I am a fiscal and social conservative and Bush has blown it over and over again fiscally. I am tempted to write a long editorialized post on what Bush did and how bad it is for America and the slimy politics all around it but that stuff really doesn't matter, though I will find it enjoyable. What matters is how if at all this affects the market picture in the next 6 to 12 months. Is the big move up today short covering or does this really change the picture? That is what matters.
As I have said over and over the FED cannot fix credit crises. Their jobs are two fold. 1) Make sure the banking system is running smoothly. 2) Fight inflation. It's very very simple. Now when the banking system freezes, when liquidity is the issue, the FED has several tools to fight with. When the problem is a credit crises they can't do anything to solve the problem. They can prescribe some Tylenol to help ease the symptoms but they can't cure the sickness unlike with a liquidity crises. Other branches of the government can!! They can orchestrate bailouts and wave a magic wand with your and mine tax dollars to erase bad credit that was made. That is why the cut in the discount window couple of weeks ago I thought meant jack squat in the big picture. It helped ease the liquidity crises but it took none of the toxic debt out. The junk was still out there. What Bush is proposing does change things, a little. Whether you agree with it not (my thoughts should be clear) it does change things on the margin. Even more important is it signifies that the federal government is able and willing to step in to alleviate the credit crises. The reason this is important is because it is a 100% reversal from what the White House said just three weeks ago. 100%.
I have spent most of my day trying to understand GSE pass-throughs and the role of the FHA trying to understand the impact because I am ignorant to a large extent the way that all works. Here are a few points that I think I can I have gathered. Forgive me if I misstate something because like I said this was not an area of expertise for me.
1) The FHA is essentially an insurer. Typically if certain types of loans meet certain conditions the FHA will collect a guarantee fee in exchange for insuring the creditworthiness of this loan.
2) What Bush is proposing essentially lowers the standards of what FHA can insure. Essentially increasing the risk the Federal Government is taking on their books.
3) However for this to be doable it seems the FHA would have to raise the guarantee fee. What is the problem with that? Well a large portion of the loan problem is adjustable rate mortgages that are getting repriced up. Individuals could afford the 3% teaser rate but can't afford the 12% fixed rate this is adjusting up to. Will individuals be able to transfer into fixed FHA loans that will be more expensive to cover the increased guarantee fee? It is unclear if this makes it really that more affordable. Maybe a little but not much.
4) What about the prepayment penalties? Who pays for these which in some of these are loans are very high. It is unclear.
5) This does not help anyone who is underwater. In fact I have read estimates that this really only has the potential to help somewhere between 3% to 10% of troubled loans.
In general, I think we are seeing a bunch of posturing. Yes it changes things on the margin which can be very important. This was obviously masterfully orchestrated to take the attention away from the Bernake speech and be the headlines all over the United States going into a long weekend.
Does it lessen the chance of a recession? Maybe. How important is psychology in all of this. Huge. In general though after studying and reading through all of this I think it really doesn't change all that much. Reason is because the majority of these borrowers are insolvent. Helps on the margin but many homeowners are underwater. Looks much more like politics and not a solution.
I will read more and may change my opinion. We shall see. I did not rush and emotionally trade anything today. What matters is fundamentals and fundamentally I did not think the lowering of the discount window or if we lower the interest rate by 25 to 50 bips changes anything. This (even if the first move does not) has the potential to change alot though my initial take is at least initially it doesn't change much. More thoughts will be coming.
I am about to head out to the land flowing with milk and honey (College Station). So everyone have a great weekend and stick to fundamentals.
Friday, August 31, 2007
Our Socialist President is Back at Work
More on this later but in case you hadn't heard.
Bush will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates.
The change would affect borrowers who are at least 90 days behind in payments and let them stay in their homes, the administration official said.
I am an idiot, I didn't look at the papers I am signing, I am making a small salary but my covetous eyes want the big house down the street, (trumpets sounding) no fear the government will bail you out and make sure you can stay in your home even if you cannot afford it. In fact, want the yacht you neighbor has or your Corolla is not good enough but a Hummer would work, sureeeeee we will make sure you do not lose those things either if you borrow and cannot afford them. Will just take money from those acting responsibly and give it to you.
Unbelievable.
Bush will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates.
The change would affect borrowers who are at least 90 days behind in payments and let them stay in their homes, the administration official said.
I am an idiot, I didn't look at the papers I am signing, I am making a small salary but my covetous eyes want the big house down the street, (trumpets sounding) no fear the government will bail you out and make sure you can stay in your home even if you cannot afford it. In fact, want the yacht you neighbor has or your Corolla is not good enough but a Hummer would work, sureeeeee we will make sure you do not lose those things either if you borrow and cannot afford them. Will just take money from those acting responsibly and give it to you.
Unbelievable.
Thursday, August 30, 2007
HAPPY BIRTHDAY!!!
The guy next to me in the picture turned 77 today. Hopefully he has at least another 23 years of compounding capital for shareholders of Berkshire.
Interesting Graphs
http://www.investech.com/ - interesting graphs comparing the housing bubble to the tech bubble.
Here are some additional interesting graphs. Comparing what a drop from the peak in July would look like compared to other bear markets. The amazing thing is we have not dropped that far. We can't even stay below 13,000 and some are acting like it is the buying opportunity of a lifetime and others are acting like the end of the world is upon us and the government needs to do something. ANYTHING!! Please, how will these same people react emotionally if the Dow drops below 12,000, 11,000 or even 10,000???
(Click on the graphs to enlarge)
Here are some additional interesting graphs. Comparing what a drop from the peak in July would look like compared to other bear markets. The amazing thing is we have not dropped that far. We can't even stay below 13,000 and some are acting like it is the buying opportunity of a lifetime and others are acting like the end of the world is upon us and the government needs to do something. ANYTHING!! Please, how will these same people react emotionally if the Dow drops below 12,000, 11,000 or even 10,000???
(Click on the graphs to enlarge)
Bin Laden Option Trades
http://www.thestreet.com/s/terror-trade-street-abuzz-with-bin-laden-options-trades/newsanalysis/optionsfutures/10377063.htmlpuc=googlefi
Before you just throw this out as something meant only for mild curiosity, don't. "The Wisdom of Crowds" one of my all time favorite books speaks to special markets like this and how remarkably they tend to predict something. The problem is you usually never know until after the fact. Now a 50% drop in the S&P seems absurd but what about 20%? Like I said seems laughable but I would at least give it a wink keeping it in the back of your mind. Paragraph from the story reminds us of the predictive behavior some of this stuff freakishly has.
Those concerned about the worst-case scenario recalled that large put contracts were placed on airline stocks, notably American, a unit of AMR and United Airlines, in the weeks leading up to the Sept. 11, 2001 terror attacks.
Before you just throw this out as something meant only for mild curiosity, don't. "The Wisdom of Crowds" one of my all time favorite books speaks to special markets like this and how remarkably they tend to predict something. The problem is you usually never know until after the fact. Now a 50% drop in the S&P seems absurd but what about 20%? Like I said seems laughable but I would at least give it a wink keeping it in the back of your mind. Paragraph from the story reminds us of the predictive behavior some of this stuff freakishly has.
Those concerned about the worst-case scenario recalled that large put contracts were placed on airline stocks, notably American, a unit of AMR and United Airlines, in the weeks leading up to the Sept. 11, 2001 terror attacks.
One of the Best
Article from Financial Advisor on Jean-Marier Evillard. Now that he is investing again it can be easily argued that he is one of the top ten active managers today.
http://www.firsteaglefunds.com/firstEagle/fortune_world_according_to_eveillard_aug_07.pdf
http://www.firsteaglefunds.com/firstEagle/fortune_world_according_to_eveillard_aug_07.pdf
Wednesday, August 29, 2007
Crazy World
So we have an almost complete reversal of yesterday. Insane. The market really has no idea what it wants to do and is moving without conviction. Both the dramatic move down yesterday and the move up today was surrounded by very light volume.
There was a letter leaked today that was written to Senator Charles Schumer by Bernanke promising essentially to protect the markets. I wonder if it was not leaked by the FED themselves after yesterday's market fallout. All part of the PR campaign they are waging to keep everything propped up and keep from lowering rates if possible. I am telling you history is on the side of the dollar having a huge impact in all of this and the dollar has a potential of crumbling if there is a major cut in rates. Bernanke is in trouble and he is hearing it from Senators on one side and the treasury on the other.
Anyway FORGET Fundamentals, FORGET anything that we used to look at. TRADE on whatever the Fed says next.
All sort of unreal to me. Stick to fundamentals. That is what will come out sooner or later.
There was a letter leaked today that was written to Senator Charles Schumer by Bernanke promising essentially to protect the markets. I wonder if it was not leaked by the FED themselves after yesterday's market fallout. All part of the PR campaign they are waging to keep everything propped up and keep from lowering rates if possible. I am telling you history is on the side of the dollar having a huge impact in all of this and the dollar has a potential of crumbling if there is a major cut in rates. Bernanke is in trouble and he is hearing it from Senators on one side and the treasury on the other.
Anyway FORGET Fundamentals, FORGET anything that we used to look at. TRADE on whatever the Fed says next.
All sort of unreal to me. Stick to fundamentals. That is what will come out sooner or later.
Unskilled and Unaware
http://www.apa.org/journals/features/psp7761121.pdf
I have tried to make it a habit to be friends with those who can prove me wrong in something and not slow to do so. It is much more valuable for an individual to have a thought proven wrong one previously thought right than a thought they thought was right actually shown to be right. It is amazing to me however how many people in this world really would rather remain ignorant than risk being proven wrong in some belief risking some degree of embarrassment. One must constantly be challenging ones basic assumptions no matter how "mainstream" or accepted those assumed truths may be. Though I fall in this trap at times, I recognized long ago that the cost of embarrassment is not worth the cost of ignorance. Maybe that is why I annoyed most of my classmates in college because I would not hesitate to interrupt the professor and discuss something I did not understand. One's pride is a dangerous hindrance to knowledge and wisdom and a battle that must (or I am shamed to say I at least must) be fought daily.
This is a study done showing how inaccurate individuals are at self assessing one's skill set. The takeaways to finance should be obvious. It is sort of a classic in certain circles so some of you may have read it but it was brought to my attention again today and I thought I would post it. It is fairly lengthy but if you read the first two pages and the last two pages you get most of the takeaways.
A couple of quotes taken from the paper that are particularly insightful:
"Ignorance more frequently begets confidence than does knowledge." - Charles Darwin
"The quicker you realize that Amos is smarter than you, the smarter you yourself must be." - Richard Nisbett
"He who knows bests knows how little he knows." - Thomas Jefferson
I have tried to make it a habit to be friends with those who can prove me wrong in something and not slow to do so. It is much more valuable for an individual to have a thought proven wrong one previously thought right than a thought they thought was right actually shown to be right. It is amazing to me however how many people in this world really would rather remain ignorant than risk being proven wrong in some belief risking some degree of embarrassment. One must constantly be challenging ones basic assumptions no matter how "mainstream" or accepted those assumed truths may be. Though I fall in this trap at times, I recognized long ago that the cost of embarrassment is not worth the cost of ignorance. Maybe that is why I annoyed most of my classmates in college because I would not hesitate to interrupt the professor and discuss something I did not understand. One's pride is a dangerous hindrance to knowledge and wisdom and a battle that must (or I am shamed to say I at least must) be fought daily.
This is a study done showing how inaccurate individuals are at self assessing one's skill set. The takeaways to finance should be obvious. It is sort of a classic in certain circles so some of you may have read it but it was brought to my attention again today and I thought I would post it. It is fairly lengthy but if you read the first two pages and the last two pages you get most of the takeaways.
A couple of quotes taken from the paper that are particularly insightful:
"Ignorance more frequently begets confidence than does knowledge." - Charles Darwin
"The quicker you realize that Amos is smarter than you, the smarter you yourself must be." - Richard Nisbett
"He who knows bests knows how little he knows." - Thomas Jefferson
Tuesday, August 28, 2007
Crashing Real Estate
http://www.youtube.com/watch?v=10WoQZKZkNs
Levitt is a company I just recently spent hours and hours on and have decided to pass. They are doing a rights offering and I thought there may be some serious hidden value in the homebuilder. I now do not think so anymore and believe management is trying to save a different investment through their right offering (its complicated and I may do a whole blog on the conclusion of not investing with the company). Anyway this clip talks about some townhomes they just put up for auction. WOW!!!
As an aside my sister is looking to buy a house in Oregon (yes I have counseled her not to) and was looking at a new house and passed. DH Horton is the homebuilder and came back with a $25k reduction in price.
These homebuilders are desperate for cash!!! I will repeat my prediction of at least two major homebuilder bankruptcies before this is over.
Levitt is a company I just recently spent hours and hours on and have decided to pass. They are doing a rights offering and I thought there may be some serious hidden value in the homebuilder. I now do not think so anymore and believe management is trying to save a different investment through their right offering (its complicated and I may do a whole blog on the conclusion of not investing with the company). Anyway this clip talks about some townhomes they just put up for auction. WOW!!!
As an aside my sister is looking to buy a house in Oregon (yes I have counseled her not to) and was looking at a new house and passed. DH Horton is the homebuilder and came back with a $25k reduction in price.
These homebuilders are desperate for cash!!! I will repeat my prediction of at least two major homebuilder bankruptcies before this is over.
Bulls are emerging again
After last weeks rally the bulls are returning. Over the weekend, there were multiple more bullish pieces on various websites compared to the weekend before (might be just anecdotal but the apparent shift was astonishing to me anyway). Anyway in my opinion, the emergence of the bulls allows the market to move down. I wrote more on this counter intuitive thinking on posts below.
Bullish commentary.
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B228B4FA6%2DB3D1%2D450F%2D8404%2D86832B31BE34%7D&siteid=nwhpf
http://www.zacks.com/experts/featured/view_article.php?art_id=2928&newsletter_id=7
Bullish commentary.
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B228B4FA6%2DB3D1%2D450F%2D8404%2D86832B31BE34%7D&siteid=nwhpf
http://www.zacks.com/experts/featured/view_article.php?art_id=2928&newsletter_id=7
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