Mark in San Diego

Wall Street: Dumb as It Ever Was

Now you know why I don't have cable TV (HD comes in great on a $10 antenna). . .my favorite saying from an old crime novel by LA Morse - "anyone surprised by suprising developments is a congenital idiot!"

Buffett's BNI Purchase: Bearish Bet on the Economy?

The word of the day? COAL!!. . .BNSF is one of the largest shippers of coal, and China, etc. buys coal from USA. . .60% of US power is still from COAL. Agree that this is a commodity play as well as a shipping play.

Transport Sector Confirms Economic Weakness

My KSP (K-Sea Transportation) tanked today - donw 33% on lower earnings and dividend cut. Why? They are the "last mile" operator of barges that you see in NYC, Seattle, SF, etc. Taking oil, gas, etc. from tankers to power companies, refineries, etc. They see very little increase in business, and some deterioration. . .the economy is, in my opinion, going to have a second downturn as the Main Street economy is not really responding to the Wall Street runup. All those retail stores that were "hanging in" waiting for the recovery are now going belly-up, and many small restaurants here in San Diego have started to call it quits. I would say another full year to the bottom.

Not Enough Ado About Real Estate Lately

Talk about timely - your paragraph on an 800K mortgage was our lunch conversation yesterday with a friend who has an 800K option ARM here on a San Diego condo. . .he is in a panic with less investment income these days. . .another "walk away" candidate. Another couple last week sent me an email about trying to refinance their 430K 100% option ARM. . .(by the way - both properties are well underwater). . .when two friends in a week have the same problem, I know things are getting bad.

What's a Home Really Worth These Days?

I had always heard 100 x monthly rent was a better indicator. . .when I bought rental condos in the early 1990's downturn here in CA, I bought a place for 110K, and rented it for $950 a month, so I was nearly at the 100 times rent.
Here in San Diego, there were press stories about investors buying foreclosed homes for 150-200K, and renting them for $1600 a month. . .clearly these were in the sweet spot. Since that time (March/April) there has been a feeding frenzy on these cheap homes, and prices at the bottom has pushed back up to the 250K to 300K range.

As for the top end of the market, that is where implosion has been taking place. . .all those million plus homes and condos can't find buyers because they are over the conforming loan limit. That means only a few have been selling to cash buyers, and that market is limited. Should be an interesting Fall with McMansions flooding the market.

The Deflation of the American Dream

"the Deflation of the American Dream.". . .yes, I recognized this a few weeks ago as I watched the screaming about healthcare - the American public throwing a tantrum, but the real reason is much deeper than healthcare - it is about the death of the dream. . .bravo for putting this into words!

I am afraid that the current "bailouts" are only making this worse by making the wealthly and strong even more wealth and strong. This can be seen in the consolidation of the banking industry every Friday evening, when "shotgun weddings" are arranged where the strong banks take over the weak. The best example yest is JP Morgan Chase taking over WaMu with government money and blessings. Chase went from zero in California to the 2nd largest retail bank in the state with the stroke of a pen.

On Main Street, wealthy investors are snapping up homes here in CA (and the Southwest) at foreclosure prices, then renting them out. . .net result? Five families no longer own, and one family now owns five homes (based on a local newspaper item about San Diego investors).

I am afraid we have already joined the South American model of gated communities and high security condos, surrounded by poverty - just drive through a lot of LA for a first hand view!

Hidden Impediment to a Housing Recovery?

That is happening here in San Dieg - the under 300K houses are selling well - especially because investors come in with cash, and rent a 200K house out to a military family for $1600 to $1900 (military family housing allowance), and be in cash-flow positive. The 300-500k houses are slow sells, and the over 500K market is nearly dead. The local papers are touting the brisk sales of houses, as proof the housing bottom is in. . .agree, it is in at the low end, but the compression at the top is only beginning.

Los Angeles Ports Face a Grim Future

In addition to port business, keep and eye on UPS, Fedex, BNSF, etc. They have all been reporting no growth, and until they do, the economy will be stuck in the MOS (more of the same) mode. Food giant Cargill today (see Financial Times) also said business is slow and not growing. Bottom line?. . .don't bet on a fast recovery - looks like we are stuck with at least 3 years of very slow growth.

High End Housing Not Participating in Bottom

Here in San Diego, we are the poster-boy for the high end market being in free-fall. . .while low end homes have sold like hotcakes (investors can buy a house for 200K and rent it easily for $1600 to 1800 to military families, which are a large part of our economy), the high end - over 700K - is dead in the water, and when they do sell, they sell at a huge discount. The author here is right - there is no such thing anymore as a "move up buyer." People who bought a house 5 years ago for say 500K, now have a house worth 350K, and they can't afford to move up - more likely they are trying for a short-sale, or just giving up.

The housing market is like those videos of old Las Vegas hotels being demolished by explosion - first the bottom and middle are blown out, and then the top comes tumbling down!

Has the Housing Market Hit Bottom?

Here in San Diego County, low end "starter homes" in foreclosure have been flying off the shelf. . early in the year, many 3 bed/2 ba homes were going at foreclosure for 150K to 200K. With military housing allowance ranging from $1500 to nearly $2000 a month, buying a foreclosed home near a military base (one on nearly every corner here in SD), was a no brainer. . .positive cash flow immediately. Now, however similar houses are being bid up in price, and have actually cause our "average" housing price to go up a bit in the county.. . the kicker, however, is that McMansions and expensive condos are sitting on the market for years. . .anything with a non-conforming loan price (over 700K) is dead in the water.

Like the videos of old hotel implosions in Las Vegas - the bottom blows out first, and then the top comes tumbing down. . .I think we have only begun to see the top of the market collapse.

Oil Prices and the Suburbs

So much to comment upon, but I agree with author that there will be no rush to the cities. . .cities, suburbs and rural America all have their charms, and I might add, their place in each person's life. I was born and raised in small town Ohio, moved to New York City for college and graduate school, then to San Francisco for a few years, and spent most of my career in the leafy suburb of Walnut Creek, CA. I left SF for the typical reason - turned 30, had my fill of city life (homeless, traffic, noise, etc) and fled to the burbs. Now in my semi-retirement, I live in a highrise condo (Senior Silo) in downtown San Diego. . .can't really say one place was better than another, but each served its purpose at a specific time and need in life. I suspect many people have a similar "migration" pattern.

As for high oil prices, I see my condo garage filling up with hybrids (now about 20% by my count). If milage doubles for America's fleet, then essentially gas prices are one-half for hybrid drivers. There is no reason to think that hybrid milage won't continue to go up into the 50 or even 60 miles per gallon range. Then of course we have the promise of electric cars. . .the bottom line? I don't see any major change in living habits because Americans still love their cars, and love being able to escape cities if they want (or escape the suburbs). . .America always is able to do a "workaround" problems, and this time will be no different.

Putting the Flurry of Recent Insider Selling into Perspective

Of course if insiders have already sold, then perhaps this is the time to buy. . .my own observations from nearly 30 years in the market, and a large portolio, is that insiders aren't much better than anyone else in predicting the future. Insiders are often drinking their own Koolaid on the upswing, and full of fear on the downside. I had a lot of friends working for Bank of America back in the 1980's when the stock was at 10. . .they kept telling me it was a terrible company in terrible shape with bad loans to Argentina. . .needless to say, I missed out on a huge runup from there on!

California's Default Is Certain

California has a number of built-in expensese that other states don't maintain, such as the three higher-education systems; the community college system, the state university system, and University of California. State like Ohio have essentially one system- the state universities, with a branch campus system which takes the place of community colleges. . .much cheaper to run, and higher tuitions for students. California needs to merge these systems, and eliminate so much overlap.

The Economy Can't Be That Bad if Thousands Can Pay $100 for a Ballgame

I keep reminding people that during the Great Depression, 75% of the people WERE employed, and spent on movies, sporting events, etc. The racetracks in the 1930's were pretty busy. . .so now we have 10% unemployment - that means 90% of the people are still working, and most paying their bills. . .the American economy is very elastic, and has much fat (literally and figuratively), probably attendance is off about 10 to 15% in the country at ballgames, etc. In the words of Paul Volker - "never underestimate the American consumer!"

Bankruptcies of Large U.S. Corporations Soaring

The "uber" economy (banks and other financial institutions) is probably in better shape now thank right after the Lehman collapse, so in that sense there is reason for hope. The market was essentially pricing in a full on depression, and with only a "great recession" the market has recovered a bit. . .the Main Street economy, however, is still tanking. Two years ago here in San Diego, people said, "when the economy recovers in a few years". . .now even the optimists are admitting that it will take 3 to 5 years to recover (whatever recover means). Small businesses that were hanging in these past two years(hoping for a recovery) are now going belly-up at a fast rate. The second half of this recession is being a very cruel one - certainly much worse than the first for Main Street.