Tuesday, November 28, 2006
Will This be the Ultimate Symbol of the Housing Bubble?
That's not the point.
What is the point?
What?
I loved that house.
Plus the schools.
The kids are three and one
They're gonna grow up
What?
Suzanne researched this!
This listing is special John, you guys can do this!
OK
Are you kidding?
This is awesome!
Did you see the size of that garage?
Yes!
Oh, that's great! Now let me get to work!
Homes Sales Up, Prices Down!
MSNBC News Services
WASHINGTON - Sales of existing homes posted a tiny increase in October, the first gain in eight months, but the median price of homes sold fell by a record amount.
The National Association of Realtors said Tuesday that existing home sales edged up 0.5 percent to a seasonally adjusted annual rate of 6.24 million. It was the first sales increase since February.
However, the median, or midpoint, price for a home sold dropped to $221,000 in October, a decline of 3.5 percent from a year ago. That was the biggest year-over-year price decline on record. It marked the third straight month that home prices have fallen compared to the same period a year ago, the longest stretch of such declines on record.
Michelle Meyer, an economist at Lehman Bros., said the rise in sales was partly a response to falling prices and a recent dip in mortgage rates
"The pickup in home sales reflects stabilization in demand and the first signs that the housing market is beginning to balance," she said in a note to clients.
Economist Joel Naroff of Naroff Economic Advisors said the report "does not point to a major housing meltdown," but he noted that there is a "huge" supply of unsold homes and condominiums on the market.
"The housing market is far from the bottom," he said in a research note. "Sellers will have to overcome their state of denial and start dropping prices even more to clear this market. And once that happens, we will then have to convince buyers that prices have stopped falling. We are a long way from that point."
The Federal Reserve, he said, is concerned that the housing market could sned the economy into a downturn, "but as of now that has not happened."
Fed Chairman Ben Bernanke was scheduled to speak on the outlook for the economy later Tuesday.
Analysts said it was likely that home prices will continue declining for the rest of this year as reluctant sellers, accustomed to the booming market conditions of previous years, finally cut their asking prices.
The once-booming housing market, which had been one of the economy’s standout performers for the past five years, has experienced a significant slowdown this year, which has dragged down overall economic growth.
Some analysts have worried that the correction in housing could be severe enough to drag the entire country into a recession. However, those fears have eased in recent months as a big fall in gasoline and other energy prices has provided support for consumer spending.
For October, sales were down 2.9 percent in the Northeast and 1.2 percent in the South. However, they rose by 6.4 percent in the West and were unchanged in the Midwest.
WASHINGTON - Sales of existing homes posted a tiny increase in October, the first gain in eight months, but the median price of homes sold fell by a record amount.
The National Association of Realtors said Tuesday that existing home sales edged up 0.5 percent to a seasonally adjusted annual rate of 6.24 million. It was the first sales increase since February.
However, the median, or midpoint, price for a home sold dropped to $221,000 in October, a decline of 3.5 percent from a year ago. That was the biggest year-over-year price decline on record. It marked the third straight month that home prices have fallen compared to the same period a year ago, the longest stretch of such declines on record.
Michelle Meyer, an economist at Lehman Bros., said the rise in sales was partly a response to falling prices and a recent dip in mortgage rates
"The pickup in home sales reflects stabilization in demand and the first signs that the housing market is beginning to balance," she said in a note to clients.
Economist Joel Naroff of Naroff Economic Advisors said the report "does not point to a major housing meltdown," but he noted that there is a "huge" supply of unsold homes and condominiums on the market.
"The housing market is far from the bottom," he said in a research note. "Sellers will have to overcome their state of denial and start dropping prices even more to clear this market. And once that happens, we will then have to convince buyers that prices have stopped falling. We are a long way from that point."
The Federal Reserve, he said, is concerned that the housing market could sned the economy into a downturn, "but as of now that has not happened."
Fed Chairman Ben Bernanke was scheduled to speak on the outlook for the economy later Tuesday.
Analysts said it was likely that home prices will continue declining for the rest of this year as reluctant sellers, accustomed to the booming market conditions of previous years, finally cut their asking prices.
The once-booming housing market, which had been one of the economy’s standout performers for the past five years, has experienced a significant slowdown this year, which has dragged down overall economic growth.
Some analysts have worried that the correction in housing could be severe enough to drag the entire country into a recession. However, those fears have eased in recent months as a big fall in gasoline and other energy prices has provided support for consumer spending.
For October, sales were down 2.9 percent in the Northeast and 1.2 percent in the South. However, they rose by 6.4 percent in the West and were unchanged in the Midwest.
Friday, November 17, 2006
UK Preparing for the Worst in Housing Prices!
Banks told to predict effects of a 40% crash in house prices
By Patrick Hosking, Banking and Finance Editor
BANKS in the UK have been ordered by financial regulators to assess how they would cope in the event of house prices crashing by 40 per cent.
The instruction to include a housing slump scenario in their stress-testing models comes after the Financial Services Authority found that some banks were failing to include gloomy enough assumptions in their modelling.
The FSA said yesterday that an “appropriate” benchmark was to assume property prices fell by 40 per cent and that 35 per cent of mortgages in default ended with homes being re-possessed. It stressed that this was not a forecast but a “severe but plausible scenario” and one that banks should examine when deciding how robust their balance sheets were.
In a speech to the British Bankers’ Association yesterday, Clive Briault, the FSA’s managing director for retail markets, remarked on banks’ differing views over the size and impact of a house market downturn, hence the need for reference points.
He also warned bankers to ensure that they have properly stress-tested their mortgage portfolios in the wake of decisions by some to lend people greater multiples of their incomes.
In a letter to bank chief executives last month the FSA accused some of failing to consider scenarios in which they might be forced into losses, dividend cuts or capital shortfalls.
“We were struck by how mild the firm-wide stress events were at some of the firms we visited,” wrote the FSA’s director of major retail groups, David Strachan.
A few banks were “weak in all respects” in stress-testing.
House prices fell about 15 per cent nationwide in 1989-1992, and in parts of East Anglia by 40 per cent, leading to repossessions, write-downs and bank losses.
Banks are obliged to stress-test hypothetical adverse movements in asset prices, interest rates and exchange rates to ensure that they have a sufficient capital cushion. But stress-testing is only as robust as the assumptions made.
The FSA move came as UK house prices grew at their fastest for four years, according to new figures from RICS.
By Patrick Hosking, Banking and Finance Editor
BANKS in the UK have been ordered by financial regulators to assess how they would cope in the event of house prices crashing by 40 per cent.
The instruction to include a housing slump scenario in their stress-testing models comes after the Financial Services Authority found that some banks were failing to include gloomy enough assumptions in their modelling.
The FSA said yesterday that an “appropriate” benchmark was to assume property prices fell by 40 per cent and that 35 per cent of mortgages in default ended with homes being re-possessed. It stressed that this was not a forecast but a “severe but plausible scenario” and one that banks should examine when deciding how robust their balance sheets were.
In a speech to the British Bankers’ Association yesterday, Clive Briault, the FSA’s managing director for retail markets, remarked on banks’ differing views over the size and impact of a house market downturn, hence the need for reference points.
He also warned bankers to ensure that they have properly stress-tested their mortgage portfolios in the wake of decisions by some to lend people greater multiples of their incomes.
In a letter to bank chief executives last month the FSA accused some of failing to consider scenarios in which they might be forced into losses, dividend cuts or capital shortfalls.
“We were struck by how mild the firm-wide stress events were at some of the firms we visited,” wrote the FSA’s director of major retail groups, David Strachan.
A few banks were “weak in all respects” in stress-testing.
House prices fell about 15 per cent nationwide in 1989-1992, and in parts of East Anglia by 40 per cent, leading to repossessions, write-downs and bank losses.
Banks are obliged to stress-test hypothetical adverse movements in asset prices, interest rates and exchange rates to ensure that they have a sufficient capital cushion. But stress-testing is only as robust as the assumptions made.
The FSA move came as UK house prices grew at their fastest for four years, according to new figures from RICS.
Wednesday, November 15, 2006
Las Vegas' Perfect Storm!
Yet another "Boom City" faces the harsh reality of the bursting of the housing bubble. Las Vegas experienced remarkable, unprecedented growth in the last few years but as a taxi driver remarked to me, during my July vacation, "Things have gone too crazy". When the taxi driver's "get it" better than the "flippers", you know you're at or near the end of the cycle.
Many factors affecting local real estate market
By NEIL SCHWARTZ
SPECIAL TO THE REVIEW-JOURNAL
I have read several articles recently about the current state of the Las Vegas real estate market. I now know why the public is totally confused.
After 18 years selling real estate both here and in Los Angeles, I have seen all the elements that affect a market. But never have I seen the problems facing us presently all coming together at the same time. It's like a perfect storm.
I believe if members of the public are well-informed with complete and accurate information, they themselves could help in solving this problem.
By getting a complete picture, they would better understand the problem and work toward a quicker solution.
Here are the elements:
1. We have an affordability problem in this town. They say that 5,000 to 7,000 people are moving in every month. So why do we have so many homes unsold on the market? Unfortunately, the wages being paid for the majority of jobs new and old are not high enough for the people to buy a home. You need approximately $57,000 of income to purchase a $211,000 home. Look around. Do you see many $211,000 homes? To solve this problem, either wages need to go up or prices need to come down. What's your guess?
2. Many investors who helped drive the prices up thinking they would make a killing are simply dumping their homes on the resale market to get out from under a mistake they made. They simply bought too late in the game to flip and they did not realize the $2,000 monthly payment can't be covered by a $1,200 monthly rental income. Because of the dumping of these properties on the resale market, the present inventory is more than 20,000 resale single-family homes and condos or townhomes. Fifty percent of the homes on the resale market are non-owner occupied. Who do you think is going to lead the market in pricing?
3. Some owners who have had their properties for a long time had built up some nice equity. Then interest rates dipped and they refinanced, increased the amount of their loan, bought cars, paid for vacations, etc., and now are finding out that with the market in somewhat of a decline, the value of their home is less than their loans. These people are trapped. These homeowners are the foreclosures of tomorrow.
4. Let's talk about loan fraud, which is occurring at an alarming rate. As sellers get backed up against the wall, they will be willing to listen to the few who will try to get something for nothing. A seller has his home on the market for three months at $400,000 and has not had any offers -- and along comes an offer of $460,000, but the buyer wants the seller to give him cash back of $60,000 after the close of escrow. Of course the lender won't know about this. After the deal closes and the buyer gets his $60,000, he is gone and never makes a payment on the mortgage. Here goes another one into foreclosure -- and since this scam is a federal crime, whoever they catch is going down, including the seller and almost everyone who touched the deal.
5. The public keeps hearing these reports from the experts that prices are not going down -- as a matter of fact, they are going up. Give me a break. What they don't say is that more and more sellers are giving incentives to buyers by paying all or part of the closing costs. This is legal, providing the lender is aware of it and limits the amount. So if a seller sells his home for $400,000 and gives the buyer 3 percent of the sales price for closing costs (that's $12,000), the seller really sold his home for $388,000. This is never mentioned when the experts report the real estate activity. The appraisers are required to make an adjustment for this incentive when they compare properties. The seller did not get $400,000, he got $388,000.
As I mentioned, all these elements are presently at work in the Las Vegas market. It's time for the media and the experts to take a day off and join an everyday working agent to see what all the facts are and report them accurately so the public can be well-informed and make good decisions.
Neil Schwartz is local real estate agent.
Many factors affecting local real estate market
By NEIL SCHWARTZ
SPECIAL TO THE REVIEW-JOURNAL
I have read several articles recently about the current state of the Las Vegas real estate market. I now know why the public is totally confused.
After 18 years selling real estate both here and in Los Angeles, I have seen all the elements that affect a market. But never have I seen the problems facing us presently all coming together at the same time. It's like a perfect storm.
I believe if members of the public are well-informed with complete and accurate information, they themselves could help in solving this problem.
By getting a complete picture, they would better understand the problem and work toward a quicker solution.
Here are the elements:
1. We have an affordability problem in this town. They say that 5,000 to 7,000 people are moving in every month. So why do we have so many homes unsold on the market? Unfortunately, the wages being paid for the majority of jobs new and old are not high enough for the people to buy a home. You need approximately $57,000 of income to purchase a $211,000 home. Look around. Do you see many $211,000 homes? To solve this problem, either wages need to go up or prices need to come down. What's your guess?
2. Many investors who helped drive the prices up thinking they would make a killing are simply dumping their homes on the resale market to get out from under a mistake they made. They simply bought too late in the game to flip and they did not realize the $2,000 monthly payment can't be covered by a $1,200 monthly rental income. Because of the dumping of these properties on the resale market, the present inventory is more than 20,000 resale single-family homes and condos or townhomes. Fifty percent of the homes on the resale market are non-owner occupied. Who do you think is going to lead the market in pricing?
3. Some owners who have had their properties for a long time had built up some nice equity. Then interest rates dipped and they refinanced, increased the amount of their loan, bought cars, paid for vacations, etc., and now are finding out that with the market in somewhat of a decline, the value of their home is less than their loans. These people are trapped. These homeowners are the foreclosures of tomorrow.
4. Let's talk about loan fraud, which is occurring at an alarming rate. As sellers get backed up against the wall, they will be willing to listen to the few who will try to get something for nothing. A seller has his home on the market for three months at $400,000 and has not had any offers -- and along comes an offer of $460,000, but the buyer wants the seller to give him cash back of $60,000 after the close of escrow. Of course the lender won't know about this. After the deal closes and the buyer gets his $60,000, he is gone and never makes a payment on the mortgage. Here goes another one into foreclosure -- and since this scam is a federal crime, whoever they catch is going down, including the seller and almost everyone who touched the deal.
5. The public keeps hearing these reports from the experts that prices are not going down -- as a matter of fact, they are going up. Give me a break. What they don't say is that more and more sellers are giving incentives to buyers by paying all or part of the closing costs. This is legal, providing the lender is aware of it and limits the amount. So if a seller sells his home for $400,000 and gives the buyer 3 percent of the sales price for closing costs (that's $12,000), the seller really sold his home for $388,000. This is never mentioned when the experts report the real estate activity. The appraisers are required to make an adjustment for this incentive when they compare properties. The seller did not get $400,000, he got $388,000.
As I mentioned, all these elements are presently at work in the Las Vegas market. It's time for the media and the experts to take a day off and join an everyday working agent to see what all the facts are and report them accurately so the public can be well-informed and make good decisions.
Neil Schwartz is local real estate agent.
U.S. Consumption Not Supported By Income
Economist at Morgan Stanley, Stephen Roach says,"I think we are coming to a critical point in the global business cycle, where an unbalanced world needs to get rebalanced and I think the key mechanism of that rebalancing will be slower rate of consumption by the US consumer. I think that’s been triggered as we speak by the bursting of the US housing bubble. I think it has global consequences for those economies that are heavily dependent on the US consumers."
Excerpts from an inerview given to CNBC-TV18
Q: Are you feeling bullish or bearish?
A: Both - I hate labels. The global business cycle is turning to a downside and that will certainly leave me bearish on prospects for world economic growth for 2007. The constructive comments that I have added to the debate in the last few months, have more to do with structural underpinnings of the global economy. And the fact that the so-called stewards of globalization - the G7 Finance Minister and the IMF are now mindful of the serious risks that could be caused by mounting global imbalances and are beginning a long process to do something about it. So, I have to take those legitimate concerns and efforts on board, in accessing my overall outlook for the global economy.
Q: I read in one of your recent reports that you are structurally positive but cyclically slightly pessimistic, what does that mean?
A: Again that is very much what I try to say. Cyclically, the world economy looks like it will disappoint next year, in terms of economic growth as the US housing bubble bursts, the US consumer and the construction industry feels the heat - it has global implications. Structurally, if the G7 and the IMF can get the architecture right in dealing with global imbalances, that could temper the downside and that will leave me a little less pessimistic than I might otherwise be.
Q: Are you convinced that structurally we have a lot to be positive about?
A: This is a glimmer that things may be getting better in terms of the global policy architecture, that is required to deal with mounting imbalances. We have an IMF meeting coming up very shortly, which will give us a further read, whether or not these global policymakers are truly up to the task.
Q: Do the cyclical factors really worry you?
A: It certainly was a possibility six years ago, plus an equity bubble popped and the world went into a mild recession at the end of 2000 and early 2001. We are now seeing the bursting of a major asset bubble in the US property market. It could well have equally profound implications on the US and what is still a US-centric global economy. We have to take these developments seriously and if an asset bubble six years ago gave us a recession - the question obviously is why can’t it do it again this time as well?
Q: You have seen the first signs of trouble in the housing market already - can we get away with or do you think it will be a really big problem?
A: There are two dimensions of the housing bubble response - there is the construction activity that is associated with building new homes and renovation of old homes and there is the price effect that has to deal with the value of the asset class. In the construction area, we are moving under recession right now, we are not going to get away with a mild slowing of growth rate. There is a huge backup of inventory of unsold homes - both new and existing sales are falling precipitously.
Ironically, construction activity is still being maintained at a high level in the residential construction sector because a lot of projects underway need to be completed but the pipeline is drying up and there will be a recession. In terms of house prices, the adjustments will hopefully be more moderate. We are hoping that there won't be a widespread price destruction and major declines in home prices. If that occurs, then the impact on wealth dependant, asset dependant American consumers will be particularly acute.
Q: How important is the US consumer as an engine of global economic growth?
A: I don’t want to sound too US-centric but the American consumer is by far the dominant consumer in the global economy. Last year, the US consumer spent close to USD 9 trillion that is 20% more than all consumers in Europe. It is more than three times the consumption levels in Japan. It's about 10 times consumption levels in China and it is 17 times consumption spending in India. So, the American consumer is clearly the most powerful consumer in the world. US consumption is a record 70% of US GDP and the consumption is not supported by income as I just eluded to.
It has been associated with record debt service ratios and negative saving rates for the first time since 1933. So, I think the case for consumption adjustment is compelling and unless some other brave consumer steps up somewhere else in the world and I am dubious of that, then I think there will be global consequences of the coming consolidation of the American consumer.
Q: If the US consumer does slow down, can the US get away with a non-recession like situation, a mild kind of growth which some of the economists tend to be veering towards?
A: I think in a post-housing boom climate, the US growth rate will be about 2% weaker then otherwise might have been the case. They will have their 1% point reduction coming from their construction impacts in the building area, and the other 1% point reduction coming from consumption. We have been growing about 3.25%-3.50% over the last few years, so if we take a couple of points off of that, then that will still leave you with a positive growth rate of say 1.25%-1.50% zone.
Q: If the US and China were to slow down at the same time, what happens to global commodities like crude, hard commodities, precious metals etc?
A: Commodity professionals have concluded that this sector is now in the early stages of a secular boom and everybody is talking about a super-cycle in commodities, and ignoring the possibility of downside pressures that would be evident, if China and the American consumer slows down.
China last year, accounted for a bulk of incremental demand in most of the major commodity prices. Here is a country that accounted for 5% of world GDP but consumed about 25% of all the aluminum in the world. Around 35%-40% of steel, iron, coal and nearly 50% of the cement in the world last year was poured into China. So, if China slows or if it tries to move to a more commodity efficient growth model, (which it has to do in order to deal with high cost of commodity prices) there could be a significant downside to global commodity prices.
Q: Will you be surprised if the Fed raises rates in the next quarter or so?
A: I wouldn’t be shocked at anything. The Fed has indicated that it does have concerns over the residue of inflationary pressure in the pipeline, but they are also mindful of the fact that their policy action impacts the economy. So, they do not want a tightening policy at a time when they are fearful that the business cycle maybe slipping. If the economy looks like it is coming back smartly, there is still a residue of inflationary pressure - then you could see some additional tightening by the US central bank. I don't suspect that would be the case but I could be wrong.
Q: What’s your best guess - will they cut interest rate down to 2.5%-3% or could it go lower than that?
A: Given the adjustments that I envision, I would find it very difficult to see them cutting the federal funds rate below 4% at any point in the next year or so.
Q: Where does it leave emerging markets though, what’s bad for the US, is it good for the emerging markets?
A: Emerging markets are very vulnerable in that regard. Our emerging market experts at Morgan Stanley, don’t agree with me for a second. They stress that their new fundamentals justify these narrow spreads. And I think to some extend their points are well taken because emerging markets have come a long way since the financial crises of 1997-98, in correcting many of the flaws that were evident back then.
But the next crisis is never like the last crisis and the next crisis could well be the loss of momentum by the American consumer, which is still the driver of the end market demand that supports most emerging market economies in the world. So I suspect, emerging markets could get hit on the shortfall of their major source of end market demand.
Q: Just to sum up you are saying that we have a tough couple of years ahead for the financial and commodity markets across the world?
A: I think we are coming to a critical point in the global business cycle, where an unbalanced world needs to get rebalanced and I think the key mechanism of that rebalancing will be slower rate of consumption by the US consumer. I think that’s been triggered as we speak by the bursting of the US housing bubble. I think it has global consequences for those economies that are heavily dependent on the US consumers.
Excerpts from an inerview given to CNBC-TV18
Q: Are you feeling bullish or bearish?
A: Both - I hate labels. The global business cycle is turning to a downside and that will certainly leave me bearish on prospects for world economic growth for 2007. The constructive comments that I have added to the debate in the last few months, have more to do with structural underpinnings of the global economy. And the fact that the so-called stewards of globalization - the G7 Finance Minister and the IMF are now mindful of the serious risks that could be caused by mounting global imbalances and are beginning a long process to do something about it. So, I have to take those legitimate concerns and efforts on board, in accessing my overall outlook for the global economy.
Q: I read in one of your recent reports that you are structurally positive but cyclically slightly pessimistic, what does that mean?
A: Again that is very much what I try to say. Cyclically, the world economy looks like it will disappoint next year, in terms of economic growth as the US housing bubble bursts, the US consumer and the construction industry feels the heat - it has global implications. Structurally, if the G7 and the IMF can get the architecture right in dealing with global imbalances, that could temper the downside and that will leave me a little less pessimistic than I might otherwise be.
Q: Are you convinced that structurally we have a lot to be positive about?
A: This is a glimmer that things may be getting better in terms of the global policy architecture, that is required to deal with mounting imbalances. We have an IMF meeting coming up very shortly, which will give us a further read, whether or not these global policymakers are truly up to the task.
Q: Do the cyclical factors really worry you?
A: It certainly was a possibility six years ago, plus an equity bubble popped and the world went into a mild recession at the end of 2000 and early 2001. We are now seeing the bursting of a major asset bubble in the US property market. It could well have equally profound implications on the US and what is still a US-centric global economy. We have to take these developments seriously and if an asset bubble six years ago gave us a recession - the question obviously is why can’t it do it again this time as well?
Q: You have seen the first signs of trouble in the housing market already - can we get away with or do you think it will be a really big problem?
A: There are two dimensions of the housing bubble response - there is the construction activity that is associated with building new homes and renovation of old homes and there is the price effect that has to deal with the value of the asset class. In the construction area, we are moving under recession right now, we are not going to get away with a mild slowing of growth rate. There is a huge backup of inventory of unsold homes - both new and existing sales are falling precipitously.
Ironically, construction activity is still being maintained at a high level in the residential construction sector because a lot of projects underway need to be completed but the pipeline is drying up and there will be a recession. In terms of house prices, the adjustments will hopefully be more moderate. We are hoping that there won't be a widespread price destruction and major declines in home prices. If that occurs, then the impact on wealth dependant, asset dependant American consumers will be particularly acute.
Q: How important is the US consumer as an engine of global economic growth?
A: I don’t want to sound too US-centric but the American consumer is by far the dominant consumer in the global economy. Last year, the US consumer spent close to USD 9 trillion that is 20% more than all consumers in Europe. It is more than three times the consumption levels in Japan. It's about 10 times consumption levels in China and it is 17 times consumption spending in India. So, the American consumer is clearly the most powerful consumer in the world. US consumption is a record 70% of US GDP and the consumption is not supported by income as I just eluded to.
It has been associated with record debt service ratios and negative saving rates for the first time since 1933. So, I think the case for consumption adjustment is compelling and unless some other brave consumer steps up somewhere else in the world and I am dubious of that, then I think there will be global consequences of the coming consolidation of the American consumer.
Q: If the US consumer does slow down, can the US get away with a non-recession like situation, a mild kind of growth which some of the economists tend to be veering towards?
A: I think in a post-housing boom climate, the US growth rate will be about 2% weaker then otherwise might have been the case. They will have their 1% point reduction coming from their construction impacts in the building area, and the other 1% point reduction coming from consumption. We have been growing about 3.25%-3.50% over the last few years, so if we take a couple of points off of that, then that will still leave you with a positive growth rate of say 1.25%-1.50% zone.
Q: If the US and China were to slow down at the same time, what happens to global commodities like crude, hard commodities, precious metals etc?
A: Commodity professionals have concluded that this sector is now in the early stages of a secular boom and everybody is talking about a super-cycle in commodities, and ignoring the possibility of downside pressures that would be evident, if China and the American consumer slows down.
China last year, accounted for a bulk of incremental demand in most of the major commodity prices. Here is a country that accounted for 5% of world GDP but consumed about 25% of all the aluminum in the world. Around 35%-40% of steel, iron, coal and nearly 50% of the cement in the world last year was poured into China. So, if China slows or if it tries to move to a more commodity efficient growth model, (which it has to do in order to deal with high cost of commodity prices) there could be a significant downside to global commodity prices.
Q: Will you be surprised if the Fed raises rates in the next quarter or so?
A: I wouldn’t be shocked at anything. The Fed has indicated that it does have concerns over the residue of inflationary pressure in the pipeline, but they are also mindful of the fact that their policy action impacts the economy. So, they do not want a tightening policy at a time when they are fearful that the business cycle maybe slipping. If the economy looks like it is coming back smartly, there is still a residue of inflationary pressure - then you could see some additional tightening by the US central bank. I don't suspect that would be the case but I could be wrong.
Q: What’s your best guess - will they cut interest rate down to 2.5%-3% or could it go lower than that?
A: Given the adjustments that I envision, I would find it very difficult to see them cutting the federal funds rate below 4% at any point in the next year or so.
Q: Where does it leave emerging markets though, what’s bad for the US, is it good for the emerging markets?
A: Emerging markets are very vulnerable in that regard. Our emerging market experts at Morgan Stanley, don’t agree with me for a second. They stress that their new fundamentals justify these narrow spreads. And I think to some extend their points are well taken because emerging markets have come a long way since the financial crises of 1997-98, in correcting many of the flaws that were evident back then.
But the next crisis is never like the last crisis and the next crisis could well be the loss of momentum by the American consumer, which is still the driver of the end market demand that supports most emerging market economies in the world. So I suspect, emerging markets could get hit on the shortfall of their major source of end market demand.
Q: Just to sum up you are saying that we have a tough couple of years ahead for the financial and commodity markets across the world?
A: I think we are coming to a critical point in the global business cycle, where an unbalanced world needs to get rebalanced and I think the key mechanism of that rebalancing will be slower rate of consumption by the US consumer. I think that’s been triggered as we speak by the bursting of the US housing bubble. I think it has global consequences for those economies that are heavily dependent on the US consumers.
Tuesday, November 14, 2006
Consumer Credit Plunges
MarketWatch is reporting U.S. consumer credit down by most since April 1992
Consumers may have finally "caved in". It remains to be seen whether or not this is finally a precursor to recession or just another step along the way.
U.S. consumer credit outstanding fell by the biggest amount since April 1992 in September as households took out fewer loans for items like automobiles and boats, the Federal Reserve said Tuesday. Total consumer credit fell by $1.20 billion in September, or by a seasonally adjusted annual rate of 0.61%, to $2.366 trillion, the Fed said. In April 1992, outstanding consumer credit fell by $1.78 billion, according to the Fed.
The decline was unexpected. Wall Street economists surveyed by MarketWatch were expecting consumer credit to grow by $5.4 billion in September. Most of the decline was in so-called nonrevolving credit, like loans for cars and boats. Nonrevolving credit fell by $4.05 billion, or by a seasonally adjusted annual rate of 3.21%, to $1.50 billion.
Consumers may have finally "caved in". It remains to be seen whether or not this is finally a precursor to recession or just another step along the way.
Friday, November 10, 2006
The Bulls Charge!
Excellent observations from Lew Rockwell:
"I’m not sure I want popular opinion on my side – I’ve noticed those with the most opinions often have the fewest facts."
~ Bethania McKenstry
Opinions are like noses: everyone has one. But a strange thing happened on the way to Dow 12,000 – the overwhelming majority of financial pundits sound like a broken record:
"I think we should put on another 100 points in the S&P 500 by next February and another 1000 points on the Dow."
~ Peter Canelo, Canelo & Associates, 10/13/06
"Our feeling is that the economy is slowing and this is good news for investors."
~ Abby Cohen, Goldman Sachs, 10/17/06
"The upside still outweighs the downside in our view… People forget – this isn’t like the late 1990s. This is like the mid-1990s."
~ Tony Dwyer, FTN Midwest Securities, 10/18/06
"I don't think the economy's 'landing.' I think the economy's doing great… It's better than Goldilocks quite honestly. This is the greatest global boom of all time."
~ Ed Yardeni, Oak Investments, 10/18/06
"Count me somewhere between bullish and very bullish. The U.S. stock market remains undervalued, in my opinion."
~ Bill Miller, Legg Mason, 10/21/06
"It simply is not remarked upon enough how unbelievably powerful, how unbelievably bullish this rally is."
~ James Cramer, CNBC’s "Mad Money," 10/27/06
Optimism is pervasive on Wall Street, yet some bulls, well aware of the laws of contrary opinion, claim too much pessimism as a reason to own stocks:
"The fact is we can't find enough to worry about, and that's usually a good time to find value in the stock market… Any red ink between now and the end of the year is an opportunity and not something for investors to run from."
~ Mike Williams, Tocqueville Asset Management, 10/13/06
"… I think bravado and optimism begets bad times and chronic cautiousness paints a beautiful picture for the future. [This] is a low-risk, high-return situation created by cautious players."
~ James Paulsen, Wells Capital Management, 10/20/06
"Could we have a big bear market? I don’t think so. Bear markets come from a combination of positive sentiment with bad surprises virtually no one anticipates… Today too many gloomsters and not that many big-time boomsters (like me) are around for this combination to occur."
~ Kenneth L. Fisher, Fisher Investments, 10/30/06
The bulls can’t possibly be running confidently and running scared at the same time. What are the "facts" regarding investor sentiment?
Guest commentary on CNBC (a.k.a. "Bubblevision") is universally upbeat, bordering on giddy.
Over the last 420 weeks the Investors Intelligence poll of investment newsletter editors has recorded more bears than bulls just 6 times.
The Hulbert Stock Newsletter Sentiment Index shows its sampling of short-term market timers with a 67.0% exposure to the stock market. According to Mark Hulbert, "the HSNSI's average reading since the bull market began on Oct. 9, 2002, has been just 29.5%, or less than half the current sentiment reading. In other words, the wall of worry that has on average existed during this more than four-year bull market has now evaporated."
Institutional investors have not deviated from their fully invested course. Mutual fund cash levels remain at a paltry 4.3%.
Short sellers are nearly extinct. An estimated $4 billion resides in bear fund assets against $5.5 trillion in stock fund assets. The Strunk Short Index used to follow 25 short bias hedge funds; that number has dwindled to 8 or 9 (there were over 9,200 hedge funds at last count).
In a twist of irony, many in the bear camp have resigned themselves to owning stocks (primarily energy and commodity-related) as a hedge against hyperinflation.
The investing public is all in. Equities account for 35.6% of household financial assets compared to the long-term average of 26.5% (since 1952). Money market fund balances are near an all-time low 21.3% of mutual fund assets
Ten of our favorite sentiment indicators are, on average, in the 73rd percentile of bullishness versus readings over the past ten years. Overall, 1996 to 2006 was a period of stock market ebullience, making the current level of enthusiasm all the more extreme.
Meanwhile, the Soft Landing crowd continues to turn a blind eye to a credit bubble about to go into an uncontrolled spin. Median existing home prices dropped 2.5% year-over-year, their worst showing in nearly four decades. Foreclosures in California have doubled in the past year and are up tenfold in Boston since 2004. Default rates on subprime loans were 7.35% in July from 5.51% a year earlier, according to Friedman Billings Ramsey. Michael Perry, CEO of Indymac Bank (one of the nation’s largest home lenders), thinks 4% of America's mortgaged homeowners might lose their homes to foreclosure in coming months, four times worse than the historical average. Subprime lender Accredited Home Lending, Washington Mutual (with a large exposure to subprime) and mortgage insurer Radian Group all witnessed sharp stock drops on disappointing 3rd quarter earnings releases. Since this rally began in mid-July, the Philadelphia Bank Index (BKX) looks exhausted, capturing just 54% of the gain of the S&P 500.
Never confuse a stampeding herd with the facts. Only in a bubble can the majority – utterly intolerant of dissent – delude itself into believing it is in the dissenting minority. We’re not sure whether such behavior is disingenuous or simply dysfunctional. Perhaps the old saw applies: "When everyone is thinking alike, no one is really thinking."
"I’m not sure I want popular opinion on my side – I’ve noticed those with the most opinions often have the fewest facts."
~ Bethania McKenstry
Opinions are like noses: everyone has one. But a strange thing happened on the way to Dow 12,000 – the overwhelming majority of financial pundits sound like a broken record:
"I think we should put on another 100 points in the S&P 500 by next February and another 1000 points on the Dow."
~ Peter Canelo, Canelo & Associates, 10/13/06
"Our feeling is that the economy is slowing and this is good news for investors."
~ Abby Cohen, Goldman Sachs, 10/17/06
"The upside still outweighs the downside in our view… People forget – this isn’t like the late 1990s. This is like the mid-1990s."
~ Tony Dwyer, FTN Midwest Securities, 10/18/06
"I don't think the economy's 'landing.' I think the economy's doing great… It's better than Goldilocks quite honestly. This is the greatest global boom of all time."
~ Ed Yardeni, Oak Investments, 10/18/06
"Count me somewhere between bullish and very bullish. The U.S. stock market remains undervalued, in my opinion."
~ Bill Miller, Legg Mason, 10/21/06
"It simply is not remarked upon enough how unbelievably powerful, how unbelievably bullish this rally is."
~ James Cramer, CNBC’s "Mad Money," 10/27/06
Optimism is pervasive on Wall Street, yet some bulls, well aware of the laws of contrary opinion, claim too much pessimism as a reason to own stocks:
"The fact is we can't find enough to worry about, and that's usually a good time to find value in the stock market… Any red ink between now and the end of the year is an opportunity and not something for investors to run from."
~ Mike Williams, Tocqueville Asset Management, 10/13/06
"… I think bravado and optimism begets bad times and chronic cautiousness paints a beautiful picture for the future. [This] is a low-risk, high-return situation created by cautious players."
~ James Paulsen, Wells Capital Management, 10/20/06
"Could we have a big bear market? I don’t think so. Bear markets come from a combination of positive sentiment with bad surprises virtually no one anticipates… Today too many gloomsters and not that many big-time boomsters (like me) are around for this combination to occur."
~ Kenneth L. Fisher, Fisher Investments, 10/30/06
The bulls can’t possibly be running confidently and running scared at the same time. What are the "facts" regarding investor sentiment?
Guest commentary on CNBC (a.k.a. "Bubblevision") is universally upbeat, bordering on giddy.
Over the last 420 weeks the Investors Intelligence poll of investment newsletter editors has recorded more bears than bulls just 6 times.
The Hulbert Stock Newsletter Sentiment Index shows its sampling of short-term market timers with a 67.0% exposure to the stock market. According to Mark Hulbert, "the HSNSI's average reading since the bull market began on Oct. 9, 2002, has been just 29.5%, or less than half the current sentiment reading. In other words, the wall of worry that has on average existed during this more than four-year bull market has now evaporated."
Institutional investors have not deviated from their fully invested course. Mutual fund cash levels remain at a paltry 4.3%.
Short sellers are nearly extinct. An estimated $4 billion resides in bear fund assets against $5.5 trillion in stock fund assets. The Strunk Short Index used to follow 25 short bias hedge funds; that number has dwindled to 8 or 9 (there were over 9,200 hedge funds at last count).
In a twist of irony, many in the bear camp have resigned themselves to owning stocks (primarily energy and commodity-related) as a hedge against hyperinflation.
The investing public is all in. Equities account for 35.6% of household financial assets compared to the long-term average of 26.5% (since 1952). Money market fund balances are near an all-time low 21.3% of mutual fund assets
Ten of our favorite sentiment indicators are, on average, in the 73rd percentile of bullishness versus readings over the past ten years. Overall, 1996 to 2006 was a period of stock market ebullience, making the current level of enthusiasm all the more extreme.
Meanwhile, the Soft Landing crowd continues to turn a blind eye to a credit bubble about to go into an uncontrolled spin. Median existing home prices dropped 2.5% year-over-year, their worst showing in nearly four decades. Foreclosures in California have doubled in the past year and are up tenfold in Boston since 2004. Default rates on subprime loans were 7.35% in July from 5.51% a year earlier, according to Friedman Billings Ramsey. Michael Perry, CEO of Indymac Bank (one of the nation’s largest home lenders), thinks 4% of America's mortgaged homeowners might lose their homes to foreclosure in coming months, four times worse than the historical average. Subprime lender Accredited Home Lending, Washington Mutual (with a large exposure to subprime) and mortgage insurer Radian Group all witnessed sharp stock drops on disappointing 3rd quarter earnings releases. Since this rally began in mid-July, the Philadelphia Bank Index (BKX) looks exhausted, capturing just 54% of the gain of the S&P 500.
Never confuse a stampeding herd with the facts. Only in a bubble can the majority – utterly intolerant of dissent – delude itself into believing it is in the dissenting minority. We’re not sure whether such behavior is disingenuous or simply dysfunctional. Perhaps the old saw applies: "When everyone is thinking alike, no one is really thinking."
Subscribe to:
Posts (Atom)