Saturday, December 30, 2006

Stock market dividend trends

The question is whether the current market is overvalued since overvaluation tends to lead to trouble? Charles Dow used the dividend yield on the Dow as his gauge of valuation. Earnings can be whatever an accountant says they are, but there's no BS about dividends. A company doesn't pay out a dividend unless it's making money, and when a company raises or lowers its dividend, serious analysts always take note.

Growth Fund Guide follows the dividend multiple (price times the dividend) for the S&P 500 going back to the mid-1800s. For instance, the price/dividend ratio for the S&P was a fat 35 at the 1929 high, and you know what happened after that. In February 1966 the price/dividend ratio was a high 34 and a long bear market followed. In August of 1987 the price/dividend ratio was a high 38, after which came a market smash.

So what's the price/dividend today? It's a record high 57, but never mind, it's possible that "this time it's different," and there'll be no negative aftermath following the current extreme overvaluation.

But for anyone who is short this market, I will warn you in Keynes' words -- "The market can stay irrational longer than you can stay solvent."

Thursday, December 28, 2006

Formula to check out

Check out this simple formula: take the dollar value of new and existing single-family homes in 2005 and divide it by the nation's gross domestic product, the total of all goods and services produced in one year. That gives you a ratio of 16.3 percent.

"That's off the scale," Kasriel said. "The ratio has never been that high. The median is 8.4 percent and the previous high, of less than 12 percent, was in the late 1970s."

Real estate prices have been dropping faster than ever before. The National Association of Realtors said last month that the median price in October for existing homes fell to $221,000 nationally, down a steep 3.5 percent from October 2005.

"That's the largest decline on record since 1968, and the speed of the decline has been breathtaking," Kasriel said. "It's just like a straight line down."

"About $800 billion in equity was taken out of the housing sector by consumers in 2005. This year I expect it'll be about $500 billion, and in 2007 it'll be between $200 (billion) and $300 billion," he predicted.

As housing-related cash dries up, so does the overall economy. Baker terms it "a significant drop" in economic liquidity.

"If we go into recession, it'll be because of housing."

Tuesday, December 26, 2006

Contra Costa median price: New Lows

This post should serve as a market technical alert. Whenever a technical breakthrough occurred, it's considered a significant market status update. It's not life and death, but it's important to know. The median price of new listings declined to another new low, as usual at the end of each year. And, the new low this year is lower than the previous low that occurred at the end of last year.

Wednesday, December 20, 2006

Subprime: 20% will fail

Center for Responsible Lending (CRL) study reveals that 2.2 million American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market.

CRL's research suggests that risky lending practices have triggered the worst foreclosure crisis in the modern mortgage market, projecting that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

Adjustable rate mortgages known as 2/28s (or "exploding ARMs") operate with an initial "teaser" rate for two years, followed by a steep payment increase.

Wednesday, December 13, 2006

Housing Graph **Click on Image**

********** Click on Image ***********

Step 1 defined: over-anxious bottom-fishers jump in at the first hint of decline, confident that the roaring boom will soon re-appear. They have more chance of catching "The Great Pumpkin" on October 31. (with a tip of the hat to the "Peanuts" comic strip.)

The next steps are already visible: a tightening of lending standards which will ultimately choke off the easy lending which fueled the boom. The answer, we're assured, is that the Fed will lower interest rates, re-igniting the blood lust for real estate. But Japan offers an interesting object lesson in this regard. Low interest rates do not necessarily translate into new loans being made.

At the height of Japan's property bubble, when downtown Tokyo was worth more than all the real estate in the entire U.S., banks were literally begging customers to borrow another couple million dollars--for any purpose. After the bubble popped, Japan's central bank lowered interest rates to effectively zero, where they remain today, 15 years (and many tears) later--but the recovery in real estate in tepid and confined to central Tokyo.

Why? Because banks were no longer able to lend money to poor risks, regardless of the low interest rate. As banks get stuck with non-performing loans, their losses mount, meaning that they have to raise cash to maintain even a mere 2% cash reserve against losses. (The current requirement for U.S. lenders is a paltry 1%--a number which is sure to rise.) As losses spiral out of control, their need for cash spirals up in tandem. The more foreclosed real estate they auction off to raise cash, the more they lose on their books as the foreclosed properties are sold for less than the mortgages.

From: Charles Smith

Friday, December 08, 2006

Realtors are finished!!!!

Realtors are done. Richard Barton, founder of Expedia, is going to send them where he sent the Travel Agents. as of yesterday is now a user-generated content similar to popular networking sites such as MySpace. You can now advertise you home **for sale** in two ways. "Make Me Move" and "For Sale". You can add photos of your house for sale. A Red Flag shows on the map over your house when you post it for sale. It is free just like

The move will allow homeowners and real estate agents to add properties’ **for sale** with photos, descriptions, improvements and selling price to Zillow., founded by Barton and Lloyd Frink, another former Expedia executive, has created a compendium of individual home pages, with price estimates and aerial photos, for 67 million homes in the U.S. Ultimately, Zillow would combine elements of free listings site Craigslist, social-networking site MySpace and online encyclopedia Wikipedia.

The site has 3.5 million unique users, and 252,000 have signed in and amended their home records. Zillow faces competition from a number of real estate sites, such as and, although the company says it is the only major user-generated property website, other than some property blogs.

Do you think this will kill the Realtors. Please respond!!

Wednesday, December 06, 2006

Home Builders: frown on excessive inventory

Existing homes on the market outnumber new homes for sale by about six to one. But, if you look at the incredible run-up in inventories of existing homes, we would argue that a lot of those homes really aren’t for sale. In many cases, homeowners have put their house up for sale at above-market prices and will simply take that house off the market if it doesn’t sell.

The inventory of new homes is real. Builders need to sell these homes. That will be an interesting dynamic to watch. Homebuilders are under more pressure today to control inventories than they were in the past because more builders are public companies. For example, in the 1990 housing slowdown in California, only one of the top 10 builders was a public company. Today, nine of the top 10 builders are public companies. Equity analysts treat homebuilders like manufacturing companies and frown on excessive inventories.

So, we believe builders will be much more aggressive than individual homeowners in cutting prices. They want buyers to purchase new homes, not existing homes. We think homebuilders are going to push on price, so that they make the sale rather than the existing homeowner.

Monday, December 04, 2006

US Dollar plunging: equals higher interest rates

You'd think the US would bend over backwards to render the dollar "as good as gold." But ironically, this is hardly the case. Instead, the US is the world's wildest spender. The US is the world's greatest spendthrift. The US creates deficit after deficit. The US has become the greatest debtor the world has ever seen. At this point the current account deficit of the US is running just under $900 million, which amounts to 6.6% of the US's entire Gross Domestic Product. No currency has ever survived that kind of ratio for long.

For years sophisticated, knowledgeable investors have expected the dollar to decline, and I mean decline in a major way. And for years these sceptics have been wrong. Even the world's greatest investor, Warren Buffett, was wrong on the dollar, and it proved to be an expensive mistake (at least in timing) for Mr. Buffett.

Remember, it's to no one's advantage to see a plunging dollar. If the dollar heads down in earnest, US imports will rise in price, and since the US is addicted to foreign goods, the cost of living in the US would rise substantially. This is called price inflation, and Americans would not be happy with it.

If the dollar probes the lower depths, the rest of the world could panic. The fact is that much of the world depends for its prosperity on its exports. And the target of a huge percentage of the world's exports is the United States. The US is consumer to the world.

The implication of a dollar cave-in are huge. For one thing, a swooning dollar would immediately be accompanied by rising interest rates. Rates would rise because dollar buyers and holders would demand a greater pay-off as a reward for holding dollars. In turn, rising rates would probably throw the US into recession, if for no other reason than rising rates would crush the already fragile housing industry.

Sunday, December 03, 2006

Prediction: 43.5% drop in prices by 2011

Prediction: 43.5% drop in prices by 2011

Click here for LARGER GRAPH by

Friday, December 01, 2006

The markets

"Manufacturing in the U.S. unexpectedly contracted last month for the first time in more than three years, taking away a pillar of economic growth" (from Bloomberg this morning).

New home sales are falling and home inventories are rising. Building permits and housing starts fell sharply last month. Last week saw mortgage application fall heavily.

The Chicago manufacturing index, a leading economic indicator, is now below the critical 50% level.

After being up in October, durable goods orders plunged in November.

As discussed last week, Wal-Mart's same-store sales dropped a tenth of a percent on the latest reading. WMT is consider by many to be a bellwether for store sales.

One important indicator of the job market, initial claims for unemployment benefits, are up substantially.

Consumer debt continues to rise as consumers continue to spend more than they are taking in.

The dollar is under pressure from Europe as their healthy economy points to coming higher rates in the Euro-zone.

"Mortgage Bonds in U.S are buffeted by Loan Delinquencies, Home-Market Slump. The mortgage bond market is beginning to buckle under the weight of the worst U.S. housing slump in six years" (from today's Bloomberg).

The markets are comprised of what everybody knows about everything. Thus, from an economic standpoint, the markets are the world's best discounting mechanisms. But wait -- we read the list that I have posted above, and we ask, "If all those problems have surfaced, then how in the world could the Dow have just risen to record highs?"

The bad news on housing and the economy continues to drift in. The market knows all about the bad news, and still it holds up. My guess is that the markets have enormous faith in the Fed to "make everything all right." Is this much faith in the Fed justified? Guess we're just going to find out.

Fannie Mae and Freddie Mac: Does not raise loan limit

Despite many in the East Bay living in the priciest real estate markets in the country, the federal government doesn't see it that way and reaffirmed that notion this week.

California, like most of the nation, has a Fannie Mae and Freddie Mac conforming loan limit of $417,000.

Alaska and Hawaii, as well as the U.S. territories of Guam and the Virgin Islands, are considered more costly markets and have limits of $625,500.

That $417,000 doesn't buy a lot in the East Bay, especially because the median cost for a home in Contra Costa County is $550,000 and in Alameda County is $590,000, according to DataQuick Information Systems. Solano County's median price is $460,000.

Any home loan higher than the federal limit of $417,000 is called a jumbo mortgage, which normally carries a higher interest rate. At 44.5 percent of all new loans, California had the highest rate of jumbo mortgages in the nation.

The East Bay, an area covering Alameda and Contra Costa counties, had a rate of 63.1 percent.

Jay Damato, a mortgage broker with Elite Financial in Walnut Creek, said his business has been affected by the high cost of the East Bay. Six years ago, 80 percent of his customers could use Freddie Macs or Fannie Maes, but now that number has halved.

Does this loan limit contribute to the housing slide?????

Construction Spending

Construction spending dropped in October, 1.9% below the revised September estimate of $608.8 billion to $597.1 billion . The drop from the March 2006 high looks like a free fall (red arrow). Is the Goldilocks scenario of a "soft landing" possible? The stock market's selling off this morning.