NY Times Persistent Fear Drives Stocks Down response and comment
Rampant speculation never plays out like anyone expects. The latest real estate bubble will again rewrite history as for the first time in US history Median US home prices will actually decline. The equity markets are again reacting to the liquidity crisis and they should. The Wall Street cockroach theory holds where there is one roach there is thousands. Meaning where there is one problem there is a many more. Liquidity is just the first domino to fall. There is going to a seemingly be a never ending sting of accounting write offs and revised income statements. Speculative loans will have to immediately hit the bottom lines of every financial company.
Meanwhile the Fed continues to cling to every shred of positive news. Caught in the headlights with a fairly new chairman it is unlikely that they can do much. Investors are clamoring for an interest rate cut but the Fed rarely has knee jerk reactions. If they lower rates too soon there is nothing in the arsenal to react with if an even larger problem erupts. Wall Street usually over reacts to bad news and this situation is sure to play out the same way. Bad news and over selling and gloom and doom. As the real news leaks out on earnings it is likely that the market will quickly rebound. Sure they are jittery right now but things will improve.
Improvement is not what the real estate market is not likely to see for some time. Look for values to drop significantly as the higher end of the market is affected by reduced liquidity and stricter loan approvals. Still many are still in a good position especially if they moved up during the boom or sat tight. I do not know how many are in this group but home values increased so dramatically during the boom that even a significant drop will do nothing but hit their net worth.
The real problem is that no one knows how damaging the drop will be to consumer confidence and retail sales. This is the real kicker. Chances are there is a drop for some time probably into the end of the year and then rebound. The economy was being fueled by the housing market during the early 2000's however the economy is again healthy enough to withstand this latest challenge. There is not going to be any more easy money in the real estate market for quite some time. Liquid investors should be able pick up some good values at the right time. That time has not arrived.
Wednesday, August 29, 2007
Monday, August 27, 2007
Penny Stock Scam Spam Emails - risky and annoying
I get about twenty or thirty emails a week pushing some penny stock. These scams are losing bets and no one with limited investment experience should invest in them. First a little about the penny stock market. Penny stock is a term used to describe stocks that generally trade below $2, have thin or no market and whose trading is fairly unregulated. Most are defunct companies that used to be listed on NASDAQ and lost their official listing due to deficient financials. These stocks are losers and because of the limited market for these securities they can be subject to manipulation.
Enter the email scammers. Overseas email hype artists take advantage of the thinly traded issues and turn them into vehicles to commit fraud outside of the regulatory arm of the US government. They do this by finding a suitable thinly traded penny stock candidate.
They quietly purchase as much of the penny stock shares without causing rapid price acceleration. Then they begin spamming. I do not know their success ratio but it only takes a few suckers for them to start unloading their shares at higher prices. The stock begins to move up due to higher demand and then others take notice. They say to themselves "hey that email was right...it is going up" if they are lucky they will stand on the sidelines and not let greed get the best of them. Eventually the scam artists sell all their shares at a hefty profit leaving the duped investor trying to make a buck holding the bag. As the hype fades the stock price rapidly deteriorates and the investor losses big time or is left with a bum investment.
For more info: Kiplinger.com, Spamnation, Realy Hot
Enter the email scammers. Overseas email hype artists take advantage of the thinly traded issues and turn them into vehicles to commit fraud outside of the regulatory arm of the US government. They do this by finding a suitable thinly traded penny stock candidate.
They quietly purchase as much of the penny stock shares without causing rapid price acceleration. Then they begin spamming. I do not know their success ratio but it only takes a few suckers for them to start unloading their shares at higher prices. The stock begins to move up due to higher demand and then others take notice. They say to themselves "hey that email was right...it is going up" if they are lucky they will stand on the sidelines and not let greed get the best of them. Eventually the scam artists sell all their shares at a hefty profit leaving the duped investor trying to make a buck holding the bag. As the hype fades the stock price rapidly deteriorates and the investor losses big time or is left with a bum investment.
For more info: Kiplinger.com, Spamnation, Realy Hot
Unsinkable Real Estate Market Hits Icy Certainty
In response to the New York Times article: Drop Foreseen in the Median Price of US Homes
In 2002 I wrote an article concerning the US real estate market, interest rates and Allan Greenspan then the Chairman of the Federal Reserve. It was evident then that low interest rates were fueling an upswing in real estate values and the trend was not only in the US but around the world in developed countries. The gist of the article was that if the real estate market continued a bubble would develop and the backside consequences would be much more damaging than any rapid declines in stock values. The ugly backside of the real estate bubble is now on the US economy in full swing. The ramifications of which are still to be determined.
Allan Greenspan repeatedly tried to quietly "talk some sense in the market" this is a typical measured response from someone in his position trying to guide a ship away from an iceberg. He knew all too well that the current trends in the housing market could not continue unabated and that excess speculation would come with a hefty price tag. Still he kept rates low. No doubt with undue pressure exerted on him by the Bush administration. Greenspan knew that the housing market was keeping the economy afloat and the strategy was to use real estate wealth to pump life into the corporate cycle. It worked probably to well and Greenspan snapped up his walking papers as the economic ship sped dead on into icy waters. Corporate profits rebounded this is no surprise since US corporations are the thoroughbreds of profiteering. The problem was that by the time the general economy began to rebound the real estate bubble had passed the all important fantasy speculation threshold.
Bubbles or excess speculation are actually quite common in capitalistic societies such as ours if left unchecked. In fact Greenspan tried to talk the stock market down off its lofty perch in the late 1990's and the market only moved higher, much higher. In fact the bubble in the housing market correlates quite nicely with the burst of the stock market in 2000 -2001. As wealth was created in the late 90's via the stock market the smart money began to move into real estate. Why? Equity prices got too high and as risk increased an outlet for those funds had to be found. Those funds moved into real estate because interest rates were so low, equities were lower and going lower and it was the only place to find a decent return. Soon that early money fueled a stampede and real estate values soared.
However, unlike the equities market where there is a surplus amount of due diligence and transparency the real estate market moves behind smoke and mirrors. Speculators were buying houses unseen in Wyoming and Idaho expecting significant returns. Real home buyers got squeezed into the bidding process with speculators and prices rocketed. This bubble fed off itself as a home bought a year ago could now be flipped for significant gains. Those gains were then multiplied by flipping it into new speculation. The lending market became competitive and efficient at lending mortgage money on "sure" bets. This is because there was a thriving equities market for portfolios packed with mortgage loans with comparatively fat interest returns.
As the trend continued and real estate values continued to climb the inevitable burst was destined to be just as dramatic as its speculative rise. As housing prices peaked and the easy money in the mortgage business began to fade some lenders found shill bidders with shaky financials to keep the ship at full steam. They were making too much money and too many people were drinking the "this is not a bubble" Kool-aid. As foreclosures began to rise smart money began to pull away from the lucrative mortgage backed portfolios.
This began quietly and then stories turned to rumors and those in the know tried to soften the blow. However, this only fueled the behind the door strategic scrambling for the exits. Soon without liquidity lenders found themselves in an accounting bind that not even the best bean counters could cook. At first I am sure that the honey mooning management did not listen to the warnings. The smart companies pocketed significant profits and then went out of business with someone else holding the hot mortgage backed potatoes.
It is likely that we are only seeing the top of the iceberg right now in terms of fall out from rampant speculation in the real estate market and industry. In the equities markets you have a certain amount of equity or margin upfront providing the means of speculation and trouble positions can be liquidated rapidly. This usually means a rapid decline in stock prices to depressed levels below their actual valuation. The real estate market takes weeks and years to unravel and there is no fast way to dump troubled properties. The dominoes are beginning to rapidly fall for years to come and the current troubles for the mortgage market are just beginning. No one is going to be touching speculative portfolios tied to real estate and liquidity is drying up. But that growing problem can quickly turn into catastrophe because more and more capital is required over time.
New home buyers will be squeezed in the middle. Unable to sell and in significant upside down equity in their homes they will be forced to try and hold on. Many will not and as the trend continues many may just throw in the towel, foreclose, go bankrupt and start over. This does not bode well for the overall economy. At least corporate profits are moving forward and the US economy will rebound. However, the real estate market is going to be in shambles for many years to come. If the theory holds and the backside of the speculation is just as fervent and lasting as the upside then throw in your life boat now. As the ship sinks you might as well survive as opposed to trying to tread in icy waters. The real estate market is no longer on the "top of the world."
In 2002 I wrote an article concerning the US real estate market, interest rates and Allan Greenspan then the Chairman of the Federal Reserve. It was evident then that low interest rates were fueling an upswing in real estate values and the trend was not only in the US but around the world in developed countries. The gist of the article was that if the real estate market continued a bubble would develop and the backside consequences would be much more damaging than any rapid declines in stock values. The ugly backside of the real estate bubble is now on the US economy in full swing. The ramifications of which are still to be determined.
Allan Greenspan repeatedly tried to quietly "talk some sense in the market" this is a typical measured response from someone in his position trying to guide a ship away from an iceberg. He knew all too well that the current trends in the housing market could not continue unabated and that excess speculation would come with a hefty price tag. Still he kept rates low. No doubt with undue pressure exerted on him by the Bush administration. Greenspan knew that the housing market was keeping the economy afloat and the strategy was to use real estate wealth to pump life into the corporate cycle. It worked probably to well and Greenspan snapped up his walking papers as the economic ship sped dead on into icy waters. Corporate profits rebounded this is no surprise since US corporations are the thoroughbreds of profiteering. The problem was that by the time the general economy began to rebound the real estate bubble had passed the all important fantasy speculation threshold.
Bubbles or excess speculation are actually quite common in capitalistic societies such as ours if left unchecked. In fact Greenspan tried to talk the stock market down off its lofty perch in the late 1990's and the market only moved higher, much higher. In fact the bubble in the housing market correlates quite nicely with the burst of the stock market in 2000 -2001. As wealth was created in the late 90's via the stock market the smart money began to move into real estate. Why? Equity prices got too high and as risk increased an outlet for those funds had to be found. Those funds moved into real estate because interest rates were so low, equities were lower and going lower and it was the only place to find a decent return. Soon that early money fueled a stampede and real estate values soared.
However, unlike the equities market where there is a surplus amount of due diligence and transparency the real estate market moves behind smoke and mirrors. Speculators were buying houses unseen in Wyoming and Idaho expecting significant returns. Real home buyers got squeezed into the bidding process with speculators and prices rocketed. This bubble fed off itself as a home bought a year ago could now be flipped for significant gains. Those gains were then multiplied by flipping it into new speculation. The lending market became competitive and efficient at lending mortgage money on "sure" bets. This is because there was a thriving equities market for portfolios packed with mortgage loans with comparatively fat interest returns.
As the trend continued and real estate values continued to climb the inevitable burst was destined to be just as dramatic as its speculative rise. As housing prices peaked and the easy money in the mortgage business began to fade some lenders found shill bidders with shaky financials to keep the ship at full steam. They were making too much money and too many people were drinking the "this is not a bubble" Kool-aid. As foreclosures began to rise smart money began to pull away from the lucrative mortgage backed portfolios.
This began quietly and then stories turned to rumors and those in the know tried to soften the blow. However, this only fueled the behind the door strategic scrambling for the exits. Soon without liquidity lenders found themselves in an accounting bind that not even the best bean counters could cook. At first I am sure that the honey mooning management did not listen to the warnings. The smart companies pocketed significant profits and then went out of business with someone else holding the hot mortgage backed potatoes.
It is likely that we are only seeing the top of the iceberg right now in terms of fall out from rampant speculation in the real estate market and industry. In the equities markets you have a certain amount of equity or margin upfront providing the means of speculation and trouble positions can be liquidated rapidly. This usually means a rapid decline in stock prices to depressed levels below their actual valuation. The real estate market takes weeks and years to unravel and there is no fast way to dump troubled properties. The dominoes are beginning to rapidly fall for years to come and the current troubles for the mortgage market are just beginning. No one is going to be touching speculative portfolios tied to real estate and liquidity is drying up. But that growing problem can quickly turn into catastrophe because more and more capital is required over time.
New home buyers will be squeezed in the middle. Unable to sell and in significant upside down equity in their homes they will be forced to try and hold on. Many will not and as the trend continues many may just throw in the towel, foreclose, go bankrupt and start over. This does not bode well for the overall economy. At least corporate profits are moving forward and the US economy will rebound. However, the real estate market is going to be in shambles for many years to come. If the theory holds and the backside of the speculation is just as fervent and lasting as the upside then throw in your life boat now. As the ship sinks you might as well survive as opposed to trying to tread in icy waters. The real estate market is no longer on the "top of the world."
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