Thursday, March 30, 2006
I think there is still a decent chance that the markets push up another 5% from here, but the valuations of every sector are getting increasingly less attractive. I'll have Nasdaq and Banks on my screen as possible Put LEAPs, but timing those purchases will be tricky.
On a lighter note, the proportion of online shoppers that are not using available tools to scour for the lowest price is surprising to me. Before any online purchase I visit Dealcoupon to check to see if the store has any online specials (free shipping, coupon code, etc). Half of your searches might not turn up a valuable coupon, but it's a simple search that can save you some real cash.
Wednesday, March 29, 2006
It is worth repeating that this is a national economic risk, not an upstate NY risk. However, any economic shock of this size could have a ripple effect that would eventually impact our economy.
Some highlights from the article:
"•The collateral backing mortgages is stretched precariously thin – one in 10 homeowners has zero-to-negative home equity.
I'd add that this ratio increases quickly if home prices begin not just to stagnate but actually start to fall.
•Recent estimates put one-quarter of all mortgages underwritten last year in the subprime, or riskiest, category. That's well above the 13 percent average share for the decade through 2005.
And the 13% share from 2000-2005 is more than double the historical average of 5-6%.
•Despite historically low borrowing costs, households spent a record amount of after-tax income at year-end to pay required principal and interest payments.
The general rule of thumb is never spend more than 30% of your after-tax income on housing. Many people are now pushing 60% of their income toward an asset that may decline in value.
•In the next two years, about a quarter of all outstanding mortgages – or more than $2 trillion worth – will reset at higher rates.
We've talked about this before - $2 Trillion in mortgage resets is a huge number.
Also, consider these real estate stats to really grab your attention:
• 43% of first-time home buyers did so with no down payment in 2005.
• The median down payment for those first-time buyers was 2% (on a $150,000 home).
What happened to the days of 20% down?
• Adjustable Rate Mortgages accounted for almost 40% of mortgages originated in 2004 and 2005.
• $1.4 Trillion in Equity was cashed out through refinancings in 2004 & 2005.
There is still just a 10-15% chance that the real estate bubble ends badly, but the scenario is scary enough that we need to look at it very closely.
While many local school boards struggle to push 2% tax increases along to homeowners consider the town of Summit, NJ. As a disclaimer, Summit was my the neighboring town to my old hometown in NJ. Summit is a lovely, old world town with quirky shops and many great restaurants.
Summit is about to cross the Rubicon. The average city homeowner will soon pay more than $1,000 a month in property taxes, with Summit becoming the first of Union County's 21 communities to cross the threshold.
With the city and the school board both considering 8 percent tax hikes, and the county portion expected to rise by 6 percent, the average homeowner will soon be staring down the barrel of a $12,521 annual property tax bill, a jump of 13.5 percent, or nearly $1,500 over the past two years.
Furthermore, city and school officials believe that unless residents want to see class sizes increased dramatically, or substantial cuts to police, fire and public works services, or they finally agree to the need for regionalized services, there may be no end to this upward spiral.
I'd note that these numbers reference AVERAGES and with many middle class homeowners paying far less than $12k/yr, you can imagine that some are paying a multiple of $12k/yr in real estate taxes.
I'll take shopping at Sam's Club and eating at Subway over a $12k/yr tax bill any day.
Tuesday, March 28, 2006
The argument holds that both countries would be so economically devastated by a trade or financial war -- "mutually assured economic destruction" -- that neither would trigger one despite growing trade tensions.
By that logic, China won't stop buying billions of U.S. dollars each month because to do so could prompt a dollar collapse that would undermine the American consumer and the global stability upon which China's economic miracle rests. It follows that the U.S. would not implement tough sanctions to punish China's undervalued currency because such action could trigger inflation, higher interest rates and recession.
Hmmm, okay so let's take a look at the current global backdrop - The EU and Japan are recovering (entering a period of higher interest rates), while oil prices remain unstable China is securing supply around the world and the US economy is, in my view, teetering. We as a nation may never be in a better negotiating position with China than we are today. In 20 years, we may be an afterthought in their rearview mirror.
For history buffs, The UK circa 1905 is to the US circa 1999, as the US circa 1948 is to China circa 2008. I think there is going to come a time in the near future when we are going to go to our creditors (China, etc) for a bump up in our credit limit and they're going to tell us to call Ditech.com....
This is not path which is predetermined - financial restraint by the Federal Government (and consumers), improved energy policies and a rebirth of innovation in the US can help turn the tide, but....
Let's just say Canadian Dollars look attractive at current levels :)
I clearly see the concern of teachers being that the quality of the tutoring may not be up to par, but the markets will weed out the weak tutors. If I'm paying someone $25/hour and Johnny is still failing Earth Science then Johnny is getting a new tutor. I think this is an opportunity to exploit technology to improve science and math results around the US.
In a related story, the NY Times covers the cut backs that schools are making to meet the Math and Reading requirements of the No Child Left Behind act. My principal concerns with this course of action is that by lowering the bar to enable every child to "succeed" we are creating a culture of mediocrity. A collection of C students that think they're successful because they can read See Spot Run. This is of particular concern in Upstate NY where some of our schools and students test at or below the state averages.
I see the puzzled look on your face - but this is a financial blog, what's your point? Well, today's 2nd grader has to have enough intelligence/earning power to pay taxes to support my mother's Medicare/Social Security bill. In my opinion, raising a generation of underachievers is not the best way to reach that goal. I'd much rather see an educational establishment which pushes everyone to OVERACHEIVE with the realization that not everyone is Einstein. Some people are destined to be Mark Cuban or Paris Hilton and that's fine, but I want my school to foster as much growth as possible for the best and brightest, not curtail funding for education to help Paris learn to spell V-I-D-E-O.
Just my 2 cents.
The more interesting scenario seems to be playing out on the global stage. Japan and Germany are experiencing economic recoveries which is bolstering their currencies and their markets (IFO hits 14 1/2 yr high).
So on the global stage, new world economies China and India are experiencing explosive growth, old world economies Japan and Germany are recovering and oil countries are flush with cash thanks to $65/barrel oil.
I continue to believe that in the 2nd/3rd quarter of 2006 Mr. Bernake will be faced with the toughest Fed vote in 10 yrs - our economy will be teetering while the world is experiencing strong growth, do you continue to raise rates to attract foreign dollars to support our Federal and Current Account Deficits (but which may ultimately contribute to a US recession) or do you end the rate hikes because our economy has cooled and risk a currency collapse/3% increase in the 10yr-note?
I don't envy those making that decision as there is no right answer as far as I can see.
Sunday, March 26, 2006
However, I've been surprised how many people are unaware of the really impressive savings rates offered by large online divisions of international banks.
I'm not promoting either of these banks, but the reality is that if you have meaningful funds to allocate to savings you really should be earning a more attractive rate than the measly 1% that the corner branch offers. Check out -
1) HSBCDirect - They currently are running a promo through 4/30/06 where they are paying 4.8% - yeah you read that right 4.8% - on new and existing deposits. This is a separate division of HSBC and is not an offer available through your local HSBC branch, you have to make deposits online to be eligible for this rate. However, since the stock markets have averaged returns less than 4.8% for the past 5 yrs with a great deal more risk than an FDIC insured bank account, this is a pretty attractive spot to allocate at least a portion of your assets.
2) INGDirect - an early player in online banking, they have let HSBC take the lead on interest rates, but their 4.75% on new deposits and 3.8% on existing funds is still more than 6 times the national average.
The application process for these banks is remarkably tedious, but banking online is a breeze after the initial set-up and the near 5% yields make it worth the effort.
At the very least you could tell your local branch that you saw a 4.8% savings rate online and that if they don't improve their rates soon, you'll be a former customer.
Cheers from Grindstone Financial!
WITH three children and large extended families, Alisha and Sudhir Karandikar thought that their 1,800-square-foot house in San Jose, Calif., was too small.
To finance the project, the Karandikars — she is a full-time real estate agent, and he is a high school math teacher and also an agent, part time — got a $450,000 construction loan. When the house is done, the total loan will be $1.2 million.
Let's pause for a moment and let that sink in - a real estate agent and a high school math teacher are going to have a $1.2 million Interest Only Mortgage which they plan to refi in 5 yrs.
By their own calculations this couple will have paid in almost $400k in INTEREST in five years without reducing their principal by a penny.
But obtaining the loan took only 12 days, and the Karandikars wanted to get started. "We are happy with this," she said.
Again I'd like to clarify that I'm principally focused on the challenges facing the national housing market and the impact that it's decline will have on the US economy. Jefferson County seems somewhat insulated from this trend right now (but have you noticed all the For Rent ads in the paper? That could be a trend to watch). Having said that when this housing market unravels, there will be two guilty parties - the US Consumer that feels that they have the right to have a $1.2 million house regardless of income or occupation and the financial institutions that have been their enablers. The odds are 60/40 that there will be S&L like hearings in Congress by the Spring of 2009.
What banker in their right mind would look at the W-2 for a real estate agent in Marin County (the frothiest - is that a word? - of the bubble housing markets) and a math teacher - no offense to the many hard working teachers in the US, you are clearly the hardest working, most underpaid professionals I've encountered - and decide "Yes, I'd like to loan you $1.2 million". That person should be fired yesterday.
For the record - Housing starts plummeted last week and the weakest areas in the survey? The west coast (California) and the south.
Friday, March 24, 2006
I hope that you'll bookmark my blog, add your comments or questions to the discussion or shoot me an email with topics you'd like to see covered in future posts.
Thanks again for visiting Grindstone Financial.
Thursday, March 23, 2006
If I were a worker with 10+ years of experience on the job and GM was trying to offer me $140k to walk away, that would be pretty tempting. The two greatest concerns facing these workers have to be:
1) If I leave GM what skills do I have that will enable me to get another job and
2) If I stay how do I know GM is going to survive through 2010.
The buyout offers some measure of comfort that an employee could use that lump sum as a safety net while he/she sought new employment. I understand there is a GM plant in the North Country and my suggestion to workers considering a buyout is that you may need to relocate to new part of the country in order to find comparable employment.
On the other hand, I've witnessed GM's steady fall from grace for 15+ years. I remember in 1996 hearing a colleague refer to GM as a bank and health insurance company that made inferior cars. That's a harsh assessment, but it's been pretty accurate. GM has lost a generation of buyers, most 18-34 year-olds could not name 5 GM cars but they could tell you every car that the HUGE guy has on sale this week. If a worker chooses to stay with GM, I'd suggest that they prepare themselves for the possibility that GM, as we know it, may not exist in 5 years.
Like I said, just my 2 cents.....
February existing home sales
An important number in this release was median price. After peaking around $220k in Aug 2005, the median price has slipped about 5% to $209k. This is clearly a reflection of higher interest rates and some softening of demand. I hate to use the weather excuse, but it was really warm in January 2006 and warm weather in the winter helps sell houses. Many of those January sales probably closed in February and may have effected the data.
So, in general, I'd say that Wall Street is right to assume that the Fed is not done raising interest rates, but I believe that it has less to do with our domestic economy than it does with Japan's resurgence (a topic for another time).
"With the allure of easy money, thousands of Americans flocked to jobs in the real estate industry during the boom years. ...As the housing market slows, there will likely be a lot of stories of people who are bailing out of their real estate jobs and other professions related to housing — appraisers, mortgage brokers and home construction workers — and many not by choice.
This could send shock waves through the job market and the economy. That's because housing helped drive the economy out of the last recession. Almost four out of every 10 jobs created in the past four years were in housing-related fields. At the end of last year, a record 9.8% of U.S. workers were employed in the real estate industry, up from 8.2% a decade ago, according to Moody's Economy.com. "If we don't get the job creation that we need to sustain spending, the economy could be in trouble as we get into '07," he says.
While New York registers a rather modest 8% of our jobs from real estate related fields, I'd note that a the income generated by those jobs can often be substantial (particularly downstate) and those high incomes help bolster our overall tax receipts. If we and other states around the country start to lose high income jobs (and their associated tax revenues) state budgets could be in trouble for 2007 and 2008.
A special welcome to all of you that have found me via Newzjunky.com. It is an indication of the power of Newzjunky when traffic spikes 2000% simply because of a link on his page. Thanks for visiting and please add your comments, questions or suggestions for future topics you'd like discussed (mortgage rates, stock trends, currencies, debt issues, etc?)....
Tuesday, March 21, 2006
Much of the true bull market gains have been sector specific (energy) or small-cap. The majority of individual portfolios have seen little upside in this "5 year bull market".
With that said, I think the tide is finally turning and the markets could enter a period of weakness from April to October 2006. I'm principally an options trader utilizing my fundamental market/stock specific knowledge. I'll be looking at NASDAQ puts in the next couple of weeks.
Sorry for the long lay-off. I was playing Dad 24/7 for the past couple of weeks while Mom was in NYC.
This is a bad news - really bad news scenario for the economy. The bad news is that the new interest could amount to $15-$20 billion of additional interest payments for borrowers. Some view this as a minor issue given the scope of the economy but my read is different. If these borrowers represented a standard distribution of good, average and poor credits than I might view this as little more than a bump in the road. However, the overwhelming majority of these borrowers will be poor credits and the individuals least likely to be able to absorb a 10%-30% increase in their mortgage payment. I believe that this will cause a disproportionately high number of new homebuyers to default in 2006 and more likely in 2007.
But wait it gets better!! Remember all those home equity loans taken out by your cash poor, house rich neighbor so he could buy two new BMW X-5's? Well, he wasn't alone.
Over the past 2 years there were more than $1.4 trillion in home equity withdrawals. Consider this analogy. This is like everyone who had a banging E-trade account in Feb 2000 borrowing $1.4 trillion against their new found stock market gains. When the stock market collapse everyone just lost paper gains. It was painful, but the gains were never realized. If the housing market stalls or tumbles (see Las Vegas, San Diego or starting in NJ/Boston) - you have assets falling against a fixed debt that was inflated by home equity withdrawals.
There is a 20% chance that you will hear this phrase over and over in 2007-2008. "It was the perfect storm of economic events."
Tuesday, March 07, 2006
This is a great way to waste 15 minutes at work - Personal DNA. Admittedly, with US Productivity falling for the first time in years, this might not be the best suggestion I've ever made, but.....let's just say you did it during your lunch break.
Like most personality profilers, the questions are fairly straight forward, but I like their graphical answer tools. In the end, you'll get a cool image of your personality.
"The era of low-cost loans is ending, and interest rates on many federal education loans are poised to leap, starting July 1, because of congressional cuts.
The rate for so-called Stafford Loans, which represent the vast majority of federal education loans, will be fixed at 6.8%, compared with the current variable rate range of 4.75% to 5.38%.
The rate for loans taken out by parents on behalf of their children will increase from 6.1% to 8.5%."
If you are a parent with $20,000 of Stafford loans for your son or daughter your annual interest payments (just interest not principle) will jump from $1,200 to $1,700/yr.
Monday, March 06, 2006
Unfortunately, this measure is being cut in the interest of saving federal dollars. If the trend in M3 was relatively benign I wouldn't be all that concerned with losing the data, but M3 has shown a dramatic spike upward in the past three years. This spike is of great concern for inflation hawks and current account deficit watchers.
Congressman Ron Paul (R-TX) has begun an effort to restore the M3 measurement. Please contact your congressman - Republican or Democrat - and encourage them to promote this bill. Without this data our ability to make accurate assessments of the US economy will be severely curtailed.
Having said that, the decision to buy BUD and WMT is perplexing. I think it's part of his falling US Dollar play, but I think he's year early on that call as well. I assume the call is buy Walmart and BUD b/c as the dollar falls they will extend their reach into other global markets. I understand BUD, but Walmart?
Their investor relations guys are pushing China, Mexico, India, etc as big growth prospects but how many Walmarts will they stick in upstate NY? It seems like every time you turn on the TV their is a new Walmart being discussed up here. My main question for Walmart is - if you've searched the whole planet and determined that the next great profit center for Walmart is Potsdam, Watertown or Lowville, I'm concerned.
Walmart's new supercenter in Leray will certainly enable it to get a larger share of your total budget - they can get your food money (hurting Price Chopper, Hannaford, P&C, Sam's), your general merchandise money (hurting Kmart, Walmart), your home improvement/landscaping money (hurting Lowe's, Home Depot, Walmart, Kmart) and your tire/auto money (hurting local tire/quick lube stores and Sam's). Is there a theme? While Walmart's Supercenter is clearly going to boost the total % of your expenditures going to Walmart, it will have an effect on many of the existing Walmart stores (Arsenal St, Sam's).
That's not a growth story I like. I imagine Mr. Buffett bought Walmart near it's $42 low and it might be a good holiday trade, but I question the logic of making Walmart a core holding.
"There is enough saving in the world to provide the capital," says John Rutledge of Rutledge Capital.
Fully 80% of mortgage refinancings last year were "cash out." That means borrowers refinanced to a larger loan balance to get their hands on some cash to spend.
Last year, consumers pulled a mammoth $243 billion from their home equity.
That's nearly $1,000 per man, woman and child in the US. If this pool of excess capital (which was mostly spent) suddenly dwindles - as evidence seems to suggest that it will fall sharply in 2006 - the consumer-driven portion of the US economy could come to a grinding halt.
The article ends with a quote for the ages - "We want to be richer," Wyss says.
Thursday, March 02, 2006
Thus, far price declines have been relatively minor, but I believe this is principally due to sellers taking a wait and see attitude with the market. However, there are 2 factors that I believe can quickly change the pricing landscape - 1) new construction continues to escalate and builders (often with construction bridge loans) will need to sell in order to repay their loans and 2) rising rates push low-equity buyers out of their mortgages.
"Sales of new homes fell 5.0% in January to an annual rate of 1.233 million units, after an
upwardly revised reading for December. The details of the report are noteworthy for several
1) The January decline is the fourth monthly drop in the last six months.
2) There was a 5.2-month supply of unsold new single -family homes in the market place, the largest supply of unsold homes since November 1996."
3) The number of new houses for sale under construction and completed show an alarming upward trend.
Asha Bangalore - Northern Trust - Feb 2006
The number of new houses for sale under construction has rarely crossed 200k units (1978 and 1990 bubbles). Since 2000 this number has spiked from 180k units to almost 320k units.
It is important to note that thus far pricing has remained relatively firm, but if interest rates continue their march upward and newly constructed homes sit on the market for 6+ months, I believe that this orderly real estate market could become very disorderly.
Wednesday, March 01, 2006
An interesting read on the perils of real estate purchases as a market cools off. I disagree with the authors assumptions (that this bubble will pop like 89) and that it will have a minor impact on the economy.
I think this time we're facing a market more like Japan circa 1992. Real estate fell 60% in Japan and stayed down for 12 yrs. This coupled with the dramatic change in financing in the US today - zero down, interest only, etc have become the norm - will, in my opinion, have a dramatic negative effect on the US economy.
There are ways to turn this around, but we'll talk about that later.
The markets have shown strength today on the back of softer oil prices and the remarkable American consumer that can not stop spending. Despite that with existing home sales showing weakness again and confidence slipping I remain in the bear camp for April - Dec 2006.
Sales of Existing Homes Near 2-Year Low; Consumer Confidence Ebbs - NY Times
"Taken together, the figures suggested that the economy, while strong today, may be poised for a slowdown in the second half of the year, especially if the Federal Reserve continues increasing short-term interest rates to keep inflation in check, analysts said."
Hmmm, a weaker economy coupled with rising rates to fight inflation -- sounds familiar.
The professor seems to dismiss this as a trend with little basis in reality, but I'd strongly disagree. Wall Street today is influenced to amazing degree by the hedge fund business. Hedge Funds, particularly the big option players are major short-term traders that move markets. Many of the newer hedge funds are a less disciplined than their predecessors and they tend to be very heavily influenced by the dynamics of the trade rather than the fundamentals of company XYZ.
Much of the large option and stock trading that we see today, I speculate is coming directly from Permabulls (those people that consistently see the bright side of bad news) or Permabears (vice versa). There are very few traders and hedge fund managers willing to interpret information as it's received and change their viewpoint.
Because of this trend, we are in a precarious position. If momentum swings from the Institutional Permabulls to the Institutional Permabears, the market could face some challenges in 2006-07.