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Tuesday, July 31, 2007


hindenburg omen

from ft alphaville -- can the total percentage of issues making either new lows or new highs be an indicator of disaster?

more on the five qualifiers:

  • That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
  • That the smaller of these numbers is greater than 79.
  • That the NYSE 10 Week moving average is rising.
  • That the McClellan Oscillator is negative on that same day.
  • That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

more back research here.



history of consumer confidence

the latest from the conference board regarding consumer sentiment:

The Conference Board Consumer Confidence Index, which had dipped in June, rebounded in July. The Index now stands at 112.6 (1985=100), up from 105.3 in June. The Present Situation Index increased to 139.2 from 129.9 in June. The Expectations Index rose to 94.8 from 88.8.

that means the differential i track here went from (-41.1) to (-44.4). these are modest improvements from the march low.

the level of this measure has gone thusly, taking the revised figures from the following month report (except in the current month reading, of course):

july 2007 139.2 94.8 (-44.4)
june 2007 129.9 88.8 (-41.1)
may 2007 136.1 90.1 (-46.0)
april 2007 133.5 88.2 (-45.3)
march 2007 138.5 87.9 (-50.6)
february 2007 137.1 93.8 (-43.3)
january 2007 133.9 94.4 (-39.5)
december 2006 130.5 96.3 (-34.2)
november 2006 125.4 91.9 (-33.5)
october 2006 125.1 91.9 (-33.2)
september 2006 128.3 91.0 (-37.3)
august 2006 123.9 84.4 (-39.5)
june 2006 132.2 87.5 (-44.7)
may 2006 134.1 85.1 (-49.0)
april 2006 136.2 92.3 (-43.9)
march 2006 133.3 90.3 (-43.0)
february 2006 130.3 84.2 (-46.1)
january 2006 128.8 92.1 (-36.7)
december 2005 120.7 92.6 (-28.1)
november 2005 113.2 88.4 (-24.8)
october 2005 107.8 70.1 (-37.7)
september 2005 110.4 72.3 (-38.1)
august 2005 123.8 93.3 (-30.5)
july 2005 119.3 93.2 (-26.1)
june 2005 120.8 96.4 (-24.4)
may 2005 117.8 93.4 (-24.4)
april 2005 113.8 86.7 (-27.1)
march 2005 117.0 93.7 (-23.3)
february 2005 116.8 96.1 (-20.7)
january 2005 112.1 100.4 (-11.7)
december 2004 105.7 100.7 (-5.0)
november 2004 90.2 96.3 6.1
october 2004 92.2 94.0 1.8
september 2004 97.7 95.3 (-2.4)
august 2004 100.7 97.3 (-3.4)
july 2004 105.3 106.4 1.1
june 2004 100.8 105.9 5.1
may 2004 90.5 94.8 4.3
may 2004 90.5 94.8 4.3
april 2004 90.4 94.8 4.4
march 2004 84.4 91.3 6.9
march 2004 84.4 91.3 6.9
february 2004 83.3 91.9 8.6
january 2004 79.4 107.8 28.4
december 2003 74.3 103.3 29.0
november 2003 81.0 100.1 19.1
october 2003 67.0 91.5 24.5
september 2003 59.7 88.5 28.8
august 2003 62.0 94.9 32.9
july 2003 63.0 86.3 23.3
june 2003 64.2 96.4 32.2
may 2003 67.3 94.5 27.2
april 2003 75.2 84.8 9.6
march 2003 61.4 61.4 0.0
february 2003 63.5 65.7 2.2
february 2003 63.5 65.7 2.2
january 2003 75.3 81.1 5.8
december 2002 69.6 88.1 18.5
november 2002 78.3 89.3 11.0
october 2002 77.2 81.1 3.9
september 2002 88.5 97.2 8.7
august 2002 93.1 95.5 2.4
july 2002 99.4 96.1 (-3.3)
june 2002 104.9 107.2 2.3
may 2002 111.2 109.7 (-1.5)
april 2002 106.8 109.6 2.8
march 2002 111.5 110.2 (-1.3)
february 2002 96.4 94.0 (-2.4)
january 2002 98.1 97.6 (-0.5)
december 2001 97.8 92.4 (-5.4)
november 2001 96.2 77.3 (-18.9)
october 2001 93.5 n/a n/a
september 2001 125.4 78.1 (-47.3)
august 2001 125.0 79.2 (-45.8)
july 2001 151.3 92.9 (-58.4)

by this measure, we're potentially in a cyclical position now similar to that seen in 2001.

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Thursday, July 26, 2007


koros - hybris - ate

greek tragedy is surmised as a play in three acts embodied in three daemons -- koros, hybris, ate. the first is the period of coincident greed and good fortune on the part of the diligent protagonist; the second, the ego-driven overreaching of the protagonist who believes skill the greater part of his success when in fact it is luck; and finally, folly, disaster, disillusionment, destruction, repentance and denouement.

so it would seem that, at least for some neoconservatives, we have reached the conclusion.

I reflected on what things I believed at the onset of the war, that I no longer do as a result of the war. A short list:

1. Having been absolutely certain that the war was the right thing to have done, and that we would prevail easily, I am no longer confident that I can discern when emotion is affecting my judgment unduly.

2. I no longer implicitly trust governmental institutions, including the military -- neither in their honesty nor their competence.

3. I no longer believe the Republican Party is superior in foreign policy judgment to the Democrats.

4. I no longer have confidence in the ability of our military, or any military, to solve deep cultural and civilizational problems through force alone. I mean, I thought nothing could stand in the way of the strongest military fielded since the days of ancient Rome. No more.

5. I have a far greater appreciation for how rare and fragile liberal democracy is, and a corresponding revulsion at the American assumption that it's the natural state of mankind. Which is to say, the war has made me rethink my ideas about human nature, and I'm far more pessimistic now than I ever was.

is it often in the penultimate lines of a tragedy that the protagonist or his chorus reflects upon his fate and draws the most revealing and insightful conclusions.

it's deeply unfortunate, however, that their intellectual journey to humility has to come at this horrifying price. watch the video in the right sidebar. those soldiers will be coming home not as the loyal faithful but as quiet revolutionaries. at least, hopefully quiet.

please also read the corresponding discussion of two of the many literary masterworks yielded of the great war.

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Wednesday, July 25, 2007


prime loan problems

countrywide, one of the largest of the subprime lenders, is reporting seeing default rates jump in its prime portfolio.

Countrywide Financial Corp. helped trigger a Wall Street sell-off Tuesday when it said that a growing number of customers once considered to be good credit risks were having trouble making their mortgage payments.

Until recently, such problems had been almost exclusively limited to the so-called sub-prime market, for borrowers with flawed credit records and high-cost mortgages.

But Countrywide, the nation's biggest home loan company, reported Tuesday that it was seeing more of its good-credit "prime" borrowers do the same.

"The spillover into prime, I don't think, is something that should shock anybody," Angelo Mozilo, Countrywide's chief executive, said in a three-hour conference call with investors and analysts to report second-quarter earnings.

The Calabasas-based company said payments were at least 30 days late at the end of the second quarter on 3.4% of prime first mortgages, up from 2.1% a year earlier.

The delinquency rate was worse among borrowers of prime home-equity loans — second mortgages — who missed payments at a rate of 4.6%. That was up from 1.8% a year earlier.

Sub-prime delinquencies also worsened sharply in the quarter, Countrywide said. Payments were late on 23.7% of sub-prime mortgages, up from 15.3% in the same period in 2006.

"Probably the most disheartening thing about Countrywide's results was the extent to which its weak performance in the second quarter reflected deterioration in prime home-equity loans, rather than exclusively sub-prime credit," said Kathy Shanley, a senior investment grade analyst at Gimme Credit, a New York-based corporate bond research firm. She rated the company's bonds as "deteriorating."

nonetheless, it shocked a lot of people who have spent their time dreaming up ways in which the housing depression would constitute no threat to their investment portfolio. countrywide shares tanked on the news, and the market generally shed a couple percent. they guessed at a bottom in housing somewhere out in 2009, but anything they might predict so far from now constitutes little more than reading animal entrails.

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Wednesday, July 18, 2007


first downgrades of alt-a-backed securities

moody's is warning and fitch is acting. things are moving faster than i thought they would here, but the ratings agencies suddenly seem semiserious about their integrity after years of complicity.

the effect of these downgrades may well be devastating. bear sterns surprised optimists on wall street last night by revealing the extent of the damage to their problematic hendge funds -- they're completely destroyed. and as the cdo's of rmbs's that they levered into are finally marked to reality, bear becomes the cue ball in a chain of collisions.

"This could force a wide variety of other holders of subprime mortgage securities and CDOs to meaningfully revalue their holdings," Richard Bove, an analyst at Punk Ziegel, said in an interview. "That would cause significant declines in book value and stock prices."

the market is down this morning, and the investment banks are being knocked down severely -- merrill off 4%, goldman off 3%, lehman off 3%, credit suisse off 2%, ubs off, bear off again. an important thing to note about this body of charts is how many of them peaked in the first quarter of this year and have been trading down since. as go the financials, so goes the market in time.

there's decaying pretense of containment in fed chairman ben bernanke's testimony this morning. the spillover into further credit markets beyond subprime has finally become undeniable, and poor consumer strength is contributing to the change in zeitgeist. so is a sharply decreased investor appetite for the leveraged buyout financing that has fuelled the private equity world to unprecedented heights this year.

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Tuesday, July 17, 2007


the neocon booze cruise

too stunning and farcical to be allowed to fade down the memory hole. via washington note, this from johann hari and the independent as he joined a cruise ship full of "conservatives" assembled by the national review who paid $1200 for the privilege of hearing neocon luminaries like bill kristol and norm podhoretz wax fascistic -- unadulteratedly, unapologetically, undisguisedly fascistic.

it's certainly no surprise that significant swathes of the american electorate are racist, monarchical, imperialist and reactionary -- it is so in every society. that they have found voice and power is what separates the united states from so many other nations. how long that may last is anyone's guess, but the hope must be that the second bush presidency has exposed the ruthless stupidity of such views to the wider electorate that previously enabled their exponents. it certainly seems that the lesson has filtered into the military.

but there is something to consider here. just as dinesh d'souza exclaims on ship that "liberal treachery" lost vietnam by "demanding america's humiliation", the war in iraq has become a cultural touchstone that red-state fascists will never concede. george will recently compared the situation to that of the german conservatives of 1918, who were convinced in their militarism that the german army had not lost but been betrayed -- and that a second war would right a basket of perceived wrongs against a presumedly natural nordic order, not to mention a deeply insecure german national pride.

the united states will be compelled to leave its imperial vision of iraq in the end, at great damage to both the mideast and itself. but what becomes of its domestic politics in the aftermath is not a trivial question. america has been both polarizing and vulgarizing at a remarkable rate since the first world war. i've feared the degeneration of the public discourse for most of my adult life -- even as i've sometimes contributed to it, as a man of my times -- and can all too easily imagine the return of political violence to this country in a manner not dissimilar to that introduced by those who exploited the zeitgeist of hope abridged in weimar germany.

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Thursday, July 12, 2007


here come the foreclosures

bloomberg reports:

Foreclosures are soaring amid a glut of properties and as interest rates close to an 11-month high make it more difficult for borrowers to refinance. Defaults may rise further as owners with adjustable rates see their payments soar. The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to Freddie Mac data.

An estimated 58 percent of properties in the foreclosure process are linked to borrowers with subprime loans, and RealtyTrac expects U.S. foreclosures to reach 1.8 million by year's end, Rick Sharga, a spokesman for the company, said in an interview.

``We're running much further ahead of what we had anticipated in terms of year-over-year,'' Sharga said. ``Historically, 40 percent of properties entering default make it as far as auction, with half of those going back to banks and the other half to investors.''

i clearly overstated the case when i said here that "adjustable rate loans constituted a majority of the loans made in the peak bubble years". but i unfortunately didn't overstate in saying, "this means millions of american homes are going to be forced onto the market in the next year or two."

it should be noted (as it is extremely important to note) as it is in the comments at calculated risk that losses implied by 1.8mm foreclosures, at perhaps an average loan value of $250,000 with loss severity of 45%, would be in the neighborhood of $162bn. that is a figure comparable to the profits of the entire american commercial banking sector in 2006.

the current picture for cook county through realtytrac is of 30,300 properties in preforeclosure, 8100 at auction, 16800 reo.


Tuesday, July 10, 2007


"death knell for the troubled industry"

finally, the ratings agencies that covered for the investment banks for so long have decided to opt out. more from calculated risk; moody's is going with the tide as is fitch, but no one has yet attacked triple-a rated instruments backed by junk.

once those are addressed, maybe they can start talking about the alt-a universe of cdo's. and eventually treasuries.



adjustable rate mortgages

big picture passes on the analysis of stephanie pomboy through barron's:

"Based on the share of ARMs in some state of negative equity at the end of last year and the decline in home prices so far in 2007, a stunning $693 billion in mortgage loans are already in the red. Assuming lenders are able to recover 70% of those assets -- which seems optimistic given the massive amount of housing inventory yet to be unwound -- that means mortgage lenders are already grappling with $210 billion in outright losses."

pomboy estimates that nearly 1 in 4 adjustable rate loans are already upside-down, and another 5% price decline would increase that figure to nearly 1 in 3. adjustable rate loans constituted a majority of the loans made in the peak bubble years. this means millions of american homes are going to be forced onto the market in the next year or two.

with arm rate resets coming on those loans right now -- many forcing payment increases in excess of 30% to already debt-strapped homeowners, many of whom are participating in the nascent consumer slowdown being confirmed more widely now after having been anticipated for some time -- the setup is there for a infection of the wider economy. subprime isn't the limit of the problem anymore; alt-a loans and their associated cdo's -- a truly huge reservoir of debt by comparison to subprime, one that is not limited to specialty lenders and speculative hedge funds -- are demonstrating that they too are failing to perform as advertised.

this is a strange point that only recently came to my attention.

The subprime pool started out with more overcollateralization, but losses have exceeded excess interest and so the OC is shrinking. The Alt-A pool started out with low OC--it was meant to grow through application of excess interest--but it too experienced losses exceeding the excess, as well as fast prepayments which have reduced the gross excess spread amount, and so its OC has not grown to its target.

You will notice also that both of these pools are fixed rate closed-end second liens. These borrowers did not get caught in a nasty rate adjustment, nor did they max out a credit line in order to pay bills.

The moral of the story, it seems to me, is twofold: Alt-A isn't performing anywhere near as well as its boosters claimed it would, for one thing. For another, a bad security structure can go a long way to offsetting the higher credit quality of the collateral. A security set up with "growing" OC, that is, initial low overcollateralization that is expected to reach its "target" over time, depends absolutely crucially on the accuracy of the prepayment speed estimates and the loss timing projections that went into its initial structure.

note that this is before the rate resets hit.

this is extraordinarily bad news, to the extent that such problems in alt-a-backed securities are widespread. the failure of alt-a may very well shut the mortgage market for all but the surest credits as money simply flees the sector. there's only so much fannie mae and freddie mac can do, after all, to ensure liquidity. that would turn a housing market beset by a shocking dropoff in buyers into a wasteland of oversupply.

bear stearns' recent fund collapse is just the first, most speculative leg of this kind of fallout. more of those are coming, but that's the lesser, if more volatile, aspect. the huge money that fuelled the housing market came through these investment-grade cdo's which connected higher-risk mortgages to much larger reservoirs of money than had previously been available to make them. with that cash spigot shut and everyone already overexposed, i'm not sure how loans will get made to most people trying to buy a house. huge supply will force prices down. who will want to loan money into housing -- at least, at interest rates that anyone can afford -- when significant percentages of mortgages made are going to be underwater and vulnerable?

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Tuesday, July 03, 2007


the angler

from wapo.

reagan administration constitutional law scholar bill fein touts vice president cheney's impeachment in slate.



the last two housing downturns

the housing depression has continued to accumulate momentum, with things anecdotally getting yet worse in june. but as an effort to approximate a cyclical buy point, i thought this graph might be useful.

new starts peaked with prices and existing sales in 1978 and bottomed in 1982 (five years on). new sales and existing sales bottomed in 1982 as well. while overall inventory continued to rise, sales rose faster, cutting the months of supply from 1983 through 1986. real prices turned up in late 1983/early 1984.

new starts peaked again with existing sales in 1986 and bottomed in 1991 (again, five years on). prices leveled in 1986 but did not begin to decline until 1988. new sales and existing sales also bottomed coincidentally in 1991. increasing sales again decreased inventory as measured by months of supply from 1992 to 1994. the final low in real prices followed in 1994.

new starts peaked with existing sales in 2005. prices had not broadly declined by ofheo's measure through the end of 2006. it should show declines (as the case-shiller index did) in 1q2007.

one might expect, if precedent holds, for starts to bottom and inventory (as measured in months of supply) to peak around 2010 -- three years from now -- to be followed at some distance by a bottom in prices. this roughly comports with the new york times analysis, which shows house price downtrends to be persistent events lasting at least 14-16 quarters (ie, well into 2010). calculated risk there also notes, however, that the frothiest markets experienced longer corrections, lasting up to six years.


I seriously entertained your advice of waiting until 2008 to purchase Gaius, but I could hold on no longer. I bought a condo near my daughter's school for 250k that had been originally listed for 275.
Given that the same condo would have gone for substantially more than the listing price only a few years ago (and quickly at that), I figure the sale price matches the overall area downturn pretty well which has been around 10% down from 2005.
Meanwhile the exploding area called Loudon county near here (Northern Virginia) is now "upside-down sale" central with foreclosures happening at a startling rate. People are literally just walking away from huge estates.

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congrats, imk! -- fwiw, i myself am not going to be able to heed my own advice and wait until anything like 2010. with a growing family headed by an insistent wife, who can? :) 2008 looks more likely for me. we'll see if things are better or worse then.

there is this to consider too -- while real prices may continue to slide for years, nominal prices may not if the monetary authority takes to the time-honored method of debasing the currency in order to escape the american debt bubble.

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Growing? Are congratulations in order?

It does look like putting one's money into something that isn't currency-based is a good idea and I feel pretty good about it. My condo is on the low-end for where I live, but it will just be my daughter and I for the foreseeable future.

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