Monday, December 31, 2007

Doug Kass - almost half of Kass' last year improbable surprisess came to pass (up from 33% in 2006 and 20% in 2005).

Kass' 20 Surprises for 2008

1. The Housing Depression of 2007 morphs into the Retail Spending Depression of 2008.

2. Corporate profits drop by 10% in 2008.

3. The S&P 500 Index falls by 5%-10% in 2008.

4. Volatility pushes even higher. Daily moves of 1%-2% become commonplace.

5. The Federal Reserve eases monetary policy in 2008, with nearly every meeting accompanied by a 25 bp cut.

6. Growth in the Western European economies deteriorates.

7. The Chinese juggernaut continues apace. Chinese stock market doubles again in 2008.

8. The Japanese market puts on a surprising resurgence.

9. The housing bust accelerates. High profile bankruptcies in 2008 include Countrywide Financial, Beazer Homes, Hovnanian, Standard Pacific, WCI Communities and Radian Group.

10. Financial stocks fail to recover.

11. Research in Motion, Apple Computer and Google move into bubble status and their shares double in 2008.

12. Yahoo! and eBay merge. So do Amazon and

13. General Electric will sell NBC Universal to Time Warner, which will not sell or spin off AOL.

14. U.S. dollar's value falls by over 10% in 2008; Gold rises to over $1,000/oz.

15. The price of crude oil eclipses $135/barrel.

16. Acts of cyberterrorism occur that compromises the security of a major government. Financial markets will be exposed to hackers.

17. The Hedge fund community are disintermediated* in 2008. Outflows accelerate.

18. There are several Enron-like accounting scandals in 2008.

19. Democrats Clinton/Kerrey and Republicans McCain/Crist represent their parties in the Presidential/Vice Presidential contest in November. Democrats grab the White House.

20. Sovereign Wealth Funds become targets of American politicians.

- From Barry Ritholtz - The Big Picture

* Disintermediated - let's not pass this word by. (It tests the patience of my imagination - Let's not forget writing should be simple - and words should be direct)
1.In economics, disintermediation is the removal of intermediaries in a supply chain, "cutting out the middleman".
2.What the management guru would tell you if only you could understand what he meant.

Wednesday, December 19, 2007

Fake Home Sales - Don't look at what they say!

Buyers, sellers and other market participants typically monitor fluctuating home values through sale records that legally have to be listed with county clerks. But incentives offered to buyers -- ranging from free cars or furniture to cash rebates -- are making those prices less reliable as a sign of what buyers actually paid, netting out the giveaways. And that may be misleading lenders and people shopping for homes, some real-estate lawyers and appraisers warn."

Some examples where the incentive is not public:

• KB Home, Colorado: $196,000, according to deed.
Actual price = $168,400

Buyer disclosure form: KB paid $27,600 to 3rd firm, which made a cash payment to the buyer.

• Lennar, Florida: $479,000
Actual price = $450,000-459,000

Home buyers received Vouchers to purchase Mustangs, or a $20,000 Harley-Davidson.

• Bennett Homes, Maryland: $600,000
Actual price = $469,000

And of course - The Back Door - Screw the Buyer
Originally listed in February 2005 for $635,000; Wells Fargo held two mortgages: first for $479,800, second for up to $120,000. Buyer's agent said the transaction included a $120,000 "payment by the builder to an organization that collected fees for finding buyers."

- From Barry Rhitholtz - The Big Picture

Sunday, December 16, 2007

Prices Will be going up Substantially after the 1st of the year and then Prices will fall, substantially, by the end of 2008

How can this statement be true. We have never retreated from rising prices in the past - what makes this different?


Stagflation begins with inflation driving the economy into recession - lower productivity, consumption, more than normal announcements of layoffs, higher unemployment etc. eventually leading to deflation - lower prices until consumption resumes. This has a greater spiraling effect than most other forms of economic change except maybe a Depression.

How do we deal with this best - in our own economic situation:
1. Take the "wants" out of our spending and move into "needs" category
2. Accumulate Cash
3. eliminate unnecessary automatic payments
4. learn to live with what you have.
5. Spend smarter - avoid known heavy increases if possible

Saturday, December 15, 2007

Quant Tools - Used in Investments

A scientific phrase - using Quant Tools - will become a common phrase in thwarting a decline in markets - by paralleling two separate types of investments. Investors will be targeted by fund managers (who are looking for progressive fees.) - Watch out! A few managers have become successful. An example of this type of investment. Two years ago AMD was selling for $40 and INTC (intel) was selling for $18. Buying Intel and selling short AMD (at the same time) would have rewarded you a $10 profit in Intel (18 to 28) and a $30 prolfit in AMD - short (40 to 10.)
Intel and AMD are the only competitors in a certain type of chip - while one was going to recover and the other was going to decline - if they are picked and "paired" in an investment - you can make money on both! This was a classic "pairing" - Many situations can be "paired" in investments - for profit in a declining market.

1% Growth plus 4.3% Inflation = Stagflation

So What!? -
Stagflation* > Recession > Deflation.
*Stagflation - little or no growth (GDP) with inflation eventually leading to recession and deflation (lower demand requires prices to decline)

Let's face it: When your CEO (George W.) is sub-par - he is influenced by - his perceptions (which are views created by intelligence, or the lack thereof) He chose an academic to run our Money (Bernanke) and a Fox (in the hen house) to be the Secretary of the Treasury (Paulson.) You'll remember that he (Paulson) was the CEO of Goldman Sachs - who is now being accused of Manipulating the markets to make money on the failure of Sub-Prime Mortgages, among other SIV's (Structured Investment Vehicles) the grouping of less than desirable debt, etc. etc. etc.

Sooner or later, Goldman Sachs will be accused of Selling SIV's while "Selling them Short." Selling short is a way of making money while the value of an asset goes down.

Remember - "White Collar Crime" generally goes without punishment - except a slap on the hand.

Wednesday, December 12, 2007

America Needs a Good Recession! Like it or Not - It began last Summer -A reduction in interest rates, of any size will not cushion the fall!

Bernanke, Paulson, all the Kings Horses and All the Kings men - All of the Talking Heads -they are so lost in their own numbers, lies, deceit - that our economy is adrift with no rudder.

1. No bailout for sock puppets ... and not for junk mortgages
Remember all the shareholders who invested in Wall Street's last fiasco, those bizarre, no-earnings, dot-com schemes like and its cute sock puppet? Nobody bailed them out after the 2000 crash that triggered a 30-month recession and wiped out $8 trillion in market-cap. This time Washington's just trying to salvage an out-of-control Wall Street.
2. U.S. dollar loses more credibility
Can it get worse? Yes, the dollar will sink lower. Martin Feldman, former chairman of Reagan's Council of Economic Advisers, recommends doing nothing in a Wall Street Journal OpEd piece: "Arbitrarily changing the terms of mortgages held by investors around the world would destroy the credibility of American private debt." But they're doing it anyway. They got greedy, sold junk. Now people don't trust us anymore.
3. Supply-side hypocrisy
It's almost funny. Supply-siders pretend to trust the free market to work out problems. Yet the elite of the conservative free-market supply-siders on Wall Street, at the Federal Reserve and (except for the Veep) in the White House, pushed for and got government intervention to minimize mortgage credit losses created by Wall Street's excessive greed.
4. PR stunt and photo-op
Washington knows this is just a PR photo-op pandering to Middle America's fears. But "it's too little, too late and too voluntary" says a New York Times editorial. "Only an estimated 250,000 borrowers, at best, will benefit" from the mortgage-rate freeze. "From mid-2007 to now, some 800,000 have entered foreclosure. From 2008 through mid-2010 ... there will be an estimated 3.5 million loan defaults." Free market politicians know it won't work.
5. Undermines responsible mortgagees
Many worry the biggest losers may profit most, like speculators. Even junk mortgagees who are able to pay excessive reset rates may get no breaks. Moreover, the damage will spill-over to the tens of millions of responsible homeowners who are current on their mortgages. Plus, they will be indirectly penalized; for example, if they have to sell, they'll compete against mortgagees getting bailout benefits and tax breaks in a down market.
6. Taxpayer revolution coming
Wall Street got too greedy, made mega-billions. The average managing director made $2.52 million repackaging mortgages. Bubble pops. Housing collapses. Defaults. Foreclosures. Local revenues dropping. Federal, too. A Wall Street Journal editorial put it bluntly: "More than 95% of homeowners are making payments on time, and they believe it is unfair to pay more taxes to assist those who've been less responsible." Still, it's happening and they're angry. Expect a rebellion. This is Wall Street's problem, not the taxpayers.
7. Déjà vu Spitzer and Enron
New York Attorney General Andrew Cuomo has already subpoenaed Wall Street. Next: Congress, the SEC and other state regulators will demand answers, such as why was Goldman shorting the SIVs they were selling, many of which quickly went into default? What did they fail to disclose? Sounds like a massive conflict of interest with major liabilities. These hearings could drag on a long time, further undermining the international credibility of the dollar.
8. Washington was hiding the truth
As recently as August, U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke both proclaimed that our subprime/credit problems were "contained." Then, suddenly, they were a "contagion" enflaming recession fears. The truth: Both had the data long before August, and mislead us. One is a former chief of a leading Wall Street bank packaging the SIVs. The other is our Fed boss with a staff of thousands of economists and data-crunchers. They knew the truth many months ago, and did nothing.
9. Washington's priority? Wall Street
Remember, Paulson's first response in August was not to help the two million subprime mortgage holders. No, Paulson's first response was to create a $100 billion bailout fund to help his old Wall Street cronies keep all those junk mortgage credits off their balance sheets. More conflicts? You bet. Enough to make Chris Dodd, chairman of the Senate Banking Committee, threaten a formal investigation of Paulson.
10. American economy unmanageable
Maybe America's $13 trillion economy is just too darn big and complex to understand, let alone manage. Remember Bush Sr.'s chairman of the Council of Economic Advisers, Michael Boskin? He miscalculated U.S. tax revenues by $12 trillion a few years ago. Remember the low-ball estimates of drug entitlements? Or the estimates on Iraq war costs? We're in denial, unable to see or admit to -- let alone deal with -- big issues such as Social Security, until too late. Worse, our political quick-fixes handicap future generations.
11. Law of unintended consequences
Remember how everyone thought biofuels would make America oil-independent? Instead, feed prices shot up, and then the price of meat, as distribution costs soared. Today, we know it was all payback to corporate agribusiness for campaign contributions. Same here: Wall Street's a huge campaign donor. Too many unknowns can trigger blowback.
12. Prolonging recession pain
Washington's trapped in short-term solutions again, ignoring the future. Rate freezes will drag out the recession, ultimately making it worse. Property values will drop further, new home construction will be delayed, equity-to-mortgage ratios will fall, but the income of junk mortgage owners won't improve in a recession.
13. America needs a good recession
Deep down, Washington and Wall Street know you can't stop the coming downturn. Recessions are natural, inevitable, essential; a positive way of cleaning out the excesses of a prior bull market. So stop whining. It will flush itself! Stop fighting, go with the flow. When I was at Morgan Stanley, the Dow was around 1000. We lived through the brutal 1970s recession. We've grown stronger through a few recessions since. We're now above 13,000. We'll live through the 2008-2009 recession.
And we'll come out even stronger
Marketwatch - Paul Farrell

Sunday, December 9, 2007

elton john - candle in the wind

For Diana and everyone who never had a real chance - and blew thru the obstacles. Truely a great woman that beauty could not deny - England's Rose

Back to The Economy and The Stock Market - actually nothing more to say - seeing will be believing - taking time off to observe.

cow sense - cutting horse

A great horse is born that way. Although the music leaves much to be desired (turn the volume way down)- the horse has excellent breeding. The Horse - knows what to do. When someone lets you ride a cutting horse - you are generally instructed to stay off the horses shoulders, hold the reins loose, one hand on the horn and the other on the side of the saddle - stay centered - the horse knows what to do. The rider is a passanger, visualize as the horse works how difficult staying in the saddle would be......Somewhere in this horses past was an il-fitted saddle which created the white spots on both shoulders - probably why he is feeling so good - no saddle.
The Amateur in this picture looks like the ultimate horseman, actually it is my first time riding a cutting horse. I was told to stay out of the horses way, hold on, let gravity allow your body to stay centered - and finally the horse will stop when the cow stops. Notice the horse has no tie-down - no resitrictions - the rider must have total confidence in the horse - June 2003 - Montana

Saturday, December 8, 2007

Syndrome ofI Inappropriate Enthusiasm

There appears (designed by Wall Street) proliferated by the News Media - about a storm that almost hit our economy. The Scenario developed by such notables as Henry Paulson, Secretary of the Treasury, Ben Bernanke, Chairman of the Federal Reserve Board - and many others of "like authority" who at all costs are trying to turn the tide of a disastrous economy. We live in a time where what is perceived should become reality - if you perceive it hard enough. The background is Christmas Music, celebration of a New Year coming - and a New Year of fresh starts. They Have a Plan, finally, which will solve the "big Problem" and all can now go on with their lives without fear - creating a Syndrome of Inappropriate Enthusiasm.

Lets take a look as some "Facts!"

Other than US Treasury notes and Bonds - there appears to be no safe bond funds - as the proprietors are slow to reveal the % of their fund that is riddled with default.

The Automobile industry has announced a closing of all their truck factories - at least until February - not done since whenever - as there is an extreme over supply of inventory - this would be "light trucks" pick-ups, etc.

The Trucking industry (which moves the products that we consume) is almost at a crisis point - Fuel, drivers, on the road hauling, etc. - in a "can't continue this way" point.

The credit industry is in turmoil. The lenders, the borrowers, the insurance backers, you name it.

The Real Estate industry is in denial of their own bankruptcy.

Employment numbers are being manipulated (towards the positive) by the "Birth/Death" adjustments.

Inflation is being recalculated to avoid the "nasty secret." Since many vehicles (Social Security payments, for one) are restructured by an increase in the "Cost of Living", the truth of inflation would increase the National Debt substantially.

We are winning a war that we are losing.

We are so powerful, that "oil" has us by the balls!

We are considered, by ourselves, that we are the world power, as all of the major currencies have increased in value at the expense of ours.

We have a leader who is a "fool" as a front man (Bush) and "Behind the Scenes" the man who is calling the shots (Cheney) - Mr. Evil!

OK - We now have A Stock Market which is at all time Highs - with companies in great economic strength - which is living in a "syndrome of inappropriate enthusiasm" - Last Man out is the one to get burned the most - We'll see.

Maybe we will weather these storms - we'll see soon - by announced "layoffs" after Xmas. They could be the - "last straw that breaks the Camel's back"

Of course, If none of these things come to a head by March 31st - we have indeed weathered the storm - as always Time will Tell.

We love phrases: inappropriate enthusiasm, irrational exuberance, on balance, cautiously optimistic, guns and butter, new era, intergenerational differences, new paradigm about: Recessionary Influences, repeated inflationary warnings, liars crooks and thieves, acute recession - never before experienced by most living souls.

Thursday, December 6, 2007

The Stock Market continues to rise - Against all Odds

In the year 2000 - the cause of the big fall in the stock market was an extreme over-valuation of the Stock Market. This is not the case in 2008. The economy will break due to "Zero Hour" (read below) - A credit market in chaos, a Real Estate Market in extreme over-valuation - a government who believes that "pounding the problems" will make them go away - finally, a consumer who is "spent out" - If massive layoffs are announced after XMAS into the new year - this will become the "igniter" that will touch off - the reality - don't mess with the markets.

We live in a "market based" economy - adding fuel to the fire will be the "freeze" of the ARMS rate adjustment in the interest rates on mortgage based debt. This will affect Banks, Guarantors, Insurance Companies, Pension Funds, Money Market accounts, future growth in Real Estate - and overall debt supply and demand - resulting from reliability to be flexible in asset based debt. This will result in a downward spiraling of economic growth. Debt is used as leverage to growth - and the contraction of Debt - we begin to get the "Chicken Little" effect.

Zero Hour

"Zero Hour" - interplay of debt growth and GDP growth. When we are in a debt-induced, asset-based economy, “Are we there yet?” means arriving at Zero Hour, which is a scary proposition. For those unfamiliar with the concept of ‘Zero Hour’, it is the moment at which creation of new money no longer has an impact on GDP, or the real economy.
“Are we there yet?”- Very close - Zero Hour. How do we know we are at zero hour? We know we are because M3 (money supply) has now exploded to an 18% year over year rate while the Fed has downgraded 2008 GDP growth expectations to 1.8-2.5%. Yes, money is growing at a rate ten times that of new economic output.

So What!? -

Stagflation* > Recession > Deflation.

*Stagflation - little or no growth (GDP) with inflation eventually leading to recession and deflation (lower demand requires prices to decline)

Tuesday, December 4, 2007

Magnolia Opening

- thanks Tim Knight

The Spin

Focus on the above - notice that it appears to be moving - That's the Spin - in fact, "Spin" does not change anything - it's an optical illusion put there to "trick" your mind

The $8 billion repo the Fed entered last week amounts to roughly $25 per American in extra cash to carry around the malls. To frame this as some sort of extraordinary effort to stabilize the banking system is absurd.

The problem with the U.S. financial system here is not liquidity, but the solvency of mortgage loans and securitized debt. The Fed's actions are not likely to have material impact on this. To believe otherwise is mindless sheep-like superstition. Do investors really want to bet their financial security on the hope for “Fed liquidity” promised by uninformed analysts who don't understand monetary policy because they can't be bothered to look at the data?

Saturday, December 1, 2007

Housing, Mortgages, ARM resets, The Economy, Why no one knows!

Nov. 30 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers.

Paulson was joined yesterday by Federal Deposit Insurance Corp. Chairman Sheila Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich.

Bair has proposed letting borrowers with adjustable-rate subprime mortgages, who are living in their homes and unable to afford resets, get extensions on the starter rate for at least five years. They could also be offered 30-year fixed-rate loans. Reich prefers a three-year freeze.

"The objective of modifications should be to make homeownership sustainable, rather than deferring foreclosure to a later date," wrote Dodd, a Connecticut Democrat who is seeking his party's presidential nomination.

Subprime loans, given to people with poor or incomplete credit histories, typically offer a low introductory rate for the first two or three years. The rate then resets for the duration of the mortgage. About 100,000 subprime loans will reset to higher rates each month over the next two years.

Paulson said in an interview with Business Week three days ago that ``well before the end of the year, we will have a template and the infrastructure in place to make it easier to handle the wave'' of mortgage resets.

The rout will get worse because defaults on home loans are likely to rise, analysts said. The FDIC estimates that 1.54 million non-prime mortgages valued at $331 billion will reset by the end of next year.

Paulson may be trying the same approach he took with Citigroup, JPMorgan Chase & Co. and Bank of America Corp. in September to address structured investment vehicles, units set up by banks to finance purchases of assets such as corporate bonds and mortgage securities, Abernathy said. Treasury encouraged the banks to set up a fund that will buy assets from the SIVs, without committing any government money.

Regulators still lack reliable estimates on the extent of the subprime mortgage crisis. Three months after they asked banks to modify loans for borrowers at risk of default, agencies have little comprehensive data on what lenders and loan servicers have done, officials say.

Mortgage-industry lobbyists have argued that an across-the- board solution is difficult to apply. Rewriting contracts also risks moral hazard -- encouraging borrowers to take on more debt in the expectation of being bailed out if needed later. - Bloomberg

One of the arguments against Agricultural Subsidies is... it allows people who have made poor financial decisions to operate in a "Market Based Economy" - not to fail. We are again providing this vehicle to sub-prime mortgagees. whether it be business failure or personal financial failure - it becomes enormously painful to those who have to endure it. These subsidies are not there to protect the individual - they are there to protect the businesses who have provided the money (loans, etc.) The Consumer is the Pawn - Business is the King. Vis...Savings and Loan Bail Out....Long Term Capital Management Bail out. Etc...Iraq War -Business Enrichment.

"In the room the women come and go
Talking of Michelangelo.

And indeed there will be time
To wonder, "Do I dare?" and, "Do I dare?"
Time to turn back and descend the stair,
With a bald spot in the middle of my hair --
(They will say: 'How his hair is growing thin!")
My morning coat, my collar mounting firmly to the chin,
My necktie rich and modest, but asserted by a simple pin --
(They will say: "But how his arms and legs are thin!")
Do I dare
Disturb the universe?
In a minute there is time
For decisions and revisions which a minute will reverse." ........... -The Love Song of J. Alfred Profrock - T.S. Elliot

Here's Fortune's forecast for the value of an upscale home (one that sells for double the local median price) in five years.
House prices (thousands)
Metro area June 2007 Five-year projection
San Francisco $1,732 $1,568
San Jose $1,669 $1,419
Honolulu $1,314 $1,204
Orange County, Calif. $1,419 $1,104
East Bay, Calif. $1,562 $1,078
Stamford, Conn. $988 $968
New York $1,100 $950
San Diego $1,211 $926
Los Angeles $1,107 $841
Boston $834 $793
Long Island, N.Y. $947 $725
Seattle $854 $687
Inland Empire, Calif. $791 $667
Greater Washington, D.C. $856 $641
Palm Beach County, Fla. $760 $553
Chicago $574 $550
Fort Lauderdale $731 $532
Sacramento $705 $521
Miami $759 $514
North/Central N.J. $607 $512
Portland, Ore. $589 $476
Denver $502 $474
Las Vegas $611 $450
Minneapolis $448 $434
Hartford $484 $433
Baltimore $565 $408
Phoenix $521 $399
Norfolk $500 $387
Raleigh $447 $381
Milwaukee $445 $377
Philadelphia $472 $370
Salt Lake City $464 $360
Richmond $462 $359
Austin $363 $347
Orlando $522 $343
Nashville $367 $342
Dallas/Fort Worth $329 $334
New Orleans $328 $321
Tampa $444 $320
Greater Kansas City $309 $314
Charlotte $406 $313
Houston $304 $308
Atlanta $349 $305
Cincinnati $284 $301
Jacksonville $393 $299
Columbus $296 $295
St. Louis $304 $295
Cleveland $249 $273
Memphis $283 $269
Indianapolis $244 $262
San Antonio $302 $262
Oklahoma City $256 $240
Pittsburgh $237 $232
Detroit $201 $215