Housing Bubble Bursting?

[Randolph Kinney]

Melt Downs Are Coming

http://www.marketwatch.com/news/story/Story.aspx?guid=%7BE5FE0DE4%2DBFE4%2D4081%2D8604%2D755143FDB4B7%7D&siteid=

"In order to prevent further mark-to-market losses on the natural gas positions, and to reduce the risk of defaulting on margin calls, we transferred these positions to a third party at a price that resulted in additional significant losses," Amaranth founder Nick Maounis wrote in an email notice to investors Wednesday evening.

Including losses on the natural gas portfolio, the cost of the third-party transaction, and losses on other positions that were sold to generate liquidity, Amaranth estimates that the net asset value of its funds has declined 65% month-to-date and 55% year-to-date.

Investors are now scrambling to get out of their Amaranth investments, leaving the firm struggling to survive.

 

[Randolph Kinney]

Amaranth investors try to sell stakes at big discount

Amaranth investors try to sell stakes at big discount

Anger at timing of loss disclosure; stakes offered at 60% discount

By Alistair Barr, MarketWatch
Last Update: 7:51 PM ET Sep 19, 2006

SAN FRANCISCO (MarketWatch) - Some investors are so eager to get out of their investment in Amaranth Advisors LLC that they're willing to sell their stakes in the massive hedge fund for less than half what they were worth at the end of August.

Amaranth investors are now offering to sell their stakes in the fund for between 35% and 45% of the estimated net asset value at the end of August, according to Hedgebay, which operates a secondary market for hedge fund holdings.

Potential buyers are interested in paying between 10% and 20% of the estimated net asset value, Hedgebay data show.

http://www.marketwatch.com/news/story/Story.aspx?guid={24ABECB2-B095-454D-A177-ED38FE75C059}&siteId=mktw

It would appear that the above actions are indicative of a panic as investors in this hedge fund sell at any price to get out. Liquidity is drying up. The remaining holdings of Amaranth will be distressed sales to meet investor demands to cash out, causing additional losses for the investors that remain in the fund. Investors in other hedge funds may become panicky and sell, which will complete the herd mentality and spread lack of confidence. Looks like contagion in the making.

 

[Brad Ellis]

Randolph,

From your post, "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."

Thought you said that the international markets like the U.K and Australia did not impact the U.S. market.

And your natural gas fund story is actually right to the point. We saw a tremendous run up in natural gas prices over the last couple of years. There may have been stories about that being a bubble market but, frankly, I never saw one. So now a couple of funds crash. Only signal I had was my last gas bill- ridiculously low (under $20)- or it could have been they did not read the meter.

Anyway, these corrections happen very quickly and usually without any fanfare. In 1987- know that one well since I was trading commodiites back then and got my lunch handed to me- saw only one major analyst predict it. I memory serves, her name was Ellen or Eileen something- last name with a G.

And I sure learned something from that. A VP at my mortgage brokerage firm back then loaded up on stocks immediately after- I think at about 7000 on the Dow. In under a year he made a lot of money on that.

In 2001, and of course without warning, 9/11 hit. Not faulting any predictors back then- really unforseen-we corrected again- deeply. My daughter had just received a big bonus check and called me. Wjat do I do, she asked? I told her go out and invest is all in good quality stocks. thingk she got into Cisco at about 8 or 9. Thank you, Dad. Well under a year again.

We all keep learning. And what I am learning here is that there is enough hype to sink an entire Navy and STILL the market chugs along. Sure on a downward trend, but nothing all that remarkable, frankly. RE demand mitigated, in part due to somewhat higher interest rates. That caused an over-supply in new home building driving down prices. Add to that the ton of hype and you have even more sellers trying to market their homes, but some of them are simply testing this market to see if they can still get the higher price. Not many are. The market is back at a normal pace- perhaps a bit below it, but not in bubbleland, in my view.

The U.K and Australia corrected and apparently have come roaring back. The herd learns, too.

but I do feel for the gummint employees in SD County and before that in Orange County some years back.

Is this a SoCal anomaly? Maybe we should let Arnold do the investing? He's rich.

Brad

Brad

 

[Brad Ellis]

Moh,

Wrong agan. I cited Lereah as only one of a very large group of notables who all keep saying we are going in for the soft landing. I am predicting a correction- as opposed to a bubble- and have been for quite a few months now. It is not just him at all. Just read that Senate testimony again- the synopsis is clear- no bubble. The OFHEO report had that word in the title because that is what the Senate called the hearings. The actual testimony was summarized as our not being in a bubble.

And Berg is like Buffet? Ridiculous. Who respects him? Not the street. The street focuses on performance and he does not produce much. Guys who produce, like Richie Friedman of Smith Barney's Legg Mason Aggressive Growth fund produces. He is respected.

And his philosophy? Buy and hold as he said on Louis Rukeyser's Wall St. Week some years ago.

And my advice to RE buyers is to watch this market because it just may not go down all that much and for those who seek a new home, trying to time this market is just as silly and may well cause the buyer to not get that low price he sought.

Buy and hold, if you are an investor. The RE market will correct and when it is done- and I do not think it will take too long-it will once again find it's level. The basic economic forces do not disappear. Increasing population increases demand. Builder inventories are already much lower and as they continue to decrease we will see that demand/supply levels back in balance- and quickly. Same will apply to existing homes. Utility has not changed much and purchasing power may begin to increase next year if the Fed starts lowering again.

Supply-demand-utility-purchasing power, the forces that create value are still in place. You do remember that from appraising 101, no?

Just waiting for a check to arrive and then I am buying Hovanian.

Brad

 

[Brad Ellis]

Randolph,

"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."

What is that telling you? When you bet on 10 year notes going down due to higher interest rates and they do not go higher, you lose. Why are rates not going up? Because the economy is already slowing and the Fed does not need to raise rates, at least yet.

So what happens if the Fed has done its job correctly? Rates will stay stable for a while and then come back down. Guess what that will do to the RE market?

As for this hedge fund, it impacted GS by all of 4%- a billion dollar loss and the negative hit is 4% to the firm's bottom line. They only made $918 Million. Poor babies!

Brad

 

[Randolph Kinney]

Brad,

Thought you said that the international markets like the U.K and Australia did not impact the U.S. market.

No, I did not say that.

And your natural gas fund story is actually right to the point. We saw a tremendous run up in natural gas prices over the last couple of years. There may have been stories about that being a bubble market but, frankly, I never saw one.

I suppose that you have a definition of what a bubble is and if you see the word bubble, that has a different meaning to you. Commodities are principally governed by supply and demand, except today we have hedge funds and speculators that influence price and can exaggerate price movement. All you have to do Brad, is go back several years and look at a chart of gold, copper, silver, oil, gasoline and natural gas. They all have one thing in common; they moved up in price. Today, gold has dropped back below $600 after reaching $700, oil has dropped back from $78 to near $60, natural gas has dropped back to under $5 from near $15.

So how would you term the natural gas price movement Brad? What is a bubble? Did it pop?

And what I am learning here is that there is enough hype to sink an entire Navy and STILL the market chugs along. Sure on a downward trend, but nothing all that remarkable, frankly.

I suppose it depends on what market you are in and how close you keep up with it. Does the trend in mortgage defaults, especially on sub prime, worry or concern you? How do you explain the reasons why it is rising at double digit rates?

RE demand mitigated, in part due to somewhat higher interest rates.

Long term interest rates are under 6.5% Brad, is that a concern? Did that cause demand to go flat?

That caused an over-supply in new home building driving down prices. Add to that the ton of hype and you have even more sellers trying to market their homes, ...

Well now, something is causing inventories to rise, could that be lack of affordability and lack of demand?

The market is back at a normal pace- perhaps a bit below it, but not in bubbleland, in my view.

The terms "normal" and "bubble" have no meaning to me in the way you are using them. Normal does not describe the current conditions in the market. Or are you saying that you see that word "normal" in how appraisers are characterizing current market trends?

 

[Randolph Kinney]

Brad,

What is that telling you? When you bet on 10 year notes going down due to higher interest rates and they do not go higher, you lose. Why are rates not going up? Because the economy is already slowing and the Fed does not need to raise rates, at least yet.

What this is telling me is that hedge funds and speculators are taking positions on interest rates to capture a gain if they move in the one direction or a loss if they move in the opposite direction. They take these positions to "hedge" other positions that are interest rate sensitive. The idea is to transfer risk or hedge against a risk. Sometimes markets move is such a way that the very people who are hedging against risk are causing more risk with exaggerated price movements.

So what happens if the Fed has done its job correctly?

How often does that happen? Judging from the past recessions and other problems, not often. Today, NAR is saying the FED has gone too far with interest rates. Other pundits are saying the FED has not gone far enough with raising interest rates because inflation is still a concern.

Bond prices go up and they go down, day to day, week to week, month to month. How much of that price movement is due to the direct FED action in the market Brad?

 

[Randolph Kinney]

Here Comes Hard Landing

Philly Fed's business index drops to first negative in three years

By Greg Robb, MarketWatch
Last Update: 2:37 PM ET Sep 21, 2006

WASHINGTON (MarketWatch) -- Manufacturing activity in the Philadelphia region fell in September, the first monthly decline since April 2003, led by a drop in new orders and shipments, according to the Federal Reserve Bank of Philadelphia on Thursday.

The Philly Fed index fell to -0.4 from 18.5 in August. The details in the release suggest no growth in manufacturing in the region, the Philly Fed said.

The report is the first hint that the slowdown that's well underway in the housing sector may have spread into the manufacturing sector.

http://www.marketwatch.com/news/story/Image.aspx?Guid=194092125b7047fcb88192689d1d115c&Track=201

There was a sharp reaction to the data in financial markets. The stock market fell sharply, while Treasury bond prices rose and yields declined to six-month lows. For the first time, futures markets were pricing in a small chance of a rate cut by the Fed this year.

The benchmark 10-year Treasury note ended up 22/32 at 101-25/32 with a yield of 4.648%, the lowest close since March 16 and down from its Wednesday closing level of 4.728%.

http://www.marketwatch.com/charts/gifquotes/story-sm-ss.img?symb=TNX&time=19&freq=1&compidx=aaaaa:0&comp=&uf=0&lf=1&lf2=0&lf3=0&state=0&sid=11420&startdate=&enddate=38981&nosettings=1&style=1012&size=1&mocktick=1&rand=

 

[moh malekpour]

Brad,
I am not trying to tell you how to investment. I am just giving you my opinion about the construction segment of the housing market. I believe that segment is in more trouble than the sub-prime lenders. It still has another one or two years to go downward that can be called at the buying level. If you are a contrarian investor who buys low and sells high, you should find out if that segment is at the buying level or not.

Your advice to RE buyers that market may not go down that much and buyers may not get the low price they seek is a wishful thinking.

Lest be logical and use economic fundamentals. We know that the supply and demand is the basis of value increase, value decline and stable value. Low supply or high demand =value increase. High supply or low demand = value decline. Balance supply and demand = stable value. Value is gauged by the rate of inflation or CPI. The rate of inflation or CPI has been 2%-3% last 5 years. If you had $100 bill last year and left it under the mattress, that $100 bill would be worth $97 today because it has lost 3% its purchasing power due to the increased inflation. If you had invested that $100 somewhere that was $103 today, you would had stabilized your $100.
We know that the housing market in Southern California had an increase of 25% every year in the row in last 3 years. We can say that housing market outperformed the stable market or rate of inflation market by 23% per year 3 years in the row.

We got to know why housing market increased more than any other market segment by 23% per year. We know that the other market segment was increasing only at 3% per year according to the government statistics. We also know that the overall economic growth like GDP was about 5%, the wage increase was 0%. So, why the housing got so much attention and increase?
The answer to that question is the lowest interest rate coupled with exotic and sub-prime rates loans created a huge demand for residential homes. With that money available to public, poeple bought first, second, and third homes, vacation homes and investor homes. Builders increased their products, converts apartments to condos and existing homeowners borrowed and spent. Every existing homeowner became 50-60% richer than 3 years earlier. But when that low rate stopped, the market woke up to the reality and bounced back. No matter what you want to call it now, correction, bust or crash, the reality is the market needs to give back what had gotten in last 3 years due to that artificial demand. Homeowners who didn’t use their homes as a piggy bank and didn’t withdraw their last penny of their equity for that vacation trip or car or furniture, are going to hang on to their properties. Those who thought they are going to have another 25% increase this year and another one next year and already borrowed against it are in trouble. Those who were not qualified for that home price and tried exotic loans are going to be in trouble because it is going to takes a long time for the market to move upward again. Market that doesn’t move up is a stagnant market and by definition is declining.

Your biting on population increase and low builders inventories. Population increase is nothing new. US population has been increasing all the time. That increase is due to the new birth and immigration. Since 9/11, the rate of legal and illegal immigration has been declined. The birth rate has been steady but so is the death rate. There hasn’t been any statistics to indicate that US population is increasing more than typical so much that creates that much demand for housing. That is true that everyone likes to come to this country but it is also true that it is about 10 times harder to immigrate to US now than 30 years ago.
The Fed may cut the rate next year but it is not going to be the same show that we had 3 years ago. The only time that Fed will be forced to cut the rate is when we are in recession and if we are in recession, cutting rate is not going to create demand for more homes because poeple are going to be out of job and employment. In addition, they are going to watch for those exotic loans for the next round if it ever happened.
Saying builders have low inventory is like saying the earth is flat. Currently builders got no idea what they can do with their current and proposed homes for next 3 years and you say they have low inventory. I think builders segment is going to go down more than what you think. You are opposing market timing but you are timing the market yourself. You want to catch a falling sword before you let it fall and then pick it up. How do you know that Hovanian is at the bottom right now? I like Contrarian investing but you should know the top and the bottom before you jump in but this is only my opinion. You should do what you think is the best for you.

 

[Brad Ellis]

Moh,

Better tell that to Congress because by most estimates we now have over 12 million illegals here just from Mexico- does not include ireland, Poland, and other countries where the government knows there are a number of them.

Also, you do NOT have to be a legal immigrant to buy a home here.

Brad