The Mess That Greenspan Made

Why stop with just a floor under stock prices?

Monday, October 27, 2008

Bloomberg reports the Karachi Stock Exchange has extended its pricing "floor" indefinitely to prevent stocks from tumbling further, prior to the government being able to borrow enough money to buy shares. It seems to be working wonders as shown below via Reuters.
Those in the rest of the world can only dream of that kind of performance in equity markets over the last two months, prompting the question of why such floors are installed at other stock exchanges.

The U.S. has a debt ceiling - an artificial, yet movable limit to U.S. spending excess. Why not a stock floor? And, while they're at it, how about a housing price floor too?

From Bloomberg:

"Some time is still required for the implementation of market stabilization measures,'' Adnan Afridi, managing director of the Karachi Stock Exchange told reporters today. Shaukat Tarin, the Prime Minister's finance adviser will visit the exchange on Oct. 31, after which a decision about ending curbs will be taken, he said.

The Karachi Stock Exchange's benchmark KSE 100 Index has lost more than one-third of its value this year. Board members met over the weekend to discuss extending the curb, which was scheduled to be lifted on Oct. 27. The board also discussed ways to prevent possible violence by angry investors.

The eight-week-old trading curbs have prevented stocks from falling below their Aug. 27 closing prices, shielding investors from a record sell-off. Pakistan has twice imposed trading restrictions and bailed out individual investors. Since the curbs were imposed, Pakistan's credit rating has been cut, giving it the world's second-lowest grade.

The KSE 100 Index closed unchanged at 9,182.88 on Oct. 24. The benchmark has risen or fallen less than 1 percent on each trading day in the past seven weeks.

Down only one-third for the year and with volatility of less than one percent per day, this sounds like something the rest of the world should implement as soon as possible.

In the U.S., the ~~63 percent~~ many 401k investors who have recently stopped contributing to their retirement accounts would surely reconsider their decision if such a floor was installed.

Better yet, why stop with just a price floor? Why not mandate an increase of, say, the rate of inflation plus four percent? That should fix things in a jiffy!

New strategy: long ammo, short Dubai

While it is true that the U.S. dollar has been unstoppable versus the world's other paper money lately (except for the yen, of course), each day the greenback growing stronger and stronger because it looks less and less bad versus pounds, euros, kronas, and others, there are at least two other significant trends that shrewd investors might want to ponder.

Fond of paired trades such as the short dollar-long gold pair that has decidedly flipped the other way over the last few months, another paired trade looks mighty tempting today:

Long ammo, short Dubai

How exactly one would do this via a brokerage account is anyone's guess, but the evidence that this paired trade might have some lasting profit potential was provided in two stories in today's newspapers.

The expected results of the upcoming election are playing a clear role in the recent bull market in bullets, but fear of civil strife amid a rapidly weakening economy are also involved, as explained in this Washington Post report.

Americans have cut back on buying cars, furniture and clothes in a tough economy, but there's one consumer item that's still enjoying healthy sales: guns. Purchases of firearms and ammunition have risen 8 to 10 percent this year, according to state and federal data.

Several variables drive sales, but many dealers, buyers and experts attribute the increase in part to concerns about the economy and fears that if Sen. Barack Obama of Illinois wins the presidency, he will join with fellow Democrats in Congress to enact new gun controls.
...
Gun purchases have also been climbing because of the worsening economy, which fuels fears of crime and civil disorder, industry sources and specialists said.

"Generally, we know that hard economic times always result in firearm sales," said James M. Purtilo of Silver Spring, who publishes the Tripwire Newsletter.

Gary Kleck, a researcher at Florida State University's College of Criminology and Criminal Justice whose work was cited in the District's recent Supreme Court gun-control case, said that although there are no scientific studies linking gun sales and economic conditions, people often buy firearms during periods of uncertainty.

A quick look at Smith & Wesson (Nasdaq:SWHC) shows there is little relief to be had there, but surely there are other ways to go long guns and ammo.

The other side of the trade comes via the city of Dubai, one of the seven emirates that make up the U.A.E., a boom town with little oil but huge aspirations of becoming a cultural, financial, and real estate center for those with oil.

Their aspirations today are decidedly different now that oil fetches only about $60 a barrel versus the almost $150 price of a few months ago.

This Wall Street Journal story has the details.

In Dubai, real-estate agents are seeing what could be the first signs that the city-state's property boom is sputtering. There's no concrete evidence yet of significantly falling prices, and Dubai's property developers have said they remain optimistic. But property investors, who were making big gains buying and then reselling property just a few months ago, are lowering asking prices and increasingly willing to stomach losses to free up cash, brokers said.

The sudden softening could be an early warning of deeper problems for Dubai, which has fueled its recent supercharged growth through debt. Amid today's financial crisis, overseas borrowing and refinancing are much more difficult, raising questions about Dubai's ability to pay back its loans.
Analysts have been forecasting a downturn in prices for months. Earlier this month, property consulting firm Colliers International said Dubai property prices rose 16% in the second quarter. That was much slower than the 42% price rise in the first quarter. Regional bank EFG-Hermes said last month that it expects prices to peak next year and fall -- as much as a cumulative 20% -- by 2011.

Real-estate agents in Dubai said they're now seeing a clear slowdown. They say speculators, especially those who were financing their property investment, have largely fled the market.

"There are a lot of people who need liquidity, and a few of them are ready to drop their prices," says Mara Firetti, a consultant at AAA Group, a real-estate broker in Dubai.

Investors in new luxury villas at one Dubai development -- each priced at between $1.4 million and $2.2 million -- were reselling property at premiums of 10% to 15% of the original purchase price just six months ago, Ms. Firetti says. Now, premiums have shrunk to zero in many cases. That means investors are willing to sell at a loss, because they've already sunk in upfront fees.

Those price increases - 42 percent in the first quarter, 16 percent in the second - bring back fond memories of what it used to be like in Las Vegas, Miami, and Phoenix a few years ago. Actually, those price increases make the old U.S. hotspots look rather tame in comparison.

It seemed that it was only a matter of time for Dubai.

New home sales rise, prices fall

A short time ago, the Census Bureau reported sales of new homes rose 2.7 percent in September, from a 17-year low in August, propelled by a 9.1 percent plunge in home prices.
Sales of new homes rose from an annualized, seasonally adjusted rate of 452,000 in August to 464,000 in September as builders became more aggressive in reducing prices amid stiff competition from foreclosure sales.

Distressed sales - foreclosures and short sales - have been supporting existing home sales all year with prices undercutting that of home builders and this has had a huge impact on new home sales.

From the peak in 2005, new home sales have declined 67 percent, while existing home sales have declined just 28 percent, more than one-third of existing home sales now counted as distressed sales.

The inventory of unsold new homes was reduced sharply, from 404,000 in August to 374,000 in September, but remains at historically high levels relative to sales. The months of supply metric fell from 11.4 months to 10.4 months, however, this is still about double the normal inventory-to-sales level.

The median price of a new home reached a four-year low at $218,400, down from $240,300 in September of 2007 with further price declines expected.

While sales of existing homes are reported after closing, new home sales are reported when contracts are signed, meaning that an unusually large number of new home sales reported in September may have difficulty in closing due to the worsening of credit market conditions and tighter lending standards.

Monday morning links

Foreclosure king says wait til 2010 to buy

Sunday, October 26, 2008

The LA Times has a nice story about Leo Nordine, a 45-year old Hermosa Beach real estate broker who specializes in foreclosure sales and must be about the only realtor in the world who doesn't own a cell phone. Really!

He drives an eight-year old car too! Amazing.

It's as if frugal is cool now. Our two six year old cars and a shared cell phone (it's a Pay As You Go and rarely gets turned on) look downright wimpy by comparison.

Can we really make the transformation back to a society of modest savers?

It looks like we're about to find out...

Sorry, this was supposed to be about Mr. Nordine, but I can't help but stop and gawk at this wave of thriftiness that is sweeping the country.

Anyway, back to the Foreclosure King...

As might be expected, business is booming these days and he has some important advice for renters who are now chomping at the bit, anxious to become homeowners.

Nordine, a 45-year-old native son and surfer didn't just catch the current foreclosure tidal wave, he has sold 3,500 bank-owned homes during the last two decades. He credits his uncanny ability to time the real estate market's cycles and position himself to reap its rewards as the key to his extraordinary success. And he does it all from the comfort of his home overlooking the Strand in Hermosa Beach.
...
Nordine has made his own fortune not only by selling homes but also by investing shrewdly. In the 1980s, he bought about 20 properties, most of them single-family homes in Torrance. He sold them off in 1990 and '91 when he anticipated a bust was coming. He dived back into the market in the mid-1990s -- this time apartments in Santa Monica -- and sold off most of them in 2005.

Today, he and his second wife own a 22-unit complex and a 12-unit complex in Santa Monica; a single-family home and a four-plex in El Segundo; nine bungalows and a four-plex in Torrance; a five-plex in Redondo Beach; and the house-office in Hermosa Beach.

But being a dad and husband is what it's all about for Nordine. His is the first face his son Nate sees every morning when he wakes and the last one he sees at bedtime.

So what advice does Nordine offer those concerned about the real estate market?

Don't sell unless you absolutely have to. Don't buy until 2010, when prices should be at 2000 levels. And apply every spare nickel to paying off your debt, including mortgages.

Take heart aspiring homeowners (like us) 2010 isn't much more than a year away...

Swaggering is down

After the last few months, this bit of satire at The Onion (hat tip EU) is probably applicable to much of the rest of the world. Here in late-2008, swaggering is way down everywhere.
Admittedly, it is increasingly difficult to do so, but it is still important to maintain a sense of humor these days.

NEW YORK—According to an alarming new study published Monday in The Journal Of Applied Behavioral Science, the time-honored American activity of swaggering, an extremely arrogant manner of walking, has dropped by nearly 90 percent since 2007.

The severe economic turmoil of recent weeks and the United States' diminished credibility and moral standing on the world stage are just two of the major factors named in the study as contributing to the precipitous decline in self-important locomotion.
...
Dr. Thomas Ewell, an expert on boastful walking styles throughout American history, said he is not surprised by the overall decline in public swaggering. According to Ewell, pompous walks have always been adversely affected during times of national turmoil.

"It's cyclical—different modes of presumptuous sauntering come and go," Ewell said. "For example, popular 1920s walks, which included cavalier watch-chain-twirling, the hooking of one's thumbs into one's suspenders, bowler hats cocked to ridiculous angles, and exuberant heel-clicking—both single and double—were more or less eradicated by the Great Depression."

While the studies cited must be bogus (it is The Onion, after all), the gist of this is probably quite accurate. Much of the swagger seen in America prior to 2007 - when all we had to worry about was a war that was going badly - it's all gone now.

ooo

This week's cartoon from The Economist:

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Why stop with just a floor under stock prices?