Download Thoughts on the Market - July 2007

Thoughts on the Market
July 11, 2007
By Daryl Montgomery
Take-Away from Reza’s Talk
• Most Important thing said was:
TAKE ACTION!
• Stock prices will tend toward an option
strike price in direction of Market
Movement in last few days before
expiration.
• Short-term trends/patterns NOT that
important.
Take (Intelligent) Action
• More money is lost from Not making good trades
than from making bad trades. Inertia and
perfectionism are costly.
• The market rewards you for taking (perceived)
risk. Buy “inexpensive assets”. If a lot of people
are buying, it’s not inexpensive.
• You ultimately (not all the time) win when the
probabilities are on your side.
• You must do your own work, probably 95%+ of
investment information is misleading.
Public Investment Advice Rarely Pays
FOOL.COM
Along with being the world's greatest living investor,
Warren Buffett is an outstanding writer, a generous
educator, and a not-unsubstantial wit. His annual letters
to shareholders, replete with investing insights both
timely and timeless, without fail also include a number
of well-delivered jokes. In his most recent letter, Buffett
writes: "We show below our common stock
investments. With two exceptions, those that had a
market value of more than $700 million at the end of
2006 are itemized. We don't itemize the two securities
referred to, which have a market value of $1.9 billion,
because we continue to buy them. I could, of course,
tell you their names. But then I would have to kill you."
Public Investment Advice Rarely Pays
Fool.com
In that regard, a fascinating study has recently been released.
It's titled " Attention and Asset Prices: The Case of Mad
Money," and it examines the effects of sudden attention on
stock prices, both large cap and small cap. The abstract for
the report pretty much sums up the findings of the study:
"We document market inefficiency in the days following the
buy recommendations of Jim Cramer, host of the popular
CNBC show Mad Money. The average overnight return
following a first-time recommendation by Cramer is 2.86% for
our entire sample and 6.76% for the smallest quartile but
these gains disappear (reverse) within several trading days.
We also find that trading volume and short sales volume are
all significantly higher than normal on the day following
Cramer's recommendations."
You Should be Watching –
Real Estate
• This bubble like all others will deflate.It is likely
to cause a spike in Interest rates, which in turn will
make the Stock Market Decline (Bear Stearns).
• Sub-Prime and other iffy mortgages have been
monetized and sold as multi-part bonds (RMBS).
Barron’s estimates that $1 Trillion of this paper
exists, most held by major financial institutions
and a 7% default rate could wipe out its value.
• Two million sub-prime mortgages will have their
interest rates reset in the next several months.
• Mortgage defaults are increasing rapidly even
though the economy is in good shape.
The Trouble with Real Estate
May 27, 2007 – New York Times
Fighting Off Foreclosure
By CHRISTINE HAUGHNEY
SHERRI CAUGHMAN prides herself on being the kind of conscientious New Yorker
who does her homework before making any major purchases. So when Ms.
Caughman, 44, a supervisor in the city’s food-stamp program, decided last November
to buy a two-family house in Jamaica, Queens, she took a class on buying real estate,
researched the property through city records and vetted the terms of her mortgage
with her former sister-in-law, a real estate broker.
Ms. Caughman was also counting on help from her elderly parents, who would move
into the downstairs apartment and help out with the mortgage on the $515,000
house. But three days after she closed on the house, her parents decided to move back
to South Carolina. Suddenly, Ms. Caughman, who makes
was left to pay a $3,699 monthly mortgage.
[NOTE: Yearly Payment = $44,388]
$40,000 a year,
July 9, 2007 – New York Times
Increasing Rate of Foreclosures Upsets Atlanta
By VIKAS BAJAJATLANTA — Despite a vibrant local economy, Atlanta
homeowners are falling behind on mortgage payments and losing their homes at
one of the highest rates in the nation, offering a troubling glimpse of what experts
fear may be in store for other parts of the country.
The real estate slump here and elsewhere is likely to worsen, given that most of
the adjustable rate mortgages written in the last three years will be reset with
higher interest rates, …. As a result, borrowers of an estimated $800 billion in
loans will be forced in the next 12 months to 18 months to make bigger
monthly payments, refinance or sell their homes.
A big reason the fallout is occurring faster here is a Georgia law that permits
lenders to foreclose on properties more quickly than in other states.
The problems include not just people losing their homes, but also sharp declines
in property values, particularly in lower-income and working-class
neighborhoods.For example, a three-bedroom house near Turner Field, where the
Atlanta Braves baseball team plays, fetched a high bid late last month of
$134,000 at an auction by the bank that took possession of it. Almost three years
ago, the new home was bought for $330,000.
The former owner of the home, could not be reached for comment. Property
records show she took out two loans to finance 100 percent of the purchase
price. She borrowed the money from Ownit Mortgage Solutions, a California
company that sought bankruptcy protection in December after many of its
customers defaulted on their loans. Investors who bought bonds backed by Ownit
loans will bear the loss on her home.
While the surge in foreclosures in other big cities like Cleveland, New Orleans and
Detroit can be attributed to local economic challenges, Atlanta more closely
reflects the nation. Its unemployment rate, 4.9 percent in May, is low and close to
the national average of 4.5 percent. And businesses here are adding jobs, albeit at a
slower pace than they were last year.
Like others across the country, homeowners here took out aggressive mortgages in
the last few years when interest rates were low and housing prices were soaring.
Many are not able to refinance because their homes are worth less than they paid
for them and their credit is now too weak for them to qualify for another loan.
Atlanta also serves as a microcosm for some broader national trends: wages have
been stagnant for much of this decade, homeowners have taken on record amounts
of debt, and mortgage fraud has been on the rise.
At the end of March, 2.8 percent of all owner-occupied homes nationally were
vacant and for sale, up from 1.8 percent at the start of 2005. That is the highest
vacancy rate in the 51 years the Census Bureau has been tracking it.
By Alistair Barr, MarketWatch- Jul 10, 2007
SAN FRANCISCO (MarketWatch) -- Influential rating agency Standard &
Poor's said on Tuesday that it may downgrade $12 billion of subprime
mortgage-backed securities because losses in this low-end part of the homeloan market have increased and will probably get worse.
Credit ratings on 612 classes of residential mortgage-backed securities
(RMBS) backed by U.S. subprime collateral have been put on CreditWatch
with negative implications, S&P said. Beginning in the next few days, the
agency said most of these classes will be downgraded.
That covers about $12.078 billion in rated securities, or 2.13% of the $565.3
billion in U.S. RMBS rated by S&P between the fourth quarter of 2005 and the
fourth quarter of 2006, the agency noted.
The agency said it's also reviewing ratings of Collateralized Debt Obligations
(CDOs) that invested in the RMBS that could be downgraded. (CDOs are a bit
like mutual funds that hold asset-backed securities. Many CDOs bought
subprime RMBS, helping to fuel the housing boom earlier this decade.)
S&P also said it's changing the way it evaluates subprime RMBS, partly
because of unprecedented levels of misrepresentation and fraud, combined
with potentially shoddy initial loan data. The new approach will be applied to
RMBS deals and could affect the ratings of other mortgage-backed issues.
You Should be Watching –
Oil and Gas
• A spike in Oil and Gas prices would derail the
world economy.
• Oil and Natural Gas Prices are currently priced
inappropriately in relationship to each other. Oil
should be 7 times the price of Natural Gas. The
ratio hit 11.25 times last week (Look for
regression to the mean).
• Oil tends to peak between June and Sept.
Natural Gas peaks between October and January.
SP 500 – 10 Year Chart
DJIA – 10 Year Chart
NASDAQ – 10 Year Chart
SP500 – 3 Month Chart
NASDAQ – 3 Month Chart
DJIA – 3 Month Chart
SP500 – 3 Year Chart
NASDAQ 3 Year Chart
DJIA – 3 Year Chart
Bear Stearns – 1 Year