Housing Bubble Bursting?

[Brad Ellis]

Moh,

Your quote,

"Thank you Brad,
Finally, you acknowledged that you are not buying the stock of your own company. I don't blame you, I wouldn't buy it either. With that acknowledgment, can we assume that you believe in your heart that there is going to be a hard landing and a market crash but you just don’t want to say it? "

Utter rubbish. The 52 week high/low ranged from about $34 to about $50. The current close was $40. EPS is $5.00- all per public data. The current trend for almost all bank stocks is downward.

I do not buy stocks in a sector that is trending down; I buy stocks in a sector when it is trending up.

Wall St. traders and investors have a saying, "The trend is your friend." I, and others add- "...until the end".

So, not buying right now has nothing whatever to do with the performance of my firm at all; it has everything to do with the sector trend.

When the trend reverses- and it will- I'll be jumping in again. Note that I have not sold a single share since 2002- I am holding it because I am not only in profit but expect the share price to increase nicely after all the dust settles from H+R Block, etc.

Anyone who tries to time a market has rocks in their head. That is why I wait to a trend to be established.

We continue to increase market share over the longer term. Our profits are just fine, thank you.

And, once the trend reverses, do you really think I will not be buying a stock with enormous upside potential that is selling for P/E of 8 ???????

In 2002 I bought it at about $18 and sold some about 6 months later at $22. That was about a 40% annualized return. The current price represents an increase of 122% over 4 years +/-. By comparison, my Citigroup stock went up only about 11% in the same period. Hmmm.

As to your assertions/questions about whether I believe there is a crash coming, the answer is NO.

I will , however, start pricing out headstones. For yours, it will say, "here lies Moh, who died from a broken heart because the real estate market did not implode."

Now a question for you: If this market does not crash, are you going to be man enough to admit you were wrong?

I guess we will see that soon enough, too.

Brad

 

[Brad Ellis]

Randolph,

We have discussed the Japanese market and whether or not it portends something similar for the U.S.

I think that other markets may be more indicative due to their greater similarity to the U.S. economic setup. Here is one such comment from the Kiplinger Washington Letter:

"Trends in once-frothy housing markets abroad may auger well to the U.S. economy as residential property here loses steam, prompting homeowners and consumers in general to curtail spending.
Booms in the U.K. and Australia were even boomier than here. Median house prices tripled in the U.K. and doubled in Australia.
But their economies swooned only briefly, avoiding a recession, even though rising interest rates affect consumer spending there more than they do here. That's because a bigger share of homeowners in the U.S. than abroad use long-term, fixed rate mortgages.
House prices also suffered relatively short periods of decline in the two countries and are now on the rise again...about 6% in both in the past year. As in the U.S., population trends and lack of space for building are providing underlying growth in demand for housing.

But the U.S. economy may be proportionately more vulnerable to a housing slump. Residential construction in the U.S is about 6% of gross domestic product, compared with 3% of the U.K's economy. So a pullback by home builders could have a larger impact."

I did not add the underlines- that was done by Kiplinger, so no emphasis added.

My questions now are 1) whether or not our markets will react more like the U.K and Australia whose economies, in my mind anyway, are more similar to our own or more like Japan who you seem to think provides a better comparison, and 2) just how much will the builders' collective pullback affect our overall economy?

No one knows. But it is still interesting that these markets have already recovered.

This same newsletter forecasts prime at 8.25% for the balance of the year, housing sales easing 9% this year and 4% next year with retail sales up 4% this year and 3.5% next year. To them, this all translates into GDP growth easing to 2.5% next year.

If they are correct, and of course, that is subject to the same tests as would apply to any other forecast, then it indicates no recession on the horizon.

Right or worng? No one knows, but interesting to watch and track.

Brad

 

[moh malekpour]

Brad,
1-It is not just H&R Block; any sector that has anything to do with residential housing market is down. Banks, mortgage companies, builders, homedepote, real estate agents, loan agents. Just show me a residential lender with no involvement in sub-prime. All of them were doing sub-prime, some less, some more. When Fannie Mae started to buy sub-prime loans, all lenders went for them.

Ed Groshans, an analyst at Fox-Pitt, Kelton, estimated that if losses in these pools of mortgages reached 10%, investors in the triple-A tranches would still get all their interest and principal back.

"Higher interest rates will cause more people to go delinquent on their mortgages, but not enough to push losses on these pools over 6%," the analyst said.

Indeed, Lacoursiere of Banc of America Securities said other mortgage companies, such as Countrywide, Washington Mutual and IndyMac (NDE) , are much more exposed to trouble in the subprime market than is Fannie Mae.

But Berg said most analysts and investors are underestimating the impact of the unwinding of what he called a "historic housing and mortgage bubble."

"We are only postulating that the subprime book could get in trouble and experience normal losses," he added. "Things could get far worse than our mildly bearish assumptions

This is the link to the article:http://money.cnn.com/services/tickerheadlines/djh/200609181307DOWJONESDJONLINE000519.htm

2-Past performance doesn't guarantee the future. lets talk about tomorrow not yesterday
3-depending on how you define the crash. The residential housing market is at the verge of crash now.
."

 

[Randolph Kinney]

Brad,

My questions now are 1) whether or not our markets will react more like the U.K and Australia whose economies, in my mind anyway, are more similar to our own or more like Japan who you seem to think provides a better comparison, and 2) just how much will the builders' collective pullback affect our overall economy?

I see that you did not comprehend what contagion is all about. Markets that are independent of one another can be overwhelmed by herd mentality, both from internal generated fear (lack of confidence) and external generated fear, compounded by speculators who sense opportunities to exploit fear and weakness along with government policies that exacerbate the problems.

There is no doubt that the government here is concerned about GSEs and the total quantity of issued debt and what that represents if, for whatever reason, there is a loss of confidence in that debt. Read about it in the current issue of Valuation Insights & Perspectives, Third Quarter 2006, Page 26, published by the Appraisal Institute or any news report on the subject. Try reading posts numbers 1452, 1454, 1455, and 1468 in this thread.

Taken from Valuation Insights & Perspectives, Third Quarter 2006, Page 26

Warning of potentially serious financial effects from systemic risk posed by Fannie Mae, Freddie Mac and other government-sponsored enterprises, the Bush Administration reiterated its call for GSE regulatory reform and for a reduction in GSE investment portfolios.

Henry warned that the actual or perceived inability of a GSE to meet debt or mortgage-backed security obligations, as well as potential reductions in market value of GSE debt obligations, could have both direct and indirect consequences for the financial sector and the economy. Commercial banks, he pointed out, held $264 billion in GSE debt as of December 31, 2005. If key commercial banks suffered a loss because of their GSE investments, the availability of credit could decrease and “financial markets across the board would likely become very illiquid and volatile as firms with significant losses attempted to unwind their positions,” Henry said.

 

[Randolph Kinney]

WaMu in 'very difficult' revenue environment

WaMu in 'very difficult' revenue environment

By Nick Godt, MarketWatch
Last Update: 4:24 PM ET Sep 20, 2006

NEW YORK (MarketWatch) -- Washington Mutual's chief operating officer, Steve Rotella, said Wednesday that the current environment in the banking industry is "difficult" and is expected to remain "very difficult" on the revenue side for some time.

http://www.marketwatch.com/news/story/Story.aspx?guid=%7B335E1840%2DF012%2D453E%2DAD6E%2DD8E1910719EE%7D&siteid=

NOTE: I have edited the article to shorten it and added red highlights.

The No. 1 concern, Rotella said, stems from a reduction in the size of the mortgage business, which has shrunk from roughly $3.3 trillion "not too long ago" to $2.5 trillion this year.


"So you've got a contraction in the marketplace that has been fairly significant, and any time that happens in the mortgage business ... you need to go through a supply-demand equilibrium process," Rotella said.


The second key challenge, he said, comes from the interest-rate environment, namely the fact that short-term rates have remained higher than long-term rates, a so-called inverted-yield-curve situation, which squeezes banks' net interest margins.


Finally, the slowdown in the housing market has lowered the volume of demand for mortgages, Rotella said.

WaMu's portfolio of subprime mortgages -- including both those on its own books and those it services (or, for a fee, collects monthly payments on) -- amounted to $20.5 billion at the end of June, roughly its average size over the past several years.


Risks of defaults on mortgage payments are increasing as the housing market and the economy decelerate, but Rotella said WaMu feels "reasonably good about the quality of that portfolio," which has an average Fair, Isaac & Co. credit score of 620 to 625.


"You know, we've seen increasing delinquencies in that business in general, in our service portfolio and our owned portfolio, which is not unexpected, given the maturation of the portfolio but also the health of the market right now," he said.


WaMu has also sold "the vast majority"-- roughly 70% -- of its option-ARM mortgages, which are considered among the most susceptible to defaults, to the secondary market.


"So, clearly, if there were a significant, major national decline in housing, it would have an impact on us," Rotella said, "but we feel we've taken the actions to mitigate that."

 

[Brad Ellis]

Moh,

Your quote, "When Fannie Mae started to buy sub-prime loans, all lenders went for them. "

Perhaps you were not aware that virtually every lender in America who now does sub-prime was doing them before Fannie Mae. You have this exactly backwards. Fannie literally entered this market only recently.

And now you presnet Mr. Berg- a guy who can barely outperform the S+P over the long term and now cannot even keep up with it when most good funds are seriously out performing it.

Spare me.

Brad

 

[Brad Ellis]

Randolph,

WAMU's quote. "The second key challenge, he said, comes from the interest-rate environment, namely the fact that short-term rates have remained higher than long-term rates, a so-called inverted-yield-curve situation, which squeezes banks' net interest margins."

So, let's see. Long term investors normally demand a higher rate when uncertainty exists- the risk portion of the rate.

We have seen probably 300 articles, links, etc. posted right in this very string in the last 6 months. That's about 1 every busness day on average. And that has to be a tiny percentage of what is out there. Add to that blogs, chat rooms, etc. etc. Has this all been a secret?

How long does it take for contagion to hit? And will it even hit at all given the massive amounts of data that is freely available to almost any homeowner, investor, and others?

Brad

 

[Randolph Kinney]

Brad,

How long does it take for contagion to hit? And will it even hit at all given the massive amounts of data that is freely available to almost any homeowner, investor, and others?

Contagion occurs when there is herd mentality and a loss of confidence. It often explains phenomena like the 1987 stock "correction" where government shut down trading because of the spiral down selling with lack of buyers. It explains why institutions fail when liquidity becomes scarce, investors panic and sell at any price. It explains why Amaranth became near insolvent due to continued selling in natural gas futures causing the price of natural gas to drop suddenly. It sold its entire portfilio of natural gas investments. Amaranth had $10 billion in assets, told investors on Monday that it's facing year-to-date losses of 35% after losing more than $3 billion in a week on natural gas trades that went awry. As a result, the San Diego County Employees Retirement Association (SDCERA), which oversees more than $7 billion on behalf of retirees and employees of the county, which had invested $175 million in Amaranth could lose a significant part of it. Other energy hedge funds were also impacted. MotherRock LP shut down after losing $230 million in June and July in the natural gas market. The commodity markets are showing a large degree of volatility, especially energy and metals, which is caused by the movement of large amounts of money in and out of those positions.

You cannot know exactly when the contagion will hit but there are signs all around, in different markets. Interest rate movements, foreign or domestic, is reflected with shifting of funds from one market to another. If the level of defaults on sub prime mortgages continue to rise at the current rate (double digit), it will cause a lack of confidence in that market and there will be a sudden shift of money out of that market resulting in a lack of liquidity as sellers out number buyers. After the panic happens with some institutions failing and the government steps in, you will know that it was contagion.

 

[moh malekpour]

Moh,

Your quote, "When Fannie Mae started to buy sub-prime loans, all lenders went for them. "

Perhaps you were not aware that virtually every lender in America who now does sub-prime was doing them before Fannie Mae. You have this exactly backwards. Fannie literally entered this market only recently.

And now you presnet Mr. Berg- a guy who can barely outperform the S+P over the long term and now cannot even keep up with it when most good funds are seriously out performing it.

Spare me.

Brad

Brad,
The man is considered a leading market practitioner like Warren Buffet and has an opinion. You agree with David Lereah because you like what he says although it doesn't make any sense but you don’t like Berg because he doesn’t say what you like to hear.
You don’t need to believe Berg’s opinion about the Sub-Prime lenders situation, just read and watch news and read articles on this forum. It is the talk of the day.
A fund performance most of the time depends on the risk that the management takes. The risk is a golden rule in investment: more risk you take, more return you get but there is another side to it also, more risk you take, more loss you may get. Small cap stocks outperform large caps because they are riskier but it doesn’t mean they are better companies. Those who market time the stock market are aware of the riskier stocks and that is why they can be a buyer today and seller next month.
It doesn’t matter if Fannie Mae started using Sub-primes or banks, the fact is all of them got engaged in sub-prime lending because there wanted to get more return for their share holders but I am not sure if it was a prudent to engage in a risky business merely for more profits.

 

[Randolph Kinney]

Goldman hedge fund lost 10% of its value in August

Goldman hedge fund lost 10% of its value in August

By Simon Kennedy
Last Update: 4:50 AM ET Sep 13, 2006

LONDON (MarketWatch) -- Goldman Sachs' $10 billion Global Alpha hedge fund lost nearly 10% of its value in August, according to a report in the Wall Street Journal, citing a draft of a letter sent to the fund's investors. The newspaper said the loss likely had an effect on the investment banks results, in particular at its asset management unit, where third-quarter net revenue dipped 4% from the second quarter to $918 million. The Journal added that the loss occurred across many different trading strategies, including negative bets on 10-year U.S. Treasuries and Japanese government bonds, both of which rallied in August after the Federal Reserve paused its series of interest rate hikes.