August Stock Talk II

D2 - in no way shape or form is now the time for bargain hunting

if you have to buy stock, go to the very very big caps...no financials, and no business that relies on borrowed money to function (ex: cars, home builders, construction, building materials, cement, wallboard)

its bad out there

Why would anyone "have to" buy anything?  I think the bargains will be best found primarily in tech and healthcare.  It just seems to me that today, maybe for the first time, EVERYTHING is being thrown under the bus.  I think the subprime effect is overblown and we are not headed for a recession.

 I agree. I drew up some charts of the Dow last night that were rather emphatic about a serious change. The bull is old. The best thing I have done in the past month is buying a slug of SKF shorting the Financials.
  Richard Arms always maintained that volume usually increases throughout an up move, not a down move. Often a bear market is terminated by a very climactic heavy volume...the volume of the entire move is likely to be fairly uniform.

The last heavy fall after was after 5+ years of irrational exuberance, unsustainable valuations and an internet bubble detached from reality.  P/E ratios are not unsustainable.  Earnings have been good as a whole.  Earnings are good, interest rates are low and the fed is going to cut.  This whole sumprime and credit stuff is sharp but short-lived.  Not sure where the bottom will be but I think unlike the last big fall in '00 we will see new highs on the indices within a year.

D2 - the debt market is dried up. the cost of doing business has increased in the last month. noone wants any part of lending money b/c they are worried about repayment more than the risk they are taking

you think the housing market in the last5 years was NOT irrational exuberance?

earnings and fundamentals are good for the most part, its just that i dont think anyone knows how deep this problem runs

The latest blow to investor confidence came from the mortgage sector. Countrywide Financial Corp. (CFC.N: Quote, Profile, Research), the biggest U.S. mortgage lender, said it had to draw down an entire $11.5 billion bank credit line to fund its operations after it was essentially shut out of other credit markets.

D2 - CFC is the largest mortgage originator in the country

 

to be clear... that's largest residential mortgage originator

Koaj,

I am in the market for a house myself, but I am not going to rush into it. I sold my last place about a year and a half ago right before the market starting going into this nose dive. I work(ed) for a mortgage broker so I've had my finger on the pulse of this housing market for sometime now. What i am going to do is wait for the housing market to hit the ceiling (i still think we are 3-6 months away but the affects should linger for a while) and then start pushing hard for a new property. California will be the goldmine for investors with capital. Once again it's just not sub-prime banks that are going to get hit hard....A-paper lenders will be affected.There is a reason why they keep changing their lending guidelines and they don't lower the interest rates when the bond market calls for it. here is a good site to check once a twice a week to see what lenders have imploded....

 

https://ml-implode.com/

great site - they link to hedge fund implosion as well

First Mangus shut down today


gunners - you are correct; should have clarified

Agree with KOAJ, this analysis is spot on, not only for the previous bubble burst, but for the current one "The last heavy fall after was after 5+ years of irrational exuberance, unsustainable valuations and an internet bubble detached from reality." Replace "internet" with housing, and bingo!!

except this time the leverage is not 2:1 like margin or 4:1 its more like 100:1 or 50:1 with creative mortgages

look out below

Housing get ahead of itself and has corrected but was/is not a bubble in the same way.  No way.  I think from '95'-00 the NAZ moved from like 800 to 5,000+.  So we're talking about a 6 fold spike.  Overall home prices have never seen such a thing.  Plus home prices peaked in '05 and probably  didn't even 2X the previous 5 years before that.

There really is no comparison.  Home prices rose due to supply and demand.  Tech stocks of all ilk went crazy because the market thought we have some new paradigm. 

D2 - probably right...but housing hasnt corrected in the least bit

we havent seen the puke selling/price drop that we should see with the lack of buyers or lack of money lent to buyers...i figure that will take another 3-6 months

I disagree.  if you notice in these huge market sell-offs, MVIS volume has not been that high.  some people are selling and dropping the price a bit.  but there is good support and plenty of people are holding strong.  the volume today was well below the 13 week average as well as under the 10 day average volume.  Look for a good bounce sometime soon.

I am a pretty optimistic guy though.

 

how about that rally this afternoon??

I am sorry, but home prices did not just "supply and demand." They reflected the massive number of  liar loans, intense speculation (one in four houses purchased towards the end were bought purely for flipping) and governmental decision making of the worst kind.

passed along to me from a friend, a quote from Tobin Smith as bullish as any I have seen/read....

But during the past two days, we have seen severe deterioration in key parts of the capital markets that can only lead to one conclusion: We are at least six to eight weeks from getting to capitulation climax of this correction.

We could be down another 10% or so -- moving right up to a bear market sell-off before all is said and done. Right now, we are seeing all the leaders of the market getting thrown overboard by sellers who have to sell the good stuff to keep the wolves at bay. This is hedge fund extermination driven by a forced liquidation from margin calls and redemptions.

As I've noted before, this death dance will take 45 to 60 days to get done -- we'll have to accept that as a grim fact of life now. That's why the best-performing stocks and companies are getting butchered here. The cashiers at the prime brokers are selling everything they can with market orders -- and in overwhelming quantities.

And they'll do the same thing tomorrow, and do it again the day after that and the day after that -- continuing until the forced selling ends.

For example, look at the sell-off in base metals and basic resource companies with 5 to 7 P/Es and double-digit growth: There is nothing in the fundamental growth rates of companies such as Southern Copper (PCU), Peru Copper (CUP) and Rio Tinto (RTP) that have negatively changed.

So, what's different? Nothing but the forced-selling cycle. This is being led by multiple financial quakes that are hitting the markets simultaneously:

1) Long-Term Debt Securities Market "Mark-to-Market": This quake was exacerbated by five to 10 times leverage. This is where investment entities are marking debt securities to current prices, and with few bids in the market, this "death by a thousand cuts" has just begun. With such leverage, a 10% drop can be a 100% decline. That move breaks loan covenants and -- boom! -- forced liquidation.

2) Quant Fund Redemptions: These also exacerbated by five to 10 times leverage. With $200 billion in equity and five to 10 times leverage, many of these quant funds invest out of the same playbook. They did not have a program to anticipate a credit market seizing, and now they are forced to unwind winning positions to make redemption requests and margin calls.

3) The Short-Term Credit Market Lock-Up: This is where short-term commercial paper backed by financial assets -- car loans, home loans, etc. -- are NOT being rolled over and loans are called.

4) The Yen Carry Trade Unwinding: The rise of the yen as carry trades (sell the yen, buy higher-yield currencies) get reversed.

5) Exchange Traded Funds (ETFs) Redemptions: Tons of new ETFs hold thinly traded stocks that they now are selling to meet redemptions.

This quintuple financial quake has started a worldwide "de-leveraging wave."

This kind of wave sets up the cash to fuel the big snap-back that will surely occur when the selling wave has run its course. But this meltdown has metastasized into virtually all parts of the $40 trillion credit market -- not just mortgage-backed securities.

During the next 30 to 45 days, we can expect to see the following events:

* More than one major bank and brokerage will take major charges against third-quarter earnings and book value as they come clean on their subprime mortgage problems.

* A number of hedge funds you have never heard of will go under -- and a few that you have heard of will be mortally wounded.

* Calls will increase for recession starting later this year (i.e., "the consumer is tapped out and weak home prices will cut spending").

* News of private equity deals will grind to a halt.

* Exotic credit default swaps -- bets against debt -- will get closed.

* Hearings in Congress on subprime mortgages and hedge funds.

In short, whatever good news there is in the real economy will get swamped by the daily drum beat of bad news … until the Fed comes to the conclusion the real economy is at risk.

PS when I wrote bullish, I meant he has been bullish and dismissive of the sub prime fiasco's ramifications. Apparently no longer.

 And hollywood, thanks for your insight regarding the housing. I suppose a liberal definition of flipping to me would cover those people you describe, who were taking mortgages out they could never really qualify for, with the expectation they would be able to unload the house a couple of years later for a hefty profit.
 I cannot lay my hands on the article that stated the 1 in 4 number but if I run across it in my email I will send it along.
  No matter.It is a shame that people not even remotely connected to the housing debacle will end up paying for it, in many ways.

not the article I was referring to but one written in 2005 by Peter Schiff:

One reason few expect housing prices to collapse is the mentality that homeowners need to live somewhere and as such will be reluctant to sell their residences.  This argument ignores that fact that so many of today’s homebuyers do not occupy their properties as primary residences, and that relatively attractive rentals provide homeowners with viable, none-ownership alternatives for shelter.  However, a more in-depth analysis reveals that contrary to prevailing rhetoric, housing speculation is not only rampant, but also far more pervasive than the data suggests, perhaps even more widespread than was the case with tech stocks during the NASDAQ bubble.

 

According to a recent study by the National Association of Realtors, 23% of homebuyers specifically identified their purchases as investments.   Another 13% identified their purchases as vacation properties.   Since rental yields are so low, those buying properties as investments are by definition speculating.  However, buyers of vacation homes, are also speculating, as inherent in the decision to buy such properties is the expectation of price appreciation.  Absent such a forecast, it is far more economical to vacation in hotels.  Further, as owners of rental or vacation properties do not occupy their properties as principal residences, a change in sentiment as to future price appreciation could easily cause such owners to sell, or worse, to walk away from mortgages in circumstances of negative equity. 

 

However, the mere fact that owners occupy their houses as principal residences does not necessarily remove such properties from the category of speculative investments.  For example, 58% of recent California homebuyers financed their purchases using ARMs (with percentages in pricier counties exceeding 80%).  The primary reason given to justify such mortgages was owners’ intentions to resell the properties in relatively short periods of time.  Such buying is clearly speculative, regardless of the speculator’s intention to occupy the property.  Given high transaction costs and low relative rents available in markets where such mortgages are most pervasive, absent the expectation of rapid price appreciation, such short-term buyers would clearly be better off renting.