August 28, 2006

I'll say it again - I think we're heading for a wicked market crash


Last time I posted a headline that I felt like a stock market meltdown was just around the corner was April 11, 2006 ("Anyone feel like a good crash"). Yes, HP was laughed at there, as the market was setting new fresh highs, confidence was in the air.

Well, on April 11, the NASDAQ closed at 2310. Today it's at 2140, or down 8%. Not a crash, but a big bear hit for sure. Then look at almost any stock that has anything to do with real estate or the consumer and there are crashes all around. Sell in May and Go Away, yet again.

Well, now it's time for a real crash. The Housing ATM is closed, the consumer is rapidly sobering up, GDP is falling, the dollar is tanking, inflation is roaring, restaurant and retail stocks are getting killed, REIC stocks keep going south, consumer and CEO confidence has plummeted, the homebuilder index is drifting to suicidal, the Fed doesn't look like it's done, gas prices are still high and going higher, and last week's housing news and even internal NAR report scared an entire nation of homeowners.

The US economy is rolling over, it's fallen off of that cliff we all knew it would one day. There's only so much debt that can be hoisted, then it contracts, sometimes wickedly. In addition, millions are already feeling the Bubble pain, with realtors, mortgage brokers, appraisers, title agents, builders etc not getting paid (thus not shopping, not dining out, not buying houses...)

The crash might come suddenly, or like the QQQ's 70% freefall 2001 - 2003, it could be a death by a thousand cuts. Something like Iran blowing up (possibly this week) can really set it off, and something like a Fed rate CUT could confuse it even more. But we're going down, not up.

I'm in 5.05% US$ cash, COP options and now 9 stocks (mainly retailers) on the short side via Jan '07 puts, five that are up over 100% already. And I sleep well at night, although I worry about the country and what's to come.

Finally, I think people around the world are now realizing how illiquid their housing assets are, and how liquid their stock investments can be. And now that they're going into hunker down mode, and raising cash, they can hit the sell button right quick.

49 comments:

Anonymous said...

Let's hope your right. I've made 200k in homebuilder puts. Holding on for more. If they all go BK I'll make $1.8 million.

Anonymous said...

Actually it will be $2.7 million profit.

Anonymous said...

remember the trolls like "the banker"? think how screwed they are today

keith said...

I actually don't like shorting the builders today - I think 50% off is where they needed to go, but most are now at book value (even though the value of that book might be suspect)

Watch rapid consolidation in this sector, with the big getting bigger.

Anonymous said...

I disagree. Watch for many to go bankrupt as they don't have the money to pay their bills.

I was talking with the CFO of a builder here in California the other day. He said they haven't sold a home in 3 months. However they've lowered their prices so much that in 3 of their communities they will lose money by making the sale.

Land values are plummeting.

KB Homes is a competitor of theirs in a few communities. He said they keep building and they are hurting them because they are selling homes for lower than they are and losing on every home. He says they paid about the same for the land as they did.

Anonymous said...

KB Homes will fall and Bruce Karatz will be the fall guy for the Bubble. With his cashing out of 150m in options in 2005 with options he got at all time lows he will be going to jail.

Expect more lawsuits to go their way. They won't be able to keep up with all their problems.

By the way, KB Homes is still building like crazy here.

Anonymous said...

Keith- You've got to do a piece on the new FDIC lending rules. Here they are. If people thought there weren't many borrowers wait until these new regulations hit.

Here are the highlights from the 17 page document put out by the FDIC.

“guidance” from the Federal Deposit Insurance Corporation. It covers the following topics and gives suggestions as to what the changes should be.

Increasing qualification standards such as qualifying for the adjusted payment of a non-traditional loan instead of the “teaser rate”

Lowering loan to value of non-traditional loans

Reintroducing verification of income and assets and getting away from credit score only approvals

Reduced documentation loans now include what’s referred to as “risk layering.” That means these loans are made to the people with the least money down, the poorest credit, the least knowledge of what they are signing, and the highest loan to value. They are suggesting this practice be discontinued

Reduced concentration of these types of loans in the portfolio

Increase the monitoring of these loans for fraud

A suggestion that if too high a percentage of a lender’s loans default, they will be asked to repurchase the loans themselves. “It should be noted that the repurchase of mortgage loans beyond the selling institution’s contractual obligations is, in the Agencies view, implicit recourse,” was the actual wording.

Here is the verbiage used as a warning to follow the “guidance”:
“Institutions should avoid the use of loan terms and underwriting practices that may result in the borrower having to rely on the sale or refinancing the property once amortization begins. Loans to borrowers who do not demonstrate the capacity to repay, as structured, from sources other than the collateral pledged are generally considered unsafe and unsound.

Anonymous said...

These new regulations will take things from bad to a scene of destruction.

-No stated income
-10% down required
-Income qualifying for the adjusted payment, not the teaser payment
-Fraud checking
-Making lenders accountable

This is the nail in the coffin.

Anonymous said...

Also, CTX borrowed 1 Billion last quarter. What happens when their bank freezes their credit lines sometime in 2007?

keith said...

Here's exactly what will happen, from Manias, Panics and Crashes (timeless - written pre-housing-bubble). I might make a tread just of this later:
__________

· The upswing usually starts with an opportunity - new markets, new technologies or some dramatic political change - and investors looking for good returns.

· It proceeds through the euphoria of rising prices, particularly of assets, while an expansion of credit inflates the bubble.

· In the manic phase, investors scramble to get out of money and into illiquid things such as stocks, commodities, real estate or tulip bulbs: 'a larger and larger group of people seeks to become rich without a real understanding of the processes involved'.

· Ultimately, the markets stop rising and people who have borrowed heavily find themselves overstretched. This is 'distress', which generates unexpected failures, followed by 'revulsion' or 'discredit'.

· The final phase is a self-feeding panic, where the bubble bursts. People of wealth and credit scramble to unload whatever they have bought at greater and greater losses, and cash becomes king.
_____________

- Credit contraction like the new FDIC guidelines is classic! It's nice to see everyone playing their correct role and this unwinding following the book so perfectly. Seriously, it's like we have the winning lottery numbers before the drawing

panicearly said...

FDIC 2006 summer outlook
http://tinyurl.com/s887o

reads like a history of manias &credit crunches from the first paragraph to t he last

Anonymous said...

I'm with you Keith. I hope the market goes down sub 8000 on the DOW and everyone with a 401K realizes that they won't ever retire.

I already know they won't. That is why I work for local gov't. and get state retirement, which will still exist. You all have to pay taxes and therefore pay for my retirement.

The Thinker said...

I took a drive through north-eastern Queens, New York City yesterday. We have all seen those pictures of the bubble benches; I believe Queens may very well be the bubble borough. Picture rows of dilapidated 2-familty homes stacked side by side. In the center of the roads is a grassy island that divides the traffic. In these grassy islands are placed sign after sign. Every 10th house was for sale. It was quite scary. What has happened to us?

Anonymous said...

I bought an October Toll Bros put but the dang stock keeps going up!

Anonymous said...

I moved all my 401-K into cash last year anticipating a crash. If more did so, what would happen to the DOW?

By the way, just spoke with my CPA last week here in SoCal (I always file late) and he told me three clients of his in the homebuilding business who were making mid-six figure salaries were all just laid off and very worried because their standard of living had risen to match their $500K salary.

Looks like we are getting very close to the end.

Anonymous said...

Hey Anonymous with State Retirement. Most State Pension funds are grossly under funded. Most "invested" in derivatives and CMO's (collateralized mortgage obligations) - Warren Buffet and Charlie Munger's "Financial weapons of mass destruction". They all pay till they quit. Not unlikely that the genuis in charge of your pension fund has bought quite a few "rock solid" bonds (that was sarcastic by the way in case you missed it) that are backed by that crap. If there are some defaults on mortgages that back those bonds what do you suppose happens to the value of those bonds. If you have 5-10% losses, probably cuts way into the value of those bonds since they are written with an assumed future value of the contract (principle plus interest repaid). The idiots who have granted these loans in the first place made the assumption that at a minimum they would get the principle back (can't lose on real estate for collateral on the loan huh? - again sarcastic remark) and the only one with the risk that bond goes down in value is the pension fund. Great scam. Now what if both happen. Loan is liquidated short AND the underlying collateral for the mortgage loan is sold for less than the principle due - both LOSE. IRS wins because debtor receives a little notice telling him how much passive income he received months (or years) after the foreclosure sale took place and guess what, Uncle Sam wants his juice NOW. I would not sleep too soundly just because you've got a "IRON CLAD STATE PENSION FUND". Lots of folks participated in the making of this shitstorm either directly or indirectly and they are all going to bear some of the consequences. They all pay until they quit. That's an old finance company quote told to youngsters entering the business when they were trying to decide if they should make a loan (and at what rate) or if they should pass. People are going to get a crash course in that lesson very soon.

Anonymous said...

God! that guy Lawrence Yun is such an idiot! It's such obvious pandering, it literally made me sick to my stomach!

Anonymous said...

I'd agree with your predictions IF the markets were free from interference and manipulation. Don't underestimate the Fed and its allies on Wall Street and in other central banks. The only thing that might scare these guys is a derivatives crisis where they don't have enough resources to paper over default problems.

Anonymous said...

Unlike most "investors", those sharks know when to cut and run.

Anonymous said...

anon 4:23

You mean manipulations like this?

http://tinyurl.com/z3d54

Funny how the BoJ turned 180 degrees in two months. These idiots can print as much money as they need. They are like coke addicts with a 10 ton stash.

Pass the gravy please said...

The state of Cal went broke as did Orange County, CA. There are no gaurentees. You should really have enough of your own wealth before you can consider retiring. the SS, medicare, whatever is just gravy that I think will not be in the bowl when it is passed to me.

boycot said...

"Now, about the Deflation case. Most people misjudge the powers of the Fed. Almost all its power, long-term, is a matter of The Confidence Game (title of a book on the Fed). Fed is in no position to inflate as most inflationists think. Deflation will come so suddenly, as a result of the Demand Destruction leading to inflation falling very fast and going from +1.0%, YoY, to below zero within months, that Fed will not be able to pre-empt it. Once Deflation takes root for few months it would be very hard to get rid of. The proverbial Pushing On the String (not being able to Pushing ON More Debt!) will become a reality."

Anonymous said...

Bernanke has stated over and over that he and his other banker friends will never allow a deflationary spiral to take hold in the U.S. economy. As for "[the] Fed is in no position to inflate as most inflationists think", you are flat wrong. They can inflate electronically and as the housing bubble proves, move trillions of dollars into sectors of the economy in a short time.

Of course war is the ultimate inflation tool. Do you seriouskly think we are headed for a period of protracted peace?

Anonymous said...

When your average Joe has a service or product (or house) to sell and there are few buyers and Joe is competing against Mary and "Suzanne" and Bob for the limited surplus dollars that Sam the Buyer has, Joe isn't going to give a fat rat's ass what Ben is up to at the Fed where credit is concerned. The housing bubble wasn't a real bubble. It was the aftermath of a credit bubble. If borrowers en masse had decided to go out and buy tulip bulbs with their easily obtained borrowed money and the lenders were ok with taking said tulip bulbs as collateral because you just can't lose with tulip bulbs as collateral (heh, heh), then you would have seen a repeat of the tulip bubble. It could have been GI Joes (with kung fu grip) or Beanie Babies or any number of tangible items. It is a credit bubble created and the powers that be are tightening credit not loosening it. What is sad is that the Fed really hasn't even tightened up very much over the past two years and already people are squealing like stuck pigs. Economic Girly Men are crying and weeping over a mild uptick in interest rates. If these kinds of small and incremental increases had been made 30 years ago when we were last suffering through some stagflation, people would think they'd died and gone to heaven. We've turned into a nation of pussies.

Anonymous said...

"If these kinds of small and incremental increases had been made 30 years ago when we were last suffering through some stagflation, people would think they'd died and gone to heaven."

Exactly, and that is why the Fed cannot wring out these bad debts from the economy by allowing or encouraging deflationary liquidations. It's medicine so strong it would likely kill the patient.

Their only practical course of action is to allow inflation to "fix" the problem by making the debts manageable. We will pay off creditors with inflated dollars. Will some people get screwed along the way? Of course they will, but Citi Group, Countrywide, and JPMC will do just fine.

Anonymous said...

Pardon the newbie question, but...

Is he long or short on his COP options?

Mark in San Diego said...

Not all sectors of the market will tank. . .yes retail, housing, selected banks. Some defensive stocks - utilities, healthcare, etc. may hold up well. People will have to go back to basics, and pay for necessity items. If Goodwill and Salvation Army stores were traded on a stock exchange, I would be buying! Any good ideas for necessity stocks??

Stuck in So Pa said...

I stopped by the local Goodwill
store last Saturday. I could not get on the lot. You could NOT find a parking space. Front of the building, side, back, didn't matter! Their lot looked like Home Depot used to look like, packed solid. Indicator of things to come??? If they had stock, it would be a damn good pick

The Thinker said...

Actually Anonymous, according to CNN.COM (business, real-estate section)'s latest article about the bubble, the loosening of credit was only responsible for a 1 time bump in housing values and could not have caused 5 years of exorbitant price gains. One quick bump was due to low interest rates, the rest of the climb was nothing but soap!

Anonymous said...

2001 Federal Resere overnight rate 6.25% and commentary suggests it will climb. Attacks and overnight rate drops off cliff to under 2% within a year. Economy still soft and people still bellyaching - more cuts down to 1% by 2004. And, just for good measure, let's keep it there for nearly a year. Get that party really cooking and keep people running on more emotion than common sense. Whoops, too much stimulus for too long and looks like we are destroying the currency? Well, gotta take some of the money off the table now slowly and incrementally - reverses the psychology of the market and makes the herd stop and think (for a change). Law of unintended consequences.

Anonymous said...

Oh, and btw, the Fed is not directly responsible for cheap mortgage money. The bond market is what drives that but, the Fed overnight rate is what gives the bond market its competition for investor dollars. Go short and get paid, go long and get paid, but how much and for how long. Like picking your "pacer" in a 10k race. Pick another runner who won't leave you in the dirt but at the same time pick a runner who will make you stretch yourself and not slack off or sand bag. Fed decided it would just lolly gag for 5 years and as a result no competition for the bond market to follow. Investors in same accept unreasonable risks for limited returns - but going short even more stupid when overnight rates are 1%.

keith said...

long COP, awarded in 2002, redeem in 2012

Anonymous said...

"Oh, and btw, the Fed is not directly responsible for cheap mortgage money."

Very true when the BoJ is loaning at 1/2%. Carry trade lets them turn around and offer it to Harry Homeowner at 6%, or Cindy Credicard at 21%.

The spread is ridiculous, but I suppose the bonuses bought many high-end palaces in NY, CT, and FL. How do you wean people off seven figure bonuses when they can control the people who set all this up?

Anonymous said...

Take a look at The Daily Reckoning today "Financial Mousetrap" and read Empire of Debt. Entertaining and enlightening. Bill Bonner rocks!

Anonymous said...

" DNA found on JonBenet Ramsey's body does not match sample DNA from suspect John Mark Karr, Denver, Colorado's KUSA television station reports. "

*** does that mean a wicked market crash tomorrow? ***

Anonymous said...

given how irrational people have become, it might.

Dogcrap Green said...

Anonymous said...
Let's hope your right. I've made 200k in homebuilder puts. Holding on for more. If they all go BK I'll make $1.8 million.

Monday, August 28, 2006 8:43:27 AM


Your going down

boycot said...

Anon,
"They can inflate electronically and as the housing bubble proves, move trillions of dollars into sectors of the economy"

You have to get people to borrow and spend. The only entity doing that anymore is the Bushcons.

" We will pay off creditors with inflated dollars."

The problem with this scenario is that the government would have to carry it's debt at higher rates.

illegally yours in PHX said...

I do think I'm starting to see some signs of the crash. Although I know it's coming, you didn't see it yet mainstream. But in the last week or two you are really starting to see the panic.

I've seen the builders that are offering 100K or more, double in the past 2 weeks. I've seen more and more resale price reductions of 150K or greater. And finally, I've seen investors start to say, just give me what I paid for the home so I can break even. It's not everywhere yet, but the percentage is getting higher.

What I find hard to believe is how many homeowners actually closed on a new home even though their old home hasn't sold yet. That just makes me sad, although people get what they deserve. Only someone very gullible or outright stupid (or stupidly rich) voluntary takes on 2 mortgages. As I've gone out to see homes, I've been running into this more and more.

But like I keep telling my wife all we need is one sucker over his head to get our 60% off asking price.

Anonymous said...

can somebody splain 2 me why they are rebuilding new orleans?

Anonymous said...

Hey Dog Crap Green-

House Your Housing Boom Website.

Is it getting harder to find content to justify your opinion?

You need to take sometime to understand cycles.

I know it's hard to face the facts because it's too painful to.

Anonymous said...

"can somebody splain 2 me why they are rebuilding new orleans?"

Votes in '08

keith said...

dogcrap - even the catholic church came around to the idea that the sun didn't revolve around the earth

take new information and input and adjust my good man

"the upcoming housing boom" is laughable

Anonymous said...

The market almost always takes a hit in October. There's even an investment strategy based on it in a book called Riding the Bear.

Also, an older, wiser man told me that the market isn't as vulnerable as it once was due to the multinational nature of corporations. He basically feels that corporations DO rule the world and will go to wherever they can make money.

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