Mr. Mortgage's Patent Eye Medicine

Well, this table's not exactly eye candy. But it sure is something, especially if one is interested in California real estate.

Please note: this is not a same-house comparison, so the numbers are at the mercy of a change in mix of houses sold. But still...

Since Everyone's Talkin' Ponzi

First off, sorry if this constitutes rubbing people's noses in it, but figured it a worthwhile exercise. So, what exactly is a Ponzi scheme? I'm gonna give it a go. Roughly, it can be construed as any financial operation in which there is no steady-state, stable condition. It's grow, or die.

How's it all work? Well, if I promise 100% annual returns, and do nothing productive, but instead redistribute my inflow, it goes something like this. I take $1 from A, and in order to remain liquid when A wishes to redeem the $2 in a year, within that year I have to recruit a similar $1 from B, so's I have $2 to give A at end of year. Done with A, unless she reups. But neglecting that, now I owe B $2, but have no funds, which means I need two new $1 suckers investors, C and D, in order to remain solvent. Therefore, as a pure redistribution unit, whatever return I promise, I have to grow by that same rate. 100% annual returns? Gotta grow suckers subscriptions 100% annually.

How stupid! Who'd ever fall for a scheme like that, right? Well, what if I promised a mere 12% annual return, rain or shine? Or even a safe-as-houses 6%? Or even just 3%? Just don't ask me how, and I'll do it. By the way, if everyone and their mother's brother decided to go get their alleged money out of the alleged bank at the same time it might not look so rosy. It's called a run on the bank, and we actually can't afford it in this glorious day and age. Hence my painfully sincere Modest Proposal a short while back. Will bank for kibble.

Better yet: what if I promised you mere return of your money--or maybe a little less, yet--in a month or three? And in the meantime I went out and printed more money, so that at end of term you got your money back, and it had to go out there and compete with more of the same? Yeah, right: that would never fly.

Ok, ok; how about this scenario. Everyone's income goes up by an average of 5% a year, nobody saves any money, but everyone scrambles to lever up and "buy" widgets which cost several multiples of annual income, simply because their prices recently have been, and hence always will be, appreciating at clips of 10-30%, or more, a year? That's gotta be sustainable, and Charles Ponzi had nothing on that in scope. Totally unrelated to this, Calculated Risk made a crucial point today that just can't be belabored enough:

That is a key point - the chain is broken - there is no move-up buyer.

Basically, to paraphrase Keynes, in the long run, everything's a Ponzi (or pyramid) scheme.

Might as well put a plug in for my favorite psychosociofinancial book, Charles Kindleberger's Manias, Panics, and Crashes. It can kinda be summed up as a history-always-repeats-only-sheeple-don't-see-it-until-after-the-fact sorta tome, but it can also be tied up in one pithy line: "Nothing so undermines your financial judgment as the sight of your neighbor getting rich." But before you thinks of investing any other moneys, you mights as well reads it.

But c'mon; why would anyone want to monetize envy? So much more rewarding to comestiblize it.

Et Tu, Scania?

Apparently some people (but no pedants) took issue with our mindless glory-seeking repetition of Volvo's announced European truck orders slowdown of a couple months ago. So maybe orders didn't just completely disappear like we cynics parroted, but instead Volvo was trying to recognize cancellations. So numbers not so bad after all. Whew: kibble not subject to spontaneous wholesale transporterizationalness to twilight zone after all. Close one.

Well, somehow, truck orders (African or European?) are so bright that Scania has decided to suspend truck production in five factories across Europe for one month spanning the customary winter holidays. Will refrain from comment now, but not without giving away punchline:

Danielsson said falling order intake, which has dropped about 50 percent in the past nine months, was the main reason for the stoppage.

"We don't want to build up stock," he said.

Jumbo Prime: The New Subprime

Mr. Mortgage is calling The Jumbo Implosion. Nothing major:

Analysts are not taking into consideration how much trouble the American economy will be in across the nation when those middle to upper class home owners all over the nation see their prices fall as much as the lower end has. This will happen - it has to. Unless folks start paying cash and see extra value in million dollar homes, home prices will gravitate to the most readily available financing, which is still $417k.

He tosses California a special bone:

BUYING A $650K HOME WITH $85K PER YEAR INCOME - MOST POPULAR IN CA

A 5/1 interest only at 5%, qualifying at interest only payments, means that a $520k loan carried a payment of only $2166 per month. Add in $650 per month for taxes and insurance, and the total is roughly $2825. With a 15% second of $97,500 at Prime carrying payments of $325 per month and reasonable ‘other debt’ at the time of $400 per month, the total payment out the door would be $3541 approx. This means a household income of $7082 per month could buy a $650k home with 5% down. This is not out of the realm of hourly workers or moderate income single worker families .

Now the same home is worth $450k, the borrowers added debt after the loan was funded and all of their after tax income is going out to debt each month. They can’t save a penny and are going broke just to live in this underwater house. They can rent the same house for $2500 per month. The best decision is to walk.

$650k Purchase in 2006 - 95% first/second combo

$2166 per month on a $520k 5/1 interest only Jumbo Prime
$650 taxes and insurance
$325 per month on a $112,500 heloc
$400 other debt
——————————————————–
$3500 per month total payments
$7000 per month ($84k per year) needed to qualify

(numbers above are approximate)

Now days, the same income buys a $275k to $300k mortgage with 10% down. This shows why housing prices keep falling.

The average note discount at Trustee Sale in CA last month among the big banks was 45%. If these loans were mostly 80% loans at the beginning, this means the homes are being discounted over 55% and still less than 5% sell at auction. They rest go back to the bank as REO.

Home values going parabolic in Jumbo regions like CA had much to do with the nation’s past six year’s wealth effect. When a home goes from $300k to $1 million, that equity is extracted and spent. The home in Nebraska going from $100k to $200k was insignificant. This is why when it comes down to housings impact on the broader economy, ‘as goes CA so goes the rest of the nation’.

Oh; is that all? Actually, there is more in the original post.

In case anyone's wondering who this Mr. Mortgage is or what he looks like, when I first heard of him back in April, he was foaming at the mouth about Lehman mortgage lending standards. This when Lehman was a $44 stock, and not a pink sheet special. Yet.

Bullish or Bearish?

Fascinating pair of charts by Doug Short today.

In the first, the real S&P index since 1871 is plotted with its trendline. That's "real" with CPI-based inflation according to the BLS.

The second chart is nominally the same, only this time "real" means with CPI according to Shadowstats, as alluded to in "Stupid CPI Games."

The first chart is pretty bearish-looking, but the second is really rather bullish. Ack; my head's spinning--and no, I'm not dizzy from chasing my tail; thanks for asking. Like I would ever indulge in such a pointless, unintelligent-seeming activity.

Goldman Says...

Buy our stuff, but bet on it failing, too! I'm not making this up:

Goldman Sachs Group Inc., one of the top five U.S. municipal bond underwriters, is angering politicians and public-finance officials in New Jersey, Wisconsin, California and Florida by recommending that investors purchase credit-default swaps to bet against 11 states’ debt.

Not sure how exactly they mean this. Are they just covering their, uh, bases, so they'll be right no matter what? Or is it like the subprime fiasco, where they sold MBSs, then shorted them, to make money twice, wherein the latter time was against their clients of the former? Or is it doublespeak like the warnings on cigarette packs that actually cause people to want to smoke?

Whatever it is, I'm guessing those munis don't taste so good anyways.

And please be sure that, whatever else you do, you don't excessively feed the hopelessly cute white dog with the sad face staring straight into your eyes...

Williams: Unemployment More Like 16%

According to Shadwstats' John Williams, real, all-inclusive unemployment is now more like 16%. More on his method here.

Sound far-fetched? Well, according to the official Bureau of Labor Services number, official unemployment measure U-6 is now 12.5%.

Taleb Calls Roubini Out

For being the optimist we all know "Dr. Doom" to be. Video from Charlie Rose on Calculated Risk here. Mr. Rose takes it all in stride, thumping the book on the table with coldly premeditated casual journalistic flair. Or not.

BTW, for those who haven't been keeping score, Dr. Nouriel Roubini's been proven right time and time again, but the time lag from initial pronouncement to eventual vindication has been shortening. Would that the interval from initial drool to eventual feeding would shorten similarly...

Uh, I'd Like a Do-Over, Please

In case any missed it, reader John kinda nailed the case for DryShips shut for me with his last comment on the previous post about the less than rosy case for said company. Here's the link. I believe there may be some character issues here, and, in general, would much rather be the fleecer than the fleecee.

DryShips: Caveat Emptor

Well, in case you missed it in the comments section of "Buying Dollars for Dimes", reader John quickly pointed out a couple of unsavory tidbits (oxymoron?).

First up is "Curious George," in which it is disclosed that CEO Economou owns his own private fleet of ships, which might tend to smell like a conflict of interest. That, and he doesn't seem to care so much about shareholders. Oh, and a previous company went bankrupt with Economou ending up with most the fleet while shorting creditors some, if you consider "37 cents on the dollar" less than adequate.

Also, in "Dry Bulk Shippers..." the planned sale/dilution of existing equity is discussed.

Perhaps cheap isn't as cheap looks, but still...

Buying Dollars for Dimes

There's this thing called the Baltic Dry Index, which is a broadish measure of the supply vs. demand, or price, to ship certain stuff (bulk dry raw materials, if you care) around the world. It's cratered lately, to the tune of roughly 95% off peak. I shudder to think of my feeding quantities, which have already been cut by some 40% due to austerity measures and alleged stifle weakness, falling another 55%.

There's this company that ships bulk dry goods--and does some drilling, too--called, of all things, DryShips. Thing is, its equity, which consists largely of dry bulk ships and drilling rigs net of debt, is, according to their latest quarterly report, some $2.1B. As contrasted to their market cap, which is a mere $170M, or less than last quarter's net income of $179M. So really, the title shoulda been buying dollars for pennies. But pennies shouldn't exist anyway, given their prohibitive materials cost and negative utility, so let's compromise and say nickels, which doesn't alliterate nearly as well with dollars as does dimes. So provided dry bulk armageddon doesn't truly occur, since otherwise we're all doomed anyhow, the stock at current valuation shouldn't get much worse. But could it?

Well, as the sometimes-wise Keynes once said, "The market can stay irrational longer than you can stay solvent."

Update: Though having seemingly caught a presumably local bottom for this stock, prudence dictates I direct you to this and especially this, in which I conclude the company probably isn't worth the risk. Unlike most, I'd rather be good than lucky, though wouldn't mind the luck if it were more systematic. The good kind, natch...