Friday, August 29, 2008

Hmmm, It Might Be Time to Consider "Stuffing Money in My Mattress" as an Asset Class

According to this article on Marketwatch.com just 17 out of the 2,100 mutual funds that are open to new investors have positive returns for the past 12mths and year-to-date. That's 0.81% of mutual funds with positive returns (before fees) or you had a 1 in a 100 shot at making money in a mutual fund this year. That should ease the pain when you open up your next Fidelity or Vanguard statement, right?

"Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have positive returns for both the past 12 months and year-to-date, according to investment researcher Morningstar Inc. Nancy Tooke runs three of them."

So in effect, if you exclude the effects of inflation and falling dollar, if you had stuffed your money in your mattress you would have beat 99% of "professional" money managers that were taking new money. Wow, these guys make the Farmers Almanac look accurate.

The article goes on to praise Ms. Tooke for her stellar 3-4% returns (about what a decent bank paid last year without any fees). Yikes. An average investor with a limited understanding of the market could beat that in a day if they were willing to be a bit of a contrarian.

Reminder - I added some subscription options on the sidebar. Email delivery of new posts or RSS Feeds, the choice is yours.

Happy Labor Day!

Thursday, August 28, 2008

Here come the Bulls...

The markets continue to feed of suspect data and spiral higher. I've been saying for some time that you need to be especially wary of the government data and in particular watch how the big money reacts to the data.

The two most recent data releases - durable goods and GDP - have been interpreted as good news and the markets are up about 350 points in the last couple of sessions. The headlines and the summary reports run by the news wires clearly seem to be good news for the economy. Again, I don't recommend fighting the news but be aware that most of the big money uses head fakes like these establish short positions.

1) Durable goods - Consider as Goldman Sachs noted that "Durable goods orders beat expectations with a 1.3% month-on-month increase in July. But the apparent strength is due to higher prices, not stronger activity. In fact, deflating orders by the producer price index for durable manufactured goods shows a 9.4% year-on-year drop in real orders, the worst since early 2002." In effect we report durable goods orders in dollar terms and since we are seeing fairly profound producer inflation we are selling fewer goods for more money and that gives the illusion of a strong economy when in fact the exact opposite is occurring . For example, assume that last year a producer of paper equipment might have sold 10 units for $1,000,000. If today they sell 9 units for $1,100,000, the durable goods number shows a 10% increase, when the reality is they've sold fewer goods and the associated inflation that they are experiencing (steel, energy, raw materials) offset any price gains they've realized.

However, most small money traders and people running the desks while the big boys vacation in the Hamptons this week will see Durable Goods Beat Expectations and they'll start buying stocks with two fists.

2) GDP - Again the headline here screamed Q2 GDP Revised UPWARD to 3.3%!! and away they went. However, the devil is in the details - Inventories rose, stimulus spending drove some of the growth, exports were surprisingly strong as a result of the weak $ and Federal Government continues to spend like a drunken crab fisherman on leave in Dutch Harbor (shout out to my fellow Deadliest Catch viewers). Q3 will not likely see a repeat of these events as the US $ has strengthened and the stimulus checks are almost all spent.

As expected this should present an opportunity to build a short position in the first weeks of September.

Cheers!



Wednesday, August 27, 2008

Hurricane Rallies in Oil and Random Thoughts on China....

I'm still a believer in the downward trend in oil, but it's hard to fight the tape when there is a hurricane headed for the Gulf of Mexico. I had a near term target of $110 in oil with a 12 mth target of $90, but the oil traders are back and they are feasting on the hurricane hysteria so it's best to go to the sidelines until Gustav is out of the picture. I think the new range for oil is probably $115 to $125 until Hurricane season ends. Of course, Georgia/Russia, an October surprise in Iran or any other factor could blow these forecasts out of the water.



I'm no longer short oil and I'll look for an opportunity to get short again if oil reaches the mid $120's.

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China's Olympic experience was wonderfully choreographed and far exceeded my expectations. Having said that, China may not be the all powerful engine of economic growth that we fear. Consider the following:



1) China is considering an economic stimulus package despite having reported GDP growth in excess of 10%.

"China is considering a 370 bln yuan package of fiscal expenditures and tax cuts to stimulate the economy, the Economic Observer reported, citing a source close to the matter. The report said the plan includes 220 bln yuan in government spending and 150 bln worth of tax cuts."

Maybe they are not really growing as fast as reported? Would a country that obsesses over controlling the message so much that they would make a 9 yr-old girl lip sync at the Olympics actually put out misleading economic data? Food for thought.



2) China's growth is literally killing it's people.

Despite the respite from pollution during the Olympics, the air quality in China is so bad that our children may not have to worry about competing with their children 20 years from now. The health issues that are going to crop up in China over the next 20 years are going to be a monumental issue for them to overcome. The Guardian put together some rather disturbing slides of the pollution in China.






3) The quality of Chinese made products continues to decline, not improve

The great promise of Chinese manufacturing is that by incorporating western manufacturing techniques with their massive labor force, you will get a superior product for half the cost. To date, it has been purely anecdotal evidence (the a/c unit that breaks after 2 years, the water cooler that breaks after 3 years, the printer that stops working after 18 mths, the bike tubes that burst upon inflating), but the quality of Chinese made products is so poor that it is creating an opportunity for a US manufacturer to regain market share.

If I were a consultant, I'd encourage a major consumer product company to fight the outsourcing trend and bring manufacturing of major consumer products back to the US (or another industrialized nation). I think consumers would gladly pay a 25% premium for goods that were deemed to be superior in quality and performance to those manufactured in China.

I have some final thoughts on the lack of free thought and how that limits innovation but I'll save that for another post.

Cheers!

Tuesday, August 26, 2008

Local Wind Project Gets Some Unwanted Publicity

The folks at Maple Ridge in Lowville and more importantly the many wind supporters in various communities in Northern NY might want to work really hard to bury this story in the NY Times - Power Grids Limits Potential of Renewable Energy.

This has long been the problem with renewable energy in the Northeast - an antiquated transmission system that can't handle the flexible energy schedule that is subject to the whims of the shifting winds off Lake Ontario.

"The grid’s limitations are putting a damper on such projects already. Gabriel Alonso, chief development officer of Horizon Wind Energy, the company that operates Maple Ridge, said that in parts of Wyoming, a turbine could make 50 percent more electricity than the identical model built in New York or Texas.

Transmission lines carrying power away from the Maple Ridge farm, near Lowville, N.Y., have sometimes become so congested that the company’s only choice is to shut down — or pay fees for the privilege of continuing to pump power into the lines."

The problem is that the wind energy issue is being fought locally without any strategic input from the Federal Government. A $60 billion enhancement of our grid that would enable large scale wind (and solar) projects in the middle of the country to feed that power to our cities on the coasts would be a fantastic first step. The cost is not insignificant but when viewed as a long-term strategic "investment" it is substantially more attractive than some of our most recent multi-billion adventures (the GSE bailout comes to mind).

Just in case, there is any confusion I am an enormous proponent of wind power. However, I think it is disingenuous of the wind industry to simply talk about generation of power and fail to discuss the transmission issue.

At least one business is booming...

According to the Courant, the repo man is experiencing an economic bonanza as more middle and upper-middle income families fall behind on their toys that were financed with easy money during the past 5 years.

"Charlie Clarke throws his boat into gear and speeds toward the waterfront mansion in North Palm Beach. His eyes fix upon the 63-foot yacht docked outside. He's piloting Little Tow — an 18-footer that barely fits a crew of three.

Within minutes of hopping onto the wooden dock, he has untied the yacht from land and attached it to his own boat. Little Tow may seem like no match for the larger craft, but with a 150 horsepower engine, the job is a breeze as his tow captain pulls the yacht away with Clarke on board. "Piece of cake," Clarke says.

Though the struggling economy means hard times for most people, it's a godsend for the repo man, the person who shows up — often unexpectedly — to snatch your property when you're behind on payments."

Like most financial problems this one sits squarely on the backs of the consumer who though they could afford a $100k boat because the payments were "just" $880/mth over 15 years.

"I remember years ago when we used to pick up a boat a day," says company President Bob Toney. Right now he has 650 boats for sale or ready for sale across the country — in addition to Florida, he has teams working in Los Angeles and Cleveland. "People that have gotten into boating more recently are not as experienced, and may not have realized the costs involved. Fuel is a big part of it. Marinas are charging $5 to $6 a gallon, and you've got a 300- to 400-gallon tank."

Sunday, August 24, 2008

Parallels Between the Southern California and NNY Real Estate Market


There was a good piece in Sunday's NY Times highlighting the problems of Merced, CA where 3 out of 4 homes sold recently were foreclosures.


When you hear about the stories of unbridled growth in Watertown consider the following:


"But hardly anyone in Merced planned very far ahead.


Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth.


Certainly not the developers. They built 4,397 new homes in those neighborhoods, some costing half a million dollars, without asking who in a city of only 80,000 could afford to buy them all. (Does this sound familiar?)

Obviously not the speculators turned landlords, who thought that they could get San Francisco rents in a working-class agricultural city ranked by the American Lung Association as having some of the worst air in the nation.


And, sadly, not the local folk who moved up and took on more debt than they could afford. They believed — because who was telling them differently? — that the good times would be endless.


“Owning a home is the American dream,” says Jamie Schrole, a Merced real estate agent. “Everybody was just trying to live out their dream.”"


It's a classic mistake in real estate. Professional developers saturate a market and let the individual homeowners take the hit down the road.


In the three years since housing peaked here, the median sales price has fallen by 50 percent.


Unfortunately, the impact of a weak housing market is wide and eventually, it will cut very deep. Municipalities around the country are starting to feel the pinch as tax rolls fall.


During the good times, Merced built up a $17 million rainy-day fund. Now the city has a revenue shortfall. “We’ll bridge that gap by using the reserves,” says James Marshall, the city manager, “but over time the bridge ain’t long enough.”


When you flip through the local paper and note the surprisingly high number of homes listed in Northern NY above $200k (and many surpassing $300k) consider that our median income is just slightly higher than that in Merced.


He was selling houses for $300,000. That means a buyer would have needed a household income of about $100,000 to comfortably make the payments. But Merced’s per capita income of $23,864 ranks among the lowest for metropolitan areas in the country. “None of us paid much attention,” Mr. Glieberman says.


It isn't an exact match to the NNY real estate market but the warning signs are on the wall - rapid increase in prices, limited change in fundamentals of the local economy and investors/contractors driving prices up.

Cheers!

Friday, August 22, 2008

Who made $270mil off Bear Stearns' Collapse???

Well, it certainly wasn't me, but I remember seeing a ton of out of the money puts trade in Bear Stearns in early March. I half-joked to a friend that "it looks like someone is betting that Bear Stearns is going out of business -- this week!!".

There's a pretty flimsy article in the UK Independent covering that huge option trade in early March.

The derivatives trade involved put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each on 20 March, and 165,000 shares for $25 each also on 20 March, according to Bloomberg data. The options cost the anonymous investor $1.7m.

The argument that an investor that risked $1.7million could bring down a firm the size of Bear Stearns is laughable. However, that huge option trade attracted a lot of attention and led many other investors to start scrutinizing the house of cards that was Bear Stearns. No one investor took down Bear, but it did signal the beginning of the end.

The bigger question is why aren't you playing options? Turning $2 million into $200 million in a couple of weeks is a nice return.

Thursday, August 21, 2008

Oh Microsoft, How the Mighty have Fallen....

It took me a long time to come around to the conclusion that Microsoft was really losing it's stranglehold on the tech industry. Yeah, Google had some cool features, but what moron actually clicks on the paid search results? Clearly, a lot more than I expected.

Oh and Apple makes cool little tools for playing around, but no one does serious work on an imac do they? Ooops, wrong again.

Now comes word that Microsoft is hiring Jerry Seinfeld to make them appear cool again. Huh? As Silicon Alley Insider notes, is Jerry Seinfeld even cool anymore?

"Specifically, Microsoft is paying Seinfeld $10 million to pal around with Gates and joke about how cool Windows is. The goal of the campaign? To get that nerdy Windows guy in the Apple ads out of people's heads."

Someone really needs to give the boys in Redmond a reality check.

Wednesday, August 20, 2008

Gas Prices Down for 42nd Straight Day and Financials Can't Find a Floor

Gas prices continue to follow larger trend in oil and fell in California for the 42nd straight day. According to a San Diego newspaper a gallon of gas has finally broken through the $4 level. The fact that oil has fallen so sharply, so quickly in the face of hurricane season and the Russian/Georgia conflict speaks to the power of the demand destruction that occurred as a result of $4.50/gallon gas. Demand destruction and traders bailing out of the oil trade are the primary drivers of this move, but I sense that most of the global oil producers think that we have acquired a taste for $95 oil (roughly $3.30/gallon gas). I think that if the trend continues when oil breaks $100 you'll hear more talk of OPEC cutting production.

Ultimately, cheaper gas does nothing to break our addiction to oil and in fact it will reduce the incentives to find fossil fuel alternatives, but I can't change the market, I can only observe the trends.

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Just when you thought the worst was over for financials.........The get whacked again. I was right on the direction of this trade (financials going lower) but I missed the timing. I thought it would be best to wait until Labor Day weekend to go short financials and I thought you'd get a chance to buy puts at more attractive prices. We might still get a bounce or two from here, but some of the big names have a lot of life sucked out of them already.

In my new role as a futurist I offer the following big picture global view of the events of the past 3 mths. Just as our economy falters, China puts on a surprisingly successful Olympic games and exits the games positioned to be a global leader for the 21st century. This is a very important time in our history and as I've said before, I think that when the history of this century is written we will look back and note this moment as a literal and figurative passing of the economic torch. I hope that I am wrong, but for most of the 21st century the US has looked and felt like the UK at the beginning of the 20th Century - an aging superpower that is slowly losing it's grasp on the world's economy. I don't foresee a complete collapse of the US economy but rather a slow fade from power much like the British experienced 100 years ago. We have a very small window of opportunity to fix this and here's my plan:

- 75% of the world's best and brightest still want to come to the US, let's welcome them with open arms.

- Clean electricity generation, non-fossil fuel based personal transportation and delivering access to clean fresh water are going to be the greatest vehicles of economic growth in the next 50 years. China has powered their growth by making junk for Walmart. They have no specific lead in these Super-Industries yet, but time is short. One major windmill manufacturer in Germany mentioned last week that in 2007 not one new competitor emerged from the US, but 35 companies were started in China.

- Clean up our act. Our Federal Gov't spends like a drunken crab fisherman right now and that has to change. We have to slash healthcare costs, slash defense spending (yes, I said it cut defense spending - any country that spends more on defense than the next 45 countries in the world COMBINED has some serious issues), increase education spending (the right kind of education spending), etc. These are political footballs that no one wants to touch but if we don't we'll find ourselves mortgaging the farm 10 acres at a time to pay for another night out a Red Lobster.

Cheers!

Tuesday, August 19, 2008

Stunning Real Estate Map

Don't worry about the details, but it's important to note that the blue diamonds represent year over year price declines of more than 20%. California has a number of regions down over 30% year-over-year and Florida is really ugly as well.

Some of their key observations:
- 29% of homes purchased in the last 5 years have negative equity (ie, the mortgage exceeds the value of the house).

- Foreclosed homes account for 50% of all home sales in some markets

- Home values are now falling in 85% of the country

"Nationwide, nearly one in four (23.7%) homes sold during the past year sold for a loss while nearly 15 percent of sales were foreclosures(5). In parts of California, more than 60 percent of homes sold in the past year were for a loss while homes sold in foreclosure exceeded 50 percent.

In New York- Northern New Jersey-Long Island MSA, which has the lowest rates of foreclosure among the markets monitored by Zillow, the percentage of homes sold for a loss since the second quarter 2007 is 8.8 percent and the percent of homes that sold in foreclosure is 3 percent.

In many markets, the rate of these Distress Signals is two to three times what was reported just a year ago. For example, 32.7 percent of homes sold in the second quarter were sold for a loss and 18.6 percent were foreclosure sales compared to the year-ago quarter when the rates were 12.2 percent and 7 percent respectively. In the San Francisco-Oakland-Fremont MSA, for example, nearly half (48%) of all homes sold in the second quarter recorded a loss while 34.3 percent were foreclosed; however, just a year ago, the rates were 14.9 percent and 10.7 percent respectively."

So what does this mean for Northern NY? Well, we continue to be an outlier. We didn't participate fully in the real estate boom and we're not experience the great pain --- yet. I've long argued that the high percentage of employment tied to public service (Ft. Drum, education, prisons, Border Patrol, Law enforcement) and the relatively small private sector in NNY means that we follow the state and federal budget patterns more closely than the private sector economy. However, they are very closely linked. As tax revenues fall, payrolls in the public sector will shrink and this will have a dramatic effect on our local economy in 2009 and 2010. So, despite our current stability in the NNY real estate market I think the best days are behind us.
Cheers.

Monday, August 18, 2008

OPEC "2008 Has Been Berry, Berry Good To Us"




With apologies to Sammy Sosa, the news today that total OPEC revenues in 2008 will surpass total US Tax Receipts for the first time in since 1980. Just 5 years ago tax receipts were running at roughly 4 times total OPEC revenue. 2008's OPEC revenue of $1.2 Trillion is roughly 6 years of oil revenue at 2003 prices. The geopolitical ramifications of this sort of global wealth transfer are easy to see (check out Burj Dubai - Started in Sept 2004 and to be finished in Sept 2008).


The Organization of Petroleum Exporting Countries' export revenue will surpass what the U.S. raised last year in individual income taxes. The cartel's revenue may reach $1.174 trillion this year, edging U.S. personal income tax receipts for the first time since 1980, when gasoline shortages and the Iranian hostage crisis transfixed the country.

Source: Econopic


I Want A Cool Nickname Like Dr. Doom...

There's was a brilliant article profiling Nouriel Roubini in the NY Times Magazine this weekend. Dr. Roubini's work was once ignored as permanently pessimistic, but today realism seems to be gaining traction again and his star has never been brighter (although I'd guess many on Wall Street wish he'd go away).

The whole article is worth a read but the key paragraph is below:

For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

Markets: The great commodity unwind continues and I don't see any reason for it to change this week. Short oil, short corn and long equities (particularly large cap tech) is the trade until Labor Day. The one variable is that the next two weeks are the big vacation weeks on Wall Street. Most of the players will be with their families in the Hamptons, flying to Nantucket, sitting in traffic on the Garden State Parkway. This can lead to some wild trading particularly on Friday which is option expiration for August.

* Disclosure I have a position in DUG (an ultra-short oil fund).

Thursday, August 14, 2008




It's definitely worth a click-thru to checkout this map highlighting the foreclosure rates across the country.

A couple of things jump out at you when you see this image - The Southwest and Florida are in deep, deep trouble. We are at the very beginning of the housing meltdown and many of these counties have 1 out of 25 homes in foreclosure. This problem is not going to be fixed with sound bites and itty bitty bailouts. It's going to take big thinking from our best and brightest. Unfortunately, it may be too late before the message gets to Washington.

What's up with Northern NY and for that matter all of the Northeast? The rate of foreclosures clearly surprised me in the Northeast but I think the NNY numbers are a bit of an anomaly. You get a light blue if 1 in 1,000 to 10,000 homes is in foreclosure and a dark blue county if 1 in 10,000 to 100,000 homes are in foreclosure. Given that most counties in NNY have fewer than 100,000 homes it doesn't take many foreclosures to start skewing the data. It is worth watching however, and if we shift to a majority of pink counties (1 in 250 to 1,000 homes in foreclosure) we may start on a very slippery slope.

Cheers!

The Drill Now Myths

I'll preface this post by saying that this is not a political commentary. I don't do politics. I'll leave that to the rest of the blogosphere (btw - anyone hate that word as much as I do?). However, I do have an opinion on markets and supply/demand issues and the drill now nonsense is clearly an economic falsehood that needs to be exposed.

So without further delay here are the facts:

1) Drilling might eventually add 200,000 barrels/day. The Energy Information Administration (EIA) estimated that is the amount of oil we could produce on the Outer Continental Shelf (OCS) if the drilling ban were lifted. The EIA estimated this to be approximately 200,000 barrels per day. Global oil demand is forecast to be 87.7 mil next year. So we are talking about a 0.2% of global demand. To call that amount a drop in the bucket might be generous.

2) OPEC's Reactions - If for some reason that 0.2% increase in supply did actually impact prices can you guess what will happen? OPEC - 70%+ of global supply - would simply cut back on their production by a very small amount and we'll be right back at square one.

3) It's not OUR Oil - This is probably the most pervasive myth. "We need to get our oil" is the popular refrain across Washington. Well, unless tWashington want to nationalize ExxonMobil, our country does not have a national oil company. We have lots of private companies in the US that like to drill and pump in the US (Exxon, Chevron, etc). When that oil comes out of the ground it becomes part of the global oil supply and can be sold to anyone. There is no guarantee that that oil would even stay in the US unless Congress mandates it again. In the mid-90's up to 4-7% Alaskan oil was shipped to Asian countries until Congress banned that activity.

4) Price can destroy demand - The combination of high prices and a weaker US economy have finally impacted demand. In 2008, daily US consumption of oil is down almost 800,000 barrels/day or a 3.8% decline in daily demand. Remember that 200,000 number from increased drilling? Well that pales in comparison to this number. This decline in demand has 16 times the influence on prices that our prospective drilling does. In fact, this is the great fear of OPEC. If price stay above their natural level ($70) you can expect global demand destruction and oil prices could reverse to an unnatural level of $50 or lower. Unfortunately, the recent fall in prices at the pump (I paid $3.50/gallon pretty consistently up and down the east coast this weekend) is likely to push oil demand back up and with it prices.

So, should we drill? IF it can be done safely and economically, then sure, but we should stop kidding ourselves that it will have any impact on global oil prices.

To paraphrase Tom Freidman - The answer to breaking a crack addict's addition isn't cheaper crack and the answer to our oil addiction isn't cheaper oil.

Cheers!

Friday, August 08, 2008

Funniest Ribbon EVER!!!


Okay, so I came in 3rd out of 10 people and I was beaten by 60 year-old but I was still pretty happy with my finish in the Chaumont Triathlon this past weekend.

That was until my wife pointed out the Figure Skater on the top of my 3rd Place Ribbon.

Huh? What are they trying to say about my manhood?

Well the week played out as expected....

After the 300+ point fed rally, I said to expect a reactionary sell-off which was fueled by more weakness in financials (they'll bounce from here). Oil continues to weaken despite the news out of Russia that they are at war with the Georgians. Oil's around $117 as I write this and it if it breaks $115 I think the next stop is $105. The dollar continues to gain ground as well.

So, the market is range bound right now but the sell oil, buy stocks (particularly defensive tech) trade seems intact for next week. This is a risky pair trade b/c the economy is really struggling and I find it hard to be long anything right now, but with properly set downside limits I think you can feel comfortable being long QQQQ and long DUG next week.*

* Disclosure - I have a long position in DUG.

Wednesday, August 06, 2008

The Nearly Extint Rallyasaurus Makes an Appearance

The markets rallied sharply yesterday on the back of weaker oil prices and the idea that the Fed is going to leave rates alone for sometime. Again this shouldn't have come as a shock to anyone, the Fed is not going to make any dramatic moves right now in the face of an election. I know, the Fed is supposed to be an independent entity but anyone that has watched their moves over the past 10 years knows that they are anything but independent.

Oil continues to weaken on concerns that prices are causing demand destruction (true) and funds continue to unwind their long oil trades (true and more important). I'm not a technician but oil looks like it has further to fall from here.

So, if none of this was "news" why the big rally? Well, that's where the psychology of Wall Street comes into play. A lot of money on Wall Street is run by people that are happy to get the last 30% of a move. They think they know what will happen (a Tuesday market rally), but they aren't sure, so they wait and wait and wait, until the market has shown them some conviction and then they buy with two fists for the rest of the day.

Days like that tend to be followed with a sell-off so if today starts a little weak look for a triple digit decline by the end of the day.

Yesterday's action is in keeping with our summer thesis. Business is awful for almost everyone, but stocks look like they are going higher for the next month. Long the market and short oil is a pretty good trade for the next two weeks.

There should be a nice opportunity to short the market again after Labor Day.

***** Disclosure - I'm talking my book b/c I'm long the mkt via S&P and QQQ and short oil via DUG (up 45% in 2 mths).

Tuesday, August 05, 2008

Homes selling below construction cost?

This is a pretty good map showing the regions of the country where construction costs exceed sales prices. It's pretty clear that the Midwest continues to be hard hit by the loss of manufacturing jobs and Detroit's slowdown.

What is particularly interesting for readers in Upstate NY is that both Rochester and Buffalo are on this list. I'd argue that Jefferson/Lewis/St. Lawrence counties are more like Rochester/Buffalo than any East Coast region that has been insulated from the sharp housing declines.

There may come a time in the very near future when sellers in upstate NY are in the same boat as their Western NY friends.

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Separately, is there any piece of Arsenal St. commercial property that is not for sale? The old Salvation Army Building, the Long John Silver Store, the car wash by the mall, Hannaford's lot, the old Rex Store, plus all the empty spaces in the Old Navy building, the Gamestop building, the new building in front of Sam's, etc, etc. I think the owners of commercial real estate in Watertown see the writing on the wall and they are all trying to get out while the getting is good.

I'll try to put together a map of for sale properties on Arsenal St. later in the week.

Monday, August 04, 2008

Subprime Mess was the Tip of the Iceberg?

There is a compelling story in today's NY Times covering the rapid deterioration in mortgages to those with good credit. While this is not news to anyone following the markets closely, the news that good credit risks are suddenly falling behind on payments is likely to gain traction with the mainstream press.

"Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.
Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”

Prime and alt-A borrowers typically had a five- or seven-year grace period before payments toward principal were required. By contrast, subprime loans had a two-to-three-year introductory period. That difference partly explains the lag in delinquencies between the two types of loans, said David Watts, an analyst with CreditSights."

There are going to be a number of people that will continue to blame others (Wall Street, the lenders, real estate agents, appraisers, etc), but with prime and Alt-A borrowers more of the blame lies with with the borrowers themselves. By default a good credit customer should be more financial astute than a subprime borrower. So, when a prime borrower chose to buy a $650,000 3bdrm house in CA with an interest only, negative amortization loan (resulting in a $2,800 mth payment for 4 yrs) instead of a more prudent decision to buy a $350,000 house with 20% down and a 30yr fixed rate (resulting in a similar $2,800/mth payment) there is no one to blame but themselves.

Like most debt financed items in our country -cars, boats, houses, college - people remain obsessed with "What's my payment" rather than understanding the true cost of borrowing.

Cheers.