Paul Kedrosky's Infectious Greed

Mortgage Market Week in Review - A Guest Post

guest2008 — Fri, 18 Jul 2008 13:42:26 -0500

Tom Vanderwell here, and I'm taking the liberty of reposting my Mortgage Market Week in Review that normally appears at my blog at www.straighttalkaboutmortgages.com. I'll have more thoughts about the mortgage world next week and thanks to Paul for giving me this opportunity......

Well, believe it or not, we've made it through another week. And wow, what a week it's been. I'm going to try a little bit of a different "scenario" for this week's Mortgage Market Week in Review. Rather than trying to tell you everything that's been happening this week (it would be a REALLY long story) I'm going to try to hit the highlights (or low lights if you will) of what's been happening.

So, here goes:

1. Starting with last Friday afternoon, we found out that IndyMac Bank (in California) was closed by the FDIC. It's the largest bank or savings institution that has failed and approximately 10,000 of their clients had more funds in IndyMac bank than was covered by FDIC insurance and will therefore lose a lot of money. This started the week on a very negative note as the financial markets started getting a serious case of "Who's next?" worries about the banking world.

2. Chairman Bernanke of the Federal Reserve and Secretary Paulson of the Treasury testified before Congress on Tuesday and Wednesday. I'm going to give you an extremely abbreviated version (my opinion) of what he said: 1) The economy is not out of the woods, it's actually not even close to the edge of the forest. 2) Fannie Mae and Freddie Mac are very important to the health of our country's economy and we are putting these "rescue efforts" in place not because Fannie and Freddie need it now, but strictly because we want the markets to be comfortable that they won't fail. 3) Right now the risks to the economy from the credit crisis significantly outweigh the risks to the economy due to inflation (meaning rates won't go up any time soon - at least the rates that they control).

3. The "it's not so bad" syndrome started taking hold on Wednesday. What's that? I guess I'd describe it this way. You have a house with a very nice deck and a screened in porch on the back. A storm comes through and a tree gets knocked down and it falls on your deck and screened in porch totally wiping them out. You come out of the house after the worst of the storm goes through and look at things and say, "It's not so bad!" Wells Fargo, Citibank, and JP Morgan Chase all reported earnings (losses) that were not as bad as the markets had expected. Were they good? Well, JP Morgan actually did make money but if you read the details behind the headlines, their earnings were down by 53% and their credit losses in many areas of consumer financing were growing quite substantially.

4. Oil prices dropped - why haven't gas prices dropped? Oil prices dropped the last couple of days, mainly for two reasons: 1) Inventory reports came in higher than expected. I've always kind of wondered, why are they higher than expected? Did they forget to look in the last warehouse? Or did they forget about a couple of tankers full? 2) After Bernanke's testimony, the markets are expecting that the weakness in the economy is going to further decrease demand for oil.

5. Economic reports - A number of reports (Consumer sentiment, builder confidence, the Philly Manufacturing index, New Housing starts) came out and guess what, they call came out on the down side (at least once you read behind the headlines that often get spun in a different way).

6. Stock prices - the Stock market had two really good days on Wednesday and Thursday (see item #3 for details on why). This has lead to a pull away from the bond market and into the stock market and has put a LOT of pressure on interest rates in the last few days.

7. Freddie Mac came out with a plan this morning to raise $10 Billion in a stock sale. Let me ask you, would you invest any substantial sums of money in a company who is currently looking at a bailout plan that is working it's way through Congress? A bailout plan that would essentially leave you with $0 left? Don't think that's going to do anything other than muddy the waters.

So where does that leave us?

1. I believe that anyone who is telling you that this is the "bottom" of the financial problems is fooling themselves and attempting to fool you as well. If you spend some time reading a site like Calculated Risk then you can see the story behind the headlines and that story shows that we're not at the end of this game.

2. Markets don't go straight up or straight down, but they move in zig zags. My perception of this week is that it was the "Zag" that came from a lot of wishful thinking that maybe things aren't so bad. I hope they are right, but I don't believe they are.

3. As the markets continue to keep vibrating, rates have resumed their volatility.

My recommendations at this point:

1. I still believe very firmly that, due mainly to stresses at Fannie Mae and Freddie Mac, rates are going to be heading up eventually. However, with Secretary Paulson saying that "nothing needs to be done right now," I think that some of the immediate pressure is of doing something "today" is at least temporarily delayed. However that could change again by Monday. Therefore it remains critical for anyone who is thinking about buying, selling or refinancing to keep in touch and keep up with what's going on in the markets.

2. Knowledge is even more important now than it has ever been. Those who have a good sense of what's going on in the market, what's working, what's not working are the ones who can make wise decisions and work through this market cycle.

3. Remain firm in the belief that the world is not coming to an end. This is a market cycle, a downturn (a very steep one) but it's a market cycle. Those who adjust will make it through, maybe not necessarily in the same place they were, but they'll make it through.

I'll continue to keep you informed, please call or e-mail any time I can be of help.

Thanks!

Tom Vanderwell

Office (616) 653-5375

Cell (616) 292-7559

Fax (616) 825-6085

thomas.vanderwell@53.com
straighttalkaboutmortgages@gmail.com

Quote of the week: Mr. Dimon of JP Morgan, via Housing Wire: "Prime [mortgage book] looks terrible," he told analysts on the call. "And we're sorry, and there's nothing else we can say." 7-17-2008

Guest Post: The Way Forward for U.S. Energy

guest2008 — Fri, 18 Jul 2008 13:04:57 -0500

From John S. Boyd who blogs at BlindReason.org

There is a big debate in Congress now about another stimulus package as fears about another potential downturn in the economy via Bloomberg here (insert link) http://www.bloomberg.com/apps/news?pid=20601070&sid=a5P_x5HfhQA0&refer=home with an excerpt below.

``We will be proceeding with another stimulus package, and we once again hope we will work in a bipartisan way,'' House Speaker Nancy Pelosi said after House Democratic leaders met with a group of economists to discuss the spreading housing crisis and rising gas prices.

Pelosi and other House Democrats said that in addition to more rebates a second stimulus package would probably include additional spending for roads and other infrastructure, expanded unemployment benefits, home-heating assistance for low-income families and aid for states struggling with budget deficits.

Plans for the stimulus legislation are taking shape as Democrats race to approve the Bush administration's proposed rescue plan for Fannie Mae and Freddie Mac by early next week.

We have spent almost $200 billion on the last package but what did it really buy us?

Essentially, we borrowed the money to finance the stimulus from lenders in the Middle East and China for rebate checks to help consumers pay for higher prices for fuel and goods. Of course, we are buying a lot of these higher priced oil and goods from China and the Middle East who we borrowed from in the first place. It's given us some nice upticks in retail spending but has it done anything to solve the long term lack of savings in the United States, make us a more competitive country, or to help American's get their financial house in order? A financial house that has been burdened by decades of over spending and lack of savings. What happens to retail spending next quarter when an over leveraged consumer has to buy these things on their own again?

At the same time, the US government seems slow to enact any kind of long term strategic plan to address the energy problem or our long term competitiveness. The Congress seems paralyzed by extreme views from both sides of the isle and no attempt to find middle ground. If we are going to spend a few hundred billion on a stimulus plan, or a few hundred billion to bail out Fannie and Freddie on top of that, why not spend at least that on a long term energy competitiveness plan to address some of these longer term issues.

In the mean time, high oil prices persist, which hurts our trade deficit, increasing our borrowing, decreasing our currency further which in turn raises the price of oil and other imports. It's a bit of a nasty cycle and instead of looking to the Fed to solve the problem quickly with lower rates, we need some longer term solutions from the Congress. Every time something goes wrong the first reaction seems to be what is the Fed going to do to bail us out? It's funny, I wonder sometimes if people think the Fed is another branch of the government and forget we have a Congress or Executive branch.

That said, here are a few somewhat moderate ideas to toss out for consideration. I consider myself only radical in my own moderation and aside from maybe one of these ideas they hopefully fit within those parameters:

Invest in our long term energy infrastructure which includes a "Marshall Plan" for investments in solar, wind, natural gas, nuclear, geothermal, biomass and (please don't shoot me) but even drilling. We need to do a little bit of everything all at the same time to start to make a dent in this problem and do research on new technologies. No one solution is going to help here folks.
Put a tax on imported oil above $80 dollars a barrel and forget about a windfall profits tax. All a windfall profits tax on US producers will do is shift production overseas so we import even more oil, get a worse trade deficit and devalue the dollar even more. Our taxes are way below Europe, Japan, and Canada. Use the proceeds from the tax for a tax rebate to low income Americans and to fund this "Marshall Plan for Energy". In fact, we can make the cost of a fuel efficient car cost the same for consumers as regular cars do now with huge savings on fuel over the life of the car.
People hate the idea of drilling and the analogy people use is giving heroin to an addict. If you want to use that analogy here sometimes you need to slowly wean people off a drug before they can be free of it entirely. In the short term, we are using oil to fuel our economy and wishing it wasn't true doesn't change the reality of our addiction. Conservationists and those on the left should trade more drilling for a it return for a comprehensive and long term plan for energy independence. We need compromise from both sides to make something work here. Also, I never plan on going to Anwar and if we can drill there safely we should let Alaskans decide to do so.
Raise fuel economy standards higher and more quickly. There is a big court battle between the Federal Government and California because California wants the more aggressive standards. California's economy is so large, fuel standards there would quickly become a national standard. We should let California win this battle sooner rather than latter and there are all sorts ways to offset the cost to consumers and auto makers for the transition costs required to make this happen.
Provide tax credits to businesses that offer a four day work week. We wouldn't lower total fuel consumption by 20% by doing this, but it would be a dramatic reduction --say up to 5-10% which would make quite a difference on the $700 billion a year we import.
We need to bring back the 55mph speed limit. I've already budgeted the money for speeding tickets I am bound to get as I try to adjust to this.
The US has been complaining for the last few decades that consumers in emerging economies save too much and don't consume enough thus buying more of our own exports. Be careful what you wish for because we have got 1.3 billion new consumers on the planet all eager to consumer better food, buy cars and technology gadgets. It's a great thing representing a huge opportunity to sell new goods, services and even American technology. However, many of these consumers are purchasing gasoline at subsidized prices producing economic distortions that cause them to use fuel a lot less efficiently then they otherwise would. Instead of asking these governments to eliminate the subsides, why not cut these consumers a general rebate check to buy goods generally as opposed to directly subsidizing energy prices. This would at least let supply and demand take a more natural course and could possibly slow the dramatic growth we are seeing as these economies grow as much as 10% a year.

While things seem a bit dour right now, I actually am really optimistic about what this country can do when we come out of this. Long term competitiveness in technology and even manufacturing will provide great opportunities for America to sell to the 1.3 billion new consumers in the world. However, there is no quick fix. Rate cuts won't solve this. We need to stop looking to Bernake and start looking to our elected government to solve this. Borrowing just so we can buy more consumer goods from China or gasoline from the Middle East makes no sense. Borrowing from abroad to invest in our future does.

A lack of a long term plan on energy is hurting not just our economy but world stability, and our national security. We can't wait for the next election to act.

You can email John at johnspencerboyd@gmail.com

Trading Stocks is Fun, Until Someone Loses an Eye

pk — Thu, 17 Jul 2008 13:26:58 -0500

Pakistan is busily putting down riots at its stock exchange. After leading the world over the past decade, soaring by almost a factor of 10, it has dropped 35% since April, and traded down 15 of the last 18 days.

As usual, people got a sense that markets would always go up, and when they found out otherwise they reacted like kids who had their Wall-E toy taken away. They smashed stuff, shouted, and generally demanded the government do something about it. Aiding and abetting things, of course, have been Pakistani regulators, with a rule (until recently) that equities could never go down more than 1% a day. (Sound familiar?)

Check this (Reuters) picture of investors smashing through a door at the Karachi exchange, and then the following color from Bloomberg:

In Karachi investors today broke windows, threw plant holders in the parking lot of the building, burned shareholder statements and at least one protester was injured, prompting intervention by police and the paramilitary. Investors were also protesting outside the Lahore and Islamabad stock exchanges, Geo Television reported.

"We demand that all stock prices be frozen at current levels,'' said Kauser Javed, who heads the Small Investors Association. "People have sold their assets in the last 15 days to meet payments and if things continue this way, you will start hearing of suicides. The regulators always favor big brokers and investors.''

With potted plants flying outside the Karachi bourse after this stock crash, it reminds of a favorite adage: Trading stocks is fun, until someone loses an eye.

More here.

Joe Nocera, Blogger

pk — Thu, 17 Jul 2008 12:12:29 -0500

My friend, columnist Joe Nocera at the NY Times is newly blogging. Unsurprisingly, the blog is bruising, funny and irreverent. Good reading, and a fun complement to his Times columns.

Check it here.

Are these signs a bottom is at hand?

contrib2008 — Thu, 17 Jul 2008 11:30:50 -0500

by Guest Author: Tim Sykes
--------------------------------------------------

In true contrarian style, it's great when analysts downgrade stocks due to problems stemming from the credit crunch (smart) but only after they've fallen 80% (not so smart). Like Wachovia downgrading AIG yesterday?!?!?!

[via Yahoo! Finance]

Hell, even The Wall Street Journal is trying not to be last to play the "better adapt to the bearish environment or else..." game by changing the expressions on the faces of their famed portraits to better reflect these unsettled times.

[via CJR]

I can't help but wonder if this kind of widespread acceptance of gloom and doom is indicative of a bottom, whether or not it's a temporary one.

SE Asian Currencies: All's Well. Everyone Back in Pool

pk — Thu, 17 Jul 2008 10:43:32 -0500

All the previously broken SE Asian currencies have now all flipped and are running ahead of the U.S. dollar. Only the Vietnamese Dong and the Indian Rupee are still down over the last few weeks against the dollar. Mean reversion is alive and well in currency markets: No outlier move goes unpunished.

[via Pacific Exchange Rate Service]

Upheaval in Used iPhone Market

pk — Thu, 17 Jul 2008 10:26:09 -0500

This from my friends at Terapeak shows some interesting post-iPhone 3G trends in the used iPhone market. The used market is crumbling for iPhone 1.0 for some reason spiked around the iPhone 2.0 launch, and is now trailing off. Interesting, auction action on iPhone 2.0 is now falling a little too. Perhaps people are now finding them in stores.

[via Terapeak]

We Realize You Have a Choice of Subprime-Struck Banks ....

pk — Thu, 17 Jul 2008 09:56:24 -0500

This isn't me. I'm not here right now.

So, I see that we have had a barrage of wacky subprime news, and couldn't bear not commenting.

Wells Fargo, the company that dominates the California market where broken mortgages are only slightly less common than yummy mommies with recent liposuction scars, beat the Street, raised its dividend, etc.
JPMorgan, the company that is allegedly so conservative it will only lend itself money, has announced this morning a 53% drop in net income on another $1-billion in mortgage markdowns. And that's good news, of course.
IndyMac, the recently FDIC-taken over California bank, is alleged this morning on CNN/WSJ to be under FBI investigation for fraud, along with 21 other banks.

You just can't make this stuff up.

Kleiner Perkins Takes A Rain Check On Crpster.com

guest2008 — Thu, 17 Jul 2008 02:24:34 -0500

From another one of Paul's guest bloggers for the next two weeks...

There was a fair amount of of blog-borne back-and forth today over Adam Lashinksy's piece in Fortune on Kleiner Perkins, and its pursuit of clean tech and other energy investments. Ashkan Karbasfrooshan offer a sharp take on the horrror that the legendary firm might miss out on the next Twitter or Yelp.

Excuse me, but Kleiner can invest in all of the clean tech crap and bio nonsense they want... that at least seems to have some kind of meaning and impact down the road. Besides, let's consider the horrible track record of VCs that invested in the skata that permeates most dot com VC's portfolio. Give me a f'n break. We're now bashing a bunch of investors for taking a rain check of crpstr.com to invest in things that actually mean something and make a difference?

Granted that there are no sure things in this business, it's pretty incredible to be casting aspersions on the firm's three-year old strategy with oil now at $140.

-- Joseph Weisenthal, reporter and properietor The Stalwart

# of 52 week lows hits 18 year record

guest2008 — Wed, 16 Jul 2008 08:16:37 -0500

Since Paul went on vacation a few seconds ago and since I'm a strong advocate of overcoming insomnia through work I figured I'd immediately guest post to his blog (thanks, Paul, for asking me).

Quantifiable Edges has an interesting little statistic on 52 week lows.

Basically, 1/3 of all the stocks on the NYSE hit a 52 week low yesterday. The last time this has happened was in 1990.

This has only happened a few times since 1971 (5) and in all 5 instances the market was higher 4 days later and 20 days later. Not enough data to make any reasonable conclusion. Whats interesting is that if you go one further year back, 1970, there's three more occurrences and they were all negative 4 days later. Again, not interesting (too few examples) but its

A) another example of the extreme level this market has taken a beating, even when compared with 2000-2002 (which is somewhat striking if you think about what was going on then: Internet bust, enron/wcom, 911, recession, etc).

B) another example where people are comparing this year to the 70s. I disagree with this. I don't think we are in stagflation. I'm more worried about eventual serious deflation a la what "Helicopter Ben" was worried about in 2002. But I'm hoping at least over the next 4 days (and over the next decade), that 2008 isn't the new 1970 but the new 1990.

-James Altucher

Guest Bloggers, All the Way Up

pk — Wed, 16 Jul 2008 07:08:05 -0500

Okay, that's really it. To paraphrase Keyser Söze, pfff .... I'm gone (on holidays).

There'll be some other folks around here over the next two weeks. An eclectic and interesting group of people will be coming by, so stick around and enjoy.

And I'll see you all in two weeks.

How Many Americans Should You Put in Your Investment Basket?

pk — Wed, 16 Jul 2008 06:11:49 -0500

I must be tired. Just finished packing for holidays, and I spotted this new paper:

How Many Alternatives Should You Put in Your Investment Basket?
Andrew Clare and Nick Motson
City University London - Sir John Cass Business School and City University London - Sir John Cass Business School

In my fatigue, however, I initially thought the title was "How Many Americans Should You Put In Your Investment Basket". And under that name it seemed awfully timely.

Partnoy's (Credit Derivative) Complaint

pk — Wed, 16 Jul 2008 04:54:14 -0500

If you haven't read it, you really should wade into Frank Partnoy's (and co-author David Skeel's) recent paper on credit derivatives. It's long and detailed, but Partnoy is a felicitous and smart writer, and so it's worth it.

... we discuss the benefits associated with both types of credit derivatives, which include increased opportunities for hedging, increased liquidity, reduced transaction costs, and a deeper and potentially more efficient market for trading credit risk. We then discuss the risks associated with credit derivatives, such as moral hazard and other incentive problems, limited disclosure, potential systemic risk, high transaction costs, and the mispricing of credit. After considering the benefits and risks, we discuss some of the implications of our findings, and make some preliminary recommendations. In particular, we focus on the issues of disclosure, regulatory licenses associated with credit ratings, and the special treatment of derivatives in bankruptcy.

The Promise and Perils of Credit Derivatives

DAVID A. SKEEL Jr.
University of Pennsylvania Law School
FRANK PARTNOY
University of San Diego - School of Law

Sterling Hayden on Life, Entrepreneurship, etc.

pk — Wed, 16 Jul 2008 04:22:49 -0500

After my post mentioning Dr. Strangelove earlier today, late tonight I got to re-reading actor Sterling Hayden's classic (and controversial) seafaring book Wanderer. Hayden, who was a top Hollywood star at the time, suddenly up and quit, abandoning a career, and went sailing -- and he then chronicled it all in this 1963 book.

Yes, yes, Hayden is a dreamer and a romantic, and, yes,the book is more than 40 years old, but it still has its appeal. The following section is often excerpted, but it is still one of my favorite bits from Hayden's book. And you can substitute "entrepreneur" for sailing, and the gist will be the same.

To be truly challenging, a voyage, like a life, must rest on a firm foundation of financial unrest. Otherwise you are doomed to a routine traverse, the kind known to yachtsmen, who play with their boats at sea--"cruising", it is called. Voyaging belongs to seamen, and to the wanderers of the world who cannot, or will not, fit in. If you are contemplating a voyage and you have the means, abandon the venture until your fortunes change. Only then will you know what the sea is all about.

Little has been said or written about the ways a man may blast himself free. Why? I don't know, unless the answer lies in our diseased values. A man seldom hesitates to describe his work; he gladly divulges the privacies of alleged sexual conquests. But ask him how much he has in the bank and he recoils into a shocked and stubborn silence.

"I've always wanted to sail to the South Seas, but I can't afford it." What these men can't afford is not to go. They are enmeshed in the cancerous discipline of "security". And in the worship of security we fling our lives beneath the wheels of routine---and before we know it our lives are gone.

What does a man need---really need? A few pounds of food each day, heat and shelter, six feet to lie down in---and some form of working activity that will yield a sense of accomplishment. That's all---in the material sense. And we know it. But we are brainwashed by our economic system until we end up beneath a pyramid of time payments, mortgages, preposterous gadgetry, playthings that divert our attention from the sheer idiocy of the charade.

The years thunder by. The dreams of youth grow dim where they lie caked in dust on the shelves of patience. Before we know it, the tomb is sealed.

Where, then, lies the answer? In choice. Which shall it be: bankruptcy of purse or bankruptcy of life?

Bill Ackman on "Saving" Fannie Mae

pk — Tue, 15 Jul 2008 22:49:30 -0500

Hedge fund manager -- and Fannie Mae short-seller -- Bill Ackman's presentation on "saving" wildly wayward mortgage finance company Fannie Mae.

| View | Upload your own