The below paper written on the mortgage, housing and credit crisis gives one continuing pause. It is why it is very difficult to accept time horizons longer than our experience and why we are emotionally disposed to see recovery around each corner.
T2 July 3
Friday, July 10, 2009
Green Shoot Fatigue
It's tough fighting against the tide. For several months the popular (i.e. loudest) media spoke of the signs of the rebound. Truthfully, having a more defensive portfolio position started to look a little spooky. The chief strategist for Schwab called being out of the market now, "a career killer." Yeah, I grimaced as she seemed to be looking directly at me.
Anyone who says they know exactly what happens next is either lying or too old to be considered anything but suffering dementia. We have not seen this set of circumstances in our lifetime. It is not a recession in the usual sense of the word. Since World War II, the time period for most historical comparison there has never been a credit based recession. They have been manufacturing recessions for which inventory adjustment and interest rate policy would soon put the ship of state back on course.
This is driven by a lack of available credit. As I see some perfectly reasonably qualified individuals be rejected time and time again for credit one has to consider looking more deeply at the reasons. Based on the anecdotal information it would seem less a question of risk analysis by the banks an inability to lend within the regulatory capital requirements of the lenders.
Anticipation of commercial loan impairment is the fly in the ointment. The $3.5 trillion commercial real estate market could dwarf the residential real estate problems of the recent past. In the next year, about $700 billion will need to be refinanced or significant bankruptcies of shopping centers, hotels and other real estate holdings loom with the subsequent losses and effect on banks.
The argument for end of the recession in a traditional inventory readjustment shows signs of approaching---if only that were the problem. In a cyclical economic environment, we are near a bottom. Currently North American automobile sales are running at a rate of 7.0 million units per year. Production is at a 3.9 million units per year pace. Obviously production of automobiles will have to increase simply to slow the destocking process. The knock on effect to the manufacturing economy should bring some benefit.
The sea anchor to this positive cyclical process is credit system impairment. As long as severe credit headwinds exist, the traditional recession ebb and flow will not play out as we are used to. Despite the popular refusal to say it, we are in an economic depression not a mere recession. It is not the severity that defines this, it is the process of deflationary pressure unseen since the 1930's.
John Barnyak
Our view of CRE exposure has not changed at all, namely that the loss rates in that asset class will be multiples of the record loss rates on residential or RES exposures. Why on earth is the Obama Administration still listening to Tim Geithner and Ben Bernanke on the latest PPIP proposal to buy CMBS at current prices when the cash flows are falling every month? If you look at the yields on bank CRE and then extrapolate to the securitization market where much of the CRE exposure resides, there is no way that the pricing assumptions in the PPIP make sense. Guess we have to wait for T-Day for Obama & Co to wake up and smell the bird burning.
One of the questions I ask my clients is this: How do you think prices for exisiting homes and commercial both will react when the RES and CRE properties now in foreclosure work their way through the courts and come popping out onto the secondary market around Thanksgiving? My firm entered a JV with a very experienced asset management and disposal group earlier this year. The view from the disposal channel is ugly.
Excerpt of article below:
Commercial Real Estate Is a ‘Time Bomb,’ Maloney Says (Update2)
(Adds comments on rebound in third, fifth paragraphs.)
By Dawn Kopecki
July 9 (Bloomberg) — The $3.5 trillion commercial real estate market is a ticking ”time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.
About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and ”doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This ”looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.
The response by banks to this ”growing threat has been slow and inadequate,” said James Helsel, a partner at RSR Realtors in Harrisburg, Pennsylvania, and treasurer for the National Association of Realtors. ”The lack of liquidity and banks’ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.”
Anyone who says they know exactly what happens next is either lying or too old to be considered anything but suffering dementia. We have not seen this set of circumstances in our lifetime. It is not a recession in the usual sense of the word. Since World War II, the time period for most historical comparison there has never been a credit based recession. They have been manufacturing recessions for which inventory adjustment and interest rate policy would soon put the ship of state back on course.
This is driven by a lack of available credit. As I see some perfectly reasonably qualified individuals be rejected time and time again for credit one has to consider looking more deeply at the reasons. Based on the anecdotal information it would seem less a question of risk analysis by the banks an inability to lend within the regulatory capital requirements of the lenders.
Anticipation of commercial loan impairment is the fly in the ointment. The $3.5 trillion commercial real estate market could dwarf the residential real estate problems of the recent past. In the next year, about $700 billion will need to be refinanced or significant bankruptcies of shopping centers, hotels and other real estate holdings loom with the subsequent losses and effect on banks.
The argument for end of the recession in a traditional inventory readjustment shows signs of approaching---if only that were the problem. In a cyclical economic environment, we are near a bottom. Currently North American automobile sales are running at a rate of 7.0 million units per year. Production is at a 3.9 million units per year pace. Obviously production of automobiles will have to increase simply to slow the destocking process. The knock on effect to the manufacturing economy should bring some benefit.
The sea anchor to this positive cyclical process is credit system impairment. As long as severe credit headwinds exist, the traditional recession ebb and flow will not play out as we are used to. Despite the popular refusal to say it, we are in an economic depression not a mere recession. It is not the severity that defines this, it is the process of deflationary pressure unseen since the 1930's.
John Barnyak
Our view of CRE exposure has not changed at all, namely that the loss rates in that asset class will be multiples of the record loss rates on residential or RES exposures. Why on earth is the Obama Administration still listening to Tim Geithner and Ben Bernanke on the latest PPIP proposal to buy CMBS at current prices when the cash flows are falling every month? If you look at the yields on bank CRE and then extrapolate to the securitization market where much of the CRE exposure resides, there is no way that the pricing assumptions in the PPIP make sense. Guess we have to wait for T-Day for Obama & Co to wake up and smell the bird burning.
One of the questions I ask my clients is this: How do you think prices for exisiting homes and commercial both will react when the RES and CRE properties now in foreclosure work their way through the courts and come popping out onto the secondary market around Thanksgiving? My firm entered a JV with a very experienced asset management and disposal group earlier this year. The view from the disposal channel is ugly.
Excerpt of article below:
Commercial Real Estate Is a ‘Time Bomb,’ Maloney Says (Update2)
(Adds comments on rebound in third, fifth paragraphs.)
By Dawn Kopecki
July 9 (Bloomberg) — The $3.5 trillion commercial real estate market is a ticking ”time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.
About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and ”doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This ”looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.
The response by banks to this ”growing threat has been slow and inadequate,” said James Helsel, a partner at RSR Realtors in Harrisburg, Pennsylvania, and treasurer for the National Association of Realtors. ”The lack of liquidity and banks’ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.”
Tuesday, June 9, 2009
Click the Boob Tube
I've long ago dismissed the financial talking heads of CNBC and other quasi financial programs as tripe. Now Barry Ritholz one of my favorite analysts has put together a list of shortcomings which all could take to heart.
I personally think it's way to late to fix it and the damage is done. By the time anything serious would be done, technology will probably sending financial news direct to our cerebral cortex.
Barry's List
1. Stop Yelling. Stop interrupting. Stop Talking Over Each Other: This is not Jerry Springer, its serious business. People’s retirement and investments are at stake. Please treat it that way.
2. Bring us People We Don’t Have Access to. What various FinTV channels do really well is when they bring us long, thoughtful interviews with the likes of Warren Buffett, William Ackman, David Einhorn, and others. People we wouldn’t ordinarily have access to. Example: This morning, CNBC had on James Rickard. More of this please.
3. S - L - O - W D - O - W - N
4. Risk: All traders must appreciate the potential downside of trades. So too, must FinTV. Explain stop losses. Understand Risk/Reward. Recognize there are periods when Buy & Hold is a jumbo loser.
5. Lose the Octobox. Fire whoever came up with the Decabox. ‘Nuff said.
6. Separate the Signal from the Noise. Understand that most of the day-to-day action is simply noise. Look at a long term chart, you can barely see 1987 or 9/11. If those major events get lost in the long term trend, what does the intraday jags, kinks and reversals mean? Very little. Recognize that not every data release, slice of news, or rumor is at all significant. Stop treating them as if they were.
7. Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.
8. Accountability is important: I am astounded at some of the money losing hacks that are various shows again and again. These are the “articulate incompetents” to use Bennett Goodspeed’s phrase. Why not keep track of the records of guests — and let the viewers know how their past few calls have been. Are they Perma-bulls or bears? Are their stock picks awful? Are they reliable money makers? If not, let us know. (Of course, the better question is, if not, why even have them on?)
9. Bring Back Louis Rukeyser: Not the man, but rather, his style. Wall $treet Week — Rukeyser hosted it from 1970 to 2005 — was plain-spoken, thoughtful and accessible. Quiet, contemplative, discussions, with intelligent market participants, revealing helpful information. The investing public would appreciate something of that sort — again.
10. Sound FX: What is with all the bizarre sound effects every time a screen changes? Its financial news, not a video game. Kill ‘em.
11. Embed your video (on your own website or YouTube) instead of using WMP. At long last, thank you.
12. Investigative Pieces: David Faber seems to have a monopoly on deep, long thoughtful analyses. Be they on Wal-Mart, the credit crisis, whatever, his long format work is a highlight of CNBC. More of these, please.
13. Most stock picks are losers. That’s normal, but the audience does not realize this. A big part of the challenge is informing the viewer that finding the biog winners is a low probability, high outcome event. As in a baseball, a 350 hitter is a star. Explain this to your audience.
14. Stop the Bull/Bear Debate: This is a vast over-simplification of the market, and often does not serve the audience well. There are nuances and variables that get lost when you reduce everything to black and white.
15. Partisanship: Leave your personal politics at home. Viewers don’t care what most of you think.
16. Respect the Audience: We are adults. Treat us that way.
I personally think it's way to late to fix it and the damage is done. By the time anything serious would be done, technology will probably sending financial news direct to our cerebral cortex.
Barry's List
1. Stop Yelling. Stop interrupting. Stop Talking Over Each Other: This is not Jerry Springer, its serious business. People’s retirement and investments are at stake. Please treat it that way.
2. Bring us People We Don’t Have Access to. What various FinTV channels do really well is when they bring us long, thoughtful interviews with the likes of Warren Buffett, William Ackman, David Einhorn, and others. People we wouldn’t ordinarily have access to. Example: This morning, CNBC had on James Rickard. More of this please.
3. S - L - O - W D - O - W - N
4. Risk: All traders must appreciate the potential downside of trades. So too, must FinTV. Explain stop losses. Understand Risk/Reward. Recognize there are periods when Buy & Hold is a jumbo loser.
5. Lose the Octobox. Fire whoever came up with the Decabox. ‘Nuff said.
6. Separate the Signal from the Noise. Understand that most of the day-to-day action is simply noise. Look at a long term chart, you can barely see 1987 or 9/11. If those major events get lost in the long term trend, what does the intraday jags, kinks and reversals mean? Very little. Recognize that not every data release, slice of news, or rumor is at all significant. Stop treating them as if they were.
7. Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.
8. Accountability is important: I am astounded at some of the money losing hacks that are various shows again and again. These are the “articulate incompetents” to use Bennett Goodspeed’s phrase. Why not keep track of the records of guests — and let the viewers know how their past few calls have been. Are they Perma-bulls or bears? Are their stock picks awful? Are they reliable money makers? If not, let us know. (Of course, the better question is, if not, why even have them on?)
9. Bring Back Louis Rukeyser: Not the man, but rather, his style. Wall $treet Week — Rukeyser hosted it from 1970 to 2005 — was plain-spoken, thoughtful and accessible. Quiet, contemplative, discussions, with intelligent market participants, revealing helpful information. The investing public would appreciate something of that sort — again.
10. Sound FX: What is with all the bizarre sound effects every time a screen changes? Its financial news, not a video game. Kill ‘em.
11. Embed your video (on your own website or YouTube) instead of using WMP. At long last, thank you.
12. Investigative Pieces: David Faber seems to have a monopoly on deep, long thoughtful analyses. Be they on Wal-Mart, the credit crisis, whatever, his long format work is a highlight of CNBC. More of these, please.
13. Most stock picks are losers. That’s normal, but the audience does not realize this. A big part of the challenge is informing the viewer that finding the biog winners is a low probability, high outcome event. As in a baseball, a 350 hitter is a star. Explain this to your audience.
14. Stop the Bull/Bear Debate: This is a vast over-simplification of the market, and often does not serve the audience well. There are nuances and variables that get lost when you reduce everything to black and white.
15. Partisanship: Leave your personal politics at home. Viewers don’t care what most of you think.
16. Respect the Audience: We are adults. Treat us that way.
Friday, May 29, 2009
Mortgage Chaos
The government is buying Fannie Mae and Freddie Mac debt to force down yields and stabilize home prices. Could it reach still lower? 3.50%? Perhaps. But if it does it will likely be of extremely short duration as suddenly every mortgage in America will benefit from refinancing. If you haven't done your homework you will likely miss it. So do your homework, be prudent and conservative. If you plan in remaining in your home for more than a few years, this could be a windfall moment when you look back.
That was my view on April 10th and I am sticking with it. Particularly since it turned out to be right. Less than 1/10% from the bottom, I think we won't be seeing those rates again in our lifetimes. C'est la vie.
Unless the fed begins to increase purchase of mortgage backed securities massively that ship has sailed. Mortgage originators have frozen all new applications until they work through the backlog of committed but not closed loans on their books. Below is a letter being sent out by one mortgage originator.
John Barnyak
President
www.stonehouseasset.com
That was my view on April 10th and I am sticking with it. Particularly since it turned out to be right. Less than 1/10% from the bottom, I think we won't be seeing those rates again in our lifetimes. C'est la vie.
Unless the fed begins to increase purchase of mortgage backed securities massively that ship has sailed. Mortgage originators have frozen all new applications until they work through the backlog of committed but not closed loans on their books. Below is a letter being sent out by one mortgage originator.
John Barnyak
President
www.stonehouseasset.com
Mixed Messages
Today the Wall Street Journal reported the fed believes (how's that for second derivative thinking) that the rising interest rates are a function of improvement of the economy. I'm all for that if it's true.
However the falling dollar and rising gold prices indicate fewer "green shoots" and more a reluctance to own dollars, lend to the US at such low returns and a belief that inflation is lurking out there. The green shoot and wilting dollar aren't mutually exclusive, but prompt caution.
John Barnyak
President
www.stonehouseasset.com
However the falling dollar and rising gold prices indicate fewer "green shoots" and more a reluctance to own dollars, lend to the US at such low returns and a belief that inflation is lurking out there. The green shoot and wilting dollar aren't mutually exclusive, but prompt caution.
John Barnyak
President
www.stonehouseasset.com
Thursday, May 28, 2009
Gold in a Deflationary Environment
One of the more interesting developments on the web is Scribd. A means to publish online documents, even books. The paper below is one I've had in my files for years and dust off now for your perusal.
The Behaviour of Gold Under Deflation
John Barnyak
President
www.stonehouseasset.com
The Behaviour of Gold Under Deflation
John Barnyak
President
www.stonehouseasset.com
Gazing at Charts
Anyone involved in the investment industry knows that technical analysts are the pariahs of the business. My son who in ten days will take his first Chartered Financial Analyst exam already scoffs that technical analysis cannot predict the market future. Jeremy, well duh!
What charts do is describe, in a distilled fashion, the market response to all of the fundamental aspects of the economy. It does not predict, it shows. When in the midst of a maelstrom of information, opinion and pontification stepping back and looking at what a market is doing as it absorbs the information is invaluable.
We have had nearly three months of revisionist aftercasting as the pundits fall over themselves to celebrate "green shoots" and second derivative improvements. I am not privy to the machiavellian cabals of Wall Street and the White House. Interpreting the data which is at best statistically meaningless and at worst massaged ceaselessly for policy reasons is no better than a guess. (click on image to enlarge)
What I see in the S&P 500 market is a bear market doing a cowboy death kick. Not pretty, not quick but inevitable. It isn't unlike the high school horror film where the psychopathic killer is vanquished, everyone hugs and cries in relief, and then the camera pans to the spot where he died. The body is gone. He's still out there!
The recent bounce was powerful and feel good, but when we zoom out it is evident that all trends are not repaired. The market is above the 50 day moving average which was my initial buy indicator in early march, but like any wounded animal, this is when it when it is most dangerous. As this rebound has matured, the volume has dried up and it looks like late comers to the party.
The market short term cycle ebb and flow still shows lower highs and lower lows. Until I see a higher high and high low I will be cautious. In March the oversold chart combined with reasonable market valuations. In May we are now at an overbought condition and no longer attractive value. We went from an A/B market grade (oversold, reasonable value) to now a D/C market (overbought/neutral value). I do not expect to see significant valuation improvement but absent a market breakdown I will be taking a more positive equity position in portfolios on the next oversold condition.
I am hedging modestly to hold recent gains, and formulating the thematic guidelines of the next secular market forces. Following my daily thoughts will give a reader a good idea of those themes.
John Barnyak
President
www.stonehouseasset.com
What charts do is describe, in a distilled fashion, the market response to all of the fundamental aspects of the economy. It does not predict, it shows. When in the midst of a maelstrom of information, opinion and pontification stepping back and looking at what a market is doing as it absorbs the information is invaluable.
We have had nearly three months of revisionist aftercasting as the pundits fall over themselves to celebrate "green shoots" and second derivative improvements. I am not privy to the machiavellian cabals of Wall Street and the White House. Interpreting the data which is at best statistically meaningless and at worst massaged ceaselessly for policy reasons is no better than a guess. (click on image to enlarge)
What I see in the S&P 500 market is a bear market doing a cowboy death kick. Not pretty, not quick but inevitable. It isn't unlike the high school horror film where the psychopathic killer is vanquished, everyone hugs and cries in relief, and then the camera pans to the spot where he died. The body is gone. He's still out there!
The recent bounce was powerful and feel good, but when we zoom out it is evident that all trends are not repaired. The market is above the 50 day moving average which was my initial buy indicator in early march, but like any wounded animal, this is when it when it is most dangerous. As this rebound has matured, the volume has dried up and it looks like late comers to the party.
The market short term cycle ebb and flow still shows lower highs and lower lows. Until I see a higher high and high low I will be cautious. In March the oversold chart combined with reasonable market valuations. In May we are now at an overbought condition and no longer attractive value. We went from an A/B market grade (oversold, reasonable value) to now a D/C market (overbought/neutral value). I do not expect to see significant valuation improvement but absent a market breakdown I will be taking a more positive equity position in portfolios on the next oversold condition.
I am hedging modestly to hold recent gains, and formulating the thematic guidelines of the next secular market forces. Following my daily thoughts will give a reader a good idea of those themes.
John Barnyak
President
www.stonehouseasset.com
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