# MARKET MELTDOWN



## Bob Loblaw (Mar 9, 2006)

Since there are a lot of members in the field of finance - would someone be able to explain to me what is going on here?


----------



## ksinc (May 30, 2005)

https://videoplayer.thestreet.com/?...en=&cm_cat=&cm_ite=&puc=tscs&ts=1186445633578


----------



## ksinc (May 30, 2005)

FWIW, I bought on that tantrum Friday as the market sold off and did quite well today.


----------



## Laxplayer (Apr 26, 2006)

Cramer is begging Fed Chairman Ben Bernanke to cut short term rates and bail out struggling investment banks. Doing so would cause further harm to the value of the dollar.

From Ben Stein: _This whole subprime mortgage mess is just an excuse for the gunslingers and river boat gamblers on Wall Street to use their tricks to move markets and make money. The economy is still very strong. The most cagey players on Wall Street like Goldman Sachs are now trying to buy - not sell - as much distressed merchandise in the mortgage area as they can. This is a good clue about where the smart money is going.

You can panic if you enjoy being panicky. But this will all blow over and the people who buy now, in due time, will be glad they did._

https://www.cbsnews.com/stories/2007/03/18/sunday/main2581859.shtml


----------



## Laxplayer (Apr 26, 2006)

Jim Cramer/Crystal Method mix
https://bigpicture.typepad.com/comm...ght_here_right_now_bill_poole_no_idea_mix.mp3


----------



## Mark from Plano (Jan 29, 2007)

Bob Loblaw said:


> Since there are a lot of members in the field of finance - would someone be able to explain to me what is going on here?


I'm no expert, but here's the take through my VERY small keyhole:

Financial markets over the past several years have been flush with cash looking for a home. This has meant easy credit for both individuals and companies looking to expand. As that money competes with itself for a target that has meant (a) the price of money has gotten cheap, and (b) credit underwriting standards have been loosened. As a commercial lender we've seen spreads contracting and underwriting standards loosening to unprecedented levels for some time as non-traditional lenders competed for business.

This has driven two major market factors over the past several years. First, on the consumer side, is the well documented housing boom in certain metropolitan markets in the US. A portion of this has been driven by the so-called "sub-prime" market where consumers were encouraged to spend more on housing with cheap rates. If they were smart, these rates were in the form of long-term fixed rate mortgages which have been near historic lows. If they weren't (and often they were incentivized not to be) these took the form of very low teaser-rate ARMs. In a rising rate environment these can be a nightmare for most families.

Second is a return of the leveraged buyout (LBO) market, which has been red-hot over the last several months. Again, with increasing corporate profits and cheap long-term money, every deal that wanted money got it, underwriting standards be damned. Money wanted a home.

The first cracks in the dam came in the sub-prime housing market. Increased personal debt loads resulted in increased default rates. Since most of these lenders are themselves levered, it doesn't take many losses above the norm to eat up the reserves; and once those are gone and the lender starts coming to grips with all of the potential additional losses in the portfolio, the whole thing starts coming apart at the seams.

Now we're beginning to see the LBO market drying up. In part, this is because the same funds that were buying housing paper are also buying corporate paper. This means that liquidity is drying up and the market will return to a more normal level. But it's kind of like an elevator. You can get from the top floor to the bottom floor in one of two ways. One makes everybody happy and the other kills everyone. Cramer seems like a guy who's convinced that the cable just broke (or at least is very frayed), but frankly I don't see that kind of panic in either the literature or the markets; at least not yet.

Every panic generates the next set of opportunities. For example, I wouldn't want to be holding real estate in LA, Las Vegas or any of the other "hot" markets right now; at least not real estate that I needed cash out of any time soon. I think it's going to get a lot worse before it gets better. At the same time, the markets may come back to reality and provide some buying opportunities for people that didn't get swept up in the buying frenzy.

On the Corporate side, vulture funds are going to come in and buy up these mortgage and LBO portfolios (at a very attractive price) and keep the liquidity in the market. It will be a great opportunity for them, but the guys who made the loans in the first place (or who funded the bubble) will pay the price. Cramer wants Bernanke to bail out the people that made all the bad decisions. We'll see if he does it.

I think that the markets are starting to worry that the economy is headed into a recession. I would expect maybe late this year or early next year. In an economy of decreasing liquidity and potential recession the government action here is more likely to make things worse not better. Any increase in interest rates, increase in taxes, protectionist policies, increases in regulation of business or other actions that pull more liquidty out of the market could actually cut the cable. Given the control of the Congress by the Dems I'm glad we have gridlock and hope that it continues, because a misstep here could be very bad.

JMO. YMMV.


----------



## Phinn (Apr 18, 2006)

An easy credit junkie screaming for more easy credit.


----------



## jsq (Jun 25, 2007)

*easy credit let to a crack up boom, now it unwinds.*

easy credit (ie money creation from a wide variety of sources) led to hyper economies around the world and was reflected especially in high end consumption of housing, high end brands, etc. etc.
now the credit bubble is being burst. not in one day, not in one week, not even in one year.

the credit contraction will continue to unwind for a while, those with debt will find it ever more difficult to pay off their debt.
life will go from being easy for most of the world as it recently has (relatively speaking) to being very difficult for most of the world.

get out of debt and be careful with your investments and a year or two from now you will likely be glad you did.

read about the austrian school of economics, von mieses and hayek and you will be most comfortable with what is before you. comfortable financially and comfortable mentally.

regards,
jeff


----------



## jackmccullough (May 10, 2006)

From today's Slate:

Subprime NonsenseThe Fed chairman and Treasury secretary say the subprime mess has been contained. Are they joking?
By Daniel Gross
Posted Monday, Aug. 6, 2007, at 6:03 PM ET
Subprime lending is still a mess

The treasury secretary and chairman of the Federal Reserve play important symbolic roles as knowledgeable guardians of the global financial system. Yet sometimes it's scary how little they seem to know.

https://www.slate.com/id/2171739/


----------



## radix023 (May 3, 2007)

Mark from Plano said:


> I'm no expert, but here's the take through my VERY small keyhole:
> 
> Financial markets over the past several years have been flush with cash looking for a home. This has meant easy credit for both individuals and companies looking to expand. As that money competes with itself for a target that has meant (a) the price of money has gotten cheap, and (b) credit underwriting standards have been loosened. As a commercial lender we've seen spreads contracting and underwriting standards loosening to unprecedented levels for some time as non-traditional lenders competed for business.
> 
> ...


+1

An example of the LBO market drying up is cerberus buying Chrysler. Normal order is that the buyout is financed by the underwriting banks, who upon close of the deal, sell that debt on the open market. The Chrysler deal closed, but apparently the banks could not find buyers on acceptable terms and they are still holding the debt (which means that capital they had planned to have available is still tied up in this deal).


----------



## Concordia (Sep 30, 2004)

At the moment, high yield spreads have blown out a fair it but are only back to normal. When bubbles burst, there is typically a tendency to overshoot. Long-term buyers might do OK here, but I'd guess that there is more carnage to come.


----------



## Albert (Feb 15, 2006)

Concordia said:


> At the moment, high yield spreads have blown out a fair it but are only back to normal. When bubbles burst, there is typically a tendency to overshoot. Long-term buyers might do OK here, but I'd guess that there is more carnage to come.


The current lingo of my institution is that we are in a "late-stage bull market". Always look on the bright side!


----------



## JRR (Feb 11, 2006)

Bob Loblaw said:


> Since there are a lot of members in the field of finance - would someone be able to explain to me what is going on here?


You're actually worried because of Cramer?


----------



## Mark from Plano (Jan 29, 2007)

jackmccullough said:


> From today's Slate:
> 
> Subprime NonsenseThe Fed chairman and Treasury secretary say the subprime mess has been contained. Are they joking?
> By Daniel Gross
> ...


I absolutely LOVE this kind of "sky-is-falling" crap journalism. If lots and lots of people begin to believe this it will make for some wonderful opportunities for those who can keep their wits about them. The underlying economy IS very strong. The best evidence he can mount is that Countrywide's earnings are down a bit. PULEEZE.

Credit is going to dry up and that may lead to a short recession, but ultimately it is the kind of retrenching in the economy that sets the stage for higher growth. One commentator that I read calls it "creative destruction".

The problem with this author is that he has the memory span of a goldfish. We've been through this before. Bubbles happen, they burst, life moves on. The people who get hurt are the ones that either don't pay attention, or who buy into the bubble mentality or who panic when the bubble bursts. Trees don't grow to the sky, as the Germans say. The idea that an economy the size of the USA's can be managed calmly upward with no recession or setbacks is a "down-the-bunnyhole" fantasy.

The real thing to be worried about is not the economy or the lack of response from Washington. The real thing to be worried about is whether Washington in trying to do something helpful actually makes things worse. The track record on this is not good.


----------



## ksinc (May 30, 2005)

I think the biggest scandal ... is how the retail investors get cooked when the institutions change the game. The real 'discount window' is the pensions, 401(k)s and IRAs of the 'working poor' and Cramer knows it. The institutions see-saw the market a few days in a row and they are flush with cash.


----------



## Mark from Plano (Jan 29, 2007)

ksinc said:


> I think the biggest scandal ... is how the retail investors get cooked when the institutions change the game. The real 'discount window' is the pensions, 401(k)s and IRAs of the 'working poor' and Cramer knows it. The institutions see-saw the market a few days in a row and they are flush with cash.


Fair enough. But study after study shows that the only little guys who get hurt long-term are the ones that try to sit at the grown up table and time the market. This too shall pass.

Panic, if it's your own, is your worst enemy. Panic, if it's other people's, is your best friend.


----------



## ksinc (May 30, 2005)

Mark from Plano said:


> Fair enough. But study after study shows that the only little guys who get hurt long-term are the ones that try to sit at the grown up table and time the market. This too shall pass.


So, predatory market manipulation is ok because long-term the markets go up?

I think lots of individual little guys get hurt, but they are reported on as a group using broad averages. As you said, "study after study". It's all part of the game being played.

Money is money. If I take your money which is risk free to me for 10 years and make 18% ROC and then give it back to you with 6%-8% while you had all the risk and real inflation is 8-10%, were you really "not hurt"?

There's a reason people try to time the market. And; it isn't because they believe in the natural ebb and flow of capital appreciation. If they did they would all buy and hold.

Yes, if you invested $10,000 30 years ago in the indexes you would do ok as a small investor. But, if you invest $100 twice a month on the 15th and the 30th for 30 years you might actually keep your invested capital adjusted for inflation or not. Why? Because the institutions watch payroll taxes and they know the weighted averages of when people get paid and when they make 401(k) deposits. In fact, most of them have divisions making them. Fidelity knows darn well in advance when $0.5B worth of new capital is coming into the market to buy stocks. They are stocking inventory, not putting capital at risk. If you know you have buyers lined up every two weeks where is the risk?

Want a predictable trend? The market is almost always up on the Thursdays when the 401(k) deposits are going in. I make all my sells on that Thursday and I buy on that Friday. I have not bought on an up day or sold on a down day in ~10 years. Usually it's ~1% or more just on that day alone and it always reverts right back.

I agree panic and emotion are enemies. No one is suggesting them.


----------



## Wayfarer (Mar 19, 2006)

Mark from Plano said:


> Fair enough. But study after study shows that the only little guys who get hurt long-term are the ones that try to sit at the grown up table and time the market. This too shall pass.


But you see, this very admission by you, intimates it is an insider's game. Do not mistake me as being a foe of the market though. In fact, I think the foes are those playing the insider game and as ksinc said, merely aiding the transient ups and downs for money.


----------



## jkreusc (Aug 14, 2006)

Mark from Plano said:


> I'm no expert, but here's the take through my VERY small keyhole:
> 
> If they were smart, these rates were in the form of long-term fixed rate mortgages which have been near historic lows.


5.5% fixed for 30 years for me. I prepay and expect the actual term to be about 18 years, give or take. I love knowing that if the worst happens to me, I could reduce to minimum payment and still pay my mortgage working at McDonalds.

My lender tried talking me into a 7 year ARM at 4.25%. With my suspicious nature, I thought, "If you are trying to sell me a smaller payment on a mortgage, then it probably won't work out for me in the long term. You want to make MORE money, not less."


----------



## Albert (Feb 15, 2006)

ksinc said:


> Want a predictable trend? The market is almost always up on the Thursdays when the 401(k) deposits are going in. I make all my sells on that Thursday and I buy on that Friday. I have not bought on an up day or sold on a down day in ~10 years. Usually it's ~1% or more just on that day alone and it always reverts right back.


ksinc,

Is there any literature on that anomaly?

Cheers,
A.


----------



## ksinc (May 30, 2005)

Albert said:


> ksinc,
> 
> Is there any literature on that anomaly?
> 
> ...


I doubt it. It's not an anomaly. It's supply and demand. However, study black-scholes and implied vs. historical volatility. Sellers are betting on a return to the model. This is why they say if you buy enough options you will eventually go broke.

Strategies like selling covered calls result from this belief.

I'm just saying that 'because people are paranoid doesn't mean people aren't after them'. People try to time the market for a reason, because they believe it's manipulated. Whether it is or not is for you to decide.

Fidelity and I'm sure other fund families do a lot of things to discourage 'trading' their funds. They have lockout periods, and short-term trading fees, etc.. I was tagged a number of times by them. Why do they have to do that if timing the market loses the investor money? If investor B loses doesn't investor A win? They claim it's because of the volatility introduced to the fund. Really? So Joe six-pack buying in for $5000 creates volatility, but buying 1M shares of Google at 2pm and selling at 2:15pm is absorbed by market forces? Interesting.

The "trend" in question is just my opinion and observation. You'd be nuts to try to bank on it. I'm just saying historically it has worked for me. I freely admit I'm nuts. I do not buy and sell based on that and I do not buy and sell every two weeks. But, if I am going to sell a fund, I usually look to see if a 401(k) day is coming. And; if I am looking to buy I look for a Friday. Just like you should always look for an ex-date and other market events. When I buy I have a price target in mind when I get near it I look for a good day to sell without giving back 1-2% on what I view as the noise.

If you knew whatever you bought today you had a buyer on hold in 2 weeks regardless of values or markets. Knowing the market generally is moving up, how much risk is in that? And; if prices went down you could buy at lower prices to sell to that buyer? But, if prices went up you could just sell your inventory. Would you buy today?

The funds have very clearly scheduled, predictable demand. Is that manipulation? No, not really. But are they oblivious to it? No, probably not.

Isn't it odd that Time is such a primary component of value, yet Timing is supposedly unimportant? Just my opinion. I'm a skeptical, distrusting wacko.

Sure the theory of Time and Interest works as long as you can beat inflation. But, with this Treasury, you can't. TIP spread? yeah right. Based on the BS CPI number.


----------



## ksinc (May 30, 2005)

jkreusc said:


> 5.5% fixed for 30 years for me. I prepay and expect the actual term to be about 18 years, give or take. I love knowing that if the worst happens to me, I could reduce to minimum payment and still pay my mortgage working at McDonalds.
> 
> My lender tried talking me into a 7 year ARM at 4.25%. With my suspicious nature, I thought, "If you are trying to sell me a smaller payment on a mortgage, then it probably won't work out for me in the long term. You want to make MORE money, not less."


Mine did too. We had to get a second and I had a huge fight with my Wife over an adjustable second vs. a fixed second as she told me the "mortgage guy knows best." He tried everything even an interest-only HELOC. I think they are at 11-13% now. Our neighbor has a for sale sign in the yard because of the IO-HELOC they took. Sure they have a lot of equity, but unfortunately their company did not give out 10% raises the last 2 years.

I just got a post card from my old mortgage guy last week. He was laid off as his company went bankrupt and he wanted to let me know he's at a new firm in case I want to re-fi! LOL


----------



## Wayfarer (Mar 19, 2006)

ksinc said:


> Mine did too. We had to get a second and I had a huge fight with my Wife over an adjustable second vs. a fixed second as she told me the "mortgage guy knows best." He tried everything even an interest-only HELOC. I think they are at 11-13% now. Our neighbor has a for sale sign in the yard because of the IO-HELOC they took. Sure they have a lot of equity, but unfortunately their company did not give out 10% raises the last 2 years.
> 
> I just got a post card from my old mortgage guy last week. He was laid off as his company went bankrupt and he wanted to let me know he's at a new firm in case I want to re-fi! LOL


My mortgage guy tried to talk me out of using my own cash for 20% down. Told me money is so cheap, with my credit, I should float the 20% too, why dig into my cash reserves? I explained to him that I thought it would be foolish to pay a hazard fee when I did not need to and that with 20% down, I would never have to worry about being upside down in my mortgage. I had to explain to the lad what that meant. When I finished laughing he then tried to float me on an interest only. Maximize cash flow, he told me, and flip my house at a profit or re-fi in five years. After a few more chuckles I took the 30 years fixed at 5.25%. I pay my property taxes and homeowner's out of pocket too.


----------



## Karl89 (Feb 20, 2005)

Gents,

Perhaps the Duke brothers had it right - "SELL, MORTIMER, SELL!"






Karl


----------



## ksinc (May 30, 2005)

Wayfarer said:


> After a few more chuckles I took the 30 years fixed at 5.25%. I pay my property taxes and homeowner's out of pocket too.


You got me! 5.375% here. The 2nd is at 6.05%.

I pushed for 20%, but could only do so much with the Wife demanding to build our first house. We did an 80-10-10. Arg!!! Still we are far better off than the couples we talk to in the same neighborhood. Some of the things I have heard just make my head spin.

I held her off for the first 5 years of marriage ... I think it was more than most men could do in my situation. She wanted to buy while she still had $30k in cc debt most of it at 21-23% on about 10 different store cards! YIKES! I finally got that down to where I could get it all on one 4.5% fixed and then a 0% fixed for 18 months and pay it off before I would agree to a house.

Mostly, it required being an obstinate ass (born to that job, eh?) that just said "no, because I said so." I had to take her checkbook away and other things that got me called "jerk", "ass", and many other things. Now that we're flush, and she's debt-free for the first time in her life while driving a new S60, I seem to be a little more tolerable! LOL


----------



## Mark from Plano (Jan 29, 2007)

ksinc said:


> So, predatory market manipulation is ok because long-term the markets go up?


Sorry. When did "predatory market manipulation" get brought into the mix? Who's for that? Certainly not me! I'm talking about bad business decisions and bubble mentality and not panicking into a down cycle. If you're talking about manipulating markets that's something else entirely.



ksinc said:


> Money is money. If I take your money which is risk free to me for 10 years and make 18% ROC and then give it back to you with 6%-8% while you had all the risk and real inflation is 8-10%, were you really "not hurt"?


Not sure I understand your point here, but if you're saying that money managers should contribute their effort and expertise without compensation then you've lost me on that one. If I earn a subpar return from a mutual fund that's got a higher than market expense ratio, then I'm selling the fund and buying a different one. Somehow I think you're making a different point, but I'm missing it.



ksinc said:


> There's a reason people try to time the market. And; it isn't because they believe in the natural ebb and flow of capital appreciation. If they did they would all buy and hold.


It could be that they think that they're smarter than they really are. I think Warren Buffet's quote is something to the effect that his favorite holding period is forever (or something to that effect). I figure he's a lot smarter investor than I'll ever be.



ksinc said:


> Yes, if you invested $10,000 30 years ago in the indexes you would do ok as a small investor. But, if you invest $100 twice a month on the 15th and the 30th for 30 years you might actually keep your invested capital adjusted for inflation or not. Why? Because the institutions watch payroll taxes and they know the weighted averages of when people get paid and when they make 401(k) deposits. In fact, most of them have divisions making them. Fidelity knows darn well in advance when $0.5B worth of new capital is coming into the market to buy stocks. They are stocking inventory, not putting capital at risk. If you know you have buyers lined up every two weeks where is the risk?


I'd be interested in whether or not there is any evidence to support this and even if true if it has any discernable impact on investor returns over the long-term.



ksinc said:


> I agree panic and emotion are enemies. No one is suggesting them.


I'm glad we agree on something. :icon_smile:


----------



## ksinc (May 30, 2005)

Mark from Plano said:


> Sorry. When did "predatory market manipulation" get brought into the mix? Who's for that? Certainly not me! I'm talking about bad business decisions and bubble mentality and not panicking into a down cycle. If you're talking about manipulating markets that's something else entirely. Money is money. If I take your money which is risk free to me for 10 years and make 18% ROC and then give it back to you with 6%-8% while you had all the risk and real inflation is 8-10%, were you really "not hurt"?


Posts #15 and #16. Listen to what Cramer said about how they sold it off so they profit on buybacks. That's what I am saying. They just go to the retail investor who pays them the differential to borrow their money. That is the real discount window.

Those posts went together so I put them back together. Perhaps if you read it in context you will understand my point. When interest was near-zero ROC was 12%. Interest rates rose and ROC is near 18%. The risk in the hands of the retail investor. The institutions only get burnt when they start a hedge fund and buy the derivatives and hold them, much like a bookie that starts making bets instead of just taking bets.


----------



## ksinc (May 30, 2005)

Mark from Plano said:


> It could be that they think that they're smarter than they really are. I think Warren Buffet's quote is something to the effect that his favorite holding period is forever (or something to that effect). I figure he's a lot smarter investor than I'll ever be.
> 
> I'd be interested in whether or not there is any evidence to support this and even if true if it has any discernable impact on investor returns over the long-term.


Buffet plays a very different game. Usually he's making a large one-time buy of a controlling interest. That exactly plays into what I said comparing one large buy and hold vs. dollar cost averaging for the retail investor. The average guy can't buy once, he doesn't have the capital. Sure, if I had $1m to invest, it wouldn't matter when I bought as long as I held long enough. Howver, that's not the retirement planning game the 99% are playing.

It's pretty simple to do a schedule on a fund like Contra over the last 10 years and see if your DCAing beats a buy and hold. I can save you some time it doesn't.

Think about it ... Why would it? Compounding always wins over return.

In gambling terms, DCAing is making a self-weighted call. Whether blackjack or poker that eats you up someday. Inflation doesn't run in a straight line.

On top of that, your DCAing is going in with everyone else's scheduled demand. So, you are DCAing very inefficiently and buying at the closes in mutual funds.

There's only 12 tick-tocks in a calendar year. That's not enough to capture variance and beat an average on $50B. Even if only instuitively people know this and so they try to time.


----------



## ksinc (May 30, 2005)

https://www.usatoday.com/money/perfi/columnist/waggon/2006-07-13-dollar-cost_x.htm

As you can see periodic DCAing in an index mutual fund does not beat inflation. 31% over a decade? Please! That might beat the CPI, but not M3. Contra fund was ~65%. Great you actually broke even on an inflation adjusted basis. Now you can pay taxes on your withdrawals! 

Of course, Fidelity made about $5B while you were breaking even and working 9-5 the last decade! 



> So dollar-cost averaging is always illustrated with a made-up example in which you capture lower prices along the way but finish nicely ahead. The examples are always made up because, in reality, security prices rise more frequently than they fall, by a margin of about two to one.


https://moneycentral.msn.com/content/P104966.asp


----------



## Wayfarer (Mar 19, 2006)

I always suspected as much about DCA. Without such a well developed theory as yours, I always have my 401 contributions go into a money market and then make larger buys a few times a year when the mood strikes me.


----------



## tabasco (Jul 17, 2006)

that MSNmoney article was interesting in that in tracked a specific 12 month period. I suspect that not EVERY 12 month period what turn out similar relative returns; however I'm confident that over *any* decade, the lump sum at inception will outperfrom DCA.


----------



## ksinc (May 30, 2005)

tabasco said:


> that MSNmoney article was interesting in that in tracked a specific 12 month period. I suspect that not EVERY 12 month period what turn out similar relative returns; however I'm confident that over *any* decade, the lump sum at inception will outperfrom DCA.


I agree with you. I was only trying to respond to the "I'd like to see some evidence" comment about something that mathematically if not just intuitively makes common sense. The other article covers a decade, but still other decades may be vastly different. I would say the last decade has been pretty good though and probably the best case for DCAing into a mutual fund to show well. I'm sure there are other articles. I did my own schedule and came to my own conclusion and strategy which I have used succesfully ... SO FAR. LOL I try to look at value, fundamentals, technicals, and volatility on the holdings. If you want to see how I do. Wayfarer can confirm I've been watching FDVLX the Fidelity MidCap Value (moving to blend) Fund and the JKI (an ETF) for a buying opportunity after I sold in mid May. Yes, it went up a little more after I sold, but I made some interest in the meantime and missed the correction  I bought in June last year after doing roughly the same thing. So, I had done well enough and thought it was time to bounce out. I bought some on Friday which was a little earlier than I was expecting I would, but with the Cramer hysteria I thought I would take a chance and it was close within like $1 of what I was looking for. I think I'm up 2% after today's NAV comes in on FDVLX combined, but I expect it might go down again and based on how much it goes down I may buy more (meaning I will double down) to bring my average cost down. If it doesn't I have a target in mind where I will sell it. Sure, I'm dumb/crazy enough to think I can buy the dips in an overall bull market. I don't think that requires any special ability. I don't think I'm that smart or an expert or anything like that. I just like being in control of my own destiny and buying based on my perception of demand. I've done ok for "dumb money". I don't think you can beat the "smart money", but I do think I can beat inflation. Heck the "smart money" won't even let me join them much less beat them! They won't let anyone else either, which is my larger point. 

I actually like some other ideas like DRIPs. I think you can beat inflation there because of the dividend that is reinvested in addition to your DCAd contributions. I like P&G for a DRIP.


----------



## Karl89 (Feb 20, 2005)

Gents,

Here is a little free advice (and probably overpriced at that!) - wait two to three years and invest in a REIT or property fund that will make signifigant investments in Eastern Europe and the FSU. Bc a property bust is coming - when yields on Class A Moscow office product are approaching below USD borrowing costs, well one needs to look no further than Japan circa 1990. Buy low and sell high and if one thinks that property prices in garden spots like Riga, Kiev, Sofia and Moscow can keep rising until they reach London and NY levels, well I might have a bridge that would interest you.

Cash is king, unless of course you are a civil servant in Harare. Then cooking oil and toilet paper are probably more valuable.

Karl


----------



## radix023 (May 3, 2007)

I put down about 15%, no PMI, original mortgage 7.625 30 year fixed, refi'ed in 2001 to 6flat on a 15 year fixed. Promised myself I wouldn't regret 6, it is a historically low rate. My dad calls me up earlier this week and wants to buy my mortgage at 5.5. Looking at completing all payments in 12 years 5 months from acquisition with total interest paid a little less than 50% of the original principal. Life without a mortgage payment beckons.


----------



## ksinc (May 30, 2005)

radix023 said:


> I put down about 15%, no PMI, original mortgage 7.625 30 year fixed, refi'ed in 2001 to 6flat on a 15 year fixed. Promised myself I wouldn't regret 6, it is a historically low rate. My dad calls me up earlier this week and wants to buy my mortgage at 5.5. Looking at completing all payments in 12 years 5 months from acquisition with total interest paid a little less than 50% of the original principal. Life without a mortgage payment beckons.


Wow! Good for you!


----------



## ksinc (May 30, 2005)

FCNTX last 12 months
comparing $1,200 fully invested 2006 Jul vs. $100 per month.

month	NAV	buy	shares 
Jul	65.11 $1,200 18.43034864 
Aug	65.84 0 
Sep	66.55 0 
Oct	68.96 0 
Nov	70.79 0 
Dec	65.21 0 
Jan	66.62 0 
Feb	64.57 0 
Mar	65.47 0 
Apr	67.75 0 
May	70.53 0 
Jun	70.38 0 
Jul	69.79 $1,200 18.43034864 $1,286 $86 7.19%

month	NAV	buy	shares 
Jul	65.11 $100 1.535862387 
Aug	65.84 $100 1.518833536 
Sep	66.55 $100 1.502629602 
Oct	68.96 $100 1.450116009 
Nov	70.79 $100 1.412628902 
Dec	65.21 $100 1.533507131 
Jan	66.62 $100 1.501050736 
Feb	64.57 $100 1.54870683 
Mar	65.47 $100 1.527417138 
Apr	67.75 $100 1.47601476 
May	70.53 $100 1.417836382 
Jun	70.38 $100 1.420858198 
Jul	69.79 $1,200 17.84546161 $1,245 $45 3.79%

Of course, they report 17.64% 1 Year return over the same time frame with dividends and capital gains. They also had a low of $63 and a high of $73 during that timeframe. But, the EOM close prices are above.


----------



## ksinc (May 30, 2005)

these are good articles:

https://economist.com/opinion/displaystory.cfm?story_id=9587517
https://economist.com/business/displaystory.cfm?story_id=9587542
https://economist.com/business/displaystory.cfm?story_id=9602178


----------



## Mark from Plano (Jan 29, 2007)

ksinc said:


> FCNTX last 12 months
> comparing $1,200 fully invested 2006 Jul vs. $100 per month.
> 
> month NAV buy shares
> ...


What exactly do you think that this proves? That over a six month period, starting at zero there is some advantage?

1. Actually your math is completely wrong since the average invested capital in scenario #2 is not $1200, but $600, making the average return on investment 7.5%, which is, if I'm not mistaken, higher than scenario #1.

2. Investors only start at zero once. This capital invested, after the first twelve months is exactly the same. Again, your short sighted approach is blinding you to long term truths. For most small investors DCA is the best approach because it's the ONLY approach. Most small investors don't have the capital to invest large amounts up front and only invest out of current cash flow. The perfect is the enemy of the good.


----------



## ksinc (May 30, 2005)

Mark from Plano said:


> What exactly do you think that this proves? That over a six month period, starting at zero there is some advantage?
> 
> 1. Actually your math is completely wrong since the average invested capital in scenario #2 is not $1200, but $600, making the average return on investment 7.5%, which is, if I'm not mistaken, higher than scenario #1.
> 
> 2. Investors only start at zero once. This capital invested, after the first twelve months is exactly the same. Again, your short sighted approach is blinding you to long term truths. For most small investors DCA is the best approach because it's the ONLY approach. Most small investors don't have the capital to invest large amounts up front and only invest out of current cash flow. The perfect is the enemy of the good.


That's a year period. No, the math is not wrong. Realistically you'd look at total invested not average. This is $1200 July-to-July or $100 per month July-to-July. The fact that you aren't fully invested for the entire period is the point of the comparison. However, if you want to say time weighted avg it's $466.67 (not $600). Look at annual contributions and annual returns. Contra says it made 17% annual returns and people think that's what they are making with monthly contributions.

It demonstrates (maybe proves) that scheduled buys once a month in a managed 401(k) don't get you the total adv. return of the fund. You'd have to make a perfect buy on the low in July 06 and sell on the high in July 07 to get that return and managed accounts don't offer that. I know people that were down 45% for 2000-2003 and they just got back to their actual total account balance after 3 years of contributions when the market hit new highs again. Yet their fund manager probably bought a Ferrari with his bonus because he was up last year. Does that make sense to you? What if you accumulated the first $800 and bought at $64.57 in February. What's your avg invested then? It drops to $179.49.

Like Way said, the only way to do it is to buy into a MM and then move into the funds in lump sums. DCAing only 12 times per year on a schedule is not the best approach and it does not even beat inflation. And; my point you are buying on scheduled demand days which every swing trader with a blackberry is trading on. Historically, stock prices beat inflation, but you're buying at the higher prices. You are just raising your avg cost. Look at a 50-day and 200-day MA over 10-20 years. The issue is why do people try to time, remember? This is why. Heck, even just accumulating in a MM and buying crossovers is a better way to buy IMHO.


----------



## gnatty8 (Nov 7, 2006)

tabasco said:


> that MSNmoney article was interesting in that in tracked a specific 12 month period. I suspect that not EVERY 12 month period what turn out similar relative returns; however I'm confident that over *any* decade, the lump sum at inception will outperfrom DCA.


I think you are correct. There is a great deal of academic evidence to support this hypothesis. DCA was a tool invented by mutual funds and the investments business to convince you to invest small amounts, on the belief that you are less likely to invest a large amount anyway. This is no secret in academic finance.


----------



## Mark from Plano (Jan 29, 2007)

ksinc said:


> That's a year period. No, the math is not wrong. *Realistically you'd look at total invested not average*. This is $1200 July-to-July or $100 per month July-to-July. The fact that you aren't fully invested for the entire period is the point of the comparison. However, if you want to say time weighted avg it's $466.67 (not $600). Look at annual contributions and annual returns. Contra says it made 17% annual returns and people think that's what they are making with monthly contribution.


We could argue this all day I guess, and we are *WAY* off topic here, but the math is wrong.

If I invest in a lump sum, but don't invest until the last day of the year I won't make the total published return either, but that's not because the fund didn't earn it, it's because I didn't have my money at risk. It's a basic ROIC computation. I have no idea where your getting $466.67 as your weighted average investment, but if you invest a series of 12 payments of equal amounts on equal time intervals the average investment is 1/2 of the payments. Simple math unless you want to consider the capital appreciation as additional invested capital, in which case the effect would be to slightly increase your average invested capital, but the effect on the computation would be negligible for purposes of this discussion, we aren't arguing about tenths of a point.

By the way, the 17% you reference includes capital gains and dividend distributions which your computation doesn't take into account, but are in fact REAL MONEY. They aren't reflected in the share price appreciation at the end of the year because that money isn't in the fund anymore, it's in my pocket. There have been years when my fund dividend distributions were higher than the capital appreciation. It's like evaluating the performance of Citibank stock without accounting for the dividend yield.

You're focusing on the wrong thing, my friend. Mutual fund companies can be highly criticized, but not for the things you're picking on them for. Most criticism their due is because of high front-end and back-end loads that SOME funds charge and for the high administrative fees that they charge (you haven't even mentioned that). Frankly, if a mutual fund company delivered me a 20% ROIC after charging the fund a 5% fee every year that the S&P was yielding 8%, I couldn't care less. Realistically, however, we all know that isn't going to happen. My own preference is for funds with admin fees of 1% or less, since I know that no single fund always beats the market.



ksinc said:


> It demonstrates (maybe proves) that scheduled buys once a month in a managed 401(k) don't get you the total adv. return of the fund. You'd have to make a perfect buy on the low in July 06 and sell on the high in July 07 to get that return and managed accounts don't offer that. I know people that were down 45% for 2000-2003 and they just got back to their actual total account balance after 3 years of contributions when the market hit new highs again. Yet their fund manager probably bought a Ferrari with his bonus because he was up last year. Does that make sense to you? What if you accumulated the first $800 and bought at $64.57 in February. What's your avg invested then? It drops to $179.49.


Sorry, but it doesn't prove anything of the kind. DCA only happens once in a portfolio, or perhaps more if you're turning over the portfolio on a regular basis. You seem to want the MF companies to compensate you while your money isn't invested with them.

Of course I hope you're not expecting me to speak intelligently on the investment portfolios of "people you know" or on what kind of car some mythical fund manager drives. I can tell you that:

1. My own portfolio of MF's is up SIGNIFICANTLY (100%+) over where it was in 2000, 
2. That I have beaten the S&P average EVERY year, including down years. This is not based on some "published" return, but on the fact that the dollars in my account are larger than they were in the beginning.

Look. I'm no big advocate of DCA. It's like being an advocate of a hammer. DCA is a tool, like any other tool. It's a risk management tool designed for people who worry that as soon as they buy into a stock/fund it will go down immediately. It's a way to adjust the amount of shares they purchase based on the changing price of a stock. That's it. If you like nail guns better than hammers, use nail guns (they're hard to fit into tight spaces though and I wouldn't want to see your finish work). If you're not worried about the risk, don't use the tool.



ksinc said:


> Like Way said, the only way to do it is to buy into a MM and then move into the funds in lump sums. DCAing only 12 times per year on a schedule is not the best approach and *it does not even beat inflation*. And; my point you are buying on scheduled demand days which every swing trader with a blackberry is trading on. Historically, stock prices beat inflation, but you're buying at the higher prices. You are just raising your avg cost. Look at a 50-day and 200-day MA over 10-20 years. The issue is why do people try to time, remember? This is why. Heck, even just accumulating in a MM and buying crossovers is a better way to buy IMHO.


Most people investing in a 401(k) don't have the time, interest or expertise to track their investments as you suggest and to recommend that they do so is inviting disaster. It's bad advice for 95% of the population. If it works for you, great! Go in peace. Most people dollar cost average their investments because they are investing from current income, not from some mythical trust fund that they are trying to allocate. So, good luck. Hope you do well. I'm tired of this conversation and will no longer be posting in this thread since we've now completely hijacked the topic.


----------



## NewYorkBuck (May 6, 2004)

Mark from Plano said:


> I absolutely LOVE this kind of "sky-is-falling" crap journalism. If lots and lots of people begin to believe this it will make for some wonderful opportunities for those who can keep their wits about them. The underlying economy IS very strong. The best evidence he can mount is that Countrywide's earnings are down a bit. PULEEZE.
> 
> Credit is going to dry up and that may lead to a short recession, but ultimately it is the kind of retrenching in the economy that sets the stage for higher growth. One commentator that I read calls it "creative destruction".
> 
> ...


"Countrywides earnings are down a bit???!!!" Uh - almost every significant mortgage bank is now either out of business (American Home, New Century, etc.) or on the ropes (Indymac). Countrywide is better off because they have less subprime exposure, but they have oodles of MTA loans in Ca, all of which are making the minimum payment. Most of these loans will come home to roost in the next 18-24 months. They could fall too.

We had an internet boom, and that collapse moved capital to the housing market. The one major difference between them is even after the shake up, the internet boom created huge amounts of value. Business is much more efficient now because of the net. Unfortunately, bigger houses and granite counter tops do not create value. Business is not any more efficient because of granite in the kitchen. All of the growth in the last five years has not been because of huge productivity gains, it has been because people have been using the unsustainable growth in their houses as piggy banks and kept blowing money. Another difference between the net boom and the housing boom is like stocks in the 20s, housing is bought with levered dollars, and over the last five years it has gotten more and more levered. Well, like I always say - nothing is for nothing, and the hens are coming home to roost now. We are just at the beginning of this crash, and Im not sure now if it will reach into prime or not. If it does, bar the doors as it will sure as hell take down the entire economy with it. Think about it - a housing crash now takes spending out of the economy, takes home building out of the economy, and decimates the publics single positive net worth asset.

I work on the street in this very industry. It is MUCH worse than any of you who are not here can imagine. NO money is moving anywhere. Until recently, the MBS market was larger than the Treasury market, and NO money is moving. This is going to have far flung ripples into other markets like commercial papar. Imagine what will happen if Fidelity announces it cannot pay its money market funds because of a collapse in the CP market. As much as Greenspan let this crap go on and our Govt was totally asleep at the switch during these ill-advised loans (but be sure our politicians will be quick to point the finger when times get bad), we need liquidity in this market, and we need it now. Ben should have eased at least 50. He is pushing us to a govt sponsored bailout of the mortgage industry with a price tag that I cannot even fathom. You want to lower the price of gas? Develop renewables. You want to control inflation, stop printing up money. Those are solutions to these problems. Not allowing liquidity in the interest rate markets is not.


----------



## gnatty8 (Nov 7, 2006)

Not to hijack this thread further, but those interested in DCA versus lump sum might find this link interesting.

I agree with many of NY Buck's sentiments. I am in the Treasury of a Fortune 150 company, and our debt/capital markets activities have really taken a hit in the last month or 2. We have an A rating, so could still borrow money "in theory", but would pay a premium for it in the current market. Interestingly, we have not had any trouble with CP, and our CP spread (sub-LIBOR) is still holding steady, so there are mixed messages to be sure.


----------



## ksinc (May 30, 2005)

Mark from Plano said:


> We could argue this all day I guess, and we are *WAY* off topic here, but the math is wrong.
> 
> I'm tired of this conversation and will no longer be posting in this thread since we've now completely hijacked the topic.


I guess that trumps asking about the inflation rate I used on the series of contributions when you complained about completely wrong math vs. the simplified scenario I presented that average-Joe considers - $1200 is $1200. And; my calculation has more impact over the longterm vs. the one year scenario. Which was your other point, I thought. If your point was $600 is more accurate than $1200 mathematically, then I don't see why you argue with $466 other than just to disagree for the heck of it. My point was inflation-adjusted non-ROC rates offered to retail investors and that the differential is the real discount window pertaining to the OP and Cramer. Again, listen to his explanation on thestreet.com that's what he is saying.

Perhaps you lost that plot after you dragged me off in the weeds regarding manipulation. I wasn't complaining about mutual funds, I was complaining about ROC vs. MF return on a DCA buying on the high points. Which is mechanically what happens. Yes, the "fund" saw that return, but no individual DCAing 401k investor did because of when they bought, how they bought, and how the NAV price was affected by the scheduled demand. Is that really something you can argue? Because you haven't addressed that topic specifically. Perhaps I should have said, inefficient market mechanics for non-insiders - like market vs. limit orders and the average-Joe. Periodic, managed 401k DCAing is mechanically worse than a market order. That spread is the real discount window.

Yes, the fees & loads are the same (most 401ks don't have to pay loads) I kept them out for the same reason I mentioned but kept out caps & divs - to get apples-to-apples on the accumlated contribution @ NAV EOM prices.


----------



## ksinc (May 30, 2005)

gnatty8 said:


> Not to hijack this thread further, but those interested in DCA versus lump sum might find this link interesting.
> 
> I agree with many of NY Buck's sentiments. I am in the Treasury of a Fortune 150 company, and our debt/capital markets activities have really taken a hit in the last month or 2. We have an A rating, so could still borrow money "in theory", but would pay a premium for it in the current market. Interestingly, we have not had any trouble with CP, and our CP spread (sub-LIBOR) is still holding steady, so there are mixed messages to be sure.


Great link.



> However, some people also think you should dollar cost average a lump sum. For example, if you had $12,000 that you wanted to invest in a stock index fund, they would tell you to invest $1000 per month over a year, rather than investing the whole amount immediately.


I thought this was what Mark was saying comparing having $1200 and choosing to DCA in $100 increments vs. lump-summing. What I'm doing and what I think Way described is accumulating and lump-summing dips vs. DCAing. Which does IMHO over the last 10 years show a better return. You're not exactly un-invested while accumulating and the risk:return ratio is better in the MM than in DCAing risk. Conversely, it's not that hard to be correctly in the MM or short or long bonds based on overall rising/falling or steady interest rates. Yes, perhaps I lose some in the short, short term when I am in the MM as I am now and the Fed starts cutting before I move into a long bond for my income position. It's MM, short, intermediate, and Inv. Grade bonds. Not only do you have to beat a 2:1 rise:fall, but you have to beat that after inflation. Hard to do and as the article mentions, unless you perfectly time a dip. Which brings us back to 'why people try to time' and why Fidelity for example tweaks the mechanics so hard. If they are making a profit on it, someone is losing on it. Probably the schlep with his cards turned over making 3% DCA payments on the 15th and 30th.

Interesting insight on credit.


----------



## ksinc (May 30, 2005)

NewYorkBuck said:


> we need liquidity in this market, and we need it now. Ben should have eased at least 50. He is pushing us to a govt sponsored bailout of the mortgage industry with a price tag that I cannot even fathom. You want to lower the price of gas? Develop renewables. You want to control inflation, stop printing up money. Those are solutions to these problems. Not allowing liquidity in the interest rate markets is not.


Aren't we at a point with the dollar where he can't lower interest rates?

That's what bothers me. I see us in a lose-lose situation with all the printing of money we have done (which you mentioned). I saw Larry Lindsey say something like, "well Congess says that's the Treasury's job not Bernanke's". They need to be put together IMHO. This "the Fed doesn't comment on the dollar, but is confident in the Treasury" stuff Bernanke keeps repeating is bad. We have competing policies that should be coherent.

https://biz.yahoo.com/minyanville/070808/20070808manifest_id.html?.v=2


----------



## gnatty8 (Nov 7, 2006)

What a difference a few days make. CP markets have gotten pretty bad for A2/P2 borrowers, and spreads for A1/P1 paper (high grade CP) have widened a few basis points over the last few days. No trouble rolling, but overnight lending rates have really spiked. This is a good summary from one of our I-banks:

_You may have seen that the short term borrowing rates shot-up significantly over the last two days. In particular, overnight LIBOR is at 5.86%, 1m LIBOR at 5.54% and 3m LIBOR at 5.5%, increasing respectively 55 bps, 21bps and 25 bps from this Monday. The reaction of short-term interes rate markets is reminiscent of the liquidity crisis in 1998. I am attaching a 1-yr history of 3mL to illustrate the magnitude of this move. _

_We think that the reason behind this move is the desire of commercial banks to increase cash holdings anticipating increased cash demands from clients unable to roll CP or finance in debt markets on favourable terms, hedge funds facing redemptions, draws on LBO bridges which cannot be placed in the market currently. In order to add liquidity, the ECB has announced that unlimited funds will be available to banks at 4%. Indeed, 49 banks have borrowed from the ECB a combined $130Bn. The Fed may respond with similar measures. _

_The FedFunds futures market has moved this morning to price 100% likelihood of a cut in September, despite the reassurance from the Fed two days ago that inflation remains their primary concern. U.S Treasurys are down 20bps in the short end of the curve and as much as 10 in the long end. The credit and equity markets are substantially weaker from yesterday both in the US and overseas. _

_The full extent of impact on the term debt markets still unclear, however short-term borrowing is more expensive and difficult at least for now. _

I think the Fed may have made a mistake not easing monetary conditions earlier this week, but there's nothing stopping them from pulling a Greenspan and easing between Fed meetings. Let's hope.


----------



## ksinc (May 30, 2005)

Can you explain why you think it's ok to ease related to inflation, the dollar, and the broader economy?

If they are having to choose between killing a few brokers and funds that didn't use proper covenants and killing everything, isn't it better to keep rates where they are? 

I realize you are personally involved in credit, but if 96% of the economy needs rates higher and 4% needs them lower, how is that a case for lowering rates? Most non-related companies have four years of cash on their balance sheets and have been doing huge buybacks. I haven't seen anyone claim that credit or borrowing is more broadly an issue. Yes, littel borrowing is happening, but little borrowing is needed. Let them use their cash, no? It really seems like some of these loan companies are upset because a game without rules that should have never existed is now gone. Most people aren't real sympathetic to that.

As I understand it, this particular activity is less than 4% and perhaps less than 1% of that could be bad. I've heard the worst case on the loss is .7% of the economy. Real Estate related companies and sales people have been going bankrupt for the last year. GDP was largely down because of the impact of that loss. I've heard as much as 1-2%. No one suggested the Fed jump and save them then. I know a lot of related industry businesses like a distributor in Construction and they are way, way, way down.

I hope this doesn't sound callous, but my sense of fairness says if people that got MINIMUM $500,000 bonuses the last three years and had the true understanding of what was going on didn't save any of it for when the music stopped then they deserve to lose their house before the little guy that got nagged into 80-10-5 by his wife and kids making $35,000/yr.

For example, I read a story about Ferrari getting a bad rap in NY because the dealer there would only sell to previous owners because demand was so much greater than total US supply of each model and other stories about the excess of these firms like BSC and Blackstone. Throw some of the bankers in there as well.

Did you see any of Paulson's interview yesterday? 

Again, I don't mean to be callous, but these guys made almost an unconscionable killing the last three to four years. No one feels sorry for them, do they?

I'd like to see the Fed doing what they are - working to figure out who owns which loans of specific homeowners so they can renegotiate and save the loan rather than lose their home.

gnatty, I hope you personally pull through OK.


----------



## whnay. (Dec 30, 2004)

You'd think the sky is falling reading some of these posts (ie - NYBuck). The reality is that while issues persist in sub prime the market has clearly overreacted in other sectors of the borrowing economy. Overall, the underlying collateral in the US debt markets is sound, there has been no middle market collapse, defaults have not spiked in most sectors, etc. The high grade bond market is still open for business and deals are still getting done at the pro rata level. Liquidity is an issue at the moment because banks are re-pricing risk and allowing the market to settle. Once this occurs CLOs and Institutional investors will have access to warehouse lines and will once again start to buy paper. The sub prime collapse was envitible, now the market has overcorrected, it will settle in a month or two and we'll be on our way.


----------



## Wayfarer (Mar 19, 2006)

For the experts here: what do you think was the impetus in easing credit requirements so drastically? I do not think "easy profits" are the answer, as people with sub-standard credit have been around forever but were never allowed to borrow like this in the past.


----------



## gnatty8 (Nov 7, 2006)

ksinc said:


> Can you explain why you think it's ok to ease related to inflation, the dollar, and the broader economy?
> 
> If they are having to choose between killing a few brokers and funds that didn't use proper covenants and killing everything, isn't it better to keep rates where they are?


I am not involved in credit. The company I work for is a Fortune 150 Corporate who accesses credit markets, but I am not a CP dealer, broker, or banker.

That said, the health of the financial system affects everybody, not just the CP dealers and I-Banks. My own firm will not have a problem, we have credit facilities we can draw down in the event the CP market dries up altogether. But if it is costlier for all firms to borrow, that makes it hard for companies to invest, expand, and grow. Just this week, Colonial Pipelines, an A2/A credit, borrowed 30 year funds at a spread of about 138 to Treasuries. I would suspect a month ago that would have been 110. Today it could be 150.

There is a contagion effect in financial markets that spreads very quickly. Look at any of the liquidity crises in the past, particularly the 1998 crisis that was touched off by the Russian bond default. It is one of the key missions of the Fed to "Safeguard the economy against systemic financial crises" and many point to the Fed's decisive action (three 25 bps rate cuts in quick succession) as one of the reasons things were not even worse. A liquidity crisis is bad for everybody, from the corporate treasurer who needs to roll their CP to the investor who must forego a value-enhancing investment because they cannot obtain financing at a reasonable rate.


----------



## gnatty8 (Nov 7, 2006)

Wayfarer said:


> For the experts here: what do you think was the impetus in easing credit requirements so drastically? I do not think "easy profits" are the answer, as people with sub-standard credit have been around forever but were never allowed to borrow like this in the past.


At a very basic level? An increasing appetite for risk amongst the investors who purchased the CDOs that were packaged from these loans. That is just my opinion.


----------



## Wayfarer (Mar 19, 2006)

gnatty8 said:


> At a very basic level? An increasing appetite for risk amongst the investors who purchased the CDOs that were packaged from these loans. That is just my opinion.


Nothing to do with accusations of "red lining" or excluding certain zip codes, etc, which when lenders were basically forced to relax restrictions of this sort, led to a snow-balling into sub-prime in general?


----------



## whnay. (Dec 30, 2004)

gnatty8 said:


> At a very basic level? An increasing appetite for risk amongst the investors who purchased the CDOs that were packaged from these loans. That is just my opinion.


+1 your opinion is correct. To add to this I'd say that it was also the credit agencies that compounded the problem, primarily in the shadow ratings of the collateral. It was not appropriately risk adjusted, even after overcollateralization.


----------



## hcivic91 (Aug 29, 2006)

Wayfarer said:


> For the experts here: what do you think was the impetus in easing credit requirements so drastically? I do not think "easy profits" are the answer, as people with sub-standard credit have been around forever but were never allowed to borrow like this in the past.


Any time the fed funds rate gets too low there is an out-growht(read bubble) somewhere in the economy. In the late '90's it was tech-stocks in the mid'00's housing. Basically investors make unwise investments because cash is too cheap. Simply stated, credit quality went down because of the availabilty of funds. Companies justified and fueled the easing of credit standards by touting that homes are a tangable assets.

Bottom line: Easy money, makes for the ineffecient allocation of capital.


----------



## whnay. (Dec 30, 2004)

Wayfarer said:


> Nothing to do with accusations of "red lining" or excluding certain zip codes, etc, which when lenders were basically forced to relax restrictions of this sort, led to a snow-balling into sub-prime in general?


The snowball was inevitible because of the structure of these loans. Sub prime floating rate loans came with the shortest reset periods (time in which floating rate mortgage reset to the prevailing LIBOR 3 to 5 years after the loan is booked). In a rising interest rate environment these borrowers are now reseting at a much higher rate which in most cases results in hundreds of dollars in additional interest. This wouldn't be as much of a problem if these borrowers had access to refinance to a fixed rate but they don't. All the sudden you've got a large group of people with little equity in their homes flooding the market with supply as they default. The supply obviously puts pressure on home prices and the banks lose money as they are underwater between the sale price and the loan amount. Its a ruthless cycle.


----------



## Mark from Plano (Jan 29, 2007)

whnay. said:


> You'd think the sky is falling reading some of these posts (ie - NYBuck). The reality is that while issues persist in sub prime the market has clearly overreacted in other sectors of the borrowing economy. Overall, the underlying collateral in the US debt markets is sound, there has been no middle market collapse, defaults have not spiked in most sectors, etc. The high grade bond market is still open for business and deals are still getting done at the pro rata level. Liquidity is an issue at the moment because banks are re-pricing risk and allowing the market to settle. Once this occurs CLOs and Institutional investors will have access to warehouse lines and will once again start to buy paper. The sub prime collapse was envitible, now the market has overcorrected, it will settle in a month or two and we'll be on our way.


I'd say that the sky isn't falling but in certain trading rooms the roof definitely is. The issue is whether there are a lot of roofs collapsing or just a few. There are a fair number of IB's sitting around licking their chops because they aren't involved in some of this credit non-sense that's been going on and they'll be the ones that swoop in and buy up these portfolio's at garage sale prices. But the screaming you hear is exactly what you'd expect from folks in a building that's falling in around them.


----------



## whnay. (Dec 30, 2004)

Well they should have seen it coming. Its been the 800 lb gorrilla for 18 months.


----------



## Wayfarer (Mar 19, 2006)

whnay. said:


> The snowball was inevitible because of the structure of these loans. Sub prime floating rate loans came with the shortest reset periods (time in which floating rate mortgage reset to the prevailing LIBOR 3 to 5 years after the loan is booked). In a rising interest rate environment these borrowers are now reseting at a much higher rate which in most cases results in hundreds of dollars in additional interest. This wouldn't be as much of a problem if these borrowers had access to refinance to a fixed rate but they don't. All the sudden you've got a large group of people with little equity in their homes flooding the market with supply as they default. The supply obviously puts pressure on home prices and the banks lose money as they are underwater between the sale price and the loan amount. Its a ruthless cycle.


While I understand and agree with the mechanics you have just described, I wonder why, if a relative layman like myself could easily foresee the results, the "experts" did not, both in the business and the regulatory end. This was as easy to predict as condom demand on Prom Night. It is not the mechanics of this situation I am stumped by, they are clear and relatively easy to understand. That is what makes this current situation even more puzzling to me, night was surely going to follow day, yet people were allowed to carry on like the sun was never going to set on this.


----------



## whnay. (Dec 30, 2004)

The market isn't always rational Wayfarer. And deals always beget deals, once a CDO team closed Q1 it was on to Q2 and so forth. The smart managers and banks have walked cautiously over the past 18 months. What is a occuring now is a wash out of the system.


----------



## Mark from Plano (Jan 29, 2007)

Wayfarer said:


> For the experts here: what do you think was the impetus in easing credit requirements so drastically? I do not think "easy profits" are the answer, as people with sub-standard credit have been around forever but were never allowed to borrow like this in the past.


In short, money acts on supply and demand just like everything else. As a lender, we've seen a massive increase in the number of players in our little lending niche over the past few years. Lots of hedge funds and non-bank financial institutions are opening up lending funds to participate in our market. They are coming in trying to compete for new deals and are willing to offer "covenant-lite" structures and/or lower margin spreads to pry business away from the traditional lenders. As a result it drives the pricing and structure in the whole industry down. Lenders (such as ours) who have been a bit more disciplined and been willing to walk away from business when things got completely out of hand are going to fare better in the coming downturn than those who are structurally unprotected and earning smaller margins.

We've seen this all before, just not to this extent. Five or six years ago lots of institutions (including ours) got a little cute with structures and product offerings and it came back to bite them/us. Everyone kind of weathered that storm, reigned their credit policies back in and were set to be a bit more disciplined the next time around.

What's happening now is that certain credit markets are now overreacting. The corporate "B Loan" market (the most risky) is basically out of business. No deals are getting done anywhere. Whereas secured lending is going strong and still doing deals like crazy. I would expect that it will continue to do well (better even) and that the decrease in overall market liquidity will work to rebalance both margins and structures back to a more reasonable level. I'm a bit more calm than many on this board and it's probably because my roof isn't caving in.


----------



## Wayfarer (Mar 19, 2006)

Mark from Plano said:


> In short, money acts on supply and demand just like everything else.


Yeah, I get that. But as I noted above, the demand for sub-prime credit of this sort has always been there and largely gone unmet in the mortgage field. What I cannot fathom is why the institutions suddenly reversed themselves on decades of policy.



Mark from Plano said:


> We've seen this all before, just not to this extent. Five or six years ago lots of institutions (including ours) got a little cute with structures and product offerings and it came back to bite them/us. Everyone kind of weathered that storm, reigned their credit policies back in and were set to be a bit more disciplined the next time around.


Looks like the lesson was not learned.



Mark from Plano said:


> What's happening now is that certain credit markets are now overreacting. The corporate "B Loan" market (the most risky) is basically out of business. No deals are getting done anywhere. Whereas secured lending is going strong and still doing deals like crazy. I would expect that it will continue to do well (better even) and that the decrease in overall market liquidity will work to rebalance both margins and structures back to a more reasonable level. I'm a bit more calm than many on this board and it's probably because my roof isn't caving in.


I get all that too but am still just puzzled. I think whnay said it best above, sometimes markets really do stop being rational.


----------



## Mark from Plano (Jan 29, 2007)

Wayfarer said:


> Yeah, I get that. But as I noted above, the demand for sub-prime credit of this sort has always been there and largely gone unmet in the mortgage field. What I cannot fathom is why the institutions suddenly reversed themselves on decades of policy.


Again, it has to do with increased supply seeking a home. The advent and expansion of the CMO products for example, increased the amount of capital available to mortgage lenders, just as CLO's increased the amount of "B money" available to corporate lenders (especially for smaller, less creditworthy borrowers). As hedge funds looked for debt obligations to enhance yields it significantly increased the funds available in the overall market.



Wayfarer said:


> Looks like the lesson was not learned.


I think it was learned reasonable well by the more traditional players who walked away from some of the crazier deals. It wasn't learned at all by the newer market participants who were driving structure. This is obviously an oversimplification of a very complex situation, but you get my drift.



Wayfarer said:


> I get all that too but am still just puzzled. I think whnay said it best above, sometimes markets really do stop being rational.


I think that part of what happens is the Chief Credit Officers at large diversified institutions start going weak in the knees when they start seeing massive losses in one section of their portfolio and so they decide to stop the music for a while until they can get their arms around the extent to which the losses may impact other sections of the portfolio or the institution as a whole. It's like evacuating a whole building if one wing is on fire. You want to make sure you minimize the damage if it spreads to the the whole building.


----------



## Karl89 (Feb 20, 2005)

Gents,

The BNP-Paribas hedge fund crisis, the ECB move and the Bank of Korea move today to raise Korean rates 25 basis points to 5% (this after a hike in July) resembles, at least a bit, the LTC crisis in August of 1998. At least we don't have to worry about a Russian default this time (well at least not until oil falls bellow $55 USD a barrel!)

At least it boosted the USD a bit - though if the Chinese start selling USD, as they threatened to last week if we slap new trade tarrifs on them, then the greenback is in for a wild ride down.

Interesting times indeed - but a CHF buy may very well be in order.

Karl


----------



## Wayfarer (Mar 19, 2006)

Did anyone catch that John Dingle, (D) Michigan, is planning on sponsoring a bill related to global warming, that amongst other things, cuts off mortgage tax deductions for houses over 3k square feet? That will certainly help things out...


----------



## ksinc (May 30, 2005)

Karl89 said:


> though if the Chinese start selling USD, as they threatened to last week if we slap new trade tarrifs on them, then the greenback is in for a wild ride down.
> Karl


According to Paulson yesterday, that was an absurd statement by lower level people in China that have nothing to do with actual Chinese policy.

Fingers crossed though, eh?

He also said that while China was the 2nd largest holder of treasuries, the amount they held was the equivalent of less than one trading day's activity in the Treasuries market and that he thought it could be absorbed.

It's hard to remember for all we hear about China, China, China the Chinese economy is still smaller than the growth in the US Economy over several years (like 3-5).

Hating to agree with you on something  I think the EU/euro is a bigger problem for the US dollar.


----------



## Karl89 (Feb 20, 2005)

Wayfarer,

I agree that Dingle's proposal is silly BUT I do favor a National Sales Tax replacing the income tax and hence the home mortgage deduction.

Karl


----------



## Karl89 (Feb 20, 2005)

Ksinc,

I hope that Hank is right and the Chinese would be shooting themselves in the foot (drying up the chief export market and substanially reduces their own reserves) but I am concerned rather than worried. IF we could get the budget deficit under control that would give a huge shot in the arm to the USD. 

What other currencies do you see as a safe haven if the USD begins to crash? Obviously the CHF, maybe the GBP and if oil prices stay high perhaps the Norwegian kroner?

Karl


----------



## ksinc (May 30, 2005)

Karl89 said:


> Ksinc,
> 
> What other currencies do you see as a safe haven if the USD begins to crash? Obviously the CHF, maybe the GBP and if oil prices stay high perhaps the Norwegian kroner?
> 
> Karl


I'm so not a currency guy, but I notice Gold went from ~$650 to ~$680 since I bought some last month or so. It's now back around $660. I think I would buy anything below $655. Just my opinion.

https://www.kitco.com/charts/livegold.html


----------



## Karl89 (Feb 20, 2005)

Ksinc,

Yea, Gold has a bright future. Not just bc of its status as a safe harbor in turbulent times but also bc of increased consumer demand (primarily jewelry) in China, India and the Arab world. So even if the global economic jitters subside I still think the price of Gold will remain lofty.

Karl


----------



## gnatty8 (Nov 7, 2006)

Karl89 said:


> Wayfarer,
> 
> I agree that Dingle's proposal is silly BUT I do favor a National Sales Tax replacing the income tax and hence the home mortgage deduction.
> 
> Karl


I would vote for you on the strength of that platform alone.


----------



## ksinc (May 30, 2005)

I get this newsletter sent to me. Might be interesting to some.

This also came today https://www.economist.com/displaystory.cfm?story_id=9622090&fsrc=nwl

I am realizing that I'm probably on too many distribution lists!


----------



## ksinc (May 30, 2005)

Here is what I was eluding to previously regarding the dollar.



> Let's study this chart for a few moments, because it beautifully illustrates the standard theory but also why (in my opinion) the fears of a crisis might be justified this time around.


----------

