Monday, August 25, 2008

Paper Tiger Vs The Sinking Equity Tornado...

It must be August... that is what everyone watching the markets can plan on saying for the rest of the week. Data starts to be skewed each and every way, markets climb and fall in massive shifts daily, and the dog of yesterday becomes the rising star of tomorrow. No Matter which way you look at it, the markets are a half-full glass with a half-empty glass sitting right next to each other... which one do you drink from?

But one thing remains consistent-- housing stinks. That's right-- no matter how much make-up you put on the housing pig, you can't dress this one up. Data comes in today, stating that sales are up 3.1%-- the biggest single month increase in 5 months! But wait... while this seems to be good news, we are forgetting a key ingredient in this housing crunch soup-- INVENTORY.

Inventory ROSE to an 11.2 month supply (from 11.1 month in June), which is roughly twice the number of homes as a 'stable' housing market. So, regardless of the homes being sold, there are still more houses entering this tired market than leaving the market... and the prices keep falling too. We are now just over 18% off the peak prices we saw in 2006... still falling, this equity torpedo continues to sink that ever-so-amazing housing wealth that Americans depend on for retirement. And with the market shifting to a distressed sale market, with REO's and short sale's becoming more and more the norm on a daily basis, the question has to be, how do we stop the madness???

ENTER THE PAPER TIGER... The Fed's. As we all now know, the Fed is in bed with the banks. Nothing seems to matter more than saving the banks-- which makes sense right. God forbid a few of these behemoth banks crack, forcing the FDIC to print money faster Michael Phelps swims the 200 meter freestyle. That would be bad. But still, the paper tiger will have to do something to help this housing market. But what can they do?

Watch your children!

Fannie and Freddie are bad kids. These two have been hard to discipline this year, and it's starting to look like they may need money for private school soon, as the public school system they are currently going to is not making the grade. So, how do you 'privatize' Fannie and Freddie without completely scalping the people that hold billions in investments??? Answer: You can't. Someone is going to get screwed here-- the Feds or the investors, and Paper Tiger will most likely watch his own back. 'Thank You for Screwing Me' letters can be sent to Alan Greenspan.

Paper Tiger is also going to need an answer for inflation. Keeping short term rates is great for the banks-- it mitigates the loss they hold for borrowing capital (that is if anyone will lend to them), but it doesn't help inflation. And last time I checked oil is still almost 70% over the cost from last year, and seems to be leveling out. This increase in energy could cripple the US economy, as nasty 70's like funky stagflation creeps in for a few years... They say you can't have inflation with recession-- Just like Bear Stearns was adequately capitalized and just like Indymac wasn't in trouble-- it can and will happen. If they raise rates they will further crush the housing market and credit markets, but if they leave them steady or try and go lower we will be goggled up by inflation. Paper Tiger needs to be replaced.

And what does all this mean? It means the equity torpedo will continue to sink the housing wealth in America... and for what reason? We still have a weak dollar. We are experiencing the largest transfer of wealth EVER from the USA to oil producing countries. The constriction of credit and the collapse of interest for bank profits WILL create more banks to go under... and good old fashioned supply and demand. There are tons of houses (some nice, some crappy) on the market, but just not enough (qualified) buyers. The top of the market (July 06) had an estimated 24 Trillion dollars in US housing wealth. We are down over 18%, meaning that the torpedo has already blown over 4 Trillion dollars of wealth out the door... and while estimates are putting the 'bottom' of the housing market another 10% lower, plan on another 2 Trillion dollars of losses to be taken out by the tornado. But what is 6 trillion dollars between friends...

...6 Trillion Dollars has 12 zeros in it...

$6,000,000,000,000.00

Compare to your last bank statement to realize the true impact of the torpedo. Now gulp. That's right. Maybe it's time to have a drink.

Rick

Thursday, August 21, 2008

Do they make enough Drugs????

... To make you buy financials right now? I don't think so. I don't think that even if I was Jimi Hendrix high, or Sgt Pepper and the Lonely Hearts Club Band high I would buy financials. There are not enough pink and purple mind altering drugs in Juarez Mexico to make me buy financials... period.

Let's look at the hurricane that is tearing through the world that is financial right now. An estimation on the Fannie/ Freddie bail-out is at $30 billion-- which I think is a low ball shot at best. I say double that and add 10% if you want the wheels to actually turn without any issues. And that is just the tip of the iceberg. The Feds are also trying to do massive scale loan modifications on their newly acquired toxic-waste-dump Indymac portfolio of option-arms and no doc garbage loans. They will be 'fixing' the glitch by lopping off huge amounts of principle for underwater equity loans and giving fixed rate loans to late paying borrowers that have seen skyrocketing adjustments, negative amortization or job losses. And the estimation is that the rates given will be much lower than the going rate for you and I bill-payer. If this catches on, WHY would you pay your bills???? Why not just stop paying the mortgage, binge on Red Lobster and boxed wine and wait for the feds to give you 3.65% fixed with a $10,000 principle reduction. These people are being REWARDED for not paying their bills or taking out a risky loan. How will this help the current problems?

And then there is the looming bust of the commercial real estate market... uh oh-- this one could be bad. As the banks try to pick themselves up from residential mortgage losses that are thrown at them like Mike Tyson jabs, the commercial real estate upper-cut has yet to even enter the ring. Imagine a peace full neighborhood in 2005 in the middle of any state-- a happy place that is a 50 minute commute to anything, and is surrounded by McMansions that were all financed on no doc loans to 100% LTV. Bob and Mary homeowner mowed the lawn and cut the weeds back in a scary 1950's like perfection. Down the street the developer opened up a $14.8 million, 40 store strip mall/ office center that was heavily financed, and leased the space to burrito shops and flower stores, small businesses, novelty stores and mini-marts at exorbitant rent prices to cover the financing-- but that was OK! This is a good neighborhood! People will spend their money here!... Now look at the same place in 2008. Gas prices drove the commuter back to the city, and Bob and Mary couldn't make their ridiculous house payments when the loan adjusted, so they were forced to sell... but no one was going to pay the price that Bob and Mary wanted because values are down 30%. So they packed their stuff in the 2008 Tahoe they bought instead of paying the mortgage and sent the bank the keys. But Bob and Mary aren't alone... their whole neighborhood is following their lead-- and no one is cutting the grass. No one is buying $8 burritos or dining at the restaurants in the strip mall. The businesses are all leaving too. Down the Street the developer can't keep the rents in his strip mall/ office park and he is ready to foreclose... on the whole $14.8 million he borrowed for the project. Now multiply that scenario by 500 similar neighborhoods and times 50 states and you see the bitch slap wave that is about to crush the banks.

Lastly, you have the blood of the whole financial system, the consumer. And the consumer is staring into the first consumer recession since the early 90's. This time the consumer is really screwed too-- with way to much home and auto debt, a mountain of credit cards and no savings. This consumer is one missed paycheck from bankruptcy... When will the house of cards collapse? Tomorrow, 2 weeks, a year? Regardless, it's coming. And when America stops spending then we really have a problem.

So, call your drug dealer (they are listed in the yellow pages under 'doctors') and see if they have anything you can take that would have you invest in financials right now. I'm guessing they have pills to increase the strength of your trouser trout and help you with that life threatening restless leg syndrome, but unless that dealer has something you've never heard of, there shouldn't be any amount or mixture of drugs that would make you remotely interested in financials right now...