Bear Market


foreclosure sales accounted for 31 percent of first quarter sales

June 30, 2010 by · Leave a Comment 

“A total of 232,959 properties in some stage of foreclosure (default, auction, REO) were sold to third parties in the first quarter, a 14 percent decline from the previous quarter, RealtyTrac said today.”

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Investors Snap Up High-Quality Multifamily Properties as Rents, Occupancy Improve

June 30, 2010 by · Leave a Comment 

“Competition Fierce for Choice Assets But Deals Aren’t As Prolific in the First Half of Year as Some Analysts Expected”

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House Prices Are Still Too High

June 30, 2010 by · Leave a Comment 

“Sorry, But House Prices Are Still Too High And They’re Going To Fall”

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Fannie Mae Mortgage Portfolio Passes $800bn in May, Cleared to Fund More ‘Dead Assets’

June 30, 2010 by · Leave a Comment 

“The Fannie Mae mortgage portfolio passed $813bn in May, climbing $24bn from April, according to its monthly summary.”

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Sorouh Raises $640 Million Loan to Repay Bond, Finance Abu Dhabi Projects

June 30, 2010 by · Leave a Comment 

“Sorouh Real Estate PJSC, Abu Dhabi’s second-biggest property developer, raised 2.35 billion dirhams ($640 million) in loans to repay Islamic bonds and finance projects in the United Arab Emirates’ capital.”

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Doom Summer Reruns Q207: Remembering April to June 2007

June 30, 2010 by · Leave a Comment 

Come back, if you dare, to the spring of '07.  Official optimism was fighting a last ditch battle against economic reality.

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#10 "The National Association of Realtors- What a Difference a Week Makes!"

by twist, 4/13 '07

… where the NAR demonstrates that the best way to make a prediction is to backdate it.

  • "You just know the housing situation has gotten bad if the six-percenters at the National Association of Realtors finally feel the need to reveal the awful truth: Prices are going to fall. The latest verbiage from the world’s most vocal housing-bubble cheerleader, NAR economist David Lereah, actually predicts that home prices will drop by 0.7 % in 2007." – Seth Jayson Motley Fool

#9 "Home Prices May Not Crash- But Sometimes They Go Down Darn Fast"

by twist, 6/28 '07

  • Those who study speculative bubble markets though, generally do not predict a "pop," but a gradual rate of decline, particularly in real estate, where prices tend to be 'sticky.' " – twist 3/10 '07

Sometimes I have to eat my words too.  Just over three months after I said that …


#8 "Fannie Files 2005 10-K – CFO Hand-off Sounds Good"

by John M, 5/3 '07

This was one of John's "DoomWatches," when he was trying to collect samples from some great fire-stream of information about one of the topics we'd been following.

  • "But more importantly, the release marks another milestone in the company’s effort to work through an accounting scandal that prompted the ouster of its top management and raised allegations that Fannie Mae executives had manipulated the books in order to maximize their bonuses. Federal authorities are trying to recoup tens of millions of dollars in bonuses from former Fannie chief executive Franklin D. Raines. The company itself paid $400 million in penalties to settle with the Securities and Exchange Commission." – Howard Schneider in the Washington Post, May 2, 2007.
    • Little did John realize then that Fannie's & Freddie's troubles were only beginning …

#7 "Phoenix Home Sales: Worst March in Five Years"

by twist, 4/11 '07

Long time Doom nemesis Jay Butler, ASU professor and housing analyst, was tap dancing around the data to avoid the most salient point- home sales were at their worst point in five years.

  • March generally tends to be the first month that shows an improvement in a given year and the beginning of the resale season. With 5,385 sales, March did show some improvement over January (4,520 sales) and February (4,280 sales). Further, it was the strongest month since 5,685 were recorded in August 2006 and 5,040 sales in November. Thus, March showed all of the indicators of a traditional March and further supported the idea that the market has returned to its historical pattern. However, it was well below the 7,265 sales of March 2006 and 10,035 sales of March 2005, but comparable to the 5,340 sales of March 2002."  – Jay Butner
    • The twists and turns of that one were enough to make me dizzy.

#6 "Fair Isaac Foils FICO Fixing"

by twist, 6/5 '07

Companies were adding low-scoring users to credit cards of high-scoring users to repair their FICO, prompting Doom to ask…

  • How can subprime be contained when you don’t know who’s a subprime borrower?

#5 "A Slightly Off-Beat Question"

by John M, 4/5 '07

This was John's first ever try at writing up part of an American Enterprise Institute banking seminar.  He and Igor have been working steadily on this project in the years since and now "the dungeon" holds 23 complete annotated event transcripts with two more currently under construction.


#4 "U.S Pending Home Sales Down 10.5% YOY, Lowest Reading in Three Years"

by twist, 5/1 '07

Home sales were bad, but David Lereah of the National Association of Realtors could always be counted on to see improvement just around the corner.


#3 "Amendment Dares Not Speak Its Name"

by John M, 5/24 '07

As Congress was writing the legislation to enable new GSE regulator FHFA, Congresswoman Melissa Bean (D-IL) and Congressman Randy Neugebauer (R-TX) managed to get a "Bean-Neugebauer" amendment passed to limit FHFA's oversight of possible systemic risk involving Freddie and Fannie.  Whatever were they thinking?

  • "This amendment would preclude a new regulator from assessing an overly broad interpretation of risk that might unnecessarily constrain portfolio activities of Fannie Mae and Freddie Mac, which could disrupt the mortgage markets and impede the enterprises’ pursuit of their housing mission". – NAHB
    • This quote is taken from note [10] at the end of the article.  John gave credit to the Home Builders for at least raising the issue.  B-N went through with very little public discussion and now, for all we know, this legislation may still be in force.  The builders need not have worried, though, because even under conservatorship the GSEs' portfolios seem very much unconstrained no matter how risky the new mortgages are.

#2 "We’re Still Here"

by twist, 6/15 '07

To a poster on the Yahoo “gossip” boards who said, I don’t see how there could be any more RE doomsayers out there I said, We’re still here.


And a good thing too, because less than a week later those two infamous hedge funds at Bear Stearns blew up, which brings us to …

Hank. And for anyone who still thinks that smart former Goldman Sachs type Secretaries can be counted on for accurate information, (There must be one or two of you) this week’s number one pick should disabuse you of that notion.


#1 "HousingDoom Pauses for Sunshine and Roses- And Gives a Response"

by twist, 6/21 '07

On the very day that impending doom became clearly audible to everyone in the blogosphere he gave us one of the year’s funniest quotes:

  • WASHINGTON – The major slump in the housing market is nearing an end and should not have a significant impact on the overall economy, Treasury Secretary Henry Paulson said Wednesday.
  • "We have had a major housing correction in this country," Paulson said in an interview with a small group of reporters at the Treasury Department. "I do believe we are at or near the bottom."

Little did Hank suspect how near he was, that less than two months later the bottom would fall out of entire world's private banking system. Tune in next week as Doom recycles July to September '07 and the sudden onset of the global credit crunch.

Read more….

Innovation: Financial, Technical and Institutional

June 30, 2010 by · Leave a Comment 

By Charles Hugh Smith, OFTWOMINDS
We’ve had too much financial “innovation” and not enough institutional innovation.


The key context in any discussion of innovation is the returns generated. If they are marginal, then the innovation is of limited value.


In the realm of financial “innovation,” the returns were phenomenal for a handful of Wall Street players selling mortgage-backed securities and for a much larger group of unscrupulous mortgage brokers who “gamed the system” and foisted high-risk or fraudulent mortgages onto secondary markets as if they were truly qualified and low-risk.

For the nation at large, the returns on the past decade’s financial “innovations” of exponentially increasing leverage and debt, fraud, mispricing of risk and collusion have been catastrophic.

On the scientific front, many innovations in pharmaceuticals have been marginal, once side-effects and often-poor results are factored in.

On the institutional level, there has been little to no innovation, only more status-quo regulation which has generated dubious returns in terms of transparency or improvements and quite possibly negative returns when the costs of compliance are factored in.

So the key to truly productive innovation is that the return is substantial and scalable and the risks are properly assessed and priced.


In many cases, the innovation’s returns/benefits are oversold and over-promised, while the inherent risks are misrepresented, glossed over and discounted.

Thus we have “safe” medications which are suddenly discovered to have serious side-effects, and “safe” 13,000-foot deep oil wells which blow out one mile beneath the surface of the sea.

Risk can be mis-assessed and also mispriced. The risks of Fannie Mae imploding were actually quite high, but the risk was mis-assessed and mispriced. Investors who believed the status-quo assessment of risk were wiped out.

This context plays an important function in technical innovations, not just in financial or institutional innovations.


A photovoltaic panel will not blow up, but a solar heat collector which heats water (or other substance) to high temperatures could well blow a valve. A geothermal exchange system will not blow up, but a geothermal well might trigger earthquakes and could release steam. These risks–the escape of steam and the triggering of small earthquakes–can be assessed, mitigated and balanced against the benefits, but the Gulf oil blowout is stark evidence that risk management and mitigation of inherently risky systems does not render them without risk.

Inherently low-risk systems do not need elaborate counter-measures and redundancies.

The First Big Question of this century is how do we replace the cheap, high-density energy of petroleum and natural gas. If oil were really as abundant as many seem to think, why does it require dropping a mile-long pipe in deep water and then drilling a 13,000-foot deep well to extract it?

Given the horrendous expense and the inherent risks, that doesn’t seem like a good investment if cheaper/easier-to-get oil was as abundant as some seem to believe.

The solar radiation which bathes the planet every day is substantial. Some of this is captured by plants in photosynthesis, some is captured in heat, and a tiny sliver is captured via electronics or heat collectors and turned into electricity.

The rap against alternative energy is that it is fundamentally low-density. In other words, it doesn’t come pre-packaged like petroleum in a transportable, high-energy density form. Wind, solar, tidal energy, etc. are diffuse and must be collected and condensed into higher-density energy which can be stored or distributed.

If we consider the basic physics–the abundance of solar energy and the need for high-density storage and transport–then we can conclude that innovative storage technolgies will offer high returns. Many observers believe hydrogen is the obvious choice for storing solar energy (to be used in fuel cells)–whether it is solar energy converted into algae, hot water or directly into electricity.

Others note that compressed hydrogen has potentially explosive risk factors, and in terms of vehicle transport then batteries might offer a lower risk source of concentrated power. Large-scale storage of energy would also benefit from scalable innovations.

If the energy source is essentially free and the collection process essentially low-risk, then the calculus of risk and return is quite different from an inherently dangerous energy collection/storage technology.

The Second Big Question of this century is how can we do more with the energy we do collect/extract. Take a vehicle which gets 10 miles per gallon of gasoline. Now to drive that vehicle 400 miles, we need to extract oil and then refine it into 40 gallons of gasoline.

Alternatively, we extract 40 miles per gallon from the vehicle and then we find/refine 10 gallons of gasoline. The result–400 miles–is the same in each case.


Once oil becomes scarce and/or very costly, then the truly high-return innovation would be to make a vehicle which gets 200 miles per gallon of gasoline or other liquid fuels. Then only two gallons of fuel would be needed to drive 400 miles.

The model of development of energy since the start of the Industrial Revolution has been to go find more cheap sources as energy demand rose. That model is running into a variety of limits, physical and political. Therefore extracting more work from the energy we do have is the preferable model.

The “market” is not always a productive arbiter of such value. The 5% of total U.S.-generated electricity squandered daily on zombie and stand-by electronics will never be addressed by the “market” because the consumer will never demand such a modest change nor will manufacturers gain any competitive advantage from the modest extra cost of manufacture.

Only the State can impose such common-sense practices on a market which cannot recognize or register a 5% loss of the nation’s electricity because the market is individuals who will not respond to 5% of their electricity being wasted.

The Central State imposed common-sense conservation regulations on home appliances after the 1973 Oil Crisis and energy consumption actually declined as these modest measures took effect. Nobody “suffered” because their refrigerator required less electricity.

The broad outlines of high-return innovations in technology are clear; the innovations we need in institutions are less clear but no less needed.


To take but one example: is there truly no other way to educate people in the skillsets which will be valuable going forward (creativity, ability to learn on one’s own, ability to work in teams, flexibility, etc.) other than a horrendously costly university? Is there truly no other way to run a university except to charge students $30,000 a year or a total of $120,000 for four years?

Or did this institutional cost arise because “free money” was available from student loans? If government-funded and pushed student loans were ended tomorrow (which would be my recommendation), then the hundreds of colleges and universities which have grown dependent on this model of finance and education would face a stark choice: either close down or come up with an innovative way to offer education for (say) $5,000 a year.

The same institutional shock and forced innovation will occur when (not if) Medicare and Medicaid implode and the endless supply of “free money” from the Federal government ends. A pharmaceutical company can offer medications at $10,000 a dose all it wants but there will be few buyers. Either that firm will go bankrupt from lack of sales or the price of the med will magically fall to what people can actually afford.

The fact that so many people automatically claim that such institutional innovation is “impossible” is proof of our shrunken imagination and limited conceptual understanding of innovation.


We understand technical innovations easily and expect them; but institutional innovations which offer just as high returns, if not higher, than new technologies, are verboten, impossible, beyond imagination.

Here is one example. How much money would it take to close a street to cars and trucks? Almost nothing–a few concrete barriers and signs. This “innovation” would be making travel by bicycle cheaper, easier, safer and in many cases faster than travel by car.

But we find this sort of innovation uninspiring and tepid; if there were a monorail being proposed, or flying bicycles, that would pique our enthusiasm and interest. But simply making a cheap, convenient form of transport more readily available and safer offers no zing. And of course, the inertia of the status quo is immense; though there are 99 other streets still open to them, drivers would undoubtedly protest the closure of a single street–not because it was truly essential but simply because it would be perceived as a “needless limit.”

If we are truly after “faster, better, cheaper and lower energy consumption” then we have to look at sclerotic, bloated, inefficient institutions and social habits which haven’t changed substantially since the 1950s.


Is there really no other way for an accredited university to educate people without the overhead and costs which make $30,000 a year the “minimum cost”? What if student loans were no longer enabled, and people had to save up and pay cash? Isn’t it possible that new institutional forms would arise to meet the demand for education which isn’t funded by loans?

What if low-risk, long-lasting collector and storage technologies got the same enormous tax breaks that deepwater oil drilling receives? What innovations might arise from that simple institutional rebalancing of perceptions and priorities?

Yes, we need innovations–not just consumer gizmos, but technologies which offer high returns and low risks on energy production and conservation. And just as importantly, we need to face up to the inherent risks of financial “innovations” and to the stupendous need and opportunity for institutional innovations.

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for the full posts and archives.

More articles from Charles Hugh Smith….

TARP watchdog says Treasury Department is allowing recipients to judge their own compliance with program rules

June 30, 2010 by · Leave a Comment 

By Chris Carey, Bailout Sleuth

The Treasury Department is doing a lackluster
job ensuring that some TARP recipients are complying with the conditions of
their assistance, and instead has relied on the companies themselves to report
any impropriety, according to the newest audit
from TARP Special Inspector General Neil
Barofsky.

The report concerns Treasury’s
treatment of six companies that received “exceptional” levels of aid through the
$700 billion Troubled Asset Relief Program: American International
Group, Inc.
; Bank of
America Corp.
; Chrysler Group, LLC;
Citigroup, Inc.; General Motors Company; and GMAC, LLC (now Ally Bank).
 The audit was requested by Sen.
Max Baucus (D-Mont.)

As a condition of receiving
taxpayer assistance, those companies agreed to additional requirements
regarding executive compensation, expense policies and lobbying, and Treasury
is charged with ensuring its compliance.

But Treasury’s efforts to
monitor those companies has been “slow and incomplete,” according to the
report.  “Moreover, (Treasury)
relies almost exclusively on participants to identify and report compliance
failures according to their own judgment and policies,” the report continues.

As part of Treasury’s
compliance program, the department requests that the companies document the
steps they have taken to comply with the TARP rules, then meets with company
officials to discuss them. Treasury then reviews the companies’ own internal
audits before conducting its own independent reviews, if necessary.

Though Treasury has requested the
initial documents from all six companies, those requests came 6 to 14 months
after those companies received aid, with the exception of AIG.

While it has met with all six companies,
it has not reviewed the internal audits of four of them. The AIG and Citigroup
audits have been partially reviewed, and Treasury has yet to conduct its own
reviews of any of the six companies.

The report also noted that
while the companies are required to self-report their material non-compliance
with the TARP agreements, Treasury has “left it to the officials at each
company to determine whether deviations from policy are material and therefore
require disclosure.”

Only AIG has self-reported
deviations from the agreements, which concerned use of the company’s corporate
airplane and other issues. Other companies told Barofsky’s office that they found
deviations from TARP policies but didn’t report them because they decided they
were immaterial. The report cites Treasury for not providing guidance on which
sort of material is serious enough for companies to report, leaving that
decision to the judgment of the companies themselves.

“Treasury relies entirely upon TARP
recipients themselves (in some cases upon the same managers who presided over
companies as they reached the brink of failure) to abide by their various requirements
in a diligent and well-judged manner,” the report said.

It also noted that Treasury has
said it would like to boost its staff by 15 people but has not done so yet.

“In sum, Treasury has not
adopted the rigorous approach or developed the professional team necessary for
an adequate compliance system to ensure that companies receiving exceptional
assistance under TARP adhere to the special restrictions that were imposed to
protect taxpayer interests,” the report read.

Barofksy called for Treasury to
conduct independent compliance checks of the companies. The watchdog also said
Treasury should either develop clear guidelines for what type of violations
should be reported or require disclosure of all violations.

In his response to Barofsky’s findings,
Timothy Massad, chief reporting office at Treasury’s Office of Financial
Stability, said he agrees with “a portion” of the recommendation regarding the
need for increased staffing.

However, he wrote, “we strongly
disagree with many of the statements and two of your recommendations in this
report.”

Massad did not elaborate on
what specific issues Treasury takes with the report but said a more thorough
response from Treasury would be forthcoming.

A Treasury official told BailoiutSleuth
that Barofsky’s report “fails to reflect the totality of our strong oversight
efforts” but also didn’t elaborate on why Treasury disagreed with its findings.

More articles from the Bailout Sleuth….

Goldman Technician Says To Short Market Unless S&P 1083 Is Recovered Today

June 30, 2010 by · Leave a Comment 

Zero Hedge


Courtesy of reader Apocalicious, we present the following piece of technical analysis from Goldman’s Tony Pasquariello. According to the technician, a critical level to watch is the 12-month moving average, which many consider a critical indicator of upward (or downward momentum). According to Goldman, “unless S&P recovers the 1083 level today, we will have crossed down and through the moving average. On this simple basis, the technical signal is to be short the market.” In any other market we would say a 40 point ramp in the S&P on a day such as today when the ADP came in so far below expectations would be simply insane… But not in our market. After all, the best traders taxpayer money can buy reside at Liberty 33. And they are on a mission.

Full note from Pasquariello:

this is a monthly chart of S&P back to 1994.  the purple line is the 12-month moving average.  as mentioned before, historically a powerful signal occurs when S&P crosses through the moving average at month end.  based exclusively on this metric, the strategy would have gone short in late ’00 and caught the post-tech bubble selloff … it would have gone long in early ’03 and it would have stayed long through ’07 … it would have gone short in early ’08 pre-BSC collapse … and it would have gone long in Jun ’09.  the only false signal over the past 16 years was a short at the end of Aug ’98 during the Russia/LTCM crisis – but that position would have reversed by the end of Sep ’98. 
 
at the end of May, S&P approached this moving average – then around the 1070 level – but thanks to a month end rally it ultimately held.  unfortunately, with June soon to be officially in the books, the chart is clear: unless S&P recovers the 1083 level today, we will have crossed down and through the moving average.  on this simple basis, the technical signal is to be short the market.
 
I’ll reiterate my normal disclaimers: (1) I’m not a trained technician; (2) we expect some buying of S&P in the next few days related to quarter end; (3) as a colleague pointed out, in each of the last 2 violations of the 12-month MA, it was also at a time when the MACD was very overbought (which is not yet the case, so there’s less confirmation of a sell signal). 
 
nonetheless, as a relatively long-term indicator with a respectable track record, this is a sobering chart that confirms an incremental loss of upward momentum in the US equity market.

 

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More articles from Zero Hedge….

RANsquawk US Afternoon Briefing – Stocks, Bonds, FX etc. – 30/06/10

June 30, 2010 by · Leave a Comment 

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