Do You See What I See?

Peter A. McKay reflected on a pattern today which I noted yesterday and on Nov. 8th:

The Dow suffered a drop of about 60 points as Mr. Obama was speaking -- a pattern that has emerged following his other post-election press conferences. But as has been the case in every full day of trading that has included remarks from him, the Dow on Tuesday eventually returned to and exceeded its level prior to his comments by the time the closing bell rang.

Mr. Obama gave a second press conference in as many days, this time naming Peter Orszag as his budget director nominee. Yesterday, he announced his choices for Treasury secretary, as well as the heads of National Economic Council and Council of Economic Advisers.

Obama Speaks, Market Listens

Peter A. McKay writes:

Mr. Obama officially announced his economic team in a press conference that ended around 12:30 p.m. Eastern. As he spoke, the market gave back about a third of its gains but remained solidly in the black.

Is there a pattern here? One guess would be that those who pay attention to Mr. Obama's press conferences are bullish on his administration. While they are away--listening to his remarks--trading is dominated by bears who push prices down.

What Housing Overhang

Housing starts fell to lowest level since World War II, but you wouldn't know it driving around Silicon Valley.

Home values here are 50% off their peaks 2-3 years ago. My next-door neighbor has had his house on the market since June and has reduced his asking price twice. He has no takers. His isn't the only house for sale in the area. Meanwhile, I pass three separate construction sites on my 5-mile commute every day. Between them, these three sites have 200 housing units. What we have is not simply weak demand coupled with abundant supply. What we have is a guaranteed pipeline of oversupply. My prediction is that home prices won't start rising until this pipelined capacity is absorbed.

The good news is that new construction, and its progress, are easy to observe. A foreman at the Nexgen site, the farthest along among the three, said he expected to finish in 6 months. I expect work to continue for a year or more at the John Laing site. It may take longer to sell the properties, but again the process is easy to gauge. If no new construction spurts by then, it will be a reliable indicator of a housing bottom. I expect to see rising prices when I stop seeing construction sites.

Here are the addresses of comanies mentioned in this article:
John Laing Homes
Shea Homes
Nexgen Builders

Mother of All Disclaimers

I opened an account with a futures brokerage recently. I received the following email from them. I guess they wanted to make sure my email didn't bounce. It shattered my previous record to signal-to-disclaimer ratio.

Subject: FW: Email test
To: undisclosed-recipients:;

No need to reply .
DISCLAIMER: [redacted] is a US registered futures commission merchant and a member of the NFA and is a US registered broker-dealer and a member of the CBOE, FINRA and SIPC. Except as otherwise indicated, references to [redacted] also refer to all affiliates of [redacted] (collectively "[redacted]"). [redacted] does not warrant the correctness of any information herein or the appropriateness of any transaction. The contents of this electronic communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to sell or a solicitation to buy any futures contract, option, security, or derivative including foreign exchange. The information is intended solely for the personal and confidential use of the recipient of this electronic communication. If you are not the intended recipient, you are hereby notified that any use, dissemination, distribution or copying of this communication is strictly prohibited and you are requested to return this message to the sender immediately and delete all copies from your system. All electronic communication may be reviewed by authorized personnel and may be provided to regulatory authorities or others with a legal right to access such information. At various times, [redacted] or its affiliates may have positions in and effect transactions in securities or other financial instruments referred to herein. Opinions expressed herein are statements only of the date indicated and are not given or endorsed by [redacted] unless otherwise indicated by an authorized representative. Due to the electronic nature of electronic communication, there is a risk that the information contained in this message has been modified. Consequently, [redacted] cannot guaranty that messages or attachments are virus free, do not contain malicious code or are compatible with your electronic systems and [redacted] does not accept liability in respect of viruses, malicious code or any related problems that you may experience. Trading in futures, securities, options or other derivatives, and OTC products entails significant risks which must be understood prior to trading and may not be appropriate for all investors. Please contact your account representative for more information on these risks. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance. Privacy policy available upon request.

Note the self-referential nature of electronic communication. Emphasis mine.

I've Seen the Future, and It's GM

No Photoshop, this is a real GM ad. Scary, ain't it?

The Next Shoe

Yesterday, Jon Hilsenrath wrote that banks keep lending, but that isn't easing the crisis. He points to a recent paper by Harvard Business School economists David Scharfstein and Victoria Ivashina which says, by way of introduction:

There appears to have been an increase in drawdowns of revolving credit facilities. Many of these drawdowns are undertaken by low credit quality firms concerned about their access to funding.

Mr. Hilsenrath comments:

With [credit] markets shut down, they're drawing on existing credit lines to meet financing needs or simply to have money in reserve in case they need it later. [..] Individuals might be using home-equity lines in the same way, tapping them for cash while the lines are still open.

The "credit crunch" we are in started with residential real estate. Weaker borrowers found that they could no longer refinance their homes at higher valuations, and thus were unable to fund current obligations through continued borrowing. They were forced to sell (or default and have their lenders sell) their properties at lower valuations. Lower valuations made credit harder to come by, and the cycle is still unwinding. The graph Mr. Hilsenrath plots based on Federal Reserve data scares me because it may point to a coming acceleration in that cycle.

While the going was good, borrowers established "just in case" home-equity lines of credit based on then-current, high appraisal values. Lenders were eager to lend, and some were unrealistically optimistic in their appraisals. The credit limits on these lines have not been revised. They allow homeowners to turn back the clock and borrow sums that vastly exceed their present equity.

The 20% spike in "revolving home-equity lines" on the right-hand side of the graph suggests to me that in recent months there has been an increase in the number of borrowers who are "under water," or have negative equity in their homes. This increase came about not (only) through falling property values, but rather through continued borrowing at bubble-era financing standards. In effect, these owners used their one last chance to refinance their way out of foreclosure.

Some of these new borrowers have steady income streams and will have no difficulty meeting their increased monthly payments. But I expect that some will simply burn through the cash they've just borrowed and default then, inevitably dragging property values lower still, pulling the "deleveraging" cycle tighter.

The ridiculous loans banks made during the housing bubble were like an anchor with a line attached to it, in the form of (no pun intended) lines of credit. We've thrown the anchor overboard, and I expect a jolt when the line feeds out.

Not Even This

Somali pirates hijack Saudi tanker loaded with oil and front-month crude slides $2 to under $55 a barrel, a fresh 22-month low. One wonders what could lift prices.

That said, you've got to be wondering about these pirates. I wouldn't go messing with the Saudis or stealing from them if I were a pirate. I hear Saudis can hurt people they don't like, and I hear Saudi jurisprudence is swift.

I know this sounds crazy, but if you were Saudi Arabia and you were desperately trying to prop up the price of oil, wouldn't you be willing to pay "ransom" to the pirates to hijack a tanker you owned? As long as you pay the pirates less than you expect to make in profit from the rise in oil prices, you'd win no matter whose idea the hijacking was. Maybe the pirates are smart after all.

Then again, oil went down, not up, after this stunt. Whoever came up with the idea, oil bears yawned at it today.

How Bad are Luxury Car Sales?

A Porsche dealership in Redwood City, Calif., tonight.

---

Same dealership, a week later, with a better camera. Lights still out.

The Kaliningrad Euphemism

There's been a lot of talk lately about Russia's plans to deploy new missiles in Kaliningrad Oblast. Alan Cullison's description in today's Journal is typical:

Kaliningrad is a Russian enclave in Europe that borders NATO members Poland and Lithuania

The exclave district is two countries away from Russia proper and, 17 years after the breakup of Soviet Union, is still named after a Communist party boss. Maybe the Russians were too embarrassed to give the city its original name back.

The city's real name is Königsberg, and the district is East Prussia. It was a part of Germany not given to Poland after WWI and existed as a German exclave between the world wars. The Red Army occupied East Prussia and Königsberg in 1945 and proceeded to loot, rape and deport what was left of its civilian population, Russify the district and rename it. There are no ethnic Germans in East Prussia today. It remains the last piece of Europe still occupied from WWII.


(Map from this BBC article)

What Do You Want to Finance Today?

Microsoft to Offer 0% Financing For Its Business Software, reports Kerry E. Grace.

Hell, it worked so well for Detroit, why not Redmond?

Oil prices hit lowest points in almost two years

New York's light sweet crude on Wednesday slid to 56.35 dollars a barrel -- a level not seen since March 2007.

[..]

"If these prices continue... many projects will be postponed" and there will be an "energy crisis in two years," Libya's Oil Minister Shukri Ghanem told AFP by telephone. (afp.google.com)

What I hear: panic.

I Can See it Clearly

Markets Rally Despite Gloom, Peter A. McKay tells us:

In his first press conference since the election, President-elect Barack Obama focused on economic issues. [..] The Dow trimmed its gain from about 250 points to about 80 points while Mr. Obama was speaking, but it recovered almost all its gains by the closing bell. (emphasis mine)

What I forecast: he's going to do a lot more talking in the next four years.

The Hedge Funds are Selling, the Hedge Funds are Selling

Hedge Fund Selling Puts New Stress on Market, Jenny Strasburg and Gregory Zuckerman report:

Hedge funds have emerged as the latest serious problem in the global financial system. As their losses mount, they're selling off securities to meet demands for cash from lenders and investors. Compounding the problem is a surge in notices from investors indicating they want out.

What I hear: volatility is an euphemism.

It's tempting to write off recent declines as a fluke of short-term (and short-sighted) hedge fund speculation. If it's volatility, the market will turn around and swing back up, right? The shorts will have to cover, right? Wrong. These don't look like shorts going short. These look like longs going flat. The funds are selling because their customers tell them they want out of the funds, that is, out of the market. Many of these customers are long-term investors. Many of these "hedge funds" are net-long funds in all but name.

So: long-term, net-long investments are being liquidated. Blame the hedge funds if you prefer. When will the selloff end?

The University of Virginia, with an endowment of $4 billion in mid-October, recently said it plans to sell $400 million of its $1.8 billion in hedge funds in the next couple of years to fulfill commitments to other investments. (ibid, emphasis mine)

Sustainable Capitalism

In their post-election op-ed, "We Need Sustainable Capitalism", Al Gore and David Blood said:

Forty years ago, Robert F. Kennedy reminded Americans that the Dow Jones Industrial Average and Gross National Product measure neither our national spirit nor our national achievement. [..] As he put it, "the Gross National Product [..] measures everything, in short, except that which makes life worthwhile." (emphasis mine)

What I hear: Don't bet on either GDP or Dow growing if you want your life to be worthwhile.

They used a couple of terms I hadn't heard before, including "short-termism", the "need to internalize externalities". From the context, I understand the former to mean "quarterly earnings, instant opinion polls, rampant consumerism and living beyond our means;" the latter, putting "a price on carbon." They also spoke of "the building of a 21st century Unified National Smart Grid, and the electrification of our automobile fleet." Now "electrification" is a word I have heard in this context before. In 1920, Vladimir Lenin explained:

Socialism is the Soviet power plus the electrification of the whole country.

A simple algebraic transformation shows that, according to Mr. Lenin, Soviet power is Socialism minus electrification. I wonder what is Capitalism minus Dow and GDP, according to Messrs. Gore and Blood.
Gore & Blood?

The Carter Bounce

Annelena Lobb asked yesterday, "Will stocks rally with a new face in the White House?"

There are two relatively recent historical precedents for the current election, where a new president will take office amid a serious financial crisis. [New president] will confront ugly economic challenges like Franklin D. Roosevelt did after his 1932 victory and Ronald Reagan did in 1980.

The Dow Jones Industrial Average rallied in Mr. Roosevelt's first year and fell slightly in Mr. Reagan's.

The article focused on economic situation leading up to elections. It may be instructive to look at another recent precedent, one with political similarities. In 1976, an unpopular Republican president ran against a Democratic outsider.

The markets fell in the run-up to the election but stabilized and even rallied when Mr. Carter's lead became apparent. They rallied again after the election, but the rally was short-lived. The Dow made a high of 1008 on Jan. 3rd, and it was downhill and then sideways for the rest of President Carter's term. Dow didn't reach 1000 again until after the 1980 presidential election.

OPEC Blues

The president of the Organization of Petroleum Exporting Countries, Chakib Khelil, on Sunday said the cartel's recently announced production cut "will take a long time to take hold" and shore up prices because demand for oil remains below OPEC's revised production level, Agence France-Presse reported. (WSJ, 11/3/2008, emphasis mine)

What I hear: production cut on Oct. 24th didn't work, we don't expect it to work "anytime soon," and our main tool for manipulating oil prices, production quotas, are effectively useless because demand is lower than even our decreased quotas.

Ex-President Obama

I was trying to imagine what Barack Obama might do when he retires from the Presidency he will presumably win tomorrow. He will be either 51 or 55--many years of productive life ahead of him. I tried to picture him as an ex-President community organizer. Tried to picture him back in Congress. Even tried to picture him pulling a Taft and becoming a Chief Justice. I'm pretty sure he won't go shooting elephants in Africa when his term is up like Teddy Roosevelt did.

Few compare Barack Obama to Theodore Roosevelt. Some have compared him to Franklin D Roosevelt, and some to John F Kennedy. Reformers both, and Sen. Obama shares JFK's youth. What would JFK do in retirement? I'm so used to the image of JFK shot in 1963, I have to stretch my imagination to think about what he would have done in old age.

FDR, JFK, BHO... Here's hoping that if Joe Biden ever becomes President, it will not be through the Twenty-fifth Amendment.