After a well needed break, the KoolAidMan is back! During the time off, he’s been disconnected from the markets and the media, however upon returning it seems that not much has changed. Housing values haven’t rebounded yet, and the markets are still jittery.

Instead of linking to a top story about home values dropping again, we found a nice piece at Marketwatch reminding us of some old expressions that are very applicable to the realtors, home buyers, sellers, and lenders who sparked this mess that we’re in.

What goes up must come down. One reason people did this is that home prices were rising faster than personal incomes for a number of years, but that could not go on forever, as we know now.

We know now, and we could have known this back when the mania was at its prime. Most people involved chose to ignore reality and decided to speculate instead. We’re going to guess that there’s a handful of people who knew this and were able to cash out while they could, but there are millions of handfuls of people who are left holding the bag right now.

You can’t make a silk purse from a sow’s ear (or kiss a frog and turn it into a prince). These securities were based on loans of questionable quality that, when bundled together, somehow were blessed with AAA ratings by the debt-rating agencies.

There is no such thing as a free lunch. It boggles the mind how many money managers, investors and just about everyone else thought these securities could be rated almost as high as supersafe U.S. Treasurys — without any added risk. No wonder people from all corners of the planet, from sophisticated hedge funds and banks to the proverbial man or woman on the street, put chunks of money into these mortgage-backed issues.

We’ll be listening for any news on investigations into the ratings agencies as this mess unfolds. It’s difficult to predict what will happen because there are so many things going on behind the scenes that average Joe Investor doesn’t know, but we’re not in the game of making predictions here. We’d rather drink our Kool-Aid and believe that everything is OK!

Stay tuned, for later this week we’ll be covering holiday retail sales and consumer spending. We’re sure to see some interesting statistics in the coming days!

Financial Market, Investing, Economy, Stock Market, Real Estate | No Comments »

CNNMoney.com is reporting that home builders’ confidence fell further in October, and their outlook for the future remained at a record low level, according to a recent industry survey.

The National Association of Home Builders/Wells Fargo Housing Market Index showed the overall confidence measure had dropped to 18, which is the lowest reading in the 23-years the survey has been conducted.

The report is just the latest reading to show the home building and new home sales markets to be in serious trouble. In remarks Tuesday, Treasury Secretary Henry Paulson said that the housing decline is still unfolding and he termed it the most significant current risk to our economy.

“The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth,” he warned in prepared remarks.

Our future economic growth may already be severely penalized, and our economy as a whole may be better off if home prices are more affordable. No matter how much regulators try to keep prices from falling, the market should take care of things on its own. A steep drop in housing prices would bring affordability levels somewhere back below the stratosphere and within reach of many more people who can actually afford a home with nominal loan terms: no more creative financing like negative amortization or interest only teaser rate loans.

Still, the builders’ trade group says that its members hope that they are at or near the bottom of the market.

It takes more than hope to alter reality. Perhaps the home builders’ trade group should mix up another batch of the Kool-Aid they were drinking two years ago when home sales and values were increasing with no end in sight.

Kool-Aid, Investing, Economy, Real Estate | No Comments »

CNN is reporting that a consortium of the worlds largest banks is creating a fund to back up $100B in risky (and likely underperforming) mortgage and other securities.

The fund, according to reports in the New York Times and Wall Street Journal, would be used to buy securities at risk in the current credit crunch in an effort to avoid a broader economic problem. An agreement on the fund’s framework could be announced as early as Monday, the Times reported, adding the talks were ongoing and could still result in no accord.

Back in May 2007, Federal Reserve Chairman Ben Bernanke publicly stated that the mortgage mess was contained. Since that statement was made, several major mortgage lenders and hedge funds trading mortgage backed securities have gone belly-up.

It appears that banks are taking some responsibility by preparing a fund like this. After all, these same banks made a considerable profit over the past few years from issuing and trading mortgage backed securities, so it’s only reasonable that they try to cover their tracks. On the other hand, this may just be an attempt to maintain confidence of major investors by preventing any large scale losses. It’s in the banks’ best interest to avoid any financial crisis and to keep people investing so they can earn their commission.

It is surprising that these major banks couldn’t see this coming until it was [nearly] too late. It seems that everyone involved with mortgages or real estate, even large banks, were drinking the Kool-Aid and believing the party would never end.

Financial Market, Kool-Aid, Investing | No Comments »

MSN Money is reporting that investors are paying out to insure against a possible US stock market crash. The spread between the cost of put and call options on the S&P500 has hit its highest level since 2001, indicating that investors are taking precautions against a market decline.

A put gives the purchaser the opportunity to insure against a fall in the market and is the option but not the obligation to sell shares at a specified price and date in the future. A call gives you the right but not the obligation to buy shares, allowing the buyer to position himself in case of a market rise.

It seems that not everyone is drinking the Kool-Aid. When your own money at stake, you have to stop and think for a moment when the markets reach record highs, especially when there’s a lot of talk about economic slowdown and less consumer spending.

William Strazzullo, chief market strategist at BellCurve Trading, said the stock market stood at a crucial juncture with the Dow Jones Industrial Average and the S&P 500 both hitting new highs on Thursday.

“In spite of the talk of recession and less consumer spending, we are back at record highs,” said Mr Strazzullo. “To sit up here is bullish and the clock is ticking for shorts. Either we roll over or set the stage for a bigger push higher.”

Todd Salamone, senior vice-president at Schaeffer’s Investment Research, said: “Everyone is expecting a huge decline.”

But Mr Salamone disputed that a crash was imminent. In 2001, put options became more expensive because the market was already falling, he said, while today, hedge funds were buying large volumes of puts to protect their long positions.

A crash may or may not be imminent, and any single economic factor such as reduced consumer spending is unlikely to make a difference. It’s difficult to predict markets, however those who do stand to make a nice profit.

Investing, Economy, Stock Market | 1 Comment »