and debt markets.

 
 
 
 
Comment by Chip
2006-12-02 14:17:25

The type immediately following #5 is, “…Obviously, this is not actually going to happen, …”

These are teasers — best to read the entire article. Libertarians don’t hate either party, but we despise big government; we constantly try to influence both major parties.

 
 
Comment by Bearmaster
2006-12-02 06:32:22

Hello housing bears! Any SoCal LAX area bears here? I have posted the real estate $$$ volume charts up for November. Absolutely incredible to think how much real estate activity has shriveled up in this area, and we have yet to see any real house price declines!

Comment by ockurt
2006-12-02 07:07:36

Hi Bearmaster, haven’t heard from you in awhile. Nice report.

I would lump the RPV zip 90275, PVE 90274, and South Torrance zips 90505 into one category. The location and the pricing of these zips tend to be similar (although 90274 is higher) as well as the buyer pool.

Doesn’t surprise me that the priciest communities are seeing the biggest $$$ transaction drops. Stuff has gotten real pricey there.

Comment by pv tom
2006-12-02 07:52:20

I live in the 90275 zip and have been watching the pucker factor increase on two properties close by… In our area you just never know who “really” has the big cheese. Some amazing houses at some amazing prices… Looking to see who blinks first…

 
 
Comment by sm_landlord
2006-12-02 08:48:10

Bearmaster,

Thanks for continuing to track Santa Monica. You numbers confirm what I have been seeing anecdotally, which is that the market is frozen up almost solid. (Sales down 55.2% YOY).

There is no sign of the other shoe dropping (falling prices). At this point, my guess is no action until spring at the earliest. I’m still looking for the trigger that will start this local market unwinding. Local employment seems to be growing, so it’s probably going to take an exogenous event to trigger a decline in housing prices - something will have to trigger some sales. Both the old and the new media companies seem to have done their layoffs for the year, with the last being Disney cutting 200 animators. ARM resets don’t show any impact here yet, since prices have not fallen, and cheap mortgage money is still available. I guess we’ll see what happens in January.

Any other locals have insights into the Beach cities markets, Santa Monica in particular?

 
 
Comment by arlingtonva
2006-12-02 06:39:36

They’re not building anymore land, but the future may look something like this:
http://features.cgsociety.org/gallerycrits/60256/60256_1152359707_large.jpg

Comment by sm_landlord
2006-12-02 09:07:38

They’re not building any more space habitats!

 
Comment by rms
2006-12-02 11:20:30

That’s a cool graphic (–>saved).

You know, if we actually lived like that, “they” really could cut off our air. Living in a technological society based on division of labor has terrible risks, i.e., the high degree of dependency.

 
 
Comment by winjr
2006-12-02 06:43:12

Doug Noland’s concluding remarks this week:

“Wall Street and the global leveraged speculating community have become incredibly powerful. I don’t expect they’ll be willing to let go of this pot of gold without a hell of a fight.”

It almost sounds as if he’s presenting the Speculative Community as a unified front, a perception that might not quite hold when there’s the slightest bit of unwinding (i.e. when push comes to shove) and the overriding theme becomes “I’ve got mine - you’re on your own”.

Comment by tg
2006-12-02 07:26:40

You have a valid point but who owns the US Treasury now GS?

Comment by auger-inn
2006-12-02 10:39:11

Speaking of Tin Foil hat issues. Has anyone read the nuances of the Coin Act of 2006 that is going to get passed? It calls for the FED to take over the duties of the Mint and Bureau of Ingraving.

The bill also calls for the replacement of $1 Federal Reserve Notes with $1 coins as well as a redesign of the commemorative $2 Federal Reserve Note. Still think the money changers are being tough on inflation? If so, why is this bill proposing the $1 Federal Reserve Note being phased out in favor of a $2 Federal Reserve Note and a $1 coin? If they were tough on inflation there’d be no need to phase out a smaller unit note for a larger unit note.

The bottom line is this, the U.S. Mint and the Bureau of Engraving and Printing perform Constitutional functions of the U.S. government. These powers should not be transferred to the Federal Reserve. It is bad enough that this institution has been given a private monopoly on printing our currency. If this bill passes and gets signed by the President, the Federal Reserve will also be given a private monopoly on making our coins and even printing our Treasury securities. This bill takes away power from the U.S. Treasury and gives it to a private banking cartel. They will probably say that this bill will eliminate bureaucracy and make government more efficient but I strongly disagree. Money creation is one of the few Constitutional functions of the U.S. government. Any deviation from our government having complete control over our monetary system makes government less efficient. The Federal Reserve has already turned the American people and our government into slaves of a never ending debt cycle because the power of currency issuance was given to them. They’ve bought off both the Republican and Democrat parties. I’m all for small government but let’s look at eliminating the government institutions that do not perform any Constitutional functions before doing something like this.
http://www.funnymoneyreport.com/article_view.php?id=16

Just when you thought you’d heard it all.

Comment by spike66
2006-12-02 15:35:29

I think I’m paying attention, augur-inn, but your posts always contain fresh and alarming info. Many thanks.

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Comment by GetStucco
2006-12-02 08:21:59

Cartel-like coalitions historically have self destructed when the temptation to take the money and run became overwhelming.

 
Comment by asuwest2
2006-12-02 08:48:38

Yup.. a more cutthroat lot you’re not likely to see… Name of the game will be STAB & GRAB.. I got mine, you’re on your own.

 
 
Comment by CarrieAnn
2006-12-02 06:48:05

http://tinyurl.com/y9ojfk

The Big Picture
Retailers’ Massive Discounting
in Consumer Spending
“One of the issues we have been discussing has been how widely and deeply Retailers will be discounting, and what it means to the overall economy.

The most recent review of price cutting is that they are both deep and broad. Our quick survey of both brick and mortar coupons and online savings codes shows that discounting is ramping up dramatically. This will likely pressure for Q4 profit margins.

Attached are 2 PDFs we scraped together (from various shopping fiends we know); These represent almost 40 major retailers discounting for the first post Black Friday weekend’s sales events.

Download Gap, Banana Republic, Old Navy.pdf

Download 6 Store, 30 online coupons.pdf

As you can see, the price cutting is quite dramatic”

More retail news in line with blog predictions 6-8 mos ago.

Comment by GetStucco
2006-12-02 08:40:41

‘The Big Picture
Retailers’ Massive Discounting in Consumer Spending

“One of the issues we have been discussing has been how widely and deeply Retailers will be discounting, and what it means to the overall economy.”‘

Another part of the big picture: Retail discounts resonate with homebuilder discounts.

Discounts are necessary to lure in buyers when aggregate demand is flagging thanks to the triple-whammy of a midwest manufacturing downturn, a home construction industry recession and the shutdown of the home-equity ATM machine. Too bad discounts have a tendency to eat away at corporate profits.

 
Comment by Chip
2006-12-02 14:40:35

Since we’re of the topic of retail buying, does anyone know the “catch” with Google Checkout? I assume it is a means by which they track you to a greater or lesser degree, after the purchase. I quit using Ebay because of their insistence on using PayPal. The promotion for Google Checkout is just too heavy — whazzup?

 
 
Comment by ockurt
2006-12-02 07:10:12

Jump-start that sale (LAT)

The first step on the fastest route to ’sold’ is pinpointing the right price.

http://tinyurl.com/y8559s

Comment by GetStucco
2006-12-02 07:37:33

The best way to pinpoint the price in a falling market is by Dutch auction — drop the price at regular time intervals until a buyer is found. It worked for tulips, and it will work for houses now that the bubble has burst.

 
 
Comment by winjr
2006-12-02 08:05:09

With all the talk of the strength of our global economy, how is it actually faring? JP Morgan reports that it’s slowing, at least in the manufacturing sector:

“Global Manufacturing PMI at Fifteen-Month Low of 53.3 In November, as Expansions of Production and New Orders Lost Traction.”

See the 12/1/06 headlines at
http://www.ism.ws/

Comment by Hoz
2006-12-02 08:23:44

See November 2006 (Dean Baker) Center for Economic and Policy Research
(caution 24 pg pdf)
http://tinyurl.com/y97y7v

“Recession looms for the U.S. Economy in 2007″

November 2007, Dean Baker

This paper forecasts that weakness in the housing market is likely to push the economy into a recession in 2007. Economist Dean Baker provides predictions for GDP, job and wage growth; inflation (CPI); investment; exports and imports; and more.

Comment by GetStucco
2006-12-02 08:29:37

For how many years running has Dean Baker been predicting the housing market would bring down the US economy?

Comment by Hoz
2006-12-02 10:03:08

I believe when he started slamming Greenspan in April, 2005, but CEPR has not (to the best of my knowledge, which can be painlessly etched in block letters on my thumbnail) given a recession scenario tied to the housing bust. Frankly this is all old news to any reader of this blog - it is all common sense - however his timetable of 3 years is a lot shorter than what I would figure. The magnitude of the drop is the same ~40% from peak 2005 prices.

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Comment by GetStucco
2006-12-02 08:32:46

Detroit to geriatric Wall Street raider: Good Riddance!

http://www.signonsandiego.com/uniontrib/20061202/news_1b2gm.html

 
Comment by GetStucco
2006-12-02 08:54:22

Here is a link to a slightly dated (7/31/06) Slate article on the near-term prospects for a recession.

http://www.slate.com/id/2146882

The part that grabbed me is this:

“Of course, we shouldn’t expect groups of economic forecasters to see a recession coming. Sometimes it seems like the people who crunch the data and construct models are the last to know. They tend to extrapolate based on existing trends, and as a result they’re not very good at calling the tops or bottoms of the economy. When two economists, James Stock of Harvard and Mark Watson of Princeton, looked at the Philadelphia Fed forecasts at the time of the last recession, they found that in late 2000, the group thought the economy would grow at a 3.3 percent rate in the first quarter of 2001. It wound up contracting at a 0.6 percent annual rate.”

So how much credence should we give to those who are saying a soft landing is on the way?

Comment by winjr
2006-12-02 09:16:25

“So how much credence should we give to those who are saying a soft landing is on the way?”

Zero. And how many of them have a vested interested in a soft landing? Almost all of them.

 
Comment by winjr
2006-12-02 09:19:46

“looked at the Philadelphia Fed forecasts at the time of the last recession, they found that in late 2000, the group thought the economy would grow at a 3.3 percent rate in the first quarter of 2001. It wound up contracting at a 0.6 percent annual rate.”

Talk about a colossal miss! And these guys are our brightest economic minds? Maybe Bill Gross should be Fed Chairman.

Comment by Hoz
2006-12-02 10:33:37

Why should he step down?

 
 
 
Comment by Mike
2006-12-02 09:00:37

Something I forgot about concerning the last housing recession. Back in the latter part of the 80’s when that housing recession (which was nothing compared to this one in the making) was at it’s peak, a close friend who was pretty well heeled and considered to be “smart” where investments were concerned, started to invest in a financial instrument which appeared to be, from what I can remember, a kind of 3rd mortgage. I do remember the name of the company which sold these instruments. It was called Acme Finance or Acme Investments, based on Los Angeles. Basically, they dealt with property owners who’s options for borrowing to stay afloat in the downturn, had run out. Banks were not interested in extending any more credit. Obviously, the private lender received a pretty hefty % rate interest wise.

Anyway, to cut a long story short, my friend had about 6 of these instruments which ranged from from private property to commercial buildings. Eventually, over a period of 2 years, ALL defaulted and because he was way down the line, when the buildings were sold off for the benefit of creditors, he ended up getting zip. However, for 2 years prior to default, he did get something back. I also remember that the loans were packaged so that a group of investors would invest in a package, thus spreading the risk.

Not sure how this effects the current situation because Greenspan’s financial theories were not in play at the time and bank money was was in short supply because they were not interested in lending money as they were dealing with a flood of reo’s. Also, Ben Bernake’s “threat” (and that’s exactly what it is - a THREAT) to throw money out of helicopters would have appeared way too risky….but times have changed.

I’m not sure how this compares to today’s scenario considering Bernake’s helicopter “threat”. So many new elements have been added. Once it was simple. Too much credit - withdraw the punch bowl. Too little credit - bring on the punch bowl. Only those (or at least the majority of borrowers) who’s credit record showed they were capable of dealing with payments, got the green light. Now, with the advent of the exotic loan fad, anyone with a pulse simply asks and receives.

The problem with Bernake’s “threat” is that much of the world has lost faith in the US dollar AND the also the will or capability of the US to dig itself out of it’s financial hole. Thus, if Bernake carries out his “threat”, the dollar will nose dive even further. Maybe that’s the plan? That the US dollar nose dives so much over the next 30 years, as US incomes fall and India and China’s incomes rise, the currencies become almost equal and we can compete with them and sell goods for the reserve currency which takes over from the US dollar. Namely, the Euro.

Comment by tg
2006-12-02 09:14:05

Big Ben Bernanke speaks his mind.http://globaleconomicanalysis.blogspot.com/

Comment by GetStucco
2006-12-02 09:44:21

That you, Tim?

 
Comment by GetStucco
2006-12-02 09:51:46

Mish — that piece is destined to become a classic. I love this line:

“We are hoping but do not know that the ultimate guarantor of these derivatives is not Madame Merriweather’s Mud Hut in Malaysia.”

And I am glad to hear that Bernanke has decided on glasnost — it worked wonders for Gorbachev’s career!

Comment by NYCityBoy
2006-12-02 11:33:14

Stucco,

Openness is good but it sounds like we need more “Perestroika”. A restructuring after this mess blows up will be essential to avoid this disaster in the future. Somehow I doubt the boys benefiting from this corrupt system will want to restructure it to their disadvantage.

(Comments wont nest below this level)
Comment by GetStucco
2006-12-02 16:01:24

Eto pravda.

 
 
 
 
Comment by GetStucco
2006-12-02 09:21:06

“Once it was simple. Too much credit - withdraw the punch bowl. Too little credit - bring on the punch bowl.”

The rules of the game and the consequences of ignoring them have not changed, but the ability to manipulate perceptions has greatly increased. Hence the rules may be ignored for a much longer period of time before the ugly consequences of doing so are realized.

 
Comment by GetStucco
2006-12-02 09:25:48

‘Thus, if Bernake carries out his “threat”, the dollar will nose dive even further. Maybe that’s the plan?’

That would at least put a quick end to the political yammering for a stronger renminbi yuan…

P.S. BernaNke…

 
 
Comment by GetStucco
2006-12-02 09:02:26

12/2/06 WSJ p. A1:

You Can Buy a House for $1,000 Today, But You’ll Pay a Price
***
Foreclosure-Auction Bargains Often Need Costly Work; Obscenities on the Wall

Comment by GetStucco
2006-12-02 09:14:56

This article is rich!

“Pittsburgh — In an era when million-dollar houses are no longer exceptional, some homes sell for less than the price of a Brooks Brothers suit.

At an auction of foreclosed real estate here in April, Monte Lowderman struggled to entice someone to bid for a two-bedroom house in one of the city’s roughest neighborhoods.

“Now, folks, I’m not telling you it’s ready to move in to,” said the auctioneer. He paused, then added: “You know, the way to make money is recognizing potential.”

Chales Lantzman, a real-estate investor here, didn’t find the house particularly appealing but put up a hand and offered $500. That turned out to be the high bid.

Nationwide, about 3,800 foreclosed homes sold for $1,000 or less in the first 10 months of this year, according to First American Real Estate Solutions, a data provider in Santa Ana, Calif.”

Comment by winjr
2006-12-02 09:31:59

“Chales Lantzman, a real-estate investor here, didn’t find the house particularly appealing but put up a hand and offered $500. That turned out to be the high bid.”

That’s PGH for you. I’ve had an estate property for sale for over a year now, $29K asking price. The only offer we’ve received to date was $20K, which the executor of the estate declined, against my advice.

There are quite a few homes here where the tax liens exceed the FMV. Those are the crack refuges you may have read about in Bloomberg’s piece last week regarding MBIA. And it’s not just in the Hill district, but can be found in Wilkinsburg, Homewood, Duquesne, Rankin … ugh. The list goes on. Really, REALLY nasty and blighted areas. Many of these areas were formerly home to the steel industry.

 
 
 
Comment by DAVID
2006-12-02 09:22:45

I listed this fine home located in one of Sacramento’s finest hoods last month when they had it listed at $279,000. Now they do not even show price.

http://sacramento.craigslist.org/rfs/242464993.html

Comment by Paladin
2006-12-02 19:18:16

Price is now $260,000. MLS # 60125336. You can go to the Sacramento Bee and get the MLS access. 940 SF, no garage. http://www.sacbee.com/content/homes
Navigate thru the various details and you can get there.

 
 
Comment by tcm_guy
2006-12-02 09:25:28

May have been posted already:

http://tinyurl.com/yyynd

Ex-KB Home CEO Could Get $175 Million Despite Leaving - Report

LOS ANGELES (AP)–Bruce Karatz, who stepped down last week as chief executive of KB Home (KBH), could receive as much as $175 million in severance pay, pension benefits and stock options despite leaving the home builder amid a stock-option controversy, according to a report in Monday’s editions of the Los Angeles Times.

 
Comment by easthawaii
2006-12-02 12:59:03

Link to charts for commercial real estate Houston with comparisons for other cities.

http://www.houapts.com/links/2006houstontrends.pdf

 
Comment by GetStucco
2006-12-02 16:17:23

Has the Fed thrown in the towel on the $US?

Check out this graph — shows GDP only cost $US1.40 as recently as 2001; price of a GDP is currently nearing $US2.00 — that would be 43% inflation.

Comment by GetStucco
2006-12-02 16:18:53

Fears for US industry edge dollar closer to 50p mark

· American currency sinks ever closer to 1992 low
· City analysts warn about effects on UK exporters

Larry Elliott, economics editor
Saturday December 2, 2006
The Guardian

Sterling moved to within two cents of the $2 level last night after a recession-warning signal from America’s manufacturing base led to a fresh wave of frantic selling of the dollar on jittery foreign exchanges.

Speculation that the Federal Reserve, the US central bank, might be forced into an early cut in interest rates to revive the flagging economy pushed the pound to almost $1.9850 at one stage yesterday.

With the dollar having already suffered a week of falls, the trigger for the latest bout of selling was the release of the Institute for Supply Management’s monthly snapshot of American industry. This showed the overall index dipping below 50 - the cut-off point between an expanding and contracting manufacturing sector - for the first time in three and a half years.

http://business.guardian.co.uk/story/0,,1962178,00.html

 
Comment by GetStucco
 
 
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