Friday, August 24, 2007

Where did the punchbowl go?

Having personally lost a small fortune in the stock market in 1999 and 2000. I can tell you that markets can stay irrational for a very long time. Any seller that has had his/her property on the market for 60-90 days and hasn't received a reasonable offer is nuts. They need to drop their price or sit out the credit crunch. The credit crunch could last many years.

The big problem I see and I speak to dozens of realtors a week; is that sellers feel that their "equity" is real money. I always have to remind people that something is worth only what another person is willing and able to pay. The ability of people to pay irrational prices for homes in bubble areas is gone for the middle class market. Remember the rich are different. Working class vs asset class. The loose financing is gone. Stated loans are on life support. Real income for middle class Americans has barely kept pace with inflation the last few years. At the end of the day Wall St can create the wildest financing known to man but it has to be repaid some day. Investors don't give money away. The market for ALT A and subprime mortgages is DEAD. In addition, a knee jerk reaction has occured in large prime loans as well requiring extreme levels of documentation and big down payments on the order of 20-25%. No stated income loans unless you are putting 20% down and have a 720 FICO. That is a generalization of course as every loan scenario is unique.
I am a very optimistic person by nature so negative views are seldom heard from my lips. I am sorry to say that we are in for a very long period of recession or stagflation(low growth with inflation i.e. late 70's). If you need a broader clue as to how bad our nation is currently behind the eight ball check our dollar vs major currencies and you will see what the world thinks of our prospects. Too much governement and household debt. The world's appetite for our excess is over. It's time to save and be prudent. Back to reality. The punch bowl of easy money is gone. Parties over it's time to sober up.

Shocking move by FED to aid CITI and Bank of America.

In a shocking revelation after market hours the FED on August 20th wrote a letter allowing the bank(i.e. retail banking)divisions of Bank of America and Citigroup to extend to their brokerage divisions capital(i.e. loans) up to 25% of their capital. The previous limit was 10% for all banks with brokerage divisions. This rule has been in place for decades to prevent stock/bond market calamity from filtering back to affect the safety of the retail bank operations. Of course all accounts are FDIC up to 100k but this points to a very large situation the FED and the world's banks know that they are trying to fix behind the scenes. Their was no announcement on monday when this letter was effective. The news comes out after stock market hours on a Friday. The letter can be found here.Their server is jammed currently with people trying to read the letter. Also read the CNNFN story here:This is a developing story and I will have more later tonight.