November 30, 2009

The Facts Indicate Continued Home Price Woes

Posted in Banking, Finance, investments, Uncategorized at 8:37 PM by Robert Barone

Much has been made about the recent uptick in home sales.  Some pundits are calling a housing bottom and claiming that things will soon return to normal.  Others claim that things will get worse.  Our opinion is based on the fundamentals of demand and supply and the resulting pricing pressures. 

Supply and Demand

The more houses that are available for sale vs. willing buyers, the less each house will sell for.  We have record housing overhang.  Many astute observers have commented on the shadow inventory that includes homes in default that are not yet on the market.  Today’s (November 24, 2009) Wall Street Journal has a front page article stating that 1 in 4 mortgagors are underwater, emanating from homes that were purchased in 2006 or 2007.  Clearly, a high and rising mortgage default rate, along with massive amounts of underwater mortgages, means that more supply will be added to the “for sale” inventory in the coming months.

Affordability

Housing affordability is a function of income and credit availability.  If you don’t have income, you can’t afford a house payment.  The average American is making the same real income as they were a decade ago, but has significantly higher personal debt. The real costs of insurance, food, tuition and other expenditures have all risen during this same period, leaving most people with less money for discretionary consumption.    Meanwhile, the cost of a new home is still high relative to income.  Lower incomes with rising fixed costs of living are not a recipe for rising home prices.  Continuing job losses are also an ominous sign.

The Impact of Deficits and Taxes

Record Government deficits also mean that taxes will rise in the future (through tax hikes, and through the hidden tax of money printing and inflation).  Higher taxes mean that less income is available for businesses to pay out as wages, and less after tax income for workers.  It is easy to see that current trends don’t support rising incomes over the near term. 

Credit and Interest Costs

Credit availability is also an important factor in housing prices.  Few people buy their houses with cash, and thus need to get a loan in order to make a purchase.  Mortgage rates are currently very low, due to Government subsidies.  Without subsidies, mortgage interest rates will rise and bring down affordability and thus home prices. To see the effects of rising interest rates, Google “mortgage calculator” and play around with a few scenarios.  Remember, buying a home at what appears to be a rock bottom price today may actually be a sky-high price if wages continue to stagnate and mortgage rates climb significantly.

Rents and Home Values

Like any other investment, houses have a cap rate, the return on investment one would get if the house were rented.  Look at places like Craig’s List to get a feel for average rental prices in a given area.   Using an average monthly rental income, one can then return to the mortgage calculator and see what it would cost to finance a house.  Rents should cover the mortgage, and allow for property taxes, maintenance, and upkeep. If rents don’t cover the mortgage, the buyer is speculating that the value of the house will rise, maybe not a good idea in the current environment.  It is also important to look at the total number of rentals in the area (supply and demand again), as well as trends in rental rates (up or down). 

Mortgage Resets

Last, but not least is the mortgage reset chart.  There are trillions of dollars in loans that will be coming due or will reprice over the next few years.  All of these loans will need to be refinanced in the most likely scenario of higher interest rates (and the resulting lower home values).  While we can only speculate on what will happen to each specific loan, and on what interest rates will be when each loan comes due or reprices, we can reasonably infer that most people’s payments will go up, not down.  

When Government Support Ends

The Government has thrown over a trillion dollars at the housing market, purchasing mortgage bonds and providing incentives to various groups of homebuyers.  It should not come as a surprise that spending such vast sums has temporarily propped-up home sales. 

It is important to remember that the fundamentals of markets always apply in the long term.  Governments can not add debt forever, as higher debt leads to higher interest rates and inflation, and perhaps, even social unrest.  The Government can not prop-up housing forever.  

Conclusion

The inferences we make from the above observations are not good news for the economy of for the American homeowner.  Nevertheless, based on the facts, it is hard to come to any conclusion other than that home price declines are still ahead.

Matt Marcewicz

November 24, 2009

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778.

November 10, 2009

Is the Recession Really Over?

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , , , , , at 9:41 PM by Robert Barone

News pundits are hailing the end of the Great Recession.  The numbers have come out, and the American economy has grown again.  What does this mean for our friends and our families?

The metric the Government uses to measure the economy is called Gross Domestic Product, or GDP for short.  GDP is defined as the market value of all final goods and services that a country makes in a given year.  By tracking this number, Government statisticians can figure out whether or not the economy grew in any given period. 

There are a few basic problems with GDP that should preclude us from taking the number at face value. 

First, it is a complex calculation, and is most often revised after it is originally released to the press. What may be a positive number, upon release, may be a negative number three months later.

Second, the inputs of the GDP

(Consumption + Investment + Government Spending + Net Exports = GDP)

make it a number that is easy to manipulate.  Retail sales and investment (excellent measures of “business”) may fall off a cliff, but GDP may go up. By taking on debt and spending money, the Government can easily manipulate the number higher.  For example, the most recent GDP number would have been much lower if it hadn’t been for the new home buyer subsidies and cash for clunkers program.  Keep in mind, both of these stimulus programs were funded with debt (and/or printed money), and will have to be repaid in the future through higher taxes and/or inflation. 

Third, I can’t pay my bills with GDP growth.  As stated above, GDP may reflect the Government taking on debt and handing out money, as opposed to real business activity.  The cost of this debt will be a future drag on profits, incomes, and growth.  It is important to remember that the Government does not make and sell things for a profit.  The Government’s income is derived by taxing business, taxing incomes, and taxing transactions (i.e. capital gains, sales tax). Therefore, a bigger GDP number obtained by increased Government spending may mean less income for you and me in the future. 

Since most of us get our paychecks by working at or owning a business, why don’t we look at measures of business activity instead of GDP?  If business does well, people are hired and paid.  Tax collection goes up as well, as profits are taxed and people have more money to spend on goods and services.  If business declines, people make less money and get laid off.  Obviously, tax collection also suffers under these circumstances.

For a quick and dirty look at business activity, we decided to review the sales results of a handful of companies in the shipping industry.  Most of us buy and consume products that are made somewhere else.  Whether we buy things at a store, or online, shipping is involved in the process of bringing producers and buyers together.  If business is up, then sales of a diverse group of shippers should rise as well. 

We chose to look at the following companies’ sales growth in 2009, as reported in their SEC filings and/or press releases:

Overseas Shipholding Group:  – 35.11 %   

Expeditors International:  – 34.23 %

UPS:  -15.22 %

Burlington Northern:  – 24.26 %

Using our quick and dirty shipment method, we can see that sales are down significantly from 2008 levels.  This means that business activity is down, and therefore incomes must be down. 

Now lets look at GDP growth for the first nine months of 2009, and compare it to the first nine months of 2008, using numbers from www.bea.gov:

GDP Growth: 2009 (through third quarter):  -2.38%

What we can tell from our little exercise is that movement of things has slowed down a lot more than GDP. Since most incomes (personal and Government) ultimately come from business revenues, and not GDP, we can see that things are quite a bit worse than they were a year ago.  Given that businesses are still announcing significant job cuts, I’d expect that spending won’t come rocketing back in the near term.  We will ultimately reach a bottom in the Great Recession, but as investors, we need to focus on the fundamentals, not Government hype.

Matt Marcewicz

November 6, 2009

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778.

November 6, 2009

The Unholy Washington – Wall Street Alliance

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , , , , at 9:34 PM by Robert Barone

Insider Trading

            The federal government spent millions prosecuting Martha Stewart for making a few thousand dollars on an insider trading tip, and today, November 5, 2009, announced a large sting with 14 indictments in connection with its insider trading investigation of the Galleon hedge fund.  However, the SEC has ignored the $270 million that was made by a trader who bet $1.7 million on March 11, 2008 that Bear Stearns, then trading just below $63 per share, would lose more than half its value in a 9 day period.  The trader purchased $30 and $25 Puts on Bear which expired on March 20th.  The day after the purchases, Bear’s stock went into freefall.  If any trade ever deserved an investigation, this one does.  After some Congressional questioning, the SEC issued subpoenas.  Strangely, no mention has ever been made of any findings. 

            Of critical note, on March 11th, the same day the mysterious and hugely speculative trades were made, a meeting was held at the Federal Reserve Bank of New York (FRBNY) consisting of Geithner, then FRBNY’s President, Bernanke, and every major Wall Street firm except Bear Stearns.  The meeting was actually secret, only discovered by a Bloomberg reporter by accident, from a mention on Bernanke’s calendar.  Putting the pieces together, one could infer that Bear was the topic of discussion at the March 11th FRBNY meeting and information was leaked to the trader that same day.  The following questions need answers:  1) Why, more than 18 months after the meeting, and after a period of financial panic, don’t we know the topic of the meeting?  2) If it wasn’t about Bear Stearns, why weren’t they invited?  3) Why won’t the SEC discuss or pursue the source of information used by the trader, or even identify the trader?

Naked Short Selling

            One of the tactics used to bring down Bear and later Lehman Brothers was “naked” short selling, an illegal and unethical practice used by (reserved for) the large Wall Street “prime brokers” when they smell blood.  SEC regulations say that to “sell short”, one must “borrow” existing shares.  This regulation is enforced by every broker/dealer for their regular accounts.  That is, you or I cannot “short” without first finding and borrowing the stock.  But, these rules apparently are not enforced on the large Wall Street firms.  In both the Bear and Lehman cases, on the days just prior to their demise, there were more shorts outstanding than there were shares in circulation.  Why isn’t there an investigation of this and a disgorging of the illegal profits as called for under SEC regs?  If you or I had done this, the SEC would want to put us in jail!

            What I have said simply here is well chronicled by author Matt Taibbi in the October issue of Rolling Stone.  Not unexpectedly, the article is somewhat irreverent.  What is unexpected is where it was published, Rolling Stone, not a beacon of conservatism.  Why hasn’t the business media, which pursued Martha Stewart with such passion, even made a mention of these “irregularities”?

The AIG Farce

            Unfortunately, there is more.  On October 27th, a Bloomberg story (authors Teitelbaum and Son) appeared regarding the AIG bailout.  It seems that for several weeks prior to the AIG bailout, then CFO, Elias Habeyab,  was trying to persuade banks who had purchased $62 billion (notional value) of AIG’s CDOs to accept 40% discounts on the paper, as AIG didn’t have the wherewithal to pay at par.  On September 16, 2008, the FRBNY stepped in with an $85 billion credit line, effectively buying 78% of AIG for the American taxpayers.  Eventually, the rescue plan would amount to $182 billion.  In early November, Geithner (still President of FRBNY), Bernanke, and the Treasury (Paulson) began negotiations with the large Wall Street players about the price at which AIG would pay on its swap obligations.  The price of this stuff on the street was at 40% – 60% discount.  The authors found a term sheet from FRBNY regarding the price.  On the term sheet the discount at which AIG was to redeem this dubious paper was crossed out.  Geithner, Bernanke and Paulson had agreed to repurchase the AIG swaps at par.  The authors calculate that, as a result, the American taxpayers gave the large Wall Street firms a $13 billion gift.  FRBNY placed this paper into an LLC called Maiden Lane III.  As of June 30, 2009, Maiden Lane III was carrying this paper at a $7 billion loss.  Who benefited?  Large Wall Street firms mainly, including Goldman Sachs, JPMorganChase, Morgan Stanley, and Citi.

More Conflicts and Insider Abuse

            Clearly, the deal that FRBNY made on behalf of AIG contributed greatly to the profits of Goldman, JPMorganChase, et al.  Some say the deal even saved Goldman (remember, Goldman had to quickly raise capital during this period and even turned to Warren Buffet for a capital injection).   There are several disconcerting facts that need to be aired and investigated: 1) Both Jamie Dimon, head of JPMorganChase, and Stephen Friedman, Chairman of Goldman, sat on the Board of Directors of FRBNY.  Friedman was Chairman of FRBNY at the time.  What role did these two play in the determination of the par price that AIG paid?  If this wasn’t a conflict of interest, it sure has the appearance of one;  2) Friedman purchased 52,600 shares of Goldman stock while it was still under pressure from the market’s belief that AIG would not redeem its CDOs at par.  But, according to the Bloomberg story, those purchases occurred after FRBNY’s decision to pay at par, a decision that Friedman, as FRBNY Chair, certainly had access to, probably had knowledge of, and possibly had input into.  At today’s price for Goldman shares, Friedman’s profits on his Goldman purchases exceed $5 million.  Where is the “insider trading” and conflict of interest investigation? 

Control of the Fed

            Each of the 12 Federal Reserve Banks are owned by the “members” who contribute capital in proportion to their size.  Because the Fed is privately owned, its ownership list is not publicly available (yet the Fed makes monetary policy on behalf of the public!).  The members, according to their share holdings, elect the Board of Directors.  Thus, the large Wall Street, “Too Big To Fail” institutions, elect and control the Board of Directors. 

Winners and Losers

            Given the above, it should not be a shock that AIG was given $182 billion and paid its CDO obligations at par (instead of $.60) after it was seized by FRBNY because those in control of FRBNY, Goldman, JPMorganChase, et al, had a huge vested interest and stood to lose significantly, perhaps even to the extent of failure.

            In this light, it also isn’t shocking that TARP funds have been given mainly to “Too Big To Fail” institutions that had overleveraged and had lost on their risky bets, while such funds have been withheld from small community institutions that had not overleveraged or placed such risky bets.  Consider this, if the “Too Big To Fail” Wall Street institutions, now all of which are Bank Holding Companies, can get rid of their smaller rivals, there is market share to be gained!

            All in all, the whole financial meltdown episode stinks of greed, conflicts of interest, insider manipulation, and government acquiescence to the rich and powerful on Wall Street.  The investigations of “insider trading” now taking place appear to be a smokescreen to convince the public that laws are being enforced, when, in fact, the most egregious acts are ignored because of who committed them.  Unfortunately, there is no one in Washington who is willing or possibly is politically able to stand up to such outrages.  And the business media simply doesn’t want to rock the boat.  Typically, we find such conduct (greed, conflict of interest, unethical and illegal behavior) between the governments and private sector power brokers in third world countries.

Robert Barone, Ph.D.

November 5, 2009

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778.