Turley Muller

Of Blind Squirrels and Flying Pigs: The Fallacy of Market Predictions

Great Article. I especially agree with the market discounting mechanism of known information and collective sentiment.

Everyday I read/hear an investor recommending to stay away from financials. Why? (Basically everyonbe gives the same reason)

-Because we just don't know how bad it really is and everyday we wait for the next shoe to drop and when it happens we still know there are more to follow. We know financials are facing a crisis, but until there's visibility I would stay away. The unknown is just too great.

Do they mean wait for visibility so then we can buy shares AFTER they have gone up 30% or what have you.

The whole market knows 'they don't know" that's why financial shares have gotten a beat-down- to a reduced price to compensate for the risk (which is defined by uncertainty).

And when the next shoe drops, will shares fall? Investors expect more writedowns so I think let the shoes drop, shares will probably rise since those events at least should start bringing in more clarity.

Some financial stocks should trade at these levels or even lower, and there are some that are very oversold. Still wouldn't touch countrywide though.

Thanks for sharing your insight.

Mortgage Originated Credit Crunch May Just Be Beginning

I worked on the trading desk for a top-15 largest bank since 2004 which was only prime and Alt-a and other non-conforming mortgages. In a sense, some of it's just as risky as the de-facto "Sub-prime" due to the extreme lax credit standards. Our mortgage company didn't set those, neither did our parent bank. Wall Street would knocking down our doors for Alt-A and jumbo 103% interest only investor property etc and would offer premium money for them. We would originate those loans because they could be sold. We sold our ARMs to the Bank, Fixed Rates were securitized into agency MBS, and Alt-a and Jumbo etc would be bulked up and sold to whichever wall street firm. When they got aggressive on the ARMs, treasury (bank) saw a drop off in loan sales to them because we could offer better pricing on loan programs that would be sold to these firms. Who were the usual suspects in the news now. That prompted treasury to step up on some loan programs but passed on others with too much risk. Wall street didn't care. It's funny looking back how these guys would try to squeeze us on agency MBS trades which is such a liquid market and I have 10 bids sitting in front of me. Sometimes they may fade you a plus (1/64th) on FNMA etc., just to turn around and pay a 1/2pt to 1pt through the market or the cover on jumbo paper or Alt-A package. I think the attraction is to the slow prepay qualities of the high risk loans. After experiencing the refi boom and having all mtge's pay off, Wall Street is looking for some slow pre-pay speeds. Especially if they are creating all these structures, they have to predict the speeds of the underlying securities so they can set the tranches / classes up to get disired yield / maturity. Sub-prime borrowers are the least likely to pre-pay or refinance-slow speed. They carry a high yield. Which with mortgages, high yield means faster speed and shorter life. Sub-prime can offer high yield and a longer life. The fact of the matter is Sub-prime speeds are very fast due to the high level of defaults. Several years ago, default rates were very tame, I think making some investor's more complacent. Home values were rising rapidly, thus borrowers were focused and more disciplined in staying current since one doesn't want to lose an investment that is quickly appreciating due to its potential future value. But, what happens when home values fall? Owners' have negative equity in their home. They're a lot less disciplined to make payments for an asset that's worth less than what they owe. If they sell they still come up short on the balance owed. So, many just let it go into default, and that's probably the best option they have. Additionally, banks can't save the mortgage by doing the whole REO thing - (Real-Estate Owned) when home values fall. If they are rising and a borrower can't make payment the bank will find a warm body to occupy the house and make payments on the borrower's mortgage. Essentially the bank assumes the mortgage instead of foreclosing on the property to use sale proceeds to pay off the mortgage balance owed to the investor. But, that's hard to do in a housing recession. One way or another, somebody is going to eat the loss.