Housing and its Future. Friday, Sep 17 2010 

So much has been written about the housing market and its overall effects on the economy so I will not spend much time here.

Without dating myself the S&L crisis was partly solved through the removal of bad loans from the balance sheet of banks, the repackaging of said bad loans, and selling them off in tranches to investors.

The quicker the bad loans are dealt with the quicker credit policy will normalize. At the present time, banks will continue to invest in Treasuries over lending as long as the risk reward matrix favors Treasuries. Attempts to push the banks out of Treasuries and into lending will likely backfire as banks are in a risk averse mode and unwilling to lend in the way which caused the credit bubble.

The aftermath of the housing crisis has dominated headlines across traditional and electronic media yet I am avoiding it for a number of reasons.

Harkening back to my commentary at the beginning and middle of 2010:

“Non-performing loans continue to cause problems in the US banking sector. In fact, financial stocks
remind me of post crash Internet stocks. Some recovered all of their losses 10 years later but ask the
shareholders of stocks like Microsoft, Cisco, Yahoo, and Intel about their 10-year returns. There are values but you should not be buying now for a buy-and-hold strategy.

When a bull market starts the leaders of the new bull market are not the leaders of the previous bull market. Going back almost 20 years to the late 80’s/early 90’s when the high yield debt bubble burst and the S&L crisis consumed headlines the banking sector required years of mergers and healing before returning to normal. It is my opinion that the same will happen with the popping of the housing bubble in 2008.

For the past two years, the US has gone through a process similar to the five stages of grief where we initially denied that there was a problem and everything was under control. Then we had anger at the banks for making these loans regardless of the failure of people to provide proper loan documentation while chasing quick real estate gains. Banks then tried to negotiate and workout the loans so that borrowers can stay in their homes. Finally, people are throwing up their arms and walking away which leads to acceptance by the banks that they have to face up to the problem loans.

It has always been my belief that the faster we work through the problem loans the quicker credit policy can return to a sense of normality.

For the banking industry, the key to getting out from underneath the banking and mortgage problems is loss recognition. Once losses are recognized, the industry will move forward.“

History is not on the side of banks and the housing market with respect to historical trends and market leadership. Looking back into history, previous leaders after the LBO wave of the late 80’s were shunned in the 90’s as the Internet and technology boom took hold. After the popping of the tech bubble in 2000 technology stocks were shunned and stock prices of blue chip technology companies such as Microsoft, Dell, Cisco, and Intel languished. It is true that companies such as Apple, Amazon, and Google have flourished to a certain degree but if one looks at the NASDAQ one sees an index which has come nowhere close to recovering to its previous all-time highs.

I believe that the financial stocks will suffer the same fate as the technology companies and the next bull market, commodities, is beginning to appear on the radar screen of most investors after moving up for the last seven years.

Rather than focus on the problems and the back and forth between global regulators and financial stocks, housing data, and other items I prefer to look for solid values and the beginning of the next bull market which will take hold and drive the equity markets to new highs.

Comment on Tuesday’s article about the dilutive effect of gold producers using their stock as a currency. When a company acquires a zero revenue/loss making company using stock the result is highly dilutive on the acquiring companies stock price as the acquired company does not add to revenues or profits. If the acquired company has revenues and profits then the dilution effect is greatly reduced.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

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Green shoots? Friday, May 29 2009 

Recent press reports concerning green shoots are leading consumers to believe that the economy has turned a corner and we are on the road to an economic recovery. However, one has to look at these reports with skepticism and filter through the noise in order to ascertain the real story behind the scenes.

GM and Chrysler’s bankruptcy and reorganization will drag down second half growth rates as long as both firms are in bankruptcy. The quicker both firms emerge the earlier we can start rebuilding consumer confidence.

Recent positive data emanating from the housing market should be watched with skepticism. Housing numbers are reported on a month-over-month comparative basis and with the average temperature rising more people are looking to purchase homes. Once fall rolls around, month-over-month comparisons will fall leading to skepticism about a recovery.

The US housing market will continue to take years removing the overhang currently in place. Uncertainty over the economy will give buyers pause before jumping into the market. An additional bulwark to a recovery in the housing sector is the banks reluctance to make loans. As long as the banking sector views holding bonds over making loans on a risk adjusted basis a housing recovery will be impeded.

Given the low amount of home equity available it is unlikely that homeowners will be able to use equity to fund durable goods purchases and home renovations. Even if a loan was written down to fair value, a bank will be unlikely to extend home equity credit after losing a significant portion of the loan and future interest income.

Since income growth will be slow due to uncertainty in the job market, consumers will not be in a mood to extract equity from their homes and will likely continue to rebuild their savings.

Consumers will spend on necessary purchases but it is unlikely that businesses will fund expansion plans until they see an economic recovery taking place.

Export growth will slow as overseas consumers and businesses look to the US for growth and leadership.

Recent dollar weakness should be viewed not as dollars leaving the country but rather investment dollars held in US Treasuries being swapped for foreign equities as funds who have missed the rally attempt to play catchup. Foreign third tier markets have jumped higher in recent weeks signaling an approaching short-term market top. Second half weakness should be met with a rise in the dollar as funds retrench ahead of the expected weakness.

The differentiator here is not foreigners pulling money out of the US but rather investment funds looking to catch a higher risk adjusted return in foreign markets after the run up in the US markets. This is similar to the events that happened in the fourth quarter of last year when overseas investments were sold and proceeds converted back into US Dollars.

Efforts to restrict government spending in a recession will cause growth to lag and risk causing the recovery to lose traction. Any efforts to restrict spending should be focused on government waste with efforts on projects which will create jobs now and in the next upcycle. Increased R&D spending along with infrastructure improvements are the projects which will provide current and future benefits. Dog parks and similar programs are wasteful spending which provides no short or long term benefits.

It is likely that the green shoots people are seeing are not the basis for a long-term recovery and just the first bottom in a W shaped economic recovery.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Everything is Getting Better Tuesday, May 12 2009 

Back in the middle of the financial meltdown last October I penned a quick article entitled [url=”http://www.financialsense.com/fsu/editorials/urban/2008/1016.html“]Everything will be All Right in the End[/url]. At the time the world seemed to be falling apart but it is important to understand that although the skies seemed dark at the time, there is a light on the horizon.

Since then the banking industry has undergone stress tests, the creation of various governmental funding mechanisms, and the thinning of the herd in terms of smaller weaker banks being acquired by larger organizations. A sense of normalcy is slowly returning to the industry and as banks spend the appropriate time in recovery.

We are currently at the point where lending standards have tightened and banks feel that the risk/reward ratio is tilted in favor of holding government and corporate bonds rather than making loans. Good people with good credit can get loans in this environment however people who have no income and no job will have no access to credit as it should have been over the past five years. This has been lost in the noise about banks writing off mortgage balances and foreclosures.

We are in the same position today in terms of lending standards as we were at the bottom of every credit cycle going back as long as records are kept. What makes this cycle different from the rest was the movement of mortgages on the edge of the lending bell curve to the mean. Because these mortgages were securitized into illiquid MBS and then chopped and diced into even more illiquid securities the healing process in the banking system will take longer than normal.

So where do we go from here? The healing process will take a number of years as banks continue to deal with problem loans and rebuild their capital structures. The key is loss recognition. The quicker losses are recognized and put behind the bank the quicker they can move forward in terms of rebuilding the capital structures.

Once the capital structures are rebuilt, banks will continue to choose to hold bonds over making loans to less than creditworthy clients until the risk/reward ratio favors making loans to those clients. Any efforts by the government or private sector to return to the lending practices in the middle of this decade should be looked at as a worrisome sign. Even more worrisome would be a return to these lending practices by banks of their own accord.

One recommendation would be to allow Canadian banks, who have very strong capital bases, to acquire weaker banks in the United States. TD Bank made a sizable acquisition in acquiring Commerce Bank but other Canadian banks should be allowed to make acquisitions as well. After speaking with a number of professionals in Canada, they are showing a keen interest in expansion south of the border. Given the strong capital base and risk management practices employed in Canada, where the banking sector was recently rated the strongest in the world, the US government should be opening doors for our neighbors to the north. This would only strengthen the US banking system as a whole and strengthen any economic recovery.

We are back….temporarily Sunday, May 10 2009 

I am back temporarily to expound a bit on what is going on. Do not get excited but I feel the need to cut through the noise once again and give a bit of clarity.