Friday, September 05, 2008

It's a Busy Day...

A) Rumors, Rumors, everywhere....

A series of rumors have shaken the traders in the market. Unfortunately for people that are long equities, most of the market is moved by these traders. SocGen put out an alert yesterday calling for an imminent collapse in global equities. These sort of calls usually go unnoticed, but in today's nervous market it was enough to shake people's conviction.

Continued rumors about this hedge fund closing or that hedge fund blowing up are everywhere. Some of this is true and due to the continued collapse in commodities. However, there is another side to this story. If you're a hedge fund that's down 10% this year, you'd love to see a sharp 5% drop (like we've had this week) so you can load up your long positions for a false bear rally. This might allow you to meet your goals in the face of a weak market. You can threaten hedge funds with regulation but if you threaten their overnight billionaire status you might create some desperate moves.

Interestingly, not a rumor was Goldman cutting Merrill Lynch to sell. As unbelievable as it seems, we could see the day in 2009 or 2010 that Lehman, Bear Stearns and Merrill Lynch (and maybe even Citi) are all gone as independent entities. Since Financial Services was the last great industry where the US was a true global leader, this will be a sad changing of the guard.

B) Housing Prices - A note made the rounds last night highlighting an interview with Robert Shiller of the Case/Shiller home index and he had some rather dire forecasts:

* Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

*There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

*The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

1) Prices in some parts of the country will fall more than 30% simply because the financing math will change. In 2005, you could buy a 4 bedroom house in SoCal for $2,700/mth with no money down, a neg-am mortgage and a 40 yr payback. That same house with a traditional 30 yr mortgage might cost $4,000/mth if prices were stable. Since no one wants to pay more solely b/c the structure of the financing has changed, prices must fall. This is the big difference between today and the Great Depression. The Great Depression caused prices to fall due to supply/demand issues, the Great Credit Crunch is going to push prices lower just because access to financing has dried up.

2) I don't know where he gets the number that 10 million people owe more than their house is worth, but if that is the case we're in deep, deep trouble. Have you ever been underwater on a car, where you owe more than it's worth? Well amplify that feeling by 50 and you'll get some sense of the panic we could have on our hands if 10 million homeowners suddenly realize their home has shifted on their personal balance sheet from an asset to net liability.

3) I can't agree that home prices won't spike again after we bottom. Did we learn anything from the tech bubble? Not really, stocks ran fast and furiously from 2004 to 2007. Much the same could happen in housing, but it's probably a 2012-2015 story.

C) Microsoft ad
Some time ago I posted a comment on Microsoft's plan to recapture their cool mojo with a series of ads from Jerry Seinfeld. Well, the first of them debuted last night and it was cute, but it's not enough to slow the Apple/Google juggernaut. Google's new browser is fast winning fans and like all things Google, it's easy, clean and free.

Note - I finally changed the website address - I now have the blog hosted at - so note it in your bookmarks.


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