Financial, Real Estate, Stock Markets Trends and Current Affairs

Yep, I said it. The government bailout. The builders are now looking to get into the tax refund business in lieu of the house selling business. This actually exacerbates their problem in the medium term to gain a short term advantage. They need capital, so they are taking a big negative mark to market to do so. This accelerates the devaluation of home prices which accelerates the problems associated with it, devaluation of mortgages, foreclosures, etc. This does quicken the arrival of affordable homes (the lack of which is one of the key drivers to the diminished demand), but it also hastens the demise of the companies that just can't hang in there by making supply even more abundant at even lower prices: be it builders or financial concerns such as banks.

The interesting thing is that the federal government is subsidizing this directly through tax refunds. If you add it up, a couple of dollars from your stimulus package refund check went directly to the builder tax refund/bailout (that is assuming all of the builders wish to take advantage of this financial engineering, and I believe all of the big ones are aggressively looking into it as I type this post) - and the bailout may not even work for some builders. Lennar raised over a billion dollars in cash between tax refunds and asset sales, and they are still squarely in bankruptcy territory according to their z score.

Due to the abrupt nature of the home building lobby's cutting off of campaign financing, I assume the 5 yr tax loss extension may not be going as well as anticipated.

"The association's president, Brian Catalde, said in a statement that the group's political action committee, BUILD-PAC, had halted all disbursements to federal congressional candidates "until further notice." The statement added, "More needs to be done to jump-start housing and ensure the economy does not fall into a recession.""

"experts said the lobby's move illustrated how closely interest groups tie their donations to the decisions they hope lawmakers will take on their behalf -- a connection that usually goes unspoken.

"This demonstrates in a starker fashion than we're used to seeing how groups use political contributions to promote their positions in Congress," said Kenneth A. Gross, a campaign finance lawyer at Skadden, Arps, Slate, Meagher & Flom."

Why in the world would the media (rhetoric question) report the
street rallying when Buffet offers to buy the only thing keeping
monolines afloat? He is effectively holding the sword labeled monoline
hari kari.

From Bloomberg :

"
Berkshire would put up $5 billion as capital for the plan and is
offering to insure the municipal debt for 1.5 times the premium charged
by the bond insurers to take on the guarantee. The insurers could
accept the offer and back out within 30 days for a fee, Buffett said."

Of
course, management (at least the ones with any gray matter left) are
saying thanks, but no thanks. Wait a minute, though. They say that CDOs
have value and the mark downs are a temporary thing that will amortize
and revert back to par or above by maturity. If that was truly the
case, and you are strapped for capital that no one appears to want to
give to you, Buffet's offer makes plenty of sense. After all, he is
willing to pay you 2/3rds of what you paid for this low growth risk, but you get the capital that you seek so desperately and you get to capitalize on those structured products that you feel the market undervalues so foolishly. That
's a damn good deal for someone who is scrambling for money. Then
again, that's only if you really believe your own structured product
story. I don't think they do.

The only stock that should be rallying
is Berkshire Hathaway. Outside of potential for Buffet's stock holders,
nothing has changed. Even the Buffet equity potential has not changed
much. We all knew this is what he wanted to do - take advantage of the
mistakes that the monolines made with very little risk.

We actually had a modern day run on the bank in the UK and the equity markets shrugged it off.

It is a mistake, plain and simple. I normally don't like to tell people who specialize in a business how to run it, since they probably know more about their business than I do - but sometimes the mistakes are just so glaring. I don't care how many analysts are poring over how many books at Countrywide. BAC's error is not misjudging the value of Countrywide now, but misjudging the macro environment in which Countrywide operates.

My experience has been primarily understanding and evaluating companies from the equity perspective, but that definitely doesn't mean that I ignore the fxed income side. I am just not better at it than the other guys. What I have been noticing of late is that credit markets have been screaming murder for some time now, and the equity markets have been humming along new bullish highs and trading runs as if nothing is truly wrong. This is a strong indicator that momentum trading has again taken control of the markets. It is an environment where price trumps value. The last time this came to a head was the dot com bust. It took many institutional and individual investors 5 to 6 years to break even. Some never recouped their losses. Well, my gut has been telling me for about a year and change now that we are back there again. 2008 thus far has done nothing but confirm that we have come to a head. The pic above was an actual shot (one of very many at various locations) of the run on Northern Rock Bank in the U.K. This was real, and it was indicative of a real problem.

Well, we had a very recent run on the bank here in the states as well. There were pictures all over the web when it occurred, and now mysteriously, they are all gone. All I was able to retrieve was this screen capture of a thumbnail from Blownmortgage.com. Just as the pictorial remnants of the run have somehow disappeared, so has the equity markets prudence in the face of such a run. You can guess which bank got ran on.

The National Association of Realtors released results stating sales actually rose .04% (statistically significant?), but were down 20% from last year with prices down across the board. The Times Online is reporting Shiller Says America could plunge into Japan-Style Recession.

lerah book"Losses arising from America's housing recession could triple over the next few years and they represent the greatest threat to growth in the United States, one of the world's leading economists has told The Times.

Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: "American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars' worth of losses."

He said that US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.

"Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years," he said."

My take: I believe that my blog's readers are considerably above average in financial acumen and common sense. The NAR is simply not an entity to be taken too seriously, due to the obvious conflict of interest exemplified by their ex-economist, [[David Lereah]], who published some of the most absurd BS I have ever seen come from a nationally reknown organization. Examples of his work from Wikipedia: Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade�And How to Profit From Them was published in February 2005 at just about the tippy top of the bubble (that takes some talent). One year later in February 2006, as the market is already on it's way down, Lereah retitled his book Why the Real Estate Boom Will Not Bust and How You Can Profit from It. Lereah's previous book The Rules for Growing Rich: Making Money in the New Information Economy touting investment in technology company equities was published in June 2000 at the onset of the collapse of the dot-com bubble. This extreme cheerleading has died down substantially, but the overly optimistic spin is still evident with their new economist, Lawrence Yun.

Mr. Shiller, is a different story, though. He is to be taken seriously and has no such conflicts that I can see. BUT (there always is a but, isn't there?), you should know what it is you are looking at when you stare at his numbers. In September of last year (Happy New Year, everybody) I cautioned about misreading the numbers from the Case-Shiller index (see The Real Trend in US Housing Prices... ).

Okay folks, now its official! According to Moody's, you can now rest asured that your retirement portfolio insured by Ambac is just as safe as those insured by Berkshire Hathaway, et. al., - AAA safe! Moody's has spoken...