Misha

Four Points on the 'Great Short Trade'

For whatever this worth, I will add another observation to Derenthal’s comments. I just closed on a refinance on my house with Countrywide (BAC now; I got 4.5% with one point; it would have been ~4.7-4.8% if I loch=ked last Friday and probably even higher today – check the rates). This is my 8th mortgage so I have some experience with this. For the first time ever, I was asked to bring a last week’s pay stub to the closing (they had my ~6 week old stub on file but are clearly concerned if I still have a job). For the first time ever, they actually generated 3 different appraisals of my house and asked me to pay for them upfront (my guess, too many houses appraise below what can be refinanced and they do not want to take a hit on cost of appraisals). At closing, I asked my mortgage broker, who manages the local Countrywide branch, about the business. The % of applications that actually proceed to closing was ~40% just a couple of months ago, and is ~60% now as they learned to better prescreen the applicants. On pending closings there are no move-up mortgages in a pipeline. All mortgages are either first time buyers (“They don’t know how lucky they are,” he said) or special situations. They have difficulty qualifying even good buyers. For example, they have a couple that sold their old house a couple of years ago and then spend some time renting and deciding where they want to move. They now want to buy here, sit on a ton of cash for a down payment, but my mortgage broker is concerned that with husband self employed (can use his for qualification!?), the wive’s income may not be enough to qualify. The day before my closing, he closed on a mortgage in a highly desirable, close to skiing brand new house that was originally listed for ~1.5M but was sold as bank owned for ~650K.

The Collapse of Eastern European Risk

Tyler: You should add Ukraine to the list. It remains at the center of diverging Russian and American interests and political instability ahead of presidential elections later this year.

The Week That Was: Market and Economic Activity, April 27 - May 1, 2009

A must read for everyone.

Mr. Roubini, Please Take a Seat

I like you, man. I will be positive too. Some time into the future....


On Apr 27 05:20 PM The Good News Economist wrote:

> @altaman,

U.S. Economy Looks Ready to Bounce

I like everything you said except two things. First, it took 30 years to create the mess you described. It will probably take longer than 12-18mos to unwind the problems. Watch the banking system for clues. When Wall Street’s political power begins to decline through legislative actions and the Wall Street compensation gets more in line with compensation of other professionals, you will know that this nation has correctly adjusted its priorities. Second, thank yourself, not god.

Banks Object to Stress Test Delay

And the point of your speculations is what? To encourage more young people to go to law schools?

Bank Failures: Not a Significant Indicator

“Bank failures are a concurrent indicator of the recession.” “…no systematic relationship between the bank intervention rate and stock returns.” Thus recession has no systematic relationship to stock returns.

Great deductive power you have, Jeff. I bet you were in the top 95% of your class.

BYD: Positioning Berkshire for the 'Chinese Century'

I have my doubts about “Chinese century.” Essentially what we view as positive is the command element on the Chinese economy that allows them to “plan for a rainy day” by saving during good time, investing during the downturn, control the currency, etc. The same people who are concerned with the government involvement in the US are getting breathless when talking about China. Remember the Soviet Union and its march across the globe in 60s and 70s and into early 80’s? I do recognize that Chinese economy is a hybrid between market driven and command economy, which is better than what we saw in the Soviet Union. However, the command component, responsible for a “superior” stimulus plan and other components I just listed, gives me a pause. For now and for my money, the United States is still the place to invest and bet on despite all the current problems.

Manufacturing: 'Less Bad' or Not?

I want to thank Teresa for providing firsthand account of how things really are. Though I personally make my investment decisions mostly based on economic and market considerations, such front row confirmations should be very important to all of us.

In that spirit, let me provide my own anecdotal account on business lending. Last Monday, with my wife out of town, I took my daughter to a gymnastics class. Her friend was there with her dad as well, so I had an hour to chat with him. He manages commercial loans department for a reasonably large branch of KeyBank in a metropolitan Western US. Most of his clients are small businesses. He told me that business is very slow because of the dramatically increased lending standards. To qualify for a loan with them, you will need to show not just 2 years of profitable operation, but also a sequential cash flow improvement over this period. Just think about this: You have to show operational improvement in a slowing economy. Of course, such standard excludes all new businesses from being financed. He tells me that he cannot fund companies that are doing reasonably well, companies that he would have funded 2 years ago without any hesitation. He now tells them to “come back by the end of the year” to see how things are then and to reevaluate their loan application.

Green shoots for you, Larry.

Manufacturing: 'Less Bad' or Not?

Yeah, right. And if you project this “trend” into the future, you will conclude that the recession will end in the second half of the year. Overwhelming evidence! Try validating this conclusion using this past data in this time series and you will see that any prediction based on one data point is worthless. Also, compare to the previous recession and you will conclude that, if you believe the rah-rah CNBC crowd, we will recover faster than we did from a mild 2001-2002 recession.

Another Happy Day for Banks: Cramdown Bill Fails

The importance of government actions on the banks cannot be overestimated and the defeat of this bill may not be a cause to celebrate. Obama’s characterization of decanting Chrysler’s bond holders given yesterday may be an indication of things to come for banks. We may no longer see a very accommodating bank policy by the government in order to avoid a broader damage to the economy. If government’s plan works for Chrysler, we may see new approach to banks which does not involve saving current stock and bond holders as a consideration. As a first sign, watch the outcome of the current arguments by 6 or so banks to soften the stress test results. I am not sure the government will be persuaded.

Will there be a need for more government involvement? Who knows! Maybe not if the economy is truly recovering. I started to doubt that the moments CNBC started talking about Dow 10,000: Things are getting frothy. Note that most of bull arguments are based on the improvements in second derivatives, which is ridiculous on multiple levels. For starters, anyone who works with data knows that a derivative of a noisy data amplified noise. Second derivative is then simply useless. But if you insist on taking derivatives, take a look at the this graph (2.bp.blogspot.com/_FM7... lifted from Zero Hedge blog) that shows that for the first time since October 2008 more Americans believe that is now harder to find a job. Less jobs, more defaults of all kinds, more pain for banks, and more capital must be raised. The Government may no longer play a role of lender of last resort with minimal strings attached. I cannot blame them.

Banking Reform: Value for Value

“Root-and-branch reorganization” will become politically possible only if thing get a lot worse. Without further shocks to the system, we will settle for something less than that.

A Particularly Bad Time for a Pandemic

It is too early to tell how serious this epidemic is. However, if you use SARS time line as a guideline (www.gartner.com/pages/...), we will conclude that it may be weeks or even months before its full effect is digested by the markets. As this timeline shows, it took Dow ~3mos to fully digest the news.

Mr. Roubini, Please Take a Seat

Let’s see what you were saying before:

December 26, 2008: “…US department stores reported record numbers of shoppers…” “I am sure you'll read about retail gloom elsewhere…” And everyone but you was right.

January 01, 2009: “Unemployment's Surprisingly Large Drop.” "…The majority is always wrong." And so are you. I will use you as a contrarian indicator: When you turn negative, I will go long.

January 13, 2009: “Banks are No Longer Failing.” Great call!

I can keep going but what is the point. You are clearly a broken clock.

Banks are No Longer Failing

Let’s see what you were saying before:

December 26, 2008: “…US department stores reported record numbers of shoppers…” “I am sure you'll read about retail gloom elsewhere…” And everyone but you was right.

January 01, 2009: “Unemployment's Surprisingly Large Drop.” "…The majority is always wrong." And so are you. I will use you as a contrarian indicator: When you turn negative, I will go long.

January 13, 2009: “Banks are No Longer Failing.” Great call!

I can keep going but there is no point. You are clearly a broken clock.