Displaying items by tag: Asset Securitization Crisis

This is part one of my update on residential real estate mortgages, whose credit conditions have seen a marked improvement over the past year. Of course (yes, you know  there is always a but), I believe the improvement is the result of the rampant government intervention in the mortgage markets. As we shall see in part two for this update, even with rampant intervention some of the major mortgage institutions are so sick as to appear to be beyond mere assistance. Brace yourself for Financial Meltdown 2.0, open source edition.

Is it really a Housing Double Dip if Conditions Never Stopped Getting Worse?

Many analysts have speculated housing would reenter a “double dip” courtesy of falling home prices, decreasing home sales, increasing housing inventory, and other issues that have not been resolved since the collapse of the housing market began nearly three years ago.  Inevitably, housing policy at the federal level has completely failed to support any regeneration of demand.

Mortgage Rates Can’t Find Rock Bottom: WSJ

  • The Freddie Mac survey of 30 year mortgage rates has shown new record lows in rates for 11 straight weeks
  • 15, 10, and 5 year rates have also continued their free fall as employment data fails to ease fear in the housing market
Published in BoomBustBlog

We performed an analysis of the correlation of the stock prices of the companies that we have covered over the last two years to the broader stock market. Based on the price movements in the selected stocks and S&P 500 over the last decade, we mapped the pattern seen in the degree of correlation that is exhibited when there are changes in the overall market direction owing to change in the “perceived” macro-situation.

For the purpose of our analysis, we divided the total period under consideration (December 31, 2000 till August 31, 2010) in to four sub-periods reflecting four different market sentiments:

  • Pre-crisis- Dec 31, 2000 -Dec 31, 2007 – Long-term
  • Financial crisis- Jan 01, 2008 to March 09, 2009
  • Rally - March 10, 2009 to April 30, 2010
  • Correction - May 01, 2010 to Present

Based on the daily prices of the stocks and S&P 500 in the aforesaid periods, we calculated the following metrics to analyze the degree of correlation as well the relative price movements:

  • Correlation coefficient
  • Beta
  • Annualized volatility
  • Ratio between stock volatility and S&P 500 volatility
  • Annualized return
  • Z-score – calculated by dividing annualized return by annualized volatility
  • Ratio between stock z-score and S&P 500 z-score

Based on the matrix obtained, we have the following key observations:

Published in BoomBustBlog

As stimulus induced economic indicators drove financial markets higher through the end of 2009 and into the middle of 2010, many financial advisors and researchers believed the Great Recession was taking its final breath and believed they bore witness to a forceful yet successful example of a proper response to a endemic crisis by policymakers around the globe. Fast forward to the present and you find that the Eurozone solvency crisis, the US economic slowdown and the Chinese real estate/lending bubble forces general economic consensus to move from that of recovery and prosperity to a gloomier picture of a return to output contraction or more realistically, realization that we never really left the period of economic contraction sans hefty government stimulus.  Although it was a while ride, much of what BoomBustBlog has alleged has come to pass in terms of the condition of global banks, global economic output, and the prospects of the companies and countries that we cover. Most sell-side economists have lowered their GDP growth outlooks to near 1% for the next quarter, and more attention is being focused on central bank officials and the idea of new stimulus measures – all pretty much in line with our prognostications throughout 2008 and 2009.  The problems has been that regardless of monetary policy, new stimulus and the growing need for them markets have moved with incredible correlation and very low dispersion among stocks over the past few quarters making it very difficult to monetize the fact that we have been right all along. These recent events beg the question, “Is this the end of the Stock Picker?” and if so, then “What does this portend for the future of the investment markets when casino style gambling has returned better results than adhering to fundamentals, math and basic common sense?” “Has the Fed destroyed the fundamental investor?” Let’s peruse the topic as illustrated in the mainstream financial media:

Stocks Move with the Market: CNBC

  • 78% of the S&P 500 simply moves with the market and ignores underlying fundamentals
  • CNBC attributes this to the rise of algorithmic trading and death of traditional stock picking, however, correlations have been higher in eras that lacked heavy algorithmic trading

Correlation Soars on S&P 500: WSJ

  • Individual stock correlations to the S&P have reached their highest point since the crash of 1987
  • Movements have forced fund managers from examining long term fundamentals and into quick moves into cash, treasuries, and investment grade corporate debt
Published in BoomBustBlog

Back in September of 2007 when I was preparing to launch a hedge fund, I came up with this interesting name for a blog. It was BoomBustBlog. What made it interesting is that I can literally blog ad infinitum on the synthetically crafted booms and busts of the global economy, for the method of shepherding the economy in this day and age is actually predicated on the existence and/or creation of Booms and Busts. Of course, from my common sense perspective, one would think that the job of a central banker would be to ameliorate the effects of, and in time eliminate booms and busts... Apparently, that doesn't appear to be the flavor du jour. As a matter of fact, it appears as if central bankers are doing the exact opposite. Of course, attempting to cure a bust with a boom, or worse yet attempting to prevent a boom from busting with another boom is a recipe for disaster, and worse yet the probability of success is close to nil, yet central bankers try anyway. This leads to overt and explicit policy errors, which leads to outsized profit opportunities to those who pay attention. Enter "The Great Global Macro Experiment, Revisited", from which I will excerpt below. Please keep in mind that this article was written in October of 2008, and turned out to be quite prescient, I will annotate in bold parentheticals the portions of particularly prescient relevance. The original macro experiment piece was posted on my blog in September of 2007... For those that are interested, I plan on discussing this topic live on Bloomberg TV today: “Street Smart” with Matt Miller & Carol Massar at 3:30 pm.

Published in BoomBustBlog

Crains NY ran a happy, go lucky article today:

The stubbornly dismal economy means at least one thing: an extended stay in the spotlight for a handful of star analysts whose defining characteristic is their extraordinary bearishness. And, of course, their accuracy.

There's Albert Edwards, a London-based analyst from France's Société Générale, who believes the Standard & Poor's 500 will sink to 450, a sickening 57% drop from its current level. There's David Rosenberg, chief economist at Toronto money manager Gluskin Sheff, who warns that deflation is going to pull down the U.S. economy for years.

And then there's the New York star of this gloomy show: Reggie Middleton, a Brooklyn entrepreneur who turned to analyzing global markets after a stint buying and renovating apartments in Fort Greene and Clinton Hill. (See “Prophet of doom,” April 19.)

Bad as things may be for the economy, Mr. Middleton warns that they're poised to get much worse. Prices of real estate, stocks and bonds are all headed for serious falls... Wages will decrease, unemployment will increase. Fun, eh?


The culprit, Mr. Middleton says, is Washington. The bank bailouts, nationalization of Fannie Mae and Freddie Mac, and other interventions during two presidencies prevented the market from bottoming out in 2009 like it should have, he says. Now that the economy is weakening again and the heavily indebted U.S. government has fewer rescue options, the reckoning is coming. Markets of all kinds in the United States and Europe will get hit—hard.

“In my opinion, the amount of risk in the system is even higher than in 2008,” he says, adding this rare dash of hope: “2013 might be a good time to start taking a look at buying assets again.”

Mr. Middleton has been startlingly accurate in the past. He forecast the collapse of the housing market in 2007, and in early 2008 warned of the demise of Bear Stearns weeks before it happened. Earlier this year, he said that Ireland's finances were in terrible shape long before Standard & Poor's got around to downgrading that nation's credit rating.

For those of you who don't follow my blog, Mr. Elstein (the article's author) was referring to:

Published in BoomBustBlog

Bloomberg writes, Blackstone Returns Fees to Investors in First Clawback Triggered at Firm, I excerpt below:

Aug. 27 (Bloomberg) -- Blackstone Group LP is refunding some performance fees earned during the commercial real estate boom, the first time fund investors have clawed back cash from executives at the world’s largest private-equity company.

Blackstone and some of its managers returned $3 million in carried interest to investors in Blackstone Real Estate Partners International LP during the second quarter, said a person with knowledge of the payments. They may pay back an estimated $15.7 million this quarter to another fund, Blackstone Real Estate Partners IV, according to the person and a regulatory filing.

Blackstone’s property buyout funds recorded performance fees totaling $1.74 billion, some of which was allocated to the firm’s partners, as the market for office towers, hotels and apartments soared from 2004 to 2007. Prices have slumped about 39 percent since then, leaving New York-based Blackstone and its rivals in a position similar to that of venture capital firms about a decade ago, when the collapse of technology stocks forced them to return profits earned on Internet companies during the 1990s.

“The acute situation for clawbacks is when you have had a very successful period of gains and then the remaining deals don’t do well,” said Michael Harrell, co-head of the private funds practice at the New York-based law firm Debevoise & Plimpton LLP. “That is what happened when the Internet bubble burst and there is certainly the potential for that with the sharp downturn in the real estate market.”

Clawback Provisions

Private-equity funds, which raise money from institutions including pensions and endowments, pay a share of profits from investments, usually 20 percent, to the firm and its investment managers. If the fund’s remaining holdings suffer a permanent decline in value, clawback provisions can require the executives to rebate cash distributions in order to prevent their share of profits from exceeding the 20 percent.

Published in BoomBustBlog

I know, I shouldn't say I told you so but those perma-bullish, green shoots smoking pundits who have been saying for three years that we are nearing the bottom in real estate either have an agenda or really don't know much about real estate cycles.  It really gets under brother's skin... From CNBC:

Existing Home Sales At 15-Year Low, As Housing Weakens

Sales of previously owned U.S. homes dropped more steeply than expected in July to their lowest pace in 15 years, an industry group said Tuesday, implying further loss of momentum in the economic recover

We've been down this path before. We have every reason to be very, very pessimistic on the housing front.  We're in a HOUSING DEPRESSION!

Rates as close to zero as they have ever been, yet close to no demand while supply is piling up in droves as banks sell more homes (out of foreclose) than homebuilders do, yet developers keep building! If you look around in NYC, banks are STILL funding developers who are STILL building stuff right next to stuff that they STILL can't sell! This is video from a little more than a year ago that shocked many, even those who live in NYC: Who are ya gonna believe, the pundits or your lying eyes?. If  you take a trip down the same strip today, you will still see empty lots with tractors, cranes, for rent signs in the commercial ground space and a whole lot of empty apartments looking for a home owner or renter, dusty from the construction right next to it.

Way back in 2007, I predicted that banks would handily outstrip homebuilders in terms of property sales due to rampant REOs and foreclosures. I issued a reminder last year since the synthetic and contrived equity rally on vapor volume seemed to have had everybody forgetting that we were in a real estate depression:

Back to the Homebuilders vs. the Banks

In 2007 I put out a lot of research and opinion on the home builders and attempted to portray them in a light that the sell side analyst community and apparently the buy side investors failed to notice. See

In December of 2007 I predicted that they will compete in a losing battle with the soon to be larger residential home and land owners looking to move properties at highly discounted prices: the banks sitting on foreclosed properties – Bubbles, Banks and Builders.

Well, although I do feel I have been relatively prescient in my predictions and predilections, all of you guys who were waiting for me to be wrong can now have your day. As it turns out, the largest residential land home owner will probably not turn out to be Countrywide (see Would you buy Countrywide if all of its bad mortgages were magically wiped off the books?) or any other bank or builder after all, but most likely the FDIC, or in more direct terms – You, Mr. and Mrs Taxpayer, see: FDIC Holds $1.8 Billion in Property From Closed Banks: WSJ Link.  There are properties repossessed this year by the FDIC that were actually also repossessed during the S&L Crisis. Talk about not learning your lesson!

As lately as the 2nd quarter of this year, alleged experts were still pontificating the coming bottom in real estate, despite the fact that unemployment was high, supply was high, demand is low, and credit is tighter than frog ass! Exactly two months ago, I said As I Made Very Clear In March, US Housing Has a Way to Fall. See the following excerpt...

Published in BoomBustBlog

In early 2008, I warned my readers that several states and municipalities in this country are going to run into some very rough times, with the spectre of default definitely on the table for a few. See Municipal bond market and the securitization crisis – part I and Municipal bond market and the securitization crisis – part 2 (should be read by whoever is not a muni expert – this newsbyte may be worth reading as well).

Of course, the highly contrarian nature of my views were (and are) bound to bring about its fair share of naysayers, pointing to the sparse record of actual municipal defaults. Of course, we all know the safety of driving forward while staring in the rear view mirror, California creating its own currency in the form of IOU’s and all... I also brought up the risks that the CDS market posed in Counterparty risk analyses – counter-party failure will open up another Pandora’s box (must read for anyone who is not a CDS specialist). This was done right about the time that I also called several companies out for their CDS (and direct) exposure to real estate, mortgage debt and municipalities – namely:

I considered three of the four to be insolvent in 2007 and early 2008. History has shown whether I had a point or not. I rehash history because a review of the lessons that hurt so bad, but were never learned brings us back to the muni markets, CDS and overleveraged exposure. Is this 2008, 2010, or some non-descript chrono-anomaly from a Twilight Zone episode?

Illinois Municipal Debt Defies Gravity

Published in BoomBustBlog

Today's CPI came in higher than expected (see Bloomberg: Retail Sales in U.S. Increased 0.4% in July, Less Than Economists Forecast ) due to increasing gas prices. Last session was revised downward, and sales ex-autos and gas was actually negative. For those that don't see the pattern yet, its stagflation - and I called i last year. Asset prices () and wages (Are the Effects of Unemployment About To Shoot Through the Roof?) will continue to deflate while input prices for the production of things will inflate - the worst of both worlds.

Of course, the MSM doesn't see it that way. Again, from Bloomberg: U.S. Consumer Prices Rise First Time in Four Months, Easing Deflation Risk. Yeah, easing deflation risk in order to raise stagflation risk.

For those who didn't get the memo...

Published in BoomBustBlog

Many have labeled me a Permabear, particularly my detractors and those in the media (who are decidedly not detractors but still paint a pessimistic bent on my outlooks, see sidebar below). I am nothing of the such. I am what will be soon be known as a realist, as opposed to being a pessimist or optimist. No, I am no Permabear. My proprietary investment style (see "The Great Global Macro Experiment, Revisited")

Crain’s New York

“His work is so detailed, so accurate, it’s among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management, a Toronto firm that manages about $5 billion and subscribes to Mr. Middleton’s research.

Reggie in Forbes (Going short)

Middleton’s site combines self-promotion with meticulous financial analysis that is often delivered with a whiff of bathroom humor

dictates that I switch between extremes of bullishness and bearishness contingent upon the extreme policy errors of central bankers. As a matter of fact, I was as bullish as can be in residential real estate in NYC form 2000 to early 2004. I leveraged up on all the "in the money" distressed real estate I could find in areas of heavy gentrification, literally extracting 4 digit returns. That doesn't mean I disobeyed the laws of math though. As 2004 progressed, the writing on the wall became larger and more pronounced... Enter 2005 and math said turn bearish, common sense said turn bearish, and not to be one to look arithmetic in the face and argue, I grew bear claws and donned a ruffled brown grizzly coat! After liquidating my real estate, I took a year off and started shorting every industry that was even tangential to real assets. That was 2007. By the first quarter of 2009, I had a cumulative return in my portfolio of about 452% averaging roughly 50% cash (see Updated 2008 performance). I sensed the market was oversold, but the fundamental and macro outlooks was still quite negative, hence I pulled my profits one weekend in March (but let a few underwater positions ride). This weekend, coincidentally, happened to be the beginning of the rally that shouldn't have been, and I fought the faux bull to my detriment I got hurt in the artificially engineered, central banker and government synthesized rally of 2009, and my cumulative return was almost halved.

Published in BoomBustBlog
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