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powayseller
Participantvrudny, Nouriel Roubini is hot! I would love to meet that guy. I read his blog every day. He has many detractors, and many people call him names for his forecasts, so I can relate to him on that aspect. vrudny, you make a lot of sense, too. I like your posts very much.
More info on the drop in oil prices. Peter Schiff says it was due to speculators unraveling their positions:
Quote from Peter Schiff
Over the past several weeks, oil and gas prices have fallen sharply, prompting many to conclude that the bull market has finally run its course. With oil prices back to $60 per barrel, most are now calling for prices to fall back below $50, and some see even lower prices dominating in the years to come. As there is no real evidence that suggests an abatement of those forces that pushed oil prices up from below $20 six years ago to near $80 dollars last month, such rosy forecasts really amount to wishful thinking. The recent sharp decline is likely technical in nature, providing long-term investors with an excellent opportunity to build on established positions, or create new ones.Oil’s impressive gain over the past six years has attracted “hot money” from leveraged speculators, particularly hedge funds piling into the market. This has resulted in increased volatility, particularly on the down side. This week we learned that Amaranth Advisors, a $10 billion dollar hedge fund, blew up, losing better than 60% of its value as a result of highly leveraged natural gas bets that turned bad. The unwinding of these huge positions obviously exacerbated recent declines, and will likely help form a significant bottom to this correction. It is important to remember that the speculative money is not the driving force behind the underlying move. The fundamentals have been powering the energy market for years, and will likely continue doing so regardless of how many speculators tag along for the ride.
I have been buying oil and gas related stocks for my clients since 1996, long before the recent run up caught most investor’s attention. In the 2002-2003 run-up to the invasion of Iraq, when most strategists were calling $30 oil a temporary fluke, reflecting a “war premium,” I agued the reverse. My take was that oil prices actually reflected a “war discount” and that rather than falling when the war ended, oil prices would rise even further. See my commentary from March 13th 2003 entitled “There is no “war premium” in the price of oil!” available here. In fact, I was one of the first on Wall Street to officially forecast oil prices of $50 dollar per barrel. After that forecast proved accurate, and most top Wall Street strategist were calling for prices to collapse below $30 per barrel, I was one of the few who correctly forecast the move above $70 per barrel. In a Barron’s article dated November 2, 2004, with oil trading just shy of $50 per barrel, and oil strategist at both Merrill Lynch and Salomon Brothers predicting a quick return to the $30 level, I was the only one quoted who accurately predicted oil prices rising to $70 per barrel.
There are two primary reasons that I still believe oil prices will continue their long-term ascent. First, years of cheap oil, and the false perception that prices would stay low indefinitely, lead producers to under-invest in exploration and development, and consumers to over-utilize energy resources. As a result, it will take a long time for supply and demand to readjust to the new reality, ensuring high prices for years to come.
Second, once Asian central banks finally allow the U.S. dollar to collapse, Asian demand for oil will surge. That is because appreciated local currencies will not only make oil cheaper for Asian consumers to buy, but result in risings living standards throughout the region. As the values of their savings and incomes rise, more affluent Asian consumers will then be able to afford more energy utilizing products. Currently the purchasing power of Asian consumers is being suppressed by their governments’ foolish policies of propping up the purchasing power of American consumers.
Since there will not be enough new oil to satisfy the explosion in Asian demand, it will instead be satisfied with oil previously consumed by Americans. The flip side of increased purchasing power for Asians will be decreased purchasing power for Americans. As a result, precisely when oil gets cheaper for Asians, it will get more expensive for Americans. As the value of Asian wages and savings rise, those of Americans will fall. The extra oil consumed by wealthier Asians will no longer be consumed by poorer Americas, who will therefore be forced to conserve and economize in ways currently unimaginable.
As the yuan or yen price of oil drops, the U.S. dollar price of oil will surge. Therefore American investors, who hold oil investments instead of dollars, will in effect be able to preserve their purchasing power and protect their current standard of living. One of the best ways to accomplishing this is by purchasing Canadian energy trusts. These unique investment vehicles offer tax-advantaged, consistently high, monthly income directly related to the price of oil and gas. With many funds off 20% or more from their recent highs, now is likely an excellent time to invest. – Peter Schiff, Euro Pacific Capital
September 21, 2006 at 9:31 PM in reply to: Could a Fed Funds Rate of 3% Revive the Housing Market #36031ParticipantRoubini writes today on his blog: The Fed ease will not prevent a recession as there is a glut of housing and consumer durables.
SD Realtor, since most loans and refis in San Diego are Option ARMs and I/Os, the Fed Funds rate is more important than the 10 year treasury. So I was just wondering if reviving the exotic lending sector would help housing.
Bugs, how do you perceive buyer psychology? People are still buying homes in San Diego every day, although I wonder when that will slow down.
rseiser, homes prices in the Midwest are falling already. The median price in the Midwest was down July 06 vs. July 05. Places like Omaha, NE which never saw a run-up are under negative pricing pressure, although the inventory glut and use of ARMs has not yet made prices fall. But the auto states and Colorado are having big problems and that’s where the biggest price drops are occuring.
ParticipantSo the payment goes up 50% – 100%, the house is worth 10% – 50% less, so even if the guy *could* afford the higher payments, why would he bother? That’s the point, right Perry? If we extend that line of reasoning, what is the decision for anyone who is underwater to decide whether to pay or walk? What if the guy with the $1 mil house is too attached to his house to walk? Maybe he doesn’t want to pull his kids out of school, and he has a good job he doesn’t want to lose. What do you think?
ParticipantI did not say Option ARMs will cause payment shock *before* the reset period. They cause payment shock once the loan resets. Same with ARMs and I/Os. While you are in the intro teaser-rate period, the payment stays the same (or changes a little bit as Jim explained).
Even if the Fed lowers interest rates back to 2002 levels, the resets are going to cause a payment shock for tens of thousands of San Diegans who made minimum payments on their Option ARMs. What effect will that have on the housing market?
ParticipantSince you responded so nicely, I’d be happy to share this excerpt of the April 2006 speech from John Dugan
“… a payment option ARM allows the borrower to obtain a much lower monthly payment initially in exchange for a much higher monthly payment later. How big is that jump likely to be? Well, in one typical example that I have used involving a modest rise in interest rates of only two percent, the monthly payment can literally double overnight, at the end of the initial period.
Needless to say, that type of “payment shock” has gotten our attention. As a result, last December the bank regulatory agencies proposed guidelines to address the fundamental issues raised by nontraditional mortgages – specifically, that, over time, borrowers will experience substantial increases in required monthly payments that (1) they may not be able to afford, putting their homeownership at risk and exposing banks to substantial losses; and (2) they may not understand.” – John Dugan, April 2006
He explains why lending guidelines are needed. “If monthly payments are likely to jump because of negative amortization and/or reduced amortization periods, then lenders must take these likely increases into account in demonstrating a borrower’s capacity to meet the terms of the loan.” He expressed concern about inadequate disclosures, namely that marketing materials emphasize low intial payments and not the possibility of payments rising later.
In Dugan’s October 2005 speech, which I referred to earlier, Dugan exlains that the payment on a $360,000 option ARM (he uses the conforming loan limit) at 6% allows the borrower to make a minimum payment of $1200/month, which gradually rises to $1600/month at the end of the 5 year intro period.
At the beginning of year 6, the payment goes up 50%, from $1600 to $2500 if the interest rate is unchanged at 6%. If the interest rate has risen to 8%, the payment nearly doubles to $3,166!
So the Option ARM minimum payment doubles when the introductory period ends and interest rates have gone up 200bps. Otherwise, it only goes up 50%.
How many people can handle a 50% – 100% jump in their mortgage payment? I can say that I could *not*.
Dugan goes on to say the borrower could refinance, but what happens if interest rates have risen or the house is worth less than the new higher principal (since the mortgage increases over the 5 year period)? The borrower could be unable to refinance.
These payment shocks occur after the teaser period ends and the loan resets.
Participantjg, since median prices lag by 1-2 years, and tell us about the mix of homes sold, rather than the value of each individual home, the monthly changes in median price could simply mean that more condos sold in one month, or that San Ysidro had more/fewer sales than Del Mar. So that leads to two questions: First, is there a measurement we could use in lieu of median price, such as Rich’s median price/sq ft? Second, if we are stuck with median price, how important is that as in indicator due to the problems inherent in it? While median jumps up and down,the price of each individual house does not. So perhaps tracking the leading indicators is more important than tracking price.
ParticipantWhy did he release his Power Point presentation?
Participantvcguy_10, that makes sense.
Chris Johnston wrote about this also in his blog, and I just had another look today (see his post from today, Crude is getting crunched, and also his entry on 8/16).
September 21, 2006 at 12:38 PM in reply to: Could a Fed Funds Rate of 3% Revive the Housing Market #35975ParticipantProbably there was a fundamental reason for the price increase: larger houses, rising incomes, greater productivity, introduction of loan program which raised demand and allowed more homeownership, etc. This would be interesting to research. However, for San Diego, judging by fundamentals (wages and rents), we have a bubble on our hands.
Participantcarlislematthew, I like debates.
September 21, 2006 at 12:33 PM in reply to: Housing Weakness Poses a Significant Threat to GDP and Stocks #35972ParticipantI posted this a few weeks ago, just to see what kind of comments it would bring. But the first thing I questioned when I saw this chart is why it only goes back to 1996. The data series is available for many decades earlier. Well, another poster found out why: the series do not correlate before 1996, so this chart is an example of presenting data to make your point.
However, the housing market is a big chunk of our economy, and the IMF and Fed officials are concerned that a slowing housing market will cause a US and global recession. I expected the stock slowdown to occur in fall to winter 06, and we could still be on track.
ParticipantSDBear, I disagree with your conclusion. (“The problem is not the amount of additional credit or interest paid, but the number of people affected.”)
You only need 2% of the sellers in San Diego in distress, to bring the home prices down for the other 1,075,000 homeowners. Homes sell at the margin, and this is a point that is often overlooked by the even the experts. Their conclusion that “this won’t affect the economy, because only a small percentage of borrowers are over their heads” is complete baloney.
The truth is, home values are determined by 2% of the people, the current sellers on the market.
vrudny, great post as always. I hope to meet you and your wife at the next meet-up. Back to Fannie Mae: I also think they’ll be in big trouble, and I sold my FNM shares when they were near $75, at their peak. That makes up for my bad moves in COP, right? How much do we really know about a company who is several years late in submitting its financial statements, and how can we short a company that is so babied, that despite its lack of financial statements it has not been delisted from the stock exchange? The MBS blow-up is going to hurt them, too, but probably it will all be covered up, as are many of their current problems.
ParticipantThat is exactly what will happen (in my opinion)!
ParticipantMedian home prices are already falling in the US, yet they predict a 30% chance that they will fall in the next 2 years. PMI, wake up! It’s already happening.
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