[powayseller]

Fleckenstein, July 19, 2006 DAILY RAP

Why shorting is for the pros…

QUOTE
When Strategy Warrants Shifting

Turning to tonight’s big news, i.e., Intel, I have been vacillating over whether or not to trade around my large put position. I’ve sat on my hands to here, but I decided to reduce my position somewhat, by going long some stock against my puts.
I believe that Intel’s quarter is worse than most people expect. And, in an ordinary environment, I would think that with so many people buying the stock in anticipation that this is the last of the bad news, lots of them would be disappointed. But, I think that in the current market backdrop — since Bennie gave the bulls a little daylight — the bulls’ attempts to rationalize away Intel’s problems are likely to be more successful than ever, at least temporarily.
I am not afraid of Intel or its results. What does trouble me: That bulls will look past the fact that Intel has way too much inventory/capacity and continues to produce too many parts — and choose to focus instead on some fantastical second-half story. So, I have chosen to go long some stock against my puts.

Divulging the details of some of my daily machinations is perhaps a bit too much inside baseball, and more than what some readers want to know. My reason for doing this? To illuminate the amount of work that goes into running a short portfolio — so that folks at home see why I advise not to try shorting if they don’t have plenty of experience and lots of time to allocate to the process.”

END QUOTE

[powayseller]

Foreclosures are very competitive now: lots of other buyers out there, due to the RE boom and lots of books/seminars/TV infomercials. This causes the price to be bid up very high.

Second, you can’t do a home inspection, so you don’t know if the foundation is cracked, mold is in walls, etc. That is too risky for me.

Third, by the time the seller is in foreclosure, they may have trashed the place, torn out light fixtures, who knows what?

Does anyone have any foreclosure success stories, because all I hear are the disadvantages. My landlord is a real estate investor since he started buying SD foreclosures in the last downturn, and he told me to stay away from foreclosures. He is not buying RE in other states.

[powayseller]

Please don’t attribute too much to me. I just have a lot of time to read, and got good at cutting and pasting things that I read. I am looking forward to meeting all of *you*. I don’t know much at all.

[powayseller]

Great post! Does anyone else know of incentives from other builders?

[powayseller]

What would be the factor causing a new shift to higher prices? To me, wages would be an obvious factor. If we had inflation, and wages went up 30%, then housing prices would be cheap, and people would keep buying. Problem solved.

If I had to consider the effect of wages on future housing prices, I see a greater likelihood of flat wages for decades, supporting the case for housing prices to fall. Global trade and competition from low-wage countries, and illegal immigration have kept our real wages flat for 7 years.

Housing prices are dependent on wages and employment. So if there were a sudden shift to more high paying jobs, housing prices would increase. But this argument I provide does not answer your well-made point about a permanently higher plateau. Rising wages could allow housing prices to stay high, because the multiple of 7 is maintained.

What has increased the multiple today? Loose lending practices. If loose lending became permanent, then the multiple would stay higher.

I’m sorry I didn’t read the book yet, but could you tell me in layman’s terms what caused stock market valuation to shift to a higher level, and if that shift is indeed permanent.

What do you mean with the difference between the sample mean and population mean? The sample mean is the houses that were sold. Do you think that the types of homes sold over the last 5 years is skewed? Perhaps, to bigger homes. New homes today are much bigger, skewing the median upward. We sell 30K – 40K homes a year in a city of 1.1 million homes, so those annual home sales are setting the price for the entire city. But nobody selected which homes could be sold, so nobody influenced the sample mean. I don’t see the point. We are not selecting a sample (as the pre-med students), but measuring transacations over time. So there is no influencing of the sample.

To date, has any bubble ever corrected to a new mean? This is the Grantham challenge I noted above.

A wonderful disccusion, but I think it is a disguised version of “This time is different, because the mean was not properly determined, or the mean will change because this time is different.” Burden of proof is on you, edna.

[powayseller]

This was discussed here before. People used to refinance to get a lower interest rate, but now they are doing so to get more cash out. Some refinance to convert their higher HELOC into a lower 30 year fixed. All this proves that large numbers of people are deep in debt. I mean, who in their right mind would refinance into a *higher* interest rate?

[powayseller]

Yes, it makes sense that we went into Iraq for the oil,but how does that help us? We are supposedly drilling all the major oil fields, and there are no big undiscovered fields. What will keep oil from going to $100 this year? Demand from China is soaring, and they are making their own oil agreements with various countries.

[powayseller]

ARMs are only .01% of the SD market, but they are 50% of the resale market, and the resale market sets the price for all homes. So the 30,000 homes sold in San Diego this year set the price for the other 1 million homes that are not for sale.

It doesn’t matter if the other 1 million have their homes paid off.

See powayseller’s explanation at this post, 3/4 of the way down.

[powayseller]

The media misinterprets also. For example, there is no phrase “wiped off the map” in farsi, and the Iranian president did not say Israel should be wiped off the map, yet that statement is widely circulated as fact. He actually said the “occupying regime” [*not* Israel] should leave, and that Palestine should elect its government. I have a long analysis of this error available, but it is not for a housing forum. However, all this rhetoric is elevating tensions in the Middle East, causing our stock markets to suffer, and oil prices to rise.

On the subject of oil, I am convinced by the data of Hubbert’s Peak and Peak Oil, that we are the peak supply of oil, and that our demand is rising at a faster rate due to growth in China and India. $100 oil is not far away, due to the supply/demand imbalance. $200 oil is possible. What is truly amazing is that our government is not making plans for averting an energy crisis. It seems we don’t like to plan for unpleasantries, so we just deal with today.

[powayseller]

The Dubai ports deal would have passed, except many in Congress opposed it due to concerns that a Saudi company would compromise US port security. Bush and other high officials were in favor of the deal.

So the question remains: why aren’t our government officials concerned that foreign companies are buying our assets, and why don’t US companies buy these assets? Why doesn’t Warren Buffett buy US assets, instead of diversifying outside of the US?

[powayseller]

murray, you don’t need job losses to cause foreclosures. All you need is the borrower’s inability to make the mortgage payment. Economists are so stupid, when they say you need job losses to create foreclosures: ARMs will do the same thing. With $2 trillion of ARMs adjusting in the next 18 months, you’ll see millions of homeowners with mortgage payments increasing 30% – 70%, but mostly 40%. They won’t be able to make the payments, so they will default.

So what is the difference between not being able to make your payment because your mortgage permanently increased 40%, or you lost your job? The outcome is the same: no mortgage payment is made, and foreclosures rise.

The inability of economists to see this, is pathetic. I, as a housewife, have seen this as clear as day. But Chris Thornberg of the UCLA Anderson Forecast, have not figured this out. I sent him an e-mail, explaining all this. I hope he can improve on his future forecast. I am tired of having to educate economists and reporters.

murray, I do not blame you for your faulty conclusion on the foreclosure/job loss relationship. It is the economists who are to blame. Go through the forums and read my analysis of the UCLA Anderson Forecast. I cover this topic of recession/foreclosure/job loss in Part 1.

[powayseller]

Diego Mamani, how will we return to historical ratio of per capita income/median house price of 7, unless prices drop about 50% or wages rise? With global low wages, I dont’ see how wages can rise. Wages have been flat for about 7 years now. There has been lots of data on this blog about that fact.

The SD economy is completely dependent on us buying and selling homes to each other. I wrote an analysis of the SD job market and economy, based on my own research and my attendance at the SD May 2006 UCLA Anderson Forecast. I posted on this blog. See here . We are going to see *massive* job losses in San Diego, and unemployment will skyrocket to over 8%, reduced to 6.3% only because of the huge exodus of people leaving.

Today the salesman at the music store told me that 10 of his friends left San Diego in the past year, because of our high cost of living. He mentioned Lake Elsinore as a destination. People are leaving San Diego at the rate of 44,000 annually (Census Bureau data). There is no disposable income left for housing; people are using credit cards to pay utilities and food. Where are you getting your data?

Productivity has grown about 7x faster than wages. So what? We are more productive, but inflation is running at 8%. Forget the government cooked numbers, I am talking about true inflation. Wages are flat. Read the previous threads; it is all here.

Many houses are selling for 2004 prices, or are listed at 2004 prices. It is safe to say that anyone who bought their house in 2004 or later, has lost money on their San Diego home.

[powayseller]

I wrote to Bill Fleckenstein in his daily Ask Fleck column:

What do you think about our toll roads and bridges being purchased by Australian companies? Are they trying to find something to do with their US dollars, or are they bullish on US assets?
• The former, I would guess.

[powayseller]

Bugs, why are you defending Alan Gin?

[powayseller]

I’ve been unable over the past few months to satisfy my own questions about the impact of widespread foreclosure on the MBS market. Who holds MBS? Your mom’s pension fund, your own pension fund, foreign central banks, GSEs, everyone…. I bet even your money market account holds Fannie Mae short term debt, which holds MBS. This is a global holding. The problem is that the global liquidity was so huge, that investors did NOT demand the necessary risk premium for these loans.

The proper interest rate an investor should require on an ARM is not 1% over prime, but 3% over prime, and 5% over prime for a subprime borrower. I’m making up numbers, but you get the point… The investor was not compensated for taking on the risk of I/O, 100% financing, subprime, or any of the other risk layers.

Derivates, CMO (collateralized mortgage obligations), MBS, GSEs, all this is going to be a huge mess, and according to the Fed research papers, can cause a systemic financial crisis.

For more on this, read my post Sell Now, from last spring, which is a summary of John Talbott’s book. He delves into the impact of a financial meltdown of the GSEs and a recession, brought on by the housing bubble.

But this whole MBS problem is a little discussed problem. It is just like $100 oil. The people in charge of buying and drilling oil have known for decades that we are at peak supply, and demand is rising and won’t drop, yet they didn’t warn anyone or do anything about it. Same for the tech stock bubble, the housing bubble. Government, Wall Street, and the media have failed us time and time again. Our only real source of information is blogs, because we can share what is really going on, not what the government data is trying to tell us.

Good questions. If you get the answers, please come back and share. And search the archives, because I made some really good threads about Fannie Mae failures and MBS in the spring.

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