Daily Digest

Daily Digest - May 25

Monday, May 25, 2009, 9:51 AM
  • The Phoenix Housing Boom
  • Random musings on the market direction
  • Lost Vegas: Vanguard (Video, H/T Fujisan)
  • Steve's Economic Forum (Audio, H/T Kemosavvy)
  • Securitization: Advanta and the Fiction of True-Sale
  • Obama to Create Financial Crisis Inquiry Commission (Video)
  • Jim the Realtor: Crack House (Video)
  • The Next Catastrophe For Banks: $3.5 Trillion In Commercial Real Estate Debt
  • British banks revolt against Obama tax plan
  • Sunday Funnies 


The Phoenix Housing Boom

From David Streitfeld at the NY Times: Amid Housing Bust, Phoenix Begins a New Frenzy

With this sweltering desert city enduring one of the largest tumbles in housing prices for any urban area since the Depression, there is an unrelenting stream of foreclosures to choose from. On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.

There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr. Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own...

...The low end of the real estate market here — and in some equally hard-hit places like inland California and coastal Florida — is becoming as wild as anything during the boom.

One real estate agent was showing a foreclosed house to a prospective client when a passer-by saw the open door, came in and snapped up the property. Another agent says she was having the lock changed on a bank-owned home when a man happened by, found out from the locksmith that it was available, and immediately bought it. Bidding wars are routine.
And from Nicholas Riccardi at the LA Times: Phoenix's housing bust goes boom
After four years of renting because they were priced out of the real estate market, Jamia Jenkins and Scott Renshaw concluded the time had arrived for them to buy.

They saw that home prices had dropped so fast here -- faster than in any other big city in the nation -- that mortgage payments would be less than the $900 they paid in rent. The city is littered with foreclosed houses, so the couple figured they could easily snatch up something in the low $100,000s.


Random musings on the market direction

I want to use this holiday weekend to fill in some gaps on major issues because I think we are at a key turning point. Because the economy has left the freefall stage and I have been more positive, I have been getting the feeling that I am the bull in a room of bears. So you know something is wrong when Edward Harrison is considered the bullish one. The last two posts this morning were about the banking sector and the economy more generally.

This one is a sort of stream of consciousness one on the markets – nothing particularly deep. These are my random musings:

Treasurys. they are getting stuffed right now. But, the U.S. is not the only one that has seen yields back up. Germany has gotten the same. The question is why? Bill Gross has said it was an outgrowth of the loss in confidence in the U.S.’s triple AAA rating after the U.K. got put on earnings watch negative. I can’t say if that’s true. But, clearly, the U.S. is going to have a monster deficit and the monetary stimulus seems pretty inflationary. Now, at the beginning of the year, I was fully in the deflation camp. My mantra was “first the deflation, then the inflation.” I saw deflationary forces lasting through 2009, so I pegged gold as a wash and the Treasury bubble as getting even worse. However, I also said the risk-reward on Treasurys was awful and TIPS were the better trade if you wanted to be long Treasurys. This has turned out to be true because Treasurys are getting killed and the inflation trade is on. The Chinese are not happy and have moved to the short end. Hence the backup in yields ONLY on the long end. Everyone is piling into that short the long-end trade. If I were Bernanke/William Dudley, I would start buying long-dated Treasurys in an aggressive and sloppy way to nail the shorts.

Equities. The rally since March was way over done and I said the release of the stress test results was a sell the news event. It was. I especially felt the financials were overbought. So, are we headed lower now? It is hard to say because it depends on the economy. A recovery means stocks go higher. On par, this is not a point where you want to add new money in my opinion. If you want to gauge the recovery trade, look at industrials. They would be a leader in a real bull market.

Precious metals: As I said, the inflation trade is on. In my view, Chris Wood is right on the money in seeing gold zooming to $3000. This won’t happen overnight. But, the Chinese are hedging into gold. I think precious metals are a good place to put some money.

Oil: Ditto here. A recovery also means that demand is going to increase and that means the peak oil trade will be back on. I said oil was going to drop to $25 and rise to $55 before the year was out. It dropped to $33 or so and is already above $60. There is probably a lot of room to run here. Gold is a better bet perhaps because oil can easily get zapped by a stalled economy.
That’s it. Feel free to add your two cents in the comments, especially as regards emerging markets or Europe.

Update: onmore thing. I mentioned on Thursday that a late day selloff would be a bad sign as it would mean selling on heavy volume on bad news - which is what happens in a bear market. That didn’t happen, the market was up 50 points in the last hour I believe. So, the rally could continue.

Lost Vegas: Vanguard (Video, H/T Fujisan)

Steve's Economic Forum (Audio, H/T Kemosavvy)

We posted yet another episode of the roundtable discussions and you can get the episodes here


In Episode 6 we discuss the hardships of selling the idea of the Crash Course to friends and family, I know that anyone that gave away Crash Course DVD's as Christmas presents last year can relate to this topic. We also talk about the idea of 'What if nothing happens, what if nothing changes?', will this preparation and transformation of my life have been worth it? I thnk anyone who has been on this site for some time can relate to this episode.

In Episode 5 we sat down with Steve Brick the executive director of the Int'l BioChar Initiative and we straight out ask him 'What the heck is Biochar?' He answers the question along with where the primitive science is going and whether or not it's the silver bullet that will solve global warming and soil depletion. Interesting episode, but more on the college course level.

 Securitization: Advanta and the Fiction of True-Sale

Below is a comment by LSU Professor Joseph Mason and Eric Higgins on the evolving situation in the securitization market. While the folks at the Fed and Treasury pretend that they can breathe life back into the private label securitization market, the legal underpinnings of this OTC market are disintegrating under the weight of mounting losses and falling cash flow. – Chris

Advanta and the Fiction of True-Sale

Joseph R. Mason and Eric J. Higgins†

On Monday, May 11, 2009, Advanta Corp. announced that their credit-card securitization trust would go into early amortization and that they will shut down all of the accounts in the trust. What the casual observer (and most regulators) missed is that this announcement is also endemic of the problems at the heart of securitization: the “true-sale” classification from which securitizations obtain their off-balance sheet treatment.

A company like Advanta issues credit-cards through its banking subsidiary (Advanta Bank). These credit card receivables are then sold into a trust (Advanta Business Card Master Trust). The trust then sells the cash flows from those receivables to investors. This trust is created as a truly-sold bankruptcy remote entity from Advanta Bank and Advanta Corp., allowing Advanta to treat the sale of credit-card receivables as off-balance sheet for regulatory and accounting purposes. Technically, Advanta Corp. has no liability for the assets that are sold into the trust and must not provide any recourse to the assets. This means that if those assets deteriorate in value, it is the problem of the trust investors, not Advanta.

The problem with the arrangement is that it has always been a complete fiction. Such was clearly pointed out in Advanta’s earnings call of April 30, 2009, where management first announced it was concerned about the performance of the credit-card trust. Management stated that they were worried that the trust might go into “early amortization, ” meaning the trust would cease to exist and would immediately begin to pay out all available credit-card receivables to investors in the trust.


Obama to Create Financial Crisis Inquiry Commission (Video)

Jim the Realtor: Crack House (Video)

The Next Catastrophe For Banks: $3.5 Trillion In Commercial Real Estate Debt

In a long, analytic article about commercial real estate, The New York Post points out that the debt backed by commercial real estate has hit $3.5 trillion. The paper writes that “About $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone.”

Banks may be in no mood to alter terms of commercial mortgages, but will they have a choice?

The problem is not unlike the one that financial firms have faced and are still facing with residential housing, although commercial loans have not, in most cases, been securitized the way that mortgages were. There is a bit of good news in that. Because there is no large market for commercial mortgage-backed securities, there shouldnot be a massive process of deleveraging to hit banks with another wave of derivatives losses.

But, with commercial real estate occupancy rates falling and downward pressure on rates, money center and regional banks will be forced to write-off some of the value of loans that are renegotiated, or worse, be forced to take ownership of commercial real estate properties which are likely to continue to lose their values.

Whether the recent “stress tests” of the 19 largest US banks adequately accounting for a disaster in the commercial real estate market is hard to tell, but the losses these financial firms are facing could clearly go into the tens of billions of dollars during the next half a decade.

British banks revolt against Obama tax plan

The decision, which would make it hard for Americans in London to open bank accounts and trade shares, is being discussed by executives at Britain's banks and brokers who say it could become too expensive to service American clients. The proposals, which were unveiled as part of the president's first budget, are designed to clamp-down on American tax evaders abroad.

However bank bosses say they are being asked to take on the task of collecting American taxes at a cost and legal liability that are inexpedient.

Sunday Funnies


tomwil's picture
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Re: Daily Digest - May 25

Early retirement claims increase dramatically



US TREASURIES aslo ''increasing dramatically'

10-Yr  3.365 
30-Yr  4.386


MUG's picture
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Re: Daily Digest - May 25

Straight Eviction is the most disgusting thing i've ever seen. The bank should have the phone number of all the renters and inform them as well as the morgage holders. At least the banks should let police inform the renters 3 days before hand. Maybe they could just drop a letter in the mail-box. Funny how the banks value of phone calls and paper over people.

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Mr. Fri
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Re: Daily Digest - May 25

I really like the "Obama Man" song in the funnies section. A well needed laugh in a sea of troubled news.


eb_riesling's picture
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Re: Daily Digest - May 25

As completely disgusting as that process is, what astounds me though, is that the bank would not want to have a renter and hence some income while the property is going through foreclosure?




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Re: Daily Digest - May 25

The World is Changed - We are Starting to see How...


( *snippet* )

" If we put ourselves in the mind of a scared investor, it is increasingly difficult to see where exactly we might want to place our wealth, such that it can be secured in these turbulent times. All of the major economies are in free fall, whether Europe, Japan, the UK or the US ... "



idoctor's picture
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Re: Daily Digest - May 25

Bill Fleckenstein Why this downturn is different


I am primarily worried about is the goverment and thier deficit and how in gods  holy name were going to pay that off without taxing everyone, martians, and even satan himself (although he deserves it) into oblivion.

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Re: Daily Digest - May 25
from ASPO-USA's Peal Oil Review, 25 May 2009
The nation’s capital had the activity of a three-ring circus last week, with a challenge fired at the Chrysler bankruptcy; a GM bankruptcy in the wings; a cap and trade emissions bill clearing its first legislative hurdle; and the administration announcing a major increase in vehicle fuel standards.

While the administration says it is confident that Chrysler and GM can move through the bankruptcy courts and start returning to health in a few weeks, others are not so sure. On Tuesday a group of 300 disenfranchised Chrysler dealers filed to block the government’s plan for a quick restructuring. As the holders of $27 billion worth of GM bonds rejected a plan that leave them with only a small equity stake in a revived company, the government seems ready to send GM into the bankruptcy courts by the end of this week. The Administration loaned GM another $4 billion to keep it afloat until week’s end, bringing the total loan to $19.4 billion since December. During bankruptcy, GM is slated to receive billions more in government loans until the downsizing and restructuring is completed.

Congress is increasingly skeptical that the GM bankruptcy plan will work and many are concerned that the bondholders are being treated unfairly as compared to the unions. Amidst concerns ranging from the fate of dealerships to that of parts manufacturers is the overriding concern that car sales could collapse leading to cascading bankruptcies and millions being thrown out of work.

On Capitol Hill the House Energy and Commerce Committee passed out the American Clean Energy and Security Act of 2009. This massive bill attempts to reduce carbon emissions from American vehicles, buildings, factories, and power plants by 83 percent within 40 years. Needless to say there are trillions of dollars at stake. Should the bill pass, the supply and consumption of energy in the United States will never again be the same. Hundreds of amendments were proposed and numerous messy compromises were reached as the bill passed through the committee. 

While the bill passed the House committee despite vigorous opposition, it may not fare so well in the whole House and Senate where many are concerned about the economic impact in recessionary times.

Should the legislation stall, the Obama administration unveiled a new set of much tougher emissions and mileage standards last week. This time the automakers, realizing the precariousness of their situation, stood by the President to support the new standards. The rules essentially mandate a 40 percent improvement in mileage and emissions standards over the next six years.

These new regulations further complicate the already complex automobile-energy- economic situation. The new standards could increase the costs of cars at a time when manufacturers are struggling to stay viable, with failing business models, and many consumers are struggling to buy much of anything. All available indicators suggest that the global economy will continue to have serious problems for the foreseeable future, that oil supplies will continue to contract, and that oil prices will rise. The net outcome of the actions that took place in Washington this week, when combined with all the global economic forces that are in motion, is simply too complex to foresee.
RedShift's picture
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One might be puzzled over why the sherrifs and courts continue to favor banks over people living in forclosed homes, such as the poor family featured on the "Lost Vegas" documentary.   Who owns, operates and controls these banks?  Who guides the legislatures, the legal colleges, and the police officials?  Who is signing the papers? And who is whispering in Obama's ear?  It is time to call out the sons of the devil, and lay justice upon them, before our sons are sent to die in countless foreign wars, and our daughters reduced to harlots to our overlords.  We have precious little time left.

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