Auction Economy

David Stockman, “How my G.O.P. destroyed the U.S. economy."

2010-08-10T14:07:00.000-07:00

David Stockman, lifelong Republican and President Ronald Reagan's director of the Office of Management and Budget, wrote in a recent New York Times op-ed piece titled, "Four Deformations of the Apocalypse", or, “How my G.O.P. destroyed the U.S. economy." Of course, the New York Times or as I refer to them as, The Toilet Paper of Record - would fall all over themselves to publish anything this hyper critical of the Republican Party, but when a Reaganomics warrior the stature of Stockman says “ destroyed” and American Apocalypse” in the same paragraph, I listen.

Stockman is also equally damning of the Democrats' and their Keynesian policies. But what this indictment by someone so close to the development of the Reaganomics ideology says about America, helps all of us better understand how America's toxic holy war of partisan-politics is destroying not just the economy but capitalism in the process. Unless this war stops soon, both parties will succeed in their collective death wish for each other at the expense of our freedom and prosperity.

Why should we focus on Stockman's message? It's already lost in the 24X7 news cycle. We live in a nation where our current President thinks it’s vitally important to sit on the mid day gossip couch with a gaggle of imbeciles and talk about Lindsey Lohan, Mel Gibson and Snooky. Talk about dumbed down – America and its leadership is Snooky Stupid.

Ask yourself: How did this great nation lose its moral compass and drift so far off course, to where our very survival is threatened?

This nation has arrived at the tipping point. Although we have plenty of external enemies, they are no longer the real threat. We are committing suicide. Democracy. Capitalism. American exceptionalisim, the so called American dream. All dying. Why? Because of the economic decisions of the GOP the past 40 years, says Stockman.

While the economic policy of the Democrats have dominated congress the bulk of the last 40 years, and we know what those policies are because they haven’t changed in almost 100 years: a blend of Keynesian, Progressive and Fabian socialist tripe. But it has been the Republican blunders and their inability to counter the Keynesians and Socialists with a sustainable capitalist alternate that has us on the ropes. Stockman’s argument makes for a powerful history lesson, because it exposes how both parties are responsible for destroying the U.S. economy.

"If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. “ One has to admire that statement coming from a true conservative pedigree like Stockman’s. Much of the substantive content of the so called “Bush Tax cut” stand to be lost in the argument that the nation's wealthiest taxpayers be spared even a three-percentage-point rate increase.

With the nation's public debt soon to reach $18 trillion, Republican insistence upon salvaging the 3 % to the wealthiest 5% seems absurd. Meanwhile the Democrats would throw away the Bush cut in capital gains, hurting every property /equity investor. Compromise? Not with the partisian death match being played out on the Fox News 24X7.

In the past 40 years I have been watching politics, traditional Republican ideology has gone from the solid economic principle of balancing accounts in government, trade and the banking system to hype and slogans. It was believed and practiced that prosperity depended upon balance.

Stockman says there's a "new catechism", making a mockery of traditional Republican ideals. He says that this amounts to, "little more than money printing and deficit finance, vulgar Keynesianism robed in the ideological vestments of the prosperous classes." Worse, it has resulted in "serial financial bubbles and Wall Street depredations that have crippled our economy."

Nixon dumping gold started the U.S. spending binge and gets Stockman’s ball rolling. I have spent a considerable amount of time studying the relationship between the gold standard and the decline of the dollar. Stockman assaults the Nixon's gold policies for defaulting "on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world." This is a sound point and as the history reveals, America has been living beyond its means as a nation ever since. Stockman goes further saying, "borrowed prosperity on an epic scale ... an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves."

In Nixon’s defense, he had to pay for Johnson’s Great Society somehow, and the thought of rolling back the wave of entitlements was politically unthinkable at that time. Nixon was a coward.

Milton Friedman: "Just let the free market set currency exchange rates, he said, and trade deficits will self-correct." Stockman remarks that Friedman was wrong by trillions. And unfortunately "once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors." Without monetary discipline America was also encouraging "global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve." Yes, the road to the coming apocalypse began with a Republican president listening to a misguided Nobel economist's advice. Sound familiar? Every Democrat President since has had their favorite Nobel laureate as well. So much for the value of a Nobel.

Stockman says "the second unhappy change in the American economy has been the extraordinary growth of our public debt coupled with warmongering. In 1970, US debt was just 40% of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater. Blame? Not that the Democrats weren’t spending big at every opportunity, but Stockman points out with the 20/20 clarity of non-partisan hindsight that "the Republican Party's embrace of the insidious doctrine that deficits don't matter if they result from tax cuts" exacerbated a three decade long rise in deficit spending by both parties.

Traditional Republicans supported tax cuts, but they had to be matched by spending cuts, to offset the way inflation pushes many taxpayers into higher brackets and to spur investment. The Reagan administration's hastily prepared fiscal blueprint, however, was no match for what Stockman cites as” the primordial forces -- the welfare state and the warfare state -- that drive the federal spending machine."

As one absorbs Stockman's indictment of how the GOP has "destroyed the U.S. economy," you're probably asking yourself why any conservative like me believe what sounds like a traitor to the Reagan legacy.

Party affiliation is irrelevant.

Stockman exposes a dangerous historical trend where politics is so partisan it's having huge negative consequences.

Does the GOP have a welfare-warfare state mentality? The NeoCon GOP does. The NeoCons have pushing the military budget skyward. Republicans on Capitol Hill who were supposed to be about cutting spending, ignored most of the Democrat domestic budget, the entitlements, farm subsidies, education, etc and in the end it was a new cadre of ideological tax-cutters who killed the Republicans' fiscal religion."

When Fed chief Paul Volcker crushed inflation in the '80s there was a economic rebound. But then says Stockman, "the new tax-cutters hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts." By 2009, they "reduced federal revenues to 15% of gross domestic product," lowest since the 1940s.

Recently Bush made matters far worse by "rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures." Bush capitulated on domestic spending cuts, signing into law $420 billion in nondefense appropriations, a 65% percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy. Therefore: Bush was a tax cutting big spender and not by any measure a conservative, but a true Neo Con.

Wall Street enters a 'vast and unproductive expansion'. Stockman : "The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector." Anyone in business or even interested in business should have seen that Republicans have been oblivious to the hazard of financial markets flooding with freely printed money and deregulated of traditional restrictions on leverage and speculation. Wrong, not oblivious. Self-interested Republican loyalists like Paulson, Bernanke and Geithner knew exactly what they were doing and saw in the Democrat’s 2 decade long housing bubble just the means to the end they were seeking.

They wanted the economy, markets and the government to be under the absolute control of Wall Street's banks. They backed a foolish, left leaning power hungry Congress and Fed into bailing out an estimated $23.7 trillion debt. Worse, this bought and paid for congress have since destroyed any meaningful financial reforms by letting the banksters write the regulations. So Wall Street is now back to business as usual blowing another bigger bubble/bust cycle that will culminate in what Stockman calls the coming "American Apocalypse." When a character like a David Stockman uses the word Apocalypse, one better stand up and listen.

Stockman refers to Wall Street's surviving banks as "wards of the state." Finally I can disagree with him on a point: the opposite is true. Wall Street now controls Washington, especially the President. Unproductive trading is extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. Wall Street banks like Goldman were virtually bankrupt, would have never survived without government-guaranteed deposits and what Stockman calls; "virtually free money from the Fed's discount window to cover their bad bets."

The New American Revolution; class-warfare coming soon says Stockman. Finally, thanks to policies of both Republican & Democrat, that let us "live beyond our means for decades by borrowing heavily from abroad, steadily sending jobs and production offshore," while "high-value jobs in goods production, trade, transportation, information technology and the professions shrunk by 12% to 68 million from 77 million."

As the apocalypse draws near, Stockman sees a class-rebellion, a new revolution, a war against greed and the wealthy. And he sees it happening soon.

The trigger will be the growing gap between the economic classes: No wonder. Stockman illustrates that during the last bubble (from 2002 to 2006) “ the top 1% of Americans -- paid mainly from the Wall Street casino -- received two-thirds of the gain in national income, while the bottom 90% -- mainly dependent on Main Street's shrinking economy got only 12%. This growing wealth gap is not the market's fault. It's the decaying fruit of bad economic policy."

Stockman’s bottom line: "The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing ... it's a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach -- balanced budgets, sound money and financial discipline -- is needed more than ever."

Preaching to the choir here Brother Stockman, but I must admit that I am set back on my heals not by the message, but by the messenger.

But like messenger before him, will anyone get it? Most are helpless and would do nothing even if they could. They sit in the bleachers watching Snooky, sports and other bread & circus diversions. In fact, most Americans are so cynical that they just don’t care.

The politicians? They are now a class unto their own; the Political Class. They are so deep in the pockets of the Wall Street conspiracy that controls Washington they are part and parcel of the problem. The President on The View or their endless $100,000 a day vacations. Vacuous. Oblivious.

No, his message lost in the 24/7 news cycle, and even after final apocalyptic event, the next bigger global meltdown, the next Great Depression and through a historic class war, this deadly partisan game will continue unabated, just like a TV reality show.

A whack on the head, or the kick in the balls?

2010-08-03T14:03:00.000-07:00

I'll take the kick in the balls!

And which will you choose Mr. & Mrs. Home buyers?
The whack on the head or the kick in the balls? How about both?

Just when you thought it couldn't’t get worse – it does.

When you thought that the mental defectives league on Capital Hill and their minions within the Beltway & On The Street couldn't’t possibly cause any more damage – they find a way.

When the entire housing market is teetering on the brink, when values are failing in what is rapidly becoming the double dip of the mother of all deflations, only this government could deliver a coup de gras – an insult to the intelligence, a mallet to the head – hell - I’ll call it what it is – a kick in the balls and call it anything other than a tax.

How about the whack in the head?

How? How about a new “fee“?

Be aware that the U.S. Treasury Department is considering a new mortgage fee to fund the backstops it gives for loans purchased through Fannie Mae and Freddie Mac.

Oh boy. Now you know why they left any reform of the mortgage giants out of the recent finreg bill. They had a sleeper in the wings.

Treasury analysts say the new “fee” may be up to 1.5 percent of the borrower's mortgage, which would be a big increase from the current 0.25 percent that both Fannie and Freddie currently charge mortgage borrowers. Plus, it remains to be seen if this new charge would be in addition to that current charge!

Why not two fees? Just call the original one an “origination fee” and the new one a “Mortgage Assurance fee” – or some other happy horseshit. Hey – don’t forget - once you have a new fee – you can always raise it! Hell – raise em both!

The Treasury also has under consideration breaking up Fannie and Freddie and selling pieces to the major banks, though most believe it will end up going with the fee. Hey – why not both!

So if you obtain a mortgage for $300,000 you could see an additional fee of up to $4,500 ... and the additional cost would just keep rising with the size of the loan.

How’s that for a reversal from the recently-expired home buyer credit!

Meanwhile, banks continue to significantly tighten their mortgage lending standards.

For instance, on June 1, Fannie Mae put into effect the Loan Quality Initiative (LQI), which requires lenders to pull two credit reports along with additional verification checks on potential borrowers.

That means even if you are initially approved for a loan, it can still be put on hold or cancelled altogether if you run-up credit card debts ... apply for other new loans of any kind ... or otherwise take actions that change your perceived risk profile before the mortgage actually closes. Exactly what happens when people are trying to buy a house.
And it's worth noting that this initiative is mandatory — affecting practically every mortgage lender and secondary mortgage market product!

Therefore: (follow me here) This government, on one hand is now making it more expensive & harder to qualify for debt to buy something that on the other hand they say they want us all to buy despite the fact that this something is decreasing in value because,
there is so much of it on the market because
everyone is trying to dump it because,
it has become too expense to afford because,
there is already too much debt secured by it because,
the government wanted it to be cheap & easy to borrow because
they wanted a more egalitarian society by expanding property ownership, regardless the ability to pay.

Result, we are all poorer and hence more equal.
Guess the government got what it wanted.

How’s that for a kick in the balls?

A Dangerous Game of Confidence

2010-08-03T12:14:00.000-07:00

I'm going to be very brief and get straight to the point:

Wall Street brokers, Real Estate Hustlers, their touts and pundits seem to think their dangerous con game can prevail despite a major decline in the real economy.

Well, I have news for them: They may have lured a few investors into this most recent stock market rally. But they're certainly not convincing the hundreds of millions of consumers and businesspeople who have to deal with the worst housing deflation, the highest long-term unemployment, and the most chronic credit squeeze ever recorded.

What? You need proof?

1st: Credit — one of the best barometers of consumers' appetite for spending. Either they can and won’t or can’t. Doesn’t matter which.

Compared to the prior year, new borrowing has now suffered its deepest plunge since the 1940’s.

In fact, this is only the second time in the past 60 years that we've actually seen consumers borrow less than they're paying back. The last time was in 1991; this e, the decline is more than TWICE as bad and lasting a lot longer. I don’t know what your doing but I ‘m investing in debt retirement rather than in new debt.

What about the so-called recovery? Well, there was none whatsoever in consumer credit. It has continued plunging virtually nonstop.

#2: Consumer confidence.

Every single survey — by the Conference Board, the University of Michigan, and others — confirm the same trend: Consumer confidence plunged massively as the housing market collapsed.

Then, it rallied moderately with the Obama stimulus package.

And now, it's suddenly suffering a new plunge ... and that spells trouble for the entire U.S. economy.

Ditto for small businesses. The National Federation of Independent Business (NFIB) just reported that its optimism index plunged to a low of 81 in March of last year, enjoyed a moderate rally, and is now falling again! The main reason, according to NFIB, small business credit is in a DEEP RECESSION.

All this is very obvious to virtually everyone in America except the denizens of Wall Street & inside The beltway. Beware. Be afraid, be very, very afraid of anything coming out of the Beltway to “help small business”. It will amount to another over-reach by government. Another form of takeover of private enterprise. It’s tough enough when you borrow from a regulated bank or a private equity “loan shark” like GE Capital. They want just a little bit of control in exchange for they capital. How much control will GovCo Loans Inc take?

Equally obvious, as I explained here last week, are the three main reasons for this great malaise:

The U.S. housing market is now locked into a chronic, long-term depression/deflation, with housing starts over most sectors in a disaster zone, exsiting home sales stalled, commercial equities in the danger zone and high value properties (over 5 Million) seeing unprecedented value deflation.

In just three years, 79 percent of America's largest industry, impacting more Americans than any other, was wiped away.

Despite a series of government agency programs to shore up the industry ... plus $1.25 trillion poured in by the Fed to buy up mortgage-backed securities ... plus a big tax credit for new homebuyers ... housing starts perked up only a tad.

In fact, this recovery was so small, even after massive government efforts and even at the highest point in their recovery this year, the housing industry recouped less than one-tenth of its historic three-year bust from 2006 to 2009.

Worse, the housing industry has now resumed its decline with foreclosures rising sharply again!
Long-term unemployment in the United States is now the worst since the government began keeping records over 60 years ago.

A record 4.39 percent of the work force — or 46.2 percent of the unemployed — have been out of work for 27 weeks or more. That's DOUBLE the worst level ever recorded and TRIPLE the peak level seen in five of the past six recessions.

Plus, on average, America's unemployed have been out of work for 35.2 weeks, also the highest on record.

Most American consumers and business people clearly see all this in the real world. So they refuse to believe Wall Street b.s. and Washington propaganda. They are fed up and voting "NO" with their dollars each and every day. Do NOT fall victim to those who would lure you back into the same kinds of stocks and bonds that torpedoed your portfolio last time.

Buy down your debt. If you have anything left over, save it. Cash. Hard money, gold & silver. Pick your spot in real estate, but be careful! As The Will Rogers quote says: I buy Real Estate because they ain’t makin anymore of it” still rings true – it has to be the right real estate for your portfolio and there may be more deflation still ahead.

More about that next.

Comments, questions, dissagree - agree ?

Graphs from Money & Markets

The Mystery of the "Great Disconnect"

2010-07-30T13:22:00.000-07:00

We are living in the time of the "Great Disconnect".
Nothing reported, either economically or politically, seems to connect with reality. The reality of which I speak is of the look around you and the look it up variety. The reported cause never seems to line up with the reported effect. Most often, they are two completely unrelated events that are formed by the masters of spin into an unintelligible & intentionally misleading corollary.

Let give you a simple example using a recent event on the Dow Jones.

An investment newsletter to which I subscribe reported that on Monday, the Federal Reserve Bank of Dallas released its latest manufacturing survey. This wasn't old, stale data; this survey was conducted in mid-July. And the results were bloody awful, with the headline index plunging to -21 from -4 a month earlier. That was the worst showing in a year.

Yet the Dow Jones Industrial Average jumped 101 points.?

Now that jump was rationalized by reports that many companies were reporting good earning, example; FedEx boosted its 2010 earnings target and Harley Davison showed excellent earnings. But wait a minute: If you know anyone living in South Eastern PA, you know that Harley’s sales are in the tank. But they also have laid off over 1500 bodies in recent months – no wonder they have good numbers, at least for the nonce. As for FedEx, they can boost their projected earning all the want, but I ask; how many cuts have they made and from what direction are those consigned loads travelling? West to East, or East to West?

Or how about what happened a few days earlier? The ECRI ( The Economic Cycle Research Institute’s US weekly leading index) released its latest index report, and the results were dismal once again ... and I mean beaucoup ugly- slumping to -10.5 percent. I am told that is the worst reading going all the way back to May 2009. Every single time this indicator has slipped into double-digit negative territory, a recession has followed. Every single time.

Yet that Friday, the Dow kited another102 points. The reported rational? Honeywell and Verizon topped earnings targets, while companies such as Ford talked about a brighter 2011. Big DEAL. What did Honeywell & Verizon adjust or cut to eek out some earnings and “ brighter” isn’t any indices I would hang my hat upon, although I say good for Ford for surviving without the bailout.

You can get the disconnected spun bull on from CNBC all day long. Pundits claim investors are ignoring the bad economic news because things are about to turn, and because company comments should outweigh macroeconomic data.

Prosperity is just around the corner. There is light at the end of tunnel.

Companies, politicians, bureaucrats, real estate hustlers and those who tout them for a living, Can't — or Don't Want to , See the Train Bearing Down on Them!

If you were to climb into a time machine and go back to late 1999 and early 2000, you'd hear corporate executives waxing extremely bullish about their prospects. The heads of Cisco, Intel, Amazon.com, and many others saw nothing but rainbows and blue skies ahead. This continued even as all the leading economic indicators of the day began to slump.

What about a more recent example — say, in real estate or mortgage lending? You should go back and read the transcripts from 2005 or 2006. These guys were falling all over themselves talking about the new paradigm in housing ... the surging sales ... the soaring prices.

They continued to spout happy talk even as the underlying, empirical economic data and leading indicators began to roll over. Result: Yet another pasting for anyone who listened to the supposedly clued-in execs.

It's hard not to conclude that the corporate & political classes of America are full of liars, cheats, and charlatans. And in SOME instances, that's exactly the case. But more is going on here ...

For starters, corporate execs, especially the Real Estate Hustlers extrapolate too much from current trends. If sales are improving, say, because of the biggest government bailouts and stimulus packages in the history of the world, they tend to view the trend as sustainable. That forms the basis of their forward projections. If sales fell sharply and they cut production (and payroll!) but were able to sustain current sales levels from already paid for stock inventory and with much reduced labor outlay – in these times of the “Great Disconnect” – that calls for a great earning report. The Harley Davidson spin is a fine example.

These are the lessons of Enron, Tyco, and WorldCom. Why haven’t we learned them?

But that tendency is precisely the most dangerous at turning points in the underlying economy!

Here's something else to consider: CEOs depend on positive market perceptions of their prospects. That's because most of these guys have thousands and thousands of company shares in their portfolios.

If a corporate CEO came on the phone during a conference call and said: "You know what guys? Business stinks, and it's getting worse. Better sell your stock ... fast!" what do you think would happen?

The stock would tank, and his or her personal wealth would evaporate. So of course most CEOs are going to talk a big game just like any politician or Real Estate Hustler

The U.S. economy is stuck in the mire. But overseas economies ... particularly in Asia ... are doing better. Multinational companies that have exposure to those healthier regions are temporarily able to offset their lousy U.S. operations with foreign strength. That was definitely the case with FedEx, to cite just one example.

But we need to Cut through The BS !

When I survey the economic landscape, I see:

• Consumer confidence falling to multi-month lows,

• Regional manufacturing indices falling off a cliff,

• Banks lending less money, and mortgage and consumer credit plunging, and

• Durable goods orders falling, and job creation completely MIA.

• Real estate sales at a standstill & values cratering –again!

• And a government hell bent on destroying wealth.

And against that, I hear plenty of optimistic comments from corporate execs/ politicians, /bureaucrats / reporters/pundits and real estate hustlers who stand to benefit by talking up their prospects.

They just don't match up to reality.

A Dead Cat Bounce: Your Real Estate Values, Employment Stats.& The Federal Reserve,

2010-07-26T12:34:00.000-07:00

Dead Cat Bounce

In testimony before Congress last week, Ben Bernanke lifted the Fed's skirt and gave us a glimpse of the disasters now sweeping through the U.S. economy.
To my knowledge, he was not asked nor did he volunteer whether or not a dead cat bounced, but there were 3 other bombshells he surely did NOT talk about.

#1. What's CAUSING the economy to sink?

The stock market has not yet crashed.

Interest rates have not yet surged.

Gasoline prices have not skyrocketed.

There has been no recent debt collapse, market shock, or terrorist attack.

So what is the invisible force that's suddenly gutting the housing market, driving consumer confidence into a sinkhole, and killing the recovery that Washington was so avidly touting in this Summer of Recovery?

Bernanke didn’t say but the answer is clear enough: The recovery had very little substance to begin with. Rather, it was a dead cat bounce! An illusion bought and paid for with massive bailouts, stimulus programs, borrowing and money printing.

Put another way, the recession never really ended. Yes, we saw some growth in GDP. And yes, thanks to that growth, some companies are still reporting better earnings — the news that spurred a rally in the stock market last week. But at the core of the economy, the fires that started the recession are still burning intensely.

#2.The U.S. Housing Market Is Now LOCKED Into a Chronic, Long-Term Deflation

Housing starts — traditionally the most important measure of the housing industry — is still a disaster zone, despite the latest spin. If viewed beginning in January 2006, they suffered their worst plunge in recorded history — from an annual rate of 2.3 million to a meager 477,000 in April 2009. Thus...

In just three years, 79 percent of America's largest industry, impacting more Americans net worth & American jobs than any other was wiped away.

Then, despite a series of government agency programs to shore up the industry ... plus something like $1.25 trillion poured in by the Fed to buy up mortgage-backed securities ... plus a big tax credit for new homebuyers, housing starts perked up ever so slightly: They recovered to an annual rate of 612,000 in January of this year.

It took me a day or two to look up the numbers and fiqure it out, but this recovery was so small, it retraced just 7.5 percent of the prior fall.
In other words,
Even after massive government efforts, and even at the highest point in their recovery this year, the housing industry recouped less than 1/10th of its historic three-year bust from 2006 to 2009.
Worse, existing housing value has now resumed its deflationary decline.

The most alarming factor is that widespread reports of "strategic defaults" on home mortgages have returned.

These are defaults by homeowners who can afford to meet their monthly mortgage payments, but have deliberately decided to stop paying. Their home is now worth much less than they owe and recovery of value is nowhere in sight. They know their bank won’t or can’t get around to evicting them for as long as two years, (in many states), allowing them to live in the house cost-free. They also know this tactic can give them tens of thousands of dollars in extra cash. So they're defaulting en masse and getting away with it.

To add fuel to this fire, many sellers bought in on the bounce produced by the tax credit driven sales, believed they were seeing price stabilization and placed their properties on the market this spring, only to languish as those buyers dried up.

End result:
• Market inventories are once again ballooning as far as the eye can see ...
• Bankers who would rather cut their wrists than finance new homes, and ...
• A new slump in housing that's worse than even some pessimists were expecting.

#3. Despite his now-famous quote that this is "the worst labor market since the Great Depression," Bernanke failed to reveal that...

Official Government Data Continues to GROSSLY Understate the Magnitude of Unemployment
Bernanke did not mention that the percentage of long-term unemployed in America is the worst it's been since the government began keeping records in 1948. Two facts availalable from The Heritage Foundation's website:

• Fact #1: 46.2 percent of the unemployed — have been out of work for 27 weeks or more. That's DOUBLE the worst level ever recorded and TRIPLE the peak level seen in five of the past six recessions.

• Fact #2: On average, America's unemployed have been out of work for 35.2 weeks, also the highest on record.

Bernanke did not remind Congress that based on the government's own broad measure; the true unemployment rate in the U.S. is not 9.5 percent. It's 16.5 percent — or seven full percentage points more than the figure anyone in government ever refers to.

This broader measure includes workers seeking full-time employment, but temporarily settling for lower paying part-time jobs. Plus, it's supposed to also include "discouraged workers" — those who have given up looking for work because there are no jobs to be found. During the Clinton administration, discouraged workers were "redefined" to EXCLUDE those who had been out of work for more than a year — and that definition continues to be used to this day.

That makes absolutely no sense. If they're out of work for a year, they're discouraged. But as soon as they're out of work for a year and one day, it's suddenly assumed they're happily going about their life?!

Thus, precisely when economists now recognize that one of the biggest challenges of this Great Recession is long-term unemployment ... the Obama administration, both parties in Congress, and all U.S. government agencies continue to exclude the longest term unemployed from every single one of their unemployment statistics.

This could go down in history as one of the greatest deceptions about the true state of U.S. labor markets. And according to John Williams of Shadow Government Statistics, it's big: When you add these long-term discouraged workers back into the jobless count, you find that the real unemployment rate in the U.S. is actually 21.6 percent!

But no matter how you count it, some outstanding facts are absolutely self-evident:

FACT: The enormous magnitude of the government's intervention FAR surpasses anything ever witnessed in the history of humankind.

FACT: It's not working! Housing is still collapsed. Long-term unemployment is the worst ever recorded. And the recovery, already anemic, is aborting prematurely.

Bottom line: Dead Cats Do In Fact NOT Bounce. If you were counting on the government to prevent the second major leg in this great double-dip recession, don't hold your breath.
Your Action: If you are a real estate seller, time is of the essence. Shortening your time on market is more important than ever. The need for aggressive, market capturing marketing is paramount. If you are in the position to accept current market value, the competitive bidding format and time defined nature of auction marketing may be right for you.

Real Estate Catastrophe! Or Real Estate Hyperbole?

2010-07-23T13:44:00.000-07:00

BREAKING NEWS: The industry that triggered this great recession in the first place is coming apart at the seams ... AGAIN!

The U.S. Commerce Department just reported that all the gains made in home-building activity since last October have just been wiped out — construction of new homes and apartments just fell off the cliff:

Between May and June, new housing starts plunged 5%. That’s an absolutely astounding annualized rate of decline of nearly 50%. At this rate, HALF of all home construction — and construction jobs — would vanish in a year!

Plus for companies involved in building condos and apartments, things are even worse: Their activity plunged 19.3% IN A SINGLE MONTH!

Bottom line: This could NOT be a more serious blow for the U.S. economy. After all — it was the housing bust that drove foreclosures sky-high and pushed our largest financial institutions to the brink of bankruptcy in the first place.

OR? NAR economist expects stabilization in 2010

The National Association of Realtors’ chief economist, Lawrence Yun, Ph.D., told his constituency at the NAR convention here that the national real estate market should stabilize in 2010.

He got a big ovation from a packed ballroom at the San Diego Convention Center this morning when he heralded the “power of the NAR” for successfully encouraging Congress to extend the $8,000 first-time home buyer tax credit. As a result, “the credit is working better than first projected,” Yun said. “It now looks like we’ll have 2.3 to 2.4 million first-time buyers this year.”

OR ? ! New data: Home inventory rises as prices continue to get slashed!

All three of these headers appeared on industry newsletters over the last few days. My inbox is full of such weakly. But what is the truth? Which statement can one trust to make a real estate decision?

ALL Three statements are TRUE & All Three are also Hyperbole.

And there in lies the 2010 Real Estate Dilemma.

1. New home construction is at the precipice, ready to fail as an industry. A large swath of the nation’s unemployment number relates to that fact. Yet in my own zip code, a long stalled 55 & over apartment tower is currently under way and moving forward at a brisk pace. Once competed will it sell or sit? Will a run by local empty nesters from their too big and overtaxed single homes push that local inventory over the tipping point? Seems that the value here will get punished by success or failure of this project.

2. NAR chief economist Yun’s numbers are also correct, but also hyperbole. All I can say to the so called success of the tax credit is, “so what”? What is the net result of an $8,000 tax credit in the overall picture in the purchase of a property in excess of $200,000.00 and was offered to a very small sector of the buying public? But it did get some people in the market and the numbers reflect it.

3. With the withdrawal of this credit and the usual summer lull in sales, prices are falling again. Sharply. Despite the hype over the credit, real interest in housing hasn’t returned.

4. For commercial real estate, multiply by a factor of 3. It hasn’t had any of the attention that housing has received and is outright foundering with no relief in sight.

Yet, despite all this negativity, a family member recently successfully marketed their attached home and traded up to a larger single property to accommodate a growing family. No tax credit was involved by either party and the price paid in both transactions reflected fair market value. Nobody got rich in the deal, but no one was distressed by it either. All were in positions whereby they COULD accept current market value.

I said in March that if one didn’t sell by May 31st, that they won’t be able to sell until September or later. I appeared to have been right. On June 1st, I said that if you bought in the last ½ of May, you probably paid too much and if the deal relied on a tax credit to qualify, you will be underwater by August. I believe that will be proven to correct as well.

Hyperbole ? No, because there are always exceptions.

Some markets have stabilized, but not due to the tax credit.
Are we “at the bottom”?
Depends upon where you are standing and what you are standing on.

We are still in a market whose overall price trends are “lending limited”.
Uncertainty is still a dominate market influence.

Time on market will now return to the front burner.

We used to just call these guys Assholes, but today we diagnose them.

2010-07-13T14:14:00.000-07:00

This Obama guy is failing more completely than any president in my lifetime. One may need to go quite a’ways back in history to even find a close comparison for failure this expeditious. On every front he is floundering, overreaching, or outright flunking. His only success — health care legislation — was achieved over the will of the people. That is rarely a good idea.

His greatest success is rate at which he is manufacturing conservatives and libertarians, the ranks of which are expanding at an unprecedented clip. The only mystery left for the coming November election is how bad this beating will be.

Why has this happened?

There are several obvious answers. Obama, too inexperienced for his office, never expected to accede to it so quickly in the first place. The public (correctly) has no stomach for a multicultural foreign policy. Almost 20 years of liberal economics, (as much congressional as presidential) has reached the end of its Ponzi scheme road. Adding Obama’s & congress’ doubling down on war & foreign sourced debt and we’re in a recession/depression with no end in sight. Then there is that little eco-catastrophe in the Gulf that Mr. Obama manages with a summer golf tour.

All of that aside, there is another reason, perhaps more important than all of them. Obama has been unable to use the Bully Pulpit. No one pays attention to him. The vaunted Demosthenes of the campaign trail disappeared literally upon inauguration. He hasn't’t been able to convince anyone of anything. He only succeeds when he acts purely as a thug, muscling through legislation.

Some say and I strongly concur that this is because he wasn’t such a great orator in the first place. He just reads well enough from the teleprompter and with the prompter gone the emperor has no clothes.

But I think it is something more complex and deeper. There have been plenty of presidents with limited abilities. Many who were not orators and some with limited executive experience, although not many with NO experience. Even his less than experienced challenger and current Sec. of State could at least claim 1600 Pennsylvania Ave as her mailing address for 8 years.

No, I think it is because Obama was elected on a lie and not the lie you think. ( Although anything is possible) A big lie that was enabled by the mainstream media, and that by the time he was in office he had spent his all his credit. Belief was gone. Everyone knew he was a liar, including many liberals, even if they can’t or won’t admit it to themselves and even if they had colluded with him in the lie.

I am referring to the Reverend Wright affair. I thought it was serious at the time. In retrospect, I think it was disastrous, probably fatal. There isn’t a bus big enough to throw The Reverend under to cover this attempted deception.

Obama told us on several occasions then that he had not been aware of Wright’s extreme Black Nationalist views during the candidate’s twenty years in the reverend’s church. That made no sense at the time, but for many it flew. Obama had dedicated his book to Wright, had his children baptized by him, etc.

Wright’s separatist brand of black liberation theology was no doubt quite familiar to Obama. More familiar than it had been to many of us for decades. But likely quite unfamiliar to those 40 & under white voters who pulled the change lever. Especially the Jewish ones.

How would those too young to remember the sixties, those who wouldn't know Bobby Seal, John Africa, Elijah Muhammad or Angela Davis as anything other than names from a modern history curriculum with a nostalgic leftest bias for those wonderful 60's, and the hate and anti-semitism that they were all about. How would those sheltered from this particular brand of hate detect this lie for it gravity?

Because, the mainstream media paid little attention, or tried not to, certainly did not investigate in any depth. Indeed they went so far that many of them declared Obama’s Philadelphia speech on race a masterpiece of the MLK level, when it was no more than an assemblage of clichés and mendacious clichés at that, since they covered up the obvious uncomfortable truth that the candidate knew all about Wright and his ilk. Unlike Oprah Winfrey, who left the Trinity Church years before, Obama chose to ignore it for reasons he could or would not be honest about.

So we were lied to about this by Obama and the MSM winked. Yet it was a far more significant lie than those Presidential lies we have become all too familiar with. Obama’s prevarication was about the very essence of his political zeitgeist. Widely desirous of electing its first black president — I felt this myself but did not act upon it — the nation closed its eyes and ears, and swallowed the lie. But, whether consciously or unconsciously, it did not forget.

We have a president that no one wants to listen to because we do not believe him. His own party ignore him and not just because they fear his growing unpopularity. They also know he is unable to convince anyone of anything. He has 0 credibility because we the voter have shut him off. When his face appears on the tube, I can hear millions of remotes switching to anything – infomercials, World Cup Soccer – anything.

And now the testimony of the Christian Adams has shown that his Department of Justice has a racial bias not entirely dissimilar to those of Reverend Wright. Again the MSM is doing its best to ignore this, but the damage is still there and growing and Obama will not be able to make a speech in his defense.
I am reminded of something I was taught about people by a business mentor. It was, “when someone says to you that money is no object, you better believe that money is the ONLY object.” Now, when Obama or his surrogates try to say that race isn’t the issue, America will hear that race is the only issue.

With this fundamental obfuscation of one of his core fundamentals, his whole political persona becomes a lie. Sure, everyone tries to project the image we want people to accept and respond to, but this man's arrogance seems pathological and he has plenty of enablers.

In this short time, we are already at the “diagnoses stage” with this president. Even Nixon had a longer run of trust before his pathology caught up with him and the diagnoses began. For Nixon it was “paranoid.” For Obama? Socialist will be the least of his labels. I’m betting on narcissist.

It’s over. For all the excitement of his election, having lied his way into office, Barack Obama was essentially DOA his first night at the White House.

Obama’s place in history is assured as the 1st black president, but that fact may only be the byline. The subtitle and his real legacy may be for the shortest tenure of trust of any president in our history.

The Road Signs of Reality

2010-07-06T14:21:00.000-07:00

The New Reality

Today, we are in the midst of a massive global revolution — the East, reaping the benefits of its industry and thrift; the West, paying the price for its sloth and extravagance.

Former "Third World" countries are resource-rich, virtually debt-free and have vast cash reserves. (Most troubling is that it’s mostly our cash!) And the so-called "advanced" nations — in Europe and the United States — are nearly bankrupt, drowning in debt; most available cash, borrowed or printed.

As happens every half-millennium or so, the economic sun is setting in the West and is rising in the East.

Moral lessons aside, the reality is that a revolution of this magnitude — the historic changing of the planet's leadership — can be expected to impact the value of every conceivable store of wealth. And it's only natural that these changes be as extreme as the events that drive them.

When those on the left of the economic paradigm, like Nobel laureate, New Times contributor and liberal fascist mouthpiece for the current regime, Krugman himself began to use the “D” word ( as in depression), I realized just how radical this “Road of Change” was becoming . So what where the “Road Signs” that even the most leftist of the economic elite couldn’t ignore?

Road Sign #1— Key Reversal Signal in Stocks

After retracing nearly 10 percent from its June low, the S&P 500 topped out on the day China announced its new currency policy. That marked a bearish outside day, a key technical reversal indicator.

Now the stock market ( S&P) has formed the historically dreaded “head and shoulders pattern” that suggests a move down to 860 ... 24 percent lower than the peak level seen just two weeks ago.

I know that I usually comment on the Dow Jones numbers as that is the most visible index, but it’s S&P that is calling the important shots at this time. The Dow is playing follow the leader.

Road Sign #2—Ten Year Yields Below 3 Percent

While many market followers have been forecasting higher interest rates, the ten-year Treasury market is responding with the exact opposite.

As risks of sovereign debt problems rise and the probability of a return to recessionary GDP’s for the world increases, global investors are continuing to pile into the U.S. Treasury market for safe haven. And that's driven 10-year yields back below 3 percent.

Road Sign #3—Commodities Breaking Down

There's a famous historical study on sovereign debt crises that suggests sovereign defaults are typically triggered by a collapse in commodity prices.

So what are commodities telling us?

A surprise to me, the second quarter has been the worst quarter in more than a year for commodities. The total return index of 24 raw materials plunged 10 percent since the end of March. So I suppose that study is right.

This week the price of crude oil broke through trendline support. Moreover, the technical pattern suggests crude could fall to the mid-50s, at minimum, as hard as that is to get my head around. The only causality I can render is that global consumption must be way off.

To sum it up, the key barometers of stocks, interest rates and commodities are all pointing to lower levels. And from a big-picture standpoint, the combination of these signals should concern anyone who is not prepared to weather another economic and financial market storm.

Roads Signs to Come.

#1. Breaking down of local & state pension funds.
One may even say collapse in some states. Many are already borrowing to keep up pension commitments.

#2. Cutting loose of government sector employees.
Estimates run to as high as 400,000 public sector jobs being cut by states, counties and municipalities in the coming year as tax revenues founder and stimulus goes wherever stimulus goes – which seems to usually be up in smoke. If this developes as a trend, it will send the employment issue to a crisis level.

#3. Municipal Debt Default.
And why not? If the states go, what is there to prevent the debt crisis of major cities & municipalities from spilling over into the general debt crisis? How much is there and who will buy it?

#4. Mortgage collapse.
The return of mortgage defaults as front page news. And again, who will buy it?

These are all signs of further deflation of value. We are in the grips of Deflation in every market except debt.

If you bought real estate in May, while you got a tax credit, you probably paid too much.
Gold is in a “reset”, awaiting inflation to leapt back to new highs. Hold it.
Buy silver. It has the most headroom at this time.
Shed debt. I know I will ASAP.

Omar P Bounds III

Importing Inflation

2010-06-22T12:32:00.000-07:00

If you’ve been following this blog for any length of time, you know that I’ve been warning that Washington would be seeking to devalue the dollar to try and inflate its way out of the great financial crisis, and especially the patently unpayable $133 trillion in IOUs it has.

In much less certain terms and with greater reservations, I believed that China would eventually cooperate with Geithner & Co to revalue their yuan higher.

A higher yuan is essentially the same thing as a LOWER dollar.

Now, it’s all coming to pass. Over the weekend Beijing agreed to depeg its currency from the dollar and start pushing the value of the yuan higher.

To do so, China’s central bank will effectively have to start buying its own currency — largely by selling some of its reserve currencies, chiefly the dollar.

Already, the dollar is plunging. Gold — which has hit one new record high after another — is leaping again, up more than $7 in early morning trading today ( 6/22 ).

Most brokers will tell you stocks will now rally because China’s revaluation of the yuan means the U.S. can now create more jobs and compete with China.

But that’s hogwash and merely a cover for the truth: This is a dollar devaluation, and an attempt to inflate all dollar-denominated assets. Even the stock markets.

Think it through: Washington is telling you this is about creating more jobs in America and that China has had an unfair advantage with an undervalued currency. But there is simply no way the yuan can be pushed up enough to account for wage differentials between the two countries and create millions of jobs in the U.S.

Just ask yourself: How could a $25-an-hour worker in the United States ever compete with a 75-cents-per-day worker in China? China’s currency would have to gain nearly 3,333% to level the playing field on jobs.

Even at $12.50 an hour, China’s currency would have to gain something like 1,500% to level the playing field.

Or, there would have to still be some very punitive trade sanctions against China, which would put the world on the path to a major depression and war somewhere.

And quite frankly, although there are some real dummies in Washington, I don’t think they’re stupid enough to knowingly put the world on that kind of course.

So this is not about jobs. It’s about the dollar and inflation.

Keep in mind that when a currency strengthens in value, it effectively imports deflation into the country whose currency is rising. Put another way, its currency buys more.

Conversely, the currency that is losing value imports inflation, which is precisely what Obama, Geithner and Bernanke want for the U.S.

Bottom line: You are now witnessing Phase II of the Great Dollar Devaluation.

The Chinese will attempt to “control” the rise in the value of the yuan (and thereby, the devaluation of the dollar). And for a while, they may succeed at slowing down the yuan’s appreciation.

But history has repeatedly show that when a country depegs its currency from the dollar, market forces eventually take over, rapidly pushing the undervalued currency higher (in this case the yuan), and the dollar lower.

So while China is talking up a gradual appreciation of the yuan right now, don’t be surprised if they lose control, and the dollar starts to plummet.

Moreover, in the next phase, as the sovereign debt crisis leaps from Europe to the U.S. — you will see the worst of the dollar devaluation occur. Chairman Ben Bernanke and the Federal Reserve will use the sovereign debt crisis to create trillions of dollars out of thin air, further devaluing the U.S. dollar.

And in the final phase of the great dollar devaluation — you will see countries all over the world actively band together to replace the dollar as the world’s reserve currency.

Lest you forget: We already saw the opening acts of the move to replace the dollar last year, with China, Russia, India and even Japan calling for a new reserve currency.

And this weekend the G20 meet in Toronto, and Russian President Medvedev is already resurrecting the calls for a new world order and new world reserve currency to be put on the table at those G20 meetings.

Where will we be on Monday ?

The Shadow Market

2010-06-15T13:42:00.000-07:00

Did the Federal Reserve collude with the big banks to hold millions of houses off the market until the Fed finished adding $1.25 trillion to the banks reserves? Did the Fed do this to make it appear that its bond purchasing plan (quantitative easing) was stabilizing prices when, in fact, it was the reduction in supply that stopped prices from plunging? It sure looks that way. This is from Bloomberg News:

"U.S. home foreclosures reached a record for the second consecutive month in May, with increases in every state, as lenders stepped up property seizures, according to RealtyTrac.Inc.

“Bank repossessions climbed 44 per cent from May 2009 to 93,777, the Irvine, California-based data company said today in a statement. Foreclosure filings, including default and auction notices, rose about 1 per cent to 322,920. One out of every 400 U.S. households received a filing." (Bloomberg)

Inventory steadily declined during the period the Fed was exchanging cash-for-trash (toxic assets and non performing loans for reserves) with the banks. Now inventories have begun to rise again as the banks try to get back to business as usual. The sudden uptick in repossessions and property seizures coincides perfectly with the ending of the Fed's giant "no bankster left behind" program. Clearly, there must have been a quid pro quo.

What's so impressive about Bernanke's trillion dollar sleight-of-hand operation is its simplicity. We're just talking "supply and demand" here, not rocket science. The banks agreed to cut supply (by temporarily stockpiling homes) while the Fed loaded them up with a cold trillion-plus in reserves.
The Gov is doing its part in this “shadowing” by shunting off an unpublished number of properties (of all descriptions) from failed banks that are now in its possession to its own black holes, such as the FDIC and other such agencies for an indeterminable amount of time. The public (including most real estate professionals) are left to assume that Bernanke's program stabilized prices. It's a very ingenious deception.

These properties in government possession are actually just sitting, under the management of law firms specializing in such matters, receiving bare bones maintenace from contractors, all at the taxpayers expense. You probably drive by more than one such property a day and are unaware of its vacancy.

I drive by two a day that I am aware of.

Those properties shadowed by the banks are usually less fortunite.
Regardless, the taxpayer is getting the bill one way or another.

Those who follow the Fed may remember that "quantitative easing" was promoted as a way to increase lending to consumers and to keep interest rates on mortgages low. But that was all public relations hype. Consumer lending contracted in the last year while interest rates on the 30-year mortgage have fallen since Bernanke's QE program ended at the end of March.

So what does it all mean? It means the public was snookered yet again. It also means that housing prices will fall further as the banks & Gov eventually dump more inventory on the market. How far prices drop will depend on how quickly this “shadow” inventory clears which, in turn, depends on agreements they've made with the Fed and the other banks. Housing inventory is being released in drips and drabs according to an unknown plan of some banker/Treasury bureaucrat – or worse – with no plan at all.

Some would call this price-fixing. Here's an excerpt from an article in the Wall Street Journal that says that there's a 9-year backlog of distressed homes:

"How much should we worry about a new leg down in the housing market? If the number of foreclosed homes piling up at banks is any indication, there’s ample reason for concern. As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20 per cent from a year earlier....

“Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That “shadow inventory” was up 30 per cent from a year earlier. Based on the rate at which banks have been selling those foreclosed homes over the past few months, that entire inventory, real and shadow, would take 103 months to unload. That’s nearly nine years. Of course, banks could pick up the pace of sales, but the added supply of distressed homes would weigh heavily on prices — and thus boost their losses." ("Number of the Week: 103 Months to Clear Housing Inventory" Mark Whitehouse, Wall Street Journal)

No matter how you look at it, housing will be in a funk for the next 5 to 10 years. There's just too much product and too few buyers. The uncertain hand of Team Obama will only put more pressure on sales and prices.

Now that the government's homebuyer credits, subsidies and incentives have ended, demand for housing is drying up fast. The Mortgage Bankers Association (MBA) reports that new mortgage purchase applications have tumbled nearly 40 per cent to their lowest level since April of 1997. Sales are in freefall. Prices have already slipped 30 percent from their peak in 2006. Another 10 percent could be the straw that breaks the camel’s back.

Housing market guru Whitney Tilson explains this excerpt from his recent article titled "The Housing Non Recovery".

"Today about 17.2 % of homeowners are underwater. But if home prices drop 10 % from here, 27 % of homeowners would go underwater. In other words, as little as a 10 % drop in home prices would cause a 56% increase in the number of people underwater…which would almost certainly lead to another surge in defaults." ("The Housing Non Recovery", The Daily Reckoning)

This excerpt deserves a second reading. The next 10 % dip in prices will be more painful than the first 30 percent. The market is on a razor’s edge and any further downward move could prove deadly. It has been reported recently that more than 7 million homeowners have already stopped paying their mortgages which means that the inventory-pipeline will be bulging for years to come.

The administration needs to get on top of this problem before the next downward spiral begins, but I expect nothing further to come from that direction. The elected are far too concerned with other problems: both the real and the ideological. Foremost of which is jobs: Theirs jobs that is. What Bernake & the unelected will do is obvious: print more money and shadow more property as more banks fail.

The next disaster becomes unavoidable and its only another 10 % away.

Omar P Bounds III

What I was told on Tuesday.

2010-06-04T15:07:00.000-07:00

If you haven’t headed my warnings, it is too late to do anything today.
Regardless what the DOW does on Monday morning – sell and keep selling.

On Tuesday, June 1st I received my regular e- newsletter from one of my favorite contrarian brokers. It said this:

“This is no time for mincing words or pulling punches. This is a special red alert, the great global debt disaster is about to trigger a U.S. stock market implosion. “

Here we are Friday and look where we are at.

I was a little busy trying to cobble together a living and didn’t take much notice of the newsletter until yesterday ( Thursday June 3rd ) There are 3 fundamental indicators that when taken together shocked even I, the consummate contrainian investor.

Spain is already beginning to seize banks. Portugal, Italty, and especially Ireland are now on what the Euro bankers are calling a “blacklist”. My source on this is an analyst with a major European bank with offices here in Phila.. As these Euro socialist economies head the way of Greece, we as investors – nay Americans must be ask the question, what is the difference between these Blacklisted Sovereign Debts and Greece. Greece goes broke – so what?

Greece went south over a measly $236 Billion in external bad paper owed almost entirely to European banks. BUT Spain – one of the worlds larger economies is on the hook for $1.1 TRILLION, owned either directly or indirectly to American Banks.

“ Like several Lehmans all failing at the same time” said newsletter:

When Lehman Brothers went under 20 months ago, instantly, global markets froze up, shutting down short-term lending, sent the economy into a nosedive, and helped drive the Dow down nearly 5,000 points.

But by any measure, a default by a country like Spain would be far bigger than that of any single corporation, with the potential to wreck even greater havoc in financial markets.

Indicator #1 The single most important interest rate in the entire world is now on the rise!

The London Interbank Offered Rate — LIBOR. This is the rate that’s behind virtually every short-term loan in the United States.

When LIBOR goes up, it promptly drives up the rates in the multi-trillion-dollar market for adjustable-rate mortgages, the $7.2 trillion market for corporate loans — and more all right here in the U.S. And right now, that’s precisely what LIBOR is doing — GOING UP!

That alone can be a shock to the global economy. But what is especially shocking is the fact that there’s virtually nothing the Federal Reserve or even the European Central Bank (ECB) can do about it. This has earth-shattering implications. It not only means the global debt crisis is heating up. It also means that the Fed and central banks around the world are losing their power to STOP the global debt crisis from getting a lot worse!
Indicator #2 The cost of insuring against big corporate defaults has nearly DOUBLED in just the past few weeks!

The two-year swap spread — essentially reflecting what banks charge for managing the risk on two-year loans over and above equivalent Treasury yields.

Last year, when Washington borrowed & printed trillions of dollars to rescue nearly every major U.S. bank in trouble, this crisis indicator fell sharply, signaling — at least temporarily — that the worst of the crisis had passed. But now, it’s surging again, up SEVEN-FOLD from its lows. The clear message: A new, potentially BIGGER debt crisis is in the offing.

That means investors believe the risk that corporate bonds will default has also nearly doubled - and I am NOT talking about just junk companies that everyone knew were risky to begin with. I’m talking about INVESTMENT-grade companies, the ones meriting some of the highest ratings handed out by S&P, Moody’s, or Fitch.

The big question: If even supposedly “safe” corporate BONDS are growing riskier almost by the day ... Imagine the massive risk investors are taking with STOCKS issued by those same corporations!

These are exactly the same indicators that told us that a Great Debt Crisis would soon crush the U.S. stock market beginning back in late 2007.

Indicator #3 American Banks Are Exposed.

This is NOT rocket science. The big dilemma is that despite the recent recovery, many of the nation’s banks are STILL vulnerable. Weiss Ratings, the only ratings group that has consistently warned investors of nearly every major banking failure in recent years rates the following in their recent report:

* Bank of America merits a Weiss Financial Strength Rating of D (weak). It still has huge amounts of bad loans on its books, with close to one third of its capital tied up bad loans alone. It’s taking massive risks with derivatives. It’s definitely not yet out of the woods.

* Citibank gets a D- for similar reasons.

* SunTrust Bank also gets a D-. Its bad loans make up an even bigger share of its capital than BofA’s.

* Overall, there are 2,259 banks and thrifts in the U.S. meriting a weak rating from Weiss, with only 962 getting a strong rating. The bigger problem: The strong banks control only 3.7% of the banking industry’s assets. The weak banks control 43.8%.

And this is BEFORE they feel the inevitable impacts of the European debt crisis on global markets or our economy!

In conclusion : It was mostly the recovery in our nation’s largest banks — bought and paid for by Washington — that created the illusion that a real, sustainable economic recovery was beginning.

That illusion triggered a recovery in the Dow.

But now, with thousands of U.S. banks barely able to fog a mirror ... and with European borrowers in danger of defaulting, these banks are now facing a new peril that they did not anticipate and we ( US taxpayers) could be on the hook for.

Adding to these 3 certainties, you cannot ignore that the prime indicator of the American markets, the mood of the American people is in the toilet. They are out of work, out of money and out of patience with big government, big oil, & big banks.

They are sellerish.

Prediction : We will see Dow 8000 ( maybe 7500 ) before we see DOW 11,000 again.

What to buy: More gold, ETF’s that are designed for short selling profits. Canadian natural gas trust that are still paying dividends.

Or go to France this summer; visit the Louvre, Normandy and Epernay while your dollar still has some buying power.

Omar P Bounds III
The Bounds Auction Company

Real Estate recovery? 5 reasons you are delusional.

2010-05-26T12:58:00.000-07:00

As an auctioneer specializing in real estate, I see a plethora of circumstances and indicators that conflict with the reported information. Lately, our industry has experienced a shortage of interest in our offerings. Less bidders equates to lower prices realized.

In conversation with other real estate auctioneers, observation of results and from direct experience at our own auctions, it is obvious that there are still serious challenges ahead. The next time you see one of those up beat housing reports on the MSM propaganda outlets, I want you to consider these 5 facts about the American real estate situation.

#1) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in the month of March. This was an increase of almost 19 percent from February, and it was the highest monthly total since RealtyTrac began issuing its report in January 2005. So can you please explain again how the U.S. real estate market is getting better?

#2) The Mortgage Bankers Association just announced that more than 10 percent of U.S. homeowners with a mortgage had missed at least one payment in the January-March period. That was a record high and up from 9.1 percent a year ago. Do you think that is an indication that the U.S. housing market is recovering?

#3) Existing home sales in the United States jumped 7.6 percent in April. That is the good news. The bad news is that this increase only happened because the deadline to take advantage of the temporary home buyer tax credit (government bribe) was looming. Also, this so called incentive was effective only upon the lowest price point sector of the market. An $8,000 1st time buyer & $6,500 reseller credit isn’t going to have much influence above the $250,000 sale price mark. If one needed the credit to qualify for the mortgage, could they really afford the house? So now that there is no more tax credit for home buyers, what will that do to home sales?

#4) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010. In fact, that was almost twice the level of a year earlier. Does that look like a good trend to you?

#5) How can the U.S. real estate market be considered healthy when, for the first time in modern history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together?
There are many other signs that point southward and these are but the most obvious 5. Many small realty companies are dropping their franchise relationships and going it alone. A great deal of rank & file licensees have been forced to leave the business. Many agencies have the “Career Night” signs out, trolling for fresh meat, assuming the old adage that every new licensee has at least 1 listing in them.

From our vantage point as auctioneers, we are seeing an overall liquidity crisis. Our sellers can not afford to carry the property they own, nor can they usually afford to necessary expenses required to properly market their property. Ready, willing and able bidders on the other hand are in short supply. A few bidders, smelling the blood in the water are stepping up but they are doing so with extremely low offers. Due to the liquidity crisis on the buyer side of the market, those bidders are not being sufficiently challenged to the point of truly competitive bidding often resulting in protracted negotiations. In essence, this is a protracted way of saying: Prices are in the tank because everybody’s broke.

This situation obviously reflects a true market value that is very hard for sellers to accept.

The facts often are.

Omar P Bounds III
The Bounds Auction Company

Another Perfect Storm or just Shorting?

2010-05-21T12:29:00.000-07:00

“Capitulation fever has swept global markets on triple fears of faltering recovery in the US, Chinese credit curbs and Europe's intractable escalating debt crisis.”
Is what we are seeing a correction, a manipulation, investor capitulation or - all three or a short selling consolidation?

4 Points to Ponder

• Financial Reforms Are Just 'Cosmetic'

• Market Selloff Isn't Over: Pros

• Germany to Curb Naked Short Sales

• Market Meltdown Still a Mystery

The “Faux” financial reform being hailed as a victory for Obama is really a commitment to business as usual by the “White shoe boys” of Goldman Sacks et al. In its essence, this bill makes the Federal Reserve a true monopoly, ignores Freddy Mac and Fannie May’s problems, ignores the meltdown of American banks, the FDIC insolvency, & doesn’t restore Glass ~ Segal. What it does is assure a continuous bailout. Wall Street will be backed by the Federal Reserve and its printing press.

“Stocks are likely to continue their aggressive decline and shed another 20 percent in value as the world economy weakens”, noted economist Nouriel Roubini told CNBC.
As the market slides into correction territory, Roubini said weakness in euro zone countries and a slowdown in the US and other developed countries will make things even more difficult for investors in the months ahead.

"There are some parts of the global economy that are now at the risk of a double-dip recession," said Roubini, head of Roubini Global Economics. "From here on I see things getting worse."Prices in both stocks and commodities are likely to take a hit, and investors may only be safe in cash and other safe havens. Roubini said investors also can use options to hedge against future market risk that he said is sure to come as conditions weaken in the US, Japan, China and through much of Europe.

This was easily checked by the fact that gold slid in harmony with the Dow. While this doesn’t equate to traditional thinking, this can mean only two things; either Dow sellers were not moving to hard assets or gold was being shorted. I think the later.

"There is that risk because the problems on the macro level are first in the euro zone. Then in China there is evidence of economic slowdown...Japan is in trouble and US economic growth is going to slow down," he said. "There is also regulatory risk because we don't know how financial reform is going to occur."

"Apart from cash I would invest in short-term government bonds of countries that don't have a serious debt problem, countries like Germany and maybe Canada, a few other advanced economies that from a fiscal point of view are sounder than the weaker economies," he said. These are also countries who are taking on issues like naked short selling.

Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame, the result is known as a "fail to deliver". The transaction generally remains open until the shares are acquired by the seller, or the seller's broker, allowing the trade to be settled. Naked short selling can be used to fraudulently manipulate the price of securities by driving their price down, and its use in this way is illegal as is its trading sister, front running. Both are ways for a trader to profit from his investor’s losses.

Most stock market investors know little about flash trading, black box trading or nano second trading. Top trading houses, bankers, well financed foreign day traders and the like have been using high level electronic trading systems that can trade at the nanosecond level. On eBay, we call this use of trading/bidding software as sniping and its users as Snipers.

The recent sudden meltdown of the Dow was clearly a Sniper event. One large trader armed with a nanosecond trading capacity could easily set in motion a series of trades that would have not only set off the run, but profited from it by buying back at the same speed. Illegal? No. Controllable? Maybe, but at what price?

Omar P Bounds III
The Bounds Auction Company

Still A Time for Gold?

2010-05-12T13:59:00.000-07:00

The frightening financial gyrations unleashed by the unrest in Greece, and compounded by the mysterious kinks of electronic stock markets, have quickly reintroduced naked fear into the hearts of investors. Not surprisingly, while these concerns throw into question the safety of just about every asset class, gold and silver are beckoning once again as a means to help protect purchasing power.

We are now in the early stages of what I believe will be a global sovereign debt crisis. With Greece, Portugal and Spain, we are seeing the results in what might be considered the “subprime” nations struggling with overly burdensome debt payments. However, just like in the mortgage crisis, many “prime” nations, like the United States and Great Britain suffer from the same disease. It is just that for these countries it will take a bit longer before the symptoms materialize.

The bottom line is that many nations, including the United States, have simply borrowed more than their citizens can realistically repay.

For many such countries, default may be the only way out. The only question is how to do it. Will governments simply refuse to pay, or will they pretend to pay by printing money? I believe either option would be very bullish for gold and silver. If nations default, gold and silver prices should rise, if they inflate, they should soar.

Today the collective governments of the European Union, who had been following a more responsible policy than the United States, decided to capitulate. With their massive trillion dollar bailout package to any euro zone country that needs help financing their debt, the Europeans have decided to follow the path blazoned by the Federal Reserve. All debt problems, on both sides of the Atlantic, will now be monetized with a printing press.

While gold sold off on the bailout news, there is no question in my mind that the development is extremely bullish for gold. Germany has caved and the inflationists have prevailed. The moral hazard of the bailout will mean bigger deficits in more euro zone countries. Eventually even Germany itself will succumb and join the party. To defend the euro and sterilize their bond purchases the ECB will have to sell dollars. But to whom? The U.S. is certainly not buying.

If Europe, like America, becomes a net foreign borrower, the industrialized West must expect emerging markets to pick up the tab for both America and Europe! After all not every nation can ride the debt wagon; someone has to pull the cart. This will mean that China in particular will have to buy even more foreign exchange to prevent a collapse of both the euro and the dollar. This may push them to the breaking point much sooner than many like to think.

Last Thursday as the Dow Jones plunged 1,000 points, gold surged $35 to just under $1,200 per ounce. Yes, gold and silver may already be “hot”, but I believe there are still great quantities of kindling now lying around which could fuel a continuing fire.

I do not think we should wait for the sovereign default disease to spread. I do not think that it is too late to buy physical gold and silver. Once more people comprehend the magnitude of the problem, I believe prices may go higher than they are today.

We are at the dollar/gold high water mark at this writing.

As for your IRA. Most people own dollars in their IRAs along with equity based mutual funds. These are both poor long term investments in consideration of the above. I believe the next recession will be worse due to this debt hangover. The world will run out of trees if Bernanke thinks he can print his way out of the next round.

The problem with moving an IRA fund to gold has always been the “holding” issue. One may not actually “hold” or use those funds designated as tax deferred. It must be held by an intermediary. Until just recently, this has limited ones ability to rollover an IRA to gold as only stocks of gold producing companies have fit that requirement. For some time, these stocks had not been stellar performers as the net cost to actually mine gold had been exceeded by it trading value. Much like many natural gas and shale oil investments, they only paid off when the price of the commodity itself was expanding. Now, with more money on the table from investors and more expansion in spot price, these gold based equities are attractive and are receiving lots of attention from IRA investors. But, these are gold “related” or gold based” but not gold backed or let alone gold. They are equities in higher than average risk ventures.

Samuel Clemens wrote that a gold mine was “a liar standing next to a hole in the ground”. He also recommended that when the next gold rush comes along, invest in shovels. Both great words of wisdom.

Next came the ETF’s (Exchange Traded Funds) or so called venture funds with are nothing more than mutual funds investing in commodities rather than equities. Many of these ETF’s are built on a combination of gold mining stocks, gold investment ventures & gold holding trusts. These have been very lucrative over their short history, but like all “cooperative” funds, raise some strong questions. Who’s calling the shots? Where are the hard assets? What are the assets? And, much more importantly, as they are simply taking your money and buying gold based or actual gold with that money, do they hold enough actual hard assets to cover their investors when a run comes? While I like ETF’s based on a commodity or even an entire regiaonal stregety, like a Brazilain ETF, I balk at these all glitter and maybe no gold venture funds.

Both of these avenues of gold investment are oft time NOT actually here in the lower 48 or even Alaska. Also, these vehicles are largely not investing in actual refined gold in hand out of the ground. A mining stock is investing in a future production or even a futures sale to another company and most ETF’s only hold actual gold in trust as hedge on their more speculative activities.

Also, other than actually in hand, gold is more often an offshore investment. Most gold stocks and gold ETF’s are based on an offshore mining group. Most gold mines are not in the lower 48.

Most recently, the opportunity to purchase gold, physical, out of the ground refined bullion, and have it held for you in trust is now being offered by a few mints around the globe. In the past, this was a service open only to the very wealthy. One that I do business with is the Perth Mint of Australia. OK, so the gold isn’t “in hand”, but for IRA use, it can’t be anyway. It’s in real, out of the ground gold rather than a piece of paper. It’s safe, in that no one can take it, it’s in their vault. I can sell it back to the mint at any time at current spot value. I am charged a small storage fee annually. I can also fly to Perth anytime and visit my gold or withdrawal it physically if I wish. Why would I want to? It’s an IRA.

Gold has been the best long term investment over the last decade. Period. One doesn’t need to bury coffee cans full of coins in the back yard to take advantage of this surge in gold and one shouldn’t miss the tax loophole that an IRA affords when investing in gold.

How long will this surge in gold run? Is there a top?
Mor elater - please comment.

Omar P Bounds III

Opinions expressed are those of the writer.

Week of 5/1/2010

2010-05-07T11:30:00.000-07:00

Largely because of the sovereign debt crisis, the world’s second most important paper currency — the euro — has lost a massive 16% of its value in just over four months! At that rate, Europeans will effectively see HALF their wealth wiped out in just one year.

But as disturbing as that may be, I count three solid reasons why this great sovereign debt crisis could do even greater damage to the world’s MOST important paper currency to you and I — the dollar.

In Europe, governments are at least STARTING to cut their deficits.

But like four drunken sailors on shore leave, Obama, Geithner, Reid and Pelosi are still spending hundreds of billions of dollars that not only we don’t have ... but that we are BORROWING!

In Europe, the Central Bank is NOT aggressively inflating the money supply.

But like a deranged counterfeiter, Fed Chief Benjamin Bernanke is printing unbacked paper dollars like there’s no tomorrow...

In Europe, the governments and their people are not beholden to China or Japan to finance their follies.

But we ARE! And U.S. Treasury Secretary Timothy Geithner is begging China to effectively devalue the dollar by jacking up the value of the Yuan...

In Europe, this great sovereign debt crisis has already pushed the euro off a cliff — driving it to 14-month record lows in the last week alone.

So I ask you: What will happen to the U.S. dollar — YOURS & MINE — when investors awaken to the fact that our government’s debt load is larger than that of most of these failing European nations?

The answer is clear: The tragedy now taking place in Greece and the rest of Europe is merely a sneak preview of the chaos that this great debt crisis is about to bring to America’s shores.

When you read today’s top news stories, simply substitute “The U.S.” for “Greece” ... “Washington” for “Athens” ... and “the U.S. dollar” for “the euro” ... and you will, in effect, be reading tomorrow’s top news stories today.

Obama, Bernanke, Reid, Pelosi, Geithner, The Clintons, GW Bush, Paulson, Dodd & Barney Frank and others will be remembered as arsonists. And, they keep asking for more matches – and Congress keeps giving them more.

Other minor players who either deserve a firing squad, like the Bonus babies (Fannie Mae’s Franklin Raines and Goldman Sacks’ Blankfein come to mind) are soon forgotten while some who aren’t as culpable, like former Fed Chairs Greenspan & Volker will be pilloried by history, as after all, the winners write history.

BUT – the Greek Tragedy is NOT the driving force of this week’s Drama on Wall St.

Last week I told you that DOW 11,000 was unsustainable. I believed that there COULD be high volatility, but the last two days out paced even my contrarian prognostication… but… what is up with this “bounce”? I understand how so called programmed trading can set off a 1,000 point drop and I know that in such a situation there is oft times a midsession bounce as traders buy in on assets exposed to undervaluing at the valley of such a drop, …. But… as I pointed out last week, the markets were vulnerable to such sudden corrections because there was at that time & still is a huge shortfall in liquidity.

The very signal which forecast this week’s events are exactly the reason that the degree of “rebound” must be questioned. Where did the liquidity to fund such a rapid rebound come from when absence of liquidity was the problem? Who or what is falsely supporting our liquidity?

I leave you to ad 2+2 and get the Fed as the answer.

If you are a player you need to take this into account as you adjust for the next round.

3 three thoughts for the coming week:

1. Gold. Yep… more gold. Even as it flirts with 1,200 an ounce it is still a buy sign. I increased my gold holding by 20% this quarter. Gold stocks are good; some will skyrocket as there will be consolidation in the mining sector by the big winners. Bullion is good, but I don’t like holding hard money too closely. I hold mine offshore. Risky? Less so than under you pillow or in a bank deposit box. I like a 25% of portfolio position in gold at this time. Silver, platinum, palladium, copper are also all reasonable buys if you wish to diversify within metals. Silver is always as a good in hand hedge.

2. Oil & Natural gas. Energy stocks. When BP drops, buy it. Natural gas – buy it. I especially like Canadian gas & hydro trusts. A. they pay dividends, always have – B. they are not demoninated in Euros or US dollars. While the Canadian dollar is nothing to brag about, it is less exposed to sovereign debt than either of its western counterparts.

3. China investments. I do not currently hold any, but I am watching their markets via a broker who specializes in offshore investing. He is an all in bull here while I am less inclined. I can’t point to any sound fact to back this statement, but I believe that the Chinese will have a sharp adjustment (a crash?) sooner than later. Nothing can go as well for as long as their markets have without an adjustment. 6 to 9 months out? Perhaps as big as a 30% sudden slide. They don’t have a strong or broad base of consumer equity. China is a bubble.

It will be the sudden drop in Chinese speculation that will trigger the long predicted run on the dollar. I plan to be ready to buy at the bottom of that adjustment with gold.

A Clear Warning Sign. No Liquidity

2010-04-28T11:30:00.000-07:00

I haven’t blogged on the state of the stock market recently, primarily due to its recent resurgence has not been unexpected or worrisome. Considering ALL the liquidity poured into the market by the taxpayer, the Fed and the results of massive cuts and bookkeeping adjustments such as the huge healthcare related write downs, up was the only direction it had to go.

But, so what! Please note that one of the markets recent big movers is Caterpillar, who just recent took a billion $ Obamacare write-down. While Caterpillar and some others (Ford) are now actually pushing out a profit, they are still fragile profits. Also, some of the other strong movers represent products like the iPad, which doesn’t relate to a whole lot of Americans drawing a living wage. Great if you work at Apple, or wear a $8.50 an hour Blue shirt at Best Buy, but most of that green is heading to China.

Now, I will tell you that the majority of my indicators are signaling that the stock market has probably entered the last phase of its medium-term uptrend, which began in March 2009. If you saw earlier posting, you would know that I place great stock in price to earnings ratios.

I went over price-to-earnings ratios (based on twelve-month’s earnings) and dividend yields this week. Both metrics are showing a heavily overvalued market.

Also, I want to add that "normalized earnings," which try to even out the impact of the ups and downs in the business cycle, are strongly supporting this message.

Plus, I'd like tell you about one more important signal...

Sentiment Indicators Are Still Euphoric

I reported in Feb. that mutual fund cash level was an excessively low. Now the March figure is in, and it's the same as February's! The only other time we've seen fund managers holding such a low level of cash was in the summer of 2007, a short three months before a major stock market high. Therefore, a high % of liquidity is already in play in equities rather than in cash reserves.
While not terribly scientific, I want to give you my latest readings of what some call “Investors’ Advisory Sentiment”... The percentage of bullish advisors is dangerously high, and it's still rising!

According to Bloomberg, who tracks such trends, the” bullish” contingent stands at 53.3 percent, up from 51.1 percent just a week ago. Whereas “bearish” advisors are down to a very low 17.4 percent. Even more bothersome is the most recent ratio of bullish to bearish financial newsletters, currently at 3.06, as shown in the second panel of the chart below. Last week it was 2.7. What does THAT tell you?

This tells us that the short-to medium-term upside potential is probably very limited. The markets ride on sentiment. When sentiment so one sided its time to listen to the little bird

Speaking scientifically for a moment, my own advisor, (Peter Schiff’s Euro Pacific Capital) and I recently discussed how equity put-call ratios had fallen to levels not seen since 2000, the year of the famous NASDAQ top, when the dot com bubble burst. That should be a headline, but due to the current sentiment, is ignored.

Last week's small market correction did nothing to dampen option speculators' willingness to bet on further rising stock prices and this week’s tally is still two days away, but odds look good that despite the public lynching of Goldman Sacks, the Dow will be unharmed by Tuesday’s short sell off.

What's more important than dollar based Mutual Fund levels...What the Bullish advisors & the Regime in Washington don’t want to talk about???

Liquidity Has Dried Up Globally

There still seems to be a lot of talking about the huge liquidity driving this market higher. And yes, the Fed's answer to the housing and banking crisis was a historical wave of liquidity with M-2 money supply growth rates of more than 10 percent. But take a look at what has happened since.

Year over year M-2 growth has stalled ... growing by a mere 2 percent. That's a far cry from a huge wave of liquidity. It's better described as a trickle.

And if you take a global view, the picture is even getting worse! Greece, now Spain. Who’s next? What does it matter? There isn't any liquidity left to plug the holes.

The so called excess liquidity of the G7 nations has actually declined by 5 percent during the first quarter of the year.

If this global stock market rally was driven by liquidity — and I really think it was — the drying up of global liquidity should be seen as a clear warning sign.

This "bull move", which in my opinion was really a huge bear market rally that started in March 2009, is already on borrowed time. And I expect the market to top out during the coming months. Dow 12,000 is unsustaianable. 11,000 may be as well.

But, who knows. I sometimes fail to accept that markets respond to trends more slowly in the macro sense & react too radically to minor current events than my analysis would indicate.

But, I see no end to the insanity inside the Beltway. These guys Bernanke & Geitner, et al, are arsonists asking for more matches and Congress just says “Who do we make out the check to”?

Omar Bounds
The Bounds Auction Company

The economy isn’t always the stock market‘s primary driver.

2010-03-23T14:26:00.000-07:00

Part of the fun in making forecasts is being WRONG AS HELL and looking back on the experience and learning a thing or two.

Recently, I have been way off mark. I expected all hell to break loose in February and, well, it didn’t.

I did expect there to be a bump up – post the passing of the Health Care Bomb, ( I always believed that this monstrosity would pass ) but I didn’t see the recent 40 and 50 point Dow-Jones gains of the past few weeks. I would have bet the ranch and all my critters that we would have been 300 or more points below where we were Monday, March 20, 2010

What I learned is that the economy isn’t always the stock market‘s primary driver.

In the long run, economic development and — especially — corporate earnings are the main drivers of stock market performance. But this relationship is very loose. It becomes tight only if your time horizon is measured in decades.

Shorter term, economic development and corporate earnings are often relatively inconsequential for the stock market. Why? Economic changes are superimposed by changes in the fundamental valuation of the stock market. That means investors' perceptions and their willingness to pay for risk and income streams. Over time, investors are paying very different prices for the same earnings.

Fundamental Valuations Are Fluctuating Wildly

One needs to step back and evaluate Price – Earnings Ratios (PER). This is not unlike seeing the trees rather than the forest to decide on the relative value of the forest. During the stock market bubble of the late 1990s ( the great Reagan Bull Market that was decapitated by the Great Dot Com crash or AKA – the 1st time I went broke ) the PER even rose to more than 40.

Obviously investors came to the conclusion that the dramatic slump in corporate earnings, especially in the financial sector, was an extreme outlier (an observation that is statistically way out of line with the bulk of similar data) an irrelevancy, which should not be taken into account to value the stock market.

These severe fluctuations mean that dividends, earnings, and cash flows are fetching very different price tags in different times and are relative to the PER of the time in question.

Does this example of “market value relativity“make clear how relevant the economic background noise and even corporate earnings are to analyze and evaluate the stock market and that the rule is to pain staking analyze the Price – Earning Ratio of individual equities? If this is the rule, there is one major exception to this rule: Recession.

You Better See Recessions Coming

Every recession has been accompanied by a severe stock bear market. Not understanding the Price – Earning Ratio, failing to constantly watch the leading economic indicators, reacting instead to the background noise, is why I did NOT predict the recession of 2001, and almost lost my shirt. Learning to do so, but I accurately foresaw the 2007-2009 recession. Not that it was such a bid help to see the freight train coming as getting out of its way isn’t all that easy.

Right now the PER and other indicators do not yet forecast an imminent recession. Hence, in the current situation it is ideal to painstakingly analyze the latest economic data release du jour. It may be fun to do so for those inclined. But it doesn't help you in forecasting the stock market. I rate this regular data release ballyhoo as noise you can easily ignore.

That doesn't mean I do not follow economic development. But I am only interested in deciding whether the incoming data is starting to point to the end of the current economic rebound or not. Everything else is inconsequential.

We are living in a post bubble world. History tells us that the economy is very vulnerable to a renewed and relatively swift turn for the worse in this environment.

It follows that this rebound is dubious and fragile. But even in this scenario the leading economic indicators will pick up some deterioration before the next down wave gets started. Currently, they are doing nothing of the sort, despite the bad background noise because the PER is there on those stocks currently driving the wave and the global markets are otherwise weak. As risky as the Dow currently appears, it may be not only the best short term game around, but the ONLY game.

After all, this rebound is the result of massive governmental stimulus, bail outs and market manipulation by the Fed. Do not ignore the man behind the curtain in this rally and be prepared to bail.

Omar P. Bounds III

Is China spoiling for a showdown with the USA?

2010-03-16T13:10:00.000-07:00

The long-simmering clash between the world's two great powers is coming to a head, with dangerous implications for the international monetary system.

Photo: Obama & Chinese ambassador to America Zhou Wenzhong on the Great Wall of China from Reuters

China is succumbing to hubris. It has mistaken Obama’s soft diplomacy, some say absence of diplomacy for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for true global ascendancy. There are many historical echoes of nations badly misjudging the strategic balance of power and over-playing its hand on both sides of this exchange.

Within a month, the US Treasury must rule whether or not China is a "currency manipulator", triggering sanctions under US law. This has been finessed before, but we are in a new world now with America's U6 unemployment at 16.8pc.

Quoting liberal Keynesian Paul Krugman, this year's Nobel economist. "It's going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we're not going to get anywhere." While I do not often agree with Krugman, it’s hard to disagree with that statement, despite the potential out come.

Conversely, China's premier Wen Jiabao is defiant.

From an interview published by Bloomberg, "I don’t think the Yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency." Once again he demanded that the US takes "concrete steps to reassure investors" over the safety of US assets. "Some say China has got more arrogant and tough. Some put forward the theory of China's so-called 'triumphalism'. My conscience is untainted despite slanders from outside," he said

Days earlier the State Council of China accused America of serial villainy. "In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers' rights are seriously violated," it said. "The US, with its strong military power, has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights," it said. "At a time when the world is suffering a serious human rights disaster caused by the US subprime crisis-induced global financial crisis, the US government revels in accusing other countries." And so forth.

Obviously, the Chinese are in denial about is own part in the global imbalances behind the credit crisis, specifically by running trade surpluses, and driving down long rates through dollar and euro bond purchases. While the US treasury, Bond St. the EU Central bank & Wall St. have all made a shambles of markets, this Chinese view of events is twisted to the point of delusional.

What interests me is Beijing's willingness to up the ante. In addition to a drawback in US Treasury bond purchases, it has vowed sanctions against any US firm that takes part in a $6.4bn weapons contract for Taiwan, a threat to ban Boeing from China, Beijing's hardball stance with google and a new level of escalation in the Taiwan dispute.

At the recent Copenhagen “Hot Air Conference”, Wen Jiabao sent an underling to negotiate with Obama in what was obviously intended to be a humiliation. The Obamanator put his foot down, saying: "I don't want to mess around with this anymore." Does that sums up White House feelings towards China today?

We have talked ourselves into believing that China is already a hyper-power. It is on the path and may become one: perhaps THE ONE, but it is not one yet. China is ringed by states - Japan, S. Korea, Vietnam, and India - that are American allies when push comes to shove. It faces a prickly Russia on its 4,000km border. Emerging Asia, Brazil, Europe and many Arab trading states are all irked by China's Yuan-rigged export dumping. Not that they are to be counted upon in a fight, but they are many voices at the UN and represent great market capacity themselves.

Contrary to common belief here at home, Michael Pettis, ( visiting Professor of Economics, at Beijing University) argues that China's reserves of $2.4 trillion - arguably $3 trillion - are a sign of weakness, not strength. (source, seekingalpha.com ) He points out that only twice before in modern history has a country amassed such a stash equal to 5%-6% of global GDP: the US in the 1920s, and Japan in the 1980s, and each example preceded major depressions.

His argument goes on to make the case that these reserves cannot be used internally to support China's economy and that they are dead weight, well beyond any level needed for macro-credibility. Indeed, they may be the ultimate indictment of China's dysfunctional strategy, which is to buy tens of billions of foreign bonds every month to hold down the Yuan, preventing their economy's adjustment to trade realities.

The result is over-investment in manufacturer in capacity that is flooding the world with goods at wafer-thin export margins. As an example, China's over-capacity in steel is now greater than Europe's entire output!

Another source of concern is the stretch of credit limits of China's local governments, mostly linked to massive infrastructure projects, such as the largest dam in global history across the Yangtze. A whitepaper recently published by Professor Victor Shuh from Northwestern University and published by the Economist, warns that the over 8,000 financing vehicles China has put in place has built up debts and commitments of $3.5 trillion, He says Chinese banks may require a bail-out nearing half a trillion dollars.

Just as in the West, debt is catching up to the Chinese.

As America's single largest creditor; holding of some $1.4 trillion of US Treasuries, agency bonds, and other US instruments - China can certainly exert major leverage upon this administration, but this need not be as dire as it seems. If the Chinese Politburo deploys this illusory power, Washington can pull the plug on China's export economy instantly by shutting down trade markets.

Who holds whom ransom?

Any action by China that sets off a run on US Bonds could rebound against China. While an extreme measure, it could be stopped by capital controls. Barack Obama has never exalted free trade, has no love of free markets and in theory is all about controled markets, regardless the pain, he has shown no stomach for confrontation with the Chinese. While his top economic adviser Larry Summers let drop at the Davos conference that free-trade arguments no longer hold when dealing with "mercantilist" powers, summers is a proven incompetent, who lost billions for his past client, The Harvard Endowment.

In such a trade war, there would be a disruption of supply, which could prove to be inflationary over a short term and reap devastation on American holdings abroad. ( Not that this administration would care about the distruction of American business capital when an ideology is at stake) But, large manufacturing capacity for goods does exist outside China and would be made up over time by others. We can live without flat screen TV’s for a while, and history shows that such things have happened.

China's transformation has been remarkable since Deng Xiaoping unleashed capitalism, but as ex-diplomat George Walden writes in China: a Wolf in the World?; no one can feel at ease with a regime that still covers up Mao's murderous nihilism. China has never forgiven the humiliations inflicted by the West when the two civilizations collided in the 19th Century, and intends to exact revenge. They have no concept of property or human rights. We must handle them with extreme care.

The China-US relationship is no doubt symbiotic, but a clash might not be the "mutual assured destruction", as often claimed. Washington could win IF we had the right players on the field.

Obama is the least experienced man in any room he walks into and is guided by blind, leftist ideology. His economic team has a strong track record of incompetency. Neither have shown the slightest concern for American jobs or capital invenstment. I for one am afraid. Be very, very afraid.

We could easily lose a confrontation that we should easily win.

Omar P Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company

When an opening bid isn't.

2010-03-05T10:49:00.000-08:00

Used by permission of the author.

The Opening Bid …

Auctions are all about getting bids … from bidders. Yet, it hardly takes any effort these days to find an auction where the auctioneer is advertising an “opening bid of $500″ on an item possibly worth tens of thousands of dollars.

National Public Radio (NPR) recently conducted a radio show from an auction where bank owned homes were being offered to the public at auction. This was a reserve auction, where the seller (the bank) can accept or reject any offer, and/or withdraw the property up until the auctioneer announces “Sold!”

Most all these same homes had “opening bids” of $500, $1,000, or other such trivial amounts. Yet, many did not sell even with bids far in excess of these opening bids. Let’s explore a few issues regarding this practice with some of the actual facts from the particular auction NPR covered:

• Any type of “bid” is normally offered by a bidder. For anything to be sold at auction with an “opening bid” advertised prior would suggest that this is the minimum amount acceptable as a bid. If this is indeed the case, better, more clear wording could be used, such as “minimum opening bid,” or the like. However, if an opening bid or minimum opening bid is denoted, this should be an amount the seller will accept if no other bids are offered. To suggest you might buy a house for $500 and bid up to $87,500 and are still turned down by the seller is nothing short of deceptive.

• Some auctioneers argue that this “opening bid” is merely a number to kick off the auction — and informs bidders that “We’re not starting the bidding at $1.00 or any such number on any of these houses today.” Well sure, we understand the convenience of a starting bid in that regard. Yet, what is the strategy, outside of deception, to start the bidding at $500 when a bid of 175-times that is not acceptable? If a house has to bring 80-some-thousand dollars in order to sell, why not tell the public the starting bid (or opening bid) is just that?

• Does an opening bid of $500 or other such amount on a $87,500 house really save a lot of time and add convenience? If I’m the auctioneer, and asking for bids on a house worth $87,500, would it be unlikely that someone might just blurt out “I’ll give you $500 for it!” even with no published minimum bid at all? Of course. In fact, the actual opening bid would almost assuredly be much more than $500. It seems clear the printed “opening bid” isn’t to ensure a reasonable starting bid at the auction, but rather to entice bidders to think they might get an $87,500 house for $500.

I have not been privy to any such conversations, but can tell you I know this is how some auctioneers handle pre-auction inquiries using this tactic:

Caller: “Hi, I’m interested in one of the houses upcoming at your auction.”

Auct: “How can I help you?”

Caller: “I’m interested in 542 Locke Street, and the opening bid is $500?”

Auct: “Yes, that’s right.”

Caller: “So, I show up, register, and then bid on the house?”

Auct: “Right, these are great opportunities …”

How might a better, more honest, forthcoming inquiry be handled?

Caller: “Hi, I’m interested in one of the houses upcoming at your auction.”

Auct: “How can I help you?”

Caller: “I’m interested in 542 Locke Street, and the opening bid is $500?”

Auct: “Well, that $500 is only the starting point, our client isn’t accepting those low starting bids on any of their houses.”

Caller: “So, I’m not getting that house for $500?”

Auct: “No you’re not … I would expect to pay $85,000 or even more on that one.”

In every state in the United States, auctioneers are charged to properly represent their clients (typically the seller). This auction, and many like it with these deceptive opening bids, are no exception. Still, as then the buyers are not clients, but rather customers, certain duties are commanded by many laws and precedent including many consumer protection regulations (and as outlined in my blog: What do auctioneers owe their customers?:

• Honesty

• Integrity

• Fair Dealing

In fact, the National Auctioneers Association has written as much as part of their code of ethics:

ARTICLE 2 (in part)

Members must, in conducting an auction, deal with customers in a manner exhibiting the highest standards of professionalism and respect. Members owe the customer the duties of honesty, integrity and fair dealing at all times.

ARTICLE 11 (in part)

Members shall avoid misrepresentation or concealment of pertinent facts. There is an affirmative obligation to disclose adverse factors of which they have personal knowledge.

The more we see deceptive practices used in the auction profession, the more it damages the reputations of all auctioneers and the auction business overall. Without the confidence of the general public that we uphold a high standard of practice, our industry will suffer.

And, one more observation: How likely is this bidder, thinking he might buy a house for $500, to ever attend another auction, tell his friends what a positive experience he had, or ever hire an auctioneer?

Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.face book.com/mbauctioneer. He is Executive Director of The Ohio Auction School.

The Perfect Storm Underway in the UK.

2010-03-05T10:37:00.000-08:00

I have had the good fortune to spend an extended period of time in both the UK and many counties of the EU. I have many friends there and have developed the bad (good?) habit of paying attention to the BBC. Also, I am a habitual exchange rate/ bond rate and in general a currency watcher.

Boy are things getting ugly in the U.K. The pound is getting crushed. The price of long-term British debt securities, called gilts, is plummeting, and the cost of default insurance on the country's debt is rising steadily. We have another " perfect storm".

My takeaway: This is but a preview of what's to come here in the U.S.

Why the Crisis Is Coming To a Head in the U.K.

Britain's finances are in shambles. The country's budget deficit is running at more than 12 percent of GDP, roughly the same as in Greece. According to Bloomberg reports, for the first time, the UK recorded a whopping $6.7 billion deficit in January, much worse than the $3.9 billion SURPLUS UK economists were expecting. Why they were expecting a surplus at the rate at which they are printing currency, I can’t imagine, but that is what is reported.

The U.K. government is planning to sell $349 billion in debt this year, the most ever, to cover this deficit. But, not unlike many sovereign debt backed bonds, demand is flagging, with foreign investors dumping the most U.K. sovereign debt in nine months in January and yields generally rising. As with the US, China and the Oil Kingdoms are the largest holders of Her Majesties’ bonds.

Then a few days ago, the crisis came to a head. The catalyst: New polling data that threw the British political outlook into chaos. Polls showed that the Conservative Party's lead over the Labor Party shrunk to its lowest level in more than two years. Mr. Brown’s shenanigans are coming home to roost. Growing unhappiness with failing social programs, healthcare scandals, rapidly rising unemployment, rising taxation and expanding EU influence over the labor parties’ leadership on such issues as global carbon taxation are taking a high toll on the British Fabian Socialist rooted labor party.

Many Brits are looking to return to the prosperity of the Thatcher days – or even the relative prosperity of the Blair regime, when the labor party at least recognized the need for an open relationship with the free markets.

It now appears that neither party could come out of spring elections with a clear majority, leaving the U.K. with a "hung" parliament. That would make it much more difficult for the government to reduce the nation's debts and deficits.

With all of that, it's no wonder...

• The British pound plunged six days in a row, its longest series of declines since October 2008.

• The yield on 10-year U.K. government debt recently hit 4.27 percent, compared with a low last fall of 3.44 percent.

• The cost of protecting against a British debt default in the credit default swap market surged to more than 101 basis points, or $101,000 per $10 million of debt. That's up from around 44 bps in the fall.

Striking Similarities to the US

You don't need a Ph.D. in economics to see the striking similarities between the situation in the U.K. and the situation here in the U.S.

• Our debt situation is totally out of control, with the national debt on track to double over the next decade to almost $19 trillion.

• Our budget picture is a mess, with $8.5 trillion in deficits projected over the next 10 years.

• Our foreign creditors are starting to sell our bonds, with China alone dumping $34.2 billion of Treasuries in December, the most ever.

And politically, we're facing the same gridlock and inaction as the U.K.

Just look at the deficit commission nonsense...

President Obama had to create an 18-member panel by executive order because Congress voted down an earlier proposal. Since it's a presidential commission, Congress can just ignore any findings. And those findings won't even be released until December 1, for purely political reasons (that's after the mid-term Congressional elections).

Lastly, just like the U.K., we have bailed out, backstopped, or otherwise taken over so many institutions and segments of the capital markets that our own balance sheet is getting shakier and shakier.

PIMCO "bond guru" Bill Gross just noted in a monthly commentary:

"If core sovereigns such as the U.S., Germany, U.K., and Japan 'absorb' more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle."

"The sovereign debt crisis is subprime all over again." — Bill Gross, manager of the world's largest mutual fund.

Bottom line: We're running this country's finances off the rails. And just like in Greece ... Ireland ... Spain ... and now the U.K., it's going to come back to haunt us.

Omar P Bounds III
The Bounds Auction Company

The Rude Awakening of 2010 Vol 1

2010-01-31T13:02:00.000-08:00

The heyday of the Bush-Obama bailout frenzy is coming to an end.
The bailout's base of public support, tenuous from the outset, is collapsing. Its chief architects — Geithner and Bernanke — are politically dead or dying despite Bernake’s re-enlistment for another hitch. Obama adviser Paul Volcker and FDIC Chairman Bair are gaining rapidly in influence.

Suddenly and with growing momentum, America is shifting into a brand new phase of the crisis …

On Jan. 30 , Bloomberg reported that New York University Professor Nouriel Roubini, who anticipated the financial crisis, called the fourth quarter surge in U.S. economic growth, despite all the MSM ballyhoo “very dismal and poor” because it relied on temporary factors.

“The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor,” Roubini told Bloomberg Television in an interview at the World Economic Forum’s annual meeting in Davos, Switzerland. “I think we are in trouble.”

Roubini said while the world’s largest economy won’t relapse into recession, unemployment will rise from the current 10 percent, posing social and political challenges.

“It’s going to feel like a recession even if technically we’re not going to be in a recession,”

You and I knew all along; we were not among those sleepwalking through the storm. Nor did we ever support those who stumbled from one ill-conceived government rescue to another.

We knew all along that TARP was a classic financial blunder and ultimate moral hazard: It rewarded the guilty, while shafting innocent taxpayers.

We knew all along that the Fed's zero-interest-rate policy is a ticking time bomb: It subsidizes and stimulates The Casino we call Wall Street, while it robs America's prudent savers of nearly every penny they hoped to earn in interest and dividends.

We also knew all along that the original cause of the housing bubble was congressional policy & their money-printing machine — and that Bernanke's new machine has been running at light speed by comparison.

Throughout this entire crisis, we could plainly see the emperor had no clothes. What's changing is that, now, many others — including some who engineered the bailouts in the first place — finally see it too.

That's why …

Public opinion regarding the president's handling of the federal deficit has nosedived.
Voters say they want the deficit reduced even if it hurts the economy.
Paul Volcker — previously shunned and ignored by most of the Obama team — has re-emerged from the shadows and regained the limelight. He's pressing the administration to get tough with Wall Street. And ultimately, he could push Obama to change course on key aspects of the bailouts.

Whether he will retain that standing in the heat of battle or in the wake of a renewed banking crisis remains to be seen. Also, the last time Volker had this much suasion with the White House, the resident was Jimmy Carter. For those of you who are too young to remember, that didn't turn out too well for the American taxpayer. Many of the policies that brought us to the brink go back to the Carter administration.

But for now, his reappearance on the front lines is a metaphor for the sweeping mood change among voters and a possible policy shift at the White House.

But, alas, there is still no one of stature standing up to the biggest public nemesis of all — the Congress & the intrenched government bureaucracy itself.

There is no single organization strong enough to stop Washington from sacrificing our children's future on the altar of a false prosperity. No one able to restore the prudence and balance that can sustain our greatness over time, except the people themselves.

More later.

Your Thoughts?

Omar P. Bounds III A.A.R.E., C.E.S., G.P.P.A.

The Bounds Auction Company

These Are Supposed to Be Social Security Fixes?

2010-01-27T14:05:00.000-08:00

I am known as a bit of a contrarian when it comes to investment & financial matters but there have been times when I agreed with new legislation. But when it comes to Washington's decisions on Social Security and many other important matters, I'm almost always left mad as hell and confused. Are people living on the same planet as the rest of us ? The latest items that have run across my monitor are a prime example ...

These Are the Proposed "Fixes" For Social Security ?

In June, U.S. Senator Herb Kohl, Chairman of the Senate Special Committee on Aging, convened a hearing to examine ways to shore up Social Security. And he tasked the GAO (Government Accountability Office) to undertaking a study S.S. issues, including ways to “improve its impact on lower-income recipients”.
I hope Senator Kohl's report tackles the big issues, but I'm not holding my breath.

Kohl's larger report on the entire system will be released in the near future. But for now, U.S. News has reported these details in the GAO report. :

"The GAO report reviewed eight areas where, it said, benefit changes were most commonly proposed. The report looked at how effectively each proposal would help lower-income beneficiaries, whether it would have much of a financial impact on Social Security, and on how difficult it would be to administer."

What were those areas? Here are a few of the most common ideas our lawmakers are coming up with when it comes to making Social Security better.

A. Guaranteeing a “minimum benefit” amount for people who have worked lower-wage jobs during their careers.

B. Lowering the number of credits needed to become eligible for the program.

C. Adjusting calculations to get more money into the hands of low-income single workers.

D. Giving credits to stay-at-home parents so they don't miss out on benefits.

E. Increasing survivor benefits so widowed spouses, particularly those who didn't work, are less affected by spousal deaths.

And these suggestions continue, but they all essentially amount to increasing benefits and coverage, particularly for folks who didn't pay into the system.

All of which leaves me wondering: What are these people thinking?

Now is precisely the wrong time to be trying to find ways for Social Security to pay out MORE. The system is already unable to pay out that which it has already been committed to! This program's continual expansion over time has been gasoline on what was a well-intentioned, but ill-conceived, fire of a Ponzi scheme from day one.

When Will Someone In Washington Start Talking About The Real Problem?

This is rearranging deck chairs on the Titanic. 4 Obvious items come to my mind:

Obvious Item 1: Social Security was intended as a pay-as-we-go structure, which by any by definition means, that the more we ask it to pay out, and the more people we ask it to cover, the more money we need going IN!

Obvious item 2: Today, LESS money is coming in because of the recession.

Obvious item 3: Recipients are living longer, which is compounding the overall funding crunch.

Obvious item 4: Demographic trends tell us that there will be fewer and fewer people paying into the system and more and more people receiving money from the system as the baby boomers retire.

Social Security will begin paying out more than it receives just six years from now.

That is 2016 (and possibly sooner), Social Security will essentially be losing ground every single day. As reported by Niles Mattive of Money & Markets Blog, by 2037, it will only be able to pay out 78% of the benefits promised today.

Ok, so the stewards are busy rearranging deck chairs, the band is playing and the passengers are dancing, the Captain isn’t on the bridge, ice is falling on the deck and the view of the Iceberg is filling my monitor. Now I know how the Titanic’s lookout felt.

So what’s going to happen: They'll continually follow the same "what us worry?" policies they pursue everywhere else. Issue more misdirecting talking points, ignore budgets altogether and figure out ways to spend more, all the while kicking the can down the line.

But mark these words — another Social Security tax hike and a removal of the current contribution cap are coming sooner rather than later.

Those inside the beltway are likely to reduce benefits for many of the same recipients who spent the last few decades funding the program. The most obvious way to do this is by additional taxes on benefits being paid to “certain” recipients. On that, you can make book.

Omar P Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company

Broker Compensation in the Real Estate Auction Process

2010-01-21T12:05:00.000-08:00

Broker Compensation

Many CCIMs and residential brokers have formed alliances or work with real estate auction companies. Others are looking at auctions as a way to expand their business and income opportunities. Since the process for auctions and traditional sales are different, it makes more sense for those without auction expertise to develop a partnership with an experienced national and/or regional auctioneer to expand the potential for success and represent clients effectively.

Some of the areas where CCIMs and brokers can earn fees from auctions include:

• referring clients or properties to auctioneers for sale;

• representing buyers in purchasing an auction property and receiving a buyer's brokerage fee;

• acting as a local designated broker for an out-of-state auctioneer;

• assisting an auctioneer at open houses; and

• working with the auctioneer at an auction event.

Interestingly, during the last 30 years in the real estate auction business only about 15 percent to 20 percent of auction buyers have been represented by buyer brokers. Earning a commission as a buyer broker is easy: Don't let the opportunity pass you by.

Omar P. Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company

Changing Commercial Real Estate Auctions with Technology

2010-01-19T11:50:00.000-08:00

Changing auction technology is changing the way commercial real estate is sold.

EBay and other online services have increased the visibility of all auctions, including how they are perceived and conducted. Online real estate auctions, when combined with live open outcry real estate auctions, are taking on more prominence; however, if not implemented properly these events can prove to be unsuccessful.

While many products can be sold easily in online auctions, real estate by its nature is unique and individual. No two parcels of land, buildings, or locations are exactly the same; each has its own particular characteristics. Thus, due diligence is an extremely important part of the auction process. Technology programs, such as the CCIM member service STDBonline, are very helpful in preparing due diligence materials.

Most importantly, auctioneers rely on new technology today to publicize auctions and target potential bidders. In the past the most effective means of advertising auctions to buyers was local newspapers, the Wall Street Journal, and direct mail. However, with the lower circulation of print media and increased postal mailing costs, electronic media is now more effective. Useful formats to reach potential buyers include commercial information exchanges such as LoopNet, CoStar, and CCIMNet; targeted e-mail blast services; Web sites; banner ads; targeted cable services; and radio. In addition, potential buyers can access detailed due diligence materials on password-protected Web sites. At the auction event, Web simulcasts of live auctions bring buyers from anywhere in the world into the active bidding.

In a marketplace where value is uncertain and sales are slow, auctions demonstrate where market equilibrium should settle. The high bidder gets his purchase price reinforced by the fact that other buyers are willing to pay just $10,000 or $25,000 less than the winning bid. Auctions provide the full transparency certain situations require, such as in probate or trust sales. Bankruptcies and corporate portfolio sales can be accomplished more effectively in auctions than in traditional negotiated sales. Auctions may be the best valid forum to find today's true market value for many properties.

Need answers?

Omar P Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company

What is a Buyer's Premium?

2010-01-18T11:38:00.000-08:00

What is a Buyer's Premium?

Buyer's Premium? A unique opportunity an auction for real estate provides is the ability to use a buyer's premium, which offsets some or all of the seller's auction transaction costs. The buyer's premium is an additional amount that is added to the high bid price to determine the total contract price the buyer will pay to the seller at closing. The agreement between seller and broker/auctioneer provides the particular percentage of the buyer's premium that is paid to the broker/auctioneer by the seller at the close of escrow.

In an active and aggressive bidding environment, the buyer's premium is perceived by bidders almost as a sales tax and can lead to higher net proceeds for the seller. Specified buyer's premium can range from 3 percent to 10 percent of the bid price and is an accepted part of the process throughout the auction industry.

The buyer's premium allows the seller to increase the gross sales price and is a way for the seller to transfer transaction costs onto the buyer. When implemented properly, the seller's total effective transaction costs (marketing expenses plus commission) can be less than that of a traditional brokerage sale.

Wouldn't you rather take home more of the transaction, rather than less?

Omar P. Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company

Seller's Expense for Real Estate Auction

2010-01-18T10:54:00.000-08:00

The Seller's Cost of a Real Estate Auction

There are some differences in seller costs in an auction program versus traditional marketing. With an auction sale, a normal six- to 18-month marketing program is compressed into six to eight weeks or less. To accomplish this, an intense marketing and public relations campaign is required to present the property to all potential buyers, get them to on-site inspections, and eventually have them attend the auction event to bid.

These high-profile marketing expenses are a seller's cost and often are paid to the broker/auctioneer in advance of the actual auction date. These costs can range between 0.5 percent and 1.5 percent of the property's value.
In addition to marketing, a few other fees may be part of seller's expenses. Most often, a title search or a preliminary commitment to title insurance is prepared by an abstract company. This is usually in the range of a few hundred dollars, and very often is returned to the seller at settlement if the title insurance is placed by the buyer with the same company. In addition, it has become more common for the auctioneer to recommend that sellers obtain a pre-auction mechanical inspection report of the subject property for distribution to prospects as part of the property information package. This is a great sales tool for properties that are in very good condition costing in many instances less than $500.00.

This recommendation is determined on a property by property basis at the auctioneer's discretion. If a property is in obvious disrepair, an inspection report may not be beneficial to the outcome. In this case, pre auction inspections are encouraged at the buyer's expense. In either case, the auction sales contract remains non-contingent.

For a large property or portfolio, a stand-alone auction for a specific seller is structured with the marketing costs paid by that seller. Alternatively, a number of sellers with small properties can be combined into multi-property, multi-owner auctions where all sellers share the required marketing expenses.

When one considers that the auctioneer's commission is generally paid via a buyer's premium, the seller of real estate at auction has a much lower exposure to commission expenses, carrying costs and contingency risks.

Omar P. Bounds III A.A.R.E., C.E.S.,G.P.P.A.
The Bounds Auction Company

Why Real Estate Auctions Work Today

2010-01-16T12:01:00.000-08:00

Why Real Estate Auctions Are Working Today.
Auctions offer sellers two factors that are missing from the traditional negotiated sales process: a set time frame and control over the sales process. Particularly in today's market, many properties are experiencing limited or negative net operating income and sellers are supporting properties out-of-pocket each month. Tenant bankruptcies are causing unanticipated high vacancies or lead tenants already have vacated properties. Other buildings may be in or subject to pending foreclosure or bankruptcy, or a lender already may control the property and needs to get it off its books.

Even if the traditional transaction market was functioning properly, such properties would be difficult to sell. But in today's market, brokers and sellers come up against issues of financing, valuation, and lack of comparable sales. For example, how do you value properties with high vacancies, low or negative net operating income, or no comparable sales? And while it may be relatively easy to find a buyer, can the buyer find financing?

The auction process eliminates many of these concerns by giving the seller control over the sale. In the auction process sellers control the following factors:

• timing of the sale, usually 60 to 90 days;

• structure of the offering;

• financing through either an assumption, structured seller financing, or committed third-party financing;

• predetermined purchase and sale agreement:

To make buyers comfortable with bidding and the purchase, the seller must make the contract fair and commercially reasonable;

• property on an as-is, where-is basis with limited warranties; and

• closing in 30 to 45 days from the date the contract is signed.

What more do you need to know?

Omar P. Bounds III A.A.R.E., C.E.S.,G.P.P.A
The Bounds Auction Company

Gaining Traction in Commercial Real Estate with Auction

2010-01-16T11:34:00.000-08:00

Accelerated marketing gains traction in today's troubled market.

By Omar P. Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company

During the last 24 months, sold and closed commercial real estate transactions have been in short supply, while unsold properties seem to have increased exponentially. The last cycle in which CCIM practitioners experienced a somewhat similar market was the late 1980s and early 1990s. During those years, large property portfolios were timely and effectively sold by the Resolution Trust Corp., banks, and private sellers through real estate auction programs that came into vogue. While negotiated transactional sales were few or nonexistent, auctions and accelerated marketing programs established current true market value in a competitive bidding environment.

Today, decreased values and foreclosures of commercial assets are pervasive once again as a result of the credit crisis. As banks, institutional lenders, and private and corporate sellers expand their real estate-owned or workout situations, the question arises: How can we move these properties off our books on a timely basis at market prices?

Real estate auction marketing can be an effective alternative to the more-static negotiated sales marketing model. Open outcry,Sealed Bid auctions and other types of accelerated marketing techniques are efficient methods for the timely sale of most commercial real estate assets. In recent years a number of CCIMs and other real estate professionals have become involved in open outcry auctions or sealed bid sales as their traditional negotiated sales volume has declined. These auction programs have helped clients extricate themselves from difficult-to-sell properties.

Do you have a property or a client in need of a timely sale?

The Next Financial Perfect Storm

2010-01-09T13:43:00.000-08:00

January 6th, 2010

February, 2010. The next “Perfect Storm”
Already on its way to the business news channel of your.
It may crush the existing structure of Fannie and Freddy and drag the economy further down, no matter how many dollars the fed throws at it. Why did the Treasury & Fed recent announce that Fannie & Freddie were getting UNLIMITED backing – A BLANK CHECK, on of all days, this past Christmas Eve.

Here are the events:
Each individual event will have little visible effect alone, but combined they easily could crash the economy: these are all pending events, many will be listed on Major Media Outlets as individual events, because no one looks at them all together - but that is how we will feel them in our wallets.

1st, in the financial sectors : the next wave of ARMs will start to reset, mortgage rates will go up, the next wave of foreclosures will hit, the default on holiday expenditures will cause more chapter 7 and 13 filings, retailers already know how little they made, more chapter 11s, more scale backs or just plain closing. Example: The Footlocker retail chain is closing 120 stores - Lane Bryant closing 100 plus stores. The commercial sector bust is underway and will hit a crescendo in 2110.
Except in Washington DC and its suburbs, where office space demand is on fire. Can’t imagine why?

#1: In Banking & Finance;
The FDIC will collect the next 3 years of fees in advance to cover their depleted funds from the past bank failures. This will stress some but not all. Many banks are actually healthy, but it will push the weaker 10% that much farther towards instability.
.

So banks will tighten lending rather than loosen as they must scramble to come up with this FDIC “tax”. More FDIC take overs, in essence using the banks own funds raised from the accelerated fee collection to do so, more bank mergers to avoid insolvency, all resulting in even tighter money and possible more expense money.
1: B The Stock Market.
The American stock market, in particular the DOW at 10,600, is a mini bubble looking for a pin. It is very unstable due to any # of influences, but the two that stand out are, first, a significant lack of trading volume and secondly, the low cash reserves being held in money market accounts, as is currently being commonly reported. These are contra indicators to any true growth. Don’t over rate the strength of the DOW.

#2: Employment
While losses will slow, simply because employers are hitting the “can’t cut and still produce“ point, losses will continue.
Employer hiring, what little there is,will slow to the minimum as the uncertainty of the goverment action on healthcare and new taxes dwells.
If this issue turns out as unfavorable as many believe, mid to small sized businesses will choke on them, resulting in more layoffs or more out right closures to pay for them.

The seasonal job numbers were “insignificant”. Retailers didn’t hire this season, and even more sales went to internet providers.

The numbers of “new” unemployment extension enrollment will be staggering.

#3 - Effects of the Health Care “Reform “Legislation.
Consumers will see new FICA rates and need to cut spending even more.

The proposed 40 % Luxury tax will result in a 20 to 30 % drop in so called “disposable" income for those who had any. This will murder an already abused luxury items sector, costing more high skilled, high paying jobs. Say good bye to RV’s, boats, and the jobs related to them and travel.

The insurance companies will pass any taxation along to premium payers. More disposable income disposed of.

The absurd proposed tax on medical products,(taxing everything from band aids & tampons to artifial limbs and knee replacement hardware) will also be passed along. When a state of the art prosthetic above knee leg, already costing $60,000, is that something that we really need to tax? Is walking such a luxury?

As we have seen, much of this federally mandated program will be borne by the States, many of which are running on empty already; therefore States are forced to also raise taxes.

Insurance rates, taxes and any health related cost will increase immediately.

An early arrival of the Alberta Clipper and coldest winter in a few years coupled with a volatile oil market drains that last bit of disposable income.

If you haven’t already said good bye to your disposable income, do so now.
The vicious cycle of “Trickle Down" is relentless when in downawrd motion. The big layoff when the publicly traded multi national cuts compliment and orders to the regional, privately owned vendors and service suppliers who in turn must lay off, and can’t invest in their operations. These owners don’t buy a car this year, can’t take a vacation or take their kds out of the expensive private school.

With fewer orders going out to the multi national, the local trucking or UPS hub layoffs, the bar & restaurant where the workers met after their shift cuts back hours, lays off a waitress, their supplier cuts a driver or too and a hairdresser over on main street throws in the towel and walks away from her lease putting the squeeze on her landlord, contributing to the commercial real estate sector’s meltdown. Meanwhile, the stock in the multi national has tanked, taking the IRA’s of all above into the tank with them.

Tell me there is no such thing as trickle down economics.

Omar P Bounds III AARE, CES, GPPA
The Bounds Auction Company

The REAL Dow

2009-12-31T11:56:00.000-08:00

Few investors realize that stocks have been among the worst investments of the past decade. If they do, they probably do not realize quite how bad the decade was, because most people forget about the effects of inflation. This is especially likely as our Main Stream Media refuses to discuss the “I” word. To the media and their government handlers, inflation is a non topic. If mentioned at all, inflation is said to be minimal, a non factor or “under control”.

Despite the 2009 rebound, the Dow Jones Industrial Average today stands at just 10520.10, no higher than in 1999. And that is without counting consumer-price inflation. In 1999 dollars, the Dow is only at about 8200 and would have to rise another 28% or so to return to 1999 levels. Using today's dollars and starting at 10520.10, the Dow would have to surpass 13460 to get back to its 1999 level in real, inflation-adjusted terms.

Controlling for inflation takes extra work and makes stock gains look puny, so it is easy to see why stock analysts almost never do it. And as stated above the media almost never do it either. Remember that most of the “business news industry” is part and parcel an arm of the Wall Street equity touting machine.

But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation, noting that gold hit a record this month in nominal terms but remains far from its 1980 record in real terms. Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios' performance over time.
Looking at returns on a nominal basis can be very misleading. One must check inflation-adjusted performance to monitor investments' real value.

A few analysts trying to get a better perspective on investments' performance have taken to measuring the Dow in a variety of unconventional ways. Gold bugs look at the Dow based on gold prices, which makes its performance look much worse over the past decade. Europeans and others with international investments sometimes measure the Dow's return in euros. That makes the Dow look worse since 2006, a time when the euro has been rising. The dollar's recent rebound has helped make the Dow look a little better against the euro and gold, however.

Mr. Bernstein says some investors saving for education expenses compare returns to tuition inflation. If the portfolio doesn't rise as fast as education expenses, these investors reason, they will need to boost contributions. The same is true for someone saving for retirement expenses or for future medical costs.
Garrett Thornburg, founder of Thornburg Investment Management in Santa Fe, N.M., calculates what he calls "real-real" returns, adjusting stock performance not only for inflation but also for real-world drags such as taxes and fees.

Example : Nominally, a dollar invested in the stocks of the Standard & Poor's 500-stock index at the end of 1978 had blossomed to $22.88 at the end of 2008, including dividends, a sweet gain even after the 2008 meltdown. But once estimates of inflation, taxes and costs are removed, he figures, the investment was worth only $3.76.

But don’t jump off the bridge yet. I am not trying to put you off stocks entirely, until you consider the long-term alternatives. Measured over the 1978-2008 period, rather than over just one decade, stock performance in real-real terms actually is better than that of just about any other major investment class, Mr. Thornburg found: 4.5% a year. Stocks' ability to keep up with inflation over the very long haul may be their best selling point.

In real-real terms, stocks did better over that period than municipal bonds (2.5% a year), long-term government bonds (2% a year) and corporate bonds (0.2% a year). Real-real home prices were unchanged over those 30 years. Both short-term government bonds and commodities suffered losses.

Figuring out how to adjust for inflation can mystify most investors, although the Internet now offers several Web sites that quickly adjust numbers for inflation and some mutual funds and independent mutual-fund analysis services calculate returns adjusted for fees and taxes.

Prof. William Hausman at the College of William & Mary long has urged the media to offer people inflation-adjusted stock charts. He says newspapers and analysts frequently point to the Dow's 2007 record of 14164.53 and talk about how far the Dow would need to climb to return to that level. In inflation-adjusted terms, however, the Dow in 2007 never quite surpassed its 2000 record, Prof. Hausman calculates. To return to an inflation-adjusted record now, he adds, the Dow would need to break 15000. "It really puts in perspective how stocks are doing," he says.

Stock analysts sometimes like to note that the Dow today is worth 27 times its value at its 1929 pre-crash peak, meaning that even if you bought at the worst moment, your stock still would be way up over time. In inflation-adjusted terms, however, the Dow today is only a little over twice its 1929 peak, according to Ned Davis Research.

Some analysts measure the Dow against the performance of gold, which further dents the record of the blue chips over the past decade. Peter Schiff of Euro-Pacific, has popularized interest in measuring the Dow in gold rather than dollars. Gold has rebounded since 1999, and the fascination with the yellow metal has made investors start thinking of it again as a currency.

Ned Davis, the founder of Ned Davis Research, referred to gold as "real money" in a recent report and published charts of bonds, home prices and stocks measured in gold rather than dollars. Even with gold's swoon in recent days, the Dow looks a lot weaker over the past decade measured in gold than in dollars.

Of course, it is possible to find a hot investment that dwarfs the Dow's gains over any period, which makes many analysts question the value of adjusting the Dow for gold's gains. Such skepticism doesn't stop gold's supporters from pointing out how much weaker the Dow looks when measured in "hard" money.

In 1997, the Dow looked strong at 40 times the dollar value of an ounce of gold. With gold's rebound since 1999, the Dow now is worth about nine times an ounce of gold, meaning simply that gold has performed a lot better than the Dow.

For those who like bandwagons, that suggests that it is time to buy gold. For those who like to buy things when they are cheap, it suggests that gold was cheap in 1997, and stocks have gotten cheaper since, at least when they are measured against gold.

Remember that there are always exceptions in the equity markets. Stocks, that due to either a technology, a high demand service or commodity that they represent, can and will soar far and away above the Dow, and its 30 stock index. That after all is the lure to equities.

Omar P Bounds III
AARE., GPPA, CES
The Bounds Auction Company

Chinese to limit Treasury purchases in 2010

2009-12-22T12:42:00.000-08:00

Supporting the Beach Ball!

The Blogger & Peter Schiff

This could easily be the most important story in the end of year run up of political & economic Bombshells - and it is likely to be completely over looked। With all smoke being blown up everyone's butts by the shenanigans surrounding the Senate health care debacle and the Copenhagen farce, this little story copied below got buried।

As Dollar Busters go - this very well could stand as the " other shoe" that many Dollar watchers have been predicting.

In The Fall of 2009, I attended a talk by given by Euro Pacific's President and erstwhile US Senate Candidate for Conn., Peter Schiff , where he predicted exactly this scenario. Schiff, a long time dollar critic and gold tout asks the question that no one in the US Government wants to hear:

When will "they" ( foreign sovereignty funds & the Chinese in particular ) stop buying our debt?

"The situation is not unlike a beach ball being supported by the hand of an outstretched arm " Schiff remarked. "Our currency & economy are that beach ball and the Chinese purchases of our Treasury notes are the outstretched arm. What happens to the beach ball when that arm is withdrawn? "

As this dollar watcher see it, there are two scenarios for the beach ball in the near term, neither of which is appealing.

#1। The "arm" is suddenly withdrawn and the market for US debt goes into collapse।The "Ball" gets dropped!

Whether it bounces or hits like a ripe melon is academic?

#2 The "arm" still supports the ball, but as the US's "beach ball" get heavier, becoming more like a 16 lbs shot put, the effort, as in the cost required to support it will go up.

The cost of the US debt goes up substantially.

What is the interest only payment on 14 Trillion?

Currently, the greatest influence on the "arm" is that most of the other "balls" in the game are getting heavier as well।

Omar P। Bounds III

The Bounds Auction Company

Published on ShanghaiDaily.com (http://www.shanghaidaily.com/)

http://www.shanghaidaily.com/sp/article/2009/200912/20091218/article_423054.htm

Harder to buy US Treasuries

Created: 2009-12-18 0:13:35

Author:Zhou Xin and Jason Subler

IT is getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing supply of dollars overseas, a Chinese central bank official said yesterday.

The comments by Zhu Min, deputy governor of the People's Bank of China, referred to the overall situation globally, not specifically to China, the biggest foreign holder of US government bonds.

Chinese officials generally are very careful about commenting on the dollar and Treasuries, given that so much of its US$2.3 trillion reserves are tied to their value, and markets always watch any such comments closely for signs of any shift in how it manages its assets.

China's State Administration of Foreign Exchange reaffirmed this month that the dollar stands secure as the anchor of the currency reserves it manages, even as the country seeks to diversify its investments.

In a discussion on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.

He then addressed where demand for that debt would come from.

"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."

"The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more US Treasuries."

China continues to see its foreign exchange reserves grow, albeit at a slower pace than in past years, due to a large trade surplus and inflows of foreign investment. They stood at US$2.3 trillion at the end of September.

2009-12-12T13:33:00.001-08:00

Issues that can lift the Dollar.

The most recent employment data in the U.S. came in significantly better than what was expected and the financial markets reacted in a different way this time. Interest rates went screaming higher, the stock market surged, gold fell and the dollar shot up.

In a normal environment a stronger dollar following better U.S. economic data sounds perfectly reasonable, but in the current "risk-centric" environment GOOD news has been BAD news for the dollar. That's because it has enhanced the appetite for risk, which has translated into investors selling dollars in exchange for higher yielding/higher risk currencies.

This time around, the slightly improving data gave these dollar traders the idea that the Fed could begin reversing its zero interest rate policy sooner than later. That got the dollar moving higher. And that got the wheels turning for a bounce in the weak dollar trend. But, the Fed isn’t likely to change course anytime soon.
The dollar has continued to show strength following that turn in sentiment, but the prospects of a sooner move on rates has now been dismissed. This was a knee-jerk reaction in the markets that could soon likely be fully reversed, except in consideration of these other, more global forces , countering the 0 rate Feb policy.

What is now underpinning dollar strength is a shift in market focus toward some of the trends facing the global economic environment. That's swinging the risk appetite pendulum back toward safety, which is traditionally positive for the dollar.
In others words, as bad as the long term weakness of the dollar appears, the short term circumstances for other currencies is much worse.

So what can keep this momentum going in the dollar?
Answer: Growing risks to the global economy.

I can imagine 4 specific examples that could fuel more demand for dollars.

A. Rising Prospects of a Sovereign Debt Crisis
First it was Dubai that stoked fear in the financial markets over the Thanksgiving Day holiday. Now, Greece appears that it will struggle to meet debt commitments. Fitch downgraded Greece to just three notches above the lowest investment grade status. Greece has been the weakest link in the Euro chain since its adoption ion 2002.
Debt problems appear to be more contagious than H1N1. Debt concerns can devastate investor confidence in the capital markets of such countries, and in the global economy. And when confidence wanes, capital flees. That's a recipe for falling dominoes.

B: General Problems for the Euro
The recent downgrade in Greece turns the market focus back to the problems that exist in across the Eurozone, and that's putting downward pressure on the euro which has usually meant upward pressure on the dollar.
The E U's growth and stability pact limits all member countries to a budget deficit of 3 percent of GDP. But Greece is running a budget deficit of 12.7 percent of GDP. More than four times the limit.
In fact, the 16 member states of the Euro exchange are running budget deficits more than twice the 3 percent limit! Not as bad as the US, but significant.
So the uneven performance in Europe will likely call into question the viability of the euro currency again. Any of speculation of a break-up of the Euro is hugely dollar positive. I do not believe that will be the case. The EU has made its bed and will have to lie in it for at least the foreseeable future. But, such speculation could still abound within the periphery of the Eurozone’s weakest and more conservative member states.

C: Uncertainty Over True Economic Recovery
Now that sovereign debt problems are surfacing from Dubai, Greece, Spain and others, investors & traders are getting concerned about the sustainability of this recovery. After all, the unprecedented monetary response to the global fiscal crisis was an experiment. The outcome is unknown. And the underlying problems related to the crisis still exist: Bad debt, reduced wealth and tight credit to name a few. I believe we are facing the shortest, most volatile recovery ~ correction cycle in memory.

Moreover, when you counter a liquidity crisis by pouring money on it, you're bound to create more bubbles. While ground zero for the credit crisis was the U.S. housing market, new bubbles in real estate are developing in the areas that were relative outperformers in the downturn (such as China, India and Canada).
In Shanghai, housing, while traditionally in short supply, is on fire. Skyrocketing near 40 percent in October from the same period a year earlier. And in a story about the Canadian housing market this week, Bloomberg quoted a real estate agent as saying, "Where else in the world do you have agents lining up overnight to buy a condominium?"
Sound familiar? It should.

D: Trade Protectionism
We've already seen evidence of restrictions on global trade and capital flows from this new regime in Washington. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery. Especially in consideration that the US no longer possesses a manufacturing infrastructure to protect, restraint of trade at this point is tantamount to closing the barn door well after the horse as fled. Only the consumer can suffer through higher prices.

Clearly, the biggest factor in the protectionism threat is China's currency policy. Even after recent tour stops in China by U.S. Obama and the European Central Bank President to lobby for a stronger Yuan, the Chinese have remained steadfast on keeping their currency weak. As this issue with China's currency gains in intensity, expect protectionist acts to rise in retaliation. In turn, expect collateral economic and political damage.

In conclusion: If sovereign debt problems within the Eurozone and the Mid East along with the prospects of a “W” market trend, high volatility, one can take from that trend that there will be a retrenchment away from risk in the short term and one might not be as eager to turn the risk appetite switch back on soon. That could give the dollar a strong lift that might last longer and rise further than many expect. Even myself, who has been contra dollar for some time.

2009-12-08T12:28:00.000-08:00

Holding Costs In The Current Commercial Market

Investors often under estimate the true cost of holding non productive real estate in their portfolio. This is especially true in a downward cycle when true value is quickly slipping away over time despite any effort the investor may be taking to preserve value. Like the other numbers we deal with everyday in our lives; our daily caloric intake, cholesterol level or the true gas mileage of our vehicles; we tend to discount negative indicators. Real Estate investors are often optimistic, independent thinkers who believe that they will overcome any loss of value with the next turn of the market. The truth is often just the opposite. The longer you hold a non or under performing property the more it will cost, therefore the more value one stands to lose over a short period of time.

Besides the usual debt service, taxes & insurance costs, the overhead of a building, general maintenance as well as the physical deterioration of systems, roofing etc., must be considered in any holding cost analysis. Those costs, while considered the cost of doing business prior to any decision to sell, can quickly become onerous and fiscally destructive once the property lingers on the market for any length of time.
This is especially true of properties that have been closely held over a significant period of time or may be in an estate or trust. Equity can quickly deteriorate under the pressure of holding costs over an extended marketing period and these costs are rarely recovered through sale, especially in a soft market.

Extended time on market and the resulting holding costs are especially destructive to investors with properties already in distress and lenders holding properties in REO portfolios that are often overvalued. These properties are likely hemorrhaging equity. In addition, it cannot be ignored that these holding costs are also a lost investment opportunity. The value of these lost opportunities if invested elsewhere far out weighs any recovery in value over the short term. They become the cost “to not sell.”

Aggressive, auction marketing over a time defined period will deliver true market value to a property within its market demand, while drastically reducing this ever accruing “cost to not sell”. Rather than paying the extended cost to hold, investing in a comprehensive marketing campaign to bring property to market in a firm and time defined manner offers the opportunity to put both equity and costs back on an earning status in the shortest period of time, when time is not on your side.

Omar P Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company

2009-12-08T12:19:00.000-08:00

Unemployment 12/08/09
Last Friday we got word that the employment picture in the U.S. improved substantially over the month of November. According to the Labor Department, the nation shed 11,000 jobs, a mere fraction of the 130,000 economists were expecting.
The news came as a shock to many. In fact, president Obama reportedly corrected his chief economic adviser when she first told him the news, saying "You mean a one hundred and eleven thousand job loss?" And make no mistake, despite my general contrarian viewpoint — I'm as happy to hear the better-than-expected news.
But in my mind, there are deeper issues at hand when it comes to the employment picture.

Let's Begin with the Way Washington Measures Employment in the First Place Along with the 11,000-new-jobs-lost number, we also learned that the nation's unemployment rate dipped to 10 percent from last month's result of 10.2 percent. That's another encouraging sign, though it still represents a situation as bad as we've seen in decades.

What's more disconcerting to me is the fact that this official measure of unemployment is dubious in the first place.

Consider some of the people that it does not include:
• Anyone who is "discouraged" — i.e. they have basically given up on looking for work
• Anyone who has taken a part-time job even if they were formerly a full-time employee (known as "the marginally attached")
• And the legions of folks who are now "underemployed," meaning they are working jobs that pay far less than before — engineers driving cabs, for example -
Thus, we should be asking two important questions:

First, what is the nation's real unemployment rate? Interestingly enough, the Bureau of Labor Statistics also keeps what it calls "alternative measures of labor underutilization."

No, you won't hear this touted in a government press release.

The U-6 number, which includes marginally attached workers, workers with part-time jobs because of economic reasons, and other categories, shows the current jobless rate is 17.2 percent. And realize that there's really no way to include people who have taken major pay-cuts or other under-the-radar losses.

Secondly, will those underemployed folks ever find jobs comparable to what they once had? Obviously the answer is "some will, but other broad categories will not."
Consider all the Johnny-come-lately realtors, mortgage brokers, and contractors who were riding the housing bubble for all its worth. And consider other workers — like factory hands who were benefiting from over-the-top overtime payouts and other unsustainable trends.

Take a look this excerpt from a recent Wall Street Journal story on the underemployed. It makes my point:

"Mr. Crane had been earning more than $100,000 a year operating heavy machinery at Delco, a former unit of General Motors ... but when he lost his job he was thrust into a netherworld of part-time gigs: working the registers at Taco Bell, organizing orders at McDonald's, whatever he could find."

Now, don't get me wrong. I feel bad for Mr. Crane. But am I the only one who finds six-figure salaries on factory floors a little shocking? I know many entrepreneurs and professionals who make the same amount – or LESS! Sure, when factories were running full-tilt, even folks at chicken processing plants were raking in $70,000 a year or more. But those days are long gone.

I'm just saying that facts are facts.

Yet plenty of people have now become so used to the really good times — or are so far in debt — that they aren't willing or able to accept even merely good times.
The fact that people like this continue to collect unemployment — and even have their benefits extended — while millions of others are genuinely struggling and going uncounted demonstrates just how unfathomable this country's jobs situation is right now.

More importantly, all of these issues raise serious questions about the sustainability and rate of the economic recovery, especially with so much of GDP tied to consumer spending and so many consumers still struggling with credit hangovers from the days of excess.

So I don't care what the latest job number says. The recession seems to be abating, but many structural problems remain. And some of them are in our collective psyche.We must remember that an official unemployment rate of 10 percent is hardly something to celebrate.

Even as the overall picture improves, our economy will continue to wrestle with a protracted decline in available jobs and salaries as well as a massive credit hangover.

Omar P. Bounds III A.A.R.E., C.E.S., G.P.P.A
The Bounds Auction Company

2009-12-07T14:23:00.000-08:00

More free money?
Senate extends home-buyer tax credit and jobless aid. The existing tax credit for first-time buyers, set to expire at the end of the month, has helped boost home sales across the country. Under the Senate bill, both first-timers and existing homeowners would be able to take advantage of the expanded program through the end of April.

The measure would continue giving an $8,000 tax credit to first-time buyers and would provide a $6,500 tax break to qualified homeowners looking to move up to middle-market homes that cost no more than $800,000.

In addition, the legislation would raise the qualifying income levels to $125,000 for individual income tax filers and to $225,000 for joint filers.
Set up for the next bubble? Rather the set up the next collapse - I believe this is a case of fueling the current fire.
As for good intentions - whenever I see Chris Dodd & Co involved - good intentions are last thing that come to mind. What comes to mind is the Community Reinvestment Act. Déjà vu all over again. Cash for clunker real estate.
As usual, govt. intervention in markets results in either helping those who do not need the help or introducing an element who should not be participating in that market.
This action by Govt. further “distorts” an already woefully distorted market. If someone is giving me a $6,500 “grant– gift or write off “ to buy what I would otherwise not be able to buy or need to buy – that becomes a $6,500 “distortion” of market value. Sounds like a meaningless amount until one ads up all the other “incentives “that are already in place to buy real estate and multiplying it over time and market size.
The best analogy I can think of is holding a beach ball up with your extended arm. Everything is fine as long as one keeps his hand under the ball. What happens when the arm is taken away?
All they are doing is falsely supporting an unsupportable situation that will not correct until they cease supporting it. This, as with most of what escapes the confines of the beltway, is about control, votes and lobbyists money.
Especially when the action’s intent is to encourage people to go further into debt to buy a commodity (real estate is a commodity at this juncture ) that is in such overwhelming supply to demand, it is a marginal investment at best, regardless the incentive. If one takes pause and adds the falling value of the dollar and the inevitable inflation, well, lets just say that the govt is encouraging individuals to urinate on a forest fire with the expectation of not only curtailing the inferno, but to fertilize the ground in the process. The individual is more likely to be incinerated rather than harvest timber anytime soon.
Is it good for buyers? No. Not if they are also taxpayers. Buyers are always better served by a lower overall purchase price than any subsidy that will eventually come out of their pocket one way or another.
This appears to be more a direct result of the NAR's lobby than any concern for “righting “the ship of the general economy. It looks to this auctioneer more like a subsidy for Realtors than a sound investment opportunity for buyers.
Omar P. Bounds III A.A.R.E., C.E.S., G.P.P.A