patrick.net

"Since liability is limited to 75MM and their income stream is completely intact,"

I think certain lawmakers are working hard to push that cap more than 100X to 10B.

There is so much out there about BP as an investment that people have done homework on that you should review them instead of asking here. Seeking Alpha always have great synopsis of pros and cons commentary.

Your main question is whether the market is mispricing BP and if so what is the margin of safety. Uncertainty creates problems and opportunity.

For me, it's too early to tell how much all this will cost BP. Estimates are anywhere from 5B to 40B. Future cash flow will be hit pretty bad too as their capital investment and downsteram business and will incur significant rise in expenses will be effected. Based on my experience, stock price will go way up the day the CEO is canned.

BP will pay dearly. Exxon got a pass because of three reasons:

1. They're "American"
2. It was mostly animals affected, not people's vacation spots and businesses
3. Friendlier administration.

Now, there's no chance in hell that they'll pay anything close to the actual damage that they've caused (they'd go bankrupt if they did).

If I were a betting man, I'd put the total amount that they're on the hook for in the $5-10 billion range, spread out over 5 years.

The thing about trying to time the market, or worse yet an individual stock, is that there are a lot of people who do this for a living, 24x7, and they have access to information a lot quicker than you. They also have trading programs that can react a lot quicker than you can.

It's like trying to win a swimming race against sharks. The best way to win is not to play.

Ok, here is a good article on their liabilities, and the "75 million" number.

http://money.cnn.com/2010/06/04/news/companies/bp_legal.fortune/index.htm

"there are several mammoth exceptions. To begin with, the limitation does not apply to any of BP's liability for state and federal cleanup costs, for which BP (BP) is 100% responsible."

They will be liable for a lot of cleanup and a lot of payouts, especially if that oil turns up on beaches and hurts tourism and/or makes anyone sick. The end result, is they make a huge amount of money. This will hurt them for 3-4 years maybe, but in then end they'll come out ok.

I read a paper written for the Canadian Government by a scientist on the Valdez spill (I requested a copy from him, I knew he did this work and knew him so it was easy) and after reading it, he basically said it was a spill, there are spills far larger around the world every year, this one got media attention and was close to cities so it was easy to drum up media hype. This BP spill is a massive disaster because of the sheer number of humans that will be impacted by it in the near future, but it will get cleaned up. Nothing will ever be the same though, it's like cleaning up a dirty park. You get everything you can, but there are always a few cigarette buts, small wrappers and pieces of plastic half buried in the ground.

Where are you looking at buying?

Does anyone STILL think we’re in a bear market knowing that the market would have to crash 18% JUST to get back to FLAT from 2009?

that's not how annualized rates work, btw. Show me a nabe, and we'll talk : )

"Interest rates on 30-year fixed-rate mortgages fell this week to their lowest level this year and were just barely above their all-time low, Freddie Mac reported Thursday.

But demand for loans to purchase houses remains sluggish more than a month after the end of a federal program to stimulate the economy through tax credits for home buyers."

Here's a house I'm familiar with. It's about as far north as you'd want to go in San Leandro, perhaps too far, but it'd make a good rental.

(edit: it's not on the market now, but it will be, prolly)

http://www.zillow.com/homedetails/572-Kenilworth-Ave-San-Leandro-CA-94577/24876361_zpid/

That's my friend who timed the peak perfectly, btw. When he told me he was selling, I said, "Sell fast!".

Here's a pretty good median listing in Pleasant Hill:

http://www.redfin.com/CA/Pleasant-Hill/1942-Carolyn-Dr-94523/home/1798979

and

http://www.zillow.com/homedetails/1942-Carolyn-Dr-Pleasant-Hill-CA-94523/18390218_zpid/

On the market for $485K, which looks to me to be maybe $25K high if zillow's graph of the Pleasant Hill median is correct -- the median has gone from $444K to $460K since July, an annual 3.6% rise. Back out the $8000 credit and you get a 1.8% rise over the TTM.

Rates have fallen 20bps or 4% over these TTM, too.

I think Patrick has a free trial of his bargain hunter service. Concord has a pretty good balance of rent/price ratio as well as decent people. If it's all about the yield, it'll be the slum areas of Oakland, Richmond, Vallejo and Stockton.

Personally, I think Hercules is pretty good.

http://www.redfin.com/CA/Hercules/21-Mission-Spgs-94547/home/1971663

3/2.5 1570 SQ FT built 1990. HOA 160, Pool and Private Playfround. Rent 2100 - 2200. price less than 250K. You'll have absolutely no problem renting this for 2,100. Section 8 pays 2,400 if you want to go that route. presuming 30% down

principle : 200
Interest : 700
tax: : 260
Insurance?HOA : 250

Total 1,410
Min Rent 2,100

Free Cash Flow 690
deferred cash flow 200

interest from 75K down payment -300
Cash flow 590
margin of safety: 590/2100 = 28%
investment: 78K 75K down and 3K fee
Return: 10680
Allowance: 3300 (1.5X monthly rent
Net return 7380
ROI 9.46%
annual Depr 7,500
tax: 90% deferred

Dead cat bounce, look out below.

dude .. just because the houses that are selling cost more than the subprime hispanic owned junk that has been going back to the bank thus far, does not mean the market is doing anything ... nothing .. at all ... it is just going down super slow while the last of the stupid people with access to free money are flushed out.

everyone agrees that it is much better to pay less for a home with more expensive money. and so, we shall wait.

There's a handy barrier that is only breached by Hwy 1, Soquel Ave, and the bridge over the harbor.

When I lived there, I stayed on my side of the wall at night.

Is it possible that California is becoming a magnet for the new aristocracy?

And what will these new Aristocracy do rest of their days.

Is Santa Cruz still the scariest town on earth? Are there still vampires?

Well its also known for the place where if you look at a woman walking down the street
in a certain way, it called rape. Dont need any Lost Boys Vampires to scare you.

Speaking of "bull markets" before we hit a meaningful fib retrace on the bounce is premature, not to mention mortgage applications are down 35% from four weeks ago so there is no volume confirmation on this "bull move".

If your "bull market" was driven by the rate movement and the $8000 tax credit . . . we're gonna need some more juice right about now. The Senate failing to pass unemployment extension next week ain't going to be it.

Is it possible that California is becoming a magnet for the new aristocracy?
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This is the same kind of mentality which caused the market to crash, in the first place. While mentality like this is still pervasive, the long-term moving averages for the RE market will continue to point south.

There’s still an ocean of cash out there. Real Estate bubbles in China and Australia are about to burst.
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The implosion of RE bubbles elsewhere does not free up any cash. On the contrary, it destroys wealth, because very few are able to get out at the top, and the capital is trapped. The bubble makes sure this happens by drying up liquidity (sales) long before prices start moving southbound.

you use a moving average longer than 1 year? Why?
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Stock market bull markets typically last about 4-5 years, followed by a 1.5 year bear markets (a bear market usually lasts about 30% of the bull market). That's why we use a 1 year long-term moving average for a stock market. RE bull markets typically last about 16-17 years, so the right moving average to use for the RE market is 4 years. The last bull market we had lasted 30 years - the early 1990's was just a correction, hardly a bear market, at all. The one we are having now, is a real bear market (more than 20% national decline), which will last for, at least, 10 years. If you look at the 4 year moving average of prices, you will see that it is just now beginning to fall.

There are just as many people getting out at the top of a bubble as there are people getting in. There were just as many winners selling in 2006 as there were losers buying. IT’S NOT CORRECT that a real estate bubble destroys wealth
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Nothing destroys wealth, like the implosion of the bubble. This is because all those people who sold at the top, just got back in by buying again. Very few people actually went to renting after they sold (among all of my friends, I am the only one who actually did this, but many people sold, just to get into an even more expensive house). The reason why wealth is lost, is because, it never actually existed in the first place. The only real wealth which cannot be lost, is the wealth created by "real" labor, not from speculation - that's the true nature of bubbles. People will learn this hard truth eventually, and that's when we will see the true bottom. As long as there are still "suckers" like you left, the bottom will be ephemeral.

Prices are down 30% from the peak, across the country, while home ownership rate is only down 2%, so we had more than 30% loss of wealth in RE. Now, where did that money go. There isn't a single market (with the exception of gold, which is a very small market), which enjoyed a 30% increase during this period. On the contrary, most other markets went down too. So most of this money just disappeared into thin air. It disappeared just as easily as it was fabricated out of thin air during the RE bubble runup.

I was just wondering what would happen if the 30 year loan is either severely diminished or if it were to go away entirely, like Argentina. If a country defaults, that could happen. And if people don't believe that they will be paid back over the course of a 30 year time period, we could see 15 year with balloon payments, etc. That would severly drop house prices.

dunnross says

Is it possible that California is becoming a magnet for the new aristocracy?
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Sure is. Its no wonder the old aristocracy from Madison Avenue are parking into Google positions while others from the East Coast are taking over other major Silicon Valley companies as CEOs and VP. Yet none have any tech/engineering experience.
We are screwed!

Anyone with a money market account is buying government bonds.

Just to clarify, that would technically be referred to as a money market fund, rather than your plain vanilla money market account, the latter being a safer place to park your money.

Government bonds(...)cannot be defaulted or bankrupted on. Therefore a federal bond represents the guaranteed delivery of real money although they aren’t money.

FWIW, there was an effective default (repudiation) on Treasury bonds in '33.

http://www.aei.org/article/29262

Most of the $3 trillion added to the bond market was through FED printing - it is the FED buying gov-t bonds, not people. The FED printing money is not adding to the wealth of this country, because it simply dilutes the money which is already there. Like I said - most people, like you, seem to have this preconceived notion that you can generate wealth out of thin air - only hard work generates wealth. Everything else is fleeting.

EVERY PENNY used to inflate the real estate bubble still exists
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This is absolutely true, because the initial money used to inflate the bubble was "real", but there was very little of that money. Everything else was ephemeral. When the bubble deflates completely (about 10 years from now), only the "real" money will be left, and all the ephemeral money will be gone.

First of all, the FED has about $9T of off-balance sheet transactions:

http://www.youtube.com/watch?v=WcZH9G8S9iQ

Second, I didn't say wealth could not be created out of thin air. I said, only ephemeral wealth could be created out of thin air, and just as quickly disappear.

Third, I agree that the financial transactions are a zero sum game (keyword is transactions), but
the 80% of the wealth in RE was not related to transactions. It was the ephemeral wealth, which people agreed upon, just like your $100 bottle of water, which is really only worth $1. The 20% real wealth which is in RE, will always stay in RE, because prices will only fall 80%, not 100%.

GDP is not wealth, it is the sum of all monetary transactions:

http://www.akxqq.com/archives/76

During the same 12 months, gold is up 100%, which means RE is down by about 40% against gold currency, which, in the environment of FED printing, is the only real currency which is the true judge of RE progress.

Besides, the only reason why we had this dead-cat bounce in RE was because FED has just pumped huge amounts of money and 10,000 programs to prop up the prices. As soon as FED removed support, sales are already down 35%.

Expect much much lower prices up ahead.

dunnross says

Most of the $3 trillion added to the bond market was through FED printing - it is the FED buying gov-t bonds, not people.

Actually the fed is printing money, loaning it to the banks at .25% then the banks are loaning it to the federal government via treasuries at 3.5%. It's great to be the king.

@Nomo,
who controls the printing presses, if not The Fed? Keep it simple for me please.

Nomograph, ever heard of QE? That's FED's euphemism for printing money.

Bap33 says

who controls the printing presses, if not The Fed? Keep it simple for me please.

Money is not "printed" by the Fed, it is printed by the Treasury.

The Fed can and does create new money by crediting the Treasury's accounts. When it does this it takes a fresh T-note in exchange. In theory it can sterilize this money creation by selling this Treasury Note, which will take money out of the economy.

The Fed has all kinds of ways of getting liquidity -- money -- into the system, but dollars do not appear out of nowhere, there is always an exchange of assets.

QE is basically monetizing existing debt. Most of the QE was buying illiquid but government-guaranteed assets which juiced the money supply with new money into the system, much of it just parked in treasury issues for the safe yield.

I am far, far from an expert in this area so this is just my general understanding.

ok .. I follow thus far .... so, who tells the treasury to start printing and how much to print?

dollars do not appear out of nowhere, there is always an exchange of assets. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Of course they do. The T-bills which they get from the Treasury are also freshly printed.
Every time you go to the bank and get a mortgage, that's money created out of nowhere.

who tells the treasury to start printing

that's more a vault cash issue. I assume some % of the required bank reserves -- money the bank has that cannot be lent out -- can move to/from vault cash in the bank and electronic record at the Federal Reserve. When the Fed needs more cash to send to banks, it gets it from the Treasury, and pays just the cost of production, not the face value.

Every time you go to the bank and get a mortgage, that’s money created out of nowhere

Yes and no. Technically the bank is lending out their depositors' money. If the loan goes bust and the underlying asset can't repay the loan, somebody has to take a monetary loss somewhere.

But what did happen of course is that the check the buyer gave to the seller becomes the seller's cash when deposited in a bank and the money supply therefore increases by the amount of the loan.

What the Fed did with QE is just take over a trillion of assets on its books. Since it doesn't really care if it loses money losses it takes will just reduce the amount of money in "earnings" it makes on its operations as the nation's system of central banks. The NY FRB is the most leveraged here but can call on help from other FRBs.

Would you kindly fedex whatever you're smoking? C-S has been FLAT since December. Scroll up and look at the graph if you don't believe me. the $8000 pulled demand into that plateau and loan volume from May is at 1997 lows.

Now, interest rates are going to be the driver more than anything and it wouldn't surprise me to see 3.5/4.5 rates on 15/30 money.

Case-Shiller admitted that their seasonally-adjusted prices have not been accurate due to a failure in their model.

Current house market conditions are exactly what we had back in 2005/2006 when prices stalled and sales volume dropped precipitously. It is a classic standoff between the buyers and sellers. Sellers pull inventory off the market, hoping to come back when the market is stronger. Buyers are waiting out for lower prices. Unfortunately for sellers they are going to lose, again.

The crash of 2007/2008 skewed the seasonally-adjusted computation, because C-S uses 3 years worth of data, and a normally strong season of spring, back in 2008 was weaker than the weakest season of winter.

Accurate or not, prices DO fall (or moderate) every year in winter and DO surge in spring and summer.
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Yes, so if nominal prices are flat in the spring (where they should be up, normally), that means that seasonally-adjusted prices should be even lower, not higher like S-P is showing. Because of the last 3 years, where spring had lower prices than winter, S-P formula has switched to adjusting higher instead of adjusting lower.

I stated a fact that isn’t subject to interpretation
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So, what precisely is the document you used to make a statement "Even the bear rallies during the Great Depression never lasted more than 6 months"?

It makes predictions that homes selling in the 1930s and 1940s for $4000 should be selling today in the $80,000 range after being corrected for inflation.
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And why is this wrong? If you assume an 80% decline in prices, like I previously said, you arrive exactly at the $80,000 figure.

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Did you even look at the top of that chart? It sais $INDU, which stands for Dow Industrials. I told you before that the housing market moves a lot slower than the stock market, so a 6 months rally in the stock market, corresponds to a 2 year rally in housing. The rally we had in housing so far, only lasted 9 months (Feb-Nov), and then it stalled.

Because that chart gives prices in 1940 @ $4000 and prices in 2000 @ $80,000………………..
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Where on that chart do you see the actual formula which was used to compute inflation adjustment?

No, Case-Shiller measures deviation from inflation adjusted mean (or fair-market value). All this is saying is that a house (not a home), was 20% below fair-market in 1940, and 20% above fair-market in 2000. So, why is that so hard to believe? Are you saying that it should be much more than 20% deviation in 2000? If that's true, then, prices should fall even more.

Troy says

Without lower rates, I just don’t see any potential for housing getting more expensive, outside of Fortress areas, which have their own private economies.

Maybe, but they are not an island. More and more people are looking at the outlying areas, which are becoming much more affordable, and leaving the fortress. I have a friend that just bought in Oakland last month, after living in San Francisco for 15 years. Relative value for money will be a drag on fortress pricing for years.

Also:

Sounds like a strengthening market in the Bay area, doesn't it? Take the 94132 zip code in San Francisco. The median sale price was $720,000 in April, 75% higher than April 2009.

When you look at the details, however, the picture is quite different. A review of this zip code on trulia.com shows that 87 of the 120 listings on June 9 were foreclosures. Although we cannot tell how many of these April sales were foreclosures, MDA DataQuick reported that 30% of all sales in the Bay area were foreclosures and Radar Logic found that 31% of all San Francisco sales in February were foreclosed homes . Clearly, a majority of the sales in this zip code were either foreclosures or short sales and that is also the case for the rest of San Francisco.

With such a high percentage of "distressed sales" in San Francisco, you might be surprised that the median sales price has been rising over the last year. Here is why. As early as July 2009, an important study from zillow.com had reported that 30% of all foreclosure sales nationwide in the previous month were houses in the top third tier of home values in their local market, up from only 16% three years earlier. Foreclosures had steadily moved up from lower priced homes to expensive ones. If you take a look at San Francisco foreclosed properties on realtytrac.com, you will see that this is certainly the case with San Francisco foreclosures. The website is littered with homes that have mortgages of $500,000 and more.

http://www.businessinsider.com/keith-jurow-us-housing-markets-continuing-to-weaken-2010-6?source=patrick.net

I remember a few years ago when almost everybody believed that forecloses would NEVER be a significant factor in San Francisco real estate. (everybody is high income, there is no sub-prime here, blah, blah, blah....) Well, it's not longer true, and it's just getting started.

Sure thing. Here is one:

http://www.zillow.com/homedetails/3129-Linden-St-Oakland-CA-94608/24740065_zpid/

On sale now for $92K (probably worth as much back in 2000).

Here is the ad for house in Oakland back from 1941 ($4,250):

http://www.thepeoplehistory.com/40s-homes.html