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davelj
Participant“Did any of you foresee the pop of the NASDAQ bubble back in ’00? Or the fall of the S&P 500, then, too?”
At the time I was a sell-side analyst. I wrote a research piece saying a decline of at least 60% was in order; that is, 4914 (price at the time I wrote the report) to less than 2000. My firm’s clients thought I was nuts. It actually declined further than that.
Bubbles aren’t hard to identify. They’re hard to resist and to time.
The role of the market, after all, is to get people bullish at the top, bearish at the bottom and confused in between. (I forgot who originally said that.)
davelj
ParticipantIt’s a Buffett cliche, but in the short run the market’s a voting machine, in the long run it’s a weighing machine. Right now the market’s going up because it’s going up. I posted previously that we’d see bad news out of the following:
TXN
QCOM
INTC
AMD
RIMM
MOT
AMATAll but QCOM reported disappointing earnings for Q1 and guided lower for the year. All of their stocks are up right now. Fortunately I’ve got no dog in the fight. Nevertheless, it just goes to show you how disconnected things can get from the mooring of value.
With the exception of late-1999/early-2000 this is as crazy as I’ve ever seen things in terms of valuations versus the fundamentals and sheer animal spirits. Something will give eventually.
Recall that the biggest, most violent move toward Nasdaq 5000 occurred in a very short period of time in early-2000. I feel like this is a similar blow-off.
An interesting observation: Between 1871 and 2003 the standard deviation of returns on the stock market was approximately 17.5% annually. The standard deviation of dividends – that is, the underlying cash paid to shareholders – was just 12.4% annually. So, the movements in the stock market have historically been over 40% more volatile than the underlying fundamentals. Eventually the prices mean revert but the process can take many years (think back to the late-90s).
Anyway, eventually this market’s going to tank, but whether it begins next month or next year is anybody’s guess. Right now, people just want to buy and that’s all that’s important.
May 2, 2007 at 1:35 PM in reply to: question about building new – is there also a land bubble? #51629davelj
ParticipantYes there is a land bubble. Some economists at the Federal Reserve pointed out in a recent piece that land had increased as a proportion of the total value of a property (land + residence) by a huge number nationwide – I want to say around 25% or more. In certain areas like California land has almost doubled as a percentage of the total value of a property. So, yes, ultimately the bubble is in the underlying land much more so than the structure on top of it.
davelj
ParticipantOn average there’s no discernable difference between the amount you’ll spend on HOA fees (in the case of a condo) and the amount you’ll spend on a house’s (1) incremental homeowner’s insurance, and (2) maintenance and upkeep (remember, someone’s gotta pay to re-paint, re-roof, maintain the yard, etc. for that house). Also, as mentioned previously, you get some – albeit varying – benefit from HOA fees in the form of amenities, such as a gym, pool, etc. At the end of the day, net/net, on average, it’s a wash unless the HOAs are just eggregious and you’ll never use any of the amenities.
In other words, there’s no free lunch.
davelj
ParticipantYou might be able to find something for $1,200 per month in a new-ish building, but it will probably be a 500-600 sq. ft. studio on a lower floor with no view. You’ll get a good idea of what your options are on craigslist. If you can’t find what you’re looking for there, it might not exist.
April 7, 2007 at 4:36 PM in reply to: Some facts/observations about Servicing, Loss Mitigation, Foreclosure, etc. #49457davelj
Participantn_s_r, I basically agree with you. I think the loan modifications – which I consider to include both the formal and informal arrangements – will largely be relatively short-term in nature and will also generally be accompanied by extenuating cirumstances – job loss, medical issues, etc. (as with Ms. Rodriguez).
The average schmoe who could only afford their mortgage at the teaser rate and has very little hope of getting current at the re-cast rate (with no extenuating circumstances) won’t get much relief. That’s my take on the situation, anyway, having discussed this at length with someone who’s in the middle of this.
The problem, of course, is that there are a lot more “average schmoes” out there than there are people with extenuating circumstances.
Anyhow, we’ll see how it progresses.
April 6, 2007 at 5:43 PM in reply to: Some facts/observations about Servicing, Loss Mitigation, Foreclosure, etc. #49441davelj
ParticipantI can’t provide a link because you have to log in with a password to get to the article. My buddy provided me with his password to access it.
You’re right, “someone is holding a bond backed by hard assets and they’re expecting a certain cashflow every month for it.” But at the moment they bought that bond they were explicity agreeing to the terms of the servicing agreement for the underlying collateral, which they could have read beforehand had they so desired. It’s called “due diligence.” (I know, I know… who has time to read silly legal documents when you’re busy jamming bonds.)
And, as the article suggests, it would appear that more than a few ABS servicing agreements allow for a some flexibility where modifications are concerned.
April 6, 2007 at 12:37 PM in reply to: Some facts/observations about Servicing, Loss Mitigation, Foreclosure, etc. #49419davelj
ParticipantThe friend I referenced above just forwarded me this piece out of CSFB’s asset-backed research department. The summary is quoted directly below. It implies that modifications and the like will be increasing going forward. I’m sure this report is more-or-less accurate, but remember what CSFB’s bias is: they would prefer, if at all possible, to not raise alarm bells that would trash the value of the billions of dollars worth of ABSs they’ve put together. Again, I’m not saying these findings aren’t correct, just noting what CSFB’s bias is.
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CSFB Research
The Day After Tomorrow: Payment Shock and Loan ModificationsSummary
• Billions of dollars of subprime hybrid adjustable-rate mortgage (ARM) loans are set to reset in 2007. Compounding this is a weak housing market and subprime lenders’ significant tightening of underwriting guidelines, which will no doubt remove the refinance option for many of the subprime borrowers facing reset.
• Adding to the above is a philosophical shift in servicing practices from rapidly moving delinquent loans into foreclosure to keeping borrowers within the home. We found that many ABS deal documents give servicers a fair degree of leeway in working with borrowers.
• While the number of loan modifications to date has been relatively small, this can be partly explained by prepayment speeds that have remained relatively fast around the first reset. Therefore, servicers have not yet needed to employ
modifications in any significant amount.• Loan modifications are a double-edged sword. They can lessen ultimate losses, but may also reduce excess spread, delay losses to when excess spread is lower, and mask true borrower hardship. For these reasons, servicers will likely
utilize loan modifications prudently and will enhance their current modification reporting.• Loan modifications may alleviate to some degree the widely anticipated wave of foreclosures. We expect that both the magnitude of foreclosures will be less than commonly thought and the time span over which they occur will stretch out. Foreclosures will undoubtedly increase significantly, in our view, but modifications should attenuate the magnitude and change the timing.
davelj
Participant“Briefly” is relative. And while fundamentals always win out eventually, as Keynes once noted, “Markets often remain irrational for longer than one can remain liquid.”
davelj
ParticipantHere’s a little vignette that ties together the ’90s bust with the coming bust.
Along with a friend of mine I recently toured a large downtown condo project with one of the developers. It will be completed and ready for move-in by the end of this month. It’s a top-of-the-line, Class A development. They spared no expense on the details. Well, four percent of the units are pre-sold; you read that right, 4%. The other units have no deposit, no nothing – they’re for sale.
The builder, who shall remain nameless, is an acquaintance of my friend and told him that he was not optimistic about the current state of affairs (downtown inventory, tightening credit standards, etc.). This building’s all-in costs, including land and the whole shabang, were $370/sq.ft. That’s a big number.
Well, to tie this in the with the ’90s bust, this developer went BK back in the mid-90s only to resurface a few years later with more projects. In his defense, I know of one project he did that was completed in 2004 that did extremely well.
But, it’s hard to get builders to stop building when they’re mostly playing with the house’s (bank’s) and other investors’ money.
davelj
ParticipantSD, I’m curious. How far below the peak selling price you COULD have gotten for this unit in late-2005 was the price you ultimately got for your clients? I realize this is just an estimate, but what’s your best guess? I’m just trying to get a pulse of the market from someone (else) on the ground, so to speak.
davelj
ParticipantThere is an almost direct correlation between CD rates and the risk a lending institution takes on. Virtually all of the lenders that offer the highest CD rates are taking on the greatest risk on the asset side of their balance sheets and are thus at higher risk of failure. That’s how it works. As a depositor you take on greater risk to get at that greater return. The only exceptions to this are that some banks run short-term specials (to drum up business) and credit unions often pay higher CD rates because they pay no corporate taxes and this allows them to subsidize their depositors (and borrowers, for that matter).
IndyMac is a high-risk lender, although not as high risk at the moment as Countrywide and Accredited, for example.
If an institution fails and the FDIC takes over, your total deposit relationship (that is, the sum of your savings, checking, CDs, etc.) is covered up to $100K. Anything above $100K is subject to loss. Joint and other accounts are considered separate for insurance purposes.
davelj
Participantsdr,
Actually Milken was with Drexel Burnham Lambert, as opposed to DLJ (Donaldson Lufkin Jenrette). Drexel, unfortunately, was long gone by the time I finished graduate school.
I’ve never met Milken, but I was supposed to pitch him for one of my partnerships a little over a year ago as a friend of his is one of my investors. He had to cancel for some reason so we never got together. Normally I don’t care about cancelled meetings and the like, but I was really looking forward to meeting him. He’s one of the true giants of finance, despite the technical financial “crimes” he may have committed. (Also, as you alluded, he is notoriously frugal.)
Perhaps another time, though.
davelj
Participantsdr,
I noted the DLJ reference but I wasn’t sure if it was intentional. In fact, I interviewed with DLJ, among other investment banks, out of business school. Clearly they were underwhelmed as I didn’t make it past the first round. In fact I only made it to the second round with one firm. They were wise; I would have been a horrible bulge bracket investment banking firm employee and likely axed quickly. I’m too lazy and not particularly good at taking orders.
The one thing I know for sure is that this decline is going to be interesting. Where it settles only time will tell. I’m glad there’s a forum where people of different stripes can try to make sense of what are, ultimately, largely theoretical issues. Having said that, I’m also glad Powayseller has her own site. Sorry, but I had to say it. PS fans can commence hurling insults at me below.
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