If you haven't already done so, check out my nesteggr post Bush, FHA, & Pipe Dreams to get an idea of how I feel about the modernization of FHA and the "help" it will render.
Here, I will focus on Fannie Mae & Freddie Mac, the two cousin government sponsored enterprises (GSE) and how some democrats are still calling for Fannie and Freddie to be allowed to increase the size of their portfolios and increase the conforming loan limit which is currently at $417,000.
My issues are as follows:
1) Uh, did anyone notice that Freddie Mac released their earnings yesterday? And that those earning reports were not good? Revenue was down 45% and provisions for loan losses increased by $320 million. I was shocked yesterday that this did not cause a bigger stir than it did. Ok, so their overall portfolio comparable to others in the mortgage market is good but the $320 million was an increase of over 400%. How is that no big deal?
If Fannie or Freddie run into liquidity problems due to defaults...you want to talk about a credit crunch? Nobody will be doing loans. Many people believe the government would bail them out. While that is most likely true, it isn't a fact. Fannie or Freddie could fail.
2) Raising the conforming loan limit only helps a small portion of homeowners. The conforming loan limit is $417,000. That means this is the biggest loan amount that Fannie or Freddie will invest in (buy). Anything above $417 is considered a "jumbo" loan. Raising the conforming loan limit only helps a small portion of the mortgage market. The current median home price in the United States is 223,800 (half of homes are above this price, half below). Most homes, in most parts of the country, should comfortably fit into the conforming loan limits.
Outside of the costs, and some large cities, if you have a $500,000 home (for example), you are considered "well off". If you are indeed "well off", you should have enough money to handle adjustments in your payments. If not, you over extended yourself, you didn't plan, and I don't feel sorry for you.
3) Fannie and Freddie are also pulling in the reins on their financing options. Both recently increased their pricing for their flagship products the MyCommunityMortgage (Fannie) and Home Possible (Freddie). Fannie also announced that they are discontinuing some of their Expanded Approval (EA) products on higher loan to value loans. Not only that but Fannie has raised their pricing on all EA loans regardless of loan to value. Fannie Mae has touted their EA program as an alternative to sub-prime lending. So much for that.
Consider those facts, along with neither company has fully recovered from their accounting issues in the past couple of years to earn the responsibility of expanding their portfolios. I think President Bush said it best a few weeks ago, "Fannie and Freddie are Fannie and Freddie." That is really all you can say.
Friday, August 31, 2007
If you haven't already done so, check out my nesteggr post Bush, FHA, & Pipe Dreams to get an idea of how I feel about the modernization of FHA and the "help" it will render.
Wednesday, August 29, 2007
Yesterday's sell-off was overdone and just plain odd. The market was down over 280 points based on unsurprising news, which was plain dumb. You saw the offshoot of the stupidity today when the market gained over 247 points. And normalcy has returned right? Uh, no. Why?
1) The market is jittery right now. Bears are taking any piece of bad news and magnifying it to doomsday proportions. Any good news and the bulls are off and running. Everyday is a different story.
2) We are at the summer doldrums for the exchanges. Low trading volumes can cause violent swings in the market.
3) The future is very murky. Do you want to predict how Q3 GDP will look, or Q4 for that matter? How will the retailers fair this holiday season? When will we see the bottom of the housing market? Any guess. Yours is as good as any of the experts. Really, it is.
4) What on earth is the Fed really going to do? Lower rates to avoid possible recession? Keep them steady to fight inflation? Who knows? I don't think anyone really knows until it happens.
These are just 4 reasons we are seeing such volatility in the markets. But definitely look for more days just like the past two: down one day to come up the next.
And just for something stupid. Autonation CEO Mike Jackson calls for the Fed to aggressively cut the Federal Funds rate by 2% to avoid recession. First, can Michael Jackson really be a CEO? Secondly, how did he figure that the Fed would need to cut a full 2% to avoid recession? Seems a bit much to me. I had heard as much as 100 basis points but 200bp? I know car sales are down. But is it the rates/economy or dealerships easing back on all the incentives that were out there over the last few years? I'm guessing a combination of the two but 2% is ridiculous. Car makers need to focus on making cars that are more budget friendly in general (payment, fuel, and insurance). CEO Michael Jackson, please join Angelo Mozilo in the, "Please don't speak anymore this year category". Thanks.
Tuesday, August 28, 2007
Today we saw the Dow plunge 280 points and the S&P dropped 34 points based on EXPECTED bad news and analyst downgrades of three major investment banks.
What was expected is what happened, so why the big Deal?
A conference board reading of consumer confidence dropped 7 points to 105 and it's lowest level in a year. This was still better than the 104 analysts had predicted. Here is what I don't get about consumer confidence readings...they are poor indicators of consumers actually changing their spending habits. Look at this headline. Katrina was a singular event that effected consumer confidence but did not change spending. But the news held a cloud over the proceedings and the news continued to roll in.
Home prices dropped the most this quarter than any other in the index history. And is anyone really surprised by this news?
Fed notes from their last meeting were released. I'm not sure why such weight was put on the comments from this meeting. The Fed have issued a statement since their last meetings discussing the downside risks in the market.
Merrill Lynch downgraded Bear Stearns, Lehman Brothers, and Citigroup. All four companies, including Merrill Lynch dropped at least 3.4% today. All these companies are mired in the current sub prime mess to one extent or another. Again not surprising news that a downgrade from "buy" was completed.
American Express was the Dow laggard losing over 4% over concern about rising defaults with the company. Not a shocker. News that American Express was struggling with rising defaults is old news. Remember the company increased their amount held for losses 85% in their last earnings release?
It is going to be an interesting for the rest of this year. The ups and downs are not over, even when news that hit the markets is not totally unexpected.
Posted by Mike Carpenter at 3:22 PM
Monday, August 27, 2007
Welcome to the first installment of The Moderator. The Moderator is a good friend of mine interested in helping out with the blog. He is going to provide actual interviews in a fictional format. He doesn't know these people and have never spoken to them. It's all part of his imagination. He will be interviewing members of the financial community, politics, sports, and some of the pop culture scene on current events. Enjoy!
Moderator: Thank you so much for the intro, as short and unclassy as it may be. I am The Moderator and I am highly qualified to complete these interviews. I have taken journalism courses online. Today, for our inaugural guest, we have former Fed boss Alan Greenspan. Mr. Greenspan it is a pleasure to have you here.
Greenspan: Yes, thank you very much. I'm glad to be here.
Moderator: Great let's get started. Mr. Greenspan what can you tell me about.........
Greenspan: I see a one in three chance of recession.
Moderator: Okay, but that wasn't what I was going to ask you.
Greenspan: Charlie did the stock market sell off? See what kind of power I still have. The markets love me.
Moderator: Right, the stock market isn't doing anything. Nobody reads this blog. But what I was going to ask you is about the rumor circulating recently that you stated you would have cut the Federal Funds rate by now. How do you respond to that?
Greenspan: Totally unfounded. Not true whatsoever.
Moderator: I don't believe you. Your wrinkles are twitching. I believe you said it. It would be a classic case of the "Greenspan put".
Greenspan: I now see a one in four chance of recession!
Moderator: (15 second pause as he stares at Alan in disbelief) Sure you do professor. Any reason why you see a change in the economic outlook of the country within the last 45 seconds?
Moderator: Are you going to respond to the.................
Greenspan: Charlie, what are the markets doing now? Going up? You bet your bottom dollar! Stick that in your pipe and smoke it Bennie Boy!
Moderator: Jealous much?
Greenspan: I like fractions. They seem smarter than percentages.
Moderator: Alan, would you or would you not have already cut the Federal Funds rate by now if you were still Fed chief?
Moderator: Did you just croak like a frog at me?
Greenspan: I don't like you. You have a skinny head.
Moderator: Well, unfortunately, this is going nowhere fast. Thank you for being my guest this week Alan. Look for me next Monday with Chystler's new CEO Robert Nardelli. See you next time!
Posted by Mike Carpenter at 4:17 PM
Sunday, August 26, 2007
If you have followed along I have announced that I have started to build my own portfolio and my first choice was to go with Rydex Russell Top 50 (XLG). The money hasn't been deposited yet and I have changed my mind.
Why you ask? I like XLG, there is nothing wrong with the fund. It has an expense ratio of .2%, when most EFT funds have expense ratios of .53%. But I really don't want so much holdings in just 50 stocks. Mega caps have underperformed their small cap counterparts the last few years and I am enticed because with recent market turbulence I like the idea of mega cap companies. But if I'm wrong, I could be missing out on some good returns.
And I would rather have my risk spread out more than just through the top 50. Most index following EFT's hold most the same stocks, in just much smaller proportions. I have instead decided to go with Vanguard Total Stock Market EFT (VTI). You can see here that it holds Exxon, Bank of American, Proctor & gamble just like XLG but in much smaller percentages. Exxon is the top holding for both funds but exposure to the company is over 7% in the XLG EFT compared to just 2.74% in VTI.
Here is the EFT investment policy:
The Fund seeks to track the performance of a benchmark index that measures the investment return of the overall stock market. The Fund employs a "passive management" approach designed to track the performance of the MSCI US Broad Market Index.
I'm more comfortable with this fund that it is not subject to the volatility of individual stocks as XJG would be. I want to invest and not have to worry. Now as I continue to build I need to be mindful of not having overlap or at least avoid it as much as possible with other investments such as EFT or mutual funds that I purchase in the future.
Saturday, August 25, 2007
Three out of four, thus far. That is how many times my stock portfolio has outperformed the S&P since I started this blog.
What I did Get Wrong
This week was not as rocky as I thought it might be. Trading volumes were low, as they normally are this time of the year, and some M&A activity was seen with E-Trade and TD Waterhouse apparently joining forces. I was wrong on my housing information. New home sales actually posted a better than expected report, with sales actually showing a gain. But I still do not hold much weight in the numbers. We really didn't see the news of a "credit crunch" until the end of July. I don't think we will be seeing an uptrend in sales August.
What I Got Right
The S&P gained 2.3% this week. My portfolio gained just a smidge more than 3%. My big winner this week...Barrick Gold (ABX) posted a solid gain of 8.5%. Las Vegas Sands (LVS) bounced back nicely with a gain of 7.9%. And even my dog, so far, Transocean (RIG) finally put together a nice week with a gain of 4.3%. RIG's gained was based partly on the fact that Hurricane Dean missed the companies equipment in the Gulf of Mexico. It was a good week for most of my picks. In fact, I only had one loser, PepsiCo (PEP) which posted a lost this week of 1.7%. Not too bad.
I promise this will be the last little note that I post for a while, since this is the third in two days. I started this blog a month ago, just hoping to find a voice and maybe get some traffic. I think I have finally hit a groove with how I want my blogs to read. I never expected to be asked to write on another site, such as when Nesteggr came and asked a week into my blogging experience. Full Disclosure: Nesteggr pays for my services. I also started a third blog, Mortgage Bullet, where I am giving advice on the home buying process. It's definitely a different blog structure. Check it out too. I am very excited with my progress and look forward to continue providing content here and on my other blogs. Thanks!
My father has just released his first novel Cold Trail this week! I have added a direct link to Amazon where you can buy the hardback version.
Give some love to my family and pick up a copy.
Pick up your Financial Bullet Merchandise at my cafepress.com store.
I will be adding some additional books from Amazon that I will be recommending as investment reads. I may add a personal favorite outside the financial realm every now and again. So keep your eyes open to what I may be offering up to you.
I will be back to give you my weekly performance and a more detailed reason of my recent EFT pick.
Sorry for such a short post!
Posted by Mike Carpenter at 10:48 AM
Friday, August 24, 2007
Just some house cleaning that I wanted to do. First notice no more Google ads. Adsense is a good idea and a great way to earn some additional bucks…but I don’t have any say on which ads are posted. So, I can be blasting Countrywide (like I tend to do) and lo and behold on the right-hand side is an advertisement for Countrywide mortgages along with other funky mortgage company ads that I would never in a million years endorse. You also got to see the nice Helium.com ads. I think Helium is a bunch of hot air. So I had to put the kibosh on that stuff. Any ads that you now will see on the site are going to be affiliate type links where I choose what you are seeing. And unlike Google ads, I can tell you to click on the ads that are listed. Check them out, no obligation whatsoever.
I am also going to build some Financial Bullet merchandise. I’m definitely offering coffee cups. I can see all two of my readers going, “Why the heck would I want that?” I’m not really sure. But I really like my logo and I’m going to give them as gifts to all my family members this Christmas. If you’re not going to visit the site on a regular basis when I ask nicely, I’m going to have it printed on a flippin’ cup!
I have started my own investment portfolio (for real) over at Sharebuilder. I give my picks here all the time, I probably should put money where my typing is.
Full Disclosure: It ain’t a lot of money and I did not purchase individual stocks. I started with an EFT fund, Rydex Russel Top 50 EFT (XLG). This EFT holds extra large companies such as ExxonMobile, AT&T, Proctor & Gamble, Bank of America, & Microsoft. You can see other top holdings and fund balance here. I think this will give me a great anchor and diversify through many different sectors. I will build a small amount over the next few months and then look for another EFT that I can feel strongly about. Once I get a good amount invested maybe then I will have the confidence to go out and buy the individual stocks that I talk about so much.
Posted by Mike Carpenter at 3:22 PM
Thursday, August 23, 2007
So it is Bank of American coming to the rescue of Countrywide. It isn’t Berkshire Hathaway, that’s for certain. Bank of America’s move shows that some of the liquidity concerns have lessoned over the last few days. Maybe things are getting back to normal. By giving Countrywide $2 billion and in essence stating they are going to back the company BAC pretty much guarantees that CFC is not going bankrupt. I still am not convinced that Countrywide’s stock should be shooting up like it is, because the company will still have to change it’s way of doing business to proceed in the future as I have discussed before.
I am pleased I added Bank of America to my portfolio last week. I think as a move for BAC, this is a homerun. BAC’s $2 billion bought non-voting preferred stock that yields 7.25 percent and can be converted into Countrywide common stock at $18 per share, 17.5 percent below the shares' Wednesday closing price. Sounds like a pretty good deal to me, as long as Countrywide’s stock justifies this price (see preceding paragraph).
Ford Not Having Fun
So not only does Ford have to make a deal with their union by September 14th, they are also concerned about the sales of Jaguar and Land Rover brands. CEO Alan Mulally said that current U.S. economic conditions were a “headwind” to their turnaround plan.
I still believe strongly that Ford is going to get it turned around.
Q2 earnings showed a profit (which was thought to be something that would happen in 2009). The union and the company will ultimately come to an agreement. I understand the union being upset with Mulally’s pay package of $39 million and the average worker is being asked to take a pay cut. But the average benefit for a union worker is $25 more per hour than a Toyota worker. Something has to give for them company to stay competitive.
Jaguar and Land Rover will be sold. Projections now are for the end of the year into early next year (Ford had been saying by September 30). Ford stated that they are also looking at selling Volvo. I am all for that. The company needs to focus on the core business.
July sales were down 17% year over year. You are still seeing some hang over from reducing sales to rental fleets. The good news was the crossovers the company offers sales were up 40% in July. This will continue to improve and new models should start coming into the fold in the next couple of years.
Ford is a stock to add now because the future is going to be brighter than the past.
Posted by Mike Carpenter at 3:50 PM
Wednesday, August 22, 2007
First, before I get into anything else, I have to address yesterday's post about Buffet and Countrywide. I had a change of heart on the stock. See my blog at Nesteggr to see what I mean.
Just take a look at this headline. It's a reminder that this mess isn't just about stock price. I said this in my blog regarding the fall of American Home Mortgage, this is about people. It's a shame to see so many jobs lost. I'm sure that most of these companies made the decisions to slash jobs or shut their doors completely with a heavy heart. It ultimately is the price of doing business. As the old saying goes, "What goes up, must come down."
The mortgage industry had seen unprecedented growth in the last five years and now that the market has soured the inevitable cuts have started to bleed out. It's going to continue and it effects other businesses too.
Toll Brother, KB Homes, Pulte, and a number of other major builders have been reducing their outlooks because they can't sell the homes they have already built. Jobs have and will continue to be lost in home builders. Don't be surprised if one of these names goes under in the next 12 months if market conditions do not change dramatically.
Home improvement stores feel the pinch. Furniture retailers are squeezed. Retailers are already putting warnings out for the second part of 2007 because they are feeling it is going to be a weak holiday season. It's just not sock price. If these companies don't perform, jobs are lost in these areas too.
Yes, it is all tied together. It's not the end of the world. What we are seeing is the natural course of business. The one that it should be allowed to take (are you listening Ben?). But the sad part of the story is that the people who shout the loudest about the pain are the investors who have made lots of money in the last few years and not the ones that are actually feeling it. The people who are losing their livelihoods.
Posted by Mike Carpenter at 5:09 PM
Tuesday, August 21, 2007
The answer is simple. It’s not the origination side of the business.
Consider Countrywide’s mortgage servicing portfolio by itself. Countrywide services $1.4 trillion in mortgage loans. Most servicers “value” their servicing portfolio anywhere between 100 and 200 basis points. In real terms, Countrywide’s servicing “value” is somewhere between $14-28 billion. That is some chunk of change for just collecting mortgage payments and handling escrow accounts. Yes, there is more to it than that, but that is the gist of mortgage servicing.
Now Berkshire Hathaway will not be interested in purchasing the entire servicing portfolio of Countrywide. A good portion of Countrywide’s servicing portfolio is sub-prime mortgages and ALT-A mortgages. Berkshire would be interested in the portfolio of the performing mortgages as not to get dragged down by any of the current mess that has so often commented on. There are other aspects of Countrywide that interests Buffet, such as the companies mortgage backed securities.
But if Buffet can get a portion of Countrywide at a discount now, it’s a win-win situation for the two companies. Berkshire gets to add Countrywide to it’s stable of companies and a company that has delivered good earnings over a large period of time. Countrywide would get some much needed relief.
I do not like Angelo Mozilo but he has built the largest lender, prime and sub-prime, in the country and does not want to see it go up in smoke. I’m sure he would be acceptable to the idea of being brought into the Berkshire stable of companies.
Buffet does not comment on companies that it is buying and selling but Berkshire did recently disclose holdings in both Bank of American and Wells Fargo, the sixth and second largest mortgage lenders. And Buffet told TV network CNBC last week that the worsening credit and housing markets may present some “real” investment opportunities.
Berkshire is not interested in the origination portion of Countrywide. This is the same portion of Countrywide that announced 500 job layoffs and it is my belief will have to trim more jobs before the pain is truly through.
You saw a big jump in stock price today based on the information above. Countrywide has lost about 50% of it’s stock value within the last year. Maybe now is the time to look at Countrywide, even though I don’t like it.
Sunday, August 19, 2007
Expect more ups and downs this coming week in the stock market. Just because Ben & Co. showed that they were at least flexible to current market conditions does not mean that they will cut rates and everything will be okay. The market is still repricing itself and will continue to do so.
The Fed move "cannot fix the subprime mortgage business for financials, it cannot fix the [collateralized debt obligation] business and the unwinding and the de-levering of the leveraged credit and it cannot alleviate some of this asset-backed paper gone bad," said UBS U.S. financials analyst Glenn Schorr.
New home sales for July will be released next week. Don't look for any good news coming out from that. Any other mortgage lenders or hedge funds that report any hint of trouble will cause a sell off to re-ignite.
Also keep an eye on the yen. It raised to 14 month highs against the dollar last week. It sent the Tokyo Stock Exchange to it's worst one day performance in almost 6 years. If the yen continues to strengthen it will cause more pain.
Overall, there may be some good buying opportunities out there. Choose carefully.
Posted by Mike Carpenter at 10:08 AM
Saturday, August 18, 2007
Two out of three ain't bad. The market handed it to my portfolio this week. The S&P ended the week down 1.16%, my portfolio was down 2.1% this week. My big loser this week, ABX, which was down over 10%. Part of the issue was the Barrick was caught up in the credit crunch this week and couldn't get their money that was due to them.
Ford also put up a dismal week down 6% on the week. Again, this stock is going to be subject to roller coaster rides. It may continue to struggle as car sales numbers have been low, especially for the big three and uncertainty about the economy in general may weigh on sentiment on the stock.
Las Vegas Sands also continued to consolidate some of it's recent run up. RIG is still trying to gain some traction with it's stock price. It did see a nice rebound Friday with the price of oil going up and concerns about the US economy slowing down lessoned with the Fed cutting the discount rate.
The only winners for the whole week week: Pepsi Co. & Proctor & Gamble. Pepsi started the week with news that in was in talks to purchase a large Russian juice maker. The stock also handled the middle part of the week well because of it's defensive characteristics. PG benefited from the disclosure that Berkshire Hathaway was holding the stock. Having Warren Buffet on your side must be a good sign right?
And what about my newly added Bank of America? Well, not only did they benefit from the run on Friday in Financials in general but Berkshire Hathaway disclosed they also owned stock in BAC. Berkshire also held Financials such as Wells Fargo and JP Morgan Chase. BAC was up over 6% from my picking the stock on Wednesday.
When I chose BAC, I was torn whether to take BAC, WFC (Wells Fargo), or adding both. I went with BAC based on commentary that I had read seemed to favor BAC over WFC. I would not have lost on either choice this week. And Warren Buffet is on my side.
So even though I was down this week, I am still ahead of the market so far in my experiment. Lets see what the future holds.
Posted by Mike Carpenter at 11:52 AM
Thursday, August 16, 2007
Alright, I've already had a say in what I personally feel about Countrywide. As you can see, they aren't really high on my list. I would actually love to avoid them altogether but that would be ignoring the 500 pound gorilla in the room.
I knew that Countrywide couldn't be doing as well it as it said. They said last week they had access to over 180 billion in liquidity. Today they had to draw down 11.5 billion to help with liquidity issues. Countrywide is sending out a lot of mixed signals over the last couple of days. One day they are strong. The next they can't fund loans. Does this remind anyone of what just happened to American Home Mortgage?
What is really disturbing is that Countrywide is saying they are going to write 90% of loans to conforming guidelines (Fannie and Freddie, max loan amount of $417,000). Fannie and Freddie are the only investors right now that lenders can use to sell on the secondary market. That wipes out huge portions of their current business (sub-prime, Alt-A, and jumbo loans). I hope they have their pink slips ready because they aren't going to have work for everybody.
I had a personal issue today where a member called me to set up an appointment for application to purchase a home. They had been trying to go through Countrywide and were informed today that the product they were on was no longer being offered. I spoke with my Vice President of Operations and he said that he strongly feels that Countrywide is going to go into Bankruptcy if liquidity issues continue to plague it.
And how would Countrywide like to end a perfectly awful day? With a class action suit of course.
What is going to be Countrywide's ultimate fate? I think the next couple of weeks are going to tell the true story. You will know then if Countrywide is going to be able to continue on (as a much different lender) or have to fold up shop and go into bankruptcy (and maybe re-emerge as a much different lender). Either way, things are changing. But not me. I still don't like Angelo Mozilo. He sold out most his stock in Countrywide. And remember, he was on the board of directors at Home Depot as recently as last year. How did Home Depot do during his tenure on the board? Ask Robert Nardelli, he got rich and went off to ruin Chyrsler. I guess if Chyrsler can be ruined. But that is a whole different blog.
Posted by Mike Carpenter at 3:35 PM
Tuesday, August 14, 2007
I have been telling you since I started blogging (all of two weeks) to avoid the financial sector as I feel the market has not totally discounted all the pain that is yet to come. I do, however, see some stocks that I like priced at a discount.
Dan H over at Nesteggr gives some of his choices including Bear Stearns, Goldman Sachs, Bank of America, and Piper Jaffray. I think he does an excellent job of giving a reason for each. Now he personally owns PJC so he makes a stronger case for them, of course.
I also like Dan's other blog, The Curious Investor. I am adding it to my blogroll. Dan gives excellent technical analysis of individual stocks and EFTs.
Now I have written that I like Bank America (BAC) before. Today, I am going to add B of A to my portfolio. I do think that we may have a rough patch ahead but B of A trades at a lower P/E ratio than banks and it shouldnn't. I have a time frame on this stock of 18 to 24 months, that should give us plenty of time to ride out this rough patch and give the stock a chance to catch a bid higher.
Posted by Mike Carpenter at 2:44 PM
Monday, August 13, 2007
The Option ARM is known in my part of the world as a "California loan". This can also be said of the 40 year and yes, the 50 year fixed rate mortgages. These are loan products that were created for high cost areas, where buying a home was almost impossible unless you did some sort of creative financing.
The article here shows why the product is so dangerous. This was a product that never should have gotten off the ground. It depended solely on the idea that the home would increase in value within the duration of the fixed teaser rate period. If this happened, viola, you had equity in your home and never had to pay anything but interest toward it. But what has happened is a different story. Values have gone down in the once hottest markets in the country and now those individuals who took out interest only loans owe more than there home is worth. Owing more than what the home is worth makes finding a new loan almost impossible and ARM loans are built to go up over time.
It's a sad story to be sure, however, there are people who used these products in areas of the country that there was no reason to be used. I am from Indiana. We did not see a vast increase of property values during the boom years of 2001-2005. The homes in our state are some of the most affordable in the country. There is no reason to write an option ARM in my market based on those two facts. However, I have seen many people take advantage of this product so that they could move into their dream home and are facing an ugly ending when their home will be taken away if they are not able to keep up with the ARM payments.
The boom years will have a fall out over a number of years. My advice, save for a down payment no matter how minimal. Go to a bank or a credit union for your loan. Stay away from brokers. Do your homework before going out to look at homes or apply for a loan.
Posted by Mike Carpenter at 5:25 PM
Saturday, August 11, 2007
We beat the S&P this week again but by a much smaller margin than last week. With all the turbulence in the markets right now it is amazing that the S&P ended the week with a .77% advance. It is especially amazing since the S&P's most heavily weighted sector is Financials. That sector has been in the market this week if you haven't heard.
We ended the week up 2.2%, thanks mostly to Las Vegas Sands (LVS) again. LVS gained 9.95% for the week, even though it was down over 7% Friday alone. It has been on an amazing run for the last month, so it is not surprising to see some money taken off the table.
Here is a comment about LVS made by Zach over at Nesteggr:
LVS has had quite a run - Nice pick.
I was reading their annual report the other day and stumbled onto something a bit disturbing. In 2017, the government in Macau has the right to basically begin seizing the property from LVS. There is not any recourse or payment necessary for this to take place. This is not to be an alarmist as LVS could continue to negotiate with the powers that be, and there is a lot of money to be made in the meantime, but definitely something to keep on your radar if you plan to hold the stock long-term. The Chinese government and the customs in that part of the world are very different than our westernized practices. It will be interesting to see how this story unfolds over the next several years.
I think this is an interesting item that needs to be filed away in the old memory bank but my interest in LVS is really on a time frame of 12 months. I am keeping an eye out on China's economy (not to mention our own) and look forward to what will transpire after the Chinese host the Olympics next year, hence the 12 month outlook. Once I have a feel for the economies of the two countries I will be evaluating LVS closely.
I still haven't had a good idea with small cap stocks. Small cap stocks are scary and have really been battered recently. I want to have some, probably not more than two companies, so I can have exposure to the oversized gains these companies can realize, while also limiting the risk of my overall portfolio.
Thursday, August 9, 2007
Ben Bernake's soothing of the markets lasted just a little more than one day. Then BNP Paribas said that they were unable to value three of there funds and suspended investor withdrawls. Central banks from around the world injected billions to dollars to help with the liquidity crunch. It was off to the races for a down market from there. The market ended the day down 387 points, the second worst performance of the year.
Goldman Sachs, considered the Rolls Royce of investment banks, has even been under pressure the last two days as rumors have swirled that the company may shut down one or more of it's hedge funds. Goldman Sachs has denied this rumor.
My advice, stay away from financials. I do not believe for a moment that the true risk has been priced into the this sector. Financials had jumped the prior two days based on investors take on the Fed's probable rate cut. Currently, the market is pricing in 100% chance of a cut in September. If current market issues persist, do not be surprised to see a cut in the meantime. Otherwise, things could get uglier in the next 6 weeks.
See my Nesteggr blog to see what stock sectors you should be looking at right now.
Posted by Mike Carpenter at 4:43 PM
Tuesday, August 7, 2007
I like that Ben Guy
This is not Alan Greenspan’s Fed anymore. Ben Bernake & Co. hit a home run today, by doing nothing. With the market pretty much evenly split on whether the central bank should lower rates to give some support to the fixed income sector or keep the rates at current levels or higher due to the risk of inflation (and not to mention those tired of bubbles), the Fed did nothing and pretty much appeased both sides.
What Ben & Co. has been saying for over a year is that inflation is their biggest concern. Pretty much every analyst was certain the rate would not move today but were looking forward to what the Fed had to say about the mortgage mess, and the financial market. Many analysts were expecting the Fed to say something along the lines of that downside risks were now equal to the risk of inflation. If the Fed had made this statement, they tip their hand too much and scream, “Next move, DOWN!” The stock market would have shot straight up and treasury bonds would have been pummeled. If the Fed made no mention of the condition of the financial markets or made a firm statement that no change was coming, you would have seen a flight to quality in treasury bonds and the stock market sink.
What the Fed did was pretty slick. Here is the exact statement:
"Although the downside risks to growth have increased somewhat, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."
So think of it this way. The Fed holds the keys to both in “Increase” door and a “Decrease” door. They have been holding the “Increase” door open for 17 straight increases and a year’s worth of doing nothing. The “Decrease” door has been shut and locked up tight. The Fed kept the “Increase” door open but the have unlocked the “Decrease” door. It’s not open, but at least there is a chance.
At first the market reacted negatively to the statement with the Dow sinking more than 120 points in the first few minutes of the statement being released but then the market rebounded and gained. The market ended the day relatively flat. The same can be said about the treasury market.
So in a day that could shape the future of the economy for the next few months, the Fed did nothing, and nothing happened to the markets. Which is exactly what the Fed was hoping for.
Monday, August 6, 2007
You can finally find me on Google. Search under financialbullet, all one word and presto the third link down is me. I took part of the homeowners carnival and they used my blog The Fall of American Home Mortgage for this carnival. Pretty cool.
Did you check out gaming today? Las Vegas Sands (LVS) added another 5% today and WYNN my pick over at nesteggr was up over 6% today and have reported blow out earnings for their most recent quarter and is up another 10% in after hours trading. Expect LVS to get another nice boost in their stock price because of this news (it is up 3.8% in after hours trading)
Transocean (RIG) was my only down position today. Oil was down over 5% over concerns of a slowdown in the United States economy, so they would follow.
If you have any questions regarding any of my picks or have any questions related to the sub-prime arena or just have any questions regarding mortgages, let me know. I'd be happy to give a reply.
Also if you like what you read here or at nesteggr please sign up for a feed. I'd really appreciate it.
Posted by Mike Carpenter at 6:45 PM
Sunday, August 5, 2007
Now I started this blog to see if I really knew what I was doing in the stock market. I am using my knowledge of the overall market using my expertise in mortgage lending to guide me. For full disclosure, I own none of the stocks listed in my portfolio.
With a wild week behind us, two late day rallies on Wednesday and Thursday and the overall market decline of 281 points on Friday my portfolio actually showed a profit of 1.8%. The S&P which is the standard comparison was down 1.8% for the week. So I beat the market this week by 3.6%. Not a bad start.
I'll start with the winners. Las Vegas Sands (LVS) showed a gain of 11.87% for the week which was my top gainer. Las Vegas Sands is an exciting stock right now. I look to see this stock continue to soar. I think you may see LVS get another boost to the stock if Wynn Resorts (WYNN) has a strong earnings report this week. WYNN is my stock pick over at Nesteggr. Allergan was my second biggest gainer showing a gain for the week of 9.87%. Allergan had reported better than expected earnings and have gotten an outperform rating looking for the target price of $67.
Transocean (RIG) was my big loser of the week at 8.95% loss even though the reported strong earnings. The company issued cautious forward looking guidance and the stock sold off with that news. As I said before, I really like RIG and their acquisition of GlobalSantaFe puts them in a fantastic position to really expand their operations. I would be tempted to buy on the dip here but I'll it give another week before giving any guidance of how to handle RIG.
Ford (F) was all over this week. I reported that they were up over 6% based on a rumored sale of Jaguar, Volvo, and Land Rover, but it was also based on a positive earning report from GM. The pop was short lived as they reported a 19% drop in year over year sales later in the week. Ford lost 2.07% this week overall. Ford still has plans in place to move Jaguar and Land Rover by the end of September and Volvo by the end of the year. This may be overly hopefully with the state of the debt markets right now. If they are able to move them, it will be good news for the stock. But to the downside Ford had recall issues also arise this week. Expect volatility for the next few quarters. I think that you will really start to see the upside start some time next year.
Most of my other stocks didn't have a lot of news come out. Proctor and Gamble (PG) did report better than expected and an expanded share buyback plan.
I am actively looking to get some small cap exposure to round out my 10 picks but I want to be careful right now. As soon as I have a pick, you will know about it.
Posted by Mike Carpenter at 6:30 AM
Saturday, August 4, 2007
I know that it seems that I just got started here...and emailed everyone I know to come and check me out but I have been asked to join the nesteggr community. Nesteggr is a financial blog that I think that I can fit right in.
Come check out my first blog on nesteggr here.
I plan to still write on this blog but it will not be everyday. I will continue with my play portfolio on this blog and give you my take on performance and new picks and selling positions. I will also start building a separate portfolio on Nesteggr. I can use two different strategies and see which best fits my style.
And don't forget to subscribe to both this blog and my nesteggr blog if you like what you see. I'm not above shameless plugs.
Posted by Mike Carpenter at 5:50 AM
Thursday, August 2, 2007
Five out of six of the largest sub-prime lenders have pulled the plug on the 2/28 Adjustable Rate Mortgage (ARM), the one time favored product that has come under harsh criticism from private consumer advocate groups and Congress in the recent months.
I have had numerous people in the last year come into my office trying to refinance off of this product. Many had already gone through the first adjustment of the loan and were stunned by the amount their payment had increased by. Others had just gotten their notice about about the interest rate change and some were trying just to get out as soon as they could before anything happened.
The allure of the 2/28 is simple. It gives a competive rate and can help many credit challenged borrowers get into their new home. It does this by offering a short term fixed rate, which are the first two years, then can adjust either annually or every six months. Most of the 2/28 ARMs I have seen also have a pre-payment penalty associated with them. The pre-payment penalty normally covers the initial two years of the mortgage. I have seen a few that have actually had a pre-payment penalty that exceeded the initial fixed portion of the loan by a year. Talk about a double whammy.
Good in principle, Bad in practice
The idea of the 2/28 ARM is fine. The product helps those with weaker credit get good rates . The goal of this loan is to get the borrower into the home and gives them two years to get their credit straightened out so that when the adjustment time comes their credit scores have rebounded to the point where they qualify for a traditional prime rate mortgage. The issue arises when looking at how the product was utilized during the height of the boom. Loans using stated income or no income verification came into vogue which makes these loans even more dangerous. If you aren't verifying to see if the person can really afford the new house payment, you are setting them up to fail. The fault lies with everyone involved in the loan. The lender is trying to write as many new loans as it can before the market changed (everyone knew the boom couldn't last forever), the originator was pushed by the lender, the buyer, and money, and the buyer was at fault because they should have known better than getting into a home they couldn't afford. I know that some people were ruthlessly taken advantage of. I have run across my share of those unfortunate souls. But a vast majority of the people in this position did it because they wanted to take part in the party. Most knew that they were in ARM loans, they just thought everything would turn out alright in the end. They wanted to own their own home rather than rent. They wanted to upgrade. Whatever the reason they did it, they still took an active part.
I'm not blaming the borrower for this mess, far from it. It is the lender's responsibility to make sure the borrower knows both the pros and the cons of doing an ARM loan. But many originators/brokers are more interested in completing all the loans they can. Those of us who care more than about money have had loans approved that we have thought in our head, "We are going to end up with this house back." But when a loan is approved, it's approved. It's then up to the borrower to make up their own mind if it's in their best interest to make the loan.
Posted by Mike Carpenter at 2:53 PM
Wednesday, August 1, 2007
I have never worked a day in my life for American Home Mortgage but I sure feel like I did. The spectacular fall yesterday of the company’s stock price, plunging 90% in one day, and the near certain bankruptcy filing that the company is going to go through leaves me with a feeling of sadness. Twenty months ago American Home Mortgage bought out Waterfield Mortgage Company, at the time the largest privately held mortgage company in the country.
Waterfield is the company that I really got my start. I survived the refinance/mortgage boom at Waterfield. I learned the mortgage market there. I learned pretty much everything I know financially while I worked at Waterfield. I owe them the job that I have now, even though it was at the expense of my job with them. So when American Home Mortgage swept in and bought my company, it was the end of Waterfield. 850 jobs were lost and only 100 remained or were able to latch on with American Home. A lot of my friends were left out in the cold and never saw it coming.
Even with the staggering number of jobs lost in our market there was some hope. American Home had not ended operations in our market altogether. One hundred people still had their jobs and better yet in the last 6 months American Home had added 55 more and were advertising that they were hiring for a number of positions. They were even bringing back a number of old Waterfield employees, including a couple of very close friends.
But the fact remains, everyone who has worked in the mortgage market, who has any idea how the market works, knew that the fallout we are starting to see was going to happen. It was just a matter of when and who. And this isn’t the end of the fallout. This won’t end with American Home Mortgage. Lenders, Builders, and Investors are all feeling the crunch. Many more will not survive. News today that Beazer Homes likely will not survive this downturn surfaced and their stock stumbled significantly. Beazer disputes the claims of imminent bankruptcy. And the fed isn’t coming to bail them out this time either. They created this mess to begin with. This really is the fallout from the stock market bursting in 1999/2000.
This has more ramifications than just stock price, the interest rate you pay on your mortgage, and whether you get an adjustable rate mortgage or not. It has to due with people. Anyone who has a mortgage in process with American Home Mortgage is going to have to find a new lender. Brokers who work with the company will have to find someone else to send their mortgages through. Jobs are lost. Friends are impacted. I'm sad today because American Home Mortgage was all that I had left of Waterfield, and that too has been taken away.
Posted by Mike Carpenter at 2:52 PM