Chart of the Day: Post-Mega Bear Rallies [View article]
John - Good article and excellent charts. Hats off to Mr. Short for his contributions in perspective. I looked at the charts to see if I could find any well-formed head & shoulders other than the two in the current period (the head fake that ended in a rally back in July 2009 and the one currently forming). The only one that was well-defined (that I noticed) occurred in the 1929-1932 chart between the 5th and 9th months after the original crash bottom in 1929. It came after the market had completed an impressive rally and ended in the continued, drawn-out slide into the 1932 bottom.
I'm not saying that we are going to repeat that scenario. But, to those who dismiss it as impossible, I say simply: don't count your chickens before they're hatched. At this point, anything is possible. I recommend caution and tight stops until this market has provided a clear indication of trend once again.
Ugly Chart of the Day: Lumber As Housing Proxy [View article]
John - That is a nasty looking chart and it looks inevitable that we will be vindicated. I do buy into the indicator concept, though. That's a point well made.
We are buying lumber but not in any quantity, as we make repairs to rental properties (always lots of that to do). But right now, with the market moving so slowly, we're only working of getting two or three ready to rent at a time. Too many people are either: staying in their homes without making the mortgage payments, waiting for the foreclose; moving back in with parents or friends; or, squatting in abandoned homes. We've had to deal with a few of the later this last year.
What has become really scary to me is that people are breaking into vacant houses (even after they have been boarded up) and stealing copper pipes. Now I agree that copper went on a tear, but the price doesn't justify what's going on. In many houses they can get only two or four lengths of copper tubing, worth no more than $10-15 on the black market. For this they risk their lives and do a couple $thousand or so in damage to the property. It's a strange world we live in today!
Welcome to the Horror Show: Starring Europe and Global Currencies [View article]
"Today, of course, sees the release of US payroll data, which is usually good for some Harry Potter-calibre fantasy."
And BLS did not disappoint. They came up with more fiction and fantasy than I even expected. With the unemployment rate dropping from 10% to 9.7%, I expect the Administration to announce that we are on the right track and that their efforts to create jobs are beginning to bear fruit. The only problem is that I can't really understand what they are saying through all that sand they have their heads stuck into.
The country is on the brink of moral bankruptcy. The politicians don't care. The bankers don't care. And so many sheeple are receiving entitlement payments from the government that they don't seem to care either, as long as the checks keep coming.
We need a very radical change in the governing principles of this country. We need to go back to the beginning and reapply the principles that our founding fathers put in place and allow them to be our guide to the future. That will not happen with the current two-party system.
I encourage you to take a look at a web site that offers an alternative: goooh.com
The more I think about what is advocated by that site; the more I read articles and comments with the same string of views that our government and the banks are corrupt; the more I start to believe that goooh.com may offer a viable answer for starting over with a moral justification and accountability.
I agree that there is likely to be considerable backlash hitting incumbent Democrats. I have been predominately Republican for most of my life. However, I also feel that the Republican elected officials have abandoned the principles of the party and focused on getting reelected rather than fixing problems.
This does not leave the American voters with a viable choice for leadership that will cure the ills that have piled up over decades from out-of-touch politics.
What our country sorely needs now is a viable alternative. The three "other" parties that I am aware of all have problems that will inevitably keep their candidates from being elected. And that's probably a good thing for the following reasons (IMHO):
Green Party: Single issue focus that does not address most major issues facing the country and not representative of he majority.
Libertarian Party: The two major problems are that Ron Paul is an advocate of isolationism in a global economy and, while I believe that smaller government is absolutely a necessity, it seems he is willing to swing the pendulum far beyond the comfort zone for most Americans.
Constitutional Party: The primary reason I think their dead in the water for the time being is simple. They have a religious leader as the primary candidate. Not that I, personally, have any problems with that. But they may need a more centrist leader to gain any traction in this country at this time in history. A religious leader is not, in and of itself, a bad concept. But it may automatically shut out many Americans who may otherwise listen, IMHO, and who may otherwise be willing to follow based upon ideas that could make sense. Admittedly, I haven't researched this party or its positions on issues. But I don't think they can make it out of the chute with any perceived hindrances, real or not.
What we do need is a party to emerge with a broad platform that appeals to middle America. One that offers less government interference and costly regulation, except where absolutely necessary to provide safety and stability. One that promotes and supports the creation of small businesses because that is where most good jobs come from in America. One that supports term limits and discourages career politicians. One that emphasizes addressing the major problems that face our nation with realistic, economically feasible solutions; for Social Security, Medicare/Medicaid, Health care, the burgeoning federal debt, banking regulations, job creation, trade regulation, military readiness and secure borders, immigration, education, crime, etc. Some of these issues need solutions to be tested through pilot programs first to determine cost efficiencies and effectiveness. Some are better deployed by states with federal support. We also need leaders who will address the effectiveness of government programs and do away with those that do not solve the intended problems. The federal government should be much smaller and less intrusive. But the dismantling of ineffective programs should be done with prudence and care. I believe that this is what most Americans desire and would vote for if given such an alternative. I certainly know that we deserve such alternatives.
$70B Drop in Outstanding Consumer Credit: Double the Expected Pace [View article]
Another nail in the US economic coffin. But this one is actually a good one. For our nation to eventually get back on its feet, consumers really to need to retrench and save. It is a good thing for the long term. Unfortunately, our government leaders don't understand this and, like little children, are refusing to take their medicine. BTW, who keeps voting for these clowns, anyway?
I am among a growing number who expect to see a double dip. Where I may become a little more lonely is my sense that the second dip is likely to be much worse than the first. You see, the hole wasn't dug as deeply when we first fell into it. The government has been digging deeper at an unprecedented rate never before seen in history. The bottom looks a lot deeper this time
When the rule change by FASB is enacted in January requiring all off balance sheet assets to be reported on corporate balance sheets. Two good examples are Citi and Wells Fargo. Citi may have about $1.2 Trillion is assets off balance sheet that will have to be reported. Wells Fargo has something in the vicinity of $1.8 Trillion in assets off balance sheets. Imagine what this will do to their capital reserve ratios. When they try to raise capital it will either dilute existing shareholders )issuing more common stock) or drastically reduce their earnings capabilities (selling valuable assets). These are just two glaring examples, but there many more lesser ones that in aggregate add up to some real problems for the financial sector once again. When will Wall Street wake up and smell these rotting corpses? Probably in October when they begin analyzing 2010 in earnest.
12 Dividend Stocks to Own in This Market [View article]
Good recommendation for the cautious, long-term minded investors. Unfortunately, it appears that there are fewer such investors today than ever before.
It may be hard to stick to a sound investment strategy over time because different strategies come into favor, then falter in a sort of rotating manner. The institutional investors, such as hedge funds and investment banks (while fewer today than just two years ago) continue to have undue influence over short-term undulations in the market.
As you have pointed out, sticking to a strategy that has worked over the long haul in the past and is based upon good fundamental analysis, diversification, consistent dividend growth, ample cash flow, dollar cost averaging, and selecting entry points that provide good value is more likely to provide consistent long-term positive results that following the "crowd" into whatever strategy seems to be working today.
The obvious reason for my preference is that most small investors tend to get on board the "hot" strategy too late and then get caught in the wrong strategy when the institutional investors have already moved on to the next one.
A well-devised, consistent strategy usually prevails over time. While I may not agree with your selection of a price earnings ration of 20 (because I am not only a dividend investor, but also a value investor) I commend you on a very well-defined conservative, consistent approach that should reward those who choose to use it.
The U.S. Banking System's Terrifying Balance Sheet [View article]
Good summary article and good points by Lilguy. I especially concur with Lilguy's observation regarding the government's misallocation of funds for stimulating the economy.
I honestly believe that the worst could be behind us by now had the government done less to "save" the banks and more to stimulate business, and especialy job creation. Most of the jobs to be created by the $787 Billion stimulus package will be temporary in nature (i.e., construction jobs for projects with limited lifespans).
The role the government should have played was to have assisted in the dismantling of failed banks, sales & disposition of assets & deposits, public assurance that no deposits will be lost, etc. Yes, this would have caused more immediate economic turmoil that the process that we have chosen, but it could have been behind us by now. As it is, it may still be ahead of us and we have over $12 Trillion taxpayer dollars at risk. We could have gotten through this with half the exposure/cost to taxpayers.
The other side of the coin is how the stimulus funds are being spent. If the government had spent $2 Trillion on programs that would really stimulate the economy, we could have negated much of the downside from the banking collapse. The private sector creates lasting jobs, stimulate that! Choose industry with tremendous future potential and put together a plan to create global leadership in America. Temporarily subsidize American manufacturing for products sold in America (I really don't like this approach, but think it would be better than public works). Provide funding to states with earmarks for specific infrastructure updates and improvements (this is what we all thought was going to happen), because it would reduce future deficit spending requirements of state and local jurisdictions for water/sewar lines, bridges, etc. that have been deferred but will have to be done sometime. The jobs may not last forever, but the work needs to be done and cannot be put off forever. Let's just not spend more money on the grass at the Mall - it's fine. But much of the public works money is going for such items as improvements to existing government office buildings and the Mall. Some of the improvements are necessary. But the infrastructure needs of the nation are real and have been put off too long! It's money that will eventually need to be spent, so let's do it now. It's justified. It's real. It's not just for show.
Don't raise taxes on businesses. That just makes us less cost competitive with the rest of the global economy. Lower business taxes. So our businesses can compete and expand into new regions with lower productivity than the U.S. That create more jobs.
By giving money to the poor (and I qualify for that category at the moment, because my business profits are currently below levels where I can justify paying myself) the economy is not going to be stimulated. The poor and middle class need the money, don't get me wrong - we do, but the majority will be spent on everyday purchases or go toward paying down debt. We may buy meat occasionally, instead of beans. But it won't create jobs.
The big banks might survive and their executives will be back cashing multi-million dollar bonus checks in a few years. They may have to be creative about how the bonuses get funneled to themselves. But they'll get. That is the one thing we can all count on.
The U.S. deficit cannot afford another round of stimulus, but we'll probably get one, anyway. There will still be much left undone that has to be done even after that. We are burying our future in debt and will have so little to show for it. That's what burns me!
Are the Big Banks Gaming the Taxpayer? [View article]
Interesting article and an especially insightful comment by notblind. Yes, the banks are taking advantage of an arbitrage opportunity that may exist if the government can enlist enough buyers to buy the toxic assets at the 50 cents on the dollar price. At the 30 cents price, there is not doubt that there is money to be made, but at 50 cents it gets a little dicey. Therefor, in jumps the government with the capital to loan and reduce (almost remove) any risk from the transaction.
However, is would not expect all such assets to sell without detailed inspection. The mix of the assets is extremely important. The Alt A mortgages are supposed to be good but they lack documentation to prove their creditworthiness. That means higher risk. If a traunch (or group) of MBS contains too high a percentage of Alt A mortgages, it will probably not command a price much higher than the current going rate of 30 cents on the dollar. How much of this stuff is out there?
The other concern is for mortgages of any class for which the mortgage amount is higher than the market value of the underlying asset. Let's not forget that in some areas a residential forclosure can also require legal fees of $20,000 to $30,000. If the original mortgage amount was $250,000 and the values have dropped by 20 percent, it is now worth $200,000. If the inhabitants did not take good care of the property there will be repairs and deferred maintenance (usually the case in a forclosure) and that can run into several thousand dollars. It could easily cost the mortgage holder $25,000 to get the house on the market. Then, of course if it sells there will be closing costs, including accumulated property taxes to bring them current, real estate broker fees, etc., that will come due at closing. This could easily be another ten percent of the sales price. So now we have approximately $45,000 that will need to come out of the sales price.
If the mortgage was for 95 percent loan-to-value when originated it was roughly at $237,500. Take that times a 50 percent value and you get $118,750.
The forclosure and repairs could take another year, not to mention how long the actual marketing of the property could take. There is a cost to having money tied up so long. And, there is also a very real risk that the value of the house could drop by another 15 percent by the time it sells. That would be another $30,000, bringing the sale price of the house down to $170,000.
That, of course will bring down some of the closing costs (but not the property taxes) so let's take off six percent of the price reduction, or $1,800 off the cost side. Let's make it simple and take off $2,000 to make it easy.
$170,000 - $43,000 = $127,000 less cost @ 50 cents on the dollar, or $118,750 = profit of $8,250. And it only took two years! That would create a yield of less than 4 percent per anum.
I trust that your hedge fund manager is promising higher returns.
I realize that some of the mortgages are performing and that we really need to look at a blended rate of return. The point I am trying to make is that the mix of the assets in each traunch is critical to estimating the value of the MBS security. If the banks are buying blindly, they could be digging themselves another hole. Or maybe not. But why should they care, it's not their money that's at risk, is it? OPM (other people's money), or the use of it, can make some otherwise prudent investors foolishly bold. Remove the risk, or create the appearance of no risk, and they become bold enough to ignore the risks.
Further Signs of the Recession's Return [View article]
Good article that uses the facts without trying to distort them. A couple of comments:
"Looks pretty positive from that vantage point, but so does the beach before the hurricane strikes."
It feels more like we're in a massive hurricane and are currently in the eye. The back portion of a hurricane usually lasts longer than the front half. I experienced that in a huge typhoon during my delightful stay in Vietnam way back when. I remember pulling people out of the debris during the eye. It was perfectly calm and sunny. One would never know what was coming next. The good news in this story is that we had plenty of parts available for the helicopters that didn't get destroyed. The bad news is that there weren't nearly enough helicopter left intact.
I also think that the Euro's weakness, if it persists, and the austerity measures being implemented in Europe will likely reduce demand for US manufactured goods. That's probably just an amplification of what you mentioned in the article.
Chart of the Day: Post-Mega Bear Rallies [View article]
Clayfoot - Don't get discouraged by thumbs down of obviously good comments. Personally, I don't give many thumbs down unless I find the comment distasteful, belligerent or based upon fabrication. I am selective about my thumbs up in that I give them to those who have made me think, laugh, or have made a good point.
Trolls surface occasionally. Some of us have been hit by 50-100 thumbs down in a day where they actually go into your history and thumb down comments from weeks or months ago. I've learned to just ignore them because, in the end, good comments get more thumbs up than down and the net is the only thing that matters. I don't worry about ratings anymore. The information and the comradeship are the important things and they far outweigh the impact of Trolls.
The Wrong Kind of Falling Homeownership [View article]
pigdog 67 - I couldn't agree more! I truly do miss the good ol' days when bank speculation was akin to 10% down mortgages to a couple who could afford three like mortgages. What has happened, IMHO, is that the Wall Street culture of short-term earning growth has engulfed the banking industry and turned it into something it shouldn't be. I've written on this more extensively elsewhere so I'll refrain from ranting here.
This is not the conventional warfare that we all fear could happen. It is economic war. China was willing to finance our burgeoning credit because they could use our money to develop their domestic economy. They also knew that we couldn't go on borrowing forever without facing economic collapse. We seem to be spending ourselves into oblivion even without increasing our imports, so it would appear that the end is coming sooner than they had expected. Will they still be there for us after our next crisis? It will depend on whether they think that we can survive and flourish without them or not. If they are convinced that the next time will be more than our economic system can take, I suspect they will just stand back and watch us unravel. That is when the world will find out what America is made of, and so will we.
Printing Our Way to a Jobs Recovery? [View article]
Can't agree more! My Kudos to the author. Our President is bringing about change, but not the change he envisioned. I expect that the result of all his hard words (I haven't seen much real work yet) will be a disenchantment with the Democratic Party for the next decade or more. The change we really need is one that brings accountability and real transparency to our government and the Fed.
Chinese Wind Power Plant Coming to U.S. Soil [View article]
John - This is a very positive story, so I don't want to ruin it with a negative spin. One thing I do wonder is that if the Chinese are interested in making investments in manufacturing on US soil there must be a reason. Two reason, I think.
1. If China decouples the yuan from the US$ their investments here may become cheaper for them than investments in their homeland.
2. The obvious political gains they make with such a huge project could open doors for them to make additional investments in the future with less scrutiny and questions about why now.
After all, they want to make money from US consumption, one way or the other, so they can use their profits to continue their efforts to increase domestic demand. A third motive could be to shore up their biggest customer through a more direct investment approach to ensure that we are able to pay the interest on their Treasury investments. They need our economy to strengthen for their economy to run on all cylindars. The Chinese are not stupid.
Chart of the Day: Post-Mega Bear Rallies [View article]
I'm not saying that we are going to repeat that scenario. But, to those who dismiss it as impossible, I say simply: don't count your chickens before they're hatched. At this point, anything is possible. I recommend caution and tight stops until this market has provided a clear indication of trend once again.
Ugly Chart of the Day: Lumber As Housing Proxy [View article]
We are buying lumber but not in any quantity, as we make repairs to rental properties (always lots of that to do). But right now, with the market moving so slowly, we're only working of getting two or three ready to rent at a time. Too many people are either: staying in their homes without making the mortgage payments, waiting for the foreclose; moving back in with parents or friends; or, squatting in abandoned homes. We've had to deal with a few of the later this last year.
What has become really scary to me is that people are breaking into vacant houses (even after they have been boarded up) and stealing copper pipes. Now I agree that copper went on a tear, but the price doesn't justify what's going on. In many houses they can get only two or four lengths of copper tubing, worth no more than $10-15 on the black market. For this they risk their lives and do a couple $thousand or so in damage to the property. It's a strange world we live in today!
Welcome to the Horror Show: Starring Europe and Global Currencies [View article]
And BLS did not disappoint. They came up with more fiction and fantasy than I even expected. With the unemployment rate dropping from 10% to 9.7%, I expect the Administration to announce that we are on the right track and that their efforts to create jobs are beginning to bear fruit. The only problem is that I can't really understand what they are saying through all that sand they have their heads stuck into.
Sure It’s Legal … But Is It Right? [View article]
We need a very radical change in the governing principles of this country. We need to go back to the beginning and reapply the principles that our founding fathers put in place and allow them to be our guide to the future. That will not happen with the current two-party system.
I encourage you to take a look at a web site that offers an alternative: goooh.com
The more I think about what is advocated by that site; the more I read articles and comments with the same string of views that our government and the banks are corrupt; the more I start to believe that goooh.com may offer a viable answer for starting over with a moral justification and accountability.
Democrats Headed for a Train Wreck [View article]
This does not leave the American voters with a viable choice for leadership that will cure the ills that have piled up over decades from out-of-touch politics.
What our country sorely needs now is a viable alternative. The three "other" parties that I am aware of all have problems that will inevitably keep their candidates from being elected. And that's probably a good thing for the following reasons (IMHO):
Green Party: Single issue focus that does not address most major issues facing the country and not representative of he majority.
Libertarian Party: The two major problems are that Ron Paul is an advocate of isolationism in a global economy and, while I believe that smaller government is absolutely a necessity, it seems he is willing to swing the pendulum far beyond the comfort zone for most Americans.
Constitutional Party: The primary reason I think their dead in the water for the time being is simple. They have a religious leader as the primary candidate. Not that I, personally, have any problems with that. But they may need a more centrist leader to gain any traction in this country at this time in history. A religious leader is not, in and of itself, a bad concept. But it may automatically shut out many Americans who may otherwise listen, IMHO, and who may otherwise be willing to follow based upon ideas that could make sense. Admittedly, I haven't researched this party or its positions on issues. But I don't think they can make it out of the chute with any perceived hindrances, real or not.
What we do need is a party to emerge with a broad platform that appeals to middle America. One that offers less government interference and costly regulation, except where absolutely necessary to provide safety and stability. One that promotes and supports the creation of small businesses because that is where most good jobs come from in America. One that supports term limits and discourages career politicians. One that emphasizes addressing the major problems that face our nation with realistic, economically feasible solutions; for Social Security, Medicare/Medicaid, Health care, the burgeoning federal debt, banking regulations, job creation, trade regulation, military readiness and secure borders, immigration, education, crime, etc. Some of these issues need solutions to be tested through pilot programs first to determine cost efficiencies and effectiveness. Some are better deployed by states with federal support. We also need leaders who will address the effectiveness of government programs and do away with those that do not solve the intended problems. The federal government should be much smaller and less intrusive. But the dismantling of ineffective programs should be done with prudence and care. I believe that this is what most Americans desire and would vote for if given such an alternative. I certainly know that we deserve such alternatives.
$70B Drop in Outstanding Consumer Credit: Double the Expected Pace [View article]
I am among a growing number who expect to see a double dip. Where I may become a little more lonely is my sense that the second dip is likely to be much worse than the first. You see, the hole wasn't dug as deeply when we first fell into it. The government has been digging deeper at an unprecedented rate never before seen in history. The bottom looks a lot deeper this time
When the rule change by FASB is enacted in January requiring all off balance sheet assets to be reported on corporate balance sheets. Two good examples are Citi and Wells Fargo. Citi may have about $1.2 Trillion is assets off balance sheet that will have to be reported. Wells Fargo has something in the vicinity of $1.8 Trillion in assets off balance sheets. Imagine what this will do to their capital reserve ratios. When they try to raise capital it will either dilute existing shareholders )issuing more common stock) or drastically reduce their earnings capabilities (selling valuable assets). These are just two glaring examples, but there many more lesser ones that in aggregate add up to some real problems for the financial sector once again. When will Wall Street wake up and smell these rotting corpses? Probably in October when they begin analyzing 2010 in earnest.
Good luck and keep some powder dry!
12 Dividend Stocks to Own in This Market [View article]
It may be hard to stick to a sound investment strategy over time because different strategies come into favor, then falter in a sort of rotating manner. The institutional investors, such as hedge funds and investment banks (while fewer today than just two years ago) continue to have undue influence over short-term undulations in the market.
As you have pointed out, sticking to a strategy that has worked over the long haul in the past and is based upon good fundamental analysis, diversification, consistent dividend growth, ample cash flow, dollar cost averaging, and selecting entry points that provide good value is more likely to provide consistent long-term positive results that following the "crowd" into whatever strategy seems to be working today.
The obvious reason for my preference is that most small investors tend to get on board the "hot" strategy too late and then get caught in the wrong strategy when the institutional investors have already moved on to the next one.
A well-devised, consistent strategy usually prevails over time. While I may not agree with your selection of a price earnings ration of 20 (because I am not only a dividend investor, but also a value investor) I commend you on a very well-defined conservative, consistent approach that should reward those who choose to use it.
The U.S. Banking System's Terrifying Balance Sheet [View article]
I honestly believe that the worst could be behind us by now had the government done less to "save" the banks and more to stimulate business, and especialy job creation. Most of the jobs to be created by the $787 Billion stimulus package will be temporary in nature (i.e., construction jobs for projects with limited lifespans).
The role the government should have played was to have assisted in the dismantling of failed banks, sales & disposition of assets & deposits, public assurance that no deposits will be lost, etc. Yes, this would have caused more immediate economic turmoil that the process that we have chosen, but it could have been behind us by now. As it is, it may still be ahead of us and we have over $12 Trillion taxpayer dollars at risk. We could have gotten through this with half the exposure/cost to taxpayers.
The other side of the coin is how the stimulus funds are being spent. If the government had spent $2 Trillion on programs that would really stimulate the economy, we could have negated much of the downside from the banking collapse. The private sector creates lasting jobs, stimulate that! Choose industry with tremendous future potential and put together a plan to create global leadership in America. Temporarily subsidize American manufacturing for products sold in America (I really don't like this approach, but think it would be better than public works). Provide funding to states with earmarks for specific infrastructure updates and improvements (this is what we all thought was going to happen), because it would reduce future deficit spending requirements of state and local jurisdictions for water/sewar lines, bridges, etc. that have been deferred but will have to be done sometime. The jobs may not last forever, but the work needs to be done and cannot be put off forever. Let's just not spend more money on the grass at the Mall - it's fine. But much of the public works money is going for such items as improvements to existing government office buildings and the Mall. Some of the improvements are necessary. But the infrastructure needs of the nation are real and have been put off too long! It's money that will eventually need to be spent, so let's do it now. It's justified. It's real. It's not just for show.
Don't raise taxes on businesses. That just makes us less cost competitive with the rest of the global economy. Lower business taxes. So our businesses can compete and expand into new regions with lower productivity than the U.S. That create more jobs.
By giving money to the poor (and I qualify for that category at the moment, because my business profits are currently below levels where I can justify paying myself) the economy is not going to be stimulated. The poor and middle class need the money, don't get me wrong - we do, but the majority will be spent on everyday purchases or go toward paying down debt. We may buy meat occasionally, instead of beans. But it won't create jobs.
The big banks might survive and their executives will be back cashing multi-million dollar bonus checks in a few years. They may have to be creative about how the bonuses get funneled to themselves. But they'll get. That is the one thing we can all count on.
The U.S. deficit cannot afford another round of stimulus, but we'll probably get one, anyway. There will still be much left undone that has to be done even after that. We are burying our future in debt and will have so little to show for it. That's what burns me!
Are the Big Banks Gaming the Taxpayer? [View article]
However, is would not expect all such assets to sell without detailed inspection. The mix of the assets is extremely important. The Alt A mortgages are supposed to be good but they lack documentation to prove their creditworthiness. That means higher risk. If a traunch (or group) of MBS contains too high a percentage of Alt A mortgages, it will probably not command a price much higher than the current going rate of 30 cents on the dollar. How much of this stuff is out there?
The other concern is for mortgages of any class for which the mortgage amount is higher than the market value of the underlying asset. Let's not forget that in some areas a residential forclosure can also require legal fees of $20,000 to $30,000. If the original mortgage amount was $250,000 and the values have dropped by 20 percent, it is now worth $200,000. If the inhabitants did not take good care of the property there will be repairs and deferred maintenance (usually the case in a forclosure) and that can run into several thousand dollars. It could easily cost the mortgage holder $25,000 to get the house on the market. Then, of course if it sells there will be closing costs, including accumulated property taxes to bring them current, real estate broker fees, etc., that will come due at closing. This could easily be another ten percent of the sales price. So now we have approximately $45,000 that will need to come out of the sales price.
If the mortgage was for 95 percent loan-to-value when originated it was roughly at $237,500. Take that times a 50 percent value and you get $118,750.
The forclosure and repairs could take another year, not to mention how long the actual marketing of the property could take. There is a cost to having money tied up so long. And, there is also a very real risk that the value of the house could drop by another 15 percent by the time it sells. That would be another $30,000, bringing the sale price of the house down to $170,000.
That, of course will bring down some of the closing costs (but not the property taxes) so let's take off six percent of the price reduction, or $1,800 off the cost side. Let's make it simple and take off $2,000 to make it easy.
$170,000 - $43,000 = $127,000 less cost @ 50 cents on the dollar, or $118,750 = profit of $8,250. And it only took two years! That would create a yield of less than 4 percent per anum.
I trust that your hedge fund manager is promising higher returns.
I realize that some of the mortgages are performing and that we really need to look at a blended rate of return. The point I am trying to make is that the mix of the assets in each traunch is critical to estimating the value of the MBS security. If the banks are buying blindly, they could be digging themselves another hole. Or maybe not. But why should they care, it's not their money that's at risk, is it? OPM (other people's money), or the use of it, can make some otherwise prudent investors foolishly bold. Remove the risk, or create the appearance of no risk, and they become bold enough to ignore the risks.
Further Signs of the Recession's Return [View article]
"Looks pretty positive from that vantage point, but so does the beach before the hurricane strikes."
It feels more like we're in a massive hurricane and are currently in the eye. The back portion of a hurricane usually lasts longer than the front half. I experienced that in a huge typhoon during my delightful stay in Vietnam way back when. I remember pulling people out of the debris during the eye. It was perfectly calm and sunny. One would never know what was coming next. The good news in this story is that we had plenty of parts available for the helicopters that didn't get destroyed. The bad news is that there weren't nearly enough helicopter left intact.
I also think that the Euro's weakness, if it persists, and the austerity measures being implemented in Europe will likely reduce demand for US manufactured goods. That's probably just an amplification of what you mentioned in the article.
Chart of the Day: Post-Mega Bear Rallies [View article]
Trolls surface occasionally. Some of us have been hit by 50-100 thumbs down in a day where they actually go into your history and thumb down comments from weeks or months ago. I've learned to just ignore them because, in the end, good comments get more thumbs up than down and the net is the only thing that matters. I don't worry about ratings anymore. The information and the comradeship are the important things and they far outweigh the impact of Trolls.
The Wrong Kind of Falling Homeownership [View article]
Is China Easing Out of U.S. Debt? [View article]
Printing Our Way to a Jobs Recovery? [View article]
Chinese Wind Power Plant Coming to U.S. Soil [View article]
1. If China decouples the yuan from the US$ their investments here may become cheaper for them than investments in their homeland.
2. The obvious political gains they make with such a huge project could open doors for them to make additional investments in the future with less scrutiny and questions about why now.
After all, they want to make money from US consumption, one way or the other, so they can use their profits to continue their efforts to increase domestic demand. A third motive could be to shore up their biggest customer through a more direct investment approach to ensure that we are able to pay the interest on their Treasury investments. They need our economy to strengthen for their economy to run on all cylindars. The Chinese are not stupid.