Submitted by The Capital Spectator

Exports account for about 13% of the U.S. economy these days. That’s a small piece of the GDP pie, but it’s an important piece, thanks to the strong growth in exports.

Exports have been one of the rare consistently bright spots in the U.S. economy. For each and every quarter since Q4 2005, exports have grown at a higher pace–quite often a significantly higher pace than overall GDP, according to the U.S. Bureau of Economic Analysis. In this year’s Q1, for instance, exports jumped by 5.5%–a world above the meager 0.6% rise in overall GDP (both are quoted in seasonally adjusted real annual rates).

In fact, the strong performance in exports in Q1 is typical of the trend for the last several years. Exports, in short, have become a critical factor in keeping the recessionary forces at bay. Exports climbed 5.2% through this year’s Q1 over the year-ago quarter. Overall GDP is up only 2.5% over the same period (seasonally adjusted real annual rates).

The weakening dollar has been a potent source of the bull market in U.S. exports. As the buck has fallen, so too have the prices of U.S. goods and services as denominated in foreign currencies. No wonder, then, that exports have taken flight.

That brings us to the latest trade report for March, released on Friday. Suddenly, the winds have shifted. It’s unclear if it’s a temporary shift or if it portends a new trend. In any case, as our chart below shows, exports in March posted an unusually sharp decline, far out of line with recent history.

Total exports tumbled by nearly $2.6 billion, or 1.7%, in March. What’s more, the decline was sustained in five of the six major export categories. Only exports of foods, feeds and beverages posted a gain, which is probably due to the severe food shortages that now plague some areas of the world. Otherwise, the trend in March exports was down. Autos and consumer goods took the brunt of the fall.

What should we make of the reversal of fortunes in exports? More importantly, what does the March report imply for GDP in the quarters ahead? Clearly, the March trade news reminds us that the exports machine may not shine indefinitely. If the dollar stabilizes or rises, export growth may level out or fall. Meanwhile, if foreigners’ appetite for U.S. goods and services flat lines or falls, either because of slowing economies abroad or other factors, then export growth will moderate.

The problem is that if and when exports stop offering an economic salve to an otherwise weakening U.S. economy, what will take its place? Consumer spending may not be up to the task this year, as we discussed recently. That leaves the corporate sector to pick up the slack. The good news is that corporate America is in remarkably good shape, considering the macroeconomic backdrop. Corporate profits as a percentage of GDP were still running at an exceptionally high 11% at the end of last year, according to the Bureau of Economic Analysis. In normal times, that might lend hope to the idea that corporations will invest capital and hire employees. But these aren’t normal times. Certainly these are different times. Meantime, reading the trade reports is once again a high priority.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

1. “Wind ($23.37) v. Gas (25 Cents),” in today’s WSJ: There is a reason fossil fuels continue to dominate American energy production: They are extremely cost-effective.

2. “Democrats Windfall Tax—On You,” Investor’s Business Daily: The last time the U.S. had a windfall profits tax on oil companies, the results were disappointing: 1) Domestic oil production decreased, as oil companies produced less oil, not more, b) The level of imported oil increased due to the huge tax advantage we gave foreign oil companies, and c) Revenues from the windfall tax were far less than expected, because domestic producers pumped less and nontaxed imports flooded our market.

3. “How to Use the Strategic Petroleum Reserve (SPR),” WSJ: Over the last 8 months, the government purchased more than 10 million barrels of oil for the SPR as the price rose $40 to above $120. This is not sensible. It puts upward pressure on oil prices at the worst possible time. It is a waste of taxpayer money. It gives aid and comfort to unfriendly nations. And it is an insurance policy that, for the most part, is no longer needed. In fact, we should be selling oil from the SPR at $120. Doing so could be a powerful tool for U.S. energy policy.

HT: NCPA

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

I don’t often pass along inspirational stuff, as I do not want to offend or “preach,” but this one got to me. We can all use a single image that speaks to us of love, harmony, peace, prosperity and joy. All I ask is that you take a moment to reflect upon it.

Click here to see image.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

Government Crackdown on Good Samaritans II

MIAMI GARDENS, FL.–A man who said he thought he was just helping a woman in need is accused of running an illegal taxi service and Miami-Dade County’s Consumer Services Department has slapped him with $2,000 worth of fines.

The 78-year-old said he was walking into a Winn-Dixie to get some groceries when he was approached by a woman who said she needed a ride. Rosco O’Neil told the woman if she was still there when he finished his shopping, he would give her a ride. She was, so he did. As it turned out, the woman was an undercover agent with the consumer services department targeting people providing illegal taxi services.

MP: Taxi Cartel membership has its privileges, doesn’t it? See a related post here “Government Crackdown on Good Samaritans.”

Visit 1800blogger to see all of our industry leading blogs.

Submitted by A Dash of Insight

Improved technology, more power.  We would expect this to be good.

In fact, more power can enable us to do exactly the wrong thing.

This happens all of the time with the world’s most powerful computer, the human mind.  A year ago we reviewed analysts who thought the market looked like a replay of the 1987 crash.  This type of analysis crops up all of the time, often using old charts as evidence.  With the power to search among thousands of choices, picking the time frame, and adjusting the scales, the human computer can “prove” nearly anything.

Those developing computer-based trading systems face the same problem.  The modern software makes it easy to include many variables — too many!

Some Helpful Illustrations

Bill Rempel missed the Kentucky Derby by a few days, but his story highlighting horse race handicappers is excellent.  A group of handicappers were tested, using gradually increasing amounts of information.  The extra data increased their confidence, but not their performance!  (Read the entire discussion.)

Bill discusses Occam’s Razor and points out the importance of reducing the number of independent variables:

I use this paring down or pruning technique at work as well as when examining trading strategies or opportunities. My first question, when faced with complex models, has for a long time been “I wonder how many of those variables actually do most of the work?”

This is pretty convincing to us, since Bill sounds just like our own Vince Castelli.  It is easy to develop a model using all of the available data and lots of variables.  You will generate a perfect “post-diction” but not anything useful for prediction.

The result:  Over-fitting and over-confidence, a dangerous brew!

Unfortunately, consumers of system strategies, including a few big-time “gatekeepers” we have met, have become accustomed to seeing eye-popping (and unrealistic) results.  They apply an automatic discount, regardless of the methodology employed.

The TCA Model Applied to the S&P 500

For the purposes of comparison, the chart below shows our TCA Model (Trend, Cycle, Anticipation) as applied to the S&P 500.  Without giving away the store, we can say that the model uses a relatively small number of variables — some designed to choose between trend and cycle, and others representing indicators for each.  Much of the power comes from advanced techniques for filtering and smoothing data, thereby improving signal to noise.  The chart below is not a back-test, but the signals actually used in trading during the last year.

The overall performance shows a gain of about 6% during a time when the S&P declined by a few percent.  It accomplishes this while reducing risk by staying out of the market for significant periods.

A key point is that the model gets the investor into the market to enjoy the big moves.  The cost?  There are some losses at times of rapid changes or churning.

Finding the big moves is very important.  Some traders have trouble joining in when the market has already made a move.  They are reluctant to “chase.”  It is difficult to show gains when missing the big rallies.

Anyone interested in trading systems should join us as regular readers of The Rempel Report, where he updates and reports on several interesting trading systems.  One of these is similar to our own sector rotation approach.

TCA-ETF Update

Each Thursday (a day late this week) we share with the investment community a recent report from our ETF ratings.  We have been doing this in real time for eight months.  Our purpose is partly to gain visibility for the approach (free report available on request), but also as information for other ETF traders, and most importantly to provide a laboratory for others trying to develop trading systems.  We discuss the issues surrounding system development in many of the articles in this series.

As we noted last week, we have expanded the ETF universe, and we seek more additions.  Adding more targets is helpful, as long as they can be shown to have characteristics suitable for one’s model.

The current ratings show some dramatic changes from recent weeks, and include one of the new ETF’s, KOL.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by Businomics Blog

In Part 1, I asked why the mortgage mess happened, and why did it happen when it did.

Part 2 explains the role of the Great Moderation and the mild housing cycle in the 2001 recession.

Part 3 explains the role played by securitization of mortgages.

Part 4 explains how the 2001 recession set up the trigger for the current crisis.

In this final segment, I look at the future and provide some suggestions for policy.

 

I think that the Great Moderation will continue, for reasons explained in the Mark Thoma interview on the Businomics Audio Magazine. However, it was not the Great Moderation alone that caused a sense of invulnerability regarding housing; it was also the strength of housing in the 2001 recession. All players in real estate and mortgages have lost the notion that housing is always stable. We’ve been slapped across the face by reality. It will be quite a long time before anyone in this country thinks that housing is a no-risk proposition.

Securitization is here to stay. It makes a lot of sense, especially compared to using the Savings and Loan industry model for funding mortgages. But investors in the mortgage market have learned a bit. First, they’ve learned that housing prices don’t always go up. Second, they’ve learned that the senior tranches can take losses. Third, they’ve learned that the ratings agencies aren’t very good at evaluating risk of complex instruments. Fourth, they’ve learned that combining a bunch of CMOs into a CMO-squared does not remove systemic risk. It may help reduce the risk associated with investing in mortgages originated in one location, but it does not eliminate the risk that the entire country’s real estate market goes south.

What about the trigger? That will happen again. At some point in the future, mortgage interest rates will fall at a time when home prices have been firm. However, we will not have a mortgage mess of this magnitude again until the lessons of this cycle have been forgotten. I peg that time period - by unscientific judgment - at about 20 years.

Here are some tips for policymakers:

1. This mess is not as much about subprime mortgages as the overall housing market.

2. Fraud was present, but was not the cause of the mess.

3. The people who made big mistakes have learned from their experience.

4. Some of the practices that enabled the crisis are actually good.

Let me expand on that last point. We have three ways to finance homes, unless someone comes up with something smarter:

I) short-term mortgages, like five years or less.

II) long-term mortgages financed by depository institutions, which engendered the Savings and Loan crisis

III) securitized mortgages

Don’t be overzealous in attacking securitization unless you want to return make mortgages unaffordable to the middle class, or you want another S&L crisis.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by Businomics Blog

In Part 1, I asked why the mortgage mess happened, and why did it happen when it did.

Part 2 explains the role of the Great Moderation and the mild housing cycle in the 2001 recession.

Part 3 explains the role played by securitization of mortgages.

Now I explain how the last recession set in place the triggers for the present mortgage mess.

Let’s remind ourselves of the strength of the housing market thanks to the Great Moderation and the mild housing cycle of 2001. If a mortgagee could not make payments, there was no problem for the mortgage-backed investor. Home appreciation meant that borrowers could simply sell at a profit if unable to make payments–or they might refinance and use the cash for another year’s payments. Or in a worst case, the mortgage servicer foreclosed, but there was no loss because the house sold for more than the principal due on the loan.

These were to two main ingredients of the mortgage mess. Now let’s talk about how they came together in the early 2000s.

The recession of 2001 brought interest rates down. The Federal Reserve began cutting short-term interest rates in early 2001, and mortgage rates also fell. Mortgages had been running in the sevens in 1999, then hit eight and a half percent in 2000. With the recession, though, demand for credit fell. That, combined with falling short-term interest rates, brought mortgage rates way down. By the end of 2002, 30-year fixed rate mortgages were available at six percent, an interest rate not seen since 1965.

Low mortgage rates brought first-time homebuyers into the market earlier than normal. There was also a great deal of shuffling around of existing home owners, as they moved from one home to another. Keep in mind that transactions of existing homeowners just push the peas around on the plate: when a family buys a new home, it is typically selling an old home, so net demand is zero. Not so with first-time homebuyers.

There’s a normal life-cycle for first-time homebuyers. Young families get their finances in shape, show that they can handle debt, and accumulate a little bit of down payment. Then they buy. Well, starting in 2002, first-time homebuyers were able to buy ahead of schedule. Mortgage rates were so low that families who had expected to wait until 2004 were able to buy their first home in 2002. This trend accelerated when mortgage rates hit their low point, five and a quarter percent, in mid 2003. This interest rate was even lower than the lowest rates of the 1960s.

So housing demand was stimulated by low mortgage rates, pushing home prices up. Builders started to meet the increased demand, but it took them a while to gear up construction schedules. In the meantime, home prices accelerated. In the prior decade, the 1990s, home price appreciation had averaged a mere three percent per year. Three percent per year! But low mortgage rates changed all that. National average price measures showed six to eight percent gains in the early years of the new century. Those price gains brought out investors.

Stock prices had peaked in 2002 and fell through 2002. Even after stock prices began to rise, the levels of stock prices failed to match the earlier peaks, so stock investors were disappointed. They looked around and said, “Gee, houses sure do well. They never seem to go down, they just go up.” The three percent gains of the 1990s seem puny by Wall Street standards, but stock investments are mostly unleveraged; at most, they have a 50 percent loan to value ratio. Houses can be leveraged, with 90 percent or even higher loan-to-value ratios. Here’s a bit of arithmetic: if you pay 10 percent down on a house that appreciates by three percent, your equity grows by 30 percent!

Investors constituted net new demand, along with first-time homebuyers. In response to the strong demand, prices appreciated at an even faster rate. Homebuilders took this as a challenge, and housing starts rose from 1.5 million - a typical pace - to 2.3 million units, a fifty percent gain.

The growth of net new demand from first-time buyers and from investors was helped by carefree attitudes engendered by the Great Moderation, along with mortgage securitization. Mortgage investors tested the waters with lower down payments, less documentation of loans, borrowers with lower credit scores - and the tests looked good. A more conservative sort of person would have continued the tests through a real downturn, but that sort of person lost business to the mortgage investors who went full bore ahead.

Our economic history includes periods of low mortgage rates that did not lead to a disaster like we are experiencing today. No disaster occurred in those earlier eras because they pre-date the Great Moderation and mortgage securitization. The 1990s had the critical elements of the crisis, but not the trigger: low interest rates and a weak stock market.

Everything came together in the perfect storm that we now call the mortgage crisis.

Given what we’ve learned so far, what does the future hold for economic cycles, mortgages and the housing market? We’ll address that in our final segment.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

DETROIT FREE PRESS–Congressional Democrats, including Michigan Sen. Carl Levin, increased their calls Thursday for an energy bill (FIRST CLASS MAIL BILL) aimed at lowering record oil and gasoline prices (STAMP PRICES) – and putting OPEC (UNITED STATES POST OFFICE) under U.S. antitrust laws.

Leven denounced OPEC’s (UNITED STATES POST OFFICE’s) role in setting world (U.S. STAMP) prices. “OPEC (UNITED STATES POST OFFICE) is a monopoly. They have squeezed the American people and consumers,” Levin said. “Whenever they want to increase or reduce supply (INCREASE STAMP PRICES), they do it. If (SINCE) they were (ARE) an American outfit they’d be (SHOULD BE) in jail for monopolistic practices.”

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

Unconscionably Excessive Stamp Prices?

Over the last 89 years, the average retail price of gasoline has increased almost 14X, from 25.5 cents per gallon in 1919 to $3.517 per gallon in 2008, according to annual price data from the EIA. Over the same period, the price of a first-class stamp in the U.S. has increased 21X, from 2 cents in 1919 to 42 cents in 2008 (starting Monday, May 12), according to historical stamp price data available here. The chart above compares the two prices using an index that is equal to 100 in 1919 for both series.

If stamp prices had increased over time at “only” the rate of gas prices, a first-class stamp would only cost only 27.6 cents today instead of 42 cents.

When gas prices rose last year, Rep. Bart Stupak (D.-MI) introduced “The Federal Price Gouging Prevention Act,” which would make it a crime to “sell crude oil or gasoline at a price that is unconscionably excessive.” Shouldn’t we now investigate “unconscionably excessive stamp prices”? Monopoly has its privileges.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

DETROIT NEWS–This state-of-the-art manufacturing complex in the northeastern Brazilian state of Bahia is not only the centerpiece of Ford’s Brazilian turnaround plan, it is also one of the most advanced automobile plants in the world. It is more automated than many of Ford’s U.S. factories, and leaner and more flexible than any other Ford facility. It can produce five different vehicle platforms at the same time and on the same line.

Watch a fascinating video here of Ford’s Camaçari plant.

So who could possibly object to having the most advanced, leanest, most flexible, state-of-the-art Ford facilities like the Camaçari plant built here in the U.S., especially if it will help Ford survive and become more profitable?

Ford sources said it is the sort of plant the company wants in the United States, were it not for the United Auto Workers, which has historically opposed such extensive supplier integration on the factory floor.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

The chart above shows the annual vehicle traffic volume, measured in billions of miles traveled in the U.S., on a moving 12-month basis through February 2008 from the Federal Highway Administration. The flat trend in traffic volume over the last year or more, along with the declines in each of the last four months through February 2008, appears to be the most significant adjustment to traffic volume in any comparable period during the last 25 years. High gas prices appear to be having an effect on driving habits.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

Of the 25 most influential interest groups, the teachers’ union is the closest to the capitol in 14 of the 50 states. By contrast, the AFL-CIO is the closest in seven states. The American Association of Retired Persons (AARP) and the National Federation of Independent Business are the closest in five states, each. The American Association for Justice (AAJ)—the leading organization of U.S. trial lawyers, formerly known as the Association of Trial Lawyers of America, or ATLA—is the closest in four states.

Why do the headquarters of state teachers’ unions tend to be so close to state capitol buildings?

The teachers’ unions don’t strive to be the closest because of the extra time it takes to walk or drive a few more blocks. They strive to be the closest because it is a visible display of their power and influence. It is a symbol of the connections and resources they can devote to something as trivial as having the closest office, just like the status obtained from having the best seats at a concert or a sporting event.

Read more here.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

From GasBuddy (click to enlarge).

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

According to the most recent report on traffic volume trends from the Federal Highway Administration (Dept. of Transportation), “Travel on all roads and streets changed by -1.7% for January 2008 compared with January 2007. Travel for the month is estimated to be 226.7 billion vehicle miles.”

The January 2007 to January 2008 decline of -1.7% in miles driven was the largest percentage drop in January traffic volume in at least 16 years (see chart above, data available here and here, back to 1992). One explanation could be that consumers are responding to higher gas prices by driving less. The biggest declines in January traffic volume were in the West (-2.9%) and the South Atlantic (-3.1%), see map below.
Thanks to Bobble for data source in a comment on a CD post.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

Greyhound’s image hasn’t changed much over the years – until now. In a bid to add a little snazz to its operation, Greyhound is biting back, unleashing its secret weapon – a new luxury service called the BoltBus that operates between New York and Washington, Boston and Philadelphia.

So, what’s so special about this BoltBus, you may ask. Well, apart from a paint job that makes it look like Ziggy Stardust’s tour bus, its two big draws are extra legroom and free on-board WiFi.

Continue reading here.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by The Capital Spectator

Does money matter? The answer depends on who’s talking. Suffice to say, however, Milton Friedman’s dictum that inflation is always and everywhere a monetary phenomenon is now debatable in the academic community as well as in the board rooms of central banks around the world.

Consensus on the strategic answer for managing inflation appears to be fading. Bloomberg News’ Michael Sesit has a nice essay today on some of the stress points that harass the subject of inflation theory these days.

In the academic world, there’s a relatively fresh dispute brewing about money’s role. On the one side are some who say that money supply is no longer relevant, or at least much less relevant in the battle for containing inflation. “Nowadays monetary aggregates play little role in monetary policy deliberations at most central banks,” observes Michael Woodford, a professor at Columbia, in a paper that’s forthcoming in the Journal of Money, Credit and Banking. “I have examined a number of leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy,” he writes in “How Important is Money in the Conduct of Monetary Policy?” He goes on to report,

I find that none of them provides a convincing argument for adopting a
money growth target, or even for assigning money the “prominent role” that the
ECB does, at least in its official rhetoric. Of course, this is hardly a proof that no
such reason will ever be discovered. But when one examines the reasons that have
been primarily responsible for the appeal of the idea of money growth as a simple
diagnostic for monetary policy, one finds that they will not support the weight that
they are asked to bear.

This attack on money supply has spawned rebuttals of varying degrees, including a recent batch of opining from economists at the St. Louis Fed. For example, the title of Edward Nelson’s recent essay says it all: “Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique.” Meanwhile, another St. Louis Fed paper (”Monetary Policy: Why Money Matters and Interest Rates Don’t”) argues, “Suggestions that the Fed can control prices without controlling the nominal stock of money (or final payment) are simply wrong.”

No one will take comfort from such debates, or that central banks around the world see the future in increasingly divergent terms. The Federal Reserve continues its preference for cutting rates and seeing the inflation risk as relatively tame. That’s in contrast to the European Central Bank and others, including the Reserve Bank of Australia, which anticipates higher inflation. Some of the variance in outlooks is due to local conditions, although cynics might say that local political pressures, or the relative lack thereof, are part of the explanation too.

It’s too soon to say that globalization has advanced to the point that the world economy is united and requires one monetary policy for all. Monetary policies, for good or ill, still vary widely and so to the extent that Friedman’s edict is accurate there will be and should be different inflation rates in different countries. Nonetheless, with the higher level of financial and economic integration, inflation exporting and importing is also easier than before. No central bank is an island in the 21st century.

In a sign of the times, the capacity for the migration of pricing pressures across political borders is stirring tension around the world, particularly in Asia. Increasingly, critics are pointing to the easy money policies in the U.S. as the source of the trouble. A Singapore-based media outlet argues that the “U.S. must stop using food for fuel.”

The optimists say that inflation will soon abate, in part because of the slowdown in the global economy. Perhaps. Meantime, monetary policy is in transition as policy makers grapple with a new era that enjoys precious little precedent. The outcome, in short, is still up for grabs and less than transparent. Hanging in the balance is inflation, and it’s impact on expectations.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by A Dash of Insight

One of the ingredients for “bubbles” is the quest for the home run.  Investors look to how much they wish to gain rather than to risk and reward.

What happens when this quest intersects with a major downturn in an asset class?

The Foreclosure Boom: Donald Trump

Our local papers have featured ads from Donald Trump, explaining how you can profit from the foreclosure explosion.  This article, while a few months old, is typical of what is happening.  It is from Seattle, a pretty strong housing area which we visit four times a year for board meetings.

But not to fear, capitalists, because one man’s misery is another man’s meat. In the same issue of the P-ITrump University“,” a class where Trump promises “If you’re not a millionaire by December 2008, you didn’t attend my foreclosure workshop.” Yes, that’s right. Your struggling neighbors who are losing their homes in the subprime fiasco, are easy prey. The ad enthuses that “Foreclosures soared 94% in 2007!” What a paradise for the entrepreneur. The ad features a full-length Trump (who won’t actually be at the seminar, by the way) staring you down, challenging you to become as rapacious, amoral, and loathsome as he is. If you don’t have the guts to let Donald make your rich at the expense of the suckers of Pottersville, well, you’re fired!

The LA Times also reports on the Trump approach:

An ad in this very newspaper showed a picture of The Donald and quoted him as saying, “Investors nationwide are making millions in foreclosures . . . and so can you!

“I’m going to give you 2 hours of access to one of my amazing instructors AND priceless information . . . all for FREE.”

OK, I know what you’re thinking. You’re thinking there has to be a catch, such as the fact that the ad doesn’t mention anywhere that the free two-hour seminar is only a “preview” of the three-day workshops that Trump offers for $1,495.

The reporters are skeptical of the Trump seminars, but we are offering no opinion.  We merely suggest this information as an interesting piece of information about identifying market bottoms and investor behavior.

Books on Foreclosures

There were a number of books on foreclosures in the last real estate bust, and now we see some new ones and also some revisions.

• Foreclosure Investing for Dummies is a year old now, so not a good bottom call.  Nonetheless, we are always interested when dummies get into the game.
• Here is one that came out in April.
• This “insider’s guide” is almost a year old.
• This “complete guide” came out in January.
• If you want something that no one else knows, and only a couple of months old, this is your choice.
• And finally, here is something for “dummies” who want to fight foreclosure — with or without help from Barney Frank and Congress!

What Does it All Mean?

We do not know!  When will the wave of foreclosure buyers intersect with the foreclosure sales?  Perhaps we need to wait for the cover of a major magazine before we have a clear contrarian signal.

While we are confident of the knowledge base of our regular readers, let us make it clear that we are neither endorsing the foreclosure course nor the books cited.  It is information for investors to consider — that is all.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by Businomics Blog

Previously, I posed the question of why the crisis emerged when it did, then I explained the role of the Great Moderation.  Now I talk about how securitization formed a building block of the crisis.

The second factor enabling the mortgage mess was securitization. The first securitized mortgage transaction took place in February 1970, but primitive computers were not up to the many flavors of securitization that would eventually arrive. As the housing market boomed, securitization took off.

 

Securitization had some affects that helped form the mortgage mess. One was the growth of mortgage brokers. At first, the traditional lenders–savings and loans plus some banks–used securitization to help their balance sheets. It was a great move. No institution funded with deposits of five year maturity or less should hold 30-year loans.

Independent mortgage brokers, who could help consumers shop around for the best deals, came to dominate the industry. This business model came to dominate partly because consumers liked the idea of working with someone beholden to no one institution, and partly because the most successive (aggressive?) mortgage personnel gravitated to independent shops, where their compensation was totally on commission. The independent mortgage broker didn’t much care what happened to the loan once the paperwork was finished and he got his fee. Furthermore, there was no mortgage-lender gossip (”Gee, we sure are originating a lot of crappy loans this days.”) to rise to the executive suite. The independent mortgage brokers also enabled a more fraudulent environment, but fraud is not the dominant reason for the current mortgage mess–it’s more a side dish than the main course of explanation.

Along with securitization came investors. The main funders of mortgages used to be lenders. Now they were investors. Investors think differently than lenders. Investors hold a security while it is doing well, selling when they sense that the prospects for that investment are weaker. They assume liquidity, because that’s what they are used to. A lender, on the other hand, makes a loan and assumes he will hold it through thick or thin. The investor buys a mortgage-backed security thinking he can pawn it off on a “greater fool” if need be.

Now to top it off, mortgage securitization became very, very complex. Think first about a simple example of financial engineering: stripping Treasury bonds. Each bond has two coupons plus a maturity. A 30-year bond can be decomposed into 60 coupons plus the return of principal. A bundle of 30-year bonds can be combined into 60 different zero-coupon securities. No problem.

When the securities underlying the transaction are not issued by the United States Treasury, you want to think about credit risk. Some mortgages were guaranteed by Fannie Mae or Freddie Mac, so the mortgage risk was small. Or was it zero? Would Congress let these institutions fail if they guaranteed too many dodgy loans? Maybe yes, maybe no. An interesting issue. Other mortgage-backed securities had private guarantees. Nice–if the guarantor would survive a housing downturn. In a mortgage pool with multiple investors, who takes on the credit risk? It can be spread evenly among the owners, but that’s boring. More interesting is to create some low-risk segments, and some middling-risk segments, and some high-risk segments.

This is far from complicated enough, however. Let’s add prepayments to the broth. When you buy a mortgage-backed security, is it backed by mortgages that may be refinanced in two years, or may stay on the books for the full 30 year term. That depends on interest rates, but not just on the level of interest rates. Refinancing is “path dependent,” meaning that refinancing volume will be different at “seven percent down from nine” as opposed to “seven percent up from five.” You really have to run a thousand possible interest rate paths in a Monte Carlo simulation to understand prepayments.

So far we’re only thinking first mortgages. We could also securitize seconds. The value of a second mortgage depends on all the things we’ve discussed before, as well as on the characteristics of the first mortgage.

Now the securities get interesting. The basic mortgage-backed securities include different tranches. (One tranche might get the first 12 principal payments to come in, making it very safe. Another tranche might get some of the later payments, making it very risky.) Tranches from different mortgage pools can be combined into Collateralized Mortgage Obligations (CMOs). There are even CMOs comprised of CMOs, like a fund of funds.

All of this becomes very confusing and hard to analyze. The investors didn’t really know what they were buying in many cases. They fell back (as we all do) on a few shorthand numbers, such as estimated duration (weighted-average maturity) and credit grade. The fact that both of these concepts were just wild guesses for complex CMOs was lost on the investors.

We have the Great Moderation and a very mild last housing cycle, coinciding with the development of securitization. Next we’ll see how the last recession sowed the seeds for the current mortgage mess.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

RaiseCapital.com is an online community, where entrepreneurs can display their business ideas and capital needs to investors. Whether your venture is a start-up or existing business, RaiseCapital.com is the perfect vehicle for entrepreneurs seeking capital.

Example: utvchina.com is a Chinese youtube like website (see graphic above). It launched in spring 2007. We have enjoyed the rapid growth within one year. Current daily IP is around 350,000. Alexa ranking 3500. We are the only company with a commerical and entertainment site. Operating two versions English and Chinese drawing hits from more than 160 countries in over 40 languages. We are seeking a partner and funding to move to the next level.
Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

HOUSTON (AP) — Even as oil prices ascended to new highs of more than $124 a barrel this week, many oil and gas industry executives say they expect the price to fall significantly by year’s end, a new survey shows. Fifty-five percent of 372 petroleum industry executives surveyed by KPMG LLP said they think the price of a barrel of crude will drop below $100 by the end of the year. Twenty-one percent of respondents predicted a barrel of oil will end the year between $101 and $110, while 15 percent forecast the year-end price to be between $111 and $120 a barrel.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by CARPE DIEM

Over the last 12 trading days since April 22, the US Dollar has increased by 1.67%, as measured by the Fed’s Broad Trade-Weighted Dollar Index (data here and here), to 99.4439, the highest level since February 26, 2008 (see chart above). The 1.67% dollar appreciation is the largest 12-day gain in more than 3 years, since the 1.7% 12-day gain through April 4, 2005!

More evidence here: The USD is selling at a one-year forward premium against 23 out of 32 currencies, including a one-year 2.4% forward premium for the British pound ($1.9564/BP spot vs. $1.9099 one-year forward) and a one-year 1.7% forward premium for the Euro ($1.5421/EUR vs. $1.5161/EUR one-year forward).

Visit 1800blogger to see all of our industry leading blogs.

Submitted by Econbrowser

If the U.S. had decided to go back on the gold standard in 2006, where would we be today? That’s a question my friend Randy Parker recently asked me. Here’s how we both would answer.

Many things might have been different had the U.S. decided to promise to exchange dollars for gold at the 2006 price of $600 per ounce of gold. But let’s start with some of the things that wouldn’t have changed. I contend that we’d be no less worried today about geopolitical events in places like Nigeria, Iraq and Iran. The phenomenal growth of the Asian economies would presumably have continued. The bad mortgage loans made prior to that time would still be on the books and still be problematic, with attendant worries about the financial soundness of many institutions. All of this would have meant an increase in the demand for gold. Equilibrium would then require an increase in the relative price of gold compared to what it had been in 2006. That is, the number of umbrellas, or cars, or chairs that people would be willing to surrender in order to obtain an ounce of gold would have gone up relative to what it had been in 2006.

Now, if the number of dollars you have to surrender to obtain an ounce of gold is fixed by the government’s commitment to a gold standard, and the number of umbrellas, or cars, or chairs you’d be willing to surrender for an ounce of gold has gone up, the only way that can be is if the dollar price of umbrellas, cars, and chairs have all fallen. Maintaining a gold standard while the relative price of gold increases requires deflation in the dollar prices of all other goods.

The only way the Fed could engender that deflation is with a monetary tightening. Suppose the Fed had been dutifully implementing that procedure in August 2007, when there was a sudden increase in doubts about the soundness of key financial players. A savvy speculator would then reason as follows.

The U.S. has promised that it will continue to convert dollars to gold at $600 per ounce. But that will require them to raise interest rates at a time of potential financial panic, and I don’t believe they have the stomach for that. I’m going to ask for my dollars in gold right now, in the guess that they’ll abandon this policy shortly. When they give up the standard, my gold will have appreciated, and I’ll have a handsome profit.

And how could the U.S. respond to such a speculative attack? We’d have two choices. One would be to say to the speculators, you’re right, this idea of driving interest rates up at a time of financial crisis was a dumb one. Dollars are no longer convertible to gold at the old fixed rate.

Or the other option would be to say, no, we really mean it this time, honest, we’re serious about this whole gold standard thing. So, we drive interest rates higher and watch the deflation mount. Outstanding debt that is denominated in dollars becomes more and more costly for people to repay, and we’d see a really impressive level of bankruptcies and business failures. The cycle would continue until the politicians who promised to stay on the gold standard are driven out of office and the deflation spiral could finally be ended by the new leaders choosing option 1 after all.

Now, I know that the gold-standard bugs are howling at this point, “but that’s not how a gold standard would actually work, because…” But what I just described was not a hypothetical scenario. Instead, in my opinion it’s a pretty accurate description of what happened in the United States during the Great Depression of 1929-33.

In 1929, the U.S. was on a gold standard, with the exchange rate fixed at $20.67 per ounce of gold. Geopolitical insecurity and financial worries warranted an increase in the relative price of gold, which, with the dollar price of gold fixed, required a decline in the dollar price of most everything else. Speculators bet (correctly) that Britain would abandon the standard in 1931, but the U.S. fought against the speculation, with the Federal Reserve Bank of New York raising its discount rate from 1.5% to 3.5% in October 1931. This sharp increase in interest rates at a time of great financial turmoil succeeded in defending the parity with gold, but produced an economic disaster.

A 1991 research paper by Ben Bernanke and Harold James noted the very strong correlation between when a country abandoned the gold standard and when it began to recover from the Great Depression. The top panel above shows their calculations of the average annual growth of industrial production for the 14 countries that decided to abandon their currencies’ gold parity in 1931– they experienced positive growth in every year from 1932 on. Countries that stayed on gold, by contrast, experienced an average output decline of 15% in 1932. The U.S. abandoned gold in 1933, after which its dramatic recovery immediately began. The same happened after Italy dropped the gold standard in 1934, and for Belgium when it went off in 1935. On the other hand, the three countries that stuck with gold through 1936 (France, Netherlands, and Poland) saw a 6% drop in industrial production in 1935, while the rest of the world was experiencing solid growth.As I pointed out in an article published in 1988, gold-standard advocates think in terms of an institution whose continued operation, once adopted, would never again be doubted. But the problem is, if you can go on a gold standard, then you can go off a gold standard. And uncertainty about if and when the latter will occur can make the system itself a very destabilizing force.

Visit 1800blogger to see all of our industry leading blogs.

Submitted by EconWeekly

The GDP estimate for the first quarter is out, so it’s time to update my ranking of the Wall Street Journal forecasters. (Remember: to pit forecasters against each other I use the Root Mean Squared Error (RMSE) and the most accurate forecaster is the one with the lowest RMSE, among all who have submitted at least ten forecasts since May of 2004. I only include the predictions submitted in the months of February, May, August and November for quarters Q1, Q2, Q3 and Q4, respectively. The Q1 forecast is the one submitted in February, the Q2 forecast is the one posted in May, and so on.)

According to the latest ranking, the most accurate forecaster is Gene Huang of FedEx, pushing Gary Thayer of A.G. Edwards to second place. Resler and Hoffman keep third and fourth place, respectively. The median forecast falls from 6th to 10th. The lanterne rouge continues to be James Smith of the University of North Carolina. At 2.6%, his forecast for 2008:Q1 was as inaccurate as usual.

The naive forecast, which is equal to the growth rate observed during the previous quarter, would have been spot-on this time, since GDP grew by 0.6% in both Q4 and Q1. Historically, however, it has performed worse than any forecaster but one.

Only Edward Leamer of UCLA Anderson Forecast was right on the mark. The predictions of 38 of the 52 forecasters were within one percentage point of the truth.

Top-20 WSJ forecasters, by Root Mean Squared Error (RMSE), as of 2008:Q1

Rank	Forecaster	Firm	RMSE	Absolute deviation for 2008:Q1
1	Gene Huang	FedEx Corp.	0.95	0.4
2	Gary Thayer*	A.G. Edwards	0.95	–
3	David Resler	Nomura Securities International	1.01	0.8
4	Stuart Hoffman	PNC Financial Services Group	1.01	0.6
5	Allen Sinai	Decision Economics Inc.	1.01	0.1
6	Dana Johnson	Comerica Bank	1.02	0.1
7	Nicholas S. Perna	Perna Associates	1.02	0.3
8	Mike Cosgrove	Econoclast	1.02	0.4
9	J. Prakken and C. Varvares	Macroeconomic Advisers	1.03	0.1
–	Median	–	1.05	0.6
10	Scott Anderson	Wells Fargo & Co.	1.07	0.4
11	Nairmen Behravesh	Global Insight	1.08	0.9
12	John Lonski	Moody’s Investors Service	1.08	0.8
13	Edward Leamer	UCLA Anderson Forecast	1.08	0
14	R. Berner and D. Greenlaw	Morgan Stanley	1.08	1.3
15	Douglas Duncan	Mortgage Bankers Association	1.09	0.2
16	Robert DiClemente*	Citibank SSB	1.09	–
17	Diane Swonk	Mesirow Financial	1.09	0.1
18	Neal Soss	Credit Suisse	1.11	0.1
19	Dean Maki	Barclays Capital	1.12	0.4
20	David Rosenberg	Merrill Lynch	1.12	1

Source: WSJ’s survey of forecasters and author’s calculations.
*Not in WSJ group of forecasters, as of February 2008.

The May forecast for Q2 is also available now. On average, the top five forecasters according to my ranking predict growth of -0.1%. The median of all forecasts is 0.3%.

Previous ranking

Visit 1800blogger to see all of our industry leading blogs.

Submitted by Businomics Blog

Yesterday I posed the question of why the mortgage mess happened, and why at the time that it did.  There were two fundamental building blocks of the crisis: the Great Moderation and Securitization.  The aftermath of the 2001 recession provided the trigger for the mortgage mess.  In this post, I explain the role of The Great Moderation.

The Great Moderation is the new world of macroeconomic cycles that began in 1983. In the United States and around the world, recessions became milder and less frequent. (There’s a great interview with Mark Thoma about this topic in the Businomics Audio Magazine.)  The chart of rolling 20-quarter standard deviation of real GDP changes illustrates the calming of the economy:

 

Back in 1983, a business executive with 25 years of experience would have experienced five full business cycles. Today, an executive with a quarter-century of experience has only gone through two full cycles. We are less experienced in dealing with recessions because of the Great Moderation.

The Great Moderation by itself lowered fears of recession, but the nature of the most recent recession (not counting the current cycle) also reduced concerns about a possible downturn in housing values. The 2001 recession was triggered by a decline in business capital spending, especially in high tech and communications. Housing suffered relatively little; it was the mildest housing cycle of the postwar recessions.

As a result of the Great Moderation and the strength of housing in the 2001 recession, the housing sector appeared to be recession-proof. This was a mistake, and those of us who like to examine long data series knew it, but financial types prefer to look at recent data. When I attended my first Credit Policy Committee meeting as a bank economist, back in 1988, the experienced lenders priced consumer loans based on a five-year average loss rate. I was thunderstruck! The five-year period did not go far enough back to include a recession. In fact, credit policy coming out of a severe recession tends to be tight, so we were probably looking at abnormally good credit history. This is the kind of stuff that financial people should do a better job at.

Next: the role of securitization in the mortgage mess.

Visit 1800blogger to see all of our industry leading blogs.