Dudes, this is going to hurt - a lot

I think I owe it to my loyal readers to explain what is happening in the hedge fund market, and particlarly about CDO's (Collateralized Debt Obligations), and I would if I could figure it out. There is an Alice in Wonderland quality to the financial writers' explanations of these ventures. If you sat across a table from one of these guys and had him explain it to you for half an hour, you'd be more confused at the end than at the start, and he would be so embarassed at the gobbledygook he was mouthing he could conclude in no other way than to say, "At least, that's how they explained it to me."

This would be the same guy who after the Enron collapse confessed he never really understood how Enron was supposed to be making money, but the numbers they reported were really impressive. But he wouldn't make that mistake again.

And wasn't this also the guy who, after the dot-com crash, shook his head about the way a couple of kids could come up with an idea about how to make money selling something on the internet and sell stock for a hundred million dollars when all they really had was a rented office with some rented furniture. I guess we'd all just gotten carried away in the moment.

Bullshit! These guys are whores, happy to tell the public whatever the investment bankers and brokers want them to say. They trade not only their objectivity, not only their integrity, but their humanity to become a cog in the great devouring machine that is Wall Street.

The ultimate villains are, of course, the investment bankers who put together billion dollar deals, taking their hundred million off the top knowing, albeit with "plausible deniability", that these deals are bound to fail. Maybe the rest of us should pray that New York and California both fall into the ocean on the same glorious day. Because these deals won't just hurt the people who invest (largely through their pension funds), but will wreak havoc on the economy that was meant to employ and sustain us all. I suppose these guys will be so uncomfortable in the aftermath they'll have to retire with their hundreds of millions to some middle eastern country where they've been endowed with dual citizenship.

Anyway, a CDO is a massive dog's breakfast of debt; junk bonds and substandard mortgages with a few supposedly good loans stirred into the mix, and through the magic of "tranching" - which supposedly recognizes that some portions of this debt is more likely to default than the other portions, and arranges that interest paid on that least desirable debt will be higher than the interest paid on the rest - eliminates all but the most egregious of the credit risk. Sure enough up pop Mr Moody and Messrs Standard and Poor to slap AAA or Aaa ratings on this debt package. But if you read the small print you find the disclaimer that the ratings are "purely estimates" and "should not be used in making investment decisions".

The hedge fund then takes out credit insurance on the debt in case of default by the debtors. But this insurance is so cheap relative to the risk, that the only explanation possible is that the insurer is either an incredibly stupid fellow who's happy to take money today without worrying about what might happen tomorrow, or he's another investment banker who writes a clause into the deal that says he doesn't have to pay in case of fraud by the borrower or the fund manager. There'll be enough evidence of fraud in these deals to keep the insurer from paying until the issues are settled in court, which will be never.

You and I are now among the one in a (ten?) thousand Americans to know what's going on here, but it doesn't make us feel much better, does it?


I'm attaching a post from a real estate agent in Minnesota about his experiences with the housing bubble, and what he thinks is happening to the housing market and the economy.

"scooby said...
I've been selling real estate the past 7 years and have been quite successful, that is until last June. I primarily marketed a northern suburb of Minneapolis which has experienced tremendous growth in the past 10 years.

Frankly, it's over. The housing market has officially crashed. Here are some recent sold statistics for the area I market:
March thru June 15
(2004) Sold 172 units
(2005) Sold 216 units
(2006) Sold 168 units
(2007) Sold 53 units (350 active listings)

During this same timeframe only 17 new construction listings have been sold. Of these, 6 of them were bank owned. Currently, there are approx. 130 active new construction listings.

Ok, so the housing bubble has popped; what does that mean for the average person? First, we are losing the largest manufacturing industry in the U.S. You will begin to see unemployment tick up, but many of these jobs were under the table. Meaning, the skilled workers were being paid cash. These individuals will not be able to file for unemployment. The loss of these jobs will bubble up over the next 1-2 years and will surface on the bottom lines of retailers like Home Depot and Lowes.

Second, as prices fall, home equity loans will be a thing of the past. Falling home prices are the single leading factor in the bubble burst. Prices started falling well before foreclosures were an issue. My estimation is prices began to fall in early 2005. Homes prices have now retreated to 2003-04 levels. Meaning a home that sold in 2005 for $250,000 is now selling for $220,000 (as long as it’s in perfect condition). Homeowners’ getting over their heads financially is nothing new; however; the difference now is they can’t just sell their house, because they owe more than it’s worth. I turned away 20+ listings this year due to homeowners being upside down on their mortgages. As a result, they are walking away and letting the banks foreclose on them. As more and more foreclosures (up 90% from last year) hit the market home prices will continue to be pressured downward. Before it’s over (if things don’t spin totally out of control) we will see price levels equal to the year 2000…Approximately, a 20% decrease in prices.

Now, you may say, “great, I can’t sell my house for what I owe on it. I will just stay and wait for the market to turn. I have a good job and can get use to the idea of staying in my home a little longer. This problem doesn’t really affect me.” Wrong, as more and more homeowners are unable to tap into their homes equity they will no longer be buying cars, 4 wheelers, big screen t.v.’s, computers, lawn tractors, updating kitchens, roofs or siding etc. Millions and millions of homeowners will be putting off discretionary spending out of necessity. This will result in a tremendous fallout in the retail sector of our economy, which in turn, will have a direct effect on the transportation and manufacturing industries. Many jobs will be lost and many more homes foreclosed.

Finally, as the housing market crashes, so does the tax roll of state, county and local governments. These institutions have built their budgets on the back of the housing surge during the past ten years. It will not be unheard of to see local governments going bankrupt, schools shutting down, police departments with skeleton crews and social programs slashed. You will quite literally see ghost towns, large developments with empty Mcmansions, because it made more sense to walk away than pay the exorbitant property tax.

Sounds depressing doesn’t it. Well, history shows that it will be depressing. This is exactly what happened before the stock market crash that lead to the Great Depression."


Well, folks, that's about it for today. Maybe all this negativism reflects market fatigue. The market did close lower today and we were short, but it was up so much mid-day that we were down $500 before we closed up $50. Whewww, or as Mally would say "scaaary".