I really can't understand how anybody can be bearish at this point. The reason it doesn't make sense is that a) The subprime crisis is almost over, everybody who wanted to walk away did, everybody else is saved by the bailout package that will materialize in the next few weeks b) The banking crisis is over after the bankruptcy of Bear Stearns, c) Oil price has got as far as it can possibly get, and d) The Dow has dropped almost as far as it can possible drop before Bernanke sends in another helicopter. When all 4 shoes have dropped, there is little the market can do but go up. Then again, without these Chicken Littles we wouldn't get today's reasonable prices... [more]
TMF Bent has this to say about Hussein O$ama in a comment to this post: [more]
The Case-Schiller index is often quated as an evidence that prices are tumbling. Now, this conclusion is dead wrong. There is almost zero correlation between the index and your chances of getting a reasonable price for a house. Why? For two reasons. First, the Case-Schiller is a weighted index. In other words, when a $10M castle gets 1% cheaper, and 100 $100K houses get 1% more expensive, the index thinks that prices are stable. So when the top decile that did get a little frothy corrects, it will produce a dramatic change in the index without necessarily changing things on the ground. The second reason is that the Case-Schiller tries to be a hedonics index that measures quality changes, such as footage. The footage, of course, always grows in time, meaning that C-S countinuously makes housing appear cheaper than it is. This fotage increase, however, cannot be attributed to changing consumer preferences, becuase it's driven almost exclusively by the building departments that prevent developers from listening to the market where the demand is for smaller houses, forcing them to build in the luxury segment only. Now that some of these guargantuan houses are on sale, the index naturally reflects this. However, there is little consolation in this for 90% of buyers, because a discounted McMansion is still a McMansion and still way out of the affordable range. While C-S may be a usefull gauge for the new construction market, it is quite useless for the average buyer. As a bone to the bears, there's no use denying that C-S is down substantially. [more]
Take a real problem, unpleasant but not that hard to solve. Then take a bunch of professional activists who are out of a real job and make their living by exploiting the problem. Then take a bunch of officials who have money that needs to be wasted. Then take private interests who are eager to meet that need and want to make sure that the problem, the officials, and the public funds are still in place tomorrow, and the day after, and the day after that. Mix it all together, spruce it up with a little financing, and you'll get the situation with homeless students in Chicago. [more]
To pay $130 for a barrel of worthless liquid hoping that an even greater fool will buy it from you for $140 is bad enough, but at least you can burn it, producing some calories in the process. Now, buying shares of producing companies, drilling companies, exploration companies,and oil rig producing companies, and paying a PE of 10 for these shares at the very peak of the bubble is a much crazier idea. You have a dying industry that has maybe 10 years of life ahead of it, and you buy at the moment when the price reaches a level that would be unsustainable even in the absence of wind, solar, ethanol, etc., and you think 10 times this year's profit is cheap? Think again. The typewriter industry was profitable in 1985, but how many years of profit were still left ahead of it? How much money would you earn buying typewriter producers for 10 times 1985 profit? Well, let's see, you make 10% in 1985, 9% in 1986, 8% in 1987, then your company has to upgrade its manufacturing facilities to roll out its new line of electronic typewriters, so you get zero profit in 1988, then you earn another 5% in 1989, then your company spends the entire year 1990 fighing obsolescence of its new products that are no longer new, then it breaks even in 1991 and 1992, loses money in 1993 and 1994 and closes shop in 1995...Hopefully it did not get into debt...if its balance sheet is not a total disaster, then someone might conceivably buy the company for the sake of the crumbling factory building...Fast forward to 2008. You have solar companies that are about to achieve grid parity (think 80286 ready for launch), and you have investors standing in line to buy oil companies just as they are busy squandering their windfall profits to invest in infrastructure that can produce oil at a profit as long as prices stay above $80. Good luck with that! And now comes the sweetest part of the deal. When these speculators crash and run to Benny B. for help, what kind of help can he offer? The only way to make them solvent is to support oil prices, making everybody else pay $4 for a gallon of gas. Sounds like an easy bill to push through congress, doesn't it? House flippers were at least rational, they knew that the government would bail them out if the bet goes wrong. [more]
I am still following NY price trends. So about 3 weeks ago I signed up to receive free email alerts from The New YorkTimes real estate section each time a new property appears on the market. (For those of you who don't live here, The New York Times is the most comprehensive online source of data; if an ad appears in some other newspaper, on an agency web site, on Craigslist, Yahoo, you name it, and if the seller is serious and the ad is not a fraud, it will be in NY Times). So I signed up to receive alerts for any new 2-bedroom coop or condo for sale in my neighborhood (it's mostly apartment buildings out there, so apartments are the prevalent type of property on the local market), in the realistic price range (cutting off the two tails of the bell-shaped curve to weed out properties priced uncharacteristically high or low). Well, how many new properties do you think hit the market in 3 weeks? Well, the answer is one. That's right, exactly 1 new property in 3 weeks. It was a condo priced under half a million becuase it was built in a slum. And now the icing on the cake: it was a "new" property in the sense that the broker put a new ad for that condo (no price change, just a new date under the text of the ad); the condo itself had been on the market for a couple of months. Talk of overbuilding and a glut of new inventory. [more]
I'm wondering why this issue receives so little attention, but the fact is, the US economy is now looking an athlet running with 20-pound dumbells attached to his legs. From the investing standpoint, the cowboy's Irak adventure was a godsend because this is one reason we still can buy stocks so cheaply. This is not PE=3, to be sure, but putting illusions aside, stock prices are as cheap as they are likely to get. All right, but everything good comes to an end, and this includes stock sales. 7 months from now Obama will walk into his Oval Ofiice, and the first thing he will do is tell the troops to take to their heels. So there'll be hundreds of billions of savings, the equilvalent of receiving Bush's stimulus package next year and the year after that, etc., except the money will be real, not printed. Of course the troops will not run away in one day, it will take some time and even some frictional costs, like printing several millions of leaflets to convince ourselves that we won, but the markets also don't need to wait till the last moment. For example, when Bush said the stimulus checks will arrive in May, the market rallied in February. So we have at least one catalyst that is all but certain to begin affecting the market in Dec-Jan. How strong this catalyst is going to be? Well, if Bush's one-time (and highly inflationary) rebate took us from 12000 to 13000, shouldn't we expect a more permanent and more real tax relief to do at least as much? All other things being equal, if the Dow holds the 13000 level in Dec, I'll expect the Christmas rally to take us to 14000 in the conservative scenario, and 15000 by the end of winter will not be out of the question. [more]
The new information market participants are expecting today is the minutes from the Fed, which, as Yahoo Finance puts it, "should provide more insight into whether policymakers regard rising energy prices as a serious threat". Since policymakers don't regard rising energy prices as a serious threat, or, anyway, would never admit it if they did, it is clear that the minutes can only provide the feel-good news that the market is looking for. Which means we're going up tomorrow or maybe even today after the news release. [more]
Buffett's comments came in handy, I just needed to buy some stuff to complete my portfolio. It is clear that the recession is over and we're going back to Dow 14000 by December. Apparently, Buffett also feels disappointed that the days of PE=3 are now over.
...Even though it's not very good for my builder stocks. [more]
It's only today that I became aware of this link by reading the comments after dwot's last post (thanks, camistocks!) Anyway, Ron Paul grills Bernanke, citing a 20% increase in MZM (this is Nov 2007), and Bernanke replies: [more]
Sure, they will now say that this is a random fluke and that the multifamily market doesn't matter at all. But when the same multifamily starts were contracting, did any of these bears tell us to disregard these numbers because multifamily starts don't matter? So either way we have been exposed to some "extra" cries that the sky is falling: either now or several months ago. My personal take is that Chicken Little is dramatically wrong NOW, and I will be very much surprised if April 2008 does not go down in history as THE BOTTOM of the housing market. I think the next three months should justify my bullish take on housing and by the end of August everybody will be saying the same things that I'm saying now. Meanwhile, I like it how my HB stocks are behaving in this market, and congratulate myself with not heeding floridabuilder's advice to wait till the end of May or beginning of June. [more]
I just received this email from Citibank (my only connection to City is that I have a credit card from them). [more]
Found a good link that gives you the composition of the US economy by industry: [more]
New data from the Fed suggest that Bernanke is now trying to keep inflation under 10%. Year-on-year increase in M2 is now 6.5%. Tthe annulized percent change during the last 6 month is slightly down to 8.3%. The figure for the last 3 months is 10.7%. This is way better than last month's 7.0%, 8.6% and 12.5%. Thanks, Mr. Bernanke, we'are not turning into Zimbabwe yet (though we'are still mightily close). The only troubling thing is that M3 is still growing 20% a year, so I suggest that you do something about this number. How about introducing some of hedonic adjustment? The graph below looks outright ugly.
http://www.nowandfutures.com/key_stats.html " [more]
I'm late to comment on this, and didn't have time yet to absorb other players' responces (which I'm sure will be as plentiful as the unreported M3 supply), but my first gut reaction is we're back in the USSR, with official statistics reporting that the citizens' well-being grew another percentage point on increased production of pig iron. So they're telling us that inflation is slowing down? To mere 0.2% per month? That it's less in April than it was in March? Well, here's my take on this: I will not believe these numbers even if they show me all the input data with each data point signed and rubber-stamped by PriceWaterhouse Coopers, Ernst&Young and Arthur Anderson. My only question how long will it take before the Bureau of Labor Statistics loses all vestiges of credibility. [more]
An excellent book: Hunter Lewis, "How much money does an economy need?" A very concise, no-nonsense discussion. Balanced coverage of the opposing economic theories. The book explains the views of Keynes, Mises, Hayek and others in simple terms, covers the policies of the Federal Reserve, and provokes you to formulate your own theory. And all of that takes only about 100 pages. The author really knows how to conserve the reader's time. A recommended reading for everyone. The book is reasonably priced at $17, but it's far more cost-efficient to read it for free during a visit to your local B&N. It will take you about 90 minutes to pick the main ideas. By the way, if the store sells coffee, don't forget to buy a medium cup before you start reading. It will facilitate your understanding of the book and besides, I need to get my SBUX score to the positive territory, it's runing the scorecard. Their service is definitely getting worse, but the coffee is still excellent. [more]
Stopping by Barnes & Noble, I noticed a book by Robert Schiller titled "Irrational Exhuberance". So I glanced through the book and was amazed at the stupidity of this renowned economist. The whole book is nothing but a collection of trite cliches reported daily by the media, and shows zero capacity for independent thinking. And Schiller's view on housing are, well, moronic. I think that one of the three must be true: either Schilelr is a lopsided genius of the kind that can handle tenth-rank tensors but cannot quite figure out how to tie their shoelaces, or Schiller did not read his book, or, perhaps, he just needed some extra income and filled his book with the stuff his editor told him would sell best. [more]
Reading the blog posts, I noticed one interesting fact. Everybody here is presenting himself as a free-merketer. Whatever disagreements there may exist are really about the fine gradations of the free market orthodoxy. Everybody agrees that we need maximum economic freedom and minimum interference from the bureucrats. But when it comes to picking stocks, the tone changes immediately. Nobody wants to have anything to do with companies that operate on that very same free market they praise so ardently (think GM, F, AMR, DAL, XMSR, SIRI). That's a bad business becuause there is too much competition. Everybody wants to own a company insulated from competition, ideally due to the courtesy of bureacrats whose regulations keep competitors away. Something like ISRG, PFE, MRK, OMAB, PAC, MWA, BBBB, MSFT. Maybe SIRI if regulators rid them of the competition. Maybe PHM is enough competing builders go belly up. HAL would be perfect if Cheney could stay in Washington, DC after November. As we know form Buffett, most shareholder profits are made off of companies that have some kind of "moat". Now, when it comes to legitimizing these profits, these same shareholders once again recall their mantra that this is a free country and that profits should not be regulated by the bureucracy. I'm wondering how many proponents of free markets would still be left in the blogosphere if only they realized that a free market means profit margins that hardly ever rise above 5% and that often go negative every other year. [more]
At least this is what the 117000 residents of Vallejo, CA are going to do now. They took a large loan and then figured that paying it back would be a major pain in the neck. Sorry, creditors, if we are to pay our loan back, that would mean raising our property taxes, and we don't wanna do that. So kiss your money good bye and have a nice day. [more]
where the government finds enough suckers who want a 30-year note that yields 4.66%. There was never a year since 1960s when the real inflation (including asset inflation) was lower than 4.66%. For 1 year or 2 years, I'd still understand it, you'll lose 3-5% of the principal, but other than that, you'll be safe. But try losing 3% to inflation tor 30 years in a row, and what do you end up with? If you're a long-term bond investor, you may as well donate your life savings to the Treasury in order not to prolong the financial agony. [more]
The blog page is usable again.
Before the last facelift of Caps blog page, you could click the "more" link to see what people posted today, yesterday, and the day before yesterday. Now the link is gone, so you can only see the last 5 posts. What's the point of throwing blog entries into a black hole? I'm going on strike until they fire the idiot web designer and make the blog page usable again.
I am feeling melancholy. The economic news is getting worse and worse. No hope for recession, no hope for $200 oil, no hope for 25% unemployment. And, most importantly, no hope for bank runs, and no hope for a major collapse of the financial system. Instead, we get 0.6% growth and a booming stock market. Even the housing market is showing a paltry 13% decline, a drop that is a) useless and b) happening everywhere except New York. And it won't be even that if you take actual sales prices instead of the exaggerated Case-Schiller numbers. Buyer stikes are not getting us anywhere, Bernanke is simply inflating away any problem encountered by homedebtors and their bankers. New money fresh off the printing press is flooding the stock exchange, competing with my hard-earned real dollars for the most lucrative assets. So things are bleak on both markets. It's not that I was caught off guard like some stupid permabear. I got myself fully invested, my portfolio is in the green, and theoretically, I should be feeling like a genius. But I feel sad. These returns are no match for the real benefits that come from a crash. Instead of scooping stocks priced at a PE of 3 and retiring rich, I have to buy them at PE of 15 and hope to sell them for a 20% gain. Instead of saving tens of thousands of dollars by watching extortionate prices of housing become slighly less extortionate (I am not even saying "fair", that would be asking too much), I have to content myself with earning a few hundred dollars here and a few hundred there. Why don't we ever have a nice great depression that would send S&P to 120 and send Wall Street executives collecting food stamps so that I could buy things at a price that makes sense? [more]