February 27, 2007

What Did I Tell You? If a Butterfly Flutters in Brazil The Subprime Market Will Collapse. Dow Down 415+ Points.

As I mentioned last week, the catalyst of this global credit meltdown is the subprime market. After today’s global massacre, the Dow has had its worse one-day loss in 5 years. Given that China and Japan are tightening their credit standards, the market is now realizing that the piper must be paid. The definition of subprime is giving loans to riskier clientele and China took it in the shorts for a 9% loss across Shanghai’s major index. But who cares right? All this isn’t interrelated. After all, we can isolate ourselves as a nation since everything is made within our borders. Whoops, maybe not. Well at least we have one of the highest savings rates right? Nope. This entire Ponzi credit financing orgy was good until it wasn’t because lending was so loose it would make Paris Hilton seem like a saint. The negative news coming out of the housing sector is growing exponentially; bubble bloggers are trying to digest the information but it is equivalent to drinking water from a fire hydrant.

The Major Sell-Off

We just witnessed the worst one-day sell off since September 11, 2001. And pretty much the negative news out of Asia is that credit standards will be tighter. How in the world is this bad? If anything, this is symptomatic on how much the global economy, financed through 1st world real-estate, was based on ridiculous credit. Then Greenspan has the gall to come out and issue a warning that we may be going into a cyclical recession. Oh, you mean the one we should of experienced over fiver years ago except you took rates down to Chinatown? Thanks for that insight señor Greenspan.

Subprime Going Down in Flames

Countrywide Financial has come out publicly stating that they estimate that 40 to 50 minor subprime outfits are failing daily. Not exactly a vote of confidence for this industry. Aside from the fact that major players like Novastar and New Century Financial have been hammered these last two weeks. The game is over for these subprimers. I get a kick out of all those perma-bulls talking last week that the subprime implosion meant nothing because it is such a small piece of the pie; what happened today is a global call putting a stop to the credit spigot. Considering we didn’t have a national emergency the Dow dropping like this is rather significant, especially for the housing market. Not only that, this shows how dependent we are on China and Japan buying up our garbage credit and financing our consumer spending panty party.

Be Cautious of the 2007 Cassandra Call

So what can we expect for the remainder of 2007? Considering we are not even past Q1 let us sum up what has occurred in the past two months:

• Housing is falling nationally. In certain regions, there IS a housing crash; Florida, Arizona, and parts of Neveda.
• Credit standards are becoming more stringent. The subprime market is now finished. You can put a fork in it.
• Global credit standards will become tighter (read normal) because we have been living in Wonderland credit country.
• The sentiment is that we are heading to a recession by yearend.
• Precious metals and commodities are back up.

But then we will have the folks still living in the past thinking that what we experienced is a minor bump in the road. Forget the stats that income has not kept up with pretty much every necessity of life including college, housing, and healthcare. Yes, you can buy a HDTV for a cheaper price but last time I check HDTV boxes weren’t big enough to live in, unless you live in San Francisco then you are talking about $400,000. So the warning has been issued and all bubble watchers aren’t shocked by what is going on. In fact, you should be profiting from this mess because it is so blatanly obvious. It is like playing tennis without a net, like fishing in a barrel, like JV playing the Lakers, or any other comparison you can make. Pull up the balance sheet of many lenders; run the numbers. Short these stocks. Rebalance your portfolio. Make sure you have the right asset allocation unlike the “millionaires in the making” on CNN. Are you kidding me? These folks have about 80% of their assets in “equity” and claim to be making it. Yeah, let us revisit these people in 2008 and see where they are at. Anytime you put all your eggs in one basket and that basket falls, you are screwed.

But of course we know these folks understand the real estate cycle and the global implosion of easy credit right?

What are your predictions for 2007?


IrvineRenter said...

What are my predictions for 2007? Well...I could reinvent the wheel, or just link to this:


House prices will probably experience a minor bear rally this spring as the last of those who felt they were "priced out" come to the market with the last available option ARMS to buy up the "bargains." Late 2007 will be the beginning of the major declines in home prices brought on by a wave of foreclosures already in the pipeline. This drop will in turn create more foreclosures and begin the downward spiral to the bottom. 2008 will be very ugly, and 2009 probably won't be much better. By 2011 we will probably start to see some signs of stabilization, but not necessarily the bottom. All of the ticking time-bombs in the form of ARM's must detonate before any meaningful appreciation will occur.

I shorted the market yesterday, and with today's weak action, I shorted some more. I think we are at the beginning of a medium-term downward move, perhaps even a new bear market. BTW, it may be difficult to short the sub-primes. I tried to short NEW and LEND this morning, and they are on my broker's "hard to borrow" list; meaning they don't have any shares on hand for me to borrow to sell short. Bummer.

Dr Housing Bubble said...


Good to hear you shorted the market. I tend to agree with your analysis for the upcoming year. Not sure how large of a bump we'll see this summer. If anything, I am hearing folks praying that they will get last summer prices in 2007. If anything, many sellers are going to get a major lesson in market sentiment and will understand first hand what a buyer's market is all about.

Yesterday was a good indication that when people freak, they will leave blood on the streets. Nothing more scary than knowing your home is worth less than you paid for and your mortgage is adjusting. Not excatly the definition of success.

BTW- Congrats on becoming part of the Irvine Blog. We hope that you'll still continue to be a visitor and contributor here. You always have a home at Dr. Housing Bubble.


chris g said...

I tried shorting NFI a couple weeks ago in my Ameritrade account before the last severe drop, but couldn't get any shares to short, so I shorted FMT and bought a put option on FED. FMT made my wishes come true with their delayed SEC filing (I smell lawsuits) and FED made a couple nice moves down. BankUnited (I forget the ticker) looks like a good short candidate also. I'm generally looking for lenders with a high concentration of option ARM loans in the Alt-A segment, ones that nobody is talking about yet. They are out there.

I also wouldn't be surprised to hear about a hedge fund implosion in the next month or two, because of yesterday's market action. You just know that someone was leveraged to the hilt but was on the wrong side of a trade yesterday. Nobody anticipated that kind of movement in one day.

Remember the scene in Jurassic Park where the camera showed the glass of water, and the gentle "thud" in the distance produced the ripples in the water? That was yesterday in a nutshell.

squints said...

Dude - your interstitial ads are super lame. Your commentary keeps me coming back, but can you get rid of the full page ads?

Dr Housing Bubble said...


Agreed. I have removed those ads.

Dr. Housing Bubble

Dr Housing Bubble said...


Good stuff. The market doesn't know what it wants to do. Greenspan took back his recession comment; even after his stint he still shows no sign of a backbone.

I would be cautious on shorting stocks because my guess is that we will have a dead cat bounce this summer. However, energy prices are going back up and they normally hit their stride in late May.

In addition, I think the state will be in for a shock when they take a look at tax reciepts.

IrvineRenter said...

Dr. Housing Bubble,

Thank you for getting rid of those ads. I wasn't going to complain, but they were quite annoying.

TS said...

A few guesses.A big demand for clerical help in processing foreclosures.sales of cheap vodka and depends skyrocket.bk and divorce lawyers get rich.the credit squeeze hits jumbo loans before august.hedge funds blow up,and a LOT more lenders implode.the market freezes up before september with almost no sales and record inventories.casey serin replaces leslie appleton-young as CAR spokesperson in an attempt to restore credibility to that sick organization.a new reality show spun off of monster garage shows fb's how to convert their suv into a comfortable home starts running.

J said...

I'm nowhere near the guru's you guys seem to be. I can still follow you though.

I'm a soon to be a first time home buyer in the NW Washington area. I think I'll be hitting the list of foreclosures in the area.