Thursday, April 3rd, 2008
George Soros who came back last year to his fund because of the subpar performances took his fund back it’s previous glory by trouncing the market with currency bets against the dollar but he now suggest that the market may correct in the short term but in the long as I concur, we had large systematic problems that are not easily corrected. The two problems that he sees are in the credit swaps market and the growing foreclosures in the real estate market. My understanding of the credit swaps market was pretty limited until I read about how he suggested that the market had many loop holes which he suggest was a reason that Bear Stearns had to be rescue to avoid massive chaos which still may happen. With growth in funds for distressed securities, many people see defaults as the next logical step and with inflation rising that may likely occur. Here is a snippet of the article:
Instead of reshuffling regulatory agencies, the authorities ought to prepare for the next shoes to drop. I shall mention only two. There is an esoteric financial instrument called credit default swaps. The notional amount of CDS contracts outstanding is roughly $45,000bn. To put it into perspective, that is about equal to half the total US household wealth and about five times the national debt. The market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfil their obligations. This prospect hangs over the financial markets like a sword of Damocles that is bound to fall, but only after some defaults have occurred. That must have played a role in the Fed’s decision not to allow Bear Stearns to fail. One possible solution is to establish a clearing house or exchange with a sound capital structure and strict margin requirements to which all existing and future contracts would have to be submitted. That would do more good in clearing the air than a grand regulatory reorganisation.
The other issue is rising foreclosures. About 40 per cent of the 6m subprime loans outstanding will default in the next two years. The defaults of option-adjustable-rate mortgages and other mortgages subject to rate reset will be of the same order of magnitude but occur over a longer period. With single family home sales running at an annual rate of 600,000, foreclosures will overwhelm the market and cause prices to overshoot on the downside. This will swell the number of homeowners with negative equity who may be tempted to turn in their keys. The fall in house prices will become practically bottomless until the government intervenes. Cutting foreclosures should be a priority but the measures so far are public relations exercises.
Anyways…good luck and happy trading. I’m still long VLO, short C and GRMN. I am looking into longs in MSFT and shorts in COF.
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Thursday, February 28th, 2008
So the market is down over 1% today at the half way point but it doesn’t look very good if it drops below 12500 for the dow and 1360 for the S&P. It’s close but we’ll see if it pulls it out. I feel that it should at least test the lows again and break up. It may be forming a base as everyone seems to be getting a little more excited about financials and retailers lately. Even the battered Apple stock has seen some action lately. Techs might be getting to the point where it looks good but I think it needs to test it’s lows and at least form a base. It’s barely recovering from it’s low so there is a little more time to come.
Perhaps the deciding factor will be next week. Will the economy announce a further deterioration of the economy or will we see resilence. I doubt the resilence thing if we can’t even buy muni bonds that are pretty darn safe, how can we fund anything else. There are problems still. They need to be solved. No one is really raising money just asking for recapitalzation help.
Of course, there still is room for oil and commodities to raise a little more. Perhaps the agriculture and commodities space may be a little crowded but on weakness there should be room for growth at least until we realize that the Indians and Chinese aren’t growing as fast as we thought.
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Tuesday, August 28th, 2007
Sorry everyone. I will be on hiatus for the next couple weeks because of a huge deadline for a web project. CNBC has a fast money summary and The Street also has a summary for both Mad Money and Fast Money but you have to read and click through everything while you miss some tips and slight of hand. I’ll try to update now and then. Thanks for everyone who has been reading. Be back soon.
Well back to the topic. The spreading of the credit problem not only spread through the sub prime (low credit) loans and alta A (non documented loans) but now spread to the jumbo loans (any loan above $417,000). Well the problem lies not in the sub prime loans because people with poor credit aren’t exactly supposed to get loans if they have a bad record of paying them back. Second the problem isn’t in the Alta A loan problem because people who can’t document their assets or their income shouldn’t get a loan based on their word because that would mean every Tom, Dick, Larry and Jane can walk off the street and get a loan. I’m sure if Dateline did bust with a homeless guy trying to get a stated loan a last year, it would have blown the cover off the loan industry but it didn’t happen but boy that would have been some story.
The problem lies in the secondary market drying up for jumbo loans. Well these people can afford a half a million dollar loan but they can’t get the loan because the secondary market has stopped funding it although there isn’t as much risk as sub prime or Alta A because these people can document their income and have assets but don’t want to take out a loan that is 1-3% higher because of the amount. Let’s think about this. Well in most major markets, a half a million dollar home is not as big as it sounds. It’s very comfortable in places like Miami, Chicago, New York, San Francisco, and Los Angeles. The average home in Los Angeles is $500,000. If you save up $100,000 for your home which is a huge task for a starter home, you maybe not even get the loan because it borderlines a jumbo loan. So what is happening now is that the real estate prices are coming down to meet this lack of liquidity in the jumbo loan market. In parts of the Los Angeles county prices are being slash forty to seventy thousand so that it can be sold. So if the higher end market prices goes down, then of course the lower end market will go down but perhaps not as much. It’s a vicious cycle.
Here is the best solution: The government has to lift the jumbo loan amount for Fannie Mae and Freddie Mac to above $500,000 so that there is more liquidity for certain markets like California and New York. But here comes the problem, the government would just be feeding the fire more fuel to keep prices artificially high because most people can’t afford homes already. But we all have to worry about consumer spending as well with prices of homes going down, the refinance piggy bank is running empty on equity so those big purchases may be cut off soon. How would you feel if $50,000 equity went off your house in one month or if you already took out equity and figure out that you now owe more than the house! Not a good situation because we need our home prices high to keep some of the spending going because just today there were reports of credit card defaults were moving up so is this a sign of the consumer dying with the jumbo fall of real estate?
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Tuesday, August 21st, 2007
Here’s an interesting article for everyone about happiness. Yes it’s probably the most common thing that you hear that money doesn’t make you happy but it sure does help and we can’t lie about it but here is a summary of some books about happiness by Paul Farrell, a MarketWatch columnist.
Here’s your course synopsis, the books, the authors, the messages:
* “Zen Mind, Beginner’s Mind:” Shunryu Suzuki. “Which is more important; to attain enlightenment, or to attain enlightenment before you attain enlightenment; to make a million dollars, or to enjoy your life in your effort, little by little, even though it is impossible to make a million; to be successful, or to find some meaning in your effort to be successful.”
* “Stumbling on Happiness:” Daniel Gilbert. Another Harvard professor, who says in his new book: “If everybody realized constant production and consumption aren’t a source of happiness … how many of us would get up in the morning and say: I know it’s not going to make me happy, but I want to keep the economy going?”
* “The Art of Happiness:” The Dalai Lama. “Everywhere, by all means imaginable, people are striving to improve their lives. Yet strangely, my impression is that those living in materially developed countries, for all their industry, are in some ways less satisfied, are less happy, and to some extent suffer more than those in the least developed countries.”
* “Money & the Meaning of Life:” Jacob Needleman. “The battlefield of life is money. Instead of horses and chariots, guns and fortresses, there are banks, checkbooks, credit cards, mortgages, salaries, the IRS. But the inner enemies remain the same now as they were in ancient India or feudal Japan: fear, self-deception, vanity, egoism, wishful thinking, tension, and violence.”
* “The Millionaire Mind:” Thomas Stanley. “As most millionaires report, stress is a direct result of devoting a lot of effort to a task that’s not in line with one’s abilities. It’s more difficult, more demanding mentally and physically, to work at a vocation that’s unsuitable to your aptitude.”
* “Flow: The Psychology of Optimal Experience:” Mihaly Csikszentmihalyi. “Isn’t it funny? I’ve been studying happiness for at least 40 years, but I still don’t have a definition of it. The closest one would be that happiness is the state of mind in which one does not desire to be in any other state. Being deeply involved in the moment, we do not have the opportunity to think about anything but the task at hand — hence, by default, we are happy.”
* “Seven Spiritual Laws of Success:” Deepak Chopra. “Everyone has a purpose in life, a unique gift of special talent to give others … Sit down and make a list of answers to these two questions: Ask yourself, if money were no concern and you had all the time and money in the world, what would you do? … Then ask yourself: How am I best suited to serve humanity? Answer that question and put it into practice.”
* “The One Thing You Need to Know.” And if all else fails, take Marcus Buckingham’s incredible advice: “Discover what you don’t like doing and stop doing it.”
* “The Way of the Peaceful Warrior:” Dan Millman. “The secret of happiness, you see, is not found in seeking more, but in the capacity to enjoy less … This is the final task I will ever give you, and it goes on forever. Act happy, feel happy, be happy, without a reason in the world. Then you can love and do what you will.”
* “The Alchemist.” Paulo Coelho’s novel is a spellbinding must-read about everyone’s lifelong search: “When you want something, all the universe conspires in helping you achieve it … God has prepared a path for everyone to follow … The secret to happiness is to see all the marvels of the world, and never forget the drops of oil on the spoon.”
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Friday, August 17th, 2007
So after intense pressure to cut the Fed rate of 5.25 lower, they cut the discount rate which is the rate in which the Federal reserve lends to banks from 6.25 to 5.75 which allows banks to have more access to cash. Liquidity was the problem in the market because of the credit crunch because no one was willing to lend money and borrowing money was too expensive. Now this flushes the market with a lot more liquidity so that the mortgage companies who all were at their very last ends with funding would survive but for how long.
The federal funds rate which is tied to the prime rate which affects consumers and businesses was not cut. Everyone is expecting soon especially with consumer sentiment going down. The temporary bandaid will get us through this period but we have to keep in mind how the full brunt of the housing downturn will affect consumers. “This is fine for temporary relief, but I think they will still have to cut the funds rate because the markets will still be turbulent,” said David Wyss, chief economist at Standard & Poor’s in New York. The main problem is still the housing problem which is flowing into prime mortgages which is merely the beginning because who is going to buy all these mortgages now that they know they are going down. The hedge funds will step in when they see more blood. The market was down really hard before market but with the announcement, the Dow shot up 300 points but we’ll see if it can hold it which will provide the large psychological boost because if it doesn’t, if the Fed can’t save us who can?
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