Friday, November 30, 2007

Hype: A definition

Hype: an ingenious or questionable claim, method, used in promotion, or publicity to intensify the effect.

And that is what has happened in sub-prime and asset backed. "Everyone" knows "somebody" that has real estate problems. So take that common knowledge, and distort it to your advantage. Short the banks, buy your swaps, and spread innuendo about the banks and brokerages who were careless in their inventory. And that's the recipe given by the short and underinvested hedge funds in the market. The brokerage firms, who have gagged on, and then written down their own inventory are also complicit, as "they" know somebody else in the industry with the same pricing problems. So they react recklessly in their downgrades, which are at best misleading and superficial. If you follow these pied pipers you won't make any money. You'll lose it.

The government's bully pulpit of moral suasion will be used to keep people in their homes, without an increase in interest rate resets. These homes, are not coming on the market. You will be led to believe by some commentators that every home bought after 2005 is a liability on a bank's balnce sheet. That is just stupid. If you want to be stupid, you can believe that, and invest that way. You had billionaire William Ackman tell the world, how smart he was, and how he would profit by the demise of the mortgage insurers. Follow him, if you want to follow another pied piper. He's wrong. Why did Citadel invest in E*Trade? Did he have magnanimous intentions, or did he want to profit at their misfortune?

Wall Street uses their capital to prey on the weak, and it operates best in the fields that are most opaque. We are led to believe that these securities are so complex that no-one can understand them, or price them. What hogwash. The buyers don't want transparency, because they wouldn't be able to buy this merchandise at such low prices if they had a price discovery mechanism. And a mark-down is easier than an actual sale. But it will cause the stock to go down, and they'll sell a preferred for capital at rates and conversions that guarantee wonderful profits to the buyers. And the buyers will be lauded for "saving" the system. Like protesters who "save" the earth.

Is pricing in housing at a bottom? Do you know anybody buying a home? Most don't. They are worried and fearful. Fearful of what? Making a deal at a discounted rate? Citadel was able to buy E*Trade's portfolio because E*Trade was fearful of the unknown. Would clients leave? Would our HELOC portfolio blow up? So sell it a big discount. Housing buyers can buy at a big discount now. But few do. But are the big owners of housing inventory, the banks, being less aggressive on pricing because they see the coming rate cuts? They are, but it's at the smallest of margins, as is the slowing foreclosure rate. But this anecdote, will be dismissed by those who preach doom, gloom and Armageddon, which last I looked, only happens after the 1000 year reign of the Messiah when the lions lie down with the lambs. The bears on this market have such blinders on they'd probably miss that too!

Investing, like home buying is about price. The lows on this market were Monday. Get used to it. You won't see those prices again. But the economy won't rebound for probably another six months. But the stocks will, as they have already discounted this news. It's the same in housing. We'll probably start getting a recovery in the South, and the rest of the nation will start to thaw out in the Spring selling season, but the lowest prices can be attained now, when there is so much uncertainty about the future. Today's homeowners are looking for a buyer. But that buyer, will make money at these discounted prices, because of the anxiety of the homeowners unknowns. Which means all this hugely discounted paper that Wall street is screaming to sell, is in fact a buy.

But most people find it easier just to believe the hype.

1 comment:

Anonymous said...

Asset deflation means that houses, gold, oil, commodities, stocks, etc., will fall regardless of how low the govt. sets rates. Why, because nobody wants to borrow. Look at the 1990's Japan scenario to see what we are in for. I think the Nikkei was at 36,000 at one time.