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How it will end.
Old 07-13-2008, 05:31 PM   #1
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How it will end.

I was in the middle of composing this reply when Rich (understandably) close the tomorrow's market thread.

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Originally Posted by Enuf View Post
My wife went to cash in mid-Oct, not peak, but close enough to be very smug right now in her refusal to openly gloat at my "all-index, Bernsteinian Portfolio" performance.

So, I need a good positive scenario to make me feel emboldened to predict a glowing recovery for my portfolio that will surpass her performance. I'm down 19% since Oct and she is up 4%.

I keep mentioning the ravages of inflation that are eating her alive but she isn't feeling my vibes.

Can someone paint a less than 3 year positive scenario? For instance...
....

I'm hoping for all that but can anyone tell me holding my VTI, VEU, VWO, BNDS port is going to be a winner over her CD/MM port?
I can't tell you when this will end, but I can tell you HOW it might end, and it does not involve world peace, or <$100 oil.

The Fed is doing everything possible to re-inflate the money supply and re-establish credit. This includes things (e.g. brokerage take overs, access to the Fed funds for non-banks) that most of us didn't even know they could do.

This cheap money is causing inflation, which we can see not only at the gas pump, or grocery store, but in most every commodity. The bond market also sees this hence the 0% coupon rates for I bonds.

So in an inflationary world what does the average American do? (after they are finished despairing.) Keeping money in CD or money market is horrible they only pay 2-3% well below inflation. The stock market looks scary.
Ok a few brave souls will purchase commodities, but the average American or even the above average affluent American (i.e. board members) is hesitant to buy an OIL or Corn future, or even an OIL ETF.

Many Americans will say screw savings I am going to spend. This isn't a bad thing for the US economy. However, a bunch of folks will invest in the one commodity that most Americans are comfortable purchasing, a house.
The logic for this is pretty compelling, historically houses do well in times of high inflation. (one of the crazy things about the housing bubble was the lack of inflation) As housing prices stabilize, foreclosures will decrease especially with the artificially low mortgage rates turning most ARM resets into non-events. Lower foreclosures obviously shore up bank balance sheets. Stronger banks will lead to a stronger market. Does this happen within 3 years? I think so.
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Old 07-13-2008, 06:31 PM   #2
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As housing prices stabilize, foreclosures will decrease especially with the artificially low mortgage rates turning most ARM resets into non-events. Lower foreclosures obviously shore up bank balance sheets. Stronger banks will lead to a stronger market. Does this happen within 3 years? I think so.
I'll take that scenario. Will it happen like this? I have no idea.
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Old 07-13-2008, 06:47 PM   #3
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I think it will play out as you described. As a (part time) real estate investor, I see so much pain out there...short sales as far as the eye can see, all 20% below the loan values (which is about $100k where I invest, in MA and MD). In order to save the banks from a blood bath the Government has to find a way to stabilize prices. I am looking hard for evidence of above-average wage inflation because this will help rents and housing prices.
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Old 07-13-2008, 06:48 PM   #4
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Quote:
Originally Posted by clifp View Post
I was in the middle of composing this reply when Rich (understandably) close the tomorrow's market thread.



I can't tell you when this will end, but I can tell you HOW it might end, and it does not involve world peace, or <$100 oil.

The Fed is doing everything possible to re-inflate the money supply and re-establish credit. This includes things (e.g. brokerage take overs, access to the Fed funds for non-banks) that most of us didn't even know they could do.

This cheap money is causing inflation, which we can see not only at the gas pump, or grocery store, but in most every commodity. The bond market also sees this hence the 0% coupon rates for I bonds.

So in an inflationary world what does the average American do? (after they are finished despairing.) Keeping money in CD or money market is horrible they only pay 2-3% well below inflation. The stock market looks scary.
Ok a few brave souls will purchase commodities, but the average American or even the above average affluent American (i.e. board members) is hesitant to buy an OIL or Corn future, or even an OIL ETF.

Many Americans will say screw savings I am going to spend. This isn't a bad thing for the US economy. However, a bunch of folks will invest in the one commodity that most Americans are comfortable purchasing, a house.
The logic for this is pretty compelling, historically houses do well in times of high inflation. (one of the crazy things about the housing bubble was the lack of inflation) As housing prices stabilize, foreclosures will decrease especially with the artificially low mortgage rates turning most ARM resets into non-events. Lower foreclosures obviously shore up bank balance sheets. Stronger banks will lead to a stronger market. Does this happen within 3 years? I think so.
Sounds right to me. Housing prices come down to more affordable levels, people buy them, a few homebuilders and lenders go belly-up, and life goes on. I really don't see this situation as the deep crisis many others do--this country has endured much worse and survived.
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Old 07-13-2008, 06:54 PM   #5
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This is fun.

Really I don't know. I suspect all of humanity one way or another would like things to be positive and prosperous.

I'm going to guess this down turn wont be much longer than the other bear markets. As history has shown if you kept buying stocks you would have been ahead of the game.

Of course it could be different this time. Sorry to be such a stinker

I look at my lifestyle and have to chuckle at what other humans have had to endure during the course of history.. I mean grimace not chuckle..... I have it pretty well
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Old 07-13-2008, 07:04 PM   #6
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I think it will play out as you described. As a (part time) real estate investor, I see so much pain out there...short sales as far as the eye can see, all 20% below the loan values (which is about $100k where I invest, in MA and MD). In order to save the banks from a blood bath the Government has to find a way to stabilize prices. I am looking hard for evidence of above-average wage inflation because this will help rents and housing prices.
I'm going to prove how ignorant I must be regarding the housing crisis. Is everyone in the country about to bail on their mortgage? I understand that if you lose your job or something and your property value has fallen dramatically, you're in a true mess, but has this happened to that many people? Are there truly that many people who can't make their house payments anymore? Does it matter that much that the values have fallen if you don't have to sell? Did all the ARMs reset at one time? I know that I must be terribly naive and uninformed, and I'm grateful that at least for now, I can still make my payment, but I wonder how it's possible that so many all at once can't make the mortgage.
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Old 07-13-2008, 07:22 PM   #7
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I can't tell you when this will end, but I can tell you HOW it might end, and it does not involve world peace, or <$100 oil.

The Fed is doing everything possible to re-inflate the money supply and re-establish credit. This includes things (e.g. brokerage take overs, access to the Fed funds for non-banks) that most of us didn't even know they could do.

This cheap money is causing inflation, which we can see not only at the gas pump, or grocery store, but in most every commodity. The bond market also sees this hence the 0% coupon rates for I bonds.

So in an inflationary world what does the average American do? (after they are finished despairing.) Keeping money in CD or money market is horrible they only pay 2-3% well below inflation. The stock market looks scary.
Ok a few brave souls will purchase commodities, but the average American or even the above average affluent American (i.e. board members) is hesitant to buy an OIL or Corn future, or even an OIL ETF.

Many Americans will say screw savings I am going to spend. This isn't a bad thing for the US economy. However, a bunch of folks will invest in the one commodity that most Americans are comfortable purchasing, a house.
The logic for this is pretty compelling, historically houses do well in times of high inflation. (one of the crazy things about the housing bubble was the lack of inflation) As housing prices stabilize, foreclosures will decrease especially with the artificially low mortgage rates turning most ARM resets into non-events. Lower foreclosures obviously shore up bank balance sheets. Stronger banks will lead to a stronger market. Does this happen within 3 years? I think so.
Good work, your scenario is possible. The housing market is the main problem. I'm seeing spreading of the problems into commercial real estate and the high yield bond market and wonder if everybody can hang on long enough for that good outcome to happen? I imagine we will get through this without a disaster, I'd be interested in other ideas on how things could turn around.

Are you sure enough about it to buy the banks?
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Old 07-13-2008, 07:37 PM   #8
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I'm going to prove how ignorant I must be regarding the housing crisis. Is everyone in the country about to bail on their mortgage? I understand that if you lose your job or something and your property value has fallen dramatically, you're in a true mess, but has this happened to that many people? Are there truly that many people who can't make their house payments anymore? Does it matter that much that the values have fallen if you don't have to sell? Did all the ARMs reset at one time? I know that I must be terribly naive and uninformed, and I'm grateful that at least for now, I can still make my payment, but I wonder how it's possible that so many all at once can't make the mortgage.
You're are certainly not ignorant. Approx 4 mil mortgages out of a total $125 mil are in some stage of foreclosure. Unfortunate, but not catastrophic.
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Old 07-13-2008, 07:40 PM   #9
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Which banks? Many of them foolishly destroyed the majority of their shareholders' value. I don't know that I want to give my capital to people who don't appear to understand the business that they're in.

Take Citigroup. They are solvent, and I'm sure that at some price they represent a good long term value. The stock may even be trading below that price. However, I've put their management into the "too stupid to run a bank" category. After the massive dilution required to raise capital, I'm not too keen on them.

Wells Fargo, however, I'm interested in. They've had minor writedowns. They may have some more major ones in their HE loans before the end, but nothing that will need them to raise capital. They have a fortress balance sheet. Since the mortgage markets are getting tighter, they are going to be able to write loans at more attractive rates.

US Bank is well positioned as well.

I'm also long TCF, a regional bank based in Minneapolis. They're riskier, but I think that they will come out ok, because I don't think the housing crisis is anywhere near as bad in the Midwest as in California/Florida/Nevada/Arizona. For the most part, all of TCF's borrowers have 700+ FICO scores or very low LTVs. The stock market disagrees with me on this one though

I would even start talking about a 2009 housing market recovery here in Minnesota.

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Good work, your scenario is possible. The housing market is the main problem. I'm seeing spreading of the problems into commercial real estate and the high yield bond market and wonder if everybody can hang on long enough for that good outcome to happen? I imagine we will get through this without a disaster, I'd be interested in other ideas on how things could turn around.

Are you sure enough about it to buy the banks?
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Old 07-13-2008, 07:41 PM   #10
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clifp,
thank you for that response even thru the LOCK.

I have been amazed at the calls to stay the course in portfolios with no mention of alternative in RE recovery, etc.

Not shilling at all here but One Rincon Hill in SF has about 20 nice " need to assign my contract" offers dating back a month or so on Craigslist. Almost all at pre-construction pricing. Nice.

But I really would love to see some scenario that says the equities market will also be on the rebound for the next few years.

My port is Bernsteinian and totally Bogle Index, I got into that from reading this site as a Guest. Feeling a little let down.
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Old 07-13-2008, 07:41 PM   #11
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You're are certainly not ignorant. Approx 4 mil mortgages out of a total $125 mil are in some stage of foreclosure. Unfortunate, but not catastrophic.
Small correction, that might be 4 million out of 125 million mortgages. Not $125 Million. 4 Million mortgages at $200000 each (just a guess) is $800 Billion.
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Old 07-13-2008, 07:43 PM   #12
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Small correction, that might be 4 million out of 125 million mortgages. Not $125 Million. 4 Million mortgages at $200000 each (just a guess) is $800 Billion.
My mistake--I was refering to the # of mortgages not the value. thanks.
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Old 07-13-2008, 07:46 PM   #13
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But the losses to the banks may only be 25% of that. $200 billion is not going to break the banks

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Small correction, that might be 4 million out of 125 million mortgages. Not $125 Million. 4 Million mortgages at $200000 each (just a guess) is $800 Billion.
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Old 07-13-2008, 07:51 PM   #14
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Good work, your scenario is possible. The housing market is the main problem. I'm seeing spreading of the problems into commercial real estate and the high yield bond market and wonder if everybody can hang on long enough for that good outcome to happen? I imagine we will get through this without a disaster, I'd be interested in other ideas on how things could turn around.

Are you sure enough about it to buy the banks?
You mean besides, BBT, BAC, WFC, ASBC, USB, WFC, SNV
Or a shadow banks like CSE, and ALD
Or REIT including O, DDR, FPO
Or conglomerates with large financial exposure like GE, and BRKA.

I am also short puts on a couple of other. But to be honest at this point I am done buying more banks/financials until my puts expire. I am actually optimistic enough to think they I may still have to pay some small capital gains this year... but that is a long shot.
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Old 07-13-2008, 07:52 PM   #15
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I think real estate could be a great place to put money for some people. The problem is that investing in real estate is very much a game of skill that can also require an awful lot of work.

I'm pretty lazy.

Every time I see inflation uptick, though, I start thinking about what a great hedge long-term fixed-rate mortgage debt is.

For people with a little ambition and some horse sense, I suspect now is a very good time to be buying real estate.

Those mortgages are going to look pretty reasonable after some 70s style inflation

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clifp,
thank you for that response even thru the LOCK.

I have been amazed at the calls to stay the course in portfolios with no mention of alternative in RE recovery, etc.

Not shilling at all here but One Rincon Hill in SF has about 20 nice " need to assign my contract" offers dating back a month or so on Craigslist. Almost all at pre-construction pricing. Nice.

But I really would love to see some scenario that says the equities market will also be on the rebound for the next few years.

My port is Bernsteinian and totally Bogle Index, I got into that from reading this site as a Guest. Feeling a little let down.
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Old 07-13-2008, 07:55 PM   #16
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You mean besides, BBT, BAC, WFC, ASBC, USB, WFC, SNV
Or a shadow banks like CSE, and ALD
Or REIT including O, DDR, FPO
Or conglomerates with large financial exposure like GE, and BRKB.

I am also short puts on a couple of other. But to be honest at this point I am done buying more banks/financials until my puts expire. I am actually optimistic enough to think they I may still have to pay some small capital gains this year... but that is a long shot.
And to think I was considering selling some at a loss.
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Old 07-13-2008, 08:02 PM   #17
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I think real estate could be a great place to put money for some people. The problem is that investing in real estate is very much a game of skill that can also require an awful lot of work.

I'm pretty lazy.
Me to, plus based on my not brilliant house picking ability, and my complete lack of house maintenance skills, and lack of experience I am sticking to my area of competence.

I am hoping that REITs let me experience some of the real estate increase without having to fix the plumbing!
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Old 07-13-2008, 08:54 PM   #18
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But the losses to the banks may only be 25% of that. $200 billion is not going to break the banks
I'm not an expert and I do not have the exact figures but, from what I recall $200 billion is most of the domestic banks capital. They may have trillions in deposits, but they only have so much capital to back those deposits. If the banks have to raise $200 billion we are going to see more massive dilution (or they will get their rich Uncle to bail them out).
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Old 07-13-2008, 09:08 PM   #19
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i will take a 4% or similar money market rate being eaten by inflation over a 20% - 50% drop in portfolio value which is also eaten away by inflation anyday

maybe the old timers will remind us, but i remember reading somewhere that the 1970's were also a time of high inflation and tight credit partly brought on by a housing bubble that ended in the late 1960's that also involved subprime mortgages
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Old 07-13-2008, 09:53 PM   #20
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To be honest, I don't even have a ballpark number for the equity of US banks. I think its a lot higher than $200 billion though.

JPMorgan alone has a book value above $100 billion.
Citygroup has-- I have no idea after all of their deals with investors.
Wells Fargo has a book vaule of about $40 billion

There are hundreds (thousands?) of smaller banks. I think there will still be banks around after this settles out. There will be a few less, but I don't think it will be the end of the world.

Note-- A fair number of those losses will actually be absorbed by foreign banks, as they hold a fair amount of bad paper backed by US mortgages as well.


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I'm not an expert and I do not have the exact figures but, from what I recall $200 billion is most of the domestic banks capital. They may have trillions in deposits, but they only have so much capital to back those deposits. If the banks have to raise $200 billion we are going to see more massive dilution (or they will get their rich Uncle to bail them out).
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