Between January, 2005 and today, 16 million houses have been sold. Let's figure that the new owner probably paid double of what is was worth. So a 100k to 300k house was purchased for 200k to 600k. Figure that the new market price averages out to 300k.
Multiply 16 million homes by 300k and you end up with 4.8 trillion dollars worth of homes that have mortgages with less than desirable collateral. The owner paid too much and is struggling to hang on. So 50% of that total is about 2.4 trillion dollars. This was money added to the economy that no one had to work for, AKA bubble money.
In the past, the yearly appreciation of the home meant that the money extracted never had to be repaid. Now, the house has ceased to appreciate in value. To the over extended home owner, this change of the rules is just not logical. Everyone knows that housing always appreciates.
The US census lists the total number of housing units in the United States as 125 million as of 2005. How much equity was pulled out of all of the remaining units (125-16=109 million)? You really don’t know where to even start. We could double what was calculated for the 16 million homes purchased and call that an estimate of what the housing owners extracted from their new found equity. That would put the amount of bubble money introduced into the economy at 5 trillion dollars. This money flowing into the economy has stopped. Coincidently, the total United States budget for the last 2 & ½ years was also 5 trillion dollars.
When you realize that the last time we had something this bad in the housing market, it took 5 years to get where we are at now, and we’ve done this all in one year. Talk about over achievers, we’ve outdone ourselves!
The economy is what will be hit and hit hard. It may take time, but what is about to happen, is now more than obvious.
On the lighter side, here is some good news; Congress is going to pass a law to double the number of feet in a mile from 5,280 to 10,560. This will cut our distance to work by half thus decreasing gas consumption by 50%, God bless them!
Monday, July 30, 2007
Sunday, July 29, 2007
The Impeding Hangover
I’ve watched the stock market since about 1958. I was about 12 at the time and my grandfather would take me down to the brokerage office and we would watch the stock ticker print out a never ending trail of letters and numbers. One tape printed on a transparent ticker tape which was projected onto a screen and the other was on a regular ticker tape. Now and then one of the workers would tear off about 3 feet of the regular tape and go up to a 10 X 40 foot chalk board and update the quotes. There was seating for about 50 people, and most were as old as my grandfather. The thing I liked was that the workers would give me the short rolls of unused tape to play with. That was my entertainment from 1 to 4 PM.
Later on in the 60’s and 70’s I watched my father and his stock investments. He even formed an investment club that a lot of the neighbors joined. As an investment group they could afford to buy 100 shares of a stock. Remember wages were about $8,000 per year. The investment group deteriorated over time, people just didn’t have the money or they moved away. It was not the road to riches, it was boring.
A bear market started in 1974 that did some damage, but it didn’t really affect the general population (the DJIA went to 607). It affected the rich and the well to do, their net worth dropped considerably.
I got into the market about 1982. The DJIA was about 1100. My broker had a sign on his desk saying “DOW 2000.” It was always good for a chuckle; everyone was hoping that it would happen, we just didn’t know when.
The people making money were the stock brokers. A typical buy or sell transaction on 100 shares was about a $300 dollar commission. A round trip on one stock would cost you $600. It had to go up at least 6 points to break even. There was an additional $35 dollar charge for an odd lot sale of less than 100 shares
In 1985 I started using a discount broker. Round trip on 100 shares dropped to $220 which wasn’t too bad. Plus, everything was going up. Then, the real discount brokers came online with the advent of internet trading. From there, everyone piled into the market. 20 years ago dropping a stock name at a party would have gotten you a blank stare. Today, everyone talks stocks.
There has been no time since 1929 that we have had this percentage of people in the market that know utterly nothing about what they are doing. The Jim Cramer Stock Show has got to be an indicator of a market top (we are all going to get rich). They’re having fun, no need to spoil the party. Have another drink.
The bears are restless, this could be the week.
FYI, the DJIA circuit breaker that would close the market for the rest of the day is now 4,050 points. It’s nice to know that any future stock market panic has been well thought out. So if you feel like jumping, pick a ledge and grab a number.
Later on in the 60’s and 70’s I watched my father and his stock investments. He even formed an investment club that a lot of the neighbors joined. As an investment group they could afford to buy 100 shares of a stock. Remember wages were about $8,000 per year. The investment group deteriorated over time, people just didn’t have the money or they moved away. It was not the road to riches, it was boring.
A bear market started in 1974 that did some damage, but it didn’t really affect the general population (the DJIA went to 607). It affected the rich and the well to do, their net worth dropped considerably.
I got into the market about 1982. The DJIA was about 1100. My broker had a sign on his desk saying “DOW 2000.” It was always good for a chuckle; everyone was hoping that it would happen, we just didn’t know when.
The people making money were the stock brokers. A typical buy or sell transaction on 100 shares was about a $300 dollar commission. A round trip on one stock would cost you $600. It had to go up at least 6 points to break even. There was an additional $35 dollar charge for an odd lot sale of less than 100 shares
In 1985 I started using a discount broker. Round trip on 100 shares dropped to $220 which wasn’t too bad. Plus, everything was going up. Then, the real discount brokers came online with the advent of internet trading. From there, everyone piled into the market. 20 years ago dropping a stock name at a party would have gotten you a blank stare. Today, everyone talks stocks.
There has been no time since 1929 that we have had this percentage of people in the market that know utterly nothing about what they are doing. The Jim Cramer Stock Show has got to be an indicator of a market top (we are all going to get rich). They’re having fun, no need to spoil the party. Have another drink.
The bears are restless, this could be the week.
FYI, the DJIA circuit breaker that would close the market for the rest of the day is now 4,050 points. It’s nice to know that any future stock market panic has been well thought out. So if you feel like jumping, pick a ledge and grab a number.
Sunday, July 22, 2007
The 1930’s Era Housing Auctions Are Back
In today’s San Diego Tribune, there is a ¾ page ad titled "Lender Foreclosed Public Home Auction." USHomeAuction is holding three auctions, one in San Diego, one in Ontario and one in Los Angeles. 480 homes are listed for bid in the sale. Here is a link to their homepage
The listings are for condos and single family homes. Starting bids are about 50% of the previous value which doesn’t sound bad. Bear in mind, this is just the beginning of housing auctions.
As an auction pricing guide, I would suggest that you calculate single family homes for $80 per square foot and condos for around $35. The only reason I picked these two prices, is that you can’t build a new unit for that, you are below the contractor's cost of construction.
I can remember back when you couldn’t even sell a mobile home in Las Vegas, because condo's were even cheaper. Then there was the real estate collapse during the oil boom years in Texas. At auction, you could put a 1,000 sq ft home, on your Visa card.
It will be interesting to see if they sell the whole slate. Rumor has it that a new real estate appraisers hand book is out, titled "Up in Smoke." They are promoting it with a free gallon of tar and a bag of feathers.
The listings are for condos and single family homes. Starting bids are about 50% of the previous value which doesn’t sound bad. Bear in mind, this is just the beginning of housing auctions.
As an auction pricing guide, I would suggest that you calculate single family homes for $80 per square foot and condos for around $35. The only reason I picked these two prices, is that you can’t build a new unit for that, you are below the contractor's cost of construction.
I can remember back when you couldn’t even sell a mobile home in Las Vegas, because condo's were even cheaper. Then there was the real estate collapse during the oil boom years in Texas. At auction, you could put a 1,000 sq ft home, on your Visa card.
It will be interesting to see if they sell the whole slate. Rumor has it that a new real estate appraisers hand book is out, titled "Up in Smoke." They are promoting it with a free gallon of tar and a bag of feathers.
St Joseph the House Saint
We went garage sale hunting yesterday. My wife and I cruised our weekly route around the San Marcos Vista area. There were quite a few garage sales and we couldn’t help but notice a lot of for sale signs (I picked up a real nice rice cooker for $2).
We stopped in an over 55 community in Vista. Houses in that area are going for 270K to 300K (1,200 sq ft). The owners are quoting these prices with a straight face. I just can’t believe it, the houses are “Tear Downs."
In a nicer section built before Mello Roos, there were three in a row for sale, all for between 525K and 619K (The one with the dead lawn was definitely an REO).
Then over in our area, there were three houses looking at each other 550K to 650K. All three have Mello Roos payments besides taxes. One was a “Help You Sell” another was a “For Sale by Owner,” and the last was a Realtor listing. It sure is great to be able to park your car and look at three listings facing each other, it saves all of that driving around!
A lot of people have been suggesting that the real estate bubble has popped. For this area, I tend to doubt it. The owners have no concept of current market conditions. They bought it for 600K and by golly they are going to sell it for 600K.
On one hand, we have the owners who have extracted their equity and bought new cars, vacations, breast augmentations, and what ever. On the other, you have people that didn’t get on the wagon, they missed the boat. They don’t have the bills, but they have no exotic toys either. My wife has classified us as being in the latter group, and it’s all my fault. And of course, we know the wife is always right, cough, cough.
This bubble seems to be bursting from the outside in. The financial institutions have stopped offering the 2/28 and 3/27 loans (It was kind of like using a Bic lighter to trim your nose hairs. It worked great, but you won’t do it again). The time lag right now seems to hang on property appraisals. Housing prices are still far from what many would consider realistic.
Your typical home owner believes their homes will sell, it’s just going to take a lot longer than they anticipated, times are tough (the sign of a real plugger). The rising median home price will confirm the owner’s perception that home prices are rising, when in actuality, it’s an indicator that the lower price houses are just not selling.
Right now in this area, it looks like we are in a lateral shift, a waiting game. Nobody wants to buy at these prices and no one wants to sell for less than what they bought for. The monthly mortgage payment will bring reality back (once every 30 days). Your 2/28 is going to turn into a 24/7 headache. I wonder if that’s what St Joseph’s Aspirin is for--house headaches.
We stopped in an over 55 community in Vista. Houses in that area are going for 270K to 300K (1,200 sq ft). The owners are quoting these prices with a straight face. I just can’t believe it, the houses are “Tear Downs."
In a nicer section built before Mello Roos, there were three in a row for sale, all for between 525K and 619K (The one with the dead lawn was definitely an REO).
Then over in our area, there were three houses looking at each other 550K to 650K. All three have Mello Roos payments besides taxes. One was a “Help You Sell” another was a “For Sale by Owner,” and the last was a Realtor listing. It sure is great to be able to park your car and look at three listings facing each other, it saves all of that driving around!
A lot of people have been suggesting that the real estate bubble has popped. For this area, I tend to doubt it. The owners have no concept of current market conditions. They bought it for 600K and by golly they are going to sell it for 600K.
On one hand, we have the owners who have extracted their equity and bought new cars, vacations, breast augmentations, and what ever. On the other, you have people that didn’t get on the wagon, they missed the boat. They don’t have the bills, but they have no exotic toys either. My wife has classified us as being in the latter group, and it’s all my fault. And of course, we know the wife is always right, cough, cough.
This bubble seems to be bursting from the outside in. The financial institutions have stopped offering the 2/28 and 3/27 loans (It was kind of like using a Bic lighter to trim your nose hairs. It worked great, but you won’t do it again). The time lag right now seems to hang on property appraisals. Housing prices are still far from what many would consider realistic.
Your typical home owner believes their homes will sell, it’s just going to take a lot longer than they anticipated, times are tough (the sign of a real plugger). The rising median home price will confirm the owner’s perception that home prices are rising, when in actuality, it’s an indicator that the lower price houses are just not selling.
Right now in this area, it looks like we are in a lateral shift, a waiting game. Nobody wants to buy at these prices and no one wants to sell for less than what they bought for. The monthly mortgage payment will bring reality back (once every 30 days). Your 2/28 is going to turn into a 24/7 headache. I wonder if that’s what St Joseph’s Aspirin is for--house headaches.
Tuesday, July 17, 2007
Bear Sterns "Dropped" a Zero
Quoting from this blog three weeks ago "Hedge Fund Meltdown" June 21
".........So, April means a June withdrawal, and June means a September 1 withdrawal. These two funds are toast, but it’s going to take a while. Look’s like there is 15 to 20 billion to unwind here."
It's kind of a moot point now, since there is nothing left to withdraw.
At first they were ready to jump in with 3.2 billion. A question runs through my mind. How much is in play? I would guess 10 to 20 times the amount offered.
The Bear Sterns Fund loss could be considerably bigger. From what can be read, the total loss appears to be around 1.5 billion dollars. So when you show up with 3.2 billion to begin with, it makes you wonder.
It's kind of like when your wife buys you a new car (don't hold your breath). Whose pocket did it really come out of? The wife writes a check, the husband has the job. Then to carry it one step further, the car she bought is a Lamborghini.
When you get to this point, you have to realize that the focus of Bear Sterns is damage control. Nobody is going to wheel in that much money to prop up something unless there is a chance of a salvaging the situation. Plus where did the money come from?????? And if that isn't obvious, well, we won't go there.
This country was settled with people that voted with their feet. Sadly with Bear Sterns, people will still vote with their feet.
There is a zero missing, it just isn't that apparent yet. The real problem, is that its on the left hand side of the decimal point, not the right.
".........So, April means a June withdrawal, and June means a September 1 withdrawal. These two funds are toast, but it’s going to take a while. Look’s like there is 15 to 20 billion to unwind here."
It's kind of a moot point now, since there is nothing left to withdraw.
At first they were ready to jump in with 3.2 billion. A question runs through my mind. How much is in play? I would guess 10 to 20 times the amount offered.
The Bear Sterns Fund loss could be considerably bigger. From what can be read, the total loss appears to be around 1.5 billion dollars. So when you show up with 3.2 billion to begin with, it makes you wonder.
It's kind of like when your wife buys you a new car (don't hold your breath). Whose pocket did it really come out of? The wife writes a check, the husband has the job. Then to carry it one step further, the car she bought is a Lamborghini.
When you get to this point, you have to realize that the focus of Bear Sterns is damage control. Nobody is going to wheel in that much money to prop up something unless there is a chance of a salvaging the situation. Plus where did the money come from?????? And if that isn't obvious, well, we won't go there.
This country was settled with people that voted with their feet. Sadly with Bear Sterns, people will still vote with their feet.
There is a zero missing, it just isn't that apparent yet. The real problem, is that its on the left hand side of the decimal point, not the right.
Monday, July 16, 2007
Possible Bear Trap Squeeze
June 29, I wrote a little piece "Harvesting the Shorts." I pointed at KB Homes as a target. It might just be in the works for this week, only the stock chosen has changed.
Notice how last week the rumor, of Warren Buffett buying Hovnanian Homes, got set off with the purchase of a lot of, "out of the money" calls?
There are 62 million shares of Hovnanian Enterprises outstanding and 34 million in the public float. The June 15, WSJ short position for HOV was 18.6 million. This looks like a full blown bear trap. Somebody seems to be following my outline.
If a bunch of wealthy people got together and tried to squeeze the shorts, they would end up like Martha Stewart. Now if they formed a Hedged Fund LLC. . . Hmmmmm.
There was one bear trap back in 1929 that was very successful, I can't remember the name of the stock. I think the stock was halted when it hit $700, but the shorts ended up settling for $100 per share (they were let off rather easy).
Nah, I guess it's my imagination acting up again, but it looks so obvious, I just can't help myself. I can be wrong once in a while, can't I??
Notice how last week the rumor, of Warren Buffett buying Hovnanian Homes, got set off with the purchase of a lot of, "out of the money" calls?
There are 62 million shares of Hovnanian Enterprises outstanding and 34 million in the public float. The June 15, WSJ short position for HOV was 18.6 million. This looks like a full blown bear trap. Somebody seems to be following my outline.
If a bunch of wealthy people got together and tried to squeeze the shorts, they would end up like Martha Stewart. Now if they formed a Hedged Fund LLC. . . Hmmmmm.
There was one bear trap back in 1929 that was very successful, I can't remember the name of the stock. I think the stock was halted when it hit $700, but the shorts ended up settling for $100 per share (they were let off rather easy).
Nah, I guess it's my imagination acting up again, but it looks so obvious, I just can't help myself. I can be wrong once in a while, can't I??
Wednesday, July 11, 2007
It Can't Be That Bad, Can It?
Let’s see now, we have “Canaries in Coal Mines,” in states that don’t even mine coal. We have sighted the “Tip of an Iceberg” as far inland as Kansas (is it really that flat???). There are “Bubbles” everywhere (in my high school alone there were two girls named “Bubbles,” I guess breast enhancement is the rage).
The roller coaster franchises must be having a hell of a year; everybody seems to be on one. I wouldn’t get on a train though; looks like there are going to be some “Train Wrecks” and “Train Crashes” (one is with tracks and one is without, I guess).
Landscaping must be doing ok, I’ve heard that they are “Trimming a lot of Hedge Funds” lately. The barbers are doing lousy with all of the “Free Haircuts,” go figure.
I’ve been trying to book tickets on the Titanic, I've seen several references to its future trip. The ticket agents haven’t got any info on it yet. I guess the vacation is on hold for now.
Goldilocks is having one hell of a time especially around Wall Street and I can see why. Everything is just right--6 inch heels, a mini dress and makeup—you can make money lying down (Bear Sterns denies that Goldie is pregnant).
It kind of makes you wonder where we go from here with the stock market. If you think about it, every mutual fund manager has to be fully invested in something. If you were to advise your clients to get out of the market because of the current conditions, and they did, you would be out of a job. We know that doesn’t put bread on the table, so they will ride the wild monkey.
Google is up in the stratosphere with no dividend and a hell of a PE. The South Sea Company of 1711 comes to mind. I think they called it a bubble.
The thing that you really have to remember is that people in the past were dumber than the people of today (If you believe that, I have a Hedge fund derivate to sell you).
To tie this all up, if we are doing so great, how come all of our analogies revolve around impending doom? I guess we will have to ask Chicken Mc(I want it all)Little.
The roller coaster franchises must be having a hell of a year; everybody seems to be on one. I wouldn’t get on a train though; looks like there are going to be some “Train Wrecks” and “Train Crashes” (one is with tracks and one is without, I guess).
Landscaping must be doing ok, I’ve heard that they are “Trimming a lot of Hedge Funds” lately. The barbers are doing lousy with all of the “Free Haircuts,” go figure.
I’ve been trying to book tickets on the Titanic, I've seen several references to its future trip. The ticket agents haven’t got any info on it yet. I guess the vacation is on hold for now.
Goldilocks is having one hell of a time especially around Wall Street and I can see why. Everything is just right--6 inch heels, a mini dress and makeup—you can make money lying down (Bear Sterns denies that Goldie is pregnant).
It kind of makes you wonder where we go from here with the stock market. If you think about it, every mutual fund manager has to be fully invested in something. If you were to advise your clients to get out of the market because of the current conditions, and they did, you would be out of a job. We know that doesn’t put bread on the table, so they will ride the wild monkey.
Google is up in the stratosphere with no dividend and a hell of a PE. The South Sea Company of 1711 comes to mind. I think they called it a bubble.
The thing that you really have to remember is that people in the past were dumber than the people of today (If you believe that, I have a Hedge fund derivate to sell you).
To tie this all up, if we are doing so great, how come all of our analogies revolve around impending doom? I guess we will have to ask Chicken Mc(I want it all)Little.
Wednesday, July 04, 2007
Hedge Fund Basics, No Handgun Needed
First of all there are no licenses needed or government regulations that regulate hedge funds so anybody can start one up. Startup capital of about 20 million should do, but 100 million would be more impressive. The least understood part about a Hedge Fund is that it is usually an LLC (Limited Liability Company). There is the primary investor who starts it up, and a bunch of secondary investors. The main investor gets 50% of profits off the top and the secondary investors get to split the rest of the pie. The limited liability part of the LLC means, once the money is gone; you can’t go sue the owners of the LLC for what you lost.
So starting with 20 million, this allows the LLC to shop around for a bank loan of 80 million. The total in the kitty after the bank loan is now 100 million. Current leverage is 5 to 1.
Suppose the Hedge Fund decided to invest in the S&P 500 basket of stocks. The E-mini S&P 500 futures contract goes for a 7% margin requirement. This would be a 14 to 1 multiplier on top of the 5 to 1 or 70 to 1. I don’t think any hedge fund would be that crazy to bite on just the S&P 500.
Then we go to the next level. Puts and calls. These are the most familiar forms of derivatives. They deal with stocks and bonds. 90% of them will expire worthless at expiration. They are insurance bets. Put buyers are betting the market will go down and Call buyers are betting that it will go up. The sellers of the options believe the reverse is true, or if they think you have a chance, the option will cost you a lot more. The seller’s goal is to price the option so the buyer will let it expire worthless.
A hedge fund, has a real money maker by writing puts and calls on stocks or the index options. I’m not really sure on the margin requirements for naked option writing. I would guess it’s less than 10% of the underlying stock value and would depend on how close it is to being in the money. As the house in this deal, the odds are better than owning a casino in Las Vegas, by a wide margin.
There is an undefined area where a hedge fund can operate, insuring financial assets like home loans, that have no put or call options in the stock market. I am not sure of how the mechanics work on this sort of option. I do know that you use to be able to create options that didn't exist for thinly traded stocks on the Philadelphia Exchange.
The lenders that bought coverage are now trying to recoup their losses from the hedge fund insurance. Now it seems that the risks warranted a higher premium. The trouble is, the hedge fund did not correctly gauge the dangers of a down market.
The real fun starts once the insurance redemptions pick up speed. The misery starts once you realize what an LLC is and isn't. As an abstract entity, it sounds solid. But when you examine the limited liability of the animal and the fact that there is no regulation of the way it is run, there seems to be a rather obvious problem. The problem is what makes it so neat, it can be anything it wants to be, its a real enigma. Its losses are limited and its rewards are not. Under normal circumstances this sort of operation would require a hand gun to be successful. Plus, there is no jail time if you mess up, its perfectly legal.
So starting with 20 million, this allows the LLC to shop around for a bank loan of 80 million. The total in the kitty after the bank loan is now 100 million. Current leverage is 5 to 1.
Suppose the Hedge Fund decided to invest in the S&P 500 basket of stocks. The E-mini S&P 500 futures contract goes for a 7% margin requirement. This would be a 14 to 1 multiplier on top of the 5 to 1 or 70 to 1. I don’t think any hedge fund would be that crazy to bite on just the S&P 500.
Then we go to the next level. Puts and calls. These are the most familiar forms of derivatives. They deal with stocks and bonds. 90% of them will expire worthless at expiration. They are insurance bets. Put buyers are betting the market will go down and Call buyers are betting that it will go up. The sellers of the options believe the reverse is true, or if they think you have a chance, the option will cost you a lot more. The seller’s goal is to price the option so the buyer will let it expire worthless.
A hedge fund, has a real money maker by writing puts and calls on stocks or the index options. I’m not really sure on the margin requirements for naked option writing. I would guess it’s less than 10% of the underlying stock value and would depend on how close it is to being in the money. As the house in this deal, the odds are better than owning a casino in Las Vegas, by a wide margin.
There is an undefined area where a hedge fund can operate, insuring financial assets like home loans, that have no put or call options in the stock market. I am not sure of how the mechanics work on this sort of option. I do know that you use to be able to create options that didn't exist for thinly traded stocks on the Philadelphia Exchange.
The lenders that bought coverage are now trying to recoup their losses from the hedge fund insurance. Now it seems that the risks warranted a higher premium. The trouble is, the hedge fund did not correctly gauge the dangers of a down market.
The real fun starts once the insurance redemptions pick up speed. The misery starts once you realize what an LLC is and isn't. As an abstract entity, it sounds solid. But when you examine the limited liability of the animal and the fact that there is no regulation of the way it is run, there seems to be a rather obvious problem. The problem is what makes it so neat, it can be anything it wants to be, its a real enigma. Its losses are limited and its rewards are not. Under normal circumstances this sort of operation would require a hand gun to be successful. Plus, there is no jail time if you mess up, its perfectly legal.
Tuesday, July 03, 2007
The Nuclear Cocktail
Bear Sterns is assuming that the housing crisis is going to go away. If it does, Brear Bear Sterns gets better. Well, that is a pretty tall order for this fairy tale.
Right now, we are in a housing equilibrium moment. No one is waiting in line to buy. Housing is not appreciating (why take the risk). At the same time, nobody wants to sell for a loss.
Add on to that, most people paid too much for their present home, by about 50%- to 100%. The banks can help you refinance, but the amount you signed for on the note is not going to change. The mortgage mechanics may be different, fixed instead of adjustable, but no one is reducing your loan amount. It’s kind of like some sort of cruel Simon Legree movie, titled "Slave to the Bank, for Life."
Bear Sterns announced their problem in mid June. If these hedge funds all use the same boiler plate investors agreements, then anybody that wanted to bail out of the fund had to notify the fund by June 1, to get a check three months later. We know that didn’t happen. So the next redemption date would be September 1. But if you were a relative of the boss, they might back date . . . . . . . . . . . . .Hmmmmm.
There were 34,000 foreclosures in San Diego County as of June 1. If we project out this to September 1, we could have about 70,000 (that’s a double in 3 months). The abstraction of these home loans to bonds, and then further up into Tranches, and then derivatives, the multiplier effect in the past, worked wonders. Now the least little hic-up, at the lowest level, could turn into a mushroom cloud at the top.
Of course, if you want something that could really go nuclear, the words “Credit Card Bubble,” come to mind. I wonder what Bear Sterns has in their wallet?
As a note of curiosity, the vehicle of investment in the late 1920’s was the “Holding Company.” It was leveraged differently but similar in its purpose to the Hedge Funds of today. The only one still around, from the 1929 debacle, is Goldman Sachs. By 1933, their investors had lost close to 90% in that mess.
Right now, we are in a housing equilibrium moment. No one is waiting in line to buy. Housing is not appreciating (why take the risk). At the same time, nobody wants to sell for a loss.
Add on to that, most people paid too much for their present home, by about 50%- to 100%. The banks can help you refinance, but the amount you signed for on the note is not going to change. The mortgage mechanics may be different, fixed instead of adjustable, but no one is reducing your loan amount. It’s kind of like some sort of cruel Simon Legree movie, titled "Slave to the Bank, for Life."
Bear Sterns announced their problem in mid June. If these hedge funds all use the same boiler plate investors agreements, then anybody that wanted to bail out of the fund had to notify the fund by June 1, to get a check three months later. We know that didn’t happen. So the next redemption date would be September 1. But if you were a relative of the boss, they might back date . . . . . . . . . . . . .Hmmmmm.
There were 34,000 foreclosures in San Diego County as of June 1. If we project out this to September 1, we could have about 70,000 (that’s a double in 3 months). The abstraction of these home loans to bonds, and then further up into Tranches, and then derivatives, the multiplier effect in the past, worked wonders. Now the least little hic-up, at the lowest level, could turn into a mushroom cloud at the top.
Of course, if you want something that could really go nuclear, the words “Credit Card Bubble,” come to mind. I wonder what Bear Sterns has in their wallet?
As a note of curiosity, the vehicle of investment in the late 1920’s was the “Holding Company.” It was leveraged differently but similar in its purpose to the Hedge Funds of today. The only one still around, from the 1929 debacle, is Goldman Sachs. By 1933, their investors had lost close to 90% in that mess.
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