Marketwatch just updated: NCHE stopped fundings, too:
SAN FRANCISCO (MarketWatch) -- National City Corp. said on Monday that its National City Home Equity unit has suspended approvals of addition loans or lines of credit in response to market conditions. "This is one of a number of steps National City has taken in recent weeks to help ensure that originations are in line with existing and anticipated market conditions," the bank said in a statement that was e-mailed to MarketWatch. "We are continuing to closely monitor the market and take the appropriate steps to best navigate market conditions."
Option One changed rate sheets today again (fourth time within last 10 days) and they removed stated income completely. I can't find news release, yet. I wonder what lenders are going to refinance those poor FBs with stated income and reseting rates.
Also, can someone explain what is going on with this:
"Subprime mortgage lender NovaStar Financial Inc. said Monday it will resume making subprime mortgages through brokers starting Tuesday after taking a fresh look at "current conditions in the secondary market."
"Jimmy Cayne, chief executive of Bear Stearns, has been calling round other Wall Street chiefs asking them not to pull business as he faces a growing crisis of confidence in the bank."
I recall that ,at the time of the depression, a typical mortgage was for one year with a balloon payment at the end which was refinanced making it ,in effect, a 1/0 ARM. People lost their homes and farms in many cases not because they could not make the payments but because the banks had no money to refinance the balloon. I was thinking how similar the situation is today for ARM holders who have no hope of making reset/recast payments (making the loan a defacto balloon at the end of the teaser rate period) but cannot refinance due to tighter standards.
for me, what to do is not play in traffic. then again, I'm not a gambler. potential for disaster (and irrational spikes upward) too great in this market.
That is not good! As I said, I thought axing Spector was a mistake. He was widely seen as the brains behind most of Bear's business and Mayer just isn't in the same league.
Alan Schwartz is a classic IB and not that close to the trading and proprietary businesses. I'm not sure what they do here.
There's absolutely nothing irrational about these spikes. They're a great way for properly capitalized speculators to make money off of undercapitalized investors.
They are exactly what you should expect in this kind of market with mega short interest and lots of small time bears in the market.
Hedge funds make money off of this kind of volatility. Nothing irrational about that.
The real question is if the Fed will do something stupid or if one of these spikes gets out of hand and takes the market to new highs.
But if your positions have an appropriate safety margin, these spikes are just noise.
You seem like more of a stock guy that I am (not a tough standard), what is going on? Is the market building in some expectation of Fed relief? Is that why the financials are up? If that's it, I think we may be in for a rude awakening later this week.Could it be something else?
You seem like more of a stock guy that I am (not a tough standard), what is going on?
I can only guess based on what I'd do. But just consider that there's well over 1 trillion dollars in hedge fund capital out there. If they start behaving as a flock they can create huge stock market movements in the short-term.
I thought we might have a big rally today simply because that's what I'd do - there's a lot of money to be made squeezing money out of shorts, even if long-term it's crazy to own the stocks involved.
In the short-term I just think of the stock market as a big poker game. And for me that seems to explain a lot of the behavior.
I'm just guessing however, and don't have any specific insight into the market. I'm not a "stock guy" I just expect organized deception from the market, and I find myself being taken by surprise a lot less that other people.
NFI - after taking a fresh look at conditions in the secondary market, let's jump back into subprime. Brilliant. What do you think they see that noone else sees? Maybe they looked up the ABX charts and it was one of those days when they were missing, and their guys roared, full speed ahead!
I am hardly an expert, but I think this is called distribution. This is really a pretty weak bounce considering how oversold the market was at the end of the day Friday.
I noticed the Yahoo poll still showed something like 34% buy, 54% hold and 12% sell over the weekend. Plenty of folks still willing to buy the dips.
My contribution to the Knowledge of Stocks Index (KSI) is profoundly negative, but I did read something here: Stocks Volatile Ahead of Fed Meeting.
Charles Norton, about 4 paragraphs in.
Aegis is owned by Cerebus- they have to cut back to start feeding their new business acquisition- the UAW;-}
As for this market- they have decided that all is well, and a bunch of houses with evaporating seconds don't really bother them. They think they are going to get at least a "we are watching current market conditions closely and stand ready to provide liquidity if market conditions warrant.." Hope springs eternal.
As for the dying mortgage broker business- did it really need to exist anyway?
The stock market really isn't much of a poker game. Take a long term look at the SP500. The average return is pretty good smoothed out.
Sure, in the short term we get bumps, hiccups, overreactions, fear, greed, volatility, etc. But when we're in a bull market, every dip like this turns out to be a buying opportunity.
What's interesting is folks on the sidelines always say that they're waiting for a dip to buy. Then when the dip happens, they say they're looking for a bounce so they can short.
LOL. Meanwhile, the SP500 trends along, beating the pants off of most of those folks on the sidelines doing the wrong thing...
Actually, I don't think the short-sqeeze explains it. Most of the short positions existed three weeks ago and are now ahead (or at least ahead of where they were.) Any short squeeze was likely happening in June and early July.
I think there are a lot of people who see this as a genuine opportunity. I friend was over last night who invests. He's been doing it for years and has generally done well, definitely a Warren Buffet type investor.
He's been buying financials that seem insulated from home mortgages. I felt he really didn't grasp the depths of what is happening, but then he actually works for a living and doesn't spend a lot of time on reading all the crap I do.
Is this volitility on the downside (bear traps?) likely to move stocks from strong hands to weak hands?
I don't want to pretend to know what's going on with the market. I'm no expert. I'd only say that I'd expect the volatility to benefit the stronger hands nevermind who owns what.
The stocks may temporarily go into strong hands only to be dumped into weaker hands the next day.
If you're forced to sell or forced to cover something that you really don't want to because it's a good position in the longer term, that's going to benefit the big guy - your money becomes his money and he gains a better entry point into an attractive position.
The big guy likes that so expect that to happen alot.
Again, just speculation on my part. I'm no professional.
"Did anyone else see the CNBC alert that Fannie was seeking to raise the conforming limit?"
I heard that and it's horrifying. Have not seen any confirmation. I also heard Buffet was buying HOV and shorted the piss out of it after the rally slowed down.
I actually think you are ont something, but I'd quibble with one thing. You keep referring to "big guys." I suspect in this market what you really mean are "less leveraged and more liquid guys."
Make no mistake - this is just a short lived bounce right now. After 5 years of a bull market with max. 8.5% loss we are due for a 10+% decline from the high 14,000 Dow.
This then will be an excellent buying opportunity. I am patiently waiting.
The central bank will reduce the target rate for overnight loans between banks by a quarter percentage point to 5 percent, Merrill chief economist David Rosenberg said in a report today. In June, Rosenberg said the central bank wouldn't lower borrowing costs until next year...The Fed will cut rates to 3.75 percent ``by mid-2008,'' Rosenberg said today in the report...another 5 percent drop in home prices will slow gross domestic product growth to 1.5 percent next year, Merrill said. The firm had predicted GDP of 2.3 percent.
"Shares of Fannie Mae were higher on speculation the largest U.S. home funding company could see an easing on lending restrictions by the Office of Federal Housing Enterprise Oversight. Shares of Freddie Mac also advanced on above-average trading volume.
Fannie Mae executives have asked the OFHEO to increase the maximum amount of home mortgages it can hold in its investment portfolio so it can provide more market liquidity, the Wall Street Journal reported Monday afternoon, citing people familiar with the situation.
Calls to Fannie Mae were not immediately returned."
I think there are a lot of people who see this as a genuine opportunity. I friend was over last night who invests
Dip buyers big time today and shorts taking some well earned money off the table. Just another day in Vegas! I am still short the REIT's and a small QID positio
AC, I think the big action was in commodities today. And I did think some of the financials were oversold.
But I am not, never will be, and never have been a short-term player. I don't care at all what happens in a week or a couple of months. Having written that (and proved my total ignorance of this type of activity), I think the commodity sell-off and the gain on stocks is a reflection of recession expectations. In a recession, you need businesses which are capable of generating cash flow and you don't expect most assets to appreciate very much. This seems broadly rational to me. Friday looked kind of panicky.
Not to mention that dropping most stated-income loans is a move toward reason. Overall, I think today's activity shows encouraging trends. It's not like the economy is in the basement. As soon as we stop pounding ourselves in the head with a hammer life will improve greatly. The ERs may be filled with head injuries, but the healthy on the street can go about business without fear of unreasonable repercussions.
I'd feel a lot more comfortable about stocks in general if I were sure that companies would quit this nonsense of borrowing money to buy back their own stock rather than trying to invest in actually growing their own business, though.
I've grown suspect about all this "over the long run of 8 percent returns".
Frankly the average investor wasn't present in any strength in the market until the late 80's when 401k's were invented. With the contribution limits, it took even longer for them to be a significant portion of the stock owners. Not too many average people have actually tested the theory of investing over 30 years and then retireing on the lump sum.
I frankly don't see anyone around me enjoying great long term returns...do you? It's all theory at this point.
I got into the market in early 90's (when I could only contribute smaller amounts) and bought steadily in the broad market through the 2000 bubble (when conviently I was able to buy much more in my 457 plan!!).
So the 8 percent return may be on a lump sum invested in year x. But people don't invest that way.
My returns were worse than the average CD over those years. Sure my early money did great! But my later money is still trying to catch up.
Novastar has been in the weeds for a long time. Submit all you want - whether it gets approved and closes if and has been iffy.
Aegis will tell you they were Alt-A but they were just like every other sub-prime company.....lipstick on a pig is still a pig. I think their problem is with their sugar-daddy. Pockets are quite as deep as they were a few months ago.
"Fannie Mae executives have asked the OFHEO to increase the maximum amount of home mortgages it can hold in its investment portfolio so it can provide more market liquidity"
and this:
"The Fed will cut rates to 3.75 percent "by mid-2008," Rosenberg said today in the report."
Accredited wants your Jumbo's, A-paper fallouts and non-prime loans!!
Pay special attention to our:
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Wonder what planet has he been on for the last few weeks. Or maybe the rank and file with LEND is clueless and still believing the claptrap coming from sunny San Diego.
I'd feel a lot more comfortable about stocks in general if I were sure that companies would quit this nonsense of borrowing money to buy back their own stock rather than trying to invest in actually growing their own business, though.
And what if that busness is mature? What would you as a shareholder like them to do?
1) Invest in ancillary businesess thay have no competitive dge in;
2) Acquire a competitor in the same industry (and perhaps overpaying);
3) Try to make a mature biz a growth biz and likely flush that cash down the toilet; or
4) Give it back to you so you can invest in something yourself?
Now I am not saying that ALL buybacks are for mature businesses, but simply that shrinking the balance sheet can be a useful step for a mature business.
"According to preliminary calculations, the Dow Jones industrial average soared 286.87, or 2.18 percent, to 13,468.78, after zigzagging throughout much of the session. On Friday, the Dow fell 281 points."
Is an indication of a classic top 1929 style.
Can anyone confirm or point to a day by day chart between Sep 1st to Oct 19 1929 ?
I actually think you are ont something, but I'd quibble with one thing. You keep referring to "big guys." I suspect in this market what you really mean are "less leveraged and more liquid guys."
Specifically what I'm getting at is that traders with large amounts of cash and/or leverage benefit from this kind of volatility at the expense of those who can't because they can hold on to attractive positions even when the position moves against them, and they retain their buying power in these situations so that they can even increase their position at a more attractive entry point.
Compare this to a small-time trader who's overleveraged and gets blown out of a position with a 20% realized loss and is too afraid to get back in even though the entry point is now more attractive than their initial entry point, and long-term the position is sound (e.g. CFC going from around 30 to close to 40 and then back down below 30).
Sorry, Tanta, I meant the WSJ, Bloomberg, etc. That was meant to be self deprecating. I spend all this time, reading, thinking about things, make some 100% gains and lots of losses. Meanwhile he buys low and waits and we probably do about equally well.
Of course, when the DOW hits 12000, I'll be WAY ahead...
The stock market really isn't much of a poker game. Take a long term look at the SP500. The average return is pretty good smoothed out.
Long-term the stock market is pretty rational. As you look at smaller and smaller windows of activity, however, I think it begins to resemble a "poker game" during certain periods. Again, I'm referring specifically to the short-term here.
Average Joe - unless you are a pro or a very lucky gambler- you will do well if you stick to low fee mutual index funds like Vanguard. Pick one asset allocation model for you and sick to it. Do not sell in a panic or load up during exuberance.
Most of the companies doing buybacks HAVE to do so in order to make their earnings numbers. Take a look at the last quarters for most of them and calculate their EPS without the buybacks... they would have missed. Most of the time they buyback EXACTLY the number of shares needed to meet estimates... how convenient.
MOM,
Managers are claiming they will be doing buybacks. Although companies do file 8K's announcing intended buybacks, I don't believe they are obligated to carry through with those plans. I wonder if anyone is following up anyway.
With the dividend tax rates as they are and political winds shifting, I'll take my money and pay the tax now.
Banker, I haven't kept all of my hair even in the Spartan Fund. Life's unfair.
I did however, join Hat Club for Men, which is much cheaper than Hair Club for Men...so I saved some money there.
However, my point was...where's the evidence that I'll do well?
Can you point to any human on earth that started investing in 401k's at the start of their career, worked 30 years, and then retired on the proceeds?
Frankly I don't think it's been done yet.
Now, you can point to historical returns, but my point was that for average investor history doesn't start since 1920, it starts at around 1990 when they were encouraged to buy through 401k's en mass.
Now that we're at 70% of the country as stock holders, how much more growth can we expect and how rapid is it likely to be?
Perhaps it's like weight loss, where the early pounds are the easiest.
I distinctly remember alot of people buying homes the last few years based upon some historical model of housing returns "that never go down".
Somewhat off topic, there's some interesting stuff in this just-released item from Fitch. The firm is revising its mortgage default and loss model for prime, Alt-A and subprime residential MBS transactions ...
Was Cramer job to create the impression that the Fed must cut ?
I never would have thought that the fed would cut until I saw XLF going higher so strongly.
At that point the thought: Does someone know something that I don't starting creating doubts in my mind.
Next came the FNM rumor.
I am not a "weak short". I have held through April knowing ML are going to end up lower. When CFC (shorted at $36, $39) hit $42 I added more but today got to me and I panicked.
Who ever is playing this game fooled me today but I am still doing fine. Nothing wrong in covering in $25.5 instead of $24. The real question is what next:
Is CFc headed for the teens ? in any case it became a crowded short (but some crowded shorts like FED and DSL are doing very well for shorts)
I'm rather suspicious of the bright long-term prospects of the market (but I don't think it will be bad, either, just not spectacular). In a rational market, stock return in long term should be roughly equal to the nominal increase of GDP. The market grew faster in the last decades. Partially, because the rich-poor gap widened and the share of the profits in GDP increased, partially since the volatility and the perceived risk decreased but also due to popularity of 401k plans. What would happen when boomers start to cash out their holdings?
Banker, buybacks of shares from profits is fine for me, although in a perfect world (with no tax loopholes and no incentive for the executives to inflate the stock price), dividends would have the same purpose, only better (more open and clear). But taking debt for buybacks is IMHO stupid. If someone wants to buy the stock on margin let them do it individually. The companies should not try to speculate on their own shares.
I'll second your dividend preference. There's nothing wrong with companies shrinking their balance sheet or levering up if cash flows are relatively stable.
The problem is that most buybacks merely counteract dilution resulting from executive option grants. Dell is a good example - they've spent more than $20bn on buybacks since 2000. About two-thirds of this was to offset executive options grants. And stock's down about 50% over this period.
"Default expectations will be determined through analysis of 'back-end' debt-to-income (DTI) ratios, rather than 'front-end' DTI ratios as had been implemented in ResiLogic. If a debt-to-income ratio is not provided for a subprime loan, the default DTI is assumed to be 50%. The impact of this revision is generally minor, although subprime data files lacking in DTI information will be noticeably affected. "
Oh man, those Fitch model revisions will be pure DEATH.
1) regional adjustments from UFA? Hullo? Anyone take a look at how the regional economies are starting to trend down faster than an express elevator? Florida (lets call that a region.) TOAST! Plenty of others. OW.
2) Raising multipliers? Uh, ya. Check. That will hurt a wee bit, dont ya think?
3) Low doc? Where do you think they were pulled from? I dont think NoDoc. OUCH again.
4) Oh dear god...tanta, you read it write. They've been using Front end DTI....that is really hard to believe. And even harder when you realize just how much difference they must have known existed even years ago, between front end and back end.
Back-End Debt-to-Income Ratio Your back-end debt-to-income ratio compares your total monthly debt payments to your monthly income, and it is a widely used measure of your creditworthiness. You compute your debt-to-income ratio by dividing your monthly minimum debt payments (including your rent or mortgage and housing insurance and property taxes) by your monthly gross income.
Front-End Debt-to-Income Ratio Your front-end debt-to-income ratio compares your monthly housing expenses to your monthly income and is a widely used measure of your creditworthiness. You compute your debt-to-income ratio by dividing your monthly housing expensesincluding your rent/mortgage, interest, insurance and property taxesby your monthly gross income.
Did they honestly think that RE taxes werent going up? Or that everyone would refi out of their other debts? Or that interest rates would stay super low? This is absurd. How could they decide to just disregard all those components altogether when they knew theyd be getting worse? WTF?
4) Change in DTI Ratio: Back-end DTI ratio data is generally more available than front-end data in the data files provided by mortgage issuers. Therefore Fitch has modified ResiLogic to utilize back-end DTI. However, Fitch continues to be concerned by the prevalence of missing DTI data. Fitch will use a default assumption for missing subprime DTI of 50%.
So, if front-end was so hard to quantify, what were they using before the change?! It wasn't 50%, that's for sure.
I'll use my self as proof that the returns of the Average Joe haven't been as advertised.
I started buying stocks 15 years ago through a 457 at work (they were fairly new at the time). I have basically been maxed out on contributions since the beginning. I think the limit started at $5000, and slowly increased to today's $15,500.
I have put in roughly $150,000 total.
I have $189,000 now.
I invested mainly in three funds,S&P 500, Growth and Income, and Aggressive Opportunites.
My actual return based upon a calculator if I invested $10,000 a year ($150,000 divided by 15 years) to get to $189000 is 3%!!!
If I averaged 8% I should have $271,000. I work with many others who have invested in the 457, in a variety of funds and weighting. Their balances are very similar to mine. Nobody has gotten 8% over the long haul in REAL returns.
Reality is much different than theory. It won't be long until people begin to retire and figure that out. Like I said, there aren't many around who have 30 year old 401k's.
I bet if you sat down and figured it out (not just took the historical returns of the funds you own, but what YOU have actually returned on your investments based upon how much you bought and when) you'd see a distinct difference.
I would be interested if anyone out there has retired on a stock portfolio soley through personal contributions over a career.
oh, charming, Fitch has discovered geography after everyone yammering on and on and on about how "all housing markets are local" and "location, location, location". Granted, that's a existing sore point given my degree. ahem
Query. Is the housing Market still using MSA definitions for delineating Urban Areas instead of CBSA definitions? The OMB isn't updating MSAs anymore.
Well, in the normal use of these terms, the "front ratio" is the total housing payment (PITI) divided by gross monthly income. The "back ratio" is total debt (PITI plus all other obligations) divided by GMI.
For years and years, the GSEs and HUD required borrowers to qualify at both front and back. After a while, Fannie did some number-crunching and decided that the front ratio isn't that predictive. The real issue is how much you spend a month, not how much of that is your house payment.
Freddie took a slightly different view. They no longer have a strict front ratio requirement, like Fannie, but their UW model does look at the spread bewteen the two. Freddie says that problems start when the spread between HTI (front) and DTI (back) gets to 15% or more.
The Alt-A and subprime world stopped using front ratios years ago. I haven't seen a datatape with front ratio on it since probably 2002.
So if Fitch is really saying that all along they've been using the lower number--the front ratio--instead of the higher, more relevant number--the back ratio--my mind is officially blown.
I can't believe this. I can't believe they have front ratio--nobody reports it anymore except when you're dealing with some Freddie product.
So I'm seriously confused here. I suspect it may be "minor" because they thought they were taking HTI all this time when they were really getting DTI. Which makes them kind of sound like bozos.
AJ, sorry to tell you, but you have bad timing. 15 years is NOT the long run. When you go through a massive bubble like 1999-2001, it tends to screw up averages. Still, Id think the overall would be higher than 3% for that period. Anyone have the actual figures?
Bozos is too kind. Fraudulent market manipulators is more like what comes to mind. They knew they were minting money off this bubble. To change that calc a few years back would have killed that giant revenue stream that they forged hand in hand with the IBs. Sick, sick, sick, I tell you.
Assuming no panic trades, you are likely losing for two main reasons:
1. Fees and more fees. (2% is an outrage)
2. Asset allocation.
Asset allocation is determinative. You need a proper mix of small cap/large cap and foreign funds and yes bonds.
The vanguard SP index is up 5.98% in 10 years as of 7/31/207 and that includes the dot com bubble burst. It is up 12.11% since inception in 1976 and this fund beats 90% of funds with simiar aset allocation.
M-F, take away the last year and do the calculation. When you consider 10-15 year frames, it is quite volatile depending on what years you choose. AJs 3% could be wiped out in the coming months, leaving him with 0 over 16 years.
Banker, see RCRyan. I don't have a problem with a business buying back its own stock if it is in a strong cash position and has no better alternative. Even mature businesses will encounter business cycles when having a strong balance sheet at the bottom of the cycle will allow that business to make very good acquisitions (in the long run), so borrowing money to buy one's own stock is almost always a complete red flag for me.
What I dislike so intensely is a company that is run purely to maximize short-term share value without regard to the underlying fundamentals of the business. Really what is happening is that management makes out like bandits with stock options while the business undergoes a slow weakening.
Because of this, I am tending towards private investments only. I do not see many publicly run companies that are investing in their baseline businesses in the way that I like. I believe current trends on the public exchanges are bad for the shareholders and the bondholders long term. Btw, no one I know even wants to work for most of those corporations any more. Everyone wants to go privately held. Long term this just sucks for the exchanges. Yes, in banking you can go ahead and make incredible amounts of money, but I have always lived by the motto that I want to die as neither a looter or a victim of looting.
However, I am quite optimistic about the underlying economy because the vibrancy I see in these privately held companies. There is tremendous innovation and ambition, plus long-term strategies to gain market share and open up new markets.
One thing to keep in mind as the equity market gyrates:
A bubble is popping, but it is in credit, not equities. If spreads widen, stocks will crater; not because equity investors were wildly optimistic (as in 1999), but because they were not sufficiently pessimistic. How do they get sufficiently pessimistic? Its a tough process because stocks get "cheaper" ahead of the main credit event, at which point they get (rather violently) "expensive". "Cheaper" attracts lots of dip buyers, again and again. This produces the type of volatility we have seen the past week.
Rumours swept the market that Fannie Mae, the federal mortgage agency, would be allowed to make sweeping purchases of underpriced mortgage securities. Its shares gained 10.4 per cent, while the smaller Freddie Mac agency gained 7.7 per cent.
Can somebody enlighted me about what this means and whether there is anything to it? Is this basically the "bailout" rumour that was refered to towards the end of last week?
David - well, that's why I have been generally negative on this stuff for several years. I calculate and want return for years at a time, not a quarter or so. I am sick enough that I could blink out and be essentially non compos for several years at a time, so it's a necessity for me.
I'll always buy a company that I think has good management and a strong underlying business, but I don't see the RV in a lot of this stuff. And I am middle-aged and stubborn; if I don't see the RV I am not going to buy it. This is the first time I have ever been positive on T-Bills, but I am doing well on that stuff. I am doing great on private investments. In the wake of 9/11 we bought heavily, so I have seen a good return. But right now I am not happy with my opportunities overall in publicly traded.
Avg Joe- yup- My father and mother did it.
Turned small dollars in the 70's through the mid 80s into over 400k.
In the mid 80s quit and took over family small business and stopped contributing due to building the business and paying off debt.
They probably never put more than a total of 50k into their accounts.
I have a small legacy IRA that I contributed about 5.5k to through 1996 that is worth about 28k today. It can be done, but you have to make few investment regime changes and buy low and sell high. My father put his money into bonds in the summer of 1999 and I had to hear him rage against the market going higher and how much money it was costing him to sit and make measly bond returns. So he left 8 months more of the ride, but when he went back in he had a lot more than he would have had if he had stayed. When things look stupid in value get out, when they look cheap, buy. All of the accounts mentioned are at T.Rowe Price and are simple mutual funds. I find that a very slow trading strategy- check the statements in the mail and evaluate according to macroeconomic themes pays the best return. Sometimes you have to sit tight for your thesis to pay off too. I have been in a Japan fund since the beginning of the year and lost some money. But I might be in that fund for five years or more, so a couple of months lost money is no big deal.
Patience is hard, and look at the entire world for ideas. Also, if you start reading about your investment as the next big thing, contemplate when you want to sell.
MOM: Thanks. There's some argument about whether I was really the first Holy Roman Emperor. Some people claim it was Otto I, who wasn't even wearing short trousers when I kicked the bucket.
If Fitch was using the DTI ratio provided by the sub-prime lender, they were indeed using the right ratio. If true and they called it a Front Ratio, just more evidence the rating agencies do not truly understand what they are rating. BUT, if Fitch extracted the DTI by PITI by the income listed, then it is a really big thing as that is a Front Ratio. If that is true, that is not a "minor change".
re: S&P returns, don't forget to correct for inflation. Very different picture when looked at that way.
re: SKF, be very careful. By buying these you automagically leverage yourself 2:1. All it will take is one clear hint from Bernanke tomorrow that easing is in the offing and that thing will spike up, and won't start to get rise again until the next liquidity issue shows up.
My main point is that it's a good thing you stopped buying in 96. If you would have done what everyone else has done (and would have to do if they wanted enough to retire on) is to buy more as the market peaked. If you would have kept contributing and ever increasing amount, you'd have averaged significantly less.
Historical returns are about as acurate as LUM's dividend projection.
I just retired at age 59 and have been investing in 401K's since inception. A big plus was the company match; a big minus was the college education cost of my 3 children. However, without the pension from my last employer (20 years seniority), I would still be working.
What I dislike so intensely is a company that is run purely to maximize short-term share value without regard to the underlying fundamentals of the business.
Cool, so you'll support the Banker's Less Corporate Reporting Initiative? (BLECRI)
BLECRI will enable companies to only report earnings once a year and will repeal the Sarbox foolishness. Instead they will report only major corporate events in between years. This will allow management to change the quarter to quarter foolishness we have now.
Really what is happening is that management makes out like bandits with stock options while the business undergoes a slow weakening.
That's simply not true. Options typically have vesting periods that run from 3-5 years from issuance, so management has an incentive to grow the business over time. But the option plans typically do not account for inflation, not di they typically measure performance against peers (though that is getting better).
Your point about quality managements preferring going private is a result of the quarter to quarter stuff and Sarbox, and their willingness to do this is a demonstration of a willingness to forego short term-gains.
To those who commented on my defense of buybacks,
Regarding a leveraged approach, I take your point. Those who prefer dividends are simply not being rational given current tax policy.
I read the Fitch thing and have assumed the fetal position. Call me when it's over, someone. What they are saying is that Resilogic was an Etch-A-Sketch photo passed off as an Old Master. That's, ah, chutzpah in a major way.
Nope, I stopped contributing because I went to an employer pension plan- I have had very good performance in the subsequent 457 plan available as a supplement, but the returns have been less due to borrowing againt the plan to purchase real estate. (when they let you borrow at 5% and pay the interest to yourself, you take the money;-} I still have done very well in the 457 plan, but I have also used it to offset risks in other investments, and those hedges have lost money (like my 2x short fund for the last year and change- too early dammit).
I would recommend that you examine your fund structure very carefully for expenses- my 457 offers a bizarre but useful option to allow me to use a Schwab account for $50 a year- which allows the purchase for low costs of the same funds that I can get in the plan.
Never the less, I would not recommend that people follow some of my investment ideas- in some cases they have too much risk for the average investor. I have enough secure assets that I can swing for the fences in my 457. But decent returns of 8% should be available if you remember to accept fluctuations and risk, and even embrace them at opportune moments. My wife's retirement account has doubled over the last five years with very few contributions, and very few trades.
(100k to 200k)
So to put it plainly, I disagree.
But the key is to find a way to invest that allows you to reap some returns without making you worry too much. I find that the people who examine their statement on a daily basis do the worst, and those who just learn to make quality investments and let them ride do the best (Warren Buffet comes to mind).
I find that the people who examine their statement on a daily basis do the worst, and those who just learn to make quality investments and let them ride do the best (Warren Buffet comes to mind).
And we (sorry Lama) get to keep out hair!
Lots of fear and panic today huh Allen?
Never fear, fear still dominates in the credit markets and tomorrow is another day
muckdog said: "...What's interesting is folks on the sidelines always say that they're waiting for a dip to buy..."
I'm one of them.
I've done a study of all the significant SP500 corrections (greater than -5%) since the 1960's, along with their causes.
Based on the conditions leading up to the correction (valuation, earnings growth, yield-curve, inflation, unemployment, etc.) we're probably looking at a -5% to -10% correction, with a median duration of 26 days peak-to-trough before the uptrend resumes.
Banker, Can't agree with the annual finacial statements idea. If implemented I will no longer invest in common stock. It provides too much wiggle room for unethical management (yes, I beleive they are not all in jail) to hide operating, financial or other problems. Its not perfect, but I prefer to hold managements feet to the fire quarterly.
Both approaches have great costs ans you have noted.
My biggest fear is something Fetal Position Mama identified. The best managements are now pursuing private options. What does that mean? That regular schmoes will being investing with disproportionately weak management teams who are running public companies. Not a good long-term option.
Banker, Wait until there are a few more private equity blow ups (ala Bear's infamous funds), and it will get a lot tougher for PE to get investors interest.
You're onto something. Stocks for the long run (SFLR) is an interesting observation but strikes me as a bogus theory (have not read the book)
SFLR is built around the idea that stocks earn a higher return to compensate for higher risk. Yet if everyone acted on SFLR theory (which we are close to), stock prices would be set based on timing preferences, without regard to risk.
It's hard to put much on a theory that stops being true after everyone acts on it.
Some people retire on investments. My dad put $100/month in mutual funds between 1950-1985 when he retired. He put in 200/month when the market was down for two or more months in a row. His accounts hit 1 million in the early 90's after he retired and he then switched mostly to tax free bonds. In between he paid for the college educations of five children and helped with one grandchild.
This will be the first year when I can max out both a 403b and a 457b. I am not an indexer and try to be in the right sectors, capitalizations and countries in diversified long investments and I try to time the market using a longer term timing system. The timing suggested moving out of equities on July 17th,so I moved to 20% equities (from 80%) in mid July. Since I'm a teacher, I work more on stocks, options and futures during during the summer. I'm up 200% in my housing bubble and leveraged bank put option accounts since finishing teaching a summer term in early June. When the DOW was down 289 on Friday, my accounts were up >50K. Today with a comparable increase in the DOW, my accounts were down 30K. The volatility is getting a bit much, but I think that the risk to the downside is much greater. I hope that thing settle down in a few weeks, since I need to get ready to teach.
you can buy a "cheap" home in Santa Monica, anytime there are plenty of them...assuming you could get a loan, however it's going to be a while before they become less expensive/quasi-affordable
Regarding a leveraged approach, I take your point. Those who prefer dividends are simply not being rational given current tax policy.
In fairness I acknowledge your point that truly mature companies probably ought to shrink their balance sheet... the one thing that bothers me as much as innovative technology companies that SHOULD BE growing buying back their stock are old stodgy low tech firms 'investing in rocket science'. We don't need more buggywhip.com's do we?
The real killer as pointed out by others is when firms borrow to buyback - bad under almost any situation I can imagine. Sets them up for all kinds of issues & you can even debate whether the BS really was reduced (or were accounts just 'exchanged'... increased liability for decreased owner equity).
Banker,
I guess I'm the irrational one.
Dividend tax rates are as low as any middle class marginal tax rate in a lifetime. Are you suggesting that it's better to defer assuming rates will go lower?
Tax deferrals only enhance returns if the future marginal or applicable rate is lower than the current.
No it is irrational for a shareholder to desire double taxation. In a buyback, you only pay taxes on what you choose to sell (assuming you have a gain). If you are paid a dividend, you pay income tax on that and the corporation is using after-tax money to do so.
Why pay the extra taxes when a buyback can serve the same purpose?
You are still deferring. Some day those taxes will be paid with double taxation (unless you take a loss of course, then you can deduct $3k(?)).
Banker, I know you are smarter than I am, but I promise that if all goes well, you will pay the double tax some day (unless there's a radical change to the tax law). Favorable privatization scenarios are not likely.
On the other topic, can you believe we have to call banks that are in full compliance with Basel II and have them sign off as SOX compliant?
Next, I think I'll ask to see my doctor's high school diploma.
Really though, SOX is being scaled back, less bottom up testing, smaller samples, more risk analysis. Keep 404 and 302. Most of the rest can be scaled back much more.
I know what Banker meant. It's all due to compounding. Imagine that you have two papers. One is paying once a year 10%. The other "pays" 10% but not in cash but by compounding it (so it is taxed after you sell the bond). With no taxation, assuming that you can invest the dividend with the same yield you get the same total yield. With taxation (assuming 20% tax rate) after 20 years
Dividend bond:
(1+0.1(1-0.2)))^20=4.66
Compounding bond:
((1.1)^20-1)(1-0.2)+1=5.58
The difference is not that large if the dividend is low or the time is short but as you can see it adds up.
By the same token, zero-coupon bonds would be more advantageous than traditional bonds that pay in regular intervals.
By the way, the worst thing about the tax system on capital gains is that it taxes inflation. I think it is terribly unfair, especially on puny incomes such as treasuries or CDs. With, say, 5% interest rates, 4% inflation and 20% tax rate, all the real income is taken by the taxman. And it gets worse with larger inflation. I think one should be able to gain the amount equivalent to the inflation tax free. Then, the amount above can be taxed as regular income (or even more).
poszi,
I'm not sure why you are assuming any investment will not compound. If you are paid cash dividends and re-invest them, you will receive compounding returns. If you pay the same tax rate, your return will be identical whether you pay taxes; annually and re-invest the net proceeds, or pay upon withdrawal.
The Financial Planning Industry has promoted common misconception that deferring taxes will reduce them. Try telling that to the poor suckers who bought annuities (and their heirs).
this was sent out from our AE at NCHE this afternoon:
"Hello everyone,
As all of have heard or read, we are having some issues here at National City Home Equity. As of this moment, our doors are not closed. All loans that are in the pipeline will be honored and closed. You should have received a more detailed email regarding loans in the pipeline earlier today. If you submitted a new loan on Friday and it wasnt underwritten yet, it will not be underwritten. All loans in the pipeline can not be changed. I have been swamped with calls and am trying to talk to as many of you as I can, but realistically, I am not an underwriter and can not clear stips. I will keep everyone posted on when, or if, we will be accepting new applications in the coming days. Please call your underwriter if you have questions on a certain file. File updates should be going out today. I hope I will be able to continue working with all of you in the future."
Nat City Home Equity is done, I hear. This is a crazy time in the Business. At least it will get rid of a the green pea's who give liget lenders a bad name.
this came a couple of days ago from my AE at National City Home Equity...they are no more...
"It is with sadness that I have to type this email. National City Home Equity has joined the long list of banks that is no more. We all met with HR and our last day is tomorrow. Even though I have only been your AE for a few months, I feel I have developed a great business relationship with a lot of you. I will now start my search for new employment in this crazy industry. I can honestly say that I am impressed with the professionalism and understanding of all of you through this tough time. If anybody is willing to send me back their cell phone numbers, so I can use you as a reference, that would be greatly appreciated. Good luck to everyone and God bless."
They were a great stand-alone 2nd company to deal with...they will be missed.
Marketwatch just updated: NCHE stopped fundings, too:
SAN FRANCISCO (MarketWatch) -- National City Corp. said on Monday that its National City Home Equity unit has suspended approvals of addition loans or lines of credit in response to market conditions. "This is one of a number of steps National City has taken in recent weeks to help ensure that originations are in line with existing and anticipated market conditions," the bank said in a statement that was e-mailed to MarketWatch. "We are continuing to closely monitor the market and take the appropriate steps to best navigate market conditions."
Prudence.
Option One changed rate sheets today again (fourth time within last 10 days) and they removed stated income completely. I can't find news release, yet. I wonder what lenders are going to refinance those poor FBs with stated income and reseting rates.
I'd say stick a fork in this market but the carcass is too crispy.
What is going on with Luminent?
Also, can someone explain what is going on with this:
"Subprime mortgage lender NovaStar Financial Inc. said Monday it will resume making subprime mortgages through brokers starting Tuesday after taking a fresh look at "current conditions in the secondary market."
Regards,
Monday Rock Blogging.
Dear Prudence
From the FT
"Jimmy Cayne, chief executive of Bear Stearns, has been calling round other Wall Street chiefs asking them not to pull business as he faces a growing crisis of confidence in the bank."
FT.com / Financials - Bear Stearns seeks Wall St backing
Not good! If he's begging they probably have a large liquidity crisis on their hands. Is this what riled Cramer?
I recall that ,at the time of the depression, a typical mortgage was for one year with a balloon payment at the end which was refinanced making it ,in effect, a 1/0 ARM. People lost their homes and farms in many cases not because they could not make the payments but because the banks had no money to refinance the balloon. I was thinking how similar the situation is today for ARM holders who have no hope of making reset/recast payments (making the loan a defacto balloon at the end of the teaser rate period) but cannot refinance due to tighter standards.
Let's hope the result is different from the 30's.
Hmmmm.... Not-So-Black Monday today.
Thinks kind of display of liquidity would make it harder to justify a Fed rate cut, I think.
Of course if they did, we could see the market go up 1000 points in a single day.
Ultimate short squeeze bloodbath and so on.
What to do... what to do...
I'm not sure I remember Aegis, were they mainly Alt-A?
for me, what to do is not play in traffic. then again, I'm not a gambler. potential for disaster (and irrational spikes upward) too great in this market.
i'm watching from the sidelines.
The markets are playing follow the Yen.
dis,
That is not good! As I said, I thought axing Spector was a mistake. He was widely seen as the brains behind most of Bear's business and Mayer just isn't in the same league.
Alan Schwartz is a classic IB and not that close to the trading and proprietary businesses. I'm not sure what they do here.
Catch 22 market today.
Anyone buying in hopes of a rate cut are helping to ensure there won't be one.
and irrational spikes upward
There's absolutely nothing irrational about these spikes. They're a great way for properly capitalized speculators to make money off of undercapitalized investors.
They are exactly what you should expect in this kind of market with mega short interest and lots of small time bears in the market.
Hedge funds make money off of this kind of volatility. Nothing irrational about that.
The real question is if the Fed will do something stupid or if one of these spikes gets out of hand and takes the market to new highs.
But if your positions have an appropriate safety margin, these spikes are just noise.
AC,
You seem like more of a stock guy that I am (not a tough standard), what is going on? Is the market building in some expectation of Fed relief? Is that why the financials are up? If that's it, I think we may be in for a rude awakening later this week.Could it be something else?
Help!
You seem like more of a stock guy that I am (not a tough standard), what is going on?
I can only guess based on what I'd do. But just consider that there's well over 1 trillion dollars in hedge fund capital out there. If they start behaving as a flock they can create huge stock market movements in the short-term.
I thought we might have a big rally today simply because that's what I'd do - there's a lot of money to be made squeezing money out of shorts, even if long-term it's crazy to own the stocks involved.
In the short-term I just think of the stock market as a big poker game. And for me that seems to explain a lot of the behavior.
I'm just guessing however, and don't have any specific insight into the market. I'm not a "stock guy" I just expect organized deception from the market, and I find myself being taken by surprise a lot less that other people.
NFI - after taking a fresh look at conditions in the secondary market, let's jump back into subprime. Brilliant. What do you think they see that noone else sees? Maybe they looked up the ABX charts and it was one of those days when they were missing, and their guys roared, full speed ahead!
This ship be sinkin!
Well, it's a good time to load up on SKF (double-negative financials ETF.)
I agree with Joe, the market can't say out of one side of it's mouth, everything's fine, and out of the other, we need a rate cut.
AC
One thing for sure, to continue with the poker analogy, these big swings are like large pots. The house rake gets bigger the more action there is.
What they lose in mortgages they'll make up for in trading fees.
End of day was SKF time. That 7% drop will be reversed in no time.
I am hardly an expert, but I think this is called distribution. This is really a pretty weak bounce considering how oversold the market was at the end of the day Friday.
I noticed the Yahoo poll still showed something like 34% buy, 54% hold and 12% sell over the weekend. Plenty of folks still willing to buy the dips.
My contribution to the Knowledge of Stocks Index (KSI) is profoundly negative, but I did read something here: Stocks Volatile Ahead of Fed Meeting.
Charles Norton, about 4 paragraphs in.
Aegis is owned by Cerebus- they have to cut back to start feeding their new business acquisition- the UAW;-}
As for this market- they have decided that all is well, and a bunch of houses with evaporating seconds don't really bother them. They think they are going to get at least a "we are watching current market conditions closely and stand ready to provide liquidity if market conditions warrant.." Hope springs eternal.
As for the dying mortgage broker business- did it really need to exist anyway?
Someday this war's gonna end....
AC,
Is this volitility on the downside (bear traps?) likely to move stocks from strong hands to weak hands?
The stock market really isn't much of a poker game. Take a long term look at the SP500. The average return is pretty good smoothed out.
Sure, in the short term we get bumps, hiccups, overreactions, fear, greed, volatility, etc. But when we're in a bull market, every dip like this turns out to be a buying opportunity.
What's interesting is folks on the sidelines always say that they're waiting for a dip to buy. Then when the dip happens, they say they're looking for a bounce so they can short.
LOL. Meanwhile, the SP500 trends along, beating the pants off of most of those folks on the sidelines doing the wrong thing...
Actually, I don't think the short-sqeeze explains it. Most of the short positions existed three weeks ago and are now ahead (or at least ahead of where they were.) Any short squeeze was likely happening in June and early July.
I think there are a lot of people who see this as a genuine opportunity. I friend was over last night who invests. He's been doing it for years and has generally done well, definitely a Warren Buffet type investor.
He's been buying financials that seem insulated from home mortgages. I felt he really didn't grasp the depths of what is happening, but then he actually works for a living and doesn't spend a lot of time on reading all the crap I do.
Did anyone else see the CNBC alert that Fannie was seeking to raise the conforming limit? Maybe it was just my imagination.
Dear Geoff,
All I can think of NFI is that they believe they have enough gas to make it through the wasteland into the paradise of the next housing/lending boom.
Regards,
Is this volitility on the downside (bear traps?) likely to move stocks from strong hands to weak hands?
I don't want to pretend to know what's going on with the market. I'm no expert. I'd only say that I'd expect the volatility to benefit the stronger hands nevermind who owns what.
The stocks may temporarily go into strong hands only to be dumped into weaker hands the next day.
If you're forced to sell or forced to cover something that you really don't want to because it's a good position in the longer term, that's going to benefit the big guy - your money becomes his money and he gains a better entry point into an attractive position.
The big guy likes that so expect that to happen alot.
Again, just speculation on my part. I'm no professional.
but then he actually works for a living and doesn't spend a lot of time on reading all the crap I do.
My feelings are hurt.
"Did anyone else see the CNBC alert that Fannie was seeking to raise the conforming limit?"
I heard that and it's horrifying. Have not seen any confirmation. I also heard Buffet was buying HOV and shorted the piss out of it after the rally slowed down.
AC,
I actually think you are ont something, but I'd quibble with one thing. You keep referring to "big guys." I suspect in this market what you really mean are "less leveraged and more liquid guys."
Is that correct?
Thanks AC
Make no mistake - this is just a short lived bounce right now. After 5 years of a bull market with max. 8.5% loss we are due for a 10+% decline from the high 14,000 Dow.
This then will be an excellent buying opportunity. I am patiently waiting.
O-Joe
Whoa, the bear speaks!
Not BSC, but Merril Bear economist David Rosenberg (another very smart guy).
Merrill Says Fed to Cut Rates in October on Slowdown (Update2) - Bloomberg.com
The central bank will reduce the target rate for overnight loans between banks by a quarter percentage point to 5 percent, Merrill chief economist David Rosenberg said in a report today. In June, Rosenberg said the central bank wouldn't lower borrowing costs until next year...The Fed will cut rates to 3.75 percent ``by mid-2008,'' Rosenberg said today in the report...another 5 percent drop in home prices will slow gross domestic product growth to 1.5 percent next year, Merrill said. The firm had predicted GDP of 2.3 percent.
That's an ugly prediction. Yuck.
Hot Stocks: Brokerages, Fannie Mae Among Big Movers - CNBC
"Shares of Fannie Mae were higher on speculation the largest U.S. home funding company could see an easing on lending restrictions by the Office of Federal Housing Enterprise Oversight. Shares of Freddie Mac also advanced on above-average trading volume.
Fannie Mae executives have asked the OFHEO to increase the maximum amount of home mortgages it can hold in its investment portfolio so it can provide more market liquidity, the Wall Street Journal reported Monday afternoon, citing people familiar with the situation.
Calls to Fannie Mae were not immediately returned."
I think there are a lot of people who see this as a genuine opportunity. I friend was over last night who invests
Dip buyers big time today and shorts taking some well earned money off the table. Just another day in Vegas! I am still short the REIT's and a small QID positio
AC, I think the big action was in commodities today. And I did think some of the financials were oversold.
But I am not, never will be, and never have been a short-term player. I don't care at all what happens in a week or a couple of months. Having written that (and proved my total ignorance of this type of activity), I think the commodity sell-off and the gain on stocks is a reflection of recession expectations. In a recession, you need businesses which are capable of generating cash flow and you don't expect most assets to appreciate very much. This seems broadly rational to me. Friday looked kind of panicky.
Not to mention that dropping most stated-income loans is a move toward reason. Overall, I think today's activity shows encouraging trends. It's not like the economy is in the basement. As soon as we stop pounding ourselves in the head with a hammer life will improve greatly. The ERs may be filled with head injuries, but the healthy on the street can go about business without fear of unreasonable repercussions.
I'd feel a lot more comfortable about stocks in general if I were sure that companies would quit this nonsense of borrowing money to buy back their own stock rather than trying to invest in actually growing their own business, though.
Is this part of the "orgenized decption":
Rumors push Fannie Mae, Freddie Mac shares up
| Reuters
If so it foooled me.
I covered half today. still ahead nicely.
btw, I am not a short term player also. Made most of my money holding 1 stock for 11 years.
It is just that the amount of manipulation in this market affected me.
Muckdog,
I've grown suspect about all this "over the long run of 8 percent returns".
Frankly the average investor wasn't present in any strength in the market until the late 80's when 401k's were invented. With the contribution limits, it took even longer for them to be a significant portion of the stock owners. Not too many average people have actually tested the theory of investing over 30 years and then retireing on the lump sum.
I frankly don't see anyone around me enjoying great long term returns...do you? It's all theory at this point.
I got into the market in early 90's (when I could only contribute smaller amounts) and bought steadily in the broad market through the 2000 bubble (when conviently I was able to buy much more in my 457 plan!!).
So the 8 percent return may be on a lump sum invested in year x. But people don't invest that way.
My returns were worse than the average CD over those years. Sure my early money did great! But my later money is still trying to catch up.
Novastar has been in the weeds for a long time. Submit all you want - whether it gets approved and closes if and has been iffy.
Aegis will tell you they were Alt-A but they were just like every other sub-prime company.....lipstick on a pig is still a pig. I think their problem is with their sugar-daddy. Pockets are quite as deep as they were a few months ago.
Wow...this:
"Fannie Mae executives have asked the OFHEO to increase the maximum amount of home mortgages it can hold in its investment portfolio so it can provide more market liquidity"
and this:
"The Fed will cut rates to 3.75 percent "by mid-2008," Rosenberg said today in the report."
Can we please bring the punch bowl back!
Regards,
How 'bout them bulls?
Go bears!
NEWS ALERT!!!!!!!!!!
Just got this from the LEND rep......
Accredited wants your Jumbo's, A-paper fallouts and non-prime loans!!
Pay special attention to our:
Wonder what planet has he been on for the last few weeks. Or maybe the rank and file with LEND is clueless and still believing the claptrap coming from sunny San Diego.
Mama,
I'd feel a lot more comfortable about stocks in general if I were sure that companies would quit this nonsense of borrowing money to buy back their own stock rather than trying to invest in actually growing their own business, though.
And what if that busness is mature? What would you as a shareholder like them to do?
1) Invest in ancillary businesess thay have no competitive dge in;
2) Acquire a competitor in the same industry (and perhaps overpaying);
3) Try to make a mature biz a growth biz and likely flush that cash down the toilet; or
4) Give it back to you so you can invest in something yourself?
Now I am not saying that ALL buybacks are for mature businesses, but simply that shrinking the balance sheet can be a useful step for a mature business.
when will i be able to buy a cheap home in santa monica?
I was told that this:
"According to preliminary calculations, the Dow Jones industrial average soared 286.87, or 2.18 percent, to 13,468.78, after zigzagging throughout much of the session. On Friday, the Dow fell 281 points."
Is an indication of a classic top 1929 style.
Can anyone confirm or point to a day by day chart between Sep 1st to Oct 19 1929 ?
when will i be able to buy a cheap home in santa monica?
jed | 08.06.07 - 4:42 pm | #
Right after the big one hits.
I actually think you are ont something, but I'd quibble with one thing. You keep referring to "big guys." I suspect in this market what you really mean are "less leveraged and more liquid guys."
Specifically what I'm getting at is that traders with large amounts of cash and/or leverage benefit from this kind of volatility at the expense of those who can't because they can hold on to attractive positions even when the position moves against them, and they retain their buying power in these situations so that they can even increase their position at a more attractive entry point.
Compare this to a small-time trader who's overleveraged and gets blown out of a position with a 20% realized loss and is too afraid to get back in even though the entry point is now more attractive than their initial entry point, and long-term the position is sound (e.g. CFC going from around 30 to close to 40 and then back down below 30).
AC, I think the big action was in commodities today. And I did think some of the financials were oversold.
It looks like oil might be being deleveraged. Russ had some good info on the record long positions on oil.
Sorry, Tanta, I meant the WSJ, Bloomberg, etc. That was meant to be self deprecating. I spend all this time, reading, thinking about things, make some 100% gains and lots of losses. Meanwhile he buys low and waits and we probably do about equally well.
Of course, when the DOW hits 12000, I'll be WAY ahead...
The stock market really isn't much of a poker game. Take a long term look at the SP500. The average return is pretty good smoothed out.
Long-term the stock market is pretty rational. As you look at smaller and smaller windows of activity, however, I think it begins to resemble a "poker game" during certain periods. Again, I'm referring specifically to the short-term here.
Benjamin Graham had it right:
In the short run the market is a voting machine, in the long run, a weighing machine
Paraphrase
Bob,
You may end up way ahead, but us index guys get to keep out hair!
Average Joe - unless you are a pro or a very lucky gambler- you will do well if you stick to low fee mutual index funds like Vanguard. Pick one asset allocation model for you and sick to it. Do not sell in a panic or load up during exuberance.
Mama-
Most of the companies doing buybacks HAVE to do so in order to make their earnings numbers. Take a look at the last quarters for most of them and calculate their EPS without the buybacks... they would have missed. Most of the time they buyback EXACTLY the number of shares needed to meet estimates... how convenient.
I'd also add that the buybacks are making the door much smaller and the leverage is making the movie go'er much fatter.
MOM,
Managers are claiming they will be doing buybacks. Although companies do file 8K's announcing intended buybacks, I don't believe they are obligated to carry through with those plans. I wonder if anyone is following up anyway.
With the dividend tax rates as they are and political winds shifting, I'll take my money and pay the tax now.
Banker, I haven't kept all of my hair even in the Spartan Fund. Life's unfair.
I did however, join Hat Club for Men, which is much cheaper than Hair Club for Men...so I saved some money there.
M-F
Thanks,
However, my point was...where's the evidence that I'll do well?
Can you point to any human on earth that started investing in 401k's at the start of their career, worked 30 years, and then retired on the proceeds?
Frankly I don't think it's been done yet.
Now, you can point to historical returns, but my point was that for average investor history doesn't start since 1920, it starts at around 1990 when they were encouraged to buy through 401k's en mass.
Now that we're at 70% of the country as stock holders, how much more growth can we expect and how rapid is it likely to be?
Perhaps it's like weight loss, where the early pounds are the easiest.
I distinctly remember alot of people buying homes the last few years based upon some historical model of housing returns "that never go down".
Somewhat off topic, there's some interesting stuff in this just-released item from Fitch. The firm is revising its mortgage default and loss model for prime, Alt-A and subprime residential MBS transactions ...
http://home.businesswire.com/portal/site/home/index.jsp?epi-content=NEWS_VIEW_POPUP_TYPE&newsId=20070806006189&ndmHsc=v2A1186398000000B1186459654000DgroupByDateJ1*N1000837&newsLang=en&beanID=202776713&viewID=news_view_popup
How mch of this is orgenised by Cramer and CNBC ?
Was Cramer job to create the impression that the Fed must cut ?
I never would have thought that the fed would cut until I saw XLF going higher so strongly.
At that point the thought: Does someone know something that I don't starting creating doubts in my mind.
Next came the FNM rumor.
I am not a "weak short". I have held through April knowing ML are going to end up lower. When CFC (shorted at $36, $39) hit $42 I added more but today got to me and I panicked.
Who ever is playing this game fooled me today but I am still doing fine. Nothing wrong in covering in $25.5 instead of $24. The real question is what next:
Is CFc headed for the teens ? in any case it became a crowded short (but some crowded shorts like FED and DSL are doing very well for shorts)
I'm rather suspicious of the bright long-term prospects of the market (but I don't think it will be bad, either, just not spectacular). In a rational market, stock return in long term should be roughly equal to the nominal increase of GDP. The market grew faster in the last decades. Partially, because the rich-poor gap widened and the share of the profits in GDP increased, partially since the volatility and the perceived risk decreased but also due to popularity of 401k plans. What would happen when boomers start to cash out their holdings?
Banker, buybacks of shares from profits is fine for me, although in a perfect world (with no tax loopholes and no incentive for the executives to inflate the stock price), dividends would have the same purpose, only better (more open and clear). But taking debt for buybacks is IMHO stupid. If someone wants to buy the stock on margin let them do it individually. The companies should not try to speculate on their own shares.
Lama-
I'll second your dividend preference. There's nothing wrong with companies shrinking their balance sheet or levering up if cash flows are relatively stable.
The problem is that most buybacks merely counteract dilution resulting from executive option grants. Dell is a good example - they've spent more than $20bn on buybacks since 2000. About two-thirds of this was to offset executive options grants. And stock's down about 50% over this period.
Hey, 1 bdr condos have probably dropped probably down to $650k by now.
My God. Did any of you other mortgage weenies read that Fitch thing our Mike_in_Fl just linked to???
They've been using front ratios???
I just spit Dr. Pepper. Tell me they don't mean what I think they mean.
Here is a long term investor:
Legg Mason's Miller says unfazed by housing slump
| Reuters
Tanta,
they claim the impact on defaults is minor:
"Default expectations will be determined through analysis of 'back-end' debt-to-income (DTI) ratios, rather than 'front-end' DTI ratios as had been implemented in ResiLogic. If a debt-to-income ratio is not provided for a subprime loan, the default DTI is assumed to be 50%. The impact of this revision is generally minor, although subprime data files lacking in DTI information will be noticeably affected. "
Tanta, what does that mean?
They've been using front ratios???
Of course. You'll stop paying on your student loan, car, boat, and credit card before you'll default on your mortgage! Duh!
Oh man, those Fitch model revisions will be pure DEATH.
1) regional adjustments from UFA? Hullo? Anyone take a look at how the regional economies are starting to trend down faster than an express elevator? Florida (lets call that a region.) TOAST! Plenty of others. OW.
2) Raising multipliers? Uh, ya. Check. That will hurt a wee bit, dont ya think?
3) Low doc? Where do you think they were pulled from? I dont think NoDoc. OUCH again.
4) Oh dear god...tanta, you read it write. They've been using Front end DTI....that is really hard to believe. And even harder when you realize just how much difference they must have known existed even years ago, between front end and back end.
heaven help us...I cant read any further.
Back-End Debt-to-Income Ratio Your back-end debt-to-income ratio compares your total monthly debt payments to your monthly income, and it is a widely used measure of your creditworthiness. You compute your debt-to-income ratio by dividing your monthly minimum debt payments (including your rent or mortgage and housing insurance and property taxes) by your monthly gross income.
Front-End Debt-to-Income Ratio Your front-end debt-to-income ratio compares your monthly housing expenses to your monthly income and is a widely used measure of your creditworthiness. You compute your debt-to-income ratio by dividing your monthly housing expensesincluding your rent/mortgage, interest, insurance and property taxesby your monthly gross income.
Max:
Probably, if you live in the house.
Did they honestly think that RE taxes werent going up? Or that everyone would refi out of their other debts? Or that interest rates would stay super low? This is absurd. How could they decide to just disregard all those components altogether when they knew theyd be getting worse? WTF?
The rational is interesting:
4) Change in DTI Ratio: Back-end DTI ratio data is generally more available than front-end data in the data files provided by mortgage issuers. Therefore Fitch has modified ResiLogic to utilize back-end DTI. However, Fitch continues to be concerned by the prevalence of missing DTI data. Fitch will use a default assumption for missing subprime DTI of 50%.
So, if front-end was so hard to quantify, what were they using before the change?! It wasn't 50%, that's for sure.
M-F
I'll use my self as proof that the returns of the Average Joe haven't been as advertised.
I started buying stocks 15 years ago through a 457 at work (they were fairly new at the time). I have basically been maxed out on contributions since the beginning. I think the limit started at $5000, and slowly increased to today's $15,500.
I have put in roughly $150,000 total.
I have $189,000 now.
I invested mainly in three funds,S&P 500, Growth and Income, and Aggressive Opportunites.
My actual return based upon a calculator if I invested $10,000 a year ($150,000 divided by 15 years) to get to $189000 is 3%!!!
If I averaged 8% I should have $271,000. I work with many others who have invested in the 457, in a variety of funds and weighting. Their balances are very similar to mine. Nobody has gotten 8% over the long haul in REAL returns.
Reality is much different than theory. It won't be long until people begin to retire and figure that out. Like I said, there aren't many around who have 30 year old 401k's.
I bet if you sat down and figured it out (not just took the historical returns of the funds you own, but what YOU have actually returned on your investments based upon how much you bought and when) you'd see a distinct difference.
I would be interested if anyone out there has retired on a stock portfolio soley through personal contributions over a career.
oh, charming, Fitch has discovered geography after everyone yammering on and on and on about how "all housing markets are local" and "location, location, location". Granted, that's a existing sore point given my degree. ahem
Query. Is the housing Market still using MSA definitions for delineating Urban Areas instead of CBSA definitions? The OMB isn't updating MSAs anymore.
Ahh. So they have been calculating debt service as if the homebuyer had no other debts to service . . .
I worked in commercial lending, never had anything to do with retail/mortgages/etc.
If I showed figures like that to my risk officer I'd have been flayed alive as an example to others.
Well, in the normal use of these terms, the "front ratio" is the total housing payment (PITI) divided by gross monthly income. The "back ratio" is total debt (PITI plus all other obligations) divided by GMI.
For years and years, the GSEs and HUD required borrowers to qualify at both front and back. After a while, Fannie did some number-crunching and decided that the front ratio isn't that predictive. The real issue is how much you spend a month, not how much of that is your house payment.
Freddie took a slightly different view. They no longer have a strict front ratio requirement, like Fannie, but their UW model does look at the spread bewteen the two. Freddie says that problems start when the spread between HTI (front) and DTI (back) gets to 15% or more.
The Alt-A and subprime world stopped using front ratios years ago. I haven't seen a datatape with front ratio on it since probably 2002.
So if Fitch is really saying that all along they've been using the lower number--the front ratio--instead of the higher, more relevant number--the back ratio--my mind is officially blown.
I can't believe this. I can't believe they have front ratio--nobody reports it anymore except when you're dealing with some Freddie product.
So I'm seriously confused here. I suspect it may be "minor" because they thought they were taking HTI all this time when they were really getting DTI. Which makes them kind of sound like bozos.
AJ, sorry to tell you, but you have bad timing. 15 years is NOT the long run. When you go through a massive bubble like 1999-2001, it tends to screw up averages. Still, Id think the overall would be higher than 3% for that period. Anyone have the actual figures?
Bozos is too kind. Fraudulent market manipulators is more like what comes to mind. They knew they were minting money off this bubble. To change that calc a few years back would have killed that giant revenue stream that they forged hand in hand with the IBs. Sick, sick, sick, I tell you.
I smell a Tanta post in the very near future. Should be a good one.
The Ohio AG is already investigating these "bozos" . . . can the plaintiff's suits be far behind?
I envision singing, dancing lawyers with dollar signs in their eyes. And the ratings agencies have it coming to them.
Average Joe,
Assuming no panic trades, you are likely losing for two main reasons:
1. Fees and more fees. (2% is an outrage)
2. Asset allocation.
Asset allocation is determinative. You need a proper mix of small cap/large cap and foreign funds and yes bonds.
The vanguard SP index is up 5.98% in 10 years as of 7/31/207 and that includes the dot com bubble burst. It is up 12.11% since inception in 1976 and this fund beats 90% of funds with simiar aset allocation.
https://flagship.vanguard.com/VGApp/hnw/funds/performance?FundId=0040&FundIntExt=INT&DisplayBarChart=false
I can't help wondering about that default 50% when data's not available. That would be lo-doc at best, wouldn't it?
M-F, take away the last year and do the calculation. When you consider 10-15 year frames, it is quite volatile depending on what years you choose. AJs 3% could be wiped out in the coming months, leaving him with 0 over 16 years.
Geoff!!!
No kidding!
That's my point!
reality and theory are not the same.
EVERYONE has had my timing!!!!!!!!!!!!!!!!!!!!
Who has had 15 years in the market that didn't include the 2000 bubble.
401k's are only 20 years old!
What percentage of the population was in the stock market in the 50's, 60's, and 70's?
When everyone plays, the game changes.
Gamma and Lama, exactly.
Banker, see RCRyan. I don't have a problem with a business buying back its own stock if it is in a strong cash position and has no better alternative. Even mature businesses will encounter business cycles when having a strong balance sheet at the bottom of the cycle will allow that business to make very good acquisitions (in the long run), so borrowing money to buy one's own stock is almost always a complete red flag for me.
What I dislike so intensely is a company that is run purely to maximize short-term share value without regard to the underlying fundamentals of the business. Really what is happening is that management makes out like bandits with stock options while the business undergoes a slow weakening.
Because of this, I am tending towards private investments only. I do not see many publicly run companies that are investing in their baseline businesses in the way that I like. I believe current trends on the public exchanges are bad for the shareholders and the bondholders long term. Btw, no one I know even wants to work for most of those corporations any more. Everyone wants to go privately held. Long term this just sucks for the exchanges. Yes, in banking you can go ahead and make incredible amounts of money, but I have always lived by the motto that I want to die as neither a looter or a victim of looting.
However, I am quite optimistic about the underlying economy because the vibrancy I see in these privately held companies. There is tremendous innovation and ambition, plus long-term strategies to gain market share and open up new markets.
MoM,
One thing to keep in mind as the equity market gyrates:
A bubble is popping, but it is in credit, not equities. If spreads widen, stocks will crater; not because equity investors were wildly optimistic (as in 1999), but because they were not sufficiently pessimistic. How do they get sufficiently pessimistic? Its a tough process because stocks get "cheaper" ahead of the main credit event, at which point they get (rather violently) "expensive". "Cheaper" attracts lots of dip buyers, again and again. This produces the type of volatility we have seen the past week.
"Assuming no panic trades, you are likely losing for two main reasons:"
No I'm losing for one reason, the same reason that others with different asset allocations are losing.
Real returns have been different and will continue to be different than historical returns based upon some theoritical model.
According to the FT:
Rumours swept the market that Fannie Mae, the federal mortgage agency, would be allowed to make sweeping purchases of underpriced mortgage securities. Its shares gained 10.4 per cent, while the smaller Freddie Mac agency gained 7.7 per cent.
Can somebody enlighted me about what this means and whether there is anything to it? Is this basically the "bailout" rumour that was refered to towards the end of last week?
Thx,
David - well, that's why I have been generally negative on this stuff for several years. I calculate and want return for years at a time, not a quarter or so. I am sick enough that I could blink out and be essentially non compos for several years at a time, so it's a necessity for me.
I'll always buy a company that I think has good management and a strong underlying business, but I don't see the RV in a lot of this stuff. And I am middle-aged and stubborn; if I don't see the RV I am not going to buy it. This is the first time I have ever been positive on T-Bills, but I am doing well on that stuff. I am doing great on private investments. In the wake of 9/11 we bought heavily, so I have seen a good return. But right now I am not happy with my opportunities overall in publicly traded.
Carlomagno - it's the bailout that people have been begging for.
PS: How's the Holy Roman Empire going?
Avg Joe- yup- My father and mother did it.
Turned small dollars in the 70's through the mid 80s into over 400k.
In the mid 80s quit and took over family small business and stopped contributing due to building the business and paying off debt.
They probably never put more than a total of 50k into their accounts.
I have a small legacy IRA that I contributed about 5.5k to through 1996 that is worth about 28k today. It can be done, but you have to make few investment regime changes and buy low and sell high. My father put his money into bonds in the summer of 1999 and I had to hear him rage against the market going higher and how much money it was costing him to sit and make measly bond returns. So he left 8 months more of the ride, but when he went back in he had a lot more than he would have had if he had stayed. When things look stupid in value get out, when they look cheap, buy. All of the accounts mentioned are at T.Rowe Price and are simple mutual funds. I find that a very slow trading strategy- check the statements in the mail and evaluate according to macroeconomic themes pays the best return. Sometimes you have to sit tight for your thesis to pay off too. I have been in a Japan fund since the beginning of the year and lost some money. But I might be in that fund for five years or more, so a couple of months lost money is no big deal.
Patience is hard, and look at the entire world for ideas. Also, if you start reading about your investment as the next big thing, contemplate when you want to sell.
Someday this war's gonna end....
MOM: Thanks. There's some argument about whether I was really the first Holy Roman Emperor. Some people claim it was Otto I, who wasn't even wearing short trousers when I kicked the bucket.
Tanta......on the front ratio topic:
If Fitch was using the DTI ratio provided by the sub-prime lender, they were indeed using the right ratio. If true and they called it a Front Ratio, just more evidence the rating agencies do not truly understand what they are rating. BUT, if Fitch extracted the DTI by PITI by the income listed, then it is a really big thing as that is a Front Ratio. If that is true, that is not a "minor change".
re: S&P returns, don't forget to correct for inflation. Very different picture when looked at that way.
re: SKF, be very careful. By buying these you automagically leverage yourself 2:1. All it will take is one clear hint from Bernanke tomorrow that easing is in the offing and that thing will spike up, and won't start to get rise again until the next liquidity issue shows up.
Thanks Allen,
Your 5.5k did about 15-18% so that's good.
My main point is that it's a good thing you stopped buying in 96. If you would have done what everyone else has done (and would have to do if they wanted enough to retire on) is to buy more as the market peaked. If you would have kept contributing and ever increasing amount, you'd have averaged significantly less.
Historical returns are about as acurate as LUM's dividend projection.
Average Joe:
I just retired at age 59 and have been investing in 401K's since inception. A big plus was the company match; a big minus was the college education cost of my 3 children. However, without the pension from my last employer (20 years seniority), I would still be working.
Mama,
What I dislike so intensely is a company that is run purely to maximize short-term share value without regard to the underlying fundamentals of the business.
Cool, so you'll support the Banker's Less Corporate Reporting Initiative? (BLECRI)
BLECRI will enable companies to only report earnings once a year and will repeal the Sarbox foolishness. Instead they will report only major corporate events in between years. This will allow management to change the quarter to quarter foolishness we have now.
Really what is happening is that management makes out like bandits with stock options while the business undergoes a slow weakening.
That's simply not true. Options typically have vesting periods that run from 3-5 years from issuance, so management has an incentive to grow the business over time. But the option plans typically do not account for inflation, not di they typically measure performance against peers (though that is getting better).
Your point about quality managements preferring going private is a result of the quarter to quarter stuff and Sarbox, and their willingness to do this is a demonstration of a willingness to forego short term-gains.
To those who commented on my defense of buybacks,
Regarding a leveraged approach, I take your point. Those who prefer dividends are simply not being rational given current tax policy.
I read the Fitch thing and have assumed the fetal position. Call me when it's over, someone. What they are saying is that Resilogic was an Etch-A-Sketch photo passed off as an Old Master. That's, ah, chutzpah in a major way.
Nope, I stopped contributing because I went to an employer pension plan- I have had very good performance in the subsequent 457 plan available as a supplement, but the returns have been less due to borrowing againt the plan to purchase real estate. (when they let you borrow at 5% and pay the interest to yourself, you take the money;-} I still have done very well in the 457 plan, but I have also used it to offset risks in other investments, and those hedges have lost money (like my 2x short fund for the last year and change- too early dammit).
I would recommend that you examine your fund structure very carefully for expenses- my 457 offers a bizarre but useful option to allow me to use a Schwab account for $50 a year- which allows the purchase for low costs of the same funds that I can get in the plan.
Never the less, I would not recommend that people follow some of my investment ideas- in some cases they have too much risk for the average investor. I have enough secure assets that I can swing for the fences in my 457. But decent returns of 8% should be available if you remember to accept fluctuations and risk, and even embrace them at opportune moments. My wife's retirement account has doubled over the last five years with very few contributions, and very few trades.
(100k to 200k)
So to put it plainly, I disagree.
But the key is to find a way to invest that allows you to reap some returns without making you worry too much. I find that the people who examine their statement on a daily basis do the worst, and those who just learn to make quality investments and let them ride do the best (Warren Buffet comes to mind).
Someday this war's gonna end...
AllenM,
I find that the people who examine their statement on a daily basis do the worst, and those who just learn to make quality investments and let them ride do the best (Warren Buffet comes to mind).
And we (sorry Lama) get to keep out hair!
Lots of fear and panic today huh Allen?
Never fear, fear still dominates in the credit markets and tomorrow is another day
muckdog said: "...What's interesting is folks on the sidelines always say that they're waiting for a dip to buy..."
I'm one of them.
I've done a study of all the significant SP500 corrections (greater than -5%) since the 1960's, along with their causes.
Based on the conditions leading up to the correction (valuation, earnings growth, yield-curve, inflation, unemployment, etc.) we're probably looking at a -5% to -10% correction, with a median duration of 26 days peak-to-trough before the uptrend resumes.
FWIW.
Sebastia
Banker, Can't agree with the annual finacial statements idea. If implemented I will no longer invest in common stock. It provides too much wiggle room for unethical management (yes, I beleive they are not all in jail) to hide operating, financial or other problems. Its not perfect, but I prefer to hold managements feet to the fire quarterly.
RT,
Both approaches have great costs ans you have noted.
My biggest fear is something Fetal Position Mama identified. The best managements are now pursuing private options. What does that mean? That regular schmoes will being investing with disproportionately weak management teams who are running public companies. Not a good long-term option.
Banker, Wait until there are a few more private equity blow ups (ala Bear's infamous funds), and it will get a lot tougher for PE to get investors interest.
Actually I went long this morning with ten contracts of dia136 for 60 cents. I couldn't resist, knowing the fed will be palliative tomorrow.
They might not actually do anything, but they will soothe and markets will rise.
Admittedly, a bunch of shorts have done very well, and some I closed way too soon. But oh well, trading the small account is a hobby.
Someday this war's gonna end...
Avg Joe,
You're onto something. Stocks for the long run (SFLR) is an interesting observation but strikes me as a bogus theory (have not read the book)
SFLR is built around the idea that stocks earn a higher return to compensate for higher risk. Yet if everyone acted on SFLR theory (which we are close to), stock prices would be set based on timing preferences, without regard to risk.
It's hard to put much on a theory that stops being true after everyone acts on it.
ABX indices continue their death-spiral:
Markit Homepage
CMBX are no better..
Will these new Fitch RMBS rules terminate these Derivative indices?
Some people retire on investments. My dad put $100/month in mutual funds between 1950-1985 when he retired. He put in 200/month when the market was down for two or more months in a row. His accounts hit 1 million in the early 90's after he retired and he then switched mostly to tax free bonds. In between he paid for the college educations of five children and helped with one grandchild.
This will be the first year when I can max out both a 403b and a 457b. I am not an indexer and try to be in the right sectors, capitalizations and countries in diversified long investments and I try to time the market using a longer term timing system. The timing suggested moving out of equities on July 17th,so I moved to 20% equities (from 80%) in mid July. Since I'm a teacher, I work more on stocks, options and futures during during the summer. I'm up 200% in my housing bubble and leveraged bank put option accounts since finishing teaching a summer term in early June. When the DOW was down 289 on Friday, my accounts were up >50K. Today with a comparable increase in the DOW, my accounts were down 30K. The volatility is getting a bit much, but I think that the risk to the downside is much greater. I hope that thing settle down in a few weeks, since I need to get ready to teach.
Brutal!
"ABX indices continue their death-spiral"
What, no perfecta? Pretty close though. It'll do.
With Fitch's new news about how it was qualifying loan pools on teaser-payment debt-levels, not amortizing-payment debt-levels, it's really Game Over.
Anyone else noticed that markit.com doesn't mention ABX pool "shortfalls" anymore?
Load 'em up in to an open-pit-mine dump truck, and bury 'em.
you can buy a "cheap" home in Santa Monica, anytime there are plenty of them...assuming you could get a loan, however it's going to be a while before they become less expensive/quasi-affordable
To those who commented on my defense of buybacks,
Regarding a leveraged approach, I take your point. Those who prefer dividends are simply not being rational given current tax policy.
In fairness I acknowledge your point that truly mature companies probably ought to shrink their balance sheet... the one thing that bothers me as much as innovative technology companies that SHOULD BE growing buying back their stock are old stodgy low tech firms 'investing in rocket science'. We don't need more buggywhip.com's do we?
The real killer as pointed out by others is when firms borrow to buyback - bad under almost any situation I can imagine. Sets them up for all kinds of issues & you can even debate whether the BS really was reduced (or were accounts just 'exchanged'... increased liability for decreased owner equity).
Fly,
Points taken all around.
Banker,
I guess I'm the irrational one.
Dividend tax rates are as low as any middle class marginal tax rate in a lifetime. Are you suggesting that it's better to defer assuming rates will go lower?
Tax deferrals only enhance returns if the future marginal or applicable rate is lower than the current.
lama,
No it is irrational for a shareholder to desire double taxation. In a buyback, you only pay taxes on what you choose to sell (assuming you have a gain). If you are paid a dividend, you pay income tax on that and the corporation is using after-tax money to do so.
Why pay the extra taxes when a buyback can serve the same purpose?
You are still deferring. Some day those taxes will be paid with double taxation (unless you take a loss of course, then you can deduct $3k(?)).
Banker, I know you are smarter than I am, but I promise that if all goes well, you will pay the double tax some day (unless there's a radical change to the tax law). Favorable privatization scenarios are not likely.
On the other topic, can you believe we have to call banks that are in full compliance with Basel II and have them sign off as SOX compliant?
Next, I think I'll ask to see my doctor's high school diploma.
Really though, SOX is being scaled back, less bottom up testing, smaller samples, more risk analysis. Keep 404 and 302. Most of the rest can be scaled back much more.
I have to go. I'll read your scathing rebuttal in the morning.
Kidding I am..
lama,
I know what Banker meant. It's all due to compounding. Imagine that you have two papers. One is paying once a year 10%. The other "pays" 10% but not in cash but by compounding it (so it is taxed after you sell the bond). With no taxation, assuming that you can invest the dividend with the same yield you get the same total yield. With taxation (assuming 20% tax rate) after 20 years
Dividend bond:
(1+0.1(1-0.2)))^20=4.66
Compounding bond:
((1.1)^20-1)(1-0.2)+1=5.58
The difference is not that large if the dividend is low or the time is short but as you can see it adds up.
By the same token, zero-coupon bonds would be more advantageous than traditional bonds that pay in regular intervals.
By the way, the worst thing about the tax system on capital gains is that it taxes inflation. I think it is terribly unfair, especially on puny incomes such as treasuries or CDs. With, say, 5% interest rates, 4% inflation and 20% tax rate, all the real income is taken by the taxman. And it gets worse with larger inflation. I think one should be able to gain the amount equivalent to the inflation tax free. Then, the amount above can be taxed as regular income (or even more).
It looks like Bear is determined to screw its Hedge Fund investors. Good luck if they try to launch another.
Bear Stearns Caymans Filing May Hurt Funds' Creditors (Update4) - Bloomberg.com
poszi,
I'm not sure why you are assuming any investment will not compound. If you are paid cash dividends and re-invest them, you will receive compounding returns. If you pay the same tax rate, your return will be identical whether you pay taxes; annually and re-invest the net proceeds, or pay upon withdrawal.
The Financial Planning Industry has promoted common misconception that deferring taxes will reduce them. Try telling that to the poor suckers who bought annuities (and their heirs).
this was sent out from our AE at NCHE this afternoon:
"Hello everyone,
As all of have heard or read, we are having some issues here at National City Home Equity. As of this moment, our doors are not closed. All loans that are in the pipeline will be honored and closed. You should have received a more detailed email regarding loans in the pipeline earlier today. If you submitted a new loan on Friday and it wasnt underwritten yet, it will not be underwritten. All loans in the pipeline can not be changed. I have been swamped with calls and am trying to talk to as many of you as I can, but realistically, I am not an underwriter and can not clear stips. I will keep everyone posted on when, or if, we will be accepting new applications in the coming days. Please call your underwriter if you have questions on a certain file. File updates should be going out today. I hope I will be able to continue working with all of you in the future."
Nat City Home Equity is done, I hear. This is a crazy time in the Business. At least it will get rid of a the green pea's who give liget lenders a bad name.
The Mortgage Lender Implode-O-Meter - tracking the housing finance breakdown, related to Alt-A and subprime mortgages, lending fraud, predatory lending, housing bubble, mortgage banking, foreclosures, debt, consolidation, lawyers, class-action lawsuits
this came a couple of days ago from my AE at National City Home Equity...they are no more...
"It is with sadness that I have to type this email. National City Home Equity has joined the long list of banks that is no more. We all met with HR and our last day is tomorrow. Even though I have only been your AE for a few months, I feel I have developed a great business relationship with a lot of you. I will now start my search for new employment in this crazy industry. I can honestly say that I am impressed with the professionalism and understanding of all of you through this tough time. If anybody is willing to send me back their cell phone numbers, so I can use you as a reference, that would be greatly appreciated. Good luck to everyone and God bless."
They were a great stand-alone 2nd company to deal with...they will be missed.