Posts from — August 2007
VIX Hits 4 Year Highs
Bloomberg has the details here. Keep in mind you can run the correlations anyway you want, VIX does not correspond to market direction.
August 16, 2007 No Comments
Housing Bubble – Who Gets Hurt?
WSJ spotlights one family who will likely lose their home.
No new ground is broken here, commentators have been warning of the consequences of zero-down ARMs for a while. The old rule was to borrow 2.5-3x your annual income to allow for a sufficient margin of error if something went wrong. For anyone to buy a house in the past three years they would have to ignore that rule.
This couple isn’t poor – they have an annual income of $90,000 – but you can’t own a home in Orange County at that price. But no matter, it’s the American Dream so they did it anyway…
Some other things stand out:
- They had no plan – From the beginning they couldn’t afford the home they purchased. The couple knew they wouldn’t be able to meet the payments when the rate jumped, “he says the broker assured him he could refinance before those costs kicked in.”
- They aren’t outliers – Having less equity than the home is worth is no longer unusual. If the housing market continues to decline this will become even more common.
First American CoreLogic, a housing and mortgage data supplier in Santa Ana, recently found that nearly 7% of 32 million U.S. households studied as of December owed more than their homes were worth, based on computer estimates of the property values. An additional 4% had home equity of 5% or less. Since then, house prices have edged down in much of the country, erasing more home equity.
- The Perverse Logic of Equity Extraction –
Then another broker told him in March that his home had gained enough in value for him to qualify for a more affordable loan. They paid for an appraisal and were told their home was worth $620,000, or about $53,000 more than they paid in 2005. The Monteses were jubilant, thinking their home was saved.
In other words, even though the taxes and interest payments will rise, its ok because now they can borrow more!
August 16, 2007 No Comments
Advanced Trading Strategy – Profiting From Locked Up Shares
There may come a time where your companies stock is heading toward zero but regulations prevent you from selling because of your “insider” status.
If you know the stock is going down and still want to extract some value out of it simply pledge your shares as collateral for making another trade. If the trade goes up then you’ve extracted value out of locked up worthless shares. If the trade moves against you then your shares get called away – no problem, they were going to be worthless anyway.
Is it legal? Let see if this guy gets away with it:
Securities lawyers say that if the decision to sell was totally out of Strauss’ hands, then he’s unlikely to face legal risk. If his broker actually made the call, then the timing of the sale wouldn’t matter, says Jesse Fried, co-director of the Berkeley Center for Law, Business & the Economy at the University of California, Berkeley. Even if Strauss possessed material insider information at the time, such a sale wouldn’t violate insider trading laws.
Yet Fried and others argue that Strauss’ position may not be as clear-cut as it first appears. Much will depend on whether he exercised any discretion over how the margin call was met. “It’s a gray area of the law,” says Fried. “The core issue is whether he had a choice.”
August 15, 2007 No Comments
They’re All Connected – US Credit Woes Hit Asian Shares
Worries about US credit-market losses spreading to the Asia Pacific region flavoured trading Tuesday. Shares generally fell or rose only weakly, with Bangkok, Jakarta, Sydney and Seoul leading the drop.
…
On currency markets, the US dollar hit a two-month high against the South Korean won as investors worried about credit and foreigners continued to sell shares. The Kospi ended the day down 1.7 per cent at 1,817.89. Some investors sold shares to avoid exposure to volatility elsewhere as Seoul will be closed Thursday for a national holiday. The dollar rose to 932.10 won.
This short term dollar rise isn’t surprising. The market’s knee-jerk reaction during periods of uncertainty is a flight to safety and for a very long time safety has been the US. But how can the US simultaneously be the cause and the solution to market uncertainty? In the long term it can’t be. Expect the 2nd wave of retreats safety to the Euro or gold.
We’ll soon see one of the most overlooked consequences of globalization – the dearth of diversity. When everything, stocks, bonds, commodities, etc. moves in the same direction, the models can’t tell you the best way to manage risk. There isn’t any historical data that covers this situation. What the models will tell you is that the more you lose, the more “mis-priced” the market is and to double down. Imagine thousands of hedge funds with the same basic ideas, running substantially the same models and not realizing that the fundamental situation has now changed.
The music has stopped, the flood of credit has been cut off and not everyone has a chair. Expect to hear the Mises term, “crack-up boom” a lot more in the next year.
August 14, 2007 No Comments
Gold Going Nowhere
Since inflation and chaos both *should* cause the metal to shoot up, bears consider the rise of gold a forgone conclusion. Yet the value of this precious metal has not even out paced its price from earlier this year. The credit market meltdown has had no significant effect. Don’t lose hope,
…Peter Schiff, chief executive officer of Darien, Connecticut-based brokerage Euro Pacific Capital, with $700 million in customer accounts. “These are ideal conditions for gold. The fact that gold hasn’t risen means there’s a lot of complacency out there. People aren’t panicked yet.”
August 13, 2007 No Comments
Nassim Taleb Told You So – Black Box Funds Meet Black Swans
Similar stories appeared today in the WSJ and NY Times – this is from The NY Post. Want to see what these managers are going to say about these losses? Get the book.
First it was the mortgage bond funds that fell, and now the credit-market crunch is claiming victims in the highly sophisticated arena of so-called “black box” funds.
The wounded include some of the most impressive names in the hedge fund universe, including Goldman Sachs, JPMorgan and AQR Capital Management, whose plan to go public could be affected by its recent performance stumbles.
Officially referred to as statistical arbitrage hedge funds, these entities deploy proprietary mathematical formulas to take advantage of small price discrepancies in stocks.
August 10, 2007 No Comments
“Well, it seemed like a good idea at the time.” – Jeff Matthews INMTU
Read the entire shareholder letter from the future here:
Why we did it was this: a smart banker from Goldman Lehman Lynch & Sachs came in, all gussied up and looking sharp, and made a terrific PowerPoint presentation to the board with multi-colored slides that showed how paying a special $10 a share dividend, plus buying back a bunch of our stock at the 52-week high, would “return value to our shareholders.”
August 10, 2007 No Comments
Paging the PPT – 2nd Worse Drop This Year
Dow down 380.
August 9, 2007 No Comments
Heelys Slide 45% +
While viewing the Bodies exhibit at the Ben Franklin Museum in Philadelphia I saw a small child wearing Heelys lean back against a support column. As he shifted his weight to his heels, the wheels on his Heelys made contact with the floor and caused his legs to slide out in front of him, leaving him sprawled on the ground in a daze.
The childs pratfall presaged the stocks tumble this morning as HLYS experienced a similarly abrupt and jarring fall.
August 8, 2007 No Comments
$1 Trillion Loss in Three Weeks
Fact of the day from the Daily Reckoning:
U.S. stocks have lost more than $1 trillion in value in the last three weeks – an amount equal to about 8% of annual GDP. Goldman Sachs (NYSE:GS) – the alpha business of Wall Street – has lost 20% of its value.
August 8, 2007 No Comments
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