Monday, October 30, 2006

Common Cents

Normally when you make a bad investment, you walk away from it and take the loss. But that can change, if the size of the investment is too big to walk away from. Your common sense thinking gets turned upside down.

When disaster strikes, there is the urgency to raise cash fast. In this sort of decision-making, you end up saving the crap for last. It doesn’t really sound rational, but there is the hope that the “dogs” will come back. So it appears that we have a lot of homeowners in this dilemma right now. Their situation is just now becoming obvious.

If we examine the group that holds the mortgages, it gets a little less visible. Large institutions can hide their problems just by being so big. Second, if the amounts of cash managed are large, the financial institution can use the cash to stall for time. It’s very easy to pretend that nothing is wrong. You will get caught, but probably just not this year.

Another thing that is quite invisible right now is embezzlement. Take an embezzler, he purloins the funds and the person bezzled, is none the wiser. In fact both can be at the same resort spending money, and having fun. The only difference is, the embezzler knows he's spending your money, while at the same time you think your money is safely tucked away. This can go on until the eventful day when cash demanded from the enterprise exceeds what they can cover. It's only at this point that the person embezzled will feel the pain. Knowledge will not only set you free, it can send your blood pressure into the stratosphere.

Notice that the perceive problem is the over extended homeowner. If you carry things forward, the rest of the systemic problems will become apparent. At that point, it will be too late. The assets will be non-existent.

We have yet to see a retirement fund under the stress that will be produced by the baby boomer’s retirement. There has been no real call for funds yet. Common sense suggests that the assumed assets are safely tucked away.

Q.E.D. The Tooth Fairy lives!!!

Thursday, October 19, 2006

The Googleiots

Google, here is a company that if you thing about it, its whole infrastructure could be recreated for less than one billion dollars. All of the stock is valued at over 129 billion dollars.

It doesn't really make much money, because if it did, it would pay a dividend.

Creative accounting? Maybe, but where is the income stream? I really don't think that it is there.

What do you call these investors? If you combine the two words google and idiot, you get google-iots. Best spelling I can offer is Googleiots. This would be defined as a person who will buy anything on the hope that it goes up forever. There has to be an end to this outrageous price, it certainly doesn't seem to be in the reality of the present time. So I guess that it can be said that we are in the midsts of Googleiots trying to sell to the greater fool.

What is the stock really worth, about $8 bucks a share. A reality check tells you , that if you are buying toilet paper for $2,000 a roll, you will find a cheaper source for the purchase of toilet paper.

Thursday, October 12, 2006

Who are the Sellers?

There are several groups of people that have real estate inventory for sale, contractors, real estate brokers, flippers, home owners and banks.

Who's going to offer you the best price? The builder probably has the most leeway on price, next the bank repo, then the real estate broker (flipper), next the investor (flipper) and then the homeowner.

Builders tend to know the market and if they need to discount, it’s going to be real.

Banks offering repo's would theoretically have a 20% discount of the property to break even, if the loan was an 80/20. The second trust deed would drop off.

Real Estate Brokers especially if they are named “Stretch,” will be more eager to sell you their property. They’re going to give you a good price (hell you already told them your bottom line). Flipping is a realtor's second job (only a 3% commission to pay). There are a lot of realtors holding inventory at this time.

Investment flippers have two areas of concentration: condos and detached houses. The Condo market is between a wish and a prayer and the regular house market isn't doing much better for price appreciation.

The regular homeowners are dropping prices in $10,000 increments. They know the rudimentary fundamentals of selling, but they are only a “garage sale retailer.” It’s their price or it isn’t for sale. Can you imagine a super market offering hot dogs on sale regularly $3.95 now only $3.85? They mise well be glued to the shelf. They are not going to move.

So who is really selling houses? The answer has to be the contractor! The machine works very efficiently.

The contractor can finance through limited partnerships. If the land is bought at a reasonable price, the LLP investor can expect a 20 to 50 percent return on the investment. Even in the worst market you can imagine, the contractor can undercut the home owner. There is a limit to that, and it’s around $80 dollars per square foot. I could be a little off on that, my figures are about 6 years old. So when the houses start selling for $80 per square foot and condos for $30 per square foot, the contractors will melt into the sunset as they did in Detroit. Who gets the houses if they don’t sell? Most probably the bank. Who wants the houses at this price, only the uninformed (they're easy to spot; there is no newspaper in their driveway in the morning).

So what do we have? We have home owners wanting to move and sell their house. We have builders building more houses; there is a profit to be made. The supply is increasing, but why buy an old home when you can buy a brand new one? (Colorado is in this scenario right now, the contractors are still building and inventory is going through the roof, and prices are very reasonable).

As long as used housing prices are sticky going down in price, the contractor is going to eat the home seller’s lunch, and laugh all the way to the you-know-what. What makes it interesting is that the banks can play both ends. They loan to the contractor and to the homeowner.

So the banker says “Belly up to the bar, HELOC's for everyone, and if you need money to build, just tell me where to mail the check!”

Then you have the homeowner, he’s already spent the equity in the house, his world of dreams is now a nightmare. His wife is packing up and ready to leave him.

The typical buyer is not going to buy that used house; they’re going to buy a brand new one from that contractor down the street.

The contractor is going to keep on building until housing prices drop to where he has no profit margin. His profits will tend to be real profits. On the other hand, the homeowner's prices tend to be from some dream hoping for a sense of reality. Equity created out of nothing.

Sunday, October 08, 2006

The Roller Coaster is approaching the Top

Here's a financial news article from Friday:Link The Guardian Newspaper

20 years after London, NYSE has its Big Bang

Andrew Clark in New York
Friday October 6, 2006
The Guardian

The New York Stock Exchange will take its first step towards London-style electronic dealing today in the face of increasing international competition.

In a gradual transition, the NYSE is introducing a "hybrid market" allowing traders to buy and sell big chunks of stock at the touch of a button.

Its move is comparable to the London exchange's "Big Bang" in 1986 which led to the end of the City's trading floor - except that the Big Apple's changeover will be slower, more considered and, it is hoped, less likely to contribute to a crash akin to Black Monday in 1987.

Technology will vastly increase the NYSE's capacity. In a test on Saturday, more than 6bn shares changed hands in two hours - exceeding the exchange's record of 3.1bn for an entire day.

The changeover is nothing if not cautious. On the first day, just two stocks - American Express and Equity Office Properties Trust - will be traded under the new technology. In a gradual roll-out, all 3,600 listed companies will be included by December.

Previous electronic transactions at the NYSE were limited to small deals of 1,099 shares at a time. The new limit will be a million shares and a restriction of two trades a minute will be lifted.

Its certainly going to speed things up. The human element was like a braking mechanism. So we ought to be at full throttle by December with no emergency brake. The mutual fund traders with their star wars technology buy and sell programs will be matching wits with twits.

This could be as much fun as the automated bathrooms at Washington DC airport when the power went out. You couldn't flush a toilet, wash your hands or get a paper towel. It gives more meaning to the quote; "The road to hell is paved with good intension's."

The Non Existent Banking Crisis

Right now in California, there has been 3,855 houses that have been foreclosed on. Let's just round it up to 4,000 and figure that each loan is $500,000. So it's 4,000 times 500,000. Just count the zeros and multiply the whole numbers together. The answer is 20 with 8 zeros added to it. Two billion dollars of real estate is in default in California so far this year.

Its highly probable, that on the way to foreclosure, the owner has also maxed out their credit cards. Let's figure the amount owed on credit cards, for a family in this predicament, would probably range between $10,000 to $50,000. Here would be a real, on the books, banking loss of between 40 to 200 million dollars.

There have been 23,000 bankruptcies so far this year and about 49,000 pre-foreclosures. Here is a Link to the numbers I am quoting. If we figure that the 23,000 bankruptcy's have between $10,000 and $50,000 in credit card debt, that calculates out to between 230 million and 1.15 billion dollars of bad debt.

Speculate further, that about 4,000 of the 49,000 pre-foreclosures go into foreclosure. That's another two billion of real estate in default and of course another 40 to 200 million of bad credit card debt.

This leaves a range of between 310 million (20+20=230) to 1.5 billion (1.15+.2+.2) in bad credit card debt. If the banks can pull out 80% of their loan value on the 4 billion of real estate in foreclosure, then that would result in a loss of about 800 million.

The most optimistic numbers, would be 310 million in non collectible credit card debt and a zero loss on all real estate foreclosures (the Tooth Fairy lives!). The worse case for the banks would be 1.5 billion in credit card debt and close to 1 billion in real estate write offs.

This is kind of boring stuff, but remember, this is only one state, California. Visualize all 50 states together, now it begins to have some size and body.

One person in bankruptcy or foreclosure is not the end of the world. But a bank, with a couple hundred foreclosures and a lot of bad plastic, knows the reality of their problem right now, at this present time.

The first signs of fire in the movie theater will be after the end of the fiscal year for these banks, when they have to present their profit and loss statements.

As if things couldn't get worse, two trillion in bank loans are due to reset in the next 12 months. Here cometh the Anti-Tooth Fairy. So with the banks Federally insured (and you thought the Tooth Fairy was dead) the New Year could prove very distracting.

Friday, October 06, 2006

Kondratieff Wave Revisited

A while back, in May I covered the Kondratieff wave May8th Link and it seems to be more to the point as time goes by. Here is a link to a history lesson that's well worth reading.

The Kondratieff Wave

This gentleman's theories were published before the great depression in 1925. For those of you that don't click on the link, here is a quote from the above article dealing with the autumn just before the winter labeled Depression.

Excesses of an unpopular war, along with fiscal liberalism, cause popular reaction toward stability or normalcy. A mood of isolationism permeates . The plateau period generally lasts seven to ten years and is characterized by selective industry growth, development of new ideas ( both technological and social ) and a strong feelings of affluence, terminating in a feeling of euphoria. The inflated price structure from the primary recession, along with the desire for consumption, produces a rapid increase in debt. Eventually, wealth consumption expands beyond all practical limits, and economy slips into a severe and protracted depression.

These cycles tend to be about 60 to 70 years long. If you think about it, everyone that was about 30 years old during the last depression is no longer with us. The group memory of the past depression is gone and most of the financial shenanigans going on, are "new" in our mind's eye.

The point about perceiving a depression, is that its only visible in your rear view mirror. The investment trusts that collapsed in the 1930's smell a lot like the hedge funds of today.