Boom2Bust.com

Hedge Funds: Flash In The Pan?

On Tuesday, Jay Miller from the Wall Street Journal’s MarketBeat Blog talked about recent hedge fund performance. Miller wrote:

Hedge funds had a rough July as bets on rising commodity prices and falling financial stocks failed to pan out, according to research firm Morningstar Inc.

The Morningstar 1000 Hedge Fund Index fell 3.07%, its worst monthly performance ever.

“In July, the bet on long commodities and short financials didn’t work as well for hedge funds,” said Daniel Farkas, hedge fund analyst for Morningstar…

“It’s unusual for hedge funds to underperform equities in down markets, but hedge funds haven’t been able to navigate the credit crunch that started last summer,” Farkas said.

Hedge funds have had a tough time as of late. Back on July 10, I noted in a post that hedge funds, which often promise to make money in all markets, were in the red during the first half of the year. Chicago-based Hedge Fund Research reported that the average hedge fund was off 0.75% since January after slipping 0.68% percent in June, and that more funds went out of business during the first 6 months of 2008 than in the same period a year ago. In addition, fewer new funds were started.

There’s no shortage of hedge fund critics either. Recently, I read a piece that was suggested to me entitled “4 Reasons Investors Should Avoid Hedge Funds At All Costs,” which appeared on the website Bankaholic.com back on May 22. The author, Johns Wu, wrote:

But be warned, hedge funds are not all that they are cracked up to be. In fact, for an educated and conscientious investor, hedge funds can be a nightmare.

You can read the rest of the insightful article here.

And what about their most famous critic, the “Oracle of Omaha” himself- Warren Buffett? Back on March 13 I wrote in a post:

Just last week, the “Oracle of Omaha,” Warren Buffett, appeared on CNBC and warned of the volatile nature and exaggerated glamour of hedge funds:

CNBC: How do we see the end of this–of this explosion in hedge fund mania?
BUFFETT: Over time there will be a disillusionment when the–and incidentally, it won’t be disastrous or anything of the sort. There’ll be—there’ll be the occasional blowups here and there. But over time, when people find out that it’s not the holy grail, you know, the money will flow elsewhere. You know, people will–people always go through the rearview mirror, what’s been popular and has worked recently, and this will be like all the rest.

To be fair, hedge funds have been beating equity indices on a year-to-date basis. From MarketWatch on August 8:

Hedge funds tracked by Greenwich Alternative Investments fell in July, but continue to perform favorably against equity indices on the year. The Greenwich Global Hedge Fund Index (“GGHFI”) and the Greenwich Composite Investable Index (“GI2”) posted losses of -2.31% and -1.72% on the month, respectively. This compares to returns in the S&P 500 Total Return (-0.84%), MSCI World Equity (-2.53%), and FTSE 100 (-3.80%) equity indices. Year-to-date, GGHFI and GI2 have shed -3.00% and -1.82%, respectively, while equity indices have produced double digit losses. 32% of constituent funds in the GGHFI ended the month with gains.

“July highlights several popular hedge fund trades unwinding in a short period of time. While hedge funds as a group clearly had a weak month, their year-to-date returns still greatly outpace traditional long-only investment vehicles,” notes Margaret Gilbert, Managing Director.

Sources:

“It’s Hard to Be a Hedge Fund”
Jay Miller
Wall Street Journal (MarketBeat Blog), August 12, 2008

“4 Reasons Why Investors Should Avoid Hedge Funds at All Costs”
Johns Wu
Bankaholic, July 22, 2008

“Hedge Funds Lose Ground in July”
MarketWatch, August 8, 2008

Credit Crisis Far From Over For Financial Sector

Bank and securities firm write-downs since the beginning of 2007 now total $503 billion. And yet, a number of analysts are saying that the carnage is far from being done. Bloomberg’s Jeff Kearns wrote earlier today:

The credit crisis is “broad, deep, and global” and “far from over” for financial companies even after they reported $500 billion in writedowns and credit losses, Merrill Lynch & Co.’s chief investment strategist said.

“Investors are significantly underestimating both the scope and the extent of the credit bubble and the consequences of its subsequent deflation,” Richard Bernstein wrote in a note to clients. “The problems are not confined to large institutions that are overexposed to U.S. subprime loans.”

The lingering effects of the crisis mean banks and brokerages need “massive” consolidation because of the glut of lending worldwide, Bernstein said.

Thumbnail

Sources:

“Bank Debt Risk Rises as Writedowns, Losses Exceed $500 Billion”
Shannon D. Harrington and Abigail Moses
Bloomberg, August 13, 2008

“Credit Crisis Still ‘Far From Over,’ Merrill’s Bernstein Says”
Jeff Kearns
Bloomberg, August 13, 2008

Credit-Default Swaps May Produce Another Bear Stearns

Back on January 16, 2008, I wrote a post about an article I had read earlier that day by the Washington Post’s Steven Pearlstein. In “Caught in a Downdraft and Starting to Panic,” the 2008 Pulitzer Prize winner talked about the danger from credit-default swaps. He wrote:

Despite the brave exhortations from the CNBC Squawk Box, we are nowhere near the end of the financial unraveling that is necessary for an economic bottom to be reached…

Looking ahead, the final phase of this unraveling is likely to implicate the giant market in credit-default swaps. Those swaps are essentially contracts that allow sophisticated investors to bet on whether a company, a government entity, or even a securitized package of loans will default on its debt obligations. And they can place these bets whether they own the underlying security or not.

Because these contracts trade on unregulated derivatives markets, nobody knows who holds the losing side of the bets. But it’s a good guess that if defaults rise even to historically normal levels, a big hit will be taken by highly leveraged hedge funds, some of which may be unable to pay off on their bets and simply collapse. That, in turn, would trigger even further losses by banks and other investors that, unlike pure speculators, rely on those instruments to insure against default.

The credit-default swap has become so central to modern global finance that its size — the amount insured, in effect — is estimated at $43 trillion. If the losing side is unable to make good on even a fraction of a percent of those contracts, it could set in motion a financial chain reaction that could easily rival the subprime debacle.

Recently, I’ve noticed increased chatter about credit-default swaps in my research. Just today, I came across the following piece by the Wall Street Journal’s Donna Kardos in the MarketBeat Blog. Kardos wrote:

A growing proportion of U.S. firms are seeing credit-default-swap counterparty risk as a serious threat to global markets, and think another major financial company will go under due amid the global-markets crisis, according to a study by research firm Greenwich Associates.

The study’s results, which say the proportion seeing CDS counterparty risk as a serious threat is approaching 85%, highlight the perceived concern of another financial firm going down. Only 27% of the institutions surveyed think there won’t be another casualty along the lines of Bear Stearns, Greenwich consultant Frank Feenstra said in a statement.

The research firm said of the 146 U.S. and European banks, hedge funds and investors it surveyed, most “believe another major financial-services firm will fail as a result of the ongoing crisis in global markets — and they expect it to happen sooner rather than later.”

Almost 60% of the respondents expect another big financial firm will collapse within the next six months, while another 15% see it happening in six to 12 months.

Source:

“Who’s on the Other Side of That Trade, Anyway?”
Donna Kardos
Wall Street Journal (MarketBeat Blog), August 12, 2008

Write-Downs Approach $500 Billion, With More To Come

According to Bloomberg today, the world’s biggest banks and brokerages have reported $497 billion of write-downs since the start of 2007.

And the end is nowhere in sight, according to CNN Money’s Paul R. La Monica. The editor-at-large wrote this morning:

Make no mistake: The worst probably is not over for financial firms. Not by a long shot.

Many bank stocks have bounced sharply from their panic-induced lows of mid-July on hopes that the bleak second-quarter results represented the bottom.

But the bigger-than-expected losses reported by Freddie Mac and Fannie Mae this week, accompanied by dismal forecasts for the housing market, are strong indicators that there are likely more credit-related woes to come.

“The banks are still at the mercy of writedowns. I don’t think the worst is over for financials yet,” said Liz Ann Sonders, chief investment strategist with Charles Schwab & Co.

The International Monetary Fund forecasts that global losses tied to the credit crisis will be $945 billion. It’s a widely used number, but Sonders thinks it’s “potentially very conservative.”

So how high could losses go? Sonders points to the $1.6 trillion forecast from hedge fund firm Bridgewater Associates or even the $2 trillion number from Nouriel Roubini, the highly-respected professor of economics at NYU’s Stern School of Business.

And based on the losses already reported, we’re not even halfway through the crisis.

Source:

“$1 trillion in losses? Bank on More”
Paul R. La Monica
CNN Money, August 8, 2008

For Whom The Bell Tolls, Part 4

The U.S. employment situation looks increasingly bleak. From the CNBC website yesterday:

Planned layoffs at U.S. companies jumped 26 percent in July from June, depicting further deterioration in the labor market, a report showed on Monday.

Planned layoffs at U.S. companies totaled 103,312 in July, compared with June’s 81,755, employment consulting firm Challenger, Gray & Christmas Inc said.

Announced job cuts at U.S. companies last month were the second highest total so far in 2008, more than double the 42,897 a year earlier, the report said.

The transportation industry hurt by sky-high fuel costs accounted for the most planned cuts in July with 17,051. The financial sector battered by the credit crisis followed with 15,517 cuts. Retailers facing a pullback in consumer spending came next with 12,160 layoffs.

Employment data from the first half of the year was also dismal. According to CNBC:

From January to July, planned layoffs totaled 579,260, up 33 percent from the same period a year ago.

The outlook for Wall Street and the financial sector doesn’t look too good either. From the CNBC piece:

Financial companies, in particular mortgage lenders, have been slashing their payrolls, prompted by billions of losses and write-downs tied to soured investments on housing and mortgages.

So far this year, planned layoffs in the mortgage and subprime sector has reached 92,547, already surpassing the 2007 tally of 86,126.

With no end in sight, job hemorrhage in the financial sector could surpass the last year’s record total of 153,105 by the end of October, Challenger predicted.

Keep an eye out for those used Maseratis…

Source:

“Companies Step Up the Pace of Layoffs”
Reuters, August 4, 2008

Move Over Money Honey, It’s The Diva Of Doom

Maria Bartiromo? As my British footballing friends across the pond would say, “Who are yer?” While CNBC’s “Money Honey” was an icon of the nineties stock market boom, Oppenheimer analyst Meredith Whitney, who I refer to as “The Diva of Doom,” is seeing a meteoric rise in popularity as the global economic crisis unfolds. It’s not her looks that are winning over open-minded investors (okay, maybe a wee bit). But her gloomy forecasts, which are turning out to be uncannily correct. CNN Money’s Jon Birger wrote yesterday:

Whitney’s bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be “unprecedented credit losses” for subprime lenders.

Last October, the analyst correctly predicted Citibank would have to cut its dividend.

And now? Well, Whitney is saying U.S. home prices will fall another 33%. From the CNBC website yesterday:

Housing prices will fall more than 30 percent before the market recovers and banks will continue their reluctance to lend until the credit crisis clears up, Oppenheimer analyst Meredith Whitney said on CNBC.

In a wide-ranging interview, Whitney said the housing deterioration will be worse than even the doom-and-gloom predictions that already have circulated regarding the market…

“There’s one obvious area where the bad news isn’t all out yet, and that’s with home prices… Home prices are going to fall much more than people expect,” she said.

“I think it’s going to be well worse than 33 percent, and here’s why: If you look at the futures market, it’s indicating a range right around between 2002-2003 levels, when home ownership rates were actually higher, but fewer people can qualify for a mortgage because you’ve got to put 20 percent down, and that’s a lot of money for people,” she continued. “Furthermore, then you’ve got to find a bank to lend to you, because, Countrywide’s not lending to you.”

Meredith Whitney aka “The Diva of Doom”

In addition to a continuing housing slump, Whitney doesn’t see an end to the credit crunch anytime soon. CNN Money’s Jon Birger wrote yesterday:

The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue.

Whitney, who audaciously - and correctly - predicted last October that Citigroup would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they’ve reported so far.

The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the “incestuous” relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks’ ability to recover.

How so? The CNN senior writer noted:

For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe.

With Moody’s and Standard & Poor’s now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening.

This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution, as shareholders at Citi, Merrill Lynch and Washington Mutual now know.

“You’re going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change,” Whitney tells the magazine.

Sources:

“Housing Prices Could Skid Another 33%, Analyst Says”
CNBC, August 4, 2008

“Whitney: Credit crunch far from over”
Jon Birger
CNN Money, August 4, 2008

Jim Rogers Was Right About Wall Street And Their Maseratis

Over the past several months, legendary investor Jim Rogers has made a few comments about a certain make of car— the Maserati. Now, it doesn’t appear that Mr. Rogers dislikes Maseratis for any reason in particular. Rather, he’s been mentioning the Italian manufacturer of racing and sports cars to make a point about how out of whack things have gotten down on Wall Street. Back on June 6, Rogers told Bloomberg in an interview:

You don’t see any 29-year old cotton farmers driving around in Maseratis, but you do see a lot of 29-year olds on Wall Street driving around in Maseratis. This is not the way the world is supposed to work.

The CEO of Rogers Holdings said such a situation exists due to the tremendous excesses that have taken place in the financial communities over the past several years.

And it’s not only Wall Street traders who have been associated with the exotic sports car. Investment bankers too. Yet, they almost came close to losing theirs a few months ago— if it weren’t for their pals over at the Federal Reserve. Rogers told Bloomberg on March 17:

And here he [Fed Chair Ben Bernanke] goes and gives more of our money to Bear Stearns so these guys can continue to drive around in their Maseratis… The Federal Reserve is using taxpayer money to buy a bunch of Bear Stearns traders Maseratis.

Looks like Jim was right about Maserati being the vehicle of choice down on Wall Street. While surfing the web yesterday, I happened to notice that Bloomberg.com had posted a review of the $115,000 Maserati GranTurismo on their site. Bloomberg’s Jason Harper wrote:

The Maserati GranTurismo delivers on a quality increasingly rare in the auto world: beauty. Put it against any dozen modern cars and the GT’s supple lines, perfect swells and ideal dimensions will outshine them all.

At $115,000 it’s not exactly a drop in the bucket, yet those exotic looks leave most people thinking it’s as expensive as a Ferrari.

Don’t fret, Wall Streeters. A few more taxpayer bailouts here, and some government interference/market manipulations there, and you’ll have enough of Main Street’s hard-earned cash to finally afford that Ferrari…

Jamiroquai, “Cosmic Girl” (1996)
YouTube Video Link

Sources:

Jim Rogers Interview
Bloomberg News Video
Bloomberg, June 6, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Maserati GT, $115,000, Evokes Classic Beauty of Italian Coupes”
Jason H. Harper
Bloomberg, July 23, 2008

Homeowners, You Don’t Want To Read This

Last Sunday, Kevin Hall from McClatchy Newspapers (the third largest newspaper company in the United States) talked about the direction of the U.S. housing market. He wrote:

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have suggested over the past year that an end is in sight. But with each prediction, things have grown worse. For many homeowners, the deep housing slump feels like a drop off a skyscraper. Every time another 15 floors have passed, there seems to be more room to fall.

Most of Hall’s piece focused on research by Mark Vitner, a senior economist for Wachovia, and Mark Zandi, chief economist for Moody’s Economy.com. Vitner told Hall:

I don’t think we get strengthening in the housing market until late 2011 or 2012… I think we’re somewhere between halfway and two-thirds of the way through the correction.

The Wachovia economist, who closely studies U.S. home price trends/sales and released a report back on July 14 entitled “How Far Will Housing Prices Fall,” predicts that prices will fall 22% to 29% on average from their peak before a bottoming out occurs. The median home price has lost about 11% since peaking in October 2005.

The housing forecast from Mark Zandi, chief economist for Moody’s Economy.com, is not much better. Zandi said:

My view is that we are two-thirds through the housing downturn, at least as measured by house price declines. The price declines began in late spring 2006 and will more or less come to an end in late spring 2009. The Fannie-Freddie debacle may push this out into the summer or even fall of 2009.

Zandi believes that unless the chaos in the financial sector is resolved, his forecast of a bottom in 2009 “will prove too bright.”

Identifying the bottom is even more trickier when historical trends no longer apply to a housing market that’s experiencing an unprecedented decline. Hall wrote:

Until the current downturn, median home prices had declined more than two months in a row only once, in 1990. But the decline now has lasted 22 straight months.

Don’t hold your breath though. Someone will be waiting in the wings ready to give anyone who’ll listen an unhealthy dose of jawboning about how a housing recovery is just around the corner.

Source:

“Housing prices haven’t hit bottom yet”
Kevin G. Hall
McClatchy Newspapers, July 20, 2008

Wall Street, Housing Woes Hit The Hamptons

There goes the neighborhood. I first talked about the Hamptons, the playground for America’s rich on the East Coast, back on June 5 due to a little foreclosure problem they were having. Now, I understand that the east end of Long Island, New York, is having a bigger problem related to home sales and prices. Bloomberg’s Sharon L. Lynch and Laura Marcinek wrote yesterday:

The Hamptons housing market is feeling the heat of Wall Street’s meltdown.

Second-quarter sales volume dropped 29 percent and the median price fell 11 percent to $735,000 from a year earlier in the resort communities on the East End of New York’s Long Island, Suffolk Research Service Inc. said in a report today…

Bloomberg attributes the decline in sales and prices to tough times on Wall Street. According to Wednesday’s piece:

Transactions are dropping as financial firms have cut more than 93,000 jobs and taken more than $416 billion in mortgage- related losses and writedowns. The retreat in global stock markets, waning consumer confidence and the deepening housing recession are also keeping prospective buyers at bay.

Source: L Nichols Woodcarving

Looking at the individual towns, Lynch and Marcinek noted:

In Southampton, the median price dropped 8.6 percent to $891,000. Sales volume fell 35 percent to 257 homes. In East Hampton, prices fell 11 percent to a median of $1,000,000, Suffolk Research said. Volume there fell 40 percent to 120 homes…

In Southold, prices fell 8 percent to $507,500 and sales dropped 19 percent. On Shelter Island, the median price rose 34 percent to $1.13 million, while sales fell 26 percent to 17. The cost to buy in Riverhead also rose, up 9.6 percent to a median of $411,100, while transactions gained 3 percent to 103 properties.

Source:

“Hamptons House Prices Fall Amid Wall Street’s Decline (Update4)”
Sharon L. Lynch, Laura Marcinek
Bloomberg, July 16, 2008

More Bank Failures Ahead?

According to the Paris-based publication International Herald Tribune, a number of analysts are predicting more U.S. bank failures in the aftermath of the IndyMac tragedy. IHT’s Louise Story wrote Monday:

As home prices continue to decline and loan defaults mount, U.S. regulators are bracing for dozens of American banks to fail over the next year…

The nation’s banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.

But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

William Isaac, chairman of finance consulting firm Secura Group and a former chair of the FDIC in the early eighties, told the IHT:

Failed banks are a lagging indicator, not a leading indicator. So you will see more troubled, more failed banks this year.

Story noted that troubled small and midsize banks all share something in common:

They vary in size and location, but their common woe is the collapsed real estate market and souring mortgage loans.

According to the IHT piece, the Federal Deposit Insurance Corporation, or FDIC, has $53 billion set aside to reimburse consumers for deposits lost at failed banks. However, the IndyMac situation will subtract $4 to $8 billion from that fund, the agency estimates, “and that could force it to raise more money from the banks that it insures,” Story said.

Source:

“Analysts say more U.S. banks will fail”
Louise Story
International Herald Tribune (France), July 14, 2008

Small Banks Getting Battered By Construction Loans

Back on March 25, I mentioned that the Associated Press was reporting the Federal Deposit Insurance Corp., or FDIC, was planning to increase staffing 60% to handle an anticipated surge in troubled financial institutions. From that post:

The Federal Deposit Insurance Corp. wants to add 140 workers to bring staff levels to 360 workers in the division that handles bank failures, John Bovenzi, the agency’s chief operating officer, said Tuesday.

“We want to make sure that we’re prepared,” Bovenzi said…

Now, I can see why. The Wall Street Journal said last week:

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can’t repay. Banks are also facing intensifying pressure from federal and state regulators to deal with the problem loans on their books.

That will put additional pressure on an already stressed financial system. Banks have begun to dump bad construction and land loans at discounts, curtail new lending and halt construction projects that are under way to preserve capital. Some analysts even see a wave of bank failures as a possibility.

Delinquency Rates from Construction Loans
Source: Wall Street Journal

According to Journal reporters Michael Corkery, Jennifer S. Forsyth, and Lingling Wei, problems were brewing among small banks earlier this year. They wrote:

Scores of banks were already suffering headaches by the end of the first quarter, according to a review by The Wall Street Journal of FDIC-filed reports by 6,919 banks that make construction loans. The smallest banks, those with total assets of less than $5 billion, faced the biggest problems. The WSJ analysis didn’t include savings-and-loan institutions, or so-called thrift banks.

Nearly one in three of the banks analyzed — or 2,182 — had construction-loan portfolios that exceeded 100% of their total risk-based capital, a red flag to regulators, although it doesn’t mean the bank is in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.

Even more alarming, 73 of those banks had construction-loan delinquency rates of more than 25%…

The outlook for small banks looks pretty grim, according to the Journal. Corkery, Forsyth, and Wei wrote:

Over the next few quarters, banks are expected to begin recording much larger losses. In 2007 and the first quarter of this year, U.S. banks wrote down just 0.7% of their residential construction and land assets as bad debt, according to Zelman & Associates, a research firm. Over the next five years that figure could rise to 10% and 26%, which would amount to about $65 billion to $165 billion, Zelman projects.

Source:

“Small Banks’ Reckoning Day Is Coming”
Michael Corkery, Jennifer S. Forsyth, Lingling Wei
Wall Street Journal, July 2, 2008

Ben Stein Says Buy Real Estate

Do you know who Ben Stein is? He’s an attorney, political figure, and entertainment personality who served as a speechwriter for President Nixon and President Ford. Later in life, he became an Emmy Award-winning actor, comedian, and game show host. His part of the boring teacher in the movie “Ferris Bueller’s Day Off” was recently ranked as one of the fifty most famous scenes in American film.

Stein also has a background in economics, and serves as a “Financial Advice Expert” on Yahoo! Personal Finance. On July 3, he wrote in his column:

The best bet usually is what has gone down the most, and that, for now, is real estate. I got a letter from a thoughtful reader saying he was going to wait until real estate had reached its all time low before he bought. But how will he know? And how rarely does he find a home he truly loves? Even when homebuyers buy at the top of the cycle, if they love their homes, and if they can hold on, they always end up delighted.

Yes, there will be news saying housing will not recover THIS TIME. But in fact, except in really depressed areas, housing recovers EVERY TIME and goes on to pass its prior record. The real story of real estate, as my brilliant money manager friend, Phil DeMuth, says, is of failing to buy, not of staying away successfully. The plain fact is that you don’t know when real estate will be at bottom until it’s too late. If you see a home you love, buy it now if you plan to be in it a long time. And know that the headline writers want to whip you up and make you crazy about the economy. They sell fear. Stay calm and stay well to do.

Would these be the very same headline writers who help create housing booms, even bubbles?

I appreciate Mr. Stein’s optimism, which applies not only to housing but the stock market and the U.S. economy as well. However, I’m just trying to be a realist here. Truth is, I haven’t seen any evidence in my research that suggests housing is even close to bottoming. As a matter of fact, the same individuals who warned of the ongoing housing bust are cautioning against “catching a falling knife.” The fundamentals are still out of whack. Take one look at a U.S. housing supply chart, for example, and you may see what I’m talking about. Get rid of some of that glut, and then you might have the makings of a recovery.

As for Mr. Stein’s recommendation, I’m going to have to pass for now. I still remember the advice he gave back on August 18, 2007, to buy financials, which was right before the sector imploded:

It’s a buying opportunity, especially for the financials, maybe that I’ve never seen before in my entire life.

I wonder how many individuals lost their shirts (or blouses) on that one?

Source:

“Don’t Panic - Buy Index Funds and Real Estate”
Ben Stein
Yahoo! Finance, July 3, 2008

Playing The Markets? Caution Is The Name Of The Game

Caution is not cowardly. Carelessness is not courage.

-Unknown

Here’s one for the traders and investors out there. I came across the following list of reasons yesterday from Bennet Sedacca (with Professor Rob Roy) of the financial website Minyanville.com as to why caution is a must in the markets these days:

1. Stocks are firmly in a downtrend.
2. Corporate spreads are rapidly widening.
3. Everyone I know is saying “All is well, buy America.”
4. European equities are taking out the lows of the year.
5. The capital-raising window is closed.
6. Earnings estimates are too high.
7. While much of the move in financials is done, it should spread to other industries.
8. If the “best of breed” are missing their numbers, what happens to the real dogs?
9. We are entering the worst part of the Presidential cycle.
10. We are at war. On multiple fronts.
11. The consumer is tapped out.
12. Corporate buybacks are gone.
13. Net equity issuance is very high.
14. Oil above $100 is very bearish.
15. The savings rate is 0.
16. The U.S. is actually one of the best performing markets in the world this year.
18. Level III assets continue to grow.
19. “Credit rot” is spreading from sub-prime to prime.
20. The dollar is sinking to new lows.
21. The Federal Reserve’s balance sheet is impaired.
22. Mutual fund equity cash remains low.
23. Individual investors are now taking money from their retirement accounts to survive.
24. The market is technically on the verge of breaking down.
25. We’ve broken the 200-week moving average in the Dow Jones for the first time since 2003.

Sedacca and Roy explained each reason in detail, and offered this advice:

Risks remain high and, as always, being cautious will only lose you opportunity - not capital.

Source:

“25 Reasons To Remain Cautious”
Bennet Sedacca, Professor Rob Roy
Minyanville.com, July 1, 2008

Dow Headed Below 10,000?

Remember some of those “literary classics” from a few years ago that predicted new heights for the Dow Jones Industrial Average?:

• Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market, released November 14, 2000
• Dow 40,000: Strategies for Profiting From the Greatest Bull Market in History, released June 26, 1999
• Dow 100,000: Fact or Fiction, released September 30, 1999

Well, here’s a new forecast that points in the opposite direction. CNBC ran a piece today on how some analysts are saying that the Dow, which closed down 1.5% today to end at 11,215.5, is heading below 10,000. According to CNBC this morning:

Investors should ignore recent signs of strength and face up to the fact that we will face a prolonged bear market, John Carter, president of Trade The Markets, told CNBC Wednesday.

“Longer term we’re looking at a market that is a bear market,” Carter told “Squawk Box Europe.”

While we can expect a rally over the next three to five weeks, this is a downward spiral that is not going away any time soon, he said.

“A trend is a trend until it ends, and we’re actually looking for the Dow to take out 10,000 by the end of the year,” he added.

There are too few sectors holding the markets up, and too many dragging it down, to consider getting back into non-recession-proof sectors, according to Carter.

“A large percentage [of sectors], like financials, are getting hammered. A lot of the darlings of the past are going to get taken out back and get shot,” he said.

“I’m Your Man”

CNBC also spoke to Hugh Hendry, a partner at hedge fund Eclectica Asset Management, who added that technology stocks are also likely to be gunned down as the two were affected by bubble conditions. From the CNBC piece:

Hendry said the outlook is particularly bleak for financial and technology stocks — the two largest components of the S&P 500 — which he said have both seen a bubble.

“When a sector becomes infected by a bubble…what history reveals is it takes 25 years to regain the highs that we saw in real terms,” he said.

Source:

“Dow Will Sink Below 10,000: Strategist”
CNBC, July 2, 2008