Tuesday, July 31, 2007

The cost of over printing the dollar

Growing US Dollar Supply Leads to Rising Commodity, Oil Prices
Posted by Mogambo Guru on Jul 31st, 2007 Peter Schiff of Euro Pacific Capital writes, “In current theory, the excess cash piling up around the world is like manna from heaven. Don’t believe the hype. Liquidity is merely a euphemism for inflation. Asset prices, including stocks, are simply rising to reflect the diminished value of the currencies in which they are traded. Wealth is not being created, merely re-priced.”

Well, I don’t know where Mr. Schiff lives, but around here, it’s not wealth that is being re-priced, but poverty. As the inflation in the prices of everything continues to outstrip “income after taxes and deductions”, standards of living are being eroded because people can’t buy as much stuff as they used to; their relatively static stream of discretionary income has lost buying power against rapidly rising prices.

For example, from the Financial Times we read that inflation is finally affecting food, and that Hovis bread said it was “preparing to raise bread prices for the second time in six months. The pending increase - which the company attributed to rising wheat costs - is merely the latest in a series of price increases food and drink companies have been trying to pass on to consumers this year. The series has seen costs of making bread, beer, yoghurt and chocolate as well as dozens of other packaged food products become increasingly expensive.”

I know what you are thinking. You are thinking, “Who cares about bread? I don’t need no stinkin’ bread! I can eat pizza!” which is wrong, whereas you would have been correct if you had instead thought “I don’t need no stinkin’ bread! I can eat the bodies of dead animals that I find alongside the highway!”

And indeed you could, as the current market price of road kill is still a very economical zero, which may explain why it is not included in the Lehman Brothers’ ingredients cost index, which “covers cocoa, coffee, oats, tea, soyabeans and milk, among other commodities and which is based on spot rates.” This index, in case you were wondering, “rose 14.9% in the first half of the year”, which “follows a 16.5% increase in the second half of 2006.” Yikes! Prices of foodstuffs are up over 30% in twelve months? Yow!

And what is the biggest gainer? “The biggest increase has occurred in powdered milk prices. These have nearly doubled compared with the same period a year ago. Barley prices have also shot up 53%, while corn prices are up 68%.”

So it is no wonder that people are complaining about prices! And you may be interested to learn the surprising fact that these afflicted people are, paradoxically, not the least bit interested in, or appreciative of, being educated that their inflation problems are all self-inflicted, as they are the same drooling morons that elected the Congressional morons that have spent us into the Hell Of Crushing Debt (HOCD) and allowed the Federal Reserve to create wildly excessive amounts of money and credit to make that grotesque orgy of spending possible!

To prove it to yourself, the next time somebody says that prices are going up and that they are having a hard time making ends meet, carefully observe their reaction when you politely and respectfully go up to them and, by way of education for their benefit, say, “Shut your damned stupid mouth, you ugly little troll! Your problems are all self-inflicted, as you are the same drooling ‘I Love Big Government Creating Perpetual Entitlements’ moron that elected the Congressional morons that have spent us into the Hell Of Crushing Debt (HOCD) and who conveniently looked the other way while the damnable Federal Reserve created the money and credit to make that stupid, bankrupting spending possible! It’s your own fault, you ignorant little commie creep! You committed economic suicide, and in doing so have economically murdered the rest of us, you filthy piece of stupid, greedy, Leftist crap!”

And it is going to get worse as more people get more desperate, and things get more weird, like John Stepek at MoneyWeek.com mysteriously using the exact same words as were used in a copyrighted report from a Mogambo Economic Truth And News Service (METANS) broadcast, which bravely reported, “The Mogambo Economic Forecast Institute (MEFI) reckons that the world will face a dollar supply overload within the next five years that could send prices soaring, and coupled with an oil demand overload against an oil supply deficit, the price of oil will soar, and the prices of all other things will soar right along with it, and especially all things imported, and doubly-especially the aforementioned imported oil, in case you weren’t paying attention the first time I said it.”

The report ended with, “And with oil being a prime ingredient of making and/or moving damned near everything these days, if you don’t think that paying a couple of hundred bucks for a lousy barrel of oil is going to have a hugely inflationary effect on all prices, then congratulations, as you have passed the test! You are officially stupid enough to send US$50,000 in cash to me, addressed to ‘Occupant’, in return for which I will pray that your children do not end up being as stupid as you are. And remember; cash only!”

The Mogambo Guru for
The The Daily Reckoning Australia

Monday, July 30, 2007

The coming economic storm

I haven’t yet mentioned the DOW loosing streak, down over five hundred points in two days. That’s the second large decline this year. Unlike the first decline in February, this one is more informed. Hedge funds are failing, global credit is tightening and the last best chance for the housing market is gone with the summer selling season. It’s down hill from here and everybody knows it.

I’ve read that markets usually head fake twice before they crash. If that is so then this is the second head fake for the U.S. stock market. Some would say that it’s not a head fake, that this is it, the big one, but I don’t think so - it just doesn’t feel like it yet.

I believe, due to human nature and greed that this economy and the stock market have a little life left. There is not yet open panic so the gamblers out there will surely pile back into the stock market at the slightest provocation. Never underestimate greed.

Look for one, two or even three more upswings of global markets before reality takes hold and the sky falls. That’s what it will take to get many investors out of the game, with or without their shirts. I expect they will resemble rats from a sinking ship, all waiting until the last minute in hope of a miracle turnaround that we all know (them included) won’t be coming.

As we approach the fourth quarter of this year I expect the news to grow ever worse as the extent of the derivatives market and the damage done gets dragged into the light with voices raised, fingers pointing and the promise of bills to be brought before congress advocating financial bailouts that will only benefit the scoundrels who perpetrated and got fat off of the whole mess in the first place.

It’s not all bad. In turmoil lays opportunity, but opportunity is spare for the unprepared.

Saturday, July 28, 2007

The housing slowdown could last at least until 2009

No Housing Turnaround for Two Years?

Home sales continued to slide in June, stoking fears that the slowdown could last at least until 2009

First, it was the second half of 2007. Then it was 2008. Now analysts are saying the national housing market may not rebound until 2009

On July 25, the National Association of Realtors reported that
sales of existing homes fell 3.8% in June to a seasonally adjusted annual rate of 5.75 million units, contributing to the bleak-and-getting-bleaker outlook.

"Current inventory levels make it almost a sure thing that prices will continue to slide." On July 11 the NAR said existing-home prices would recover in 2008, rising 1.8%, to a median of $222,700 after a 1.4% decline this year. But Newport thinks otherwise. "Our view is that the downturn [in sales] will
continue into 2008," he says. "Given the level of unsold homes, however, nominal home prices will probably not rebound until 2009."

On July 26, the Census Bureau will announce the rate of new-home sales in June. In May, sales of new homes fell 1.6% to a pace of 915,000 units, while supply climbed to 7.1 months, from 7 months. At the moment, it's looking like June's report could kick off another year and a half of bad news.

The experts are often conservative with their estimates. I would venture a guess that a real turnaround won’t get under way until 2014. Every quarter we get a later date for the turnaround of the housing market. Watch as the experts’ predictions stretch to meet mine.

It’s not a hard prediction to make. There are so many pressures mounting on the economy that the dynamics of housing alone can no longer be counted on. A global credit bottle neck is about to occur which will largely be due to the failure of derivates leveraging involving hundreds of trillions of dollars. A negative American savings rate is in itself a time bomb.
The bad news is bound to get worse.

Friday, July 27, 2007

CDO sales dwindling

KKR, Homeowners Face Funding Drain as CDO Sales Slow

July 24 (Bloomberg) -- The Wall Street money-machine known as collateralized debt obligations is grinding to a halt, imperiling $8.6 billion in annual underwriting fees and reducing credit for everyone from buyout king Henry Kravis to homeowners.

Sales of the securities -- used to pool bonds, loans and their derivatives into new debt -- dwindled to $9.1 billion in the U.S. this month from $42 billion in all of June, analysts at New York-based JPMorgan Chase & Co. said in a report yesterday.

Investors are shunning CDOs after the near-collapse of two hedge funds run by Bear Stearns Cos. that owned the securities. Standard & Poor's downgraded bonds from 75 CDOs as mortgages to people with poor credit defaulted
at record rates. Concern about losses on home loans are rattling investors across the credit spectrum.

``We're walking on thin ice,'' said Alexander Baskov, a fund
manager who helps oversee $25 billion of high-yield debt for Pictet Asset Management SA in Geneva. ``People are trying to find value and the right price and right now nobody knows what it is. Pretty much everyone is in the dark.''

The shakeout is leading firms from Maxim Capital Management in New York to Paris-based Axa Investment Managers to delay or scrap planned CDO sales.

Maxim began buying mortgage bonds for a new CDO after completing its second deal in March. Chief Investment Officer Doug Jones in New York said he slowed the purchases, having acquired only a third of the assets planned, partly because the bank underwriting the deal grew concerned it could lose money as volatility increased. He declined to name the underwriter.

``We don't want to get too far along and create something
that's not sellable,'' said Jones, who manages $4 billion of CDOs.

The slowdown comes as private equity firms such as Kravis' Kohlberg Kravis Roberts & Co. and Blackstone Group LP, both based in New York, need to borrow at least $300 billion in coming months to finance acquisitions, according to Baring Asset Management in London.

Buyout groups rely on CDOs for 60 percent of the loans to
finance U.S. acquisitions, according to JPMorgan.

“Sales of the securities -- used to pool bonds, loans and their derivatives into new debt -- dwindled to $9.1 billion in the U.S. this month from $42 billion in all of June”.

I would call that a rapid slowdown. I would also point to it as further evidence of the unwinding that is taking place, the unwinding that no one wants to talk about, after all, that would be admitting failure.

The bottom line is things are coming apart fast, much faster than analysts predicted and with wider scope than anticipated by experts.

How far and wide the pain will be distributed will only be known in hind- sight. However for investment analysts to recommend buying into the CDO or LDO markets is irresponsible or just plain criminal and I hope they get more than a hand slap after the dust settles.

I think I can safely predict that the third and fourth quarters of 07 will be a white knuckle ride for some and a nightmare for many as subprime contagion spreads and derivatives markets buckle.

Thursday, July 26, 2007

Hedge Funds, Housing and Subprime Contagion

Prime borrowers catching subprime ills
Countrywide Financial's quarterly report revealed a spike in delinquencies. Why even high-quality borrowers are falling

NEW YORK (CNNMoney.com) -- The subprime mortgage meltdown has begun to spread to prime loans as even credit-worthy borrowers have started to fall behind on payments.

On Tuesday, Countrywide Financial (Charts, Fortune 500), the nation's largest mortgage lender, attributed a big drop in profits to a spike in delinquencies among prime borrowers of "second-lien loans," including home equity loans and home equity lines of credit.

These loans were often "piggybacked" onto first mortgages to help finance low- or no-down home purchases. They were also taken out by prime - but overburdened - borrowers to help pay high housing bills or fund their lifestyles.

In the past, mortgage delinquencies were tied to personal problems or basic economic reversals, such as a job loss. Today, many delinquencies can be traced to unaffordably high home prices.

"Unable to afford their own homes, [borrowers] turned to increasingly risky mortgage products," said Amy Klobuchar, a member of the House of Representatives from Minnesota, speaking Wednesday before a hearing of the Joint Economic Committee examining the national foreclosure crisis.

Some home buyers, caught up in red-hot markets and afraid of getting locked out of homeownership forever, overpaid for houses.

As long as prices escalated, they were able to tap the added equity in their properties to cover debts.

But now home prices are falling - off more than 2 percent from their highs, according to the Case Shiller home price index.

What could derail the M&A boom
A number of factors have driven the M&A market to record levels. Here's what might turn off the flow of deals.

LONDON (CNNMoney.com) -- A swell of private equity buyers, solid corporate profits, the availability of cheap debt and robust liquidity have all helped propel the boom in mergers and acquisitions.

U.S. merger volume has risen to $1.2 trillion so far this year,
according to deal tracker Dealogic. By comparison, deals in the U.S. totaled $1.5 trillion for all of 2006.

While many in the industry agree that activity has peaked, they also say the fundamentals underpinning this activity remain strong. In short, barring some external shock, few expect the boom to go bust.

At the same time, the factors keeping the deals flowing are strongly linked, which means that a problem that crops up in one area could trigger a chain reaction of difficulties for the market. Here's a look at what analysts are watching for.

Complete article: CNN Money

It was not a stretch to project subprime contagion to higher quality loans, but now prime borrowers are falling into the soup and that’s not good. It has been estimated that up to half a $ trillion in subprime loans were at risk, but with higher quality paper now entering default that amount rises considerably and threatens the stability of a number of investment banks, hedge funds and a broad range of investors.

But still the M&A machine grinds on. Does anyone else see this as a house of cards? The stock market is breaking records based not on earnings but on inflated share prices and fevered buying. (If you don’t buy in now you may not be able to afford it later) sound familiar? If it were not for the currently easy access to credit, this would not now be taking place.

When this credit cycle ends, and the end seems imminent, then a crashing sound will be heard through every economy on earth and the tax payers of many countries will be seeking medical attention for the multitude of unauthorized rear entries they will be subject to by their governments in the name of the wealthy few who will keep most of their undeserved gains.

For all of you who are already having trouble sitting, practice these words:
A bailout will only benefit investment banks. They perpetrated this credit nightmare; let them clean up the mess.

Wednesday, July 25, 2007

Gold as a hedge

U.S. Trade Deficit With China Signals ‘Buy Gold’

“Should the financial markets lose confidence in the U.S. dollar, huge capital outflows from the U.S. could lead to a rapid depreciation of the U.S. dollar, and thus dramatic appreciation of other currencies.”

The whole matter of trade deficits is, unfortunately for investors not paying attention, just one of far too many aerosol cans now roasting in the fire. When they start exploding, you’ll want to be safely hiding behind a wall of gold and silver.

In the final analysis, every day gold goes up and gold goes down, with the movements based on any number of inputs. To avoid being panicked one way or the other, a long-term perspective is required to see these fluctuations in their proper perspective. And, despite all the jagged fits and starts these
past few years, and all the nay saying along the way, three years ago, gold was trading for $393 an ounce… 40% lower than it is today.

And the better gold shares have offered exponentially higher returns than that.

While now is the time to begin accumulating your gold and gold share positions - if you have not already started doing so - how will you know when things are about to get really “interesting”? My partner Doug Casey recently made the observation that it is not when the trade deficit is rising that you should be concerned, but when it starts to contract... because that is a sign that the flood of greenbacks is starting to return home.

Currently China holds over $1 trillion in U.S. currency and growing. That’s a lot of paper.

Also Norway, as a result of vast oil wealth, holds an estimated equivalent of $1.9 trillion U.S., held in U.S. currencies and other foreign investments. If China makes a move to dump dollars, Norway will have to move assets as well. Where they would put them is a question I can not answer. A flight out of the dollar however is looking quite possible now and with that kind of money flowing out of the U.S. it could spark a panic bringing Japan and Latin America along on a dollar dumping ride.

This would surely cause a short term collapse of the U.S. dollar, perhaps holding it down for three to five years. Other currencies will skyrocket as a result of flight to safe havens, but only temporarily as they are as intangible as the dollar and will surely suffer the same fate as soon as people begin to question their underlying values.

I personally don’t see a permanent $ decline, as no other country is as yet ready to step up to the plate and fill America’s shoes. Sooner or later foreign countries will clamor for a safe currency to hedge against their own and demand support the Green Back. I don’t see any other alternative.

In the mean time, gold seems a safe bet to me.

Monday, July 23, 2007

Are we headed for debt slavery?

The New Road to Serfdom
An illustrated guide to the coming real estate collapse

By Michael Hudson
(Just as, in Voltaire’s phrase, the rich require an abundant supply of the poor, so too does the rentier class require an abundant supply of debtors.)

Never before have so many Americans gone so deeply into debt so willingly. Housing prices have swollen to the point that we've taken to calling a mortgage–by far the largest debt most of us will ever incur–an "investment." Sure, the thinking goes, $100,000 borrowed today will cost more than $200,000 to pay back over the next thirty years, but land, which they are not making any more of, will appreciate even faster. In the odd logic of the real estate bubble, debt has come to equal wealth.

And not only wealth but freedom–an even stranger paradox. After all, debt throughout most of history has been little more than a slight variation on slavery. Debtors were medieval peons or Indians bonded to Spanish plantations or the sharecropping children of slaves in the postbellum South. Few Americans today would volunteer for such an arrangement, and therefore would-be lords and barons have been forced to develop more sophisticated enticements.
Read the entire article here: New Road To Serfdom

Saturday, July 21, 2007

Why the price of oil will come down

I use the Pa Kettle system of looking at the economy. That is to say I don’t over analyze it. For instance: The Fed keeps printing new money and banks keep lending it. How far can it go?

Joe Sixpack borrows and borrows until he owes as much as he makes each month. You can call this ‘Debt Saturation’ (or the inability to service his loans). That’s fancy talk for – he can no longer cover the interest payments. That in a nutshell is as far as the debt bubble goes.

I saw a blurb on the news yesterday that mentioned ebay’s profit rose 50% on soaring online auctions in the U.S. Reading between the lines here, it looks like Joe Sixpack has not only hit his debt limit but is now selling the family jewels, jet skis, motor homes and what have you.

An earlier study showed that Joe was paying his credit card bill before his 0-down sub-prime mortgage payment. Why you ask? He has no skin in that game, ‘0-down’ don’t ya know. Saving his credit card rating is a bigger priority for him. Now it seems saving his skin is the priority.

This brings me to another Pa Kettle projection: The price of oil will drop next year by quite a lot. I’ll say down to between $40. - $50. per barrel. Why, you ask? Lack of customers.

I’ll explain. China with its’ growing industrial demand for oil is the workshop of the world. India with its’ own growing demand is the service department to the world. And America is the consumer and retail customer to the world. The mortgage equity withdrawal party in America is over. Not only is America not buying, but Joe Sixpack is selling all those goodies he bought just last year.

If Joe’s not buying, China is not getting orders to produce. India is not getting orders to service. Chindia’s growing economic middle class will start facing layoffs. Factories will scale back and both industrial and personal demand for oil will weaken.

In the U.S. if Joe gets laid off due to a faltering economy, he will have to cut back on his personal fuel consumption. If demand for oil weakens so will the price.

Vern, A.K.A. Pa Kettle

Boston's Crumbling Economy
Yesterday afternoon, with the Dow pushing 14,000, I decided to take the afternoon off and go out and document what I’ve been seeing with my camera. You’d think that with stock markets pushing all time highs that the economy would be booming. But as many observers have amply noted, fundamentals don’t
back up the strength in the financial markets.

Citing fundamentals, Mish issued a market-top call last week.
Yesterday Robert Prechter, in a special note to subscribers, issued a warning as well. In his report, he notes that breadth during the latest rally has been weak, and advised, “Aggressive speculators should return to a fully leveraged short position now…” In other words, the end of this rally is nigh.
(You can read the report as well as three months of back issues during EWI’s special free week, until July 25).

Below are the pictures I took, investigating the “fundamentals” of my local economy. All of these pictures (aside from the last one) were taken on a stretch of road that I travel regularly, and would estimate to be about 2-1/2 to 3 miles long. Consumers may make up 70% of the economy, but they need jobs from business in order to keep spending. Businesses need places to do business, and this excess capacity shows that something is wrong with the real economy in Boston.

Tuesday, July 17, 2007

Renting vs buying

I recently had a conversation with a friend of mine about renting a house vs. buying one. He said that I was throwing away my money as a renter because I was building no home equity.
‘One doesn’t build equity in this market climate’ I said. ‘One looses equity.’

He said I am merely paying for someone else’s house. ‘That’s true’ I said. ‘But if you pay interest to a banker you are paying rent for the money you borrowed thus paying for his house. Not much difference in my book.

I explained to him that if he buys a house and is making interest payments of $1,400. per month, he is merely renting the money. Even if a portion of it goes to the principal, by banker’s math the majority of that payment for the first half of the loan’s life goes to interest, no equity there. (So by his logic, throwing away money.)

On the other hand if he rents the same house, especially in this market, rents are going to be less, and after a year he has a lot more money in his bank account. ‘You actually build more equity in cash savings than you would in home purchase payment equity.’ I said.
As home values descend, the effect will compound. For my money, renting is a better place from which to watch.

I don’t know if I made my point, but this one’s for you Mike.

Life is sweet for North Port renters

"There is an abundance of rentals out there," said Donata Noone, a rental specialist with ERA Sun Coast Real Estate. "Buyers bought homes and condos when the market was good. They then tried to flip them, but realized they couldn't and decided to rent them instead."

But with hundreds of houses, condos and apartments for rent in North Port, not every owner has been able to find a tenant. So rents are plummeting, and so are rental standards.

Dennis Black, a Port Charlotte appraiser who recently completed a study of North Port's housing market, said apartment building owners are suffering the most.

"Why should tenants renew their leases when they can rent a house for about the same price?" Black asked. "I am told that apartment occupancy is down to 80 percent."

"Rents are coming way down because of supply," said Karen St. Pierre, a rental specialist with ERA Advantage Realty. "A 1,800-square-foot house without a pool that rented for $1,400 a year and a half ago is now renting from $900 to $1,000 a month."

That represents a 36 percent drop and has created a wave of resentment among investors, who have seen their taxes and insurance bills move rapidly in the opposite direction.

Thursday, July 12, 2007

If everything is so good, why is the dollar dropping?

There is a lot going on today. I’m seeing some rosy news about the U.S. economy, and the stock market is on a tear, retail sales figures (if you can believe the headlines) are better than projected, mortgage applications are up in spite of rising interest rates, foreclosures are down and a couple of CNNMoney headlines read; The greatest economic boom ever and Bulls stage record Wall Street rally.

What can I say?
Oh, I know! The dollar is dropping like a rock tossed from a plane at 30,000 feet. Against the Norwegian Kroner it was trading last week at around NOK 6.19 to $1. U.S. dollar. Today 7/12/07 at 7:12 pm Oslo time it is trading at NOK 5.73 to the $ dollar and dropping fast. The dollar is currently trading at 72 cents to the Euro and freefalling.

What does this tell us? I don’t know, but I will venture a guess: Central bankers are dumping the dollar. Gold is up as expected, as a seasonal bounce is due about now, but coincidently, at the same time as the dollar is dropping. It could signal a vote of no confidence in major currencies and a flight into gold, it damn sure looks like a vote of no confidence in the U.S. economy and the dollar no matter what the play is.

One only has to look at the financial news to see a slew of hedge funds shutting down on shaky CDOs and sub-prime mortgage news to guess where this is all going.
See: Gates of Hell

My guess is the shit is about to hit the fan and we all better learn how to duck as July is sure to bring us even more bad economic news.

Wednesday, July 11, 2007

Subprime Derivatives

From CNBC – A video primer on CDOs and Sub-prime mortgages.
If you wonder why the growing fuss over CDOs because of sub-prime mortgage fallout, you need to see this. If you wonder how hedge fund investors can loose everything, now you know.

Tuesday, July 10, 2007

Hawaii Big Island Homes Prices Drop Over 20%

Though the Big Island garnered national publicity for being one of the hottest second-home markets earlier in the year, residential real estate on the Big Island last month more closely resembled the old adage -- what goes up, must come down.

The number of previously owned single-family homes sold on the Big Island was down 18.83 percent for the first half, with the June figure falling by 22.6 percent. The number of condominiums sold on the Big Island was down 37.79 percent for the first six months of 2007 and down 44.44 percent in June.

Big Island prices also dropped. In June, more than half of the
single-family home buyers on the Big Island paid $363,000, a 20.21 percent drop from year-ago June. The median price, $405,000, paid for a Big Island condominium in June represented a 9 percent drop from the prior year. For the first six months of the year, the median price paid for a Big Island
single-family home fell by 4.75 percent and it fell by 14.74 percent for condominiums.

Monday, July 9, 2007

Approaching Waves of Default

I have a confession to make. I was a surfer once. I lived on the Hawaiian island of Maui for nine years and engaged in all forms of surfing.

The current housing market reminds me a little of that surfing past.
In the winter we surfer types would cross our fingers hoping for a swell to appear out of the north. The ocean could often be calm with sometimes barely a ripple on it for days or even weeks at a time. Then we would get the news passed about quickly on the ‘coconut wireless’ that bouy-1, about five hundred miles north, was going off (showing a rising swell). You could go to the beach for the next 24 hours and see no sign of it. In fact it was easy to believe that nothing was coming at all. But as promised, we would awake the next morning to the distant sound of thunder and a low rolling mist drifting through the valley indicating that the large swell had arrived.

One only had to make the short trip to the north shore to see how menacing the ocean had become over night. Giant man-eating waves hitting the reefs would give even the bravest watermen pause. (Yes I rode some of those, but that’s a story for another day.)

How does this relate to the economy and the housing market?
Professor Robert Shiller, chief economist at Macro Markets and Yale University has warned that no region of the U.S. is immune from the approaching housing downturn. (Let’s call him ‘Bouy-1’).

The downturn is coming, we just can’t see it yet. Most official reports have consumer confidence looking good., unemployment numbers are down, housing markets in areas like Seattle are still doing well. The ocean looks fairly calm. But a sea change is coming. Professor Shiller has reported approaching waves of financial turmoil. Many of us look out and behold a calm economic sea and think ‘what’s all the stink about?’ But when the waves arrive, like a giant Maui swell, they may leave us all gawking with our jaws hanging slack in wonder at the shear magnitude of the swell.

Case-Shiller Index: "No Region is Immune" The mantra being pushed by those "in the know" in the real estate industry - by which we mean "those with real estate-related things for sale" - is that the overhang of excessive inventories, bloated prices, weakening demand and tightening credit standards is an isolated "regional" issue. So we were surprised to see the Case-Shiller Home Price Index show that 14 of the 20 cities tracked saw year-over-year declines in home prices.

-Home values declined 2.1% in April year-over-year, according
to the S&P/Case-Shiller report released this morning.

-That was the fourth straight decline in the group's nearly
six-year-old index.

-"No region is immune to the weakening price returns,'' Robert
chief economist at MacroMarkets and Yale University
professor, said.

Friday, July 6, 2007

Crystal Ball for Florida Foreclosures

A short-sale expert says he can predict market slumps by client traffic. Next stop: The Sunshine State.

NEW YORK (CNNMoney.com) -- A tidal wave of foreclosures may be heading toward Florida, if you judge by the number of homeowners looking to get rid of their homes as fast as they can.

Duane LeGate, president of House Buyer Network, arranges quick sales for home owners in distress. He claims he can predict where markets will go bad by looking at the traffic on his Web site.

"We can tell you what's going to happen nine months from now," he said. His most endangered market right now is Orange County, Florida, home of Disney World.

"Orlando has blown up. There's been a 700 percent increase in
traffic of people filling out our forms," he said. "I could put a bull's-eye on Orlando and write the headline for what will be going on in January and February." What will be going on could include a large increase in foreclosures as well as lower prices, longer inventories and a slower sales pace.

In the House Buyer Network, an agent gets an appraisal for a
homeowner who wants a quick sale. Say the appraisal is for $200,000. The agent markets it at $195,000. If the home fails to sell within the time stipulated in the contract, the agent will buy it at a prearranged, discounted price of perhaps $180,000.

LeGate estimates the discount from what sellers would get if they didn't need to sell quickly is 5 percent to 8 percent, once all the costs and fees are figured in.

When LeGate sees big jumps in client contacts from a single county, he concludes that the area has hit a rough patch that may not come out in price stats for months. It's played out that way in the past when he saw other markets going into distress.

"We called Phoenix, two counties in California and West Palm Beach, Florida in June of 2005," he said, at a time when those areas were still perceived to be white-hot.

Now, according to figures from RealtyTrac, which markets
foreclosure properties online, the Phoenix metro area has 10 of the top 11 zip codes for foreclosure filings in Arizona, and all 10 are among the 500 worst hit zip codes in the nation. The other areas are also suffering a deep slump.

Besides the Florida markets, other locales LeGate identified as
likely trouble spots include Clark County, Nevada and Riverside County, California where the site's traffic more than doubled between June, 2006 and May, 2007, and Price George County, Maryland, where it tripled.

Short sellers negotiate with banks to settle for less than the amount owed on the loan if a home owner is headed for foreclosure. Usually this is done when a new buyer is located and an amount of sale is agreed upon, usually less than the paper held by the bank. This is called ‘short selling’. In many cases it works out for both parties. The banks don’t want to be in the real estate business and home owners don’t want to have their credit crushed.

Inevitably of course this will involve re-pricing of the asset which could have negative effects on hedge funds. If too many of these are held as such the hedge funds holdings will have to be re-priced resulting in margin calls for many funds. Really bad news for derivatives.

Thursday, July 5, 2007

Hedge Fund Meltdown

If you have been following the news the last two weeks you have seen the increasing implosion of hedge funds. It’s a scary thing because it affects the global economy. That’s you and me.

For a lighter look at the situation and a good 'dark chuckle' read Junk Debt Crisis: “Lake Tahoe Housewife To Blame

Wednesday, July 4, 2007

Panama joins the list of bubble cities

Latin America's real estate Panamania
Once a sleepy Latin American capital, Panama City has become one of the world's hottest real estate markets. How long can the fever last?
(Fortune Magazine) -- Off in the distance, where Panama Bay becomes the Pacific, container ships loaded with merchandise bound for the U.S. bob in the haze. Closer in, a flock of construction cranes hovers over densely clustered high-rises. Fourteen stories below, on Balboa Avenue, cars inch along, their windows sealed tight against the sweltering heat.

Panama City is in the midst of an unprecedented real estate boom that is transforming the skyline of this once-sleepy Latin American capital. More than 30,000 units worth about $5.7 billion have come on the market since last July, according to Paul McBride, CEO of Prima Panama, a real estate marketing

That's a lot of condos in a country where the total economy measured $16.2 billion last year. And the boom shows no sign of abating: Among the showiest of the new projects is the Ice Tower, a 106-story luxury apartment building and Hilton Hotel complex that will be the tallest building in Latin America when it is completed in 2011. Even Donald Trump has a project on the boards.

Part of what's driving growth in Panama City, where the median apartment price recently surpassed the median home price in the U.S., is a wave of retirees from North America, like the Buckleys, looking for a place in the sun. So far, few Americans have moved permanently, but many are buying second homes or just plain speculating. Europeans are here too, and there's plenty of new wealth in Latin America, in places like Venezuela and Colombia, looking for a safe haven.

Call it Panamania. Is it a bubble in the making, or the rise of a new Miami? Despite the abundance of cranes around Panama City, only about 10 percent of the projects being sold are under construction, says McBride. "We're not even seeing the construction boom in Panama yet," he says. "This place will look like Manhattan if all these projects come to fruition."

Prima Panama's McBride and others are worried that the building boom is ultimately going to exceed demand. "I do not think there will be sufficient buyers to absorb capacity, if in fact capacity is delivered," McBride says. "When you see prices going up, driven by speculative investors, that points to a bubble."

Many people are unaware that there is a growing world wide housing bubble. Panama has come up as the most recent addition to my list of bubble zones.They are in good company. France, Britton Ireland, China, Australia, Spain Norway, Sweden, and the U.S., are just some of the areas that are on my list. I will bring you more as information becomes available.

Tuesday, July 3, 2007

Key home sale index slides to 6-year low

Reading of pending home sales sinks to lowest since September 2001, suggesting more pain for the housing market.

NEW YORK (CNNMoney.com) -- Existing home sales are likely to see more declines in coming months as a key reading of pending deals fell to nearly a six-year low in May, a real estate
group said Tuesday.

The National Association of Realtors said its index of pending home sales, which reflects homes under contract, sank to 97.7 in May from 101.2 in April. The latest reading is 13.3 percent lower than May 2006.

The index was set at 100 at the start in 2001. The May reading is the weakest since September 2001, the lowest on record, when the Sept. 11 attacks hit consumer confidence. The latest reading matches the third lowest.

Lawrence Yun, the Realtors' senior economist, said home sales continue to be hit by tighter lending criteria due to problems with subprime mortgages, loans to buyers with weak credit, coupled with and a lack of buyer confidence in the market.

The existing home sales report had already shown problems before the latest pending home sales numbers. Last month
the group's May figures showed the
slowest pace of home sales since June 2003, while the glut of homes on the market hit a 15-year high.

The pending home sales report does not including any reading on prices. But both new and existing home prices have been falling year over year as the glut of homes forces sellers to ask less. The downturn in home sales and problems in subprime mortgages have also hit new home sales.

The lowest number since September 2001...

Considering the effects the terrorist attacks had on the economy at that time that is pretty dismal news. The sad part is it’s going to get worse. May and June are the hottest selling months for real estate. If the numbers were that bad, it’s not going to get better.

When you consider the beginnings of an equity meltdown starring CDOs and the like, due in no small part to sub-prime mortgage defaults, the road ahead looks more like a cliff.

Norway: A housing crash can't happen here!

Norwegian housing prices keep on rising

Prices in June were up an average 14.2 percent over June of last year, according to figures released Monday by the Norwegian real estate brokers’ association (Norges Eiendomsmeglerforbund).

Norway's central bank raised interest rates yet again last month in the hopes of controlling inflation, cooling down the red-hot housing market and paring debt levels.

Bank officials had said earlier in June that personal debt in Norway was rising at an alarming rate, in large part because of the country's strong oil-driven economy.

Prices rose higher in June than expected, especially since some home sellers have reported lower traffic through their open house showings. Brokers also have reported that it's taking longer to sell properties, with several showings needed in some cases before an acceptable bid is offered.

The numbers suggest the market remains strong, not least since prices often dip in June. Single-family detached homes were up 16.3 percent from June of last year, attached multi-family dwellings (row houses) were up 14.1 percent and condominiums were up 13.8 percent.Prices have risen 386 percent since the real estate market bottomed out in 1992.

Norway has its’ own version of the NAR, (Norges Eiendomsmeglerforbund) and they seem to be reading from the same script as David Lareah, that is before he stepped down as head of the National Association of Realtors recently in disgrace.

Being that Norway’s housing market seems to follow the US by around a year I would say the party here is over.
See Norwegian housing bubble leaking air

It is telling that in May the reports were that sales were bleak and prices were poised to drop. Now they say both that prices are rising and houses aren’t selling.
David…Is that you?

It further states that prices often dip in June…?!?
Do people really swallow that dribble?
I live in Norway and I can tell you that the housing market dynamics work the same here as most places. May and June are the peak months.

It would appear that the familiar course of cheerleading a failing market is no different here than it was in the US only a year ago.

Further, Norwegian bank officials were worried that personal debt was rising at an alarming rate.
‘I’ve got to have it now’ consumerism is rampant here. What they don’t seem to see is Personal debt is a problem for every economy.
In the past this was exclusively an American disease. Welcome to the modern era.

Don’t get me wrong, Norwegians know what is happening in the US. But Americans are all fat and uneducated. Norwegians are smarter, the government is here to help and real estate values will never go down. Ask any Norwegian...


Monday, July 2, 2007

Collateralized Debt Obligations (CDOs) and how they work

Here is a very good explanation of what CDOs (Collateralized Debt Obligations) are, how work and how they will affect all of us.

WARNING: It’s not pretty.

A New Flavor of Mortgage Trouble
By Rich Toscano
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