patrick.net

I have said for a couple of years that most people here are on the same page but the variable is the timing.
Here, here... let's raise a glass to all those poor SOBs at the HBB who were shorting the homebuilders over a year ago. Technically, they were right, but as DinOR likes to say, we had to "hit the wall at 100mph".

Here is a good bubblicious "gold indicator": your neighbor starts touting a stock called GoLD (not in a retirement account) and when you ask him if he is comfortable paying taxes on a "collectible" he gives you the old deer in the headlights look. That said, GLD is going to allow much easier access to take a direct position in the price of this precious commodity when specUfever sets in... I still have buys in at under $800, at his point I am crossing my toes as I have promised myself to go "all in" once we hit an all time nominal high.

Okay, so by my count Malcolm & Headset are in Mish's camp... Is it correct to say most of the others are betting on some sort of stagflation scenario? I have a hard time believing that Eurotrash are going to come out much better than us as they have their own RE bubble to deal with....

Citizen HARM, you will soon be in a position to judge the health of the Bay Area economy. Hope that you can take a lawn chair to the ginormous mall in Walnut Creek (too smug to tell you its actual name) and give us first hand dispatches from the front. When the foot traffic starts disappearing there, we will know all hope is lost...

Malcolm,

China has plenty of USD to buy food. We are not having a shortage in the sense that there is not enough food to go around, we just need to pay higher price for the same amount of food, that's all. Of course, if you are stuck in Africa, that's entirely another issue.

China eventually can find good use of the USD they are collecting every minute as we speak.

Good point OO. I have also noticed that some of the 'powerful' actually aren't personally rich. I'm not quite as cynical because I think wealth is beautiful and I've met some fascinating people throughout my life who were very benevolent at the same time being local movers and shakers.

The conviction of Randy Cunningham (childhood hero of mine) was indeed eye opening. This guy seemed to have it all. What you say though is why I actually fear liberal power because we do have a huge target on our backs.

But you said a food shortage in China as a consequence. I thought the same, there is the same amount of food it is a change in a policy, but if food really is more expensive that means they have to buy less.

National City is a regional bank headquartered in Cleveland, Ohio. The company has been slammed by rising defaults in mortgages it made to its customers.

During the third-quarter, National City's mortgage business lost $152 million as the value of its mortgage holdings plummeted. The mortgage woes chopped the company's profits 80% lower than a year ago. (See: "National City's Subprime Misery")

The problems have prompted National City to cut back on its mortgage business. The company announced Wednesday that it will fire 900 employees from National City Mortgage.

The problems also scared investors away from National City stock. Shares of the company have plummeted 56.5% over the past year. The stock decline left an unusually high annual dividend yield of over 10%.

Wednesday's dividend cut puts National City stock at an annual yield of 5.3%.

OO,

Those look good, oh and I agree btw. Also check out MOO. I know, sounds corny for an Ag. ETF but what's in a name?

NIA

http://www.bloomberg.com/apps/news?pid=20601087&sid=aO2aajb1Xwho&refer=home
China, the world's biggest grain producer, will tax exports of wheat, corn and rice to increase domestic supply and control rising food prices.

EBGuy,

True, but I usually preface that w/ "why do we have to?"

Oh loved Cody Banks: Secret Flipper too btw! I remember seeing an interview w/ Frankie and b/c he was a minor his folks controlled his paycheck. (I guess this was his first foray into "investing"?)

Perma-Renter,

Stories like that can make a Wednesday feel like a Monday every time! Did we close above $100 on oil?

Since the Mao time, China has always adopted a self-suffiency food program, which the government obviously abandoned as they gave up more land and resources to become the production base for the world.

There has been lots of controversy re: the official number of acreage in China dedicated to farming. Just from an overall point of view, apart from loss of arable land to residential and industrial uses, farmers also dedicated more acreage to growing higher-value-added crops like fruit and paper-pulp trees when food price was record low 5 years ago. On top of this, there is the environmental factor, unprecedented droughts and floods claimed many acreages as well. The official data of arable land in use differ quite a bit from estimates made by private organizations, the truth is somewhere in between.

Food supply is a bit more flexible to adjust than mining. But it takes time. An industrial or residential piece of land can't be immediately turned back to growing food overnight. Also, the higher-value-add crops deplete soil differently, and some of those paper-planting trees (eucalyptus etc.) disrupts local eco-system. For example, these tress have weak branches that cannot sustain the original predators of rats such as snakes and hoots, so the reproduction of rats gets out of control. It is possible to restore normalcy, but it takes time.

So China is not suffering from a structural food supply problem that cannot be reversed. Just that in the few years as they re-adjust, we can make lots of money selling food to them.

RE: food shortage

It is one of Free Market's ways to limit population growth.

DinOR,

I am not quite into MOO, because it is fertilizer ETF. What will happen is, grain price will shoot up without benefiting fertilizer companies much, as farmers are not making huge margins in their businesses. It is the shortage of food supply vs. demand that will contribute to a higher food price. Fertilizer companies will only continue to profit if farmers also enjoy a higher margin, which is not the case.

Another reason for my dislike of MOO is, Cramer recommended it. I generally use him as an inverse indicator, whenever he recommends anything in my portfolio, he makes me very nervous - is it time to cash out? Luckily my stuff has been below his radar screen so far.

Peter P Says:
January 2nd, 2008 at 1:44 pm
RE: food shortage
"It is one of Free Market’s ways to limit population growth."

Until the free market creates genetically altered crops.

DinOR / OO :

I have been trying to look for some good agricultural plays. MON seems very much overinflated and not sure about BG. I have some ADM but nothing else in that sector. The DBA is a strange beast. How to evaluate that ? It doesn't seem to go proportional to prices, maybe because it uses shorter term futures.

Any ideas ? With usual disclaimers of course.

My bad, the Fortress is impregnable.

Palo Alto Daily News:
Mortgage trouble? Act early

Counseling offered to troubled borrowers
By Shaun Bishop / Daily News Staff Writer

"Right now," Eichner said, "we're drowning in these calls."

It is one of Free Market’s ways to limit population growth.

Yes, starvation is right up there with war, pandemics and extinction-level disasters. Great "solution" to the problem of overpopulation. Anyone care to volunteer to starve first? (This is a good example of a macro-level social problem the free market is simply not well equipped to solve on its own.)

I want to buy stock in "Soylent Green"
That solves two problems.

Stuck,

my major ag. holdings are in BG (but got in early, not recommend for current level), DBA and RJA.

DBA and RJA only bets on the end price, and as all commodities, they are bound to end up in huge swings, but of course the macro trend right now is pointing up. Today is probably not a good day to load up.

I am particularly looking for a rice play, which RJA has little and DBA has zilch. Apart from the China factor, the fact that we are stupid enough to feed food to cars also dictates that food price will have to be on the rise in the next 2 years.

Can someone comment on Chindian public/private school housing arbitrage. Does this really happen? At what point does a house, in say, the east San Jose hills with private schools look better than a stucco box in Cupertino?

True, but I usually preface that with “why do we have to?”
DinOr, didn't mean to misrepresent you ... clearly you're someone who thinks applying the brakes when a wall is on the horizon is a good idea. Truly amazing that leadership at places like CITI said "pedal to the metal" and, well, close your eyes while you're at it as a turnaround it just around the corner. Had to clear out that dead wood before SIvs went in house and the tin cup went out looking for working capital...

Without the government subs., ethonol is a bust. From the seed corn to the full circle product + energy it's a negative and the amount of waste is obscene. If it was free market, it would be backburnered.

We've covered this before (though maybe it's time for a refresher thread), but it's possible to be moderately pro-REGULATION (as in no slavery, child labor, don't poison your customers, don't pollute, etc.) without being pro-SUBSIDIES or pro-price controls.

Housing, ethanol/corn, milk & oil subsidies = bad for consumers & taxpayers.

Outlawing stated-income, neg-am & I/O loans and requiring SarBox for mortgage lenders = good for consumers & taxpayers.

Seriously, there IS a difference.

EBGuy :

I have tackled that "arbitrage" question a few times. Especially to answer the myth about "economic fundamentals supporting the Fortress" argument.

If numbers matter then why wouldn't someone buy a better/newer/bigger house in Sunnyvale and send kids to private schools than buying a Cupertino for Monta Vista ? 150K per kid seem enough of for 10 years of private education.

Let's keep it simple, and ignore the benefits of lower property tax, lower mortgage servicing costs and wasted opportunity costs. Even without all these benefits, it seems that for a 2-kid family, it is better to buy a house in Sunnyvale that is 300K less than comparable Cupertino home.

My anecdotal and small sampling indicates that this is not the case. Cupertino sh1tboxes can go over 1.2M when comparable Sunnyvale homes can cost less than 900K.

There are few explanations.

1. People - the typical 2-income IT engineering family - cannot do math.
2. People are willing to pay for the non-tangible pleasure of having Cupertino on their address labels.
3. People believe that the appreciation of Cupertino houses can outweigh the additional cost to own them.

I believe that the housing in Fortress is going to bust. Softening has already started. But the real pain is still far away. The strong employment and low rate aberration cannot continue forever. One of them will break. When is uncertain.

But the arbitrage works in favor for the Sunnyvale / Santa Clara areas. In the real long run, they will do much better than Cupertino.

OO,

I usually change the channel before Cramer comes on but I bot @ IPO so my c/b is $40. At $57 clients are up over 42% (and remember this was just rolled out last Labor Day).

I mean, if Jimmy bought a car like mine, (I'm not going to trade it in the next day?) I will look at DBA though b/c what you say makes sense. Usually I have my strategy for the upcoming year well charted by this time but I've had a lot going on and if TODAY is any indication....?

Not Investment/Automotive Advice

EBGuy,

Oh I don't think it was off the mark at all. Perhaps we should be asking: "How many TIMES do you have to hit the wall...?"

I wonder if China is deciding to hold grain at home in preparation for alcohol vehicle-fuel production in the near future. Much of their foreign exchange appears to be going for petroleum. Do you think the commies are that stupid as to try the ADM "solution" to petro imports?

If banksters are having a problem making loans, won't they need more cash in order to support the lower loan-to-asset ratios of the future? Won't they push for higher interest rates to get people to put more cash into savings accounts?

Project Sentinel .... I know them well, went to them about complaints in the ghetto-fabulous Sunnyvale apartment I was in, you know, the usual, gang activity, drug deals, death threats, attempted break-ins, being followed by packs of gangers, standard stuff for Sunnyvale.

The Crime Prevention unit of the Sunnyvale PD is better to go to for the above, although the above is good for filing HUD complaints and getting the slumlord in trouble.

Funny, the place I live in now is nowhere near as hyped at Sunnyvale and no problems. Which is funny because what bought these two+ acres and buildings here wouldn't buy a damn doghouse in Slummyvale.

HARM Says:

> Outlawing stated-income, neg-am & I/O loans and requiring
> SarBox for mortgage lenders = good for consumers & taxpayers.

Why would outlawing “stated-income, neg-am & I/O” loans be “good for consumers & taxpayers”?

If outlawing stated-income, neg-am & I/O” loans be “Good” for consumers & taxpayers, would requiring only all cash sales (or maybe 50% down payments) be even “Better”?

StuckInBA Says:

> EBGuy: I have tackled that “arbitrage” question a few times.
> Especially to answer the myth about “economic fundamentals
> supporting the Fortress” argument.
> If numbers matter then why wouldn’t someone buy a better/newer/
> bigger house in Sunnyvale and send kids to private schools than
> buying a Cupertino for Monta Vista ?

The reason is that most kids (even kids from rich WASP families) can’t get in to the “good” Bay Area private schools and the kids from recent Chindian immigrants have almost no chance of ever getting in to a good Bay Area private school. If you move to Burlingame or Cupertino the public schools have to let your kid in…

FAB :

Interesting angle. Can you please elaborate why this "discrimination" ? I have never heard it before, and from your comments it doesn't seem to do with racism either. What can be more divisive than money and/or race ?

If outlawing stated-income, neg-am & I/O” loans be “Good” for consumers & taxpayers, would requiring only all cash sales (or maybe 50% down payments) be even “Better”?

In a word: yes.

Imagine a California where 50% down is the norm. Imagine working class houses that average $100-150k. Impossible you say? Nonsense.

Most of the cost of a house today is in land prices, which are absurdly high (as we all know) due to rampant speculation on margin, absurdly cheap Fed credit and the government tax subsidies that fueled it. The rest is mostly due to extortionary local government fees (as high as $100K in some NCAL counties), which could easily be eliminated if the public demanded it. The cost of labor (usually illegal) and raw materials to build the structure is practically negligible in CA --probably well under 20% of the cost of the property.

In the aftermath of the Great Depression, I/Os (and neg-ams too AFAIK) were banned and stated-income was all but unheard of, thanks to Glass-Steagal and other similar legislation. End result: affordable housing that pretty much tracked inflation and 2-3X HH wages for the next 30-40 years.

Is there any regular here who still believes that Debt = Wealth, or that allowing consumers to dig themselves an ever-deeper financial hole actually increases (not decreases) true "affordability"?

Anyone read the FOMC minutes ? The key phrase there is feeling that rates need to be reduced substantially. If anyone is still naive enough to assume that Fed is done - this might be a good time to wake up.

Note: I am not proposing actually setting a government-mandated minimum down payment of 50% or all-cash or any other figure (though at the very least the GSEs should not be buying any $0-down, stated-income mortgages).

However, banning NINJAs, I/Os and neg-ams is not only good common sense, it is also in the public's (but not Wall Street's) best interests. It was done 70 years ago, it can be done again, and it should be done.

Oh, and since we're on the subject of "regulation" vs. "subsidies", banning secret, unpublished YSPs (A.K.A. toxic-loan kick-backs for unlicensed, non-fiduciary mortgage confidence men known as "brokers") and putting up a firewall between appraisers and lenders would also not be a bad idea.

HARM, the step in the right direction for the government to do is to remove all attempts to encourage people to buy with tax breaks and whatnot, right?

If didn't have the mortgage interest deduction and the capital gains exemption and so on and so forth and got rid of all the quasi-government institutions that supposedly help homeowners, wouldn't the prices come down?

Then, let the lenders operate in a real market with no Fed cushion to bail them out. Like any other loans, the lenders will decide how much risk is appropriate.

The rates and downpayment requirements will vary based on the borrower's risk (credit rating, job etc.)

This is pretty how it was in India growing up. Most people bought houses the following way:

1. Save money while renting for years.
2. Use the saved money to buy land.
3. Using some more of the saved money (maybe after a while) and money borrowed from friends/relatives (if necessary), build the house.
4. If absolutely necessary, borrow a little bit from a bank.
5. Move in and start paying off any loans.

My father did this and many others too. And the house would be completely paid off usually a few years after moving in.

Nowadays, the US model is being adopted more and more and I feel sad about that.

I feel there is no need for banning all those dubious instruments using the strong arm of the law. If the incentives are removed and the risk stays with the lender and the Fed does not expand credit ridiculously, that will automatically happen.

sriramgopalan,

Here's the thing: there's a big difference between being pro-SUBSIDY (direct or indirect, taxpayer financial support) and pro-REGULATION.

We have NOT had any meaningful regulation in the mortgage and RE industry, especially when compared to the securities industry. What we've had are $Trillions in government subsidies, taxpayer risk underwriting and various taxpayer bailout proposals.

I would like to see this situation reversed. Real, substantive, common sense Regulation, and a whole lot less (prefereably zero) subsidies and taxpayer bailouts. I don't think we can get back to a sane lending market by eliminating the subsidies & bailouts alone.

There is a reason why there are no I/O or neg-am credit cards: it's called "Usury" --a legal concept that I would like to see come back with a vengeance and applied to the REIC.

Harm, each mortgage regulation is basically another boiler plate form that gets added to the to sign stack. People focus so much on reading that blacks can get a loan the same as whites that they neglect the note. You are right on the mark about meaninful regulation. In CA the state does a very good job regulating insurance companies so that consumers easily shop for something based on standardization of terms and coverages.

Yes redefine usury for mortgage lenders. Let rates float with the market but stop with the shell game terms.

I feel there is no need for banning all those dubious instruments using the strong arm of the law. If the incentives are removed and the risk stays with the lender and the Fed does not expand credit ridiculously, that will automatically happen.

I disagree. Banksters and companies will always try to get away with whatever they're allowed to get away with. They have a mandate to make money and serve their shareholders --period. If it's profitable and legal for them to operate factories using slave labor, they will use slaves. If it's profitable and legal for them to dump toxic waste directly into the air and public waterways, then they'll dump. If it's more profitable for them to sell "innovative" neg-am NINJA loan products (and securitize them & dump the risk onto the taxpayer) vs. "old fashioned" full-doc FRMs, then that's what they'll sell. If it's profitable and legal to hide information and coerce/intimidate competitors, then they will hide and coerce.

There's nothing wrong with capitalism, as long as some basic level of regulation is established to address its fundamental shortcomings. Namely, the tragedy of the commons, and unfettered capitalism's inherent tendency to reward unethical, coercive, fraudulent, monopolistic and other socially, environmentally & ethically unacceptable behaviors.

my dog got out the back gate, wandered around the neighborhood and came back with a mortgage in his mouth...

Maybe they will reposess his doghouse next year...

Oh, and since we’re on the subject of “regulation” vs. “subsidies”, banning secret, unpublished YSPs (A.K.A. toxic-loan kick-backs for unlicensed, non-fiduciary mortgage confidence men known as “brokers”) and putting up a firewall between appraisers and lenders would also not be a bad idea.

I suppose this is along the lines of SG's post, but I have always held the REIC will have to be destroyed if the securitization engine is to be reved up again (and there are too many reasons for it not to be). Those who "poisoned the securitization stream will be shown the door".
BTW, exotic ARMs have always been tools of the rich, so I have a hard time believing they will get banned. In fact, for our highly mobile society with shortened holding times for RE, I can see some of these types of ARMs getting more popular. Of course, this time around, someone's gonna come a knockin' to make sure the residence is truly "owner occupied" (you can bet the investors are going to want to know).