1) Let’s start on a positive note: Doug Kass says it is time to buy the financials. I may never be as successful or as clever as Mr. Kass, but I think he is early by one year or so. And this is from someone who is technically overweight financials — I own six insurers, two high-quality mortgage REITs, and two European banks. When it comes time to own financials, I may have a portfolio with 50% financial stocks, and I will pare back the insurers.
2) What of the Financial Guarantors? Forget that I said I would flip the 14% MBIA (MBI) surplus note, I did not expect that it would do so badly so quickly. The rating agencies are all concerned to potentially downgrade MBIA, Ambac (ABK), and others. Downgrades are death, and rating agencies would only consider such measures if they knew that other companies would step in to continue their AAA franchise if they kick the losers over the edge. Berky (BRK.A), by entering the financial guarantee space, has signed a death warrant for at least one of MBIA and Ambac. And who knows, Berky might buy the loser.
3) Away from that, PartnerRe (PRE), one of my favorite companies, has written off its entire stake in Channel Re, which provided reinsurance to MBIA. Leave it to that classy company to write off the whole thing, which implies bad things for MBIA, as it relies on reinsurance from Channel Re, which it also partially owns.
4) Though this is a test of the financial guarantors, it is also a test of the rating agencies, which are in damage control mode now. My view is the Moody’s (MCO) and S&P will survive the ordeal, and come back fighting.
5) For a lot of nifty graphs on the subprime lending crisis, look at this article from the BBC.
6) Now, a lot of the subprime crisis is really a stated income crisis. Think about it: income is such a standard metric for loan repayment. If one lets borrowers or agents fuddle with income, should we be surprised that loan quality declines?
7) Even the black humor of the credit crunch in residential real estate points out how much more residential real estate might fall in price, and with it the values of companies that rely on residential real estate.
8) The boom/bust nature of Capitalism can not be repealed. As an example, at the very time that you want banks to want to lend more to support the real estate market, they insist on larger down payments.
9) At my last employer, and at RealMoney, I would often say that the biggest crater to come in residential housing was in home equity loans. JP Morgan (JPM) is a good example of this. Should this be surprising? I noted from 2004-2007 how much of the ABS market had gone to home equity loans, and felt it was unsustainable. Now we are facing the music.
10) Now consider credit cards. Even cards on the high end are reporting deteriorating loan statistics. Unlike past history, many people are paying on their cards to maintain access to credit, and letting their home loans slide. Worrisome to me, and to the real estate markets as well.
11) Even auto loans are getting dodgy in this environment. No surprise, given that lending quality and consumer credit behavior have both declined.
12) Commercial rents may seem to rise in some areas, but there are tricks that owners use to occlude the economics in play.
13) Now for long term worries, consider what will happen to the real estate market as the baby boomers age. Houses in colder areas will get sold, and houses in warmer areas will be bought. This article does not take into account reverse mortgages, which will also be prominent. Aside from that, the idea that baby boomers will be able to cash out of their homes to fund retirement will be hooey, unless we let wealthy foreigners buy into the U.S. There will not be enough buyers for all of the houses to be sold without immigrants buying them.