MarketVVizard's Market Thoughts

» MarketVVizard - Thoughts

Interesting that the SOX did not participate in today's rally for most of the day, but had a pretty strong reversal late in the day. Could indicate some relief rallying is due? Hussman also said on Sunday he lifted a significant portion of his short position (based on today alone, a brilliant move).

Norm -- I have noticed at least some subtle liberal bent in The Great Crash, maybe that's why it took me so long to get around to reading it I'll probably skip The Affluent Society. Although one decidedly UN-libral thing Galbraith does mention in The Great Crash is that Roosevelt, as Governor of New York at the time of the crash, was responsible for regulating the market, and not Hoover (the Securities and Exchange Commission wasn't established until 1934).

Like Bush today, Hoover inherited a market on the precipice of disaster and history has probably treated both unfairly as a result (personally I think presidents have only marginal, if any, impact on speculative bubbles). Its going to be fascinating to watch the repeat of the "Roosevelt solution" in the new millennium. I just heard an interview with a Democratic congresswoman today who was saying instead of tax cuts Bush should have been creating "works projects". I just rolled my eyes... its a sad state of affairs when the leaders of our country think additional government bloat is the answer to any economic problem. Sadly this view dominates the liberally/socialistically biased history books. You know its going to get much worse -- only this time the Democrats will probably go down in flames when we start seeing the same kind of unemployment picture they have in many European counties develop under their watch here in America. When I first saw Kerry's TV ad, the one where he promises universal healthcare coverage and an average $1000 deduction for every American towards healthcare costs AND he's going to cut the deficit in half, I could not stop laughing... At least when Roosevelt took the reigns we could somewhat afford to "dig the hole" -- we can't today. In 20-30 years our country will be bankrupt. Neither party is addressing this as far as I'm concerned, and whichever party happens to be behind the wheel at the "wrong time" will probably get all the blame.

-- posted by MarketVVizard

» Jas_Jain - Re: The Tech Stock Discount

Why can't people like Kirk understand the plain truth: Technology is Cyclical (always has been) and Semiperformers are Extremely Cyclical. Mature companies in these sectors should trade at single digit P/E to recovery earnings.

Jas

-- posted by Jas_Jain

» Normxxx - Re: Thoughts

McClellan says the major trend direction of the Gold & Silver market is now down (possibly for the next 3 years or so-- I think he is going by that long term chart of gold I posted on this site some time ago

http://www.suite101.com/discussion.cfm/i...

I have another Gold guru who also published a LT sell just before the big drop several weeks ago-- most impressive.

Right now, the consensus seems to be that we have entered a 'trading' range.

Hoover is primarily faulted because he preferred to work through the "Big Men"-- which had always worked before. Roosevelt couldn't, and had to start from scratch, because the "Big Men," as now, had either turned out to be crooks, were completely demoralized, or had turned their collective backs on him. Hoover preferred to "work behind the scenes"-- and, so, noone saw what he was doing. Roosevelt was a thoroughbred extravert, if not exhibitionist, so everyone saw that he (and his cabal) were a perfect fury of activity.

But the thing that did Hoover in was that he let MacArthur's dispersal of the 'Bonus Army' stand for his Presidency, even though he had had nothing to do with it. (In fact, MacArthur had been expressly ordered 'to do nothing, unless provoked'-- which was all the go ahead MacArthur needed.)

Since I don't see how we can hold off TEOTWAWKI beyond the next 4 years (we won't even have Alan of the bubbles to kick around), the next President may well go down in history with Hoover. Kerry better watch out what he wishes for. Do you think a Hilary Clinton presidency will restore our social and economic fabrics? She's surely forgiving enough...

And, just think, we will have Bill ("I feel your pain!") Clinton to help out around the House.

You forget; Europe also has the dole, so unemployment is not so onerous-- except to the old-timers who have to support them. And there are getting to be fewer and fewer of working age. Oh well, we can always put off retirement until 75 or so.

Let me see, was it Chaney or Rumsfeld who said, famously, "Deficits don't matter!"

-- posted by Normxxx

» MarketVVizard - Followup on PAAS

VANCOUVER, July 28 /PRNewswire-FirstCall/ -
SECOND QUARTER HIGHLIGHTS
-------------------------

- Net earnings of $1.3 million for the quarter versus a net loss of
$1.2 million in the second quarter of 2003. Consolidated revenue
increased 67% over the second quarter of 2003 to $20.9 million.
- Record quarterly silver production of 2.6 million ounces, an increase
of 19% over the same period of 2003.
- Cash flow from operations, before changes to non-cash working capital,
increased to $2.4 million, versus $0.24 million in 2003. Year-to-date,
cash flow from operations before working capital changes increased to
$5.3 million.
- Eliminated 99% of $86.25 million in convertible debt through
conversion of outstanding debentures. Outstanding project loans also
pre-paid in full, leaving Company virtually debt free.
- Package of non-core Peruvian properties near Quiruvilca sold to
Barrick Gold Corp. for $3.65 million.

-- posted by MarketVVizard

» MarketVVizard - Re: Re: Thoughts

Let me see, was it Chaney or Rumsfeld who said, famously, "Deficits don't matter!"

Dick Cheney allegedly said, "Reagan proved deficits don't matter." although Cheney denies he said it and the only source of the quote is former Treasury Secretary Paul O'Neill's book (which I give only slightly more credibility to than a Michael Moore documentary ).

Sadly, whether Cheney said it or not, it's 100% true IN THE POLITICAL WORLD. i.e. Promising the world, and/or running up deficits is a good way to get (re)elected. That's PRECISELY why our country is in so much trouble going forward. Things started down the wrong path over 80 years ago and its only snowballed since.

-- posted by MarketVVizard

» MarketVVizard - More observations

On the bullish side, Consumer bankruptcies slow: Study shows filings dropped in first half, a sign of improved personal finances.
July 28, 2004: 6:34 AM EDT

WASHINGTON (Reuters) - U.S. consumer bankruptcy filings dropped in the first half of the year for the first time since 2000, a sign personal finances are improving as the economy strengthens, a report released Wednesday shows.
______________________________________________
I guess its significant that we are now just seeing the first drop in bankruptcies since 2000, although the decline is only 3% and that is from very high levels.
______________________________________________
Yesterday, consumer confidence JUMPED to a two year high. This is a fascinating development, as it means Americans don't perceive any trouble. And in fact they may have good reason for the rosy sentiment. Unemployment has remained low throughout this "post-bubble" economy, and at least anecdotally, I'm seeing an excellent job market developing in my area particularly over the last 3-4 months.

-- posted by MarketVVizard

» MarketVVizard - ECRI Leading Indicator

Proprietary Warning

Based on readings from its proprietary leading indexes for employment, manufacturing, services, construction and the overall economy, the ECRI says the U.S. economy is ``on the cusp of a slowdown that will persist at least through year-end.''

They aren't forecasting a recession; just a slowdown to trend growth, something on the order of 3 percent. The economy grew 3.9 percent in the first quarter following 6 percent second- half growth. Economists surveyed by Bloomberg News expect second- quarter real GDP growth of 3.7 percent. The Commerce Department will provide its first pass on the second quarter next Friday.

The stock market is siding with the ECRI outlook for less robust growth, or at least less robust profit growth, ahead. The Dow Jones Industrial Average, the Standard & Poor's 500 Index and the Nasdaq Composite Index are all posting year-to-date losses.

The ECRI's forecast for a broad-based slowdown in growth is based on the growth rate of its long-leading index, ``our frontline forecasting tool,'' which peaked in June 2003, says Lakshman Achuthan, managing director of the ECRI. The index leads cyclical turns on average by a year, he says.

July Preview

Given my distrust of econometric models, I wanted to see for myself how the long-leading index did in the last cycle. The last peak came in August 1997, well before the economy's rate of growth peaked in the fourth quarter of 1999. On a year-over-year basis, real GDP growth peaked at 4.8 percent in the second quarter of 2000.

Achuthan encouraged me to look at the relationship between the growth rates of the ECRI's proprietary long-leading index and its proprietary coincident index. Here's a shocker: The peak in the former anticipated the peak in the latter in 1998."

So what exactly is the current reading from the Economic Cycle Research Institute's leading weekly index of U.S. economic growth? At the beginning of the year, it was close to a 20-year high, but has now suffered the sharpest drop since the last quarter of 1987, falling from 11.8 to 3.1.

-- posted by MarketVVizard

» MarketVVizard - 'Rogue waves' reported by mariners get scientific backing

Wed Jul 21, 1:07 PM ET

PARIS (AFP) - European satellites have given confirmation to terrified mariners who describe seeing freak waves as tall as 10-storey buildings, the European Space Agency (ESA) said.

"Rogue waves" have been the anecdotal cause behind scores of sinkings of vessels as large as container ships and supertankers over the past two decades.

But evidence to support this has been sketchy, and many marine scientists have clung to statistical models that say monstrous deviations from the normal sea state only occur once every thousand years.

Testing this promise, ESA tasked two of its Earth-scanning satellites, ERS-1 and ERS-2, to monitor the oceans with their radar.

The radars send back "imagettes" -- a picture of the sea surface in a rectangle measuring 10 by five kilometers (six by 2.5 miles) that is taken every 200 kms (120 miles).

Around 30,000 separate "imagettes" were taken by the two satellites in a three-week project, MaxWave, that was carried out in 2001.

Even though the research period was brief, the satellites identified more than 10 individual giant waves around the globe that measured more than 25 metres (81.25 feet) in height, ESA said in a press release.

The waves exist "in higher numbers than anyone expected," said Wolfgang Rosenthal, senior scientist with the GKSS Research Centre in Geesthacht, Germany, who pored over the data.

"The next step is to analyse if they can be forecasted," he said.

Ironically, the research coincided with two "rogue wave" incidents in which two tourist cruisers, the Bremen and the Caledonian Star, had their bridge windows smashed by 30-metre (100-feet) monsters in the South Atlantic.

The Bremen was left drifting without navigation or propulsion for two hours after the hit.

In 1995, the British cruise liner Queen Elizabeth II (news - web sites) encountered a 29-metre (94.25-feet) wall of water during a hurricane in the North Atlantic.

Its captain, Ronald Warwick, likened it to "the White Cliffs of Dover."

In the next phase of research, a project called Wave Atlas will use two years of "imagettes" to create a worldwide atlas of rogue wave events and carry out statistical analyses, ESA said.

The goal is to find out how these strange, cataclysmic phenomena may be generated by ocean eddies and currents or by the collision of weather fronts, and which regions of the seas may be most at risk.

Finding out could help ship architects and the designers of oil rigs and their operators to skirt the menace.

-- posted by MarketVVizard

» Jas_Jain - Re: ECRI Leading Indicator

This time it has fallen from 13.0 to 1.1 and headed into negative territory based on data last week.

Also the fall is twice as fast as exactly four years ago! Based on the past history, there is already a 50% chance of recession within 8 months.

Jas

-- posted by Jas_Jain

» MarketVVizard - Housing Articles

July 25, 2004
GRETCHEN MORGENSON
Housing Bust: It Won't Be Pretty

With the growth rate for home prices starting to slow, now may be the time to ponder what a bear market in real estate may bring. A recent study by two economists at Goldman Sachs provides some answers.

For now, prices are still climbing over all. The average home price in the nation rose 7.71 percent in the 12 months ended in March.

But the first three months of this year showed far slower growth than previous periods. Prices rose only 0.96 percent, according to the Office of Federal Housing Enterprise Oversight, which keeps an eye on Fannie Mae and Freddie Mac. The last time housing prices grew by less than 1 percent in a quarter was in the spring of 1998.

More ominous, six states showed declines in housing prices in the first quarter: Vermont, Alaska, North Dakota, South Dakota, Iowa and Nebraska. No state had price declines in the previous quarter.

To be sure, home values are still hot in many spots. In the most recent 12 months, prices have jumped by more than 15 percent in Hawaii and Nevada, by 14 percent in California, 11 percent in New Jersey and 10 percent in New York.

In nominal terms, United States home prices are up 60 percent since 1995; in real terms, adjusted for inflation, they are up 37 percent. Viewed historically, home prices are up twice as much now as they were in the bullish real estate markets of both the mid-1970's and the 1980's.

As a percentage of disposable income, home prices are more than 18 percent above the long-term average. Prices exceeded that average by only 4 percent in the 1970's and 8.5 percent in the 1980's boom.

Michael Buchanan, a senior global economist at Goldman Sachs, and Themistoklis Fiotakis, a research assistant there, reckon that at current interest rates, home prices are now overvalued by 10 percent, on average. Because this figure spans the entire nation, the hottest markets - California and New York - are obviously more overpriced.

The economists compute fair value in home prices by using a variety of measures, including interest rates, population and demographic data, and the overall health of the economy. If interest rates increased by one percentage point, the economists said, home prices in the United States would be overvalued by 15 percent.

None of this would be worrisome if homeowners had not turned the paper profits in their properties into cold, spendable cash. But withdrawals from home equities have recently totaled 6.3 percent of household disposable income, according to the Goldman study. In the late 1980's, equity withdrawals reached only 2.5 percent of disposable income.

Federal Reserve studies indicate that as much as half of the equity withdrawals went into personal consumption and home improvements. As a result, the Goldman economists estimate that equity cash-outs added 1.75 percent to the growth in the gross domestic product in 2003. That is a significant increase from the 1.25 percent kick that equity withdrawals added in 2002.

Consumption would slip 1 percent, Goldman estimated, if housing prices fell by 10 percent, to the fair value level. But if prices decline to well below that, as often happens when overheated markets go cold, consumption may fall by 2.4 percent, Goldman reckoned.

Such a housing crash took place in Britain in the early 1990's. At the market's low, home prices had fallen by 27 percent, 5 percent below Goldman's estimate of fair value at the time.

Such a decline is not expected here, said Dominic Wilson, a senior global economist at Goldman. That's because home prices in Britain had escalated much more than they have in this country, even now. And interest rates had soared into the high teens, which is unlikely here.

But even small declines in home prices could hurt the economy. "The precise degree of the vulnerability isn't going to be clear until we see house prices slow," Mr. Wilson said. "You've never seen consumers this stretched, operating at levels of leverage we've never experienced before. House prices are starting at a level that is pretty high relative to what we think fair value is going to be, and the economy as a whole has gotten a lot more sensitive" to housing-related spending.

Indeed, Goldman estimates that home equity lines of credit and the like have magnified the effect of housing wealth on consumption over the past decade, taking it to 10 percent from 4 percent.

Although rising home prices have been stopped dead in the past by sharply higher interest rates, the Goldman economists note that bear markets don't necessarily need major triggers to get started.

Small events can change the market's psychology, and asset bubbles sometimes just cave in on themselves.

One risk that looms large, however, is that United States policy makers would have few tools to cushion the fall if a housing decline gained real momentum. Interest rates are already so low and fiscal policy so loose that little could be done to ease the pain.

"This is one of a series of risks and imbalances that suggest there has been a price to the low-interest-rate policy that led the recession to be much shallower than it might otherwise have been," Mr. Wilson said. "Fiscal and monetary policy are both already fully utilized. If things go wrong from here, the U.S. finds itself in a more fragile position." ________________________________________________________
Economy.com on Housing

Yet Another New Record for U.S. Housing Turnover

Existing home sales surged to 6.95 million units (annualized) in June, a new record high. The Q2 average of housing turnover stands a remarkable 44% (annualized) higher than the Q1 average. Turnover of homes tend to lag new home sales and mortgage applications by about a month because the former reflects contract closings. Thus, some of the recent strength may be a lagged reflection of the earlier strength in mortgage applications. But even so, these numbers suggest that the unusually sharp drop in June housing starts would be partly reversed in July.

House price appreciation continues unabated. The median price of existing homes was up 9% (y-o-y) in June; the median price for Q2 was up 22% (q-o-q annualized). A moderation in price appreciation is inevitable and imminent. But it is likely to be a gradual moderation, if only because there are few signs of overbuilding. Months supply of existing homes dropped to a mere 4.1 months, the second lowest level recorded in the history of the series. Also, according to the NAHB survey, builder expectations for future sales have begun to moderate. And, of course, housing starts and building permits both dropped very sharply in June. ___________________________________________________________
Is U.S. Housing Bubble a Fact or Strange Fiction?

John Wasik

July 26 (Bloomberg) -- Is a U.S. residential housing bubble a fact or strange fiction?

There are two schools of thought on the subject. Either speculation is rampant due to low mortgage rates and home prices are poised for a decline, or demand is at an unprecedented level and prices will rise unabated by ``measured'' rate increases by the Federal Reserve and inflationary pressures.

In either case, it's wise to be more careful when buying residential real estate now as prices continue to climb in the largest markets.

Ian Morris, chief U.S. economist for HSBC Securities USA, whose parent company is HSBC Holdings Plc -- Europe's biggest bank by market value and the holder of more than $1 trillion in assets -- is one of those who say a bubble is looming in the U.S. residential market.

``The bubble psychology has manifested itself in very rich valuations,'' Morris says. ``House prices relative to income, rent, replacement-cost and home equity have set new highs. Twenty states that account for half of the population look shaky.''

Bullish on Bubble

Morris supported his argument in a recent HSBC study that examined valuations of home prices relative to rents, income and consumer debt.

His general conclusion was that U.S. housing prices were ``bubbly and 10 percent to 20 percent too high.''

Possibly exacerbating Morris's bubble scenario is the U.S. Federal Reserve Board's stated policy of ``measured'' increases in short- term interest rates. The Fed's move will probably ``cause a reassessment of likely future house-price risks and its associated debt, thereby triggering housing's fall,'' Morris says.

Particularly telling, in Morris's view, is the housing price- to- rent ratio (P/R), which he says is an indicator of home overpricing.

``The P/R ratios for New York, Los Angeles, San Francisco, Boston and Philadelphia have surpassed the peak of the late 1980s bubble, and suggest prices could be roughly 25 percent too high compared to current rents,'' Morris says, adding that Chicago and Detroit also look expensive to him, while Dallas and Houston look ``comfortably priced.''

Situation Normal

While Morris's observations concur with leading economists like Robert Shiller, the Yale University academic and author of ``Irrational Exuberance,'' real estate analysts and the Fed say he's off track. Fed Chairman Alan Greenspan, for one, has repeatedly discounted the existence of a housing bubble.

A report titled ``Are Home Prices the Next `Bubble'?'' by Jonathan McCarthy and Richard Peach of the Federal Reserve Bank of New York, disputes the pro-bubble camp.

The New York Fed's report finds ``little basis for such concerns. The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates.''

McCarthy says strong demand is driving prices on both U.S. coasts where there are building restrictions and a shortage of available land for building.

``Here in New York, there's not much land left and there are various regulations, so it's not like they're going to be building a lot of condos,'' McCarthy says.

Being Cautious

Even within the Fed system, though, there's some room for discussion on whether housing prices are peaking. A new study by Morris Davis, a Federal Reserve economist, and Jonathan Heathcote, a Georgetown University economics professor, focuses more on the increase in land prices over the past five years.

Davis and Heathcote concluded that U.S. land prices may post a ``cumulative decline of 6.3 percent'' over the next three years with nominal growth in home prices at 2.6 percent over that period.

``This would be the smallest three-year nominal increase for home prices on record,'' the authors say.

The debate on whether home prices will rise or fall is largely academic because the Fed's interest-rate increase may only spur potential homeowners into a frenzy to take advantage of the lowest mortgage rates in a generation. In a possible nod to that view, Freddie Mac, the second-biggest buyer of home loans, predicted U.S. sales of new and existing homes will total 7.3 million this year, beating last year's record of 7.19 million.

Speculative Frenzy?

If the U.S. housing boom is coming to an end, buyers certainly aren't acting like the party's over.

``People are buying without money down and using interest- only loans,'' says George Marotta, a research fellow and former financial planner at the Hoover Institution in Palo Alto, California.

``I think we're coming close to the end'' of the housing boom, he says. ``It's not a good time to buy. I hope I'm wrong, but it looks like the stock market bubble.''

Like many in the bubble school, Marotta is concerned about high household debt levels, which he calls ``the biggest bubble of all.''

Marotta says it's troubling that while personal debt has risen, average U.S. home equity has ``dwindled to 57 percent, compared with 85 percent a half-century ago.''

Watch for Overpricing

Randy Johnson, a mortgage broker for Independence Mortgage Company in Newport Beach, California, says it pays to watch for speculation and overpricing in your market if you are buying now.

``I would put an appraisal contingency in every offer and get an appraiser I trust,'' Johnson says, advising the use of the lender's appraiser instead of the agent's to ensure that you're not overpaying for a home.

``What happens in this stage of the cycle is the sub- standard properties come on the market under the `if I can get that much for it, I'll sell it' philosophy,'' Johnson says.

``I have seen people putting these houses into escrow and finding out upon inspection that they need to do a lot more work than they thought.''

``I think that there really are people who are buying property on speculation that they can quickly resell at a huge profit,'' Johnson says. ``You can't build a market on speculators selling to the next wave of speculators.''

Just as all real-estate pricing is local, so should your focus be on your long-term financial goals and debt level. Stop worrying about whether your market is frothy and check if you're saving enough for emergencies, retirement and college. That's the best way to avoid another, more personally damaging kind of financial bomb.

-- posted by MarketVVizard

» Normxxx - Re: 'Rogue waves' reported by mariners get scientific backing

I thought scientists had given up second-guessing professional observers on the ground (or, in this case, on the water) and had stopped saying, "It can't possibly be."

We have no theory that good that it can absolutely rule out anything-- 'though, in many cases, to accept the phenomena would throw hundreds of years of science on its head.

-- posted by Normxxx

» MarketVVizard - Rolling the Dice on Mortgage Mania

Rolling the Dice on Mortgage Mania
July 28, 2004; Page C1

When little Aether Systems Inc. reported its quarterly earnings in May, the company described itself, as it had for years, as a "leading provider of wireless and mobile data solutions."

Leave aside that in the Lake Wobegon that is Corporate America, every company is "leading" and provides "solutions." Aether wasn't satisfied with the money-making possibilities in this line. So in early June, the company made the surprising announcement that it would "begin building [a] leveraged portfolio of mortgage-backed securities." Yes, it had abruptly decided to borrow heavily and invest in MBSs just as the Federal Reserve was starting to raise interest rates.

The timing and strategy was surely odd. But Aether, which has a market value of about $140 million and didn't return calls seeking comment, had hired an adviser to lend some credibility to this lane change: investment bank Friedman, Billings, Ramsey Group Inc.

Every boom must have its banker. FBR has become the i-banker to the mortgage bonanza, much as Hambrecht & Quist and Robinson Stephens were to myriad dot-coms that no longer grace us with their presence. Arlington, Va.-based FBR has advised dozens of mortgage REITs and mortgage financial-services companies during the past several years. Based on fees, FBR was second to Citigroup Inc. in market share last year in real-estate investment trust stock offerings, with 12.5%, according to Thomson Financial.

Indeed, FBR became so enamored with the niche last year that the company turned itself into a REIT by merging its investment bank with its REIT subsidiary.

Now investors have come to realize that all this might be too much of a good thing. After rising 147% in 2003, FBR's stock on the New York Stock Exchange has fallen more than 40% from its high in early March.

FBR is an investment bank wrapped in a REIT structure that brings REITs and mortgage-finance companies public and invests in them. A triple threat to some; to others, it's triply exposed to a dangerous rising interest-rate environment.

When interest rates go up, the housing and mortgage businesses are widely expected to slow. (Read: the bubble will burst.) FBR's stock slide likely would continue as its investment-banking business became soggy or some of FBR's investments took on water. There's no masking its exposure to the sector: More than 69% of its stock offerings last year and more than 59% so far this year were either for REITs or mortgage banks, according to Thomson Financial.

FBR's president and chief operating officer, Rick Hendrix, says those who fear that it is overexposed to a difficult rate environment don't understand the business. The REIT portfolio is invested in plain-vanilla instruments from government-sponsored entities and are prudently hedged, while its merchant-banking business invests early and cheaply in only the most promising deals, he says. The track record is good: Since its inception in December 1997, FBR's merchant-banking portfolio has impressive compounded annual returns of 37.5%. But boom-time returns always look spectacular.

Mr. Hendrix says FBR isn't conducting banking only for financial businesses or REITs. He points to a lucrative private-placement deal it managed last year for a coal company. Even if the businesses FBR invests in appear similar, they perform differently in any given rate environment, he argues. "It's inaccurate to look broadly and say [these businesses] are closely correlated and have negative consequences in a rising rate environment."

Perhaps. But some investors are concerned about the close association between FBR's merchant and investment-banking businesses. FBR often makes a private-placement investment in a company as it takes it public. Take Accredited Home Lenders, a subprime-mortgage banker that went public early last year. The investment bank bought 511,000 shares at the offering price in conjunction with the sale. FBR's investment amounted to 5.3% of the IPO proceeds, about the portion a lead underwriter might get from such an offering.

Is FBR "tying," i.e., promising to reinvest its fee in order to win underwriting business? Though it has been somewhat commonplace in the past for investment banks to take companies public that, say, its venture-capital arms have invested in, the practice raises potential for conflicts. "These are totally unrelated decisions," Mr. Hendrix says. "Lending or investing especially to generate banking fees is not a great business model."

Of the dozen companies that FBR's merchant-banking arm discloses that it had an equity stake in as of the end of the first quarter, FBR had done investment banking for all 12. If Mr. Hendrix is right and it isn't a great model, FBR may find out soon.

URL for this article:
http://online.wsj.com/article/0,,SB10909...

-- posted by MarketVVizard

» MarketVVizard - Election Cycle Revisited

-- posted by MarketVVizard

» Jas_Jain - Re: Election Cycle Revisited

The coming cycle would be THE WORST in history.

Jas

-- posted by Jas_Jain

» Normxxx - Lots of Cycles = DOW

by Clif Droke | April 14, 2004

This is the year the decennial, or 10-year, cycle falls/bottoms and it always makes its presence known in varying degrees. The previous 10-year cycle bottom in 1994 witnessed a minor bear market in stocks and a minor recession in the economy, as did the previous one in 1984. The one before that in 1974 saw a much more severe contraction in stocks and the economy while gold rallied.

What is it that ultimately causes the 10-year cycle? The causes are complex and varied, and there is probably no way of knowing with absolute certainty the underlying causation. But one very conspicuous parallel can be drawn between the rate of change increase/decrease in the money supply (as governed by the Federal Reserve banks) and the overall vigor of the economy during major cycle bottoms. The 10-year cycle is no exception, and as previously pointed out in a recent commentary, there was a rather dramatic drop in the rate of change in the M3 money supply last year through the early part of 2004. Such declines in M3 aren't usually reflected in the economic numbers until much later -- sometimes by as much as nine months after the slowdown begins. We have now hit the "sour spot" of the M3 slowdown phase when last year's rate of change mini-crash in M3 is being felt.

Witness the excessive worry about the job market in the U.S. This is a major political/economic hot potato and it's only being exacerbated by the 10-year cycle coming down into the fall of this year. Conveniently, that's when the presidential election is scheduled for, and the lessons of recent history tell us that when a drop in M3 is accompanied by a dramatic spike in the price of oil the year or so before an election, there is always a change of administration in November. In other words, these factors ensure that the incumbent president is ousted.

Another thing that typically happens during the year of the 10-year cycle bottom is a rise in interest rates. Not necessarily a dramatic one, but a noticeable one nonetheless. The fourth year of every decade (when the 10-year cycle bottoms) is most often used as a period of adjustment by the financial powers-that-be (read the Fed) to wring out imbalances that have developed during the preceding years of interest rate, dollar, and stock market intervention. This adjustment period is absolutely required to keep the overall financial system intact, just as a steam engine must have vent at regular intervals to prevent an explosion from the excess pressure that builds up over time. Every tenth year just happens to be one of those "steam valve" adjustment periods.

Most important to watch during a 10-year cycle bottom year is the dollar, especially as this latest 10-year cycle bottom happens to coincide with a presidential election. The dollar is of paramount importance during an election year, and with last year's dollar-driven across-the-board boom in stocks and commodities soaring to vertiginous heights, there will undoubtedly be some "correcting" of these excesses this year, and that will mean periodic rallies in the dollar. If my guess is correct, next year will be a continuation of 2003's sustained bull market in stocks, commodities, and gold -- not to mention at least some improvement in the general economy and employment situation -- and in order to ensure this return to better times, the dollar will have to be, shall we say, "adjusted" to some extent later this year. Then it's "off to the races" in 2005!

This year's 10-year cycle bottom likely won't be as severe as the one in 1974, but compared to last year's boom it will certainly be felt by most U.S. citizens. The rate of change slowdown in M3 last year is already making its presence known and probably will continue to until the election this November. It will certainly be interesting to see how it unfolds along the way, although it won't always be a pleasant ride.

As mentioned in a previous commentary, this will likely be the year the financial regulators give the financial markets a much-needed "adjustment" by letting interest rates and the U.S. dollar rally a bit, while at the same time taking some of the excesses out of the stock and commodity markets. We've already witnessed a beginning of this process as the interest rate on the 10-year Treasury yield has really taken off from its recent lows.

This rally in the dollar will take some of the excesses out of the commodities markets, which is needed to keep the inflation rate from getting out of hand.

In a previous commentary I referred to the "necessity" of the 10-year, or decennial cycle. Why is this important long-term cycle necessary? If you look back at a history of the markets you will notice this tendency to have general weakness every tenth year during the "four" year of the decade. This is essential for wringing out the excesses that have built up in the markets and the economy in the previous years along the inflation curve. While no one particularly enjoys seeing financial asset prices slide during the fourth year of the decade, it keeps the system in check for the all-important fifth year of the decade (the "05" year). Did you know, for instance, that in 140 years there has never been a "five year" where the stock market was down? This is a testimony to the bottoming of the 10-year cycle late in the previous "four year." Implication? The year 2005 will likely witness another strong rally in stock and commodity prices, notwithstanding the periodic setbacks that will be suffered along the way in 2004.

In my February 5 commentary titled "Will real estate return to earth in 2004?" I made the following statement concerning the Morgan Stanley REIT index (RMS), which is a leading indicator for the real estate sector:

"I believe we will witness at least one steep correction, perhaps rivaling a "mini-crash," in 2004, probably at some point this summer. This could easily take on the appearance of a 1987-style, straight-down correction that quickly finds support and eventually retraces its losses heading into year-end (more on that in a future article). In other words, I don't expect we'll see the end of the bull market in real estate this year, although I do believe we'll see the first major correction in real estate since 9/11."

Well that prediction has already come true to some extent as of this week as the RMS plunged below its 30-week moving average for a total loss of 100 points from its year-to-date top. The steep correction took place sooner than I expected in terms of time, but the principle is the same: a rampaging bull market always suffers at least two or sometimes three crashes (or mini-crashes) along the uptrend before it finally tops. This is really only the second mini-crash in the RMS index in the past five years so I believe we'll see at least one final upward thrust in real estate prices before the real estate "bubble" finally pops. This could be a humdinger of a rally, though (once the current correction has ended), so be prepared for the most extreme upside move you can imagine.

Why did RMS plunge so steeply? And for that matter, why has silver plunged so steeply in such a short amount of time? Because both the real estate equities and the silver market had pulled way too far out of alignment with their respective 30-week moving averages, the sub-dominant interim trend indicator for these markets. As discussed in my first book on moving averages, whenever price pulls too far above the underlying moving average(s) a steep pullback is guaranteed. For example, when live cattle futures prices on the CME pulled too far away from its 30-week MA it experienced a mini-crash of its own in December 2003.

Undoubtedly there will be some real estate bears growling right about now that the "real estate bull market is dead!" I don't think we can make this diagnosis yet, especially given the position of two very important long-term trend indicators for the RMS index (the leading indicator for real estate)-- the rising trend of the 20-month and 30-month moving averages in the long-term monthly chart of RMS. We really can't make any definitive long-term judgment on the real estate index until the 30-month MA is tested. The 30-month MA (long-term trend indicator) was tested in the Dow Jones Industrial index back in 1998 during the mini-crash that year, which in many respects is similar to the mini-crash now underway in real estate equities. At that time, the test of the 30-month MA proved successful and the Dow had at least one more year of rally left before it topped in early 2000.

Another reason the RMS index plunged this week was in response to the recent spike in interest rates. As mentioned in one of my previous commentaries, 2004 will witness a controlled rise in interest rates, but only a temporary one. Interest rates have been artificially held down for so long that a rally in rates are necessary to prevent the consumer borrowing bubble from getting out of hand and popping prematurely. Again, this is a function of the 10-year cycle.

<img src="http://www.dogsofthedow.com/prescyc-m.gif">
<img src="http://www.dogsofthedow.com/deccyc-m.gif">
<img src="http://www.dogsofthedow.com/dow-1925cpi-...">
Point of Interest - To better demonstrate the true magnitude of the great bull and bear markets of the last century, it is necessary to adjust the Dow Jones Industrial Average for inflation. What the CPI (Consumer Price Index) adjusted Dow chart shows is that the 1966 to 1982 bear market was almost as severe as that of the early 1930s. And since 1982, a true and great bull market has ensued (even when adjusted for inflation.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

» MarketVVizard - Re: Lots of Cycles = DOW

I'm not really "seein'" the 10-year cycle, not to mention much of his conclusions fly in the face of the much more prominent presidential cycle. I think our market has topped out already (long ago) and the next 4 years are going to be tough. Even with this latest tradable rally, volume is low, put call remains bearish, and investor sentiment is very bullish (can you say end of month window dressing?).

Politically speaking -- I still think Bush will win (Kerry is simply too big of a jerk to get elected) although whoever wins is likely to have their image and their party's image tarnished by the likely economic malaise.

Tonight Kerry will be parading the two crewmen he served with that now work for the campaign. It just so happens that these are the ONLY two out of 23 that support him. I have personally listened to some of the OTHER 23 on local radio interviews and believe me, they have a very different story to tell.

A group of veterans will soon try to convince a nation how what is presented on the convention stage tonight -- may not be the full story: "Only 2 of John Kerry's 23 fellow Swift boat commanders from Coastal Division 11 support his candidacy today."
<img SRC="http://images.amazon.com/images/P/0895260174.01.LZZZZZZZ.jpg" height=300 border=0>

A new bombshell book written by the man who took over John Kerry's Swift Boat charges: Two of John Kerry's three Purple Heart decorations (#1 and #3) resulted from self-inflicted wounds, not suffered under enemy fire.

The startling Purple Heart accusations, outlined in detail for the first time, are found in UNFIT FOR COMMAND, Swift Boat Veterans Speak Out Against John Kerry.

And that's just the beginning.

The book hit #2 on the AMAZON sales chart on the eve of the Kerry acceptance speech in Boston.

Swift Boat Veterans began to fume after Kerry's campaign used a photograph of John Kerry and 19 other Coastal Division 11 Swift boat officers [taken at Ton Sun Nuht Air Base on January 22, 1969] in a pro-Kerry advertisement.

William Shumadine, a member of the Swift Boat Veterans for Truth pictured in the photograph, explains in UNFIT: "John Kerry's use of a photograph with his nineteen comrades, with knowledge that eleven of them condemn him and six who cannot or do not want to be involved, is a complete misrepresentation to the public and a total fraud."
_____________________________________________________________________
LOOK OUT MICHAEL MOORE - JOHN KERRY CAN MAKE "DOCUMENTARIES" TOO!!!

<img SRC="http://cache.boston.com/globe/nation/pac..." width=300>



XXXXX DRUDGE REPORT XXXXX THU JULY 29, 2004 09:02:34 ET XXXXX

KERRY FILM DIRECTOR: THE BULLETS IN THE WATER WERE NOT FROM THE ACTUAL EVENT

The official convention video introducing John Kerry tonight, directed by Steven Spielberg protégé James Moll, incorporates homemade film footage shot by Kerry in Vietnam.

“I would have used archival footage,” Moll tells the NEW YORK OBSERVER's Joe Hagan, “but it was a pleasant surprise that he had taken his own footage while in Vietnam.”

"When Army Green Beret Jim Rassman is talking about how John Kerry saved his life,” he said, “I’m using some of that footage. It shows the swift boat and various shots of the swift boat, and some firing like you see in the water. Bullets in the water.”

Entering controversy, director Moll explains how the bullets in the water were not from the actual event.



“It’s just illustrative.”

Moll mixes in the homemade Kerry film with stirring strings and a french horn soundtrack.

Moll is said to manipulate the speed of some of the film.

One moving scene shows Kerry in slow motion, in full gear, walking with his gun through the paddies.

Kerry's homemade films are at the center of a growing controversy in Boston.

A new bombshell book written by the man who took over John Kerry's Swift Boat charges: Kerry reenacted combat scenes for film while in Vietnam!

"Kerry carried a home movie camera to record his exploits for later viewing," charges a naval officer in the upcoming book UNFIT FOR COMMAND.

"Kerry would revisit ambush locations for reenacting combat scenes where he would portray the hero, catching it all on film. Kerry would take movies of himself walking around in combat gear, sometimes dressed as an infantryman walking resolutely through the terrain. He even filmed mock interviews of himself narrating his exploits. A joke circulated among Swiftees was that Kerry left Vietnam early not because he received three Purple Hearts, but because he had recorded enough film of himself to take home for his planned political campaigns."

-- posted by MarketVVizard

» Normxxx - Re: Re: Lots of Cycles = DOW

I take all this with a large grain of salt. There are a number of WWII 'comrades' of Bush, Sr. who maintain that in that combat mission where he came under fire and presumably had to bail out, leaving 3 comrades to perish, that, in fact, Bush panicked and his actions sealed the fate of his comrades, because when he bailed out they would not have been able to evacuate the rapidly descending aircraft.

-- posted by Normxxx

» MarketVVizard - Jeremy Grantham

It just so happens that I was thinking a lot about the presidential cycle today (as if that weren't obvious) and I read this article tonight which coincidentally puts me on the same page as Grantham. Their models are predicting a -1.7% annual return on the S&P 500 for the next 7 years.

The article is a little long and dry, but like I said, worth reading.

I concur that emerging market equities should outperform most other asset classes, and if I had to be long, that's one place I would put some money (and in fact I have retirement account assets in emerging markets).

A good quote: "...the most under appreciated point in investing: long-term investors should all welcome lower prices and their associated higher compound returns... in the stock market, greed is not good, pain is good!"

And for a bit of humor...
"Kenneth Fisher [VViz: he's a respected well known market forecaster for those that don't recognize the name] wrote in Forbes magazine about 3 months ago, in a rousingly bullish article that the bull market would not end until some notorious bears like Bill Gross and me took some public abuse. My first thought was that it was comforting to be tarred with the same brush as Bill. But later on, it led me to also look for odd predictive tools. And I think I have one. I don't think the bear market that began in March 2000 will end until one or two of the public bulls claim to have predicted this long, 2-legged bear market all along."

Classic.

-- posted by MarketVVizard

» Normxxx - Re: Jeremy Grantham

You sure you want to invest in EMs? At the moment, something like 5 have crashed. You really have to be nimble in EMs-- plus, they almost always go down with Wall Street (in addition to their own crashes). It is one of my asset classes, but so far the only strategy I have is to buy after a crash, ride it to the top, and try to exit ahead of the pack.

If I remember correctly, Ken Fisher went bullish after a famous cruise at sea (vacation) when he was struck by the realization that the stock market had gone down just as much as it could or would or should. This was early in 2002!

Bear markets never end until all bulls capitulate or go into hiding (or claim to have predicted it). But I'll bet on 3 legs to the bear and no end until after 2010. 40 year cycle theory says 2010 should look like 1970. Maybe 2022 will look like 1982. I don't think I'll be around to see it, and if I am, I probably won't care.

-- posted by Normxxx

» allancoleman - Re: Jeremy Grantham

excellent post Mr. VVizard . not being as old as Normxxx , i probably will care if Jeremy Grantham's forecast is correct . not for myself as i expect the worst and am prepared . but more for my friends who aren't prepared and will find it difficult to exist on less . some are older and already retired and the job market for them to return to work is almost non existent . and living on less is difficult for those old dogs learning new tricks .

hopefully the future won't be as bad as Jeremy sees it . it'll be interesting to watch . appreciate your work VViz .

-- posted by allancoleman

» Normxxx - Re: Re: Jeremy Grantham

Do I detect a little hubris on your part? In order to be reasonably(?) protected against TEOTWAWKI* you would need an investable (liquid) net worth in excess of $5 million -- probably $10 million-- judiciously diversified across the globe and across investment vehicles.

Do make it a hobby to read as much and as varied accounts of the U.S. crashes in 1929 - 32, 1970's, 1987, 2000 - 2002+, and the Japanese crash of 1989 - ? Of these crashes, only the '30s, the Japanese crash, and (for those retired on fixed income) the '70s could possibly be seen as TEOTWAWKI.

The one thing that you have to expect from TEOTWAWKI is that its onset will always be anticipated by a (not credible) minority), who will become the economic heros of the ensuing years (deserved or not), but for most of us, will still come as a shock out of 'left field.' By its nature, TEOTWAWKI cannot be widely forseen, even among the 'wise.' (What you can do, is insure against every conceivable class of catastrophe-- takes a lot of cash to pay the insurance premiums.)

Finally, learn to control costs! As you have noted, the ability to reduce your lifestyle to a comfortable one which does not require much more than a very modest outlay for food, clothing, and shelter is paramount. Note, I have not included entertainment. You can always take the time to read those books you never had a chance to read before! (And, so far, you can still get free TV.) The biggest problem is always to convince your significant others (especially the young ones, who cannot even imagine how bad things can get) to go along with the program. A side benefit of learning to live frugally (but not stingily) is that you will have more left over to save/invest.

I unqualifiedly respect Richard Russell, but if you had followed his advice on gold (fortunately, I did not), you would be hurting about now-- unless, as he did, you had bought at the bottom when gold was below $300/oz. (in which case, you would just be experiencing a painful trip). The advice is sound, but timing is key!

For example, assuming (but not yet anticipating) a RE crash, do you know how to insure against it-- short of selling your house and moving to a rental or equivalent?

P.S. As I am not in the class mentioned above, I pray a lot (even though I am an agnostic-- couldn't hurt)!

*The End Of The World As We Know It.

-- posted by Normxxx

» Jas_Jain - Re: Jeremy Grantham

I have known this all along and it is very obvious to all except those who love to lose money.

When a long-term "investor" who is religiously doing DCA is happy when the mkt. goes up and unhappy when the mkt. goes down, it is obvious that she is a loser. No?

Jas

-- posted by Jas_Jain

» allancoleman - Re: Re: Re: Jeremy Grantham

hi normxxx . i don't have the 5 million or the 10 million you mention yet . i could very easily have the 5 million in a few more years upon pulling another double . and i hope to live long enough to possibilely pull another double after that which would give me the 10 million .

more importantly to me is i presently have enough money to DOUBLE my present annual withdrawal amount and without making any earnings on the principal , have enough to last more than the next 30 years . and , of course , if i earn anything at all on this principal over the future , i'll still have more money than i can spend intelligently . my present needs are very little . a vehicle for occassonal trips to costco ( love their meat ) and a beach alittle further down the coast where the surf's higher . and lots of walking ,exercise , eating ( i presently do all the cooking for the wife and i ) , napping , swimming , etc .

about the only problem i have i buying all these excellent books you keep recommending for myself and my friends and watching them NOT read them . got any ideas for these folks that aren't prepared for TEOTWAWKT ? ? and that think credit is a way of life . or that spend more than they make ? ?

appreciate your posting . i send alot of your stuff to my friends . keep up the good work .

-- posted by allancoleman

» Normxxx - Re: Re: Re: Re: Jeremy Grantham

Sorry, can't help with your friends. Remember Noah? He got precious little help with the Arc, and I assume it took a miracle of God to save him from his friends once the water started rising...

Sounds like you have your living style about right. Just make sure that one of those 'doubles' doesn't turn into 50% instead! Diversify geographically and across investment types (especially out of the stock market). But be carefull; a lot of those zero balanced long/short hedge funds have gone broke (their short investments went up, and their long investments went down). Do read:
When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein

-- posted by Normxxx

» allancoleman - Re: Re: Re: Re: Re: Jeremy Grantham

i had to laugh Normxxx when you mentioned Noah . i can just imagine Noah running those animals , two by two , down the gangway as the water level came up and his neighbors wanting to bring them selves , two by two , with all their extra baggge on board too . without waiting for their row number to be called no less . .

and you're probably right , God probably did have to pull off a miracle to keep all those people , without tickets , and their baggage , off the boat .

have to agree with you about life style . i figure that is one of the greatest strengths a person has . if you can get your desires in line with your money flow , the rest is just a matter of openning your wallet and paying for stuff . no debts , paying cash for everything , and being happy with the simple things in life makes budgeting easier . heck Norm , all i have to do is pay for pizza ( nature's most complete food . . ) , buy a couple of plane tickets every year from hawaii to alaska and put alittle gas in the vehicles i have on both ends and i'm home free . the condos ( fully furnished down to tooth brushes - makes packing for the flights alot easier ) , bathing suits , surf boards , and the rest is paid for .

and don't forget the hybrids too . . plus the good captain kirk has been a big help in teaching me in how to sort coconuts .

-- posted by allancoleman

» MarketVVizard - Re: Re: Re: Re: Re: Re: Jeremy Grantham

Sounds like you got it made! I don't see why you should attempt to swing for the fences trying for a double over the next 5 years, I would just concentrate on outperforming inflation personally (then again, it might take a double to beat inflation ).

As for "the average guy": Like Norm, I'm concerned that almost NO ONE seems to think about TEOTWAWKI, and as Norm mentioned, even the few that do often have spouses and/or kids that aren't on the same page.

In a disturbingly hillarious article today "Some Americans face nasty surprise as rates rise" 72 percent of people surveyed thought their rates on credit card and home equity loans were fixed! What do you even say to that?

"It's all right to have a nation full of people who never save anything for a rainy day, just as long as it never rains. Unfortunately, America is about to be hit by a tsunami"

My closest friends are usually shocked to find out how well I can live while spending so little. I can say honestly that I could live just fine on a $15,000 a year TOTAL income without having to sell my house (not even including investment income). I've probably said it before, but I love frugal living, I think its fun. I've managed to eliminate or cut to the bone almost every monthly fee imaginable without denying myself anything important. I get almost all my movie entertainment for free (legally), my cell phone costs me $1.25/month (yes, that's a buck and a quarter and that includes the cost of the phone and accessories). No cable/satellite bill, but enjoying high definition and digital programing for free. I get 5% to 10% cash back from my credit card for EVERY purchase. My broadband internet bill is $11.25/month (and that includes a static IP, 15 email accounts, and 1.5 down / 386k upload speeds), just about all the furniture in my house was either free or purchased secondhand at a deep discount. I don't care how rich I am, I'll probably never buy a new car for the rest of my life. I've learned to fix a lot of things (another activity I find amusing/rewarding) - even my riding lawnmower was free (didn't work until I fixed it, now it runs & cuts beautifully). I'm completely satisfied with all that I have been blessed with, and I'd rather give more to worthy causes than squander it away on things I don't need.

Who knows, maybe we are just paranoid nutcases, but it sure would be nice to know that a few more people were prepared for hard times just in case. Simple fact is, even if there is no economic disaster in the next 10 years, it is likely there will be one sometime in the next 40. Better to be prepared, than to get burned as retirement "in style" and with dignity will elude the squander population.

-- posted by MarketVVizard

» allancoleman - Re: Re: Re: Re: Re: Re: Re: Jeremy Grantham

i'm not swinging for the fences . hope i didn't give that impression . at the present i'm taking less than 3% of my critical mass as a withdrawal annually . and i'm earning alittle more than 5% this year . so i'm happy . so my real growth is alittle over 2% which is enough for me .

my last three doubles were all between six and seven years each . one double durning the 90's took only three years . but i doult my next double will take place that quickly especially in this secular bear market .

and you're right about having it made . i'm focusing on my health now and i'm sure i'll start gifting at some point in the future after i can see the end in sight .

i share your concern about people who don't learn from their past losses . it seems like it's a gamblers mood out there . and people are trying to either duplicate their gains of last year or make up for earlier losses suffered in 2000 / 2001 / 2002 . risk management seems to be a lost art and a discussion about it brings blank views from your companions . in spite of sharing your specific numbers with them to show them by example how a simple accounting of totals monthly is effective in generating positive returns . or at least shows one where your losses are to stop the flow of red . it's like they want to ignore reality and hope for something other than what the market wants to give them . i feel the market SAYS the same thing to everyone . but different people think they hear different things and thus the confusion . in the end i could care less WHY the market moves , all i care about is knowing the direction of the move and try to stay on the right side of that move . and i really don't care if it matches others thoughts of what the correct asset allocation is or not . bottom line is it making money or not . if it's not making money , don't be in it . if it is making money , get some more of it .

i totally agree with your living frugally . and it has developed into a life style although i haven't budgeted for years now . as dave ramsey says , " if you live like no one else " ( save every dime and have zero debts ) , then " you can live like no one else " ( later after you've reached critical mass and have no debts ) .

really appreciate all your work in finding all those different articles and links for us . i don't necessarily agree with all of them , but they sure do make one think about what's going on . i also save and attach to my personal e - mails to my friends alot of your posts , articles , and links . but sometimes i feel it's a wasted effort . but i want to share my good fortune with others . it's easier being rich than worrying about being poor .

-- posted by allancoleman

» Happy_2 - Forgetaboutit

I spend my money on suites at the Waldorf for a week every Spring, on buying jewelry on 5th Ave.for the lady of the house, on flying first class to Europe almost every year. Winters in Hawaii and Mexico. Hickey Freeman and Polo clothes, life is more than just scraping by for goodness sake.

I spend many happy hours working in my beautiful gardens. I love sitting on the porch at my beautiful Victorian home in the wine country. Live LARGE. You only go around once!

Retirement forgetaboutit. I love making money.
And, I am going to enjoy it all as much as I possibly can.

-- posted by Happy_2

» allancoleman - Re: Forgetaboutit

can't argue with ya Happy_2 . different strokes for different folks . and i would have to say most live like you do .

-- posted by allancoleman

» pbradford6 - Re: Forgetaboutit

I still argue it is in your DNA to be able to spend it like Happy on one hand and being frugal like Allan is on the other. I always just feel guilty(?) buying things that are luxuries even though we have the means to live large. Weird I know. Once you have saved all your life, it's hard to let gooooooooo. Good for you Happy. Go for the good life.

-- posted by pbradford6

» Normxxx - Re: Re: Forgetaboutit

It helps to be born poor and hate to budget. By learning to be naturally frugal, you never have to budget. (Plus, when I was in my '30s, I semi-retired and returned to school full time on the results of what I had earned playing with options. But, I still had to live modestly-- and I still did not need to budget.)

You're right; with that kind of background you feel guilty if you don't clean off your plate (think of all the starving children in China!)

Since I still trade for kicks, taking a loss of tens of thousands in a trade is no big deal for me, but I still love to save a few buck when I buy something! I never mind the actual price, I just have to feel that I am getting the best price!

-- posted by Normxxx

» DennisL - Re: Jeremy Grantham

VViz, all of those ridiculously low prices and freebies you get that you mentioned in your post, how and where do you get such fantastic deals?

-- posted by DennisL

» MarketVVizard - Re: Re: Jeremy Grantham

VViz, all of those ridiculously low prices and freebies you get that you mentioned in your post, how and where do you get such fantastic deals?

Its sort of an art I guess. For the "old school" methods of frugal living, I recommend a book you should be able to find at any big library, called, "The Complete Tightwad Gazette". But today the old timers have been left in the dust by the electronic age. My favorite web site for hot deals is Fatwallet.com but you have to have some experience to make it useful and learn to filter out all the time wasting clutter. I get ideas from the Forums section, under "Hot Deals" and more importantly, "Finance". In the finance section you will find discussion on how to maximize credit card rewards (I try not to pay cash for anything, which flys in the face of traditional frugal logic), get free money, valuable merchandise (for example I got 3 high end palm pilots this year with almost no effort) and giftcards. You will learn how to transfer balances at 0% interest for risk free investment returns, how to buy gift cards at steep discounts for personal use or resale at a profit, how to exploit loopholes like buying prepaid debit cards using a cash back credit card, or generating cash from credit protector programs. Check "Hot Deals" to find out how to get free DVD rentals and dirt cheap cell phones or internet service (although my internet deal is a little complex and probably not doable for most people). All of this might seem overwhelming at first, or like a big time commitment, but its really not a big time investment once you learn your way, and you can make thousands of dollars annually.

Like I said, I enjoy frugal living. I don't get pleasure from sports cars, polo shirts, sushi, caviar, fine wine, or first class flights (although I do like traveling, in fact I'm going to Egypt in a week).

There's a brief exchange in an interview with a fund manager that I believe is in The New Market Wizards that stuck in my mind for some reason (maybe because I'm a lot like this guy). One of the fund manager's wealthy customers sent him a picture of his new yacht as a thank you because he had purchased it with the profits from the fund. This trader was offended by it and thought "I don't do this so rich people can buy yachts!".

Buy hey, whatever floats your boat (sorry). Personally I think there is a more satisfying way to live than the "Eat drink and be merry, for tomorrow we die" lifestyle. But a transformation has to occur before that light can be seen...

-- posted by MarketVVizard

» allancoleman - Re: Re: Re: Jeremy Grantham

let us know what your observations of Egypt and the middle east are when you return . from a worldly investors viewpoint , it would be interesting .

-- posted by allancoleman

» Happy_2 - Egypt

1. Be sure to see the King Tut exhibit at the Egyptian Museum in Cairo.

2. If you take a Nile River Cruise, highly recommended, the Hilton boat is better than the Sheraton. Also, if you can wait to make your boat reservations when you get to Aswan or Luxor, the cost is half. Do not put your money in the Safe Deposit boxes on the ships. It will be stolen.

3. Best hotel in Cairo is the Nile Hilton. Even if you don't stay there, see the traditional weddings that happen almost every night in the Lobby. Great show.

4. Pay the extra money and fly over Abu Simbel. Worth the money.

5. Go to see the City of the Dead in Cairo and also the two main mosques.

6. Be prepared to be hustled by the cab drivers and tour guides. Everyone wants Basheesh. Take along about 100 One dollar bills for tips.

-- posted by Happy_2

» Normxxx - Re: Re: Re: Jeremy Grantham

Unfortunately, that's true! There was a tremendous sense of family and community during the otherwise bleak '30s. Even the well off (comparatively) and the rich pitched in. My family was as poor as church mice (we were on welfare in an age when they still believed that only n'er do wells accepted welfare; we accepted only because my father was dead), but I remember my childhood as being quite happy. Of course, we had no TV, and everyone I knew was as poor as or almost as poor as we. There was only one family for blocks around that could afford a broken down old car, and the only telephone was in the local 'candy' store and did duty for the entire neighborhood. Telegrams (delivered by Western Union boys in uniform) were only to announce deaths or something equally as bad; telephone summonses were almost as bad. We loved the movies, but considered the people and events in them as if they had lived and taken place on Mars.

The kids lived for the cartoons, sequals, slap stick comedies, westerns, etc.-- kid fare-- hardly anynone was killed onscreen and then, in only the cleanest and most tasteful way; a glimpse of nakedness at 40 yards and screened by a forest in "Ecstasy" was considered an outrage, and barred to anyone under 21 (NO PG13, or even PG17). AND NO FOUL LANGUAGE! The line, "I don't give a damn!" at the end of "Gone With The Wind" caused much public uproar and had to be specially cleared with the hollywood censors. Ah, the simple and naive "good old days" when everyone knew what was right and wrong, we fought only "good" wars in which "our" side were always heroes, etc., etc.

But the world is and was not nearly so simple, now or then.

-- posted by Normxxx

» MarketVVizard - ChIPS

New Bonds Offer Inflation Protection

Popularity of Government TIPS Spurs Wall Street to Issue Securities Tied to Consumer Prices

By JEFF D. OPDYKE
Staff Reporter of THE WALL STREET JOURNAL
July 28, 2004

There's a new bond in town. And like the government's popular Treasury Inflation Protected Securities, its aim is to help investors protect their money against the consequences of inflation.

In response to the success of the Treasury's bonds, known as TIPS, at least seven companies -- including Merrill Lynch & Co., Morgan Stanley and John Hancock Life Insurance Co. -- have begun offering securities whose returns are also tied to the inflation rate.

About $2 billion of the inflation-linked corporate notes have been issued during the past 12 months. People on Wall Street say at least three other major firms are looking at the newly booming market for inflation-linked investments. Including yesterday's $11 billion issuance of the Treasury's new 20-year inflation bonds, the TIPS market is now at $210 billion.

In addition to inoculating a portfolio against rising prices, inflation-protected corporate bonds -- typically issued in five-, seven- and 10-year maturities -- provide investors other perks, including monthly payments that immediately reflect rising prices. TIPS provide semiannual payments that only partially increase alongside inflation.

One downside: Investors owe state and federal taxes on the corporate bonds, while they only pay federal taxes on TIPS. For that reason, the corporate bonds tend to offer slightly higher yields.

The only thing holding back demand right now is the limited supply, says Jeff Barany, an executive director for investment-banking firm Morgan Stanley, which in the fall began issuing its own inflation-protected notes. Those notes were originally aimed at individuals, but have since become popular with Wall Street pros as well.

At Charles Schwab Corp., corporate notes now account for about 20% of the inflation-protected securities that clients are buying.

Like TIPS, which have been around since 1997, these new corporate inflation fighters incorporate an inflation adjustment into their calculus: the widely reported consumer-price index's urban reading, or CPI-U. But where TIPS apply the adjustment to the bond's principal, corporate notes account for inflation in the monthly coupon. That difference ultimately means the corporate notes react more swiftly to interest-rate changes and generally provide more income over their lifetime.

Corporate notes pay out monthly income that moves in line with the consumer- price index.

Appreciation is paid out over the five-, seven- or 10-year life of the note in the inflation-adjusted coupon payments.

InterNotes.com and DirectNotes.com provide links to many issuing companies. Other issuers sell them directly.

Here's how it works for investors: Last September, Household Finance, a unit of financial-services company HSBC Inc., issued 10-year inflation-linked notes with a base rate of 2.55%, plus changes in the CPI-U. An investor buying $100,000 worth of the Household notes would have received interest payments totaling $2,143 for the next six months, according to InterNotes.com, which provides individual investors online access to corporate bonds. As the CPI-U changed monthly, the investor's income would have followed suit.

After paying taxes to Uncle Sam and to a high-tax state like New York, that investor would have about $1,334 left. At maturity, the investor will get back the $1,000 face value of the bond -- its so-called par value. There's no appreciation since the inflation adjustments will have been distributed along the way.

TIPS operate differently. Changes in the inflation rate are applied to the bond's underlying principal, not its coupon, though the coupon will increase slightly alongside inflation. An investor buying $100,000 worth of a similar 10-year TIPS bond in September would have received interest payments totaling $887 during the following six months.

In addition, the TIPS investor is subject to a so-called phantom tax. Every time the Treasury adjusts the bond's principal higher, the IRS considers that taxable income. Thus, the investor owes taxes each year on the increased value, even though the money isn't received until the bond is sold or matures. In the above example, $100,000 worth of TIPS bought in September would have accrued about $679 in additional principal, according to InterNotes.com. Taxes would amount to about $470. The end result is that after taxes, an investor's real income for six months would have been about $417.

"That's one of the key things that investors like about the corporate notes -- they don't have to worry about the phantom tax, about paying taxes on money that you won't see for possibly a year," says Tom Ricketts, president and chief executive of Incapital, which manages the InterNotes program. At maturity, however, TIPS bonds will pay out at their $1,000 face value plus all the accumulated inflation adjustments. The result is that corporate notes are front-loaded while TIPS are essentially back-loaded, as investors will receive most of the inflation adjustment when the bond matures.

The different ways that TIPS and corporate inflation notes adjust for rising prices means that each is best suited for a different kind of investor.

Because of their phantom taxes, TIPS are best purchased within tax-deferred accounts like an individual retirement account. That means they're more appropriate for savers who have no need for current income, but still want their nest egg to fight off inflation.

Corporate notes, meanwhile, may be a better choice for investors "concerned about cash flow right now and keeping up with inflation" in their monthly income stream, says Tom Lee, a director in the global private client group at Merrill Lynch.

---------------------------------------------------

Comparison of TIPS calc verses corporates calc--- If the TIP starts out with a 2% coupon, and the CPI goes up by 1.5% the next six months, the principal 'value' is now $1015, 1.5% higher, per $1000 bond. Then they pay 2%, the initial coupon rate, on $1015, so your interest payment is $10.15, instead of the $10 it would have been with no inflation adjustment. The interest payment adjusts every 6 months until the bond matures. At maturity, the maturity value also adjusts for the cumulative change in the CPI from the time the bond was issued. So, if inflation averaged 3% per year for 10 years, one would receive $1300, without considering any compounding. Also, the last semi-annual interest payment would roughly be $13.

The corporate bond works differently. If the initial coupon is 2%, and the CPI changes by 3% over the last 12 months, then the next monthly interest payment is 2% plus 3% or 5%, divided by 12. There is never any inflation adjustment to the principal.

So the corporate bond fully reflects inflation in the interest payment. The question is after, say, 10 years, with which bond would one end up with more.

-- posted by MarketVVizard

» MarketVVizard - Google

Another thing to be aware of is that Google has a trick up their sleeve to manage earnings going forward -- their cash flow is SUBSTANTIALLY higher than reported earnings due to the fact that they expense stock and option compensation in their financials, and thus far, this compensation has been ENORMOUS.

___________________________________________

Rich Price, Poor Value

Going Dutch could be pricey for Google's new holders, who could see their stock fall

UNDER GOOGLE'S UNUSUAL Dutch-auction share offering, would-be investors must decide the price they're willing to pay for the search-engine company's shares. Given Google's official recommendation -- 108 to 135 a share -- they're likely to overpay. [Google]

Last week Google set that price range on an offering of 24.6 million shares expected the week of Aug. 9. At the midpoint of the range, 121.50, the shares would sell for 93 times the $1.30 a share Mark Mahaney, an analyst at American Technology Research, expects the company to earn this year. Because Google is growing rapidly, that multiple would shrink to only 49 times 2005 estimates of $2.46 a share. The Standard & Poor's 500 stock index trades for 15 times next year's earnings, which are expected to grow 11%.

A better benchmark for Google is Yahoo!, however, with 47 million visitors in June, 24% fewer than Google's. But comparisons don't necessarily flatter Google, or make either stock a value. Yahoo trades for 162 times last year's reported earnings, 90 times this year's forecast and 63 times estimates for 2005.

Industry fans argue such rich multiples are supported by Yahoo's raid growth, a characteristic Google shares. Indeed, Google's per-share earnings are expected to surge 226% in '04 and 89% in '05. Skeptics believe the market instead will start to focus on the company's earnings deceleration -- to around 30% a year -- as the law of large numbers takes hold.

Another law is also at play here: that of advertising cycles, which ensures Google's profit growth will be "lumpy" over time. Yahoo's earnings, for instance, fell 85% in 2001, as the dot-com boom went bust and ads disappeared. Should the economy falter in the next five years, the search-engine industry's ad sales -- and price/earnings multiples -- are likely to falter as well.

The Dutch-auction format makes Google's valuation especially tough to forecast. Barron's was early in alerting investors to the company's IPO ("Waiting for the Big One," Oct. 13, 2003) and possible Dutch auction, in which investors submit the number of shares they'd like to receive at a certain price. The company first will fill bids at the top price offered, working its way down to a clearing price for all the shares offered. Pundits talk about a winner's curse in Dutch auctions, because shares often trade down in the aftermarket once investors willing to pay top dollar hold the stock.

A better bet might be Microsoft, at around 28.50 per share. The company is planning to launch search software this year that can locate files on a computer as well as the Web. Microsoft was the subject of a positive cover story in last week's Barron's.

-- Jacqueline Doherty

-- posted by MarketVVizard

» MarketVVizard - Obesity

[Posted July 30, 2004]

We are advised that America is experiencing an "Obesity Epidemic", as if it is some sort of contagious disease. Government "officials" tell us that Americans are becoming obese at an alarming rate; they appear on network news programs warning of the health consequences of being overweight. Politicians talk about taxing fattening foods to stop us from harming ourselves. Meanwhile, morning news programs and pop-culture magazines promulgate the claims, and back them with anecdotes, personal stories, and offers for weight loss products that can change one's life.

Perhaps nowhere was this more in evidence than on ABC in June. For an entire week, ABC's "World News Tonight", and "Nightline" devoted as much attention as possible to the terrible trend towards morbid obesity in America. Culminating over a year of government warnings that began in January of 2003[i], the floridly titled, "Critical Condition: America's Obesity Crisis" criticized fast food restaurants, advertisers, private insurance companies, employers and, of course, free will.

At the same time, the features sang the praises of such ideas as taxing fattening foods, and using government programs to combat this pressing emergency.

The high point came on June 2, when correspondent Michelle Martin appeared on "Nightline" to sum up the entire ABC perspective.

Introduced by the urbane and restrained man of journalistic ethics, Ted Koppel, the program began with a derogatory cut on talk radio, where, Mr. Koppel said, he enjoyed "listening to the verbal agility of the host and the absolute certainty with which he plunges into areas about which he clearly knows nothing."

This implied that Mr. Koppel knew something the talk host did not, which is clearly what we ought to assume, since Mr. Koppel is, after all, Mr. Koppel.

He went on:

"Anyway, I gather that my friend, the radio host, was put out by the notion that obesity might be the responsibility of anyone other than the obese person… This was one of those classic rants about freedom and responsibility. We are all free, in other words, to eat whatever we want. And, if we become grossly overweight, it is our own responsibility and nobody else's… Bluntly stated, if you're fat, it's your own damn fault. There is some truth to that. But if, for example, you are poor, live in the inner city, and have no transportation of your own, you are significantly more likely to be obese, than if you are well-off, drive your own car and live in the suburbs. And while education does make a difference, it's not the key factor. Take a look at what 'Nightline' producer Marie Nelson and correspondent Michel Martin found."

The core of the ABC argument was thus stylishly presented, or, to be more precise, it was deftly implied. According to Ted Koppel, Marie Nelson, Michel Martin and "Nightline", true "thinking people" know that obesity is not one's own fault, it's the fault of society. It's almost as if we are being told, "watch the show, and learn!"

Well, let's study the major portions of the presentation…

"The Centers for Disease Control estimates that one out of four adults with incomes below the poverty level is obese," reports Martin in the "Nightline" piece. "The correlation is especially true for women. Those with incomes below the poverty level are more than twice as likely to be obese as women with the highest incomes."

Her opening thesis is stated more generally and more overtly by one of her interview subjects, Dr. Adam Drunowski, of the University of Washington. An outspoken proponent of economic determinism for obesity, Drunowski claims quite defiantly, "Well, some people say that obesity is a result of a low metabolism. I say it is really the result of low wages."

Which means a lot when you think about it… When you think about it the way ABC and Dr. Drunowski would prefer.

In their view, obesity is an indictment of capitalism, the result of an out of control system which caters to the "haves" and neglects the "have-nots". According to Martin, Drunowski, and others who support the belief that higher rates of obesity in the inner cities are not just correlated to, but caused by poverty, the free market system which has brought the United States such plenty is rigged against the poor. While it provides unlimited nutritional choices to those who live in the suburbs, drive cars, and can make it to large supermarkets, it offers only junk and fast food to those who need nutritious meals the most, and who can't get outside the city.

To illustrate her point, Martin joins a Detroit resident named George Bogen, a man who weighs over 485 pounds, and who has taken steps to lose weight. One such step is to walk home from work. Unfortunately, according to Martin, his poor environment is bereft of affordable "good" food, and is "a gauntlet of fast-food restaurants and convenience stores."

Thus, the noble Bogen is left "on his own" to try to get past the McDonalds and chain stores that call like Sirens to him on his odyssey. This, clearly, is a state of affairs which not only indicts capitalism, the system that put these trashy food places in his way, but also those who would try to keep government small, and not give him help trying to combat the psychic torture of having to walk past such enticing sites. Letting a local doctor speak for her, Martin implies that Bogen is at a disadvantage because government "insurers" will not reimburse for obesity-related counseling.

And so, with a few more flourishes about people "dying from obesity", and attacks on the lack of availability of "healthy food" at corner stores, Martin ends her piece by calling on Dr. Kimberly Dawn-Wisdom, Michigan Surgeon General. According to Dawn-Wisdom, one way to help alleviate the problem would be to:

"Provide affordable fruits and vegetables... And help individuals understand and empower them to know how to cook these vegetables, how to prepare them, how to serve them regularly."

And there you have it. What the ignorant radio host who believed in free will didn't understand was that capitalism has set up so many roadblocks to good nutrition in the inner cities that people simply cannot get good food, and are forced to become obese. Additionally, this daft talk host had better wake up to the fact that we need taxpayer funded fruit and vegetable programs, and obesity counseling to rectify the problem that capitalism has caused! Yes, the "Nightline" crew knows more than the talk host. And now we know as well.

There are, unfortunately, a few holes in this line of reasoning. Besides the fact that the government classification of "obese" could apply to people such as Russell Crowe and George Clooney, the very scientific claims about obesity being tremendously life-threatening are also in dispute. According to The Guardian, a 1996 project at Cornell University gathered data from dozens of previous Body Mass Index (BMI) studies "involving a total of more than 600,000 subjects with up to a 30-year follow-up."

According to the macro study: "Among non-smoking white men, the lowest mortality rate was found among those with a BMI between 23 and 29, which means that a large majority of the men who lived longest were 'overweight' according to government guidelines." When looking at non-smoking white women, "The conclusions were even more striking. The BMI range correlating with the lowest mortality rate was extremely broad, from around 18 to 32, meaning a woman of average height could weigh anywhere within an 80-pound range without seeing any statistically significant change in her risk of premature death."[ii]

Other statistics would seem to buttress these conclusions. While the "obesity" rate as characterized by government spokesmen has been increasing dramatically, the average life expectancy has done nothing but increase as well. In May of 2004, the Centers for Disease Control reported that life expectancy had risen from 75.2 years in 1990, to 77.4 years in 2002. All of this while people in the inner city were running the gauntlet of fast food and corner stores, and the federal government looked the other way when it came to providing obesity counseling for the poor.

And what of the claims made by Martin and her interview subjects that our free market system has hampered poor people in their search to buy good food?

This is a matter of economics. Anyone who runs a retail business or has worked at one, or even thought about how one operates, knows that utilization of shelf space is determined not by the heady notions of marketers and faceless capitalists who control the lives of helpless consumers, but by the store owners, based on what they correctly recognize as consumer demand in their stores.

The space provided for apples, oranges, bananas and tomatoes in a corner store is not tiny because the owner is cruelly keeping fruit and vegetables to a minimum in his establishment. It is tiny because he does not sell enough of those products to justify using up more productive shelf space. In other words, people like George Bogen have shown time and again that they prefer junk food and fast food over the "good" food Martin and her coterie of "experts" want them to eat.

One need not get first-hand evidence to confirm this fact. It is simply a matter of supply and demand. But if one did want to back it up, he need only do what I did: walk into a local chain store. In my case, it was the Seven-Eleven located on my way to work, a place where I frequently grab an apple and chocolate milk to go with a sandwich for lunch.

When asked if he would stock more fruit and vegetables if there were more demand for it over, say, Fritos and soda, the manager said, "Of course!"

When told about the argument offered by Michel Martin and the proponents of government intervention in diet, he laughed very loudly, leaning back from the counter.

"That's crazy! They don't know who is in charge here!"

No, they don't, and not many people involved in trying to regulate the choices of consumers really do. But that doesn't stop them from trying. The reason they continue in their Quixotic struggle is that they believe, in large or small degree, in the Marxist myth that the owners of the means of production make people buy things. With their Svengali-like powers, these capitalists can mesmerize people, turning them into consuming automatons, exploiting them, and pointing them towards dietary choices like chips and cookies and Big Macs when, under the control of the government, the choices offered would be highly nutritious fruits and fibers. [VViz: As a side note -- Kim Jong-il, the insane communist ruler of North Korea officially lifted his ban on hamburgers last month!]

Of course, it isn't the business owner who is in charge of the transaction, it is the consumer. Unless the consumer is willing to part with his cash, he will not spend it. Unless the consumer sees what he desires, the business owner will not be able to stay in business. As it turns out, the owner of the means of production is always at the mercy of consumer taste, and the proportion of convenience store shelf space devoted to "good" food is determined by this taste as well.

Based on Michel Martin's report, George Bogen had two sisters. One of them had private insurance and got gastric by-pass surgery when she weighed 350 pounds. The other passed away. His surviving sister told Martin, "If they could see a picture of my sister laying in a casket, and know that on her death certificate it says 'immediate cause of death, obesity,' then maybe that will wake up the government."

It would be preferable to let the government rest. It has been far too busy tinkering with our private lives as it is. The last thing store owners like my neighbor, I, and the other consumers who frequent his establishment need is a government superceding our own preferences regarding what we eat to stay alive.

-- posted by MarketVVizard

» MarketVVizard - Presidential Election

Bush 7/26 49.7
Bush 7/27 49.1
Bush 7/28 50.0
Bush 7/29 50.4
Bush 7/30 51.0
Bush 7/31 52.8
Bush 8/01 52.5

but this electin is still neck and neck. Some traders would prefer the "deadlock" that might come from a Kerry win but Republican control of congress. Others still believe Bush will be best for the economy with low taxes and plenty of stimulus (that we will pay for in some other decade presumably). I actually have no idea which guy would run up more debt longer term, but I don't think higher taxes without massive budget cuts is the answer.

Which reminds me, one of the things that really stood out to me in reading The Great Crash was the brief mention of taxation at the time (Chapter 8). In order to provide some releif, Hoover cut taxes IN HALF. But the thing that is so startling is just how LOW taxes were at the time. Someone earning $150,000/year (in today's dollars) was paying just $1800/year in taxes. That's a federal tax bracket of 1.2%! And that is BEFORE Hoover cut the tax rates almost in half! This just goes to show you how ENORMOUS and bloated our government has become since then!

-- posted by MarketVVizard

» Normxxx - Biggs: Europe and EM

By Kate M. Welling | 2 August 2004

How to introduce Barton Biggs? Why bother, especially to an audience of institutional investors? Traxis Partners, the $2 billion global asset allocation investment group the erstwhile dean of Wall Street market strategists runs with two former Morgan Stanley colleagues, Cyril Moulle-Berteaux and Madhav Dhar, celebrated its first birthday on June 1, having produced a 21.6% gain in its first stub calendar year of operations. This year, they’ve been “struggling mightily,” says Barton, as have most investors, to stay basically flat, but he still evinces confidence that Traxis’s yearend results will be reported with a plus sign. Indeed, Barton seems to relish the challenge. Still, Barton’s return to hedge fund land has left no small coterie of investment managers sorely bereft. Market-watching just isn’t the same without regular exposure to his highly literate musings on investment Sturm und Drang—or, at the moment, lack thereof. What better reason to give Barton a call?

  more. . .

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

» MarketVVizard - Latest from ContraryInvestor [Housing]_______________

Different Bubble, Different Outcome?

The Inverse Of Multiplication...In case you've forgotten grade school math, that's division.  Well, there's certainly no question that there's one thing that has multiplied like wildfire over the last half decade, and that's residential real estate prices.  As you know, the debate has currently appeared in the mainstream as to whether a bubble exists in household real estate asset values.  A few weeks back, in a study published by the clairvoyant folks at the Fed, the emphatic declaration was "no way".  (Remember, the Fedsters are currently 0 and 1 in terms of "a priori" bubble recognition.  Luckily for them they still have a chance to redeem themselves if they get to work now by correctly identifying any one of the current number of other bubblicious asset classes of the moment.)  In response to the documented Fed real estate appraisal, a research report put out by HSBC officially and professionally concluded "yes way", bubble conditions do exist in the land of US residential real estate prices.  We're not going to debate the bubble characterization issue except to say that in our minds, bubble conditions exist in real estate finance.  Although we have some pretty solid guesses, how the ultimate ebb and flow of the mortgage finance cycle plays itself out remains to be seen at this point.  

You'll remember from discussions past just how meaningful residential real estate as an asset class is to US households at the moment.  Here are some facts from the recent Fed Flow of Funds report that documents the story and pretty much puts asset class exposure into direct perspective, especially over the last half decade.  (To be fair, we've included household mutual fund holdings in the common stock asset class category along with individual stock holdings.) 

Clearly, the first and most obvious observation is that accelerating residential real estate values kept household net worth largely moving forward during one of the greatest equity bear markets in many decades.  As of the end of the first quarter of 2004, household net worth rested at an all time high.  And so did the value of household real estate assets.  As you can see, despite the recovery in equity markets, household exposure to common stock is below where it was at year end 1998.  Secondly, it's clear that real estate has become a much more meaningful asset class to households relative to their common stock holdings over the last four years.  At year end 1998, household net worth exposure to common stocks and residential real estate was about equal in dollar magnitude.  As of the end of 1Q 2004, household residential real estate values exceeded household common stock holdings by 67%.  In our minds, this has put real estate front and center in terms of the so-called household "wealth effect". As mentioned, we've been through this conceptual material before.  Suffice it to say that residential real estate values are very meaningful to the total current picture of US household net worth, to say nothing of emotional and financial well being. 

Different Bubble,  Different Outcome?...Without us having to say it, it's a pretty good bet that a downturn in residential real estate values would not be good for forward household confidence.  But if a real estate downturn were to become serious enough to trigger meaningful financial defaults, the potential consequences become much more dark than just households feeling blue.  Much more dark for the entirety of systemic credit expansion stateside, and the Fed's theoretical ability to revive and/or stimulate the broader financial and economic system.  Essentially, we're referring to the popping of a price bubble.  What we're leading up to here is that the very fact that asset bubbles, or potential assets bubbles, exist does not necessarily pre-determine massive fallout across the broader economy in the event of their popping, but rather it's how they are financed that just might be the key issue in terms of potential economic and financial fallout.  As you know, at least so far, the popping of the NASDAQ bubble four years back did not take the US economy directly into some type of deep recession or semi-depression.  At least not in terms of headline economic stats.  Certainly a lot of folks lost a lot of real money, but one of the keys to economic and financial survival so far has been the fact that lending institutions of all types were about to embark on a massive interest driven lending spree.  Broad potential for credit expansion was not hampered in general by the NASDAQ price pop.  And it's really no secret as to why.  Quite simplistically, the stock market bubble was not financed by the banks.  It wasn't financed by Fannie and Freddie.  At least not directly.  It was financed by pension funds, mom and pop investors armed with personal, IRA and 401(k) money, and it was financed late in the game by foreign interests unable to avoid the temptation of joining the party.  And, yes, in part it was financed by margin debt.  But compared to mortgage debt in the system, margin debt even at its peak was an absolute dollar rounding error.

Real estate is different.  At least as far as the banks are concerned.  And in a severe real estate downturn, FNM and FRE would probably wind up as basket cases.  At best maybe it's just their equity holders that would handle basket case duty.  The big difference in the popping of the equity bubble versus the popping a potential residential real estate bubble at the moment is the financing.  As we have shown you before, the US banking system is a huge player.  Remember, it's not just Fannie and Freddie financing every piece of real estate in this country.  The numbers simply speak for themselves.  As you can see, the commercial banking system in the US is pushing toward $2.5 trillion in total loan exposure to real estate, both commercial and residential.  Also critical to keep in mind is that what you see below is only lending activities.  On the investment side of the equation, US commercial banks have plenty of real estate related "paper" exposure in the form of direct investments in government agency debt, CMO's, GMNA's, and other assorted real estate mortgage related investment exotica.
         

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="491" height="432">
        

And, in our minds, the big difference for the US financial system if real estate values were to "pop", so to speak, is to be found in the multiplier effect inherent in fractional reserve banking.  For the sake of conceptual argument, we'll keep the numbers really simple (for ourselves more than anyone else).  Let's use a bank deposit "reserve requirement" of 10%.  The bottom line is that every dollar deposited into the banking system can ultimately potentially "create" $10 of credit expansion.  With a $1 deposit, a bank must keep 10 cents in reserves and can then lend out 90 cents.  Assuming that 90 cents purchases an asset and the seller of the asset deposits the 90 cents into the banking system, 81 cents can then be lent out (90 cent deposit less the 10%, or 9 cents, reserve requirement).  On the very first lending transaction, we've now created $1.71 of new credit for the $1 dollar originally deposited into the system.  Extend the lending possibility example to its mathematical conclusion and $1 has the potential to create $10 in new credit.  Simplistically, this is the very mechanism by which we conduct modern day "fractional reserve banking".  No big mysteries.  It's a wonderful life, right?

But what happens when defaults occur in the banking system?  Well, the machinery is thrown into reverse, whether voluntarily or not.  When a bank loses a dollar through a loan default, its original liability to depositors does not go away.  At the start of a default process, the bank simply loses $1 of its own equity.  It has to take money out of shareholders pockets to repay depositors if it loses their money in lending activities.  But, moreover, and a bit conceptually, the $1 a bank loses in a loan loss is another $1 it cannot turn into $10 of new credit expansion.  This is the double edged sword of fractional reserve banking.  Very simplistically, loan losses can beget credit contraction, dependent of course on the severity of system wide loan loss experience in any asset class.  Again, in our minds, a potential popping of the theoretical (for now) bubble in residential real estate prices could foster quite a different outcome for the real economy and financial markets than did the bursting of the NASDAQ bubble four short years ago.  The popping of the NASDAQ bubble took mom and pop money down the drain, it blew a hole in many a corporate pension fund, and postponed the retirement dates for many an IRA dependent household in the US.  But what the popping NASDAQ did not do was impede systemic credit creation.  Alternatively, a severe downturn in real estate values that triggered real mortgage loan defaults would, in part, act to set into reverse the US banking system fractional reserve multiplier mechanism.  A severe or prolonged enough downturn in real estate would, from our point of view, at the very least call into question the rate of change in US financial system credit expansion possibilities.  In other words, different bubble, very different outcome for the real US economy.  The real US economy that has become extremely dependent on credit expansion at ever accelerating rates.

As you know, we've experienced real estate downturns in prior cycles.  The late 1980's/early 1990's was the latest in what has been a series of historical replays of real estate asset price cyclicality.  And during these periods of historical real estate price downturns, banks have backed off in terms of their real estate related lending activities.  You'll see this in the chart below.  But what is also clear as a bell is that as a percentage of total bank loans and leases outstanding, US banking system exposure to real estate has never been higher than we now experience.  One quick note, what you see below does not include banking system exposure to home equity lines of credit.  That probably pushes the current number to something near 55%+.
      

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="446" height="362">
      

Greenspan and the Fed can do all of the tough talking they'd like about standing ready to raise interest rates if inflationary pressures even sneeze.  But the reality is that they will not be able to tolerate a pop in the mortgage finance bubble.  That will not be acceptable as the fallout would seem much more severe systemically than was the case with the equity bubble burst.  And, as you know, we have not even mentioned potential impacts on the large GSE's that are holding a good chunk of the remaining mortgage debt in this country.  Or the fallout a significant GSE problem would transmit throughout the system.  You remember the GSE's.  Folks like Freddie Mac, who still can't seem to be able to produce accurate financial statements and supposedly won't be able to until next year.  Just be patient, right?  Or Fannie who clocked in at 2.2% equity to total capital as of 12/31/03.  A potential GSE problem would not only be a huge negative for shareholders, but could put a severe dent in the US domestic fixed income market.

What Do We Do For An Encore?...A few last pictures of life in the residential real estate world as we have known it over the recent past.  Unless mortgage interest rates plummet at least 100+ basis points or more from where they stand today, it's a good bet that the momentum of the recent refi cycle is over.  Is what you see below perhaps the ultimate head and shoulders technical chart formation?  For the sake of credit expansion fostered by the US banking system and GSE complex, let's hope not.
       

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="470" height="443">
      

In recent months, we have likewise experienced record existing and new home sales, as well as record corresponding construction activity.  But as with refi activity, is mortgage financing beginning to peak on a rate of change basis?  Remember, what's important for the economy is not necessarily residential real estate prices, but rather the volume of financing activity occurring in the system.  That's what makes aggregate credit expansion go.  And that's what has kept liquidity flowing into the real economy via the mechanism of household consumption.
       

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="481" height="462">
      

Interestingly, the mortgage financing opportunities of the last two+ years plus the incredible fiscal and monetary stimulus pumped into the economy surely helped squash what was a rising mortgage delinquency rate that started to accelerate relatively dramatically in 1999.  Now that both of these transitory phenomenon are fading (refi opportunities and further monetary and fiscal stimulus), it will be very important to monitor delinquency rates ahead.
         

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="448" height="409">
       

But although down from recent highs, and certainly quite small relative to total mortgages outstanding, the mortgage foreclosure rate as of the end of the first quarter of this year still remains at a relatively lofty level against historical experience.
        

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="461" height="388">
       

For now, the US economy and financial system has proven that it can withstand an equity bubble implosion.  Of course the price for that resilience has been record monetary and fiscal stimulus, record credit expansion, record trade and budget deficits, etc.  We're not so sure that a meaningful setback in US real estate prices would produce a similar outcome.  Especially since the monetary and fiscal authorities have largely plundered their financial ammo supply.  And especially given the fact that the provocateurs of recent systemic credit largesse, the banks and the GSE's, would take a direct hit to the balance sheet.  In our minds, all bubbles and not created equally nor do they deflate in similar trajectory.  For now, the system has been able to withstand the bursting of one financial bubble.  Let's just hope it isn't called on for an encore performance.

Taking Stock...Again, at the moment it's just a bit too early to call for significant mortgage credit defaults ahead.  Something like that just doesn't happen over night.  But we suggest that at the moment, the probability for this type of occurrence to unfold has not been higher in many a moon.  Roughly 35% of recent mortgage refi and purchase related activity has been ARM vehicles.  Total ARM debt outstanding in the US system right now is pushing 18-20% of total mortgages outstanding.  It's a very good bet that a once in a generation interest rate cycle has seen its best days.  For some time now, we have been harping on the fact that wages will be critical to the forward movement of housing prices as anomalies in financing begin to deteriorate.  And at least for now, wage growth in the US is negative in real terms.  The year over year change in domestic wages is running close to 1% below the year over year change in the already lowballed CPI.  Overlay on this the fact that 47% of total US Treasury holdings are in the hands of the foreign community, and really never has the potential for forward interest rate volatility in US financial markets been more of a question mark.  We're not suggesting that the end of the world lies around the corner.  You can see in the chart above that a little less than 1.3% of US mortgages are in foreclosure at the moment.  But we suggest that it won't take much in the way of defaults to spark a problem, whether real or emotional in the eyes of lenders.  As we mentioned, Fannie is sitting on just 2+% equity capital.  In our minds, key to the US residential mortgage credit quality equation ahead will be interest rate volatility and real US wage growth.  Simple enough?  A deterioration in mortgage credit quality will be a process, not an event.

For now, we need to listen to what the markets are suggesting.  After all, if a mortgage credit problem is to arise stateside, the markets will have at least begun to discount it well before the reality becomes a consensus viewpoint.  And at the moment, the market appears to be telling us that broader housing momentum is slowing.  This is where any longer term problem of heightened financial risk is going to start.  As you can see below, the Philly housing index (HGX) stands at a critical technical crossroads.  The price as of month end rests at the current meeting place of the 50 and 200 day moving averages.  And it is crystal clear that the 50 and 200 day MA's have not met up like this since the equity market rally began in early 2003.
         

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="460" height="266">
       

Even more definitive from a technical perspective is the current picture of housing as described by the Dow Jones Home Construction Index.  The 50 day MA crossed through the 200 day MA to the downside last month and it sure appears that a pretty classic head and shoulders pattern is in place.  A break of the H&S neckline to the downside will be anything but good news for the broader housing industry.
         

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="460" height="266">
       

If and/or as macro housing industry fundamentals begin to deteriorate, watching the mortgage lenders will become a necessary exercise along with monitoring mortgage delinquency data.  Specifically, we'll have our eyes on the banks and Fannie.  For now, the banks recently made a new high (the Philly Banking Index) and have returned to test the breakout.  Certainly one thing to be aware of when looking at this index is the influence of M&A in the index price at any point in time.  Surely the recent Fleet and Bank One acquisitions gave the BKX a little price boost that pushed the index into record territory.  Absent any other large take over activity ahead, we should know in relatively short order whether the recent break out to new highs was simply a fake out.
        

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="460" height="266">
       

Maybe more important as the potential canary in the coal mine is Fannie.  What has struck us for a good while now is that despite absolutely record breaking refi and new mortgage activity during 2002 and 2003 (and into early 2004), Fannie has not been able to make a new high as a stock.  In fact after peaking in late 2000, Fannie is essentially putting in a series of relatively well defined lower highs.  We suggest that the ultimate resolution of the longer term wedge formation that is clearly obvious in the weekly chart below will be very telling as to mortgage credit quality stateside going forward.
       

<img border="1" src="http://contraryinvestor.com/imagesCImain..." width="505" height="266">
       

Although it may sound a bit melodramatic, an even semi-meaningful problem with mortgage credits in the US financial system ahead will spell a very different outcome for the real world financial markets and economy than was the case with the popping of the equity bubble a few short years ago.  For ourselves, we'll be watching housing industry fundamentals, mortgage paper credit spreads, delinquency characteristics, and the stocks of those folks near and dear to the mortgage finance industry like a hawk.