Housing Bubble Bursting?

[moh malekpour]

Mark,

There is a bubble in the domestic stock market here. Money has been flowing in. The FED has been pumping money to the banks to help relieve the subprime mortgage catastrophe and will continue with additional rate cuts. Other countries are raising their interest rates or are beneficiaries of a weak dollar. That is forcing a flow of dollars to those countries.

Looking at the US Treasury yield curve, from 2 years to 10 year maturity, interest rates have fallen. Look at the FED funds rate at 4.5%, it is higher today than the 10 year note which is at 4.38%, the 2 year note is around 3.5%. It points to another FED rate cut.

The dollar is tanking big time against other currencies with commodity prices rising for gold and oil particularly.

Half cash, half foreign investments until it is clear that FED policy has changed.

You can buy ETFs that will effectively short the major indices. You then have a built in hedge going long foreign, short domestic, holding cash when the dollar interest rates reverse. In that case, sell the foreign investments keeping the short position and let the cash position build.

Randolp,
I don't think foreign equities are totally safe. Most of them are dependent on US consumers and market. If US consumers dried down, equity prices of those nations that import to US are going to go down. I rather to invest in foreign currencies.

 

[Randolph Kinney]

Randolp,
I don't think foreign equities are totally safe. Most of them are dependent on US consumers and market. If US consumers dried down, equity prices of those nations that import to US are going to go down. I rather to invest in foreign currencies.

I agree Moh, foreign equities are not 100% safe. They do benefit from their higher interest rates and their higher foreign exchange rates and their natural resource based economies. Those countries that are commodity based like Canada or Australia, for example, are going up in value.

As soon as FED policy changes to raising interest rates, you sell foreign holdings. If you are already short domestic indices, you will benefit because the equity market will crash as money comes out and cash benefits with rising interest rates. Existing bonds suffer as yields adjust to higher rates.

 

[Riick]

12th of Never

.....As soon as FED policy changes to raising interest rates, ....

With Bernake at the helm, next set of rate increases are scheduled for the 12th of Never

 

[Randolph Kinney]

With Bernake at the helm, next set of rate increases are scheduled for the 12th of Never

The 12th of never comes quicker than most people can imagine. At some point, after cutting the FED funds rate down to whatever it takes to save the investors and banking system from insolvency, inflation will have had its seeds sown, fertilized, watered and growing fast.

There is basically two ways to bail out the system - 1) deflation (bankrupt debt) 2) inflation (debase the dollar).

The FED last lowered the funds rate by 0.25% and said it was done. The problem was it should have been more aggressive and lowered the funds rate by 0.50%. One of the reasons the market sold off today was because the FED is sending a message of ambivalence. The system is fine, it doesn't need any more FED help. But wait until the December FED meeting when they cut the rate more than 0.25% sending a message of whoops! it is worse than we thought and the dollar will crater more so than it has.

Some time in 2008 or early 2009, the FED will be raising the funds rate as the inflation rate approaches double digit.

 

[Randolph Kinney]

Merry Christmas? No more home equity to spend

From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist, and Alan Greenspan, the former Federal Reserve chairman. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data.

But in the first half of this year, equity withdrawals were down 15 percent nationally compared with the average for the last three years, and consumption supported by such funds plunged nearly one-fourth, according to the Kennedy and Greenspan data.

This summer, the size of withdrawals fell even more sharply to about one-third below the level of late last year, according to Mark Zandi, chief economist at Moody’s Economy.com.

“This slide in equity withdrawal is very recent,” Mr. Zandi said, “so you wouldn’t expect the drop in spending to occur until now, or Christmas.”

Sprawled across desert flats and framed by the rugged peaks of the Sierra, Reno encapsulates, in concentrated form, the forces at work on American consumers. In Nevada, and in neighboring California, home equity finance was about 20 percent of all disposable income at the end of last year, according to Economy.com. This September, it was down to about 9 percent.

http://www.nytimes.com/2007/11/08/business/08borrow.html?_r=1&th&emc=th&oref=login

 

[Randolph Kinney]

Consumer pays credit card over mortgage payment

Bankruptcy Law Backfires on Banks as Foreclosures Offset Gains


``Be careful what you wish for,'' Westbrook said. ``They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures.''

 

[Bobby Bucks]

More bad news from Bernanke http://www.foxbusiness.com/markets/...affected-outlook-broader-economy_349433_3.htm
I became convinced last month we’re finally in a mini recession. My Houston trust baby pal is still buying distressed properties on two continents, but he sold his private jet and is flying coach to be frugal. It’s going to be bad for a while I’m afraid.

 

[moh malekpour]

More bad news from Bernanke http://www.foxbusiness.com/markets/...affected-outlook-broader-economy_349433_3.htm
I became convinced last month we’re finally in a mini recession. My Houston trust baby pal is still buying distressed properties on two continents, but he sold his private jet and is flying coach to be frugal. It’s going to be bad for a while I’m afraid.

Bobby,
Welcome back. Where have been? Your link is broken. so, I am going post a similar link from bloomberg Bernanke Says Fed Sees Slower Growth, Inflation Risk

 

[Mike Garrett RAA]

I wonder if my brother will have to sell his Hawker XP?

 

[Greg Bell]

Dow down 600 points in two days ..Quick buy something..