The Big Picture | March 2008

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Uh-Oh: Cars/Vacations/Flat Panels Not Tax Deductible

Monday, March 31, 2008 | 06:30 PM

in Economy | Employment | Real Estate | Taxes and Policy | Wages & Income

Here's some more bad news for John Q. Public:

We all know that the fun of the past few years Housing binge / ATM withdrawal / GDP Party is long since over. But it turns out that the hangover isn't nearly done.

Why is that? Well, one of the advantages of Home Equity financing is that if you use the proceeds for capital improvements to the home -- *new floors, walls or lighting, installing central A/C, removing trees, refurbishing bathrooms, new lawns or gardens -- then it has the same tax deductiblity as if it were a primary mortgage.

What abut if you use the proceeds for other, non-capital improvement purposes?

From Realty blog Patrick.Net:

"Word from the IRS is that they are auditing people based on refiances on their house. If you refied and pulled money out of the house and use for other purposes than home improvement you can not claim that as Mortgage Deduction, needs to be claimed as Interest expense. Guess what, they want proof of home improvements…"

Uh-Oh !

Why do I smell some big trouble coming down the road for some people?

Source:
Refi Interest Trap?
March 28th, 2008
http://patrick.net/wp/?p=594

_______________________
* What we did to our home

Wall Street Trader

Monday, March 31, 2008 | 03:45 PM

in Psychology/Sentiment | Trading

Amusing cartoon:

Barron's "Truthiness" Instead of Truth

Monday, March 31, 2008 | 02:30 PM

in Media

Barron's used our Truthiness post from last week for their Market Watch section:

"Truthiness" Instead of Truth
Big Picture by Fusion IQ

March 24: Whether overstating job creation [or growth, or] understating inflation, a shocking amount of debate about the economic expansion has been primarily spin....[as] a parade of sycophants, despite knowing better, continued to cheer-lead punk data....First, they denied what was happening; then we got the whole "contained" thingie; then they blamed da Bears. Now they've unwittingly embraced Marx, and successfully pled for the central planners to rescue them from their own stupidity...Has "truthiness" replaced truth? [Will we] be saddled forever with these hallucinatory hacks?

Source:
MARKET WATCH: A Sampling of Advisory Opinion
Edited by ANITA PELTONEN
Barron's MONDAY, MARCH 31, 2008
http://online.barrons.com/article/SB120674492840373083.html

Was 2007 Q4 GDP Positive -- or Negative ?

Monday, March 31, 2008 | 11:52 AM

in Consumer Spending | Data Analysis | Economy | Wages & Income

Many breathed a sigh of relief over the final revision of 2007 Q4 GDP. However, we took a closer look to at some of the data to see what was happening beneath the surface.

Our advice to those who think we escaped recession in Q4 2007: Not so fast.

As you might have guessed, actual below-the-headline data was less encouraging than even that weak 0.6% final number.

Under Gross Domestic Purchases, the BEA wrote:

"Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- decreased 0.4 percent in the fourth quarter, in contrast to an increase of 3.3 percent in the third."

Real gross domestic purchases are purchases made by U.S. residents of goods and services wherever they are produced (domestic and imports). They decreased 0.4% in the Q4, very significant drop when compared to the 3.3% increase in Q3. Add to that the Gross private domestic investment decline of 2.2% in Q4.

Given those huge swings, how was it possible that GDP in Q4 was still positive?

It all comes down to the Current-dollar GDP (and the implied implied price deflator). Current dollar GDP was lowered by a significant 0.3% more than was expected.

Why does this matter? Real GDP (after inflation) is obtained by dividing nominal GDP by the GDP deflator (x 100). The smaller the deflator is, the less of GDP gains can be attributed to inflation. Had the change to above not occurred, Real GDP would very likely have been 0.0% -- or worse.

UPDATE: March 31, 2008, 1:30pm

I just got off the phone with BEA -- in the current GDP release, the changes in Q4 Current-dollar GDP were due to lowered "Imputed Financial Services" prices.

Let me also emphasize that I am not in the "books-got-cooked" camp. I am merely trying to wrap my head around how Real GDP was the same, but current dollar GDP fell so precipitously when compared to the last revision . . .

~~~

Given the impact of Inflation on GDP, is there another measure that might provide a clearer picture of the economy's direction without the pernicious impact of rising prices?

It turns out there is: Last year, Fed economist Jeremy Nalewaik suggested a different measure: GDI, or Gross Domestic Income. Nalewaik argued in a 2007 paper that GDI "has done a substantially better job recognizing the start of the last several recessions than has real-time GDP."

According to Nalewaik, GDP-based models did much worse at forecasting recessions than did GDI: The past four recession odds at their actual starting points were only of 52%, 40%, 45% and, for the 2001 recession, just 23% according to GDP data. The alternative measure of GDI did much better, signaling odds of a recession of 78%, 44%, 72% and, for 2001, 70%.

And what of today? Recent data shows an annualized GDI decline of 1% -- its largest drop since the 2001 recession.

While many people are debating whether or not the economy will fall into recession, the GDI data suggest that we are already in one -- and have been for several months.

Sources:
GROSS DOMESTIC PRODUCT: FOURTH QUARTER 2007 (FINAL)
FOURTH QUARTER 2007
MARCH 27, 2008
http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp407f.pdf

Estimating Probabilities of Recession in Real Time Using GDP and GDI
Jeremy J. Nalewaik
Federal Reserve, December 19, 2006
http://www.federalreserve.gov/pubs/feds/2007/200707/index.html

Did Economy Really Escape Fourth Quarter Drop?
Brian Blackstone
WSJ Real Time Economics, March 27, 2008, 2:02 pm
http://blogs.wsj.com/economics/2008/03/27/did-economy-really-escape-fourth-quarter-drop/

4th-Quarter Data Confirms Frailty of the Broad Economy
THE ASSOCIATED PRESS
Published: March 28, 2008
http://www.nytimes.com/2008/03/28/business/28growth.html
>

~~~

SFAS 157: Market Prices Too Low? Just Ignore Them!

Monday, March 31, 2008 | 06:47 AM

in Credit | Derivatives | Markets | Taxes and Policy

Here's a honey of an idea that almost slipped by unnoticed last week. Thankfully, the NYT's sharp eyed business columnist, Floyd Norris, caught it.

An SEC opinion letter advising companies how to deal with their Level 3 assets made a rather curious suggestion. They advised that if the prices of mark-to-model ~~crappy~~ paper are underwater, well then, declare it the result of forced liquidation -- and then you can simply ignore them.

It truly boggles the mind.

Would someone please explain to me how providing an official mechanism for allowing companies to ignore market values of the bad investments they made help investors? Instead of working towards transparency, the SEC is providing a mechanism to allow banks to hide losses from their shareholders. This is nothing short of an invitation to commit fraud.

Here's the offending passage:

“Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability.” (emphasis added)

Norris suggests this is an invitation for banks having two sets of books. One for Bank disclosures for shareholders: Ignore these paper losses, the prices are only due to a forced liquidation -- and another for Margin calls: Hey! You are underwater by XX% in this; send in more money! Apparently, the SEC believes prices are irrelevant, except when it comes to margin calls.

Stop and think about this for a moment: Every margin call is essentially a forced sale. Consider the alphabet soup of highly leveraged derivatives out there, where many of the most recent trades have occurred because some hedgie has blown up. What might the unintended consequences of this rule actually be?

Today is the last day of the quarter. There is often window dressing to the upside the last few days before a Q's end to make the fund's performance look better. Imagine if there was an incentive to make a huge category of derivatives' last trade appear to be the result of a margin call? We would have this enormous window dressing down -- so as to not have to come up with a legitimate value for tier 3 junk.

This is a directive to banks to make the situation much, much worse. They can clean up their own books by forcing liquidations elsewhere. Un-fricking-believable.

Holy shnikes, have any of these people at the SEC every worked on a trading desk?

Source:
If Market Prices Are Too Low, Ignore Them
Floyd Norris
NYT, High and Low Finance
March 28, 2008, 6:21 pm
http://norris.blogs.nytimes.com/2008/03/28/if-market-prices-are-too-low-ignore-them/

~~~

Delay Cost

Monday, March 31, 2008 | 04:00 AM

in Web/Tech

Another cool widget:

Poodwaddle.com

Goldman: Total Leveraged Credit Losses = $1.2 trillion

Sunday, March 30, 2008 | 10:52 AM

in Credit | Data Analysis | Derivatives | Finance

Barron's Alan Abelson praised Goldman Sachs economic team this weekend, saying, "They're not always right . . . but they do tend to call them as they see them, they avoid as much as possible the usual economic gobbledygook, and the numbers they collect -- the raw material, as it were, of their analyses and forecasts -- are commendably reliable.

Abelson specifically cited Andrew Tilton's recent report on leveraged losses: "that is, losses inflicted on banks, broker-dealers, hedge funds and government-sponsored outfits by the cruel credit crunch."

Ubiq-cerpt:™

"The sorry total weighs in, by Goldman's reckoning, at a cool $460 billion. And that's after loan-loss provisions.

Now, $460 billion is a nice round figure, with about half of it losses on residential mortgages and perhaps 15%-20% from commercial mortgages. As Tilton comments, "although we have made considerable progress in the residential-mortgage area, U.S. leveraged institutions have written off less than half" their projected losses. Manifestly a cheerful type, he feels "there is light at the end of the tunnel, but it still is rather dim." So dim, we must admit, that these tired old eyes, strain as they will, have trouble making it out.

We hate to add to what we consider a pretty gloomy prospect, but Tilton takes care to note that the $460 billion that Goldman expects to go down the drain is "only part of total credit losses," which it anticipates will reach a tidy $1.2 trillion. However, he explains, the leveraged losses are especially critical, as they cause a significant tightening of credit as institutions curb their lending to conserve shrinking capital. Which, for us, anyway, makes the tunnel a lot longer and the light a lot dimmer."

A trillion here, a trillion there, pretty soon, you're talking real money . . .

Source:
The True Contrarians
ALAN ABELSON
UP AND DOWN WALL STREET
Barron's, March 31, 20080
http://online.barrons.com/article/SB120674503851173099.html

Related:
Everett Dirksen
http://en.wikipedia.org/wiki/Everett_Dirksen

~~~

Arthur Levitt on the Bear Bailout, SEC, Fed

Sunday, March 30, 2008 | 03:00 AM

in Credit | Federal Reserve | M&A

Former U.S. Securities and Exchange Commissioner Arthur Levitt talks with Bloomberg's Carol Massar from Palm Beach Gardens, Florida, about the Federal Reserve's involvement in the rescue of Bear Stearns Cos., and potential implications for the financial-services markets and regulators.

click for video
(launches Windows Media Player)

Watch

Source:
Levitt Says Bear `Bailout' Raises New Regulatory Issues: Video
Bloomberg, March 26 2008
mms://media2.bloomberg.com/cache/vSIw1QRzGAHM.asf

~~~

How to Get Your Comments Deleted and Yourself Banned

Saturday, March 29, 2008 | 05:30 PM

in Weblogs

My own policies are clearly and humorously stated here, under sections titled Posting Comments and Trolls and Asshats -- but I like Teresa Nielsen Hayden's description of how to get your comments banned over at boingboing:

Q. What's likely to land me in your bad graces?
A. Since you've asked, here's a nowhere-near-exhaustive list:

1. Spamming. Linkwhoring. Re-posting text you've already posted on a dozen other sites.

2. Making supercilious and unpleasant remarks in a civil liberties thread about how the victim had it coming. This is not to say that victims never have it coming; but there's a species of internet demi-troll that appears to specialize in posting such comments. Try not to look like you're one of them.

3. Making snide comments and insinuations about the editors. That's right out. You don't like one of the editors? Take it up with them in e-mail. If you're going to comment on an entry, talk about the entry.

4. Being nasty to no purpose. (This is the catch-all.)

5. Using unnecessarily exciting language. Making an argument is fine. Making your argument in language guaranteed to make your hearers see red? Bad idea. It practically guarantees that you're going to have a dumb (and therefore boring) argument. And if the argument's not going to be interesting, we don't see the point.

6. Jeering, sneering, condescending, or one-upping when there's been no provocation. Telling people they're naive idiots for caring about whatever-it-is. Like the "I'm bored" pose, it's empty attitudinizing, and it's remarkably unpleasant.

7. Failing to notice that there are other people in the conversation. Posting a remark that's already been made five times and answered six. Coming back and re-posting essentially the same material after a twenty-message thread has discussed your previous comment. Trying to forcibly wrench the conversation onto one of your own pet topics. Posting a stale, canned rant you've posted a dozen times before at other sites. Not coming back to see how others have responded to you.

Why post comments at all, unless you expect to be read? And if you expect to be read, you must know you're part of a conversation. Therefore, you should act like it. Engage with what the other commenters are saying. Read the thread before you add to it.

8. Posting a snotty but otherwise worthless anonymous comment. It's a lot easier to get away with snotty comments if you're a registered user.

9. Dragging in one of those topics that's guaranteed to generate a huge thrash that goes nowhere, like gun control, abortion, or Mac vs. PC vs. Linux. You're only allowed to discuss those if (a.) they're relevant to the entry; and (b.) everyone in the discussion is doing their level best to say something new.

10. This list will undoubtedly get longer.

Well said!

Volatility Spike, parts III and IV

Saturday, March 29, 2008 | 10:00 AM

in Markets | Mathematics | Psychology/Sentiment | Technical Analysis

On Thursday, we noted the increase in volatility via a Financial Post column. Today's chart porn comes via the NYT & Barron's.

First up, the NYT, with this gorgeous info-graphic on volatility -- note the peak in 2002, which marked the bottom of the Bear markets (Oct 2002/March 2003):

Chart courtesy of NYT

~~~

Second, have a look at Dick Arms column in Barron's. Dick believes the recent volatility surge is a Bullish sign.

I have a lot of respect for Dick, as his methodology is statistically based and empirically driven.

Even if you disagree with him, you can at least respect his methodology, which has zero cheerleading content in it.

Chart courtesy of Barron's

Previously:

Buy Volatility (January 14, 2006)
http://bigpicture.typepad.com/comments/2006/01/buy_volatility.html

Sources:
For Stocks, It’s the Wild West, East ...
FLOYD NORRIS
NYT, March 29, 2008
http://www.nytimes.com/2008/03/29/business/29charts.html

Whiplashed? That's a Bullish Sign
Now Is the Time to Buy, Not Sell
RICHARD W. ARMS
Barron's, MARCH 31, 2008
http://online.barrons.com/article/SB120676003110074029.html

~~~

Vacation-Home Sales Plummet 31%

Saturday, March 29, 2008 | 06:38 AM

in Data Analysis | Economy | Real Estate

More ugly Real Estate news:

Each year, the National Association of Realtors (NAR) puts out a survey of Investment and Vacation Home Buyers. As is their congenital compulsion, the trade group spun the data to somehow make it appear less negative: "Second-Home Sales Accounted For One-Third of Transactions in 2007".

As if Vacation Home "market share" is a significant statistic.

Puh-leeze.

The data point we are always interested in are the year over year, NSA, sales. In 2006, 1.07 million vacation homes were sold -- a record number. In 2007, second home sales had fallen 31% to 740,000, according to NAR data. The median price of a vacation home was $195,000 in 2007, down 2.5% from $200,000 in 2006.

2007 also saw speculators exiting the housing market: Homes bought purely for investment dropped 18% to 1.35 million last year, compared with 1.65 million in 2006. That is versus a 10% decline in primary-residence sales, (2007 = 4.34 million, down from 2006 = 4.82 million)

59% of vacation homes purchased in 2007 were detached single-family homes, 29% condos, 7% townhouses or rowhouses, and 5% other. In 2006, single family homes were 8% higher (67%) and condos 8% lower (21%). This suggests that some vacation home buyers are shifting towards purchasing smaller, less expensive properties. Perhaps the aforementioned decline in speculative purchases was also a factor in this shift.

Lastly, the typical vacation-home buyer in 2007 was 46 years old, had a median household income of $99,100, and purchased a property that was a median of 287 miles from their primary residence.

Sources:
Second-Home Sales Accounted For One-Third of Transactions in 2007
NAR, March 28, 2008
http://www.realtor.org/press_room/news_releases/2008/second_home_sales_accounted_for_one_third.html

Vacation-Home Sales Plummet
Amy Hoak
WSJ, March 28, 2008
http://blogs.wsj.com/economics/2008/03/28/vacation-home-sales-plummet/

~~~

Friday Night Jazz: What New Music Are You listening to?

Friday, March 28, 2008 | 07:52 PM

in Digital Media | Music

With the first quarter coming to an end in a few days, I made an interesting discovery: I have purchased nothing new that really blew me away.

By now, I usually have 5 or 6 candidates for our year end list, but so far, just 2 strong contenders: River: The Joni Letters, and Shelby Lynne' Just A Little Lovin', a Dusty Springfield cover album.

I previously mentioned the latest Billie Holiday, but for some reason, I didn't think that quite qualified as new.

~~~

Anything circa late 2007/2008 that is really floating your musical boats?

What say ye?

Stock Market Politics & the McCain Market Rally

Friday, March 28, 2008 | 04:00 PM

in Markets | Politics | Psychology/Sentiment

I love when this happens:

In the beginning of the month, I jokingly referred to the market correction as The John McCain Market Selloff. I was -- rather sarcastically, I thought -- pre-empting the usual poor analysis that comes from partisan quarters.

Statements such as these are actually "tells;" They reveal a profound misunderstanding of how markets operate, and only serve to alert you to a persons political preferences. They provide no insight into the "preferences" of the markets.

Rorschach Test

Previously:
The John McCain Market Selloff, March 07, 2008 http://bigpicture.typepad.com/comments/2008/03/the-john-mccain.html

Source:
McCain Market Rally?
An outlook on stock market politics, with Art Laffer, Laffer Investments; Andrew Busch, BMO Capital Markets; Greg Valliere, Stanford Financial Group; and CNBCs Larry Kudlow.
http://video.aol.com/video-detail/mccain-market-rally/1663336496

March Madness

Friday, March 28, 2008 | 12:49 PM

in Credit | Derivatives | Economy

Have fun with your brackets:

Forms of Federal Reserve Lending to Financial Institutions

Friday, March 28, 2008 | 12:34 PM

in Credit | Federal Reserve

Its becoming increasingly difficult to keep up with all of the Federal Reserve’s new programs to keep the system solvent, well lubricated, and functioning.

Now, you can track all of these programs via the Federal Reserve Bank of New York. They published a handy guide counting all the ways you can ~~engage in Moral Hazard~~ borrow from the nation’s lender of last resort.

These Five were created since August:

• Term Securities Lending Facility (TSLF), announced March 11, allowing securities dealers to get Treasurys at auction for 28 days
• Primary Dealer Credit Facility (PDCF), announced March 16, for securities firms to receive overnight loans
• Term Auction Facility (TAF), announced December 12, for banks to get funds at auction without the discount window stigma
• Single-Tranche OMO (Open Market Operation) program, announced March 7, allowing securities dealers to get 28-day funds
• Term Discount Window Program (TDWP?), announced August 17, extending the length of discount-window loans to 90 days

Hat tip: Real Time Economics

Source:
Forms of Federal Reserve Lending to Financial Institutions
Federal Reserve Bank of New York
March 2008
http://www.newyorkfed.org/markets/Forms_of_Fed_Lending.pdf

~~~

The Secret Formula for Blogs

Friday, March 28, 2008 | 11:38 AM

in Financial Press | Web/Tech | Weblogs

Hardly a secret, and not exactly a formula, but fun stuff nonetheless:

Goddamned, I look huge. The diet starts yesterday.

Thanks for all the kind words, Aaron.

Source:
Barry Ritholtz's Secret Formula for Blogs
Aaron Task
Tech Ticker, Mar 28, 2008 07:30am EDT
http://finance.yahoo.com/tech-ticker/article/9176/Barry-Ritholtz's-Secret-Formula-for-Blogs

How to Get an "Iffy" loan approved at JPM Chase

Friday, March 28, 2008 | 06:44 AM

in Corporate Management | Credit | Economy | Real Estate

3 "handy steps" for getting a questionable loan approved by JPM Chase's automatic system:

1. Lump all of an applicant's compensation as the applicant's base income, rather than breaking out commissions, bonuses and tips.

2. Do not disclose use of gifts for down payments.

3. If all else fails, simply inflate the applicant's income. "Inch it up $500 to see if you can get the findings you want. Do the same for assets.

Thus reads an internal memo from Chase obtained that accidentally found its way into the hands of journalist Jeff Manning of The Oregonian. It was the basis for an article titled, Chase mortgage memo pushes 'Cheats & Tricks'.

Fraud has been a frequent theme of ours regarding Housing during the Boom, circa 2001-06. From appraisal fraud to the payola of the Ratings agencies, the entire system has been corrupted. Some will act as apologists for the worst tendencies of the banking industry, and others may debate who is to blame. We long ago reached a verdict as to where the culpability lay.

Anyone with even a modicum of experience in the mortgage industry will confirm the rampant disregard for lending standards and the corner cutting and shortcuts that were all but official corporate policy during the boom years. There was headlong rush to originate, process and securitize mortgages -- and the ability to repay the loans be damned. (Predatory Borrowing my ass!)

Exactly how deeply this attitude was in the business of making loans was revealed by this memo. It involves Zippy, Chase's in-house automated loan underwriting system.

The memo's title: "Zippy Cheats & Tricks."

It provides a rare glimpse into the corporate mentality that has been a key factor in the current mortgage crisis. (A Chase spokesperson denied that Zippy Cheats & Tricks was official policy; thus we are reassured that this was only "unofficial policy).

Here's an excerpt from the Oregonian:

"During the boom, it was common for lenders and brokers to get paid more for risky subprime loans than for 30-year fixed-rate loans because the higher-interest loans fetched a higher price on Wall Street.

Chase, the nation's second-largest bank, originates mortgage loans itself but also operates a wholesale arm that underwrites and funds loans brought to them by a network of mortgage brokers. The "Cheats & Tricks" memo was instructing those brokers how to get difficult loans approved by Zippy.

"Never fear," the memo states. "Zippy can be adjusted (just ever so slightly.)"

The Chase memo deals specifically with so-called stated-income asset loans, one of the most dangerous of the mortgage industry's innovations of recent years. Known as "liar loans" in some circles because lenders made little effort to verify information in the borrowers' loan application, they have defaulted in large number since the housing bust began in 2007. . .

The Chase memo is "a perfect example of one of the big five banks out and out telling mortgage brokers to commit fraud," said Todd Williams, a broker with Evergreen Ohana Group in Portland. "And this has been going on for years." Williams and other mortgage brokers gave a copy of the memo to Oregon financial regulators."

Three other facts make this story incredibly intriguing:

1. State regulators recognized signs of fraud early on, but attempts to curtail it were prevented. The White House asserted that it was the Feds -- and not states -- that have jurisdiction over federally chartered banks.

And the Feds? They did nothing until 2008.

2. Tammy Lish, a Portland, Oregon account representative for Chase, accidentally forwarded the memo by email. Chase fired her days after discovering thisl.

3. Chase no longer makes any stated-income loans; the bank wrote down $1.3 billion in nonperforming mortgages in 2007.

The entire episode is amazing. I expect that more and more of these smoking guns will be finding their way into public view. Perhaps we can ask the Oregonian to make the actual email available online.

(Hat tip of Calculated Risk, Housing Wire)

UPDATE MATCH 28, 2008 5:35pm

Here is the actual memo, via JPM/Chase (I had nothing whatsoever to do with the font selection).

Download zippycheatstricks.doc

Previously:
The Ongoing Impact of the Housing Sector
http://bigpicture.typepad.com/comments/2007/08/the-ongoing-imp.html

Tyler Cowen: "Predatory Borrowing The Bigger Problem" http://bigpicture.typepad.com/comments/2008/01/apologist-for-f.html

Source:
Chase mortgage memo pushes 'Cheats & Tricks'
JEFF MANNING
The Oregonian, Thursday, March 27, 2008
http://www.oregonlive.com/business/oregonian/index.ssf?/base/business/120658650589950.xml&coll=7

Seattle Real Estate News
Aubrey Cohen
Seattle Post-Intelligencer, March 27, 2008 12:40 p.m.
http://blog.seattlepi.nwsource.com/realestatenews/archives/135190.asp

~~~

Fisher of Fed Sees U.S. Economy in 'Prolonged' Slowdown

Friday, March 28, 2008 | 03:00 AM

in Economy | Federal Reserve

Federal Reserve Bank of Dallas President Richard Fisher speaks at a community forum in Waco, Texas, about Federal Reserve monetary policy, the outlook for the U.S. and regional economies and the financial industry. (Source: Bloomberg)

click for video

Source:
Fisher of Fed Sees U.S. Economy in `Prolonged' Slowdown
Video
Bloomberg, March 26 2008
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vUXa3KNGoP.0.asf

~~~

Fed Steals the Plaque from The Statue of Liberty

Thursday, March 27, 2008 | 07:00 PM

in Credit | Derivatives | Federal Reserve

Interesting conversation with my pal Dan about the low low standards for collateral for the Fed's TSLF, and for JPMorgan's Bear Stearns purchase:

I suggested that the Fed grabbed the plaque at the Statue of Liberty, and moved it to the Federal Reserve. They took this inscription:

"Give me your tired, your poor, your huddled masses yearning to breathe free, the wretched refuse of your teeming shore."

-The Statue of Liberty

And turned it into this:

"Give me your tired paper, your poorly performing mortgages, your huddled derivatives yearning to trade free, the wretched refuse of your balance sheets."

-The Federal Reserve

If you have a better explanation, I am all ears . . .

Financials Seize Spotlight from Tech

Thursday, March 27, 2008 | 05:28 PM

in Media

Yahoo Tech Ticker

Read it here first: Illogical Home Sellers

Thursday, March 27, 2008 | 01:30 PM

in Financial Press | Psychology/Sentiment | Real Estate

David Leonhardt has a terrific column in yesterday's NYT that hits upon many of our favorite themes:

Real Estate sellers (like other humans) are often irrational;

Price "Anchoring" occurs with many investors;

Here's what we wrote back in September 2007:

"Prices have slipped, but not nearly enough to eliminate the inventory. This has lead the usually cheerleading folks over at the N.A.R. to yet again lower their forecast for 2007 existing-home sales for the seventh-straight month. The real estate agent trade group is now predicting a drop of 8.6 percent in home sales versus last year. And, they expect new-home sales will fall a whopping 24% to 801,000 this year, and to 741,000 next year.

Prices have failed to come down enough to jump start more activity. Sellers have been stubbornly sticking to their imagined top tick prices of 2005. Thus, Supply remains high, and if we believe the NAR or OFHEO, prices have slipped only slightly. Econ 101 informs us that until prices fall appreciably, the inventory situation will not improve.

There is a psychological component to all this: It very much reminds me of the investors who when having missed selling Amazon at $400 and Yahoo at $200 and EMC at $80 and Cisco at $60, refused to take 10% less. So they ended up riding the stocks all the way to multi year lows.

Speaking of the NAR, we continue to note their counterproductive cheerleading. Over a year ago, we noted a group of Palm Beach Real Estate agents blamed the NAR for putting unrealistic expectations in the minds of sellers:

"A growing number of Realtors in Florida are frustrated with the state and national Realtors groups' efforts to 'spin' the market as one that is strengthening and where home prices are stabilizing.

"Many (though probably not yet most) Realtors are frustrated by customers who continue to list their homes at price levels that are 'unrealistic,' and as a result, sales volumes - and thus commissions - continue to remain depressed.

"While Realtors have noted to customers that many home builders in Florida have slashed new-home prices in order to move bloated inventories, many home sellers are still holding off, hoping - along with FAR and NAR - that prices will start moving back up soon."

courtesy of NYT

Previously:
Real Estate Inventory Still Building http://bigpicture.typepad.com/comments/2007/09/real-estate-inv.html

Quote of the day: Realtors Get Real http://bigpicture.typepad.com/comments/2007/03/quote_of_the_da_1.html

Source:
Be It Ever So Illogical: Homeowners Who Won’t Cut the Price
DAVID LEONHARDT
NYT, March 26, 2008
http://www.nytimes.com/2008/03/26/business/26leonhardt.html

See also:
How Easily Can Your Brain Be Fooled? http://bigpicture.typepad.com/comments/2007/01/how_can_your_br.html

The Psychology Behind Common Investor Mistakes http://bigpicture.typepad.com/comments/2005/07/the_psychology_.html

Chart of the Week: Volatility Index

Thursday, March 27, 2008 | 11:30 AM

in Markets | Technical Analysis | Trading

Back in January 2006, I suggested that the period of long placidness in markets were coming to an end, and that it was a good trade to Buy Volatility.

That turned out to be an even better trade than I hoped/feared: Here's a nice looking graph from the National Post, showing the records highs in the VIX:

Market Volatility Reaches Depression-Era Levels.

Sources: Bloomberg News, Andrew Barr, National Post

Excerpt:

"Market uncertainty has caused the S&P 500 index to swing at least 1% in either direction on 53% of all trading days this year. That makes the current period of investing the fourth-most volatile period ever, and pushes it past 2002 levels to be the most volatile since 1938, during the Depression era. [T]here was a good chance the current market will break the 1938 record, when the index rose or fell by at least 1% on 57% of trading days over the equivalent period . . .

The better equity market performance caused the Chicago Board Options Exchange Volatility Index, a key measure of future market volatility, to fall 0.89 points yesterday, or 3.3%, to 25.73. Over the past year, the index has traded at a low of 11.46 and a high of 37.57.

"We're in a period where nobody quite knows if there's another Bear Stearns out there, and as long as that kind of environment is pervasive, I think you'll continually to see these big upside and downside days," he said, adding his firm increased its cash investment position last summer to avoid the wild equity market swings. Mr. Bjorgen said even professionals were unsure where to put their money or ho