Leader of the Pack

Last year we had a lot of housing bubble bloggers and a many of them have fallen by the wayside. No longer do we hear references to "Canaries in coal mines," "Seating on the Titanic" or "The roller coaster getting near the top--- to the downward plunge." On another note, there were so many participants in the Real Estate Hand Basket to Hell Event, that it will take a while to sort that one out. You could say it was a Country Wide sponsored event.

The dynamic duo running the Federal Reserve and the Treasury wants everyone to believe that the financial markets are in great shape. Bear Stearns and Countrywide were what was wrong with the market???? It’s all fixed and we can go home now??? (If you still have one).


Tell me that no one is shorting the financial markets. This stale chart from Deutsche Bank from last November kind of shows how combining two smaller problems makes for a bigger one later. J P Morgan has absorbed Bear Stearns.(Double click for a larger view)


Bank of America has taken over Countrywide (maybe). There is one bank that stands out among all of them, Citigroup, leader of the pack. Is this a list you want to be at the top of?

The news gets worse, the three biggest credit card issuers are, Bank of America, J P Morgan and Citigroup. The main reason we have a real estate mess today, is because in the past, anyone could qualify for a loan. I wonder what makes credit cards different. I guess the banks are happy if you never pay them off, just pay every month.

Several large banks are in serious trouble, Citigroup trading at $17, UBS trading at $22, J P Morgan trading at $35 and Bank of America trading at $24.

This is where we are at, the solution is simple, the problem is a mind boggler. It will fix itself if left alone. The trouble is Congress; the Duddly-Do-Right of the Canadian Mounties is riding to the rescue. God help us, it’s a little like mixing Preparation H with pepper spray. After one application, your eyes will be so wide open, that you’ll never blink again.

Welcome to the Recession

As the economy slips into the depths of a [Recession/Depression] (your choice), people are starting to consume less. This decreased consumption could cause prices to go up. It sounds contrary to what would be expected. Let’s use a public utility like a water treatment plant as an example. The water utility has fixed costs. They have an administrative billing department and a group that maintains the infrastructure for water treatment and delivery. The more water consumed, the cheaper the cost per unit of production. Notice when consumption decreases drastically, the fixed costs don’t go away. The water company has to charge more per unit to keep in business.

Another misconception,“Raising taxes will increase government revenues.” It often backfires. In the 1930’s many municipalities raised taxes because the real estate base was reduced by more than half in some areas. In this case, raising the tax rate did not bring in more revenue, it brought in even less. People abandoned their homes; they couldn’t pay the bills they had. Banks today, are not foreclosing on certain areas of Detroit. Why foreclose and take possession, only to pay the back taxes and be forced to tear it down? Let the city have it (with both barrels)!

Government services will have to down size. The electricity for street lights is a fixed cost, as are public pension plans for police, fire etc. The tax base is just not there and the fixed costs are just that, fixed. Looks like education, law enforcement, fire and emergency services are in line and up front for a cut.

In private industry, the airlines fixed costs can be a double edged sword. Ticket counters, plane gates, plane leases, take off/landing fees and retirement compensation packages are all fixed costs. Add to that a not so fixed cost of airline fuel and fares that are no longer affordable to many people. Competition for the lowest air fares will run, almost of all them into bankruptcy. Naturally, our government will assume financial responsibility for these failed retirement plans.

The implied future for the airlines, suggest a death spiral for the fast food industry. Why spend 6 bucks for lunch when you can put it in the gas tank? Brown bag it to work with a thermos of coffee. That kind of kills the 4 dollar Starbucks latte. This could really put a crimp in the fast food industry. Figure 241 working days this year, a person could save $2,410 on coffee and lunch ($3,000 if you add in the taxes paid earning it).

Common sense doesn’t seem to work properly in our new environment. I guess too much money has fogged our sense of reality. Don’t expect too much help from Congress they’re all over at Countrywide getting their “Friends of Angelo” loan. Since 5 of the 6 caught were Democrats, it brings to mind the quote "If Democrats had brains, they'd be Republicans" (Don't take it politically--just joking around). We're just looking at those who got caught. I suspect there are a lot more, the imbalance makes me suspicious. I don't hold either party in high regard.

There is also a rumor floating around that the "Dodds Real Estate Mortgage Bailout Bill" is going to be renamed the "Bank of America Self Enhancement Bill." This way, the people that wrote it will get credit for their work.

It's a little like giving a hooker a signed blank check, with the taxpayer picking up the tab. Of course I guess we shouldn't bitch, the money is coming from the same place Congress got the 150 billion stimulus package to give to us. That was painless, wasn't it?

Link: Stop The Housing Bailout------------Click here to sign the petition. Name and email and you are done-- quick and painless.

The Fed has a deal for you

Here is a little unnoticed item in today's Wall Street Journal page B7 Saturday June 14 under "Legal Notices." There is a sale in progress of CDO's and RMBS's, also known as "Collateralized Debt Obligations" and "Residential Mortgage Backed Securities." The total amount being auctioned off is a "measly" 2.3 billion dollars.

Auction 9 represents about 274 million dollars.



Auction 20 totals out at 412 million.



Auction 24 is only 260 million



Here are the people throwing the party:




Here's your program guide for the whole show:



You can Google the first four or five numbers of the cusip to figure out whose name is on the certificate. That can give you an insight into the quality of the security, but it won't tell you who currently is holding it. I have an idea who may be selling this crap, but I could be wrong.

The Explosive Oil Bubble

Future’s contracts take the risk out of changing prices for both the buyer and the seller. A gold producer with a cost of production per ounce of $600 needs a guarantee that they can meet payroll, insure a profit and stay in business. A circuit board manufacture in selling product must buy gold for production at a known cost so they can deliver the product at a predetermined price. Used properly, the futures exchanges take the risk out production.

The price of oil has a very direct impact on the major airlines. They buy jet fuel futures out a couple of years, to lock in fuel costs. This very quick doubling in the price of oil since August of last year has pretty much killed the futures market for the airlines. I am suggesting that they don’t dare to commit to the higher prices long term (I could be wrong). Their ticket prices are locked to their fuel prices. The Airlines are buying spot hoping the prices will come down. It’s kind of like buying Mayonnaise. You buy two for $5 on sale (when you don’t need them); otherwise the spot price is $5 per jar. Remember when California utilities went from contract gas to spot, because spot gas was so cheap? Well, spot gas went through the roof. Hmmmmm

There is nothing illegal going on with the commodities markets. The margin requirements are the problem, they are way too low. Six percent margin encourages speculation. Hedge funds can be rather big players. Plus they are not government regulated. 16 to 1 leverage on commodities futures is a pretty good return. It’s my contention that oil has gone so high that no one is buying futures to lock in a price. Futures are being bought and sold, but only by speculators, producers and refiners. The futures buyer that needs product is only buying on the spot market in the hopes the market drops to a more reasonable level.

Two things are happening, everyone is consuming less oil and anyone with production capacity is bringing it on line. When an airline takes out of service 100 jets, that’s about 3 to 6 million gallons of jet fuel per day not being burned (a 747 holds 64,000 gallons--$256,000). Product for delivery is going to increase. Just with any bubble, there is that final surge before it pops.

The price of crude oil has gone up $15 in two days. It’s reminiscent of the housing fiasco. We can all get rich. Remember the two Bear Stearns hedge funds that collapsed last July? Leverage was the contributing factor. It exposed the real estate mess and it’s been downhill ever since.

What happened in the 1930’s to bring this country to its knees was not illegal. The investment trusts of that time, are our hedge funds of today. They were financed differently, but make no mistake, the leverage was the same. It was 10% margin in 1929. In today’s world, we have 6% or less--we know what we are doing, (and they didn’t?). Yea right!

Goldman Sachs and Company in 1929 had close to one billion dollars of securities in three investment trusts; Goldman Sachs Trading Corporation, Shenandoah Corporation and Blue Ridge Corporation. They were the “Bear Stearns” of their day. All three by 1932 were worthless. [Note: $15 dollars would pay the rent for a month in 1929, in today's money that billion lost, would be equivelent to 100 billion dollars]

The present status of the oil supply it is not easy to calculate. Storage facilities for the US are known, for the rest of the world, they are unknown. There are so many different oil producers, that total production is only a guesstimate. At some point in time with the economy going into recession and with most of the major airlines facing bankruptcy, we are going to have more oil than we can ever use.

The futures market is a ticking time bomb. If oil drops $40, it could turn into a catastrophe. The hedge funds would plunge into the abyss taking with them the banks. Congress could dust off the Glass-Steagall Act of 1933. It kept us out of trouble for some 65 years only to be repealed in 1999.

Bernanke is a little like the Sorcerer's Apprentice in Fantasia. You don't need to buy a ticket to this one; it's more than a movie!

Crude Oil Bubble Trouble Part II

Bubbles don’t wave red flags and are not considered bubbles until they pop. They are usually touted as tremendous investment vehicles. A bubble has many things going for it. Low financing costs and high returns with little (perceived) risk and a lot of participation. The stock market crash of 1929 was done on 10% margin. The housing collapse of the late 1920’s was done with 5 year interest only loans, as was our current housing bubble.


Common sense has to come into play sooner or later. Remember all of the lame excuses why housing prices would continue to increase? We have unoccupied half million dollar houses all over San Marcos with burned out lawns. I guess rich people don’t like to live here anymore.

Four dollar a gallon gasoline? How long can it last? Congress can get us to four dollar gas the old fashion way, but this is way too sudden. With oil at $131 a barrel, The world's largest known oil field becomes economically feasible. The Athabasca Oil Sands reserve of Canada will come on line. The trouble is, it could take about 3 years. By that time oil could be back to $60.

Even though we consume a little more than 1/4th of the world’s oil, we can afford to pay the price. The rest of the world cannot, they're already broke. Pundits point to the gas subsides by third world governments. It matters little, whether it is the government or the consumer who pays. It’s one and the same person. Of course 90 percent of the people in this country have a complete disconnect when it comes to government spending and the tax base it is drawn from. It's a little like free government health care, nobody has to pay for it (there’s a wink and a nod in there somewhere).


With spot oil at $131 a barrel and the futures three months out at $127, just buying 10 forward contracts with 100K (6% margin) you have the chance to double your investment over the span of a year. There is a hell of a risk, but no more so than buying a million dollar McMansion (interest only). The oil market could go south real quick. The imminent collapse of our major airlines could do it. The speculator with 10 futures would not be able to make the margin call. What that could do to the commodities market leaves one room to pause.

Just maybe the Chicago Board of Trade is FDIC insured. I haven’t heard anything to that effect but I’m sure Bernanke knows.

Gas will be back to $2 soon. You don't need as much once you lose your job.