Thanks muchly!
Interestingly, I spent some time reviewing the homes listings in my weekly town newspaper this week, something I have not done in at least a year.
Unbelievably, prices have not dropped (by any margin I can see) at all. This is no doubt due to my location, which is Fairfield County CT. ...
The fancypants areas have not yet begun to feel it. This thing is just getting underway.
I can assure anyone reading that hundreds of people showing up to auctions, real estate in the daily headlines, and waitresses speculating in real estate thinking it's as simple as "it always goes up" is a sure sign of a *top* and not a bottom in the market.
When listings sit for months and when no one even talks about real estate - that's the bottom. That's a long way off yet.
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From today's Daily Reckoning :
“The idea that housing doesn’t go down turns on its head when you actually calculate in the real-world costs of interest, taxes, insurance, etc. For instance, before those costs are counted, it looks like 16 out of the 17 top real estate markets in the 1990s were in the black. Once you add them in, however, it turns out that not one of the top property markets went up. They were all negative.
“In the 2000s, up to May 2007, you get something similar...three markets that, in unrealistic terms supposedly shot up 18%, 33%, and 36% during that period, are all actually net losers...down 10.5%, 13.4%, and 28.2%. As in negative. The gains were phantom stats from the fantasy world of no-cost property ownership.
“Running through the rest of the list, the other major markets did still make money. But instead of the astounding triple-digit gains property owners love to point to as proof that this bubble was the real deal, you find out that only two of the markets – net of costs – actually crossed the 100%-gain mark (instead of 10 markets). And annualized, only two markets were even a little above 10% gains in property values.
“Not bad, but not a miracle by any stretch.
“Two more of those top markets just barely squeaked past the annualized 8.5% gains in the S&P 500 for the same period. All the rest of the top 17 markets looked at in this article did worse than the S&P. During what was supposed to be the biggest property boom of all time.
“Again, this isn’t to say there wasn’t a bubble. Just that it truly was an event completely devoid of sanity.”
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If that isn't bad enough, let's also factor that the average home has balooned in size. So, if the avg. house in 1985 was 1200 sq. ft. and the avg. McMansion is now 3000 sq. ft. then it should cost about double or more, should it not?
60 Minutes "Living Large"
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It'd be very interesting to see if the price per sq. ft. has gone "up" as much as the price of homes supposedly has.
But this isn't all about real estate though, it's about what is happening to the average American household and consumer. And what effect will that have on the economy and how can one protect themselves from it and profit from it?
Maybe housing prices won't go down in richer communities, but if the people who live there own car dealerships and electronics outlets and restaurants and Joe & Mary Sixpack are going broke then how will those rich people do when their businesses and stocks are losing money? What about when their taxes keep rising and the cost of heating their oversized homes keeps rising? Maybe then, a couple years from now, they'll need to sell to "downsize".
Same thing at the national level - what will happen to people individually due to the national debt and profligacy? And once again, how can we protect ourselves and profit?
It's not about my home value or yours or theirs - that's not useful to the average reader here - it's about what is going on at the macro level, that's where we should focus I suggest.
As I said in recent posts, one's house can only be traded for a house of similar value in a similar naighbourhood with a similar crime level and similar schools and amenities, etc. Whether the price in dollars goes up or down that will still be true, which is why a house is not an investment. In the meantime taxes go up and the infrastructure is literally crumbling. Infrastructure is an amenity, is it not? Is that quality of it factored into housing prices? Is the cost of repairing and upkeeping it? Nope.
2nd properties are perhaps "investments", but then see above for the real costs and real returns. And none of the above even mentions risks or the costs of selling.
But if people insist on thinking they're richer because their house nominally goes up in value as measured in drastically depreciating dollars, then I guess all the gov't has to do is keep fouling the economy so there's lots of easy money and a dropping currency and the party never ends ... only it does end at some point. It always ends, and IMO it's only starting to end.
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"In the next six months, one year, two years," Warren Buffett said this morning, offering up a rare taste of bearish sentiment, “the problems in the mortgage market can cause a lot of problems with consumers and hurt buying power in the United States.” He went on to warn that crisis would have “more of an impact” than investors have already endured.
"We are still negative on the dollar," Buffett continued, shifting his focus to Berkshire’s strategy for dealing with the troubled U.S. currency. “We bought stocks in companies that are earning their money in other currencies. We are gaining foreign currency exposure.” His comments echo Jim Rogers’ and Julian Robertson’s bearishness from yesterday.
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For those who don't know, Jim Rogers is an investing legend about on par with Buffet to those in-the-know.
"Jim Rogers, chairman of Beeland Interests Inc., said he is shifting all his assets out of the dollar and buying Chinese yuan because the Federal Reserve has eroded the value of the U.S. currency.
The Chinese currency, known as the renminbi, or yuan, is "the best currency to buy right now," Rogers said. "I don't see how one can really lose on the renminbi in the next decade or so. It's gotta go. It's gotta triple. It's gotta quadruple."
The yuan strengthened past 7.5 to the dollar today for the first [time] since the central bank ended a fixed exchange rate in July 2005. The currency has gained 10.5 percent since the dollar link was abandoned.
Rogers also is buying Swiss francs and Japanese yen, which he said have been "pounded down" because of the so-called carry trades. "
– Bloomberg
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And these guys have a well-deserved reputation for being correct and being early. Oh-oh.
Back to the theme of seeing trends emerging and profiting, today I call an end to the fad that is Crocs shoes. I bought $40 put options recently on the stock with a 2010 expiry. With luck, I may have actually caught the exact top. The stock was $67, and all trends come to an end ... and those shoes are damn ugly.
As for housing, well everyone got fair warnings when those Bear Stearns funds went kaput this summer. Did the average homeowner think of hedging? I doubt it.
Me? I'm holding onto the put options I mentioned on October 11. I'm already up a few hundred percent on some, and in the case of Home Depot, for every dollar it drops under $30 I will be making 270% gains. Not a typo. Each option cost me 27c a few weeks ago and nets me $1 for every dollar HD drops below $30. Hooray for leverage and thinking ahead of even Buffet !
In the emerging Empire of Debt, people won't be building new homes too quickly or remodelling their bathrooms. HD's earnings are due Nov 13.
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On Lowes I make a 15% gain for every dollar it drops currently. Their numbers are due Nov 19.
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On CFC I'm making 100% on my investment for each dollar it drops below $15. Their numbers are due this Friday. Wouldn't surprise me to see them go bankrupt at some point. Shall we see runs on a US bank as we did in the Great Depression? Could be. There was a run on a major UK bank recently. History repeats.
Even if it doesn't get that bad, why would anyone in their right mind be banking with Countrywide right now? Because they're not thinking, that's why. Too busy watching schlockbusters on a big screen TV, all paid for on credit of course.
Invalid Link Removed Why are pensions invested in this garbage (or any stocks) and people don't care until they've lost it all? How will that affect their credit ratings and debt ratio?
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On MBI I'm making 25% for every dollar it drops below $50. And it dropped massively today on its numbers and IMO will drop a lot more.
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I've been mentioning many of these are great shorts for some time now, and have booked similar gains on these already on previous positions. That's a real-world example of what can be done to protect oneself and one's capital, and as I said with the warning shots earlier this summer anyone could have seen this coming.
That's the kind of thinking, whether the plays turn out right or wrong or too early or too late that a successful investor has going on in their mind everywhere they look. "Hey that Toyota looks nice, I wonder how the stock is doing?" or "Hey the average consumer is really farked, I wonder what the result will be?" or "Hmmm, bridges collapsing and the Corps of Army Engineers saying there are many more on the ropes ... what companies will benefit from infrastructure spending?"
Etc.
I harped on similar themes in the "Gas prices going up!" threads at length. Everyone was sure prices would keep going up (and oil prices have) but they would rather make uninformed arguments about consipracies and supply vs. demand then take action to lock-in their prices, and even make big profits. Average oil & gas stocks are up about 200% since then. Who took action? Kinda sad, IMO.
Of course I lose on some ideas, and on others I am too early such as taking an 80% gain on this stock in the example portfolio [Invalid or Expired Link Removed] and the stock jumped over 40% today alone, but a win is a win.
Anyway, IMO, the "big picture" is the direction these economic events we discuss should be focusing us. Someone can say "well the falling dollar doesn't matter to me 'cause I earn and spend in the US and never buy any foregn goods or go on vacation abroad" but the fact is that in the "big picture" they could have gained an extra 40% of those dollars just by putting their savings into a different currency. That surely matters, does it not?
So...I take it nobody uses matresses anymore?
Well, almost no one has any savings anymore so I guess not. Too busy buying junk on credit. In which case, what does a rising Chinese currency mean for the US comsumer? Prices wil go up. So why do people who are in debt and shop at Wal-Mart cheer the lame sabre-rattling some grandstanding politicians are making to try to get the Chinese - who are in the driver's seat in this matter arguably - to raise the value of their currency? And of coruse how can we profit from it? Seems like Buffet and Rogers asked themselves the same questions and came to some definite answers.
Anyway, this is all of course just my opinion and in my case I like to put my money where my mouth is, as the saying goes. Whatever direction this all takes, the varied opinions and increased participation makes for an excellent thread.
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From today's Rude Awakening :
Sub-Prime? So Over! Part II
By Adrian Ash
Goldman Sachs bucked the trend this summer by making money – pots of money – selling subprime bonds short. Ironically, Goldman also issued what might prove the most toxic of all subprime bonds back in 2006. In other words, the
savvy investment bank sold the same junk twice, and make a tidy profit both times.
None of the other big banks, however, had the chutzpah to short the very market in junk they'd given birth to – not yet, at least. And few banks seem to have created bonds quite as toxic as Goldman did.
Take last year's vintage, for example. In 2006, Goldman Sachs' mortgage-bond division – Alternative Mortgage Products (known as GSAMP for short) – issued 83 home loan-backed bonds, valued at $44.5 billion. In the subprime sector, it grew its business by 59% from 2005, unloading some $12.9 billion on to unsuspecting, stupid and/or greedy investment fund managers who thought a bond under-pinned by home-buyers with no hope of repaying might be worth having.
According to Inside Mortgage Finance, that made GSAMP the 15th biggest issuer of subprime-backed bonds in 2006. And come the start of the third quarter this year, those securities were being downgraded by the credit ratings agencies faster than anyone else's.
Research from Citigroup, dated 22nd June, found that "portions of Goldman's GSAMP-issued bonds, which include subprime loans from a variety of lenders, have been downgraded a combined 69 times by Standard & Poor's and Moody's Investors Service in the year through June 15."
"Sixty of the GSAMP downgrades refer to classes from 2006 bonds," Citigroup added, and one of Goldman's 2006 crop – the GSAMP Trust 2006-S3 – may actually be "the worst deal...floated by a top-tier firm," reckons Allan Sloane in the Washington Post.
In spring 2006, "Goldman assembled 8,274 second-mortgage loans originated by Fremont Investment & Loan, Long Beach Mortgage, and assorted other players," explains Sloane after studying the public record. "More than one-third of the loans were in California, then a hot market. It was a run-of-the-mill deal [face-value $494 million], one of the 916 residential-mortgage-backed issues totaling $592 billion that were sold last year.
"The average equity [these] borrowers had in their homes was 0.71%...[meaning] the average loan-to-value of the issue's borrowers was 99.29%.
"It gets even kinkier," Sloane goes on. "Some 58% of the loans were no-documentation or low-documentation. This means that though 98% of the borrowers said they were occupying the homes they were borrowing on – 'owner-
occupied' loans are considered less risky than loans to speculators – no one knows if that was true. And no one knows whether borrowers' incomes or assets bore any serious relationship to what they told the mortgage lenders."
Whatever the truth, one in every six of the 8,274 mortgages bundled together in GSAMP Trust 2006-S3 was already in default 18 months later. [...]
