Thursday, September 27, 2007

Just What We Needed


I have never been a fan of professional wrestling. One of my closest friends in college used to impersonate several of the popular wrestlers from the 80's era of WWF and clearly had an appreciation for the humorous side of the 'sport'. Its because of him that I have any awareness of some of these personalities - who all seem like cartoon characters to me.

And now that I've put some distance between myself and pro wrestling, allow me to introduce you to The Nature Boy, aka Ric Flair. He was one of my buddy's favorites: a showy, muscle and bleach job who wore outfits that would make Liberace jealous. I just read about him on wikipedia, and I guess he is argued to be the 'best wrestler of all time'. Who knew?

So why do I bring this up here? Well, my industry faces challenges when it comes to public perception. Ask a friend or neighbor, and they can tell you about a mortgage broker who fumbled a deal, lied about closing costs, etc. The public image is one of my least favorite aspects of my business. And in the wake of the current 'credit crunch', the news is full of headlines criticizing the mortgage industry for misleading and mistreating consumers (I've commented on that here and here).

And now along comes Ric Flair Finance dotcom. I mean, honestly. I guess its possible that this guy has adequate knowledge of the financial markets, the ability to handle other people's personal affairs with care and understanding, and a work ethic and moral compass to ensure a high standard for professionalism. But I don't know anybody in the business who wears a bedazzled bathrobe to the office... I'm just sayin'...

Tuesday, September 25, 2007

Real Estate Markets Are Local And General


Its going to be interesting to see what comes of this adjustment in housing prices. In the San Francisco Bay Area, many are defiant when it comes to bubble talk. San Francisco has some of the highest demand for housing in the nation as exhibited by the lofty price per square foot that homeowners pay. Its a city with a one of the most beautiful natural settings in the world and has a unique and vibrant culture that acts as a magnet for visitors and residents from around the country and world. Employment and recreation opportunities are abundant. Rarely will you meet someone in San Francisco who complains "I've got to get out of this town"...

But its tough to just plug your ears and ignore some of the voices out there commenting on the state of our housing market and its potential to affect the overall US economy. As I always say, the analysts all look at the same data and come up with forecasts on both extremes, and our reality is likely somewhere in the middle. Barry Ritholtz at The Big Picture has a steady flow of alarming news and charts on the housing market. And John Mauldin has my attention this week after his analysis of the recent Fed policy statement, where he suggests that the surprisingly deep rate cut is indicative of a key change in their approach - proactive versus reactive - and signifies that the Fed is fearing the effects of a housing collapse on the greater economy.

I don't mean to spread the negative-only end of the outlook, but I think its prudent to be realistic, and I try to keep my ear close to the ground for more local news and data. To this concern, I recently came across an interesting site that helps 'check the weather' in the neighborhood. Allow me to introduce you to foreclosureradar.com, where you can type in any address and see a map showing the homes in various stages of foreclosure within the specified area. Its very interesting to play with, though the specific data is only available to paying members. I think you can get a sense of your local market by keeping an eye on this, and though of course its not exactly conclusive, its at least a little informative.

Tuesday, September 18, 2007

Eyes On Fed Today For A Cut - How Deep?

As I mentioned last week, today's Federal Reserve meeting is drawing as much attention as I have seen in the past several years. Expectations are really all over the place, and I am expecting to see results right in the middle. Here are some of the popular sentiments up and down the scale of expectations for today:

  • Fed should not hike because of inflationary fears and dollar weakness. The weakness in the dollar is assumed to be inflationary because it will cost more to buy imports. Bernanke has proven the Fed's focus first and foremost on inflation...
  • The Fed is already late in making cuts, and needs to lower Fed Funds by 50 basis points (by 0.500% to 4.750%) to avoid sending our economy into recession. Job growth has been recently weak, inflation is tame, and housing and mortgages are performing poorly. Time to put some slack into the system...
  • The first cut in four years will be 25 basis points (by 0.250% to 5.000%). Also, the Fed will cite inflation as a concern, but should acknowledge that it is presently contained. This strikes a balance between slowly helping the economy without inviting inflation. The Fed should have a green light to cut because their favored inflation measure, the Personal Consumption Expenditure Index (PCE) is under 2% year-over-year. The result of this will likely be a disappointed stock market (expecting the 50 basis point cut), and a mild bond market. In the bond market, it would be preferred that there were no cut in the name of inflation vigilance, but there is room for the 25 basis points, which is already factored in.
My prediction is for something close to the last scenario. But if you are pondering a rate lock decision, you should contact me to discuss your personal situation before acting.

Wednesday, September 12, 2007

Tax Freedom Day

This is a note to everybody, but especially those of you filing taxes on your 6 month extension. Do you know how many days of the year your work efforts are dedicated purely to paying your federal tax bill? Or how many minutes into your workday it takes before you can start earning money for food, clothing... shelter?

Tax Freedom Day - the day in the year where your federal, state and local tax is considered paid for the year, assuming 100% of your salary to date was allocated to that payment - came on April 30 this year, the 120th day of the year. This is two days later than last year. View this Special Report for some good visual tools to help understand what this means, and what other budget items cost on average.

One of the key factors in the decision to go from renting to owning a home is the tax implications. Consumers with lofty tax burdens often seek the write-off of mortgage interest - one of the country's greatest tools to incentivize the American Dream. But just owning the house is only half the battle. Make sure you maximize this deduction over time, and learn to develop a tax-efficient plan for saving and borrowing. You can do this with active management of both sides of your balance sheet. Email me for more info.

Tuesday, September 11, 2007

An Eye Inside Bernanke's Stubborn Stance


PIMCO's Pual McCulley provides some great insight into the mentality of the Fed in this market, specifically with regard to the debate over when to cut Fed Funds and by how much. There are enough voices out there predicting that we are already committed to a recession, and that cuts to the Fed Funds rate will not steer our economy safely away from this fate. Others think we need cuts now, but time's a-wastin'. And then there is Ben Bernanke and the Federal Reserve. Standing firm on their inflation vigilance and sending the clear message to the markets that the Fed does not intend to bail us out. Expectations of impending cuts are riding high, but Bernanke is clearly patient.

Last time the markets hit perilous times, 2000 and the bursting of the dotcom bubble, Alan Greenspan's Federal Reserve stepped in with aggressive rate cuts. This became known as the "Greenspan Put", referring to a psychological insurance policy that was created for investors with the lowered rates and provided stimulus to the economy in the face of otherwise collapsing markets. In retrospect, Greenspan has faced criticism for acting too fast and too aggressively - as well as leaving the "put" in place for too long. Investors didn't have time to learn a proper lesson...

We are the child in need of discipline, Ben is our father. He has sent us to our room without dinner, punishment for reckless misbehavior. And now he must make sure not to starve us, but cannot feed us until the reality of our misdeeds has been realized and imprinted. This is his tightrope, and we wait for the door knob to turn...

McCulley points out that Bernanke is on a mission to redefine the trigger-point for the so-called "Fed Put":

...the goal, which I applaud, is to change consensus expectations about the location of the strike price: further, much further out of the money than under the Greenspan Fed...
Its a great piece to read, and very insightful. With Bernanke due up in 1 hour with a speech from Germany, we should get a glimpse of his mood heading into next weeks big policy meeting. I don't remember a time when there were more watchful eyes on the Fed in the last few years. This will certainly be interesting...

Monday, September 10, 2007

Some Upcoming Relief For HELOC Owners


As of this morning, Fed Fund Futures are showing a 100% chance of a .250% rate cut on September 18th. And because of the weak Jobs Report on Friday, the chance of a .500% cut has risen to around 80%. The chance of the Fed Funds rate being cut by 1.000% by year end stands at 56%.

The Prime rate - which is the underlying index for your HELOC - is 3% above the Fed Funds Rate, and moves in tandem with Fed Funds. Therefore, these cuts will have a direct correlation to the rate on your HELOC, so it's worth noting the expectations.



Tuesday, September 04, 2007

Making Sense Of Today's Market

When speaking with clients lately, it has been made clear to me that the current state of the mortgage marketplace has affected everyone on very different levels. Some people are clearly touched by the panic and have several questions about "what does this mean to me?", while others seem oblivious that this 'credit crunch' thing has anything to do with them now or in the future. More power to them. A panic state - when widespread - is a breeding ground for irrational individual behavior.

The financial talking heads in the media have a few challenges in getting rational information through to the public. For one, many of the faces on the news channels don't always follow it themselves. But when they surround themselves with economists and analysts who do get it, they need to make sure they speak in parlance that the general public can handle. CDOs, RMBS, ISM, and BBB- are not terms that reside within the daily vocabulary of people with professions outside of the financial arena.

To that concern, here are two articles that offer a broken-down explanation of what is going on right now in the mortgage market, why 'the subprime meltdown' affects other areas of borrowing money, the role of the Federal Reserve, etc. You can access them here and here.

Monday, September 03, 2007

Lessons To Be Learned While Countrywide-Hating


Do you remember when we used to party like it was 1999? That was 1999. And then 2000 came, and the stock markets took a digger. A bunch of people lost a bunch of cash, and everyone freaked out about how crazy and dangerous the markets were. Just months earlier, everyone thought they could quit their job to make a fortune day-trading shares of BBQ.com, and other great business latest and greatest IPOs. It was easy while it was easy, and then, the bubble burst.

But what happened after a little time passed? Everyone looked back and said things like "should have seen it coming" and "that was unsustainable growth - had to correct at some point". And this is always what happens in a market cycle. It booms, it busts, and you want to be there while it's booming or your neighbor is going to drive a nicer car than you - and we don't like that. If you are tired of my references to Kindleberger's Manias Panics & Crashes, skip ahead to the next paragraph. Otherwise, please note that the author walks the reader through the common traits of all history's asset bubbles, and many of his lessons are being learned - again - by today's housing market participants. To understand the psychology that drives a market to extremes, he cites a South Sea stock investor in 1720 who said, "When the rest of the world are mad, we must imitate to some measure.", and he generalizes that "There is nothing so disturbing to one's well-being and judgment as to see a friend get rich." No wonder... its in our nature. Monkey see, monkey do. Read it now to put today's market in context with history - and to give peace with the idea that we have seen it all before, and things will get worked out.

Moving along... one of the typical components a market de-bubbling is the scapegoating. Heads need to roll, somebody needs to take the fall, etc. Its formula. And rightfully, there needs to be an understanding of the players involved in creating the bubble. But don't join the witch hunt this time, because chances are you had a piece of the action this go around. I am not going to dispute any of the accused in Barry Ritholtz's list which includes: The Federal Reserve, Borrowers, Mortgage Brokers, Appraisers, Federal Government, Fannie Mae, Lending Banks, Wall Street firms, CDO Managers, Credit Agencies (Moody's, S&P), Hedge Funds and Institutional Investors. Read his paper for elaboration on each participant.

An interesting article came out on 8/26 in The New York Times specifically flinging mud at one of the mortgage players, "America's number one lender", Countrywide. From reading it, it seems some disgruntled ex-employees ran to the press in an effort to expose some of the more eye-popping sales realities of the firm. And if this article is accurate, it would represent a disappointingly low standard of professionalism for an atmosphere where business of a financial nature is to be conducted. But who knows... the media is going to push this kind of sensational stuff to build on the souring momentum of everything connected to this phase of the market.

Keep things in perspective. Stay calm. Great time to read a book.