patrick.net

Quick update from across the pond.....

Germany is now in a defacto state of financial martial law, its institutions in full blown preparation mode for the complete collapse of the global financial system.

Spain.....

Spain’s once-booming property market is in freefall, official statistics have revealed for the first time.

“Many people thought that buying property, especially a second or third home, was an investment to make a profit. Now we’ll see cascades of these homes up for sale.” Mr Blesa was speaking in Vienna, where his savings bank yesterday inaugurated a new headquarters to handle credit lines for big construction companies operating in central and eastern Europe.

And if anyone cares or is watching, Iraq looks to be on the edge of complete chaos and breakdown of social order. US prop'ed central gov't might easily fail and not recover. What a mess.

So we need McCain. :)

Spain is not the only place. England is seeing cracks. Portugal.

From what I can tell the financial problems associated wih a credit crunch are very wide spread. It would b ironic is fiath in the US were restored by shear virtue of the fact that the size of our problem relative toour GDP is so much smaller. Can you imagine attrackting capital based on the premise that our corrupt, opaque, horrible financial sysem is better than everyone else corrupt, opaque, horrible financial systems?
Time will tell how the securitization bond market goes. . .

Offtopic: who are the idiots still buying in Palo Alto? I live in mid-town area, and homes seem to come and go ... totally perplexed. I thought the GOOG party is over.

Patrick I just had this conversation with my new CPA a couple of weeks ago. DinOR is right, and your thread is right as well. If I use my LOC to increase my loan portfolios the interest will end up going on the investment interest expense since it will not be a MID above 100K. I joked and asked him how they would even know the balance on it, maybe someone could just pay it down on the last day of the year to $100K.

To be clear this applies to equity lines. A purchase money loan has no such restrictions that I know about. That is the difference you were asking about.

"Anyone know if this is true? And what’s the difference between the mortgage interest deduction and interest expense?" - Patrick

Mortgage interest deduction is a left over deduction from when individuals could deduct interest. The code was changed in the late 80s early 90s and only allowed the deduction of interest on primary residence and second home loans.
An interest expense is a line item on a business's profit and loss statement. It is deductible only as a business or investment expense.

Peter P Says:
March 28th, 2008 at 7:41 pm
"I am beginning to agree with you. However, the needs to be incentives for farmers to improve efficiency and lower costs."

I had to do a double take. Anyway, nice to see some open mindedness. I think farms are overly efficient and the corporate farming model is inhumane, UnAmerican, and present public health hazards.

Does anyone here think that commodity ETFs are going to go flat for months as the Fed marches toward zero interest rates? They have been fantastic for months, but each rate cut seems to cause at least a temporary dip.

Suppose we go through a few 75 basis point cuts and live with ZIRP for an extended period. What will be the consequences of the Fed enacting a ZIRP? What will the investment environment look like? Any fearless soul here want to look into the crystal ball and describe the future...

"Flat tax is the answer but nobody wants to listen."

The best argument I've heard against the "flat tax" was "you still have to calculate a number." So tax complexity really doesn't go away because there still has to be rules about what's taxed and what's not taxed.

I hear that you can even deduct interest on a second home, for which an RV could even qulify, which explains why there are so many of the gas guzzlers around.

NEWSFLASH.

Ummm.....I think this is particularly serious. Recall discussions here relative to money markets and safety?

This will tighten one’s sphincter up nicely.

Auction for UBS cash equivalent securities are not FAILING at a rate of 71%. Account holders are completely illiquid and cannot withdraw funds. UBS marking down accounts! Holy moses.

Stormclouds brewing folks.

From Bloomberg:

UBS AG has cut the value of the auction-rate securities its customers have in their accounts by about 5 percent following more than a month of market upheaval.

“We received calls from a young saver whose house down payment is now frozen; two siblings whose family trust is now frozen; and small business owners who find their business interrupted because money they thought was liquid is tied up in these frozen securities,” said William Galvin, the Massachusetts secretary of the commonwealth, in a statement.

How the H do these people end up with 'auction rate securities'? I never heard of them until they blew up. It sounds like something sold in boiler room tony soprano 'stock of the week' style.

I was pitched auction rate securities by my brokerages before for a little higher yield than US Treasury and GSE bonds. In an environment where interest rate was approaching 0, the pitch was that ARS offered higher after-tax yield than GSEs and Treasury. That was a period that every single basis pt in yield counts, because the yield was so f*cking low on fixed income instruments and there was too much risk in stock market. Even high yield bonds (junk bonds) were only offering 5-6% for 2-3 years, and the risk premium was compressed to almost nothing. Horrible. I didn't go for ARS because I thought the yield difference was too small to compensate for the complexity in the pricing mechanism.

In 2002 and 2003 I was carrying a full load of GSE (FNMA and Freddie Mac) bonds because the yield on fixed income was so low and the housing bubble hasn't fully developed to benefit the stock market yet.

Actually I have to be thankful to Bush, if he was not elected the second term which was a wake-up alarm, I would not have ditched all my USD bonds at a slight loss to get full speed into PM, oil and commodities. I would have been one of those stuck with soon-to-be-worthless GSE bonds. Bush 2nd term lighted a fire under my butt and forced me the divest aggressively outside of the US.

yes bush term 2 was a scary scary moment. like realizing your government has been taken over by a foreign power. thats what WE do to THEM dammit!

Actually to a certain extent, this crisis is a mechanism to give small conservative guys a nudge ahead of the risk-taking higher net worth investors.

Lots of HNWIs will wake up broke, especially those who have been earning very high salary ($500K and above) so that they have no time to manage their own portfolio. Private banking clients will be hit real hard, because lots of "innovative" financial products that came out in the last few years were targeting these people.

These HNWIs were essentially forced into high-risk hedge funds or yield chasing junk bonds in the last few years due to the extremely low interest rate. This is going to get very ugly.

Now that the subprime peons are screwed, the next group of people to be screwed are these single-digit to double-digit millionaires.

OO, no doubt you are correct and this is why the Fed's new powers/bush bailout is now surfacing.

The Bloomberg article is here.
www.bloomberg.com/apps/news?pid=newsarchive&sid=adMWraq8li6c

"listing as named plaintiffs a San Diego retiree couple who it says owned $1 million of the securities. "

Why would anyone park that kind of money in an account like that?

I currently have an empty shell of a UBS account, dating from when I worked for INTC. They hired UBS to manage the employee stock option and stock purchase plans. But I've long since excercised my options and last December sold off all my shares (at $27+ :) ) . Early this year I finally drained off the small amount of cash left in the "uninsured money market account" tied to the stock plan.

DennisN,

it is called yield chasing. I can particularly understand why the retiree couple would do that.

Wealthy retirees typically live on the assumption that they can live off the interest of their principal. It was impossible to do so for the last 5 years. Normally you would only need $1-2M to generate a reasonable after-tax return to support a comfortable lifestyle. With Treasury running at 2-3% you would need a much larger nest egg.

These ARS were all AAA rated. Not that AAA rating means anything these days, but back then individual investors were a lot more naive and trusting.

I'm a somewhat wealthy retiree living off the interest on my savings too, but I'm not that dumb. Right now I'm really feeling the pinch from these darned interest rates. But I live cheaply.

I really kick myself for not tying my cash up in CDs last fall when rates were more reasonable. I did pick up a 13 month CD at 5.55% apy when Banner Bank had a special on them.

DennisN,

the key is, you live cheaply.

Lots of single digit millionaire retirees live very lavishly.Their retirement lifestyle cost easily $150K a year, after tax.

Their expectation of lifestyle is shaped by the media, financial magazines and their peers. Vacation home, 4 luxurious international trips a year, eating out often, new cars, exclusive golf club membership, etc.

Off topic, anecdotal:
So I am friendly with a mom at my kids' school. Last spring at age 46 she proudly became a first-time condo-owner. Yesterday new condo-owner shared some rather specific plans to step up to a nice single family home in another three years or so, plus maybe take that dream vacation she's been planning. I asked her what dependencies there were, whether she had planned around recent changes in the housing market. Maybe I shouldn't ask questions like that.

She assured me that all she needed to do was break even on the condo.

By "break even" she meant that she would somehow have accumulated the full Spring 2007 value of the condo as equity. In four years. With no extra payments.

The Realtor in this case markets herself as an expert and resource for first-time homebuyers. And she let this little misunderstanding go.

How many sweet, responsible people of moderate income are subject to similar confusion? This woman tripled her monthly housing costs in order to own a home that is smaller than a lot of apartments. I can't support a bailout--though of course one is happening with or without my support--but for the first time I understand the need.

Worst of all, this lady is working until after midnight most nights to make ends meet, and she thinks she's fine. Her Realtor tells her that the condo is holding its value. And I can see pretty clearly that this particular condo-owner would never think of stepping up for a bailout. She may work herself sick, but she will not take a handout.

The people who *do* step up for the bailout will be those with more experience in gaming the system.

But that doesn't mean that there isn't real heartbreak out there.

There's a really good golf course right down the road from my house that has a mid-week senior rate of 9 holes for $9. ;)

Right now, many Asian multi-millionaires and even billionaires are being screwed real hard by a financial product called "accumulator". It is only available to private banking clients.

It is a very complicated derivative tool that enables you to buy a stock at a discount as the market heads up, but commits you to buying the same stock at an inflated price when the market heads down. The bank acts as the couter party of your bet but caps its loss by limiting how many shares you can buy at a discount but doesn't cap its gains, so your obligation to purchase stocks at an inflated price is unlimited.

The media over there calls these "accumulator" products "I come kill you later".

OO,

Sounds similar to a margin call in the 1929 era.

Peter P,

Not very logical to suddenly be FOR farm subsidies when the price of farm products are way up.

(Just like Malcolm, I did a double take).

Eliza,

That was a strangest definition of break-even I have ever heard. Can you explain it again?

NVR,

Where did you see the news about Germany?

NVR,

Re: Bush bailout plan.

Looks like the biggest anti-regulatory scam ever. As we can see, they had the plan drawn up long ago (Apr 2007). And now is the perfect time to start the economic war, following the plan.

What does remind me of, again? Oh, yes, the war on Iraq was similarly pre-planned and ready to go, waiting for any excuse.

Wow.
The UBS thing is just scary! Money market funds going iliquid and below par. Woah.
Reports last week on bond funds blowing up.
Scams like the accumulator.
It looks like, once again, Warren Buffett was correct.
People had unreasable expectations of return and chased some very riskey investments, or allowed financial institutions to offer products claimed to not be riskey but that were, in fact riskey.
Greed was is the market.
And now. Fear.
For any of you long time-in-the-market guys. Is this as bad as you have seen? I know we have had Enron and WorldCom and LTCM before. But this seems a much broader based run of malfeasance. I can't seem to find a segement of the market where risk was priced properly.

Right now, many Asian multi-millionaires and even billionaires are being screwed real hard by a financial product called “accumulator”. It is only available to private banking clients.

Isn't it very similar to selling naked puts.

Even billionaires can be suckers too.

Not very logical to suddenly be FOR farm subsidies when the price of farm products are way up.

Oil is a big factor. Farmers are not suddenly more profitable.

I really kick myself for not tying my cash up in CDs last fall when rates were more reasonable.

I really kick myself for not buying BSC puts. Mish had a very good analysis almost one week before the meltdown and I already had the quotes pulled up.

It was not meant to be. :(

If nothing else, I should have bought BSC at $3 and sold a week later at $10. Even longs could make money in this market.

Shorenstein isn't exactly calling a bottom yet but I believe he's saying it's close.
www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/03/30/BUUAVQQDJ.DTL

"There aren't a lot of people in the market with capital and there's no debt. That's a good time to be a buyer and in fact, when you look at the down cycles we've been in, the best time to be a buyer was in the early 1990s, when there was a deep recession plus a lot of oversupply of office buildings and the S&L crisis.

Then again in 1998, when there was a credit crunch, that was another great time for us. And then in 2001, when there was a recession and a terrorist event, (that) froze the capital.

Those were historically the best times to buy. I think this period - we have a recession, a very significant credit crunch - and like other down cycles, I think there should surface some pretty good buying opportunities."

So Peter, are you going to buy UBS puts Monday? ;)

Mercury News: "Startups Lose Their Sizzle"

http://www.mercurynews.com/business/ci_8747756?nclick_check=1

Lost Cause Says:
March 29th, 2008 at 9:33 pm
"I hear that you can even deduct interest on a second home, for which an RV could even qulify, which explains why there are so many of the gas guzzlers around."

Yep, even a boat if it has a toilet, qualifies as a second home.

Duke,

riskey or risky?

Depends upon whether it's Irish or Scots.

I have been saying that this country is the next Argentina, but now maybe I should embrace the coming disaster, since it will rid of the the ruling class.

So Peter, are you going to buy UBS puts Monday?

I will take a look. ;)