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18 comments:
Hi Roger:
When you get a chance, can you please post yoru TV interview on this web site? Possibly using Utube.
Also what are your thoughts on REIT ETFs?
Thanks,
Stranger
Fox, did not post the segment on their site. I need to figure out how to get from my TiVo to my computer in order to youtube it and i'm not sure how (don't think I have the right cable).
If you mean domestic, I think I would rather pick individual REITs.
If you mean foreign then maybe an ETF is right although I have picked out three foreign stocks that I would consider owning (would only select one) for later.
Right now I am zero weight ahving sold the one I owned in Dec for a tax loss. The sale was one of those should have probably sold earlier but it got much worse after I sold.
I'm not in a hurry to get back in. I know many folks love Asian RE companies but I am hesitant.
Marc Faber always talks about farm land in places like Thailand or Uruguay, too bad farm land hasn't been indexed into a fund (can this even be done?) investing in the yield from farm land seems a better spot than office buildings but maybe I have it wrong.
Roger,
Can you help me out on the banks bailing out the bond insurers?
Lets pretend the banks put up 50 billion to bail out the bond insurers. I have heard higher and lower but lets go with 50 billion.
The banks have 50 billion in losses and the insurers give the money back to the banks. Now instead of 50 billion in losses on bonds or CDOs or what ever they have investments in insurers that are under water to the tune of 50 billion. Assuming there are no transaction costs associated with this.
If the banks do not have to recognize the 50 billion dollar loss of value in the insurers who are we kidding? If the banks do have to recognize the 50 billion dollars in losses of the insurers what have they gained?
Isn't not recognizing the losses and papering over etc. what happened to Japan for 16 years?
The problem is that people are not going to pay their house hold debt obligations (mortgages, credit cards etc.) If the house hold debt bubble is bursting I see no way around the losses unless the government sucks up the loss and I do not see that happening.
I see bank losses and failures and the government honoring the FDIC insurance. So I do not expect the sky to fall. I do not see a bailout for wall street coming out of congress, so I do expect this to be a bad bear market (unless it is a series of bear markets instead like the 70s).
Which is not to say this rally can not continue for a while. A slow motion train wreck is one of the best descriptions I have read as to what is to come. I do not expect it to be pretty, but how often do house prices fall like they have and are predicted to continue.
As I read your question about a bailout my first thought is of austin Powers from the beginning of what I think was the second one where he is taking pictures and tells the models to "ignore this."
Based on the depth of your question I probably know less than you so no I doubt I can help you out with this but....
I think the thought is that it is more important to not have the entire insured bond market reprice for loss of insurance. "Papering over losses" was/is part of the Japan problem, exactly right and I don't know if that would be part of the equation (not saying no, I really do not know) but there is visibility.
I think big banks giving a bail out that they might have to write off is not the worst thing because all but one or two of the banks will fail (maybe none from here?) and on the next up swing that banks will all go back to making a lot of money (I was going to say printing money the metaphor might have been confusing)--the boom and bust (without going under) nature of the business.
There really seems to be a damned if they do damned if they don't thing working here and I am not smart enough to know what is right but I think the fear of bond repricing is the thing they fear most?
yes you are correct about the bond repricing being worse. I guess my point is there will be no insurance. How can you insure your self without taking the loss? The bottom line is the losses will be more than the current insurers can cover and then the loss is real and can only be papered over, stretched out, etc.
BTW, my prediction on bank losses and failures includes the regional banks that will not contribute to the insurer bailout. I think there will be lots of the next few years.
I am not saying it is going to be absolutely horrible, just a lot worse than most people expect. There are no easy answers to lots, and lots of people defaulting on their mortgages due to a housing bubble. All real bubbles are really debt bubbles and this is why I always emphasize house hold debt levels as a percentage of gdp.
Roger - your TiVo recording needs software to convert it. Try this:
http://sourceforge.net/projects/tivodecode/
It takes a while (I run it on a MacBook but they say it works on Windows too) but you can let it grind away while doing something else.
Thanks for a great blog.
The double inverse ETFs do not seem to track the corresponding index, any ideas on how this actually work?
SKF, FXP, EEV, DUG, QID, ...
http://www.youtube.com/watch?v=37pal-PYTUQ
The lyrics for the Bearish song are a hoot and a half.
Re the double short funds tracking;
Not to be a jerk but I have had a lot of comments/TSCM emails about this and often people are looking at the wrong index for comparison, so hopefully you do have the correct index.
The other common mistake with these is that they are intended to capture whatever they are supposed to capture on a daily basis, not over periods of time, just daily.
Generally I can say SDS does a good job but it is not perfect.
Further complicating the matter is that some of them (SDS anyway) trades until 4:15 and so can be moved by news that prints between 4-4:15.
http://tinyurl.com/2ogfc6
I remember when I first compared the Nasdaq bubble to 1929 about a year and a half ago on this blog and I could hear Roger pounding the keyboard that I was an idiot (essentially).
Well listen to what Proffesor Shiller has to say about housing.
seg
If something close to the worst case scenario that some have spelled turns out to happen then I will absolutely have been wrong. Here is another article from BusinessWeek via Yahoo calling for a potential 25% decline before its over.
I don't specifically know what your comment was or what my exact response was but it is very rare for the worst case to happen no matter how bad things seem.
I continue to believe that this will be in the realm of normal bear market and normal recession and will own being wrong if that is the case.
Roger, do I have this right? You feel that rubber will "bounce back"? Have you cleared that with the attorney's?
charlie
Palm oil will continue to slide?
charlie
Roger,
No I do not think the bear market will be worse case. I also do not think the sky will fall.
I think I said the nasdaq bubble collapse would end up being the way 1929 should have been handled. Bad but not cataclysmic.
I am also thinking it may not be that bad all at once but a series of recessions. Time will tell.
The enormous problem with debt is when people repudiate their debt. It is no big deal if joe down the street does not pay on his car, credit cards, and defaults on his mortgage. The interest rates the banks charge are high enough to compensate for a few joe's.
But when very large numbers of people decide not to pay their mortgage because the house is worth less than they owe, we have a major problem.
I know you read Hussman and you know the feds money in the banking system is on the order of 100 billion (I'm to lazy to look up what hussman actually quotes this early in the morning) He also says a broad measure of the money supply is around 13 trillion (again check husman for accuracy).
well the banking system loans are what lets all that money get created and multiplied. Thanks to the repeal of glass stegal I think there was a lot of help from wall street over the last 12 years or so.
So a lot of that 13 trillion in money supply exists because of money loaned that will never be repayed and it is all going to happen all of a sudden. So the "money" is going to evaporate along with the bad debts. It is the other side of the balance sheet.
The reason the sky will not fall is FDIC is guaranteeing your bank account even if the bank goes away.
Proffessor shillers attorneys are not letting him make a lot of predictions any more, but he did say close to 2 trilion in household worth has been destroyed by house price decline already. You get another year or two like that and your talking some real money. Shiller is predicting the decline to go into 2009 but he will not predict the size of the decline.
How many people will end up upside down on their house? How many people will walk away from their house? It is the smart thing to do for a lot of people.
The sky will not fall, but 2008 will not be borring.
seg
Charlie, good stuff, there is long list of those puns out there somewhere, I don't remember them anymore but its funny stuff.
Seg,
I may be remembering wrong but I don't think I ever said the various items you cite aren't negatives that we will have to confront, we will have to confront and deal with all of them. I imagine our difference here was and still is the magnitude of the impact.
I will admit that despite my ramblings (that were too early) about a bear market starting I am actually a very optimistic person and so I while I am convinced the downturn will be in the realm of normal I cannot rule out that my inherent biases lead me to my conclsuion as opposed to logic and reason.
Seg,
people are not going to walk away from their homes because they are upside down. Most people are so reluctant to sell a stock that's underwater, let alone walk away from a home.
Real Estate speculators have already walked away from their "investments". This already showed up on the earnings of banks and home builders.
A new breed of smarter real-estate speculators are emerging and starting to take over some of those deals, slowly but surely.
People stretched thin will have to give up their homes. This has always been the case, now we will see an up tick in that but not enough to have a material impact.
The rest will gut it out. In my middle class neighborhood people are giving up their gym memberships and their weekly maid services. Not pleasant, but not 1929 scenarios.
I mentioned in a comment here back in the summer that the solution to the home-owners' problems is simple. The ARM rates do not need to adjust upwards. At the time I mentioned that ARMS have indeed adjusted lower not higher in 2004 and that this could happen again because nobody makes money on a foreclosure. 6 months later, the banks, the Fed and the president are getting to see it my way.
This problem has always been two pronged. One issue is the home owners. Their problem is simply falling home prices and ability to keep up with mortgage payments. As long as rates stay low they will manage, suffer but manage.
The other issue is the leveraged derivatives. This is where all the write-downs and mortgage lender implosions came from. I do not know if this problem is over or not, my guess is not. We may lose a major bank along the way. But clearly we will not see destruction of our financial system as we know it. There are plenty of interested parties around the world that will make sure that does not happen.
--sami
"But clearly we will not see destruction of our financial system as we know it."
I never said it would be destroyed. Just worse than YOU think.
I maid my wife walk away from a property in the 80's. Similar circumstances to today just not as wide spread. After paying on an adjustable rate mortgage on a place for my new bride for a year +/-
I had a conversation with an attorney. He said it was stupid to continue paying on the place as it would never sell in the state we were living in. Long story short the bank got the keys in foreclossure and my wifes credit rating was trashed. Fast forward to today my wife has a paid for house and will never need a mortgage again. Credit ratings are no longer a concern.
I think LOTS of people will walk away as this deteriorates. We are only at the beginning. I f houses go down 10% more than they already have (not a dire prediction) lots of people will walk away. It is the smart thing to do and I do not think people are any more obligated than plenty of companies that declare bankruptcy. I have recieved plenty of notices of bankruptcy from former clients. It is just smart business some times.
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