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powayseller
ParticipantJosh did not berate Alan Gin, so why do you think he did? Anyway, if you live in San Diego, you would hear the name Alan Gin, as he is the main economist quoted in the newspaper, and interviewed on the radio. He forecasts the San Diego economy and reassures everyone the economy is vibrant and strong, and housing prices will keep going up.
ParticipantIf you pay me a consulting fee, I’ll give you all the data you want, siamcat. In the meantime, you can read it for free on Roubini’s blog. Just today, he wrote an entry about how economists almost never predict a recession; most are so bad at their jobs. But I am sticking my neck out to make a recession call. Beat me up if you want, but that won’t make me change my mind. Only a change in incoming data would reverse my recession call.
ParticipantChris, with all due respect, it is actually you who is ignoring the data I have presented here several times. I hope you will read this carefully, as well as Roubini’s post, so there won’t be any further confusion about the relationship of the stock market and recessions.
You corrected me yourself, and explained why the stock market is forward looking. Therefore, by definition of forward looking, the stock market falls several months before a recession, and rallies several months before the recession is over. Roubini’s charts of the last 6 recessions depicts that this is exactly what happened. (This is explained by Ellis in his book Ahead of the Curve as well.)
Roubini’s charts and research show that the stock market fell peak to trough by an average of 28%, if you correctly look at the peak before the recession started, and the trough in the middle or near-end of the recession. Some economists and investors make the mistake of looking at the stock market during the period that defines the recession, because they don’t understand the recession is a lagging indicator, and the stock market is a leading indicator of the economy.
So in each of these last 6 recessions, going back to 1973, the stock market peak occured several months before the recession began, and the trough occurred 4 – 6 months before the recession ended.
Note that in none of the past 6 recession, did we ever rally in the stock market going INTO a recession. The times you mention that the stock market rallied in a recession – yes, they always do! As wages increase, and consumer spending picks up, the stock market anticipates increased corporate earnings and prices rise; a few months later, GDP increases again, and voila: the recession is officially over. So of course the stock market rallies toward the end of a recession, but it does not rally going INTO a recession. I hope I have explained this well enough this time around.
So the only question is: will we have a recession? There is no doubt at all that the stock market must fall going into a recession. If you want me to say I could be wrong, I’ll have to say it this way: “I am 100% certain we are heading into a recession, but it is possible that I am wrong about stocks falling in a recession; investors could bid up stock prices in the face of declining and dismal corporate earnings/outlook and bleak prospects for the future. It has never happened, but markets could behave irrationally. I could be wrong about a recession, but I’m not putting my money on that; my money is on a recession.”
As Ellis explains in his book, many investors get confused about recessions. While in a recession, they stay out of the stock market. Instead, they need to be looking for signs that wages and consumer spending are picking up. Once the recession gets under way, I will be looking for signs that it is ending, so I can get back into the stock market.
Chris, I’m sorry I misquoted you. I remembered the number incorrectly. I apologize for this error. As far as your statement “You need to tighten some of these things up for your consulting because they are known by people with experience and you do not want your credibility undermined”, it is actually you who misunderstands the relationship between the stock market and recessions. So take your own advice on that one.
ParticipantSometimes I wonder when I will buy real estate; it is certainly possible that we have a long slump like Japan did. Our housing market may not turn around in 7 years, as history has shown, but could take 15 years, like in Japan.
ParticipantHow forward looking is the stock market? Two weeks? One month?
ParticipantGreat answer, LOL.
ParticipantChris, some people had posted that you can’t set a stop loss on a short, so you could lose to infinity (an exaggeration), as the price of your stock soars. Obviously, that is a misunderstanding, as you can set a stop loss.
Now here’s a reason NOT to short WM. From Bill Fleckenstein today
“Q: Your views on mortgage lenders and regional banks are clear. Which I totally agree with, by the way. Do you have any views on the big money-center banks: C, WFC, WB, WM, etc.?
• They should all be hurt to some degree– who knows what is really on their balance sheet. I think WM is the most vulnerable… but supposedly it’s takeover material, so I have stayed away.”
BTW, Bill Fleckenstein also wrote today that he expects the housing and stock market to crumble beginning this month. When I asked him about a fall rally, he said definitely not. Chris, do you consider him inflexible too?
ParticipantThe economy, and the stock market move in cycles, up and down, up and down, just like night and day.
Chris, I got your 20% gain off the first page of the last newsletter, where you list the historical average for these mid-election year rallies.
Just curious: are you flexible in your view that the market will rally this fall?
My recession call is definitelyflexible, as I evaluate it every day. I will enter the market after I see a glimmer of hope for the economy. I’d need to see that consumer spending, which is 70% of GDP, has a shot at rising again. Incoming data is just reinforcing my recession call and the bear market starting by early 07.
I am not interested in debating this further, unless you have evidence that a recession is not possible. I won’t accept the argument that stock markets rise in a recession, because history shows that the markets falls 28% in a recession. So the only way that the S&P500 can rise, is if we don’t have a recession. It is certainly possible that in a bear market individual stocks will rise, and you can make money on short-term trading, although it is more difficult. I will leave that for the pros.
Well, I’ve exhausted this topic, and now we just have to wait and see how the market goes ….
ParticipantNorth County Jim, I just read an article in the last few days about this, and I was surprised. I can’t remember now where I read it, but the story was about lenders working on programs to avoid foreclosure. My guess is they would allow a skipped payment (adding the missed payment on to principal), refinance to another product if borrower qualifies, etc. They won’t give away money, but they would like to avoid foreclosures if at all possible. I really doubt these program will help too much. After all, what can you do for someone whose intro teaser rate expires, and whose mortgage payment went up by 50%? They’re basically screwed. Their best option probably is giving the house back to the bank.
ParticipantJosh, once they don’t get paid back, they will no longer crave it. It’s amazing to me that they don’t see the risk. Even banks are taking huge risks just to earn an extra percent of return. Why is Washington Mutual selling euro bonds, in the face of a declining dollar? It’s seriously amazing; there must be a lot of pressure on companies to perform high in the short term, so the stock keeps rising.
ParticipantKelly, I don’t know anyone to refer, since people in financial trouble hide their secret very well. But get the Voice to pay the small fee for a realtytrac.com subscription. You can get a good handle on the problem. Every NOD and foreclosure has the loan history. this is how I found 4 foreclosures in Poway, where the borrower bought in the 1980’s, and then refinanced in early 2000 (don’t remember if it was an ARM or I/O), or took out several HELOCs, and then refinanced it all to pay off the HELOC. Now, they are in foreclosure. The borrowers’ names are there, and perhaps they are willing to talk about it.
Although the lower-income areas of Poway is where I see the most defaults due to recent sales, the problem you describe, of a long-time homeowner taking out all their equity, happens in the nicer areas too. Amazingly, most of these homes are not for sale, so I assume they are hoping to come up with the money to catch up on their mortgage.
Even if realtytrac.com doesn’t result in a story, you can see the trends.
Check out my post about option ARMs; the OCC considers this the most risky of all loans. Even if the interest rate stays the SAME, at the end of its 5 year into period, an option ARM payment goes up by 50%! If the interest rate on a $360K home rises from 6% to 8%, in year 6 the payment will double!!! How many trillions of dollars will this savings and loan bailout cost? Hopefully, most of the MBS is held by investors, hedge funds, pension funds, and not banks.
ParticipantChris suggested that I wait to short until a pullback off the low, i.e. past $43.50. It’s short term oversold now, so I need to wait for a little bounce. He himself is not interested in this stock. Why do people say the sky is the limit on short losses? You can put a limit on the short, just as with a long.
Participantbigtrouble, John Dugan, Comptroller of the OCC, gave a talk about the need for interagency mortgage guidance, just 3 months into his position. He is concerned about the high concentration of commercial and residential real estate loans, as well as the lax lending standards.
Commercial real estate lending: In the 2005 survey of lenders, the OCC found that lenders had relaxed standards of LTV and debt service coverage, longer maturities, and lower collateral requirements. One third of national banks have commercial RE holdings equal to 300% or more of their Tier I capital.
Residential real estate lending: In 2004, half of all mortgages were I/O. By H1 2005, half of all mortgage originations were payment-option ARMs, a higher level of risk than I/O loans. By the time of his talk, end 2005, half of all mortgages were piggyback and/or reduced doc. This layering of risky products makes the ultimate loan even more risky than the sum of the parts. (“Tthe whole is greater than the sum of the parts” is a law of nature.)
Most option-ARM borrowers, both at the high and low end of the FICO score spectrum, make the minimum payment on their mortgage each month. Half of the least credit-worthy borrowers have higher loan balances resulting from accrued interest.
Dugan gives an example to show that an option ARM’s payments will go up 50%, even if interest rates REMAIN THE SAME. A 5/1 ARM at 6% interest goes from $1600/month to $2500/month at the beginning of year 6. If interest rates rose to 8%, the payment would double to $3166 in year 6. The borrower won’t qualify to refinance if interest rates are high or the home’s value has decreased. For this reason, option ARMs are the riskiest product out there.
These concerns prompted the interagency guidance, which seeks to tighten underwriting standards, and improve borrower disclosure and portfolio risk management.
Dallas Fed Summary of Guidance Document.
The guidance was written because the government is concerned with option ARMs, the riskiest of all loans out there, because of its negative amortization feature. The second concern is lending to increasingly subprime borrowers; in other words, people who don’t qualify for 30 year fixed rate loans are qualified for the much riskier option-ARM! Does that even make sense? They are also concerned that lenders are not providing adequate disclosure of increased future payments.
The guidance requires that lenders evaluate a borrower’s ability to pay AFTER the teaser rate and intro period expires. The fact that they are not already doing this just boggles the mind!
This is where it might have some teeth: institutions which make collateral-dependent loans (the borrower must rely on refinancing or sale of the house after the amortization period begins) are subject to criticism, corrective action, and higher capital requirements.
To whom will this guidance apply? It was written jointly by The FDIC, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, and the National Credit Union Administration. So it would apply to all federally chartered and insured (NCUA, FDIC) banks, thrifts, and savings? But not to private lenders, such as Option One, right?
What percentage of loan volume would be exempt from this guidance?
Participantjg, I’m working on something too. If you’re interested, e-mail me at [email protected].
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