Mortgage Bond Insurers In Need of $200 Billion

From the UK Times via calculated risk:

http://calculatedrisk.blogspot.com/2008/01/egan-jones-monolines-need-200-billion.html

A couple hundred billion here a couple hundred there...after a while it starts to add up.

A related issue via The Big Picture:

http://bigpicture.typepad.com/comments/2008/01/quote-of-the--2.html

Bill Ackman asks if Fitch Ratings should really have a Triple AAA rating on MBIA:

Does a company deserve your highest Triple A rating whose stock price has declined 90%, has cut its dividend, is scrambling to raise capital, completed a partial financing at 14% interest (now trading at a 20% yield one week later), has incurred losses massively in excess of its promised zero-loss expectations wiping out more than half of book value, with Berkshire Hathaway as a new competitor, having lost access to its only liquidity facility, and having concealed material information from the marketplace? Can this possibly make sense?

The huge rally back in MBI from four days ago is looking spent, although the 5 day moving average is still pointing up.

-s

Jingle Mail/Homeowners Walking Away

Via calculated risk:

http://calculatedrisk.blogspot.com/2008/01/more-on-homeowners-walking-away.html

A commenter on L.A. Land this morning writes, "I am one of these people. My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.
...
"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.
--------------------------
[CR's Comments:]
There are other issues to consider than just a wrecked credit rating. There are possible tax consequences. And it is possible, depending on whether the loan is recourse or non-recourse - and the frame of mind of the lender - for the lender to seek a deficiency judgment against the homeowner. Also it appears the homeowner has not properly disclosed the planned foreclosure on his current home with his new lender.

I'm not a lawyer or a tax advisor, and there may be other issues too. Hopefully the homeowner mentioned above has obtained tax and legal advice.

If we see the national average home price decline 20 to 30 percent, this could be a big issue.

-s

Societe Generale Loss May Be Tied to Market Downturn/Fed Cut

Via The Big Picture:

http://bigpicture.typepad.com/comments/2008/01/feds-folly-fool.html

I don't think this invalidates the recent bear market action. It would seem to me to be just another part of the market weakness. The interesting thing is that the Fed may have been forced into a premature cut partially because of this.

-s

Ashraf Laidi on Margin Debt via Hamzei Analytics

This looks like another good indicator of a bear market starting recently:

http://www.hamzeianalytics.net/2008/01/margin-data-suggest-prolonged-bear.html

-s

Clueless Advisor

I have overheard several conversations of an advisor (a CFP, no less) in the last few days. This clueless advisor is telling clients that the market is doing what the market does and if they have cash free they should buy more. These conversations are not based around dollar cost averaging.
This advisor has absolutely no concept of economics, fundamental valuations, or technicals.

I feel bad for the clients, but the fact that many advisers have these views makes it easier for me to differentiate myself.

-s

Update 10/20/08: In light of what the markets have done this year, this is a very important post. I know that the advisor in question had clients "invest" in China etc. over the last two years.

Crashes of the Past

I know, it seems like will will have a bear market and not a crash, but I think it's good to look at these crash charts via The Big Picture:

http://bigpicture.typepad.com/comments/2008/01/4-prior-market.html


-S

Bounce

Well it looks like a bounce. When will it fail? Maybe S&P 1380 to 1430 or so. It could go all the way up to ~1500 and then fail. We will just have to see.

OverHedged has a good post with comments on a NYTimes article today:

http://overhedged.blogspot.com/2008/01/seems.html

I thought the same thing when I read the Times this morning. The credit bubble is huge and the 75 basis point cut is a panic move by the Fed.

I'll try and post more soon.

No Bounce? Crash?

It seems as though we may not get a bounce and that the markets may, in fact, just crash and burn. The psychology may be that instead of waiting for a bounce, the big money chose to just sell (Panic) before others.

Most people were not expecting a crash so crash may well be what we get.

My guess is that most investors are, like dear in the headlights, frozen mentally while they watch their "investments" go down the toilet.

This is a beautiful process if you think about it. When the crowd gets it wrong they really get it wrong and there is a lot of money to be made from this.

-stealth

$107.8 Billion In Losses and Counting

http://bigpicture.typepad.com/comments/2008/01/wheeee.html

I've seen projections of losses up to $500 Billion. This does not include potential Credit Default Swap losses of ~$250 Billion or more. These projections also don't factor in a 30% decline, nationally, in housing.

Here's a quote from Bill Gross of PIMCO:

"The unfairly "Ben Stein pilloried" Jan Hatzius of Goldman Sachs estimates that mortgage related losses of $200-400 billion alone might lead to a pullback of $2 trillion of aggregate lending. Even if this occurs gradually, he writes, "The drag on economic activity could be substantial." Add to that my $250 billion loss estimate from CDS, as well as prospective losses in commercial real estate and credit cards in 2008 and you have a recipe for a contraction in credit leading to a recession."

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+January+2008.htm

-stealth

Bespoke Investment Group Re: Nasdaq

Bespoke Investment Group has this to say about the Nasdaq today:

"The Nasdaq is now down 18.37% from highs reached on 10/31/07. A bear market occurs when the price declines by 20% or more after previously rallying by 20% or more. While it's not yet a foregone conclusion that the Nasdaq will turn into a bear, it's getting very close, and investors should be prepared for what the typical bear looks like. Since the Nasdaq index was created back in 1971, it has suffered 13 bear markets. The average bear has been 216 days long for an average decline of 36.51%. Only 4 out of the 13 bears saw declines of less than 30%, and 4 bears saw losses of more than 40%." (Emphasis is mine)

http://bespokeinvest.typepad.com/bespoke/2008/01/nasdaq-historic.html

I think it's a little late to talk about preparing investors for a bear market. If your advisor has not warned you about this, he's an idiot.


-stealth

The Problem With Most Financial Advisers and Brokers

Quick history lesson:

In the past there were only brokers and they worked on commission. The problem with this is that they might "churn" the client's account, which means that they would buy and sell primarily to generate commissions. Anyway, these were also stock guys in that they were mainly buying and selling stocks for customers.

You can still find these brokers, not that you would want to hire one.

Now the industry has Financial Advisers, which work on a annual fee basis and are at least somewhat trained to have a more holistic view of the client.

Here are the problems with advisers:

1. Most are incompetent and/or unethical
2. Most will hold their interests above the client's
3. Advisers are trained purely to "sell" and are judged by their peers and firms. They are not judged on investment performance but buy revenues produced.
4. Most buy investment products from wholesalers rather than doing their own research.
5. They will always tell you it's a good time to buy. Always! They will act as though you are stupid not to buy.
6. They will show research/charts to prove point #5. This research/charts will have 20 to 50 year time horizons. Most investors don't have 20 to 50 years to invest.

Here's how it works when you walk into an office of, or call, any of the big firms:

You will be put in front of the most inexperienced people/person in the firm. Now, I think that the only offices that really get this kind of business are the ones that are visible from the street. This person is highly likely to be completely incompetent and just wants to sell you anything that they can. This is what the big firms think of you the client - nothing! They could care less. They just want to sell you something and move on to the next "customer."

How would one go about finding an advisor that is truly competent and ethical? This can be quite difficult as my rough guess is that they are about 2 or 3 out of 100 at best. You could ask an attorney or a CPA for a referral but the problem with this is that most of these professionals have trouble figuring out which advisers are good and which ones they can trust. Many have been burned and just don't give referrals. Some will take years to develop relationships before referring clients.

I think the only way to find an advisor is to know just enough yourself about investing and then interview a lot of advisers.

Hopefully this blog can help you by pointing to all of the best information on the internet on investing. I will also try to boil things down for you so that you don't have to read everything.

-stealth