This is an opinion piece. I haven't seen anyone put together the numbers yet to fully quantify what I'm speculating on. Naked Capitalism estimates that $200 Billion has been transfered from shorts accounts to closing those shorts.
Normally the role of short selling keeps a 'hot stock' from overshooting. As the stock becomes over-bought to its fundamentals, short sellers step in. Once the stock dives back down to supportable levels, the short sellers "take profits" and buy up the stock. This helps keep a stock from becoming too over-sold. There is a natural group ready to party with their profits.
With short selling on financial stocks banned:
1. It created a short uptick as shorts were closed.
2. Those shorts are gone. There is no downside protection. The $200 Billion (estimated) buying pool is gone.
If we start a new downward bearish stock trend there will be no quick recovery bounce. Normally short sellers jump in when there is an uptick to close their shorts. Now they'll be on the sidelines (maybe with put options, but that doesn't have the same stabilizing effect).
Healthy companies have cash and can penalize undue short selling with a stock buyback. It takes a company short on cash to be a short target. Those companies probably had overpriced stock anyway... I consider short selling a stabilizing effect on the market.
The law of unintended consequences will now come into effect. October is a scary stock month. Will we make it though ok?
Most of my competition has too much of their portfolio in stocks. So...
Interesting times ahead.
Also, printing money is going to really drive import inflation. I still predict domestic deflation combined with import inflation. The US standard of living is about to take a hit.
I've been asked by a relative to look into the effect of today's economy on medical spending. So that will be my next blog (unless I get to my emotions article first).
Got Popcorn?
Neil
Monday, September 22, 2008
Wednesday, September 17, 2008
Resurrect the Resolution Trust Corp. (WSJ)
I've been arguing for two years to bring back the RTC. I'm happy to see this WSJ article (hattip Calculated risk) with Volker recommending it too!
Can we have Volker back as the Fed chair? Please!
here is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.
What isn't mentioned in the article is one of the RTC's best functions: To seize foreclosures, clean the title, and get them back out onto the market at 'market prices.' What they do is demand a roll call of who has claims on a property (taxes, repairs, 1st and 2nd mortgages, etc.) They then award each claim shares based on the dollar amount of the claim and the type of claim. e.g., For every $ of a 1st mortgage, one share. For a second, every $10 is a share... The house sells and after fees the shareholders split the proceeds on a per share basis. The new owners have the home free and clear and all claims that predate the deed transfer from the RTC must go through the RTC.
Bring back the RTC! Too many cities are in purgatory without it: Sacramento, Las Vegas, Phoenix, Palm Beach, Miami, Orlando, Tampa, Los Angeles (and suburbs, including the OC), San Diego, DC ex-urbs, and most likely a dozen other places (or more). I'm not for big government; but the RTC did its job well last time and is overdue.
It looks like my prediction that the RTC would be reformed 1Q08 was a bit premature... How do I know its needed? All of my wife's talk shows are about the economy. I think its funny how they're pointing out how those that 'live on a budget are ok.' ;)
Coworkers are in trouble and DOZENS (perhaps more) are staring to look into short sales; this isn't trivial. Let's just say our employer can determine that this breaks the terms of employment... But there are ways to work this out.
Got popcorn?
Neil
Can we have Volker back as the Fed chair? Please!
here is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.
What isn't mentioned in the article is one of the RTC's best functions: To seize foreclosures, clean the title, and get them back out onto the market at 'market prices.' What they do is demand a roll call of who has claims on a property (taxes, repairs, 1st and 2nd mortgages, etc.) They then award each claim shares based on the dollar amount of the claim and the type of claim. e.g., For every $ of a 1st mortgage, one share. For a second, every $10 is a share... The house sells and after fees the shareholders split the proceeds on a per share basis. The new owners have the home free and clear and all claims that predate the deed transfer from the RTC must go through the RTC.
Bring back the RTC! Too many cities are in purgatory without it: Sacramento, Las Vegas, Phoenix, Palm Beach, Miami, Orlando, Tampa, Los Angeles (and suburbs, including the OC), San Diego, DC ex-urbs, and most likely a dozen other places (or more). I'm not for big government; but the RTC did its job well last time and is overdue.
It looks like my prediction that the RTC would be reformed 1Q08 was a bit premature... How do I know its needed? All of my wife's talk shows are about the economy. I think its funny how they're pointing out how those that 'live on a budget are ok.' ;)
Coworkers are in trouble and DOZENS (perhaps more) are staring to look into short sales; this isn't trivial. Let's just say our employer can determine that this breaks the terms of employment... But there are ways to work this out.
Got popcorn?
Neil
Tuesday, September 16, 2008
Banks trying to unload commercial property debt (WSJ)
Last spring, securities firms and banks were able to sell commercial real-estate debt for discounts ranging from 5% to 20%, small compared with many residential mortgage securities. But that discount has been widening.
In other words, the smart money long ago 'cut and ran.' This real estate mania is over. Now we, unfortunately, have to deal with the downside.
late in the article:
It was in this climate that Lehman tried to save its neck by putting its $30 billion portfolio on the block last week. Lehman was hopeful because more than 70% of its whole loans were used to finance the relatively strong part of the real-estate market, such as offices, hotels, apartments and retail properties.
But the firm also had large amounts of debt tied to residential land, where values have been decimated. The firm negotiated into the final hour to sell the assets, but never reached a deal because it wouldn't cut its price enough, according to people familiar with the matter. And now comes the expected liquidation.
In other words, land loans are now being recognized as financing the derivative of real estate. In too many areas, homes are selling for less than the cost of construction. So land... is going to be a tough sell. But wait... CR has been blogging on the overbuilding of offices, hotels, and retail. Apartments are in that no-mans land. Not as overbuilt as other real estate, but having to compete with all of the FB's trying to rent until the "V recovery" that won't be.
If everyone is trying to get out... no one is trying to get in. This is going to further tighten the real estate noose. In other words tight credit will persist for years. So much for a quick job recovery...
Got Popcorn?
Neil
In other words, the smart money long ago 'cut and ran.' This real estate mania is over. Now we, unfortunately, have to deal with the downside.
late in the article:
It was in this climate that Lehman tried to save its neck by putting its $30 billion portfolio on the block last week. Lehman was hopeful because more than 70% of its whole loans were used to finance the relatively strong part of the real-estate market, such as offices, hotels, apartments and retail properties.
But the firm also had large amounts of debt tied to residential land, where values have been decimated. The firm negotiated into the final hour to sell the assets, but never reached a deal because it wouldn't cut its price enough, according to people familiar with the matter. And now comes the expected liquidation.
In other words, land loans are now being recognized as financing the derivative of real estate. In too many areas, homes are selling for less than the cost of construction. So land... is going to be a tough sell. But wait... CR has been blogging on the overbuilding of offices, hotels, and retail. Apartments are in that no-mans land. Not as overbuilt as other real estate, but having to compete with all of the FB's trying to rent until the "V recovery" that won't be.
If everyone is trying to get out... no one is trying to get in. This is going to further tighten the real estate noose. In other words tight credit will persist for years. So much for a quick job recovery...
Got Popcorn?
Neil
Readers input on down payment requirements
With all of the current turmoil in the financial markets, what is your guess on the change in down payments for 2009 and 2010? This isn't a stock market blog nor should it try to be one; but the current turmoil should have an impact on credit availability. So narrowing that down to mortgages, what do you think the impact will be?
Got Popcorn?
Neil
Got Popcorn?
Neil
Saturday, September 13, 2008
Knife catchers
Every few months at work some coworker taunts me for not buying. Invariably, its when they've called a bottom. So far, the best in this group has had to watch a comparable house sell down the block for $80k less than they bought. Only one has listened to me and accepted that real estate bottoms are not "V" bottoms but rather long flats. That decision saved him $50k in two months. (The home is still for sale, but that much cheaper.)
At some time there will be a bottom. I'll buy when I'm certain that the total downside risk is less than $100k. Where I want to buy... isn't there yet. But I've seen quite a bit of my competition buy in suburbs that, to me, are less desirable than where I'm going to buy.
Demographics are in my favor. Most baby boomers cannot retire without cashing out their real estate (primary residence and investments). This year was the first year of accelerated retirements. Next year, at my company, the retirement rate is set to double.
Its going to be interesting next year to see how the credit crunch progresses. Heck, its interesting this weekend! (Go to calculatedrisk.blogspot.com to see the discussion.)
Got Popcorn?
Neil
At some time there will be a bottom. I'll buy when I'm certain that the total downside risk is less than $100k. Where I want to buy... isn't there yet. But I've seen quite a bit of my competition buy in suburbs that, to me, are less desirable than where I'm going to buy.
Demographics are in my favor. Most baby boomers cannot retire without cashing out their real estate (primary residence and investments). This year was the first year of accelerated retirements. Next year, at my company, the retirement rate is set to double.
Its going to be interesting next year to see how the credit crunch progresses. Heck, its interesting this weekend! (Go to calculatedrisk.blogspot.com to see the discussion.)
Got Popcorn?
Neil
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