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  • Liar Loans Not the Problem [View article]
    Interesting article. You are probably right in saying that the housing market should stabilize at about 10% below its current level. But life probably won't just "go on" as usual, IMHO, until more of the excess has been wrung out of the economy, much of which is resident on bank balance sheets. As a nation I am terribly concerned that we are in denial about those excesses.

    Let me consider an example: The bank initiates a 95% loan-to-value mortgage on a home in 2001 at $400,000 somewhere in California. The original loan was $380,000. The buyers refinanced in 2004 and took out an additional $200,000 in cash. Then, in 2006 the buyers took out an additional $200,000 in equity by refinancing again. The principal is being paid down very slowly in the early years, as we all know, so the balance in 2006 is up to somewhere around $750,000. Then the housing bubble bursts and by mid-2009 the home is worth about 40% less than at the peak in 2006. Assuming that the home was worth about $800,000 at the peak, the current value would approximate $480,000. This would put the buyer underwater by $270,000. If they walk away, the bank is now underwater by $270,000 plus the closing costs (about $35,000). Until this loss is realized by the bank and hits earnings we haven't wrung out the excesses.

    A fairly recent report estimated that, based upon the current number of mortgage delinquencies and the continuing rise in unemployment and underemployment, we could see as many as 13 million more foreclosures over the next five years. This compares with less than 2 million thus far since the recession started. Even if the average house is only valued as a quarter of the one in the example, the losses on that many foreclosures will be staggering. In round numbers we are looking at another $1Trillion just in residential real estate losses to come for the banks. That, of course doesn't include any repairs or delinquent property taxes that are due.

    Then there is the commercial real estate situation. Retailers closing stores, businesses closing branch offices or going out of business. The stock market rally is projecting 4% growth, but we are still facing contraction in a very large, and important portion of the economy.

    Then there is the consumer. Well, most people have seen their home equity decline or disappear and have watched as a significant chunk of the 401k evaporated. Credit card delinquencies are still rising. I don't think the average consumer has the where-with-all to come back strong enough to support 4% growth in GDP next year. Where is it coming from? I just can't see anything materializing outside of "HOPE."

    I don't see life just going on as usual, unless the author means "usual" in the sense of how things were back in 1990 (but without the Internet bubble on the immediate horizon). I think we are going through a reset of the entire economy and will need to face a new reality.
    Aug 23 05:03 PM | 3 Likes Like |Link to Comment
  • Questionable Stories of Life After Foreclosure [View article]
    I don't think that the majority of Americans will adjust their spending habits by choice. I believe it will be forced upon them. The equity ATM is closed and with a foreclosure or bankruptcy on their credit they will be hard pressed to live at their former levels of indiscretion. Banks, out of necessity will also have to retrench in order to survive. They haven't bit the bullet yet, but I think the time is coming when they will no longer be able to continue the charade.
    Aug 23 03:42 PM | 5 Likes Like |Link to Comment
  • All Bubbles Must Break [View article]
    Prudent - Very sober and realistic views in your comment. I agree that we are likely to pull back to "normal" levels and build off of a new baseline being created by a reformation in consumption.

    Also, many seem to continue thinking that ll the baby boomers will just retire very soon as previously planned. But when we look at the decimation that has occurred to their nest eggs, many will decide to continue working a few years longer to rebuild savings in order to enjoy the comfortable retirement for which they had planned. I am near the front end of the boomer generation and intend to continue "working" for as long as I continue to enjoy doing so. This change means that the workforce is not likely to shrink excessively in the next few years as previously predicted. This could leave us in a higher-than-expected unemployment environment for much longer than what is currently baked into the economic models.

    I recall when growing up that my parents didn't buy a new car until they could pay cash. So that's what I did for quite a large part of my life. As a matter of fact, I paid for both of our last two new cars either with cash or within a few months after the purchase. A lot of people still do it that way from my generation. While I don't think we'll be going that far back for younger generations, I do believe that more people will put off major purchases longer based more on need rather than purely desire.
    Aug 23 03:22 PM | 1 Like Like |Link to Comment
  • What Housing Recovery? [View article]
    There is also the issue of the shadow inventory of foreclosed homes being held off the market by banks in an attempt to allow listed inventory drop. This number of months of inventory is a very closely watched metric and the banks are trying to manage this number down to a more favorable level to create market confidence.

    In theory, if market confidence returns, housing prices will stabilize and more people will start buying houses again. With the increased demand, the hope is that prices will again start climbing so that banks can get better prices for their homes.

    Add to this, a report by (I forgot the organization name) an organization that tracks mortgages, delinquencies and foreclosure. The report predicted that, based upon the trends in delinquencies, we will have another 13 million foreclosure over the next five years. At the time of the report, we had experienced only 1.5 million foreclosures since the beginning of the recession. This would indicate, once again, that we can expect increased numbers of foreclosures coming to the market going forward and inventory (unless it is managed by the banks) will begin to increase again and stay high for years.

    I don't think that the banks can afford to keep putting off foreclosures or hold foreclosed inventory off the market in numbers great enough to stabilize prices. I am not a perennial pessimist trying to talk down prices. I currently hold over 100 investment properties, so I would like to see prices rise. I just don't see it happening any time soon.
    Aug 23 02:59 PM | 4 Likes Like |Link to Comment
  • Steer Clear of Sears - Barron's [View article]
    I'm glad that someone has finally published something close to the truth about this company. I say this coming and did well will SHLD puts last year. But then, unfortunately, I got back in too early as it ran up and am a little under water on my newer positions. However the timing of this earnings report and news story are doing me a lot of good. I'm considering adding to my position now with puts that expire around March or April 2010. Without the advertising and the credit line to fund inventory builds I expect this holiday season to be a big disappointment for Sears & K-Mart.

    And right now I don't put a lot of weight on their real estate holdings since CRE values are beginning to crumble as well. I just don't see any positives in this stock for a while.
    Aug 23 02:05 PM | 4 Likes Like |Link to Comment
  • The Fed and the 'Clean Up After Bubbles' Approach [View article]
    An attempt to answer your question: I suspect that when speculators are making money hand over fist, they will continue the activity until the bubble pops. That would suggest that the bubble would have gotten much bigger before it popped and the economic price we would be paying could have been much worse.

    Greed begets greed in such situations, IMHO.
    Aug 22 08:22 PM | 1 Like Like |Link to Comment
  • The Great Deleveraging, Part II [View article]
    User353732 - You've made some excellent points in your comment. America is much different now and, without doubt (IMHO), on the downward side of the arc. However, prior to the 1930s we had the 1920s, called "The Roaring Twenties," when consumption and investment euphoria had gone wild. I suspect that many of the values that you have spoken so eloquently about came into being more as a result of the 1930s instead of having been so widespread previously.

    I suspect that our society is doomed to go through cycles such as these, repeating history, whenever those who remember the lessons of a depression economy have passed away from influence in society. Today, IMHO, we are on the verge of being provided another period of lessons to be learned. The Administration is repeating many of the same mistakes that didn't resolve the problems in the 1930s through stimulus. It is also added a few extra anchors overboard to continue creating a drag on the economy in its reform efforts.

    The burgeoning debt being added at an alarming rate will eventually result in a devalued dollar, rising inflation, rising interest rates; all of which could have a destructive effect on the economy.

    I realize that if the major political parties bungle things badly enough in the next few year (which it appears will happen) an opportunity may arise for a third party to emerge. Without wringing much of the corruption out of government I believe the outcome is inevitable and I don't like what I expect to see.

    In the end, I suspect we agree on where the country is heading. So, once again, I appreciate the privilege of reading your views.
    Aug 22 06:18 PM | Likes Like |Link to Comment
  • Friday Roundup: Commodities, Emerging Markets [View article]
    I agree with your assessment. The Fed and Administration is trying its best to raise inflation a bit in order to devalue the US$ with the ensuing results that we will see higher prices for commodities that generally trade in US$ denominations. They hope to pay down the debt they are piling up with cheaper dollars. However, they do not seem concerned that the trade deficit could increase in the future as demand rises.

    Perhaps they also believe that if gas prices go back up we will import less foreign oil. It doesn't seem to matter if the average American would like to not have to change their driving habits. Also, foreign made goods will become more costly and American goods will be cheaper when purchased in foreign currencies. Is that their plan? It could all backfire, IMHO, if the US$ looses too much value and an alternative currency, such as the Euro, is adopted as the new global reserve currency. Then the US$ will go into free fall and we could see hyperinflation because we don't manufacture anything anymore and our entire economic structure would necessarily have to go through a very difficult and painful transition that could last several decades.

    How far will commodities go? It depends upon two things: world demand/supply relationships and how long the Administration continues its weak US$ policies.

    On Aug 22 11:01 AM BullnBear wrote:

    > Dave,
    > Just curious about what you think the outcome of all the intervention
    > and political posturing will be with UNG, USO, etc.? How far do you
    > think this will all go?
    > I think we are seeing an example of politics actually inciting a
    > “speculation” of some sort as opposed to anything nefarious being
    > found out.
    Aug 22 11:50 AM | 5 Likes Like |Link to Comment
  • 30-Year Fixed Mortgage Rates Remain Steady While Spreads Tighten [View article]
    Many banks are holding foreclosed properties off the market trying to let inventories decrease and hoping that this will help stabilize prices. It's actually not a bad strategy, but could fail in the end. They really need mortgage rates to remain low to help develop more demand, but as the author points out, they also would like mortgage rates to creep up to increase the spread and their profits. It is a dangerous game they are playing.

    At some point, the banks will need to sell more of their shadow inventory, but they need to wait for demand to increase enough that it won't raise the inventory of homes for sale and, in turn, dampen the demand again. It's a precarious balancing act and all could blow up in their faces if inflation begins to creep higher requiring action by the Fed in the form or raising interest rates.

    Of course all parties are aware of the role each other must play in order for the banks to be successful. The Fed, IMHO, will keep rates low even in the face of inflation and a sinking dollar in order to facilitate plans by Bernanke's Buddies at the banks.

    The other danger, to which neither the banks nor the Fed seem to assign any importance, is that with inflation of commodities, such as oil, the average American will be hit with higher costs which usually results in reduced consumer demand.

    All in all, the situation is much more precarious than the Fed, the banks, the Administration or Tout TV hosts are willing to admit. The curious thing is that so many supposedly intelligent people such as economists have bought into the rosiness of our situation. I suppose if one does nothing but look at numbers and charts and plots things against history all day one does not develop much common sense or true analytical abilities.
    Aug 22 11:36 AM | 4 Likes Like |Link to Comment
  • Friday Roundup: Commodities, Emerging Markets [View article]
    I also have had several attacks, but use the same preventative techniques as basehitz and others. I have noticed from other posts that the same virus has recently been hitting social networking sites, as well, not just SA (even Twitter). It appears to be coming from Ads, so this is probably a Google problem when it comes right down to it. I would think that they should have the resources to descover and fix the problem soon enough.

    At any rate, most occurances tend to happen at either 10:30 - 10:40 a.m. or 2:00 - 2:10 p.m. on the SA site. Since I started closing my SA window during those time frames, I have no longer had a problem.

    I hope this last bit will help. I'd be interested to know if anyone has been hit outside of those windows.
    Aug 22 10:32 AM | 5 Likes Like |Link to Comment
  • 51.68% in 165 Days [View article]
    Interesting article and I really loved the chart! If I read it correctly, then as commenter cocomurph points out, the similarity of our current situation could just as easily put us at the nearly the same point as the market was in at the end of the 11/13/1929 to 4/10/1930 rally. I don't think I would have liked being talked back into the market at that point.

    Just because this rally has outdone that one by nearly 5%, doesn't mean, with any certainty, that the bull is dead. It's just a talking point made out of an assumption. And if the assumption turns out to be wrong, the author will be ever so embarrassed. If, on the other hand, the author turns out to be right, they will be heralded as a hero for having "guessed" correctly.

    Personally, I don't like to reward guesses, even when they turn out to be lucky ones.
    Aug 22 10:06 AM | 6 Likes Like |Link to Comment
  • The Great Deleveraging, Part II [View article]
    Every equity investor needs a strategy to capitalize on the current market trend, whatever it is at the time. Those who believe that this market is heading straight up from here are not likely to sustain profitability in this environment.

    A strategy that I used during the meltdown in 2000 through 2002 worked quite well. It seems to have promise for a flat or sideways, range-bound market.

    Step 1. Pick out 10 to 20 companies that are well managed, have strong balance sheets, and superior growth prospects for the long-term.

    Step 2. Build positions on pull-backs or market corrections or dollar cost average into each stock until you have attained the diversification you intend. You should try to find entry points that give you a weighted average forward P/E below the long-term average for the company.

    Step 3. As the price of each companies stock rises above the long-term average forward P/E, sell covered calls with a strike price at which you would consider taking a short-term profit. Let's use 20% as an example. The premium paid to your account for the options is not income; it merely lowers your basis and adds to current income that can be reinvested.

    Step 4. If the stock prices of the companies in which you own equity reach the strike price, you may have to deliver your stock if the options holder exercises their right to purchase the stock. You would then pocket the 20% gain along with the premium from selling the covered call option.

    Step 5. If the stock price does not hit or exceed the strike price, the option expires worthless and you keep the premium. In this case you can sell another covered call, again at about 20% above the current price and then reinvest the premium received. If, on the other hand, the option was exercised and you end up with cash, return to Step 1 and repeat.

    Granted, you can get a little more complex by using the premium from the calls to buy out-of-the-money puts as insurance against another crash. But in a sideway or range-bound market this tends to eat away at your profit potential. If I feel relatively certain (or as certain as I can make myself feel in any market) that the market is going to stay within a range for some time, I'd rather add to my profits (as in the example given) than just play safe.
    Aug 21 08:39 PM | 5 Likes Like |Link to Comment
  • Friday FX View: From Shanghai to Jackson Hole, Recovery Is Underway [View article]
    If China is tightening the credit market there, doesn't this then mean that the splurge in commodity buying should slow dramatically? And if that happens, then what of the China miracle that was supposed to pull the rest of the world out of recession?

    Europe's two main economies may see the beginnings of growth, but what of the remainder? How is the CRE holding up in Europe? I suppose that the banks are doing just as terrific there as they are here?

    When all that is reported is the positive aspects of the economy, I sense that there is much to hide. U.S. jobless claims rose when they were supposed to drop. Housing is still weak.

    China has been blowing up a bubble and it remains to be seen whether they can deflate it in an organized fashion.
    Aug 21 11:31 AM | 2 Likes Like |Link to Comment
  • Global Economy: This Ain't No Crisis [View article]
    But this time it's different! During the Depression we had a tremendous drought that drove farmers in the lower Great Plains into the cities to seek employment where there was none. Oh, wait!

    I just spoke to my nephew in Texas. They are at least 20 inches below normal rainfall levels so far this year. And I hear there are other areas wanting for rainfall, as well.

    So, as I keep looking for all the things that are different this time, I keep finding that most things are more similar than the pundits care to admit. In the end, I can't help but expect to see much higher inflation accompanied by rising interest rates that will throttle what is left of the already tattered economy.

    When interest rates top out, I hope to be a buyer of long-term bonds. Back in the early 1980s, when rates soared I bought a small amount of zero coupon bonds. If held to maturity (which I'm sad to say I did not) the total return would have been 8,000%. Roughly translated, that was $25,000 which would have matured into $2,000,000.

    Just thought ya'll might want to consider this strategy for your "To Do Lists". Enjoy
    Aug 21 10:07 AM | 7 Likes Like |Link to Comment
  • New Jobless Claims Remain Stubbornly High [View article]
    We own about 100 investment properties in Indiana (I'm not asking for pity; I've made my bed) and have found that nearly half of those that were vacant when we took possession had squatters in them. Usually, when we re-secure the houses, they just move on, but not always. Sometimes we are required to get a court order and have the sheriff evict them. Of course, we start out by trying to get them to start paying rent if they have jobs, but many are just so accustomed to living rent-free that they will push the limits. I'm sure that once they have been evicted, many just move into another abandoned home elsewhere and continue to live for free. I am getting concerned that our government is creating something that goes beyond the mere "entitlement" mentality. There is an underground society forming of people who work for cash and don't pay taxes, don't pay for housing, and don't think that there is anything wrong or undesirable about what they are doing. In several cases we found that the people had adequate incomes to afford rent, etc. They just choose to live under the radar.
    Aug 21 09:50 AM | 2 Likes Like |Link to Comment