The Credit Crisis Financial Stocks Short Journal

[Daal]

The Wilshire market cap went from $9T and change to $13T and change. Based on what?The 2nd derivative, just the removal of fat tail of a depression and total collapse.
Yet that 2nd derivative didnt tell anyone one thing about where corporate earnings will be in 2010, how much they will fall this year, so the market puts a 40% premium in stocks on the mere announcement that there is a bottom somewhere down the line but no one knows when, what damage that will bring to earnings and what kind of recovery do we get, maybe I'm wrong but this looks like a case of buy first ask questions later that end up feeding on itself in a feedback loop as opposed to cold rational securities pricing

 

[Daal]

Quote from ralph00:

You've got a bad case of confirmation bias. There is nothing in Gross' piece that hasn't been more or less conventional wisdom for months now.

Jobs report will be minus 500K and the market will be up 2% minimum today.

Let me guess you are close/at your trailing stop and ready to pull out. All the sudden you dont have a need to try to talk up your position with arguments you dont believe in. See Tiger choked again, dont fade me too often as this might cost you some money. The Green Shoot Rally of 2009 is going down the tubes

 

[Daal]

Looks like the housing wealth effect might actually not be that big

http://blogs.wsj.com/economics/2009/06/22/guest-contribution-the-mythical-housing-wealth-effect/

I accept Buiter argument here, I for one dont own a home, so I'm quite happy to see home prices go down, this would be an wealth effect, given that a future consumption good is getting cheaper by the day this might actually increase someone short on housing desire to spend.

However I dont know why Buiter is downplaying the 'liquidity' impact of declining home prices(The so called home ATM). Borrowing based on home equity(MEW) has very high during the bubble years and has now collapsed, I accept the point that some of that spending might have occured anyway as people drew on their MEWs in order to avoid drawing down on their liquidity cash balances or because they expected some kind of windfall cash payment in the near-term. But some of that spending was based on the idea that future income would grow and people borrowed against what is now known as a fantasy, they face reality now and have to cut back as they have higher leverage and interest payments cutting into income

 

[Daal]

I supposed a more simple way to explain these authors is "home prices and consumer spending are coincident indicators, with expected future incomes and actual future incomes leading both", however what backward looking data misses is that home prices set the amount of capital that banks have and therefore credit growth, its different this time because of the size of the drop, the jingle mail effect, shadow bank implosion therefore dependancy on normal banking

So it seems that the authors are right that home prices dont have a big impact through the wealth effect, it does however have a big impact on the economy through little/no MEW, bank losses/weak credit growth those things cant be called wealth effect so the authors would be right. So even though this paper seems an eye opener it doesnt change significantly the US macro outlook. It does makes me less bearish on consumer spending

I cant find the full paper though

 

[Daal]

In the spirit of providing counter arguments here is a ton, I bet even the toughest bears have trouble countering this, from one of the authors in Aug 2008:

"Also, the Case-Shiller index weights transactions by value. For example, it gives eight times as much weight to the sale of an $800,000 home as it does to a $100,000 home, meaning it is particularly sensitive to what is happening with high-priced homes in the largest, most expensive markets."(Richer folks spending is affected less by the wealth effect)

"Only four states -- Arizona, California, Florida and Nevada -- have had declines of more than 4 percent in home prices over the past year, according to the house price index of the Office of Federal Housing Enterprise Oversight. Some worry that OFHEO's index may be missing the full extent of the crisis because it doesn't include very high-priced homes with "jumbo" mortgages or homes bought with subprime loans -- the ones being hit hardest. While one could argue that the index would be more representative if it included these transactions, the properties it does include represent more than three-quarters of U.S. homes. "

"The OFHEO index provides broad coverage of large and small markets across the country, and each home is weighted equally. Furthermore, excluding subprime mortgages has an advantage -- doing so makes the index a more representative measure of the homes owned by middle-class families. Fire-sale prices from distressed sales of subprime mortgages exaggerate the declines that patient sellers are likely to experience. "

About Case Shiller
"Homes in the areas omitted or incompletely covered appreciated at a slower pace during the housing boom, and their values have been more resilient over the past two years, so the data behind the index are biased toward the markets most susceptible to dramatic swings. "

 

[GTS]

Quote from Daal:

In the spirit of providing counter arguments here is a ton, I bet even the toughest bears have trouble countering this, from one of the authors in Aug 2008:

"Also, the Case-Shiller index weights transactions by value. For example, it gives eight times as much weight to the sale of an $800,000 home as it does to a $100,000 home, meaning it is particularly sensitive to what is happening with high-priced homes in the largest, most expensive markets."(Richer folks spending is affected less by the wealth effect)

"Only four states -- Arizona, California, Florida and Nevada -- have had declines of more than 4 percent in home prices over the past year, according to the house price index of the Office of Federal Housing Enterprise Oversight.

Why look at something almost a year old? Without even getting into whether the OFHEO method is superior or inferior to case-shiller, the most recent data (Q1 2009) shows a lot more (26) states with >4% declines in the past year : http://www.fhfa.gov/Default.aspx?Page=215&Type=summary

 

[Daal]

Quote from GTS:

Without even getting into whether the OFHEO method is superior or inferior to case-shiller

Please do, I haven't made up my mind on this yet. I do know that Case Shiller matters a ton for likely bank losses since dollar numbers and bubble states are so important for them

 

[Daal]

The Fed is likely to try to adjust the market expectation in this meeting. It seems that the market would be incorrect in two things, that short rates are going up soon(Even the hawkish Richard Fisher was downplaying the idea of hikes) and that the long bond will face trouble in the exiting process. So it seems that they try to adjust that to 'we will keep rates low and everything will be fine in the end' but it seems like a crapshoot to try to forecast what they will say

 

[Daal]

Fed removes "Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term." for "However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time."

Guess the FOMC has their share of green shooters as well

 

[Daal]

Just found some 'green' shoots. A V shaped recovery as well

Getting flat YTD. Man, was the market on drugs a few weeks ago..