One important rule for investors is don’t chase bad money with good. NovaStar Financial is having a challenging time getting out of the doldrums even after a $150 million booster shot it received from private equity funds. Not only are analyst predicting a future price target of $4.50, much less than the current $5.96 price but the company is also planning on slashing the dividend for many investors. Keep in mind this is a company that once was trading as high as $64 a share. But home equity lines of credit and loans are much more expensive now that rates have shifted. 30 year fixed rates are still doing fine at historical lows, but financially, this was a small sliver of the pie for these subprime players. According to Reuters:“NovaStar shares were down $1.15 to $5.96 in late-morning trade on the New York Stock Exchange after falling to as low as $5.91 earlier in the session.
As a result of the deal, FBR's Valentin said NovaStar common shareholders will see their dividend slashed to $2.67 a share from $4.21 a share. Valentin also said the $150 million injection is not enough to sustain NovaStar, a REIT, unless mortgage markets suddenly rebound."
Like other subprime lenders, which make home loans to people with weak credit, NovaStar has suffered rising defaults and has struggled to sell the loans it makes to investors. Quarterly results have suffered this year, while rivals were prompted to exit the business or forced into bankruptcy.”
This isn’t something new. I warned about the subprime implosion a few months ago including the challenges NovaStar would face. Although many pundits were echoing that $150 million dollars would keep the company solvent for a while longer, there is no way any amount of bad money would keep over inflated assets high forever. And the caveat in the above quote is “unless mortgage markets suddenly rebound.” Now do we really see that happening?
Big Ben Chimes in Again
Then we move on to Big Ben using his glorious Orwellian Doublespeak. First, Mr. Ben is frustrated that the Yuan is rising at a slow pace:
“"I share your frustration about the slow pace" of China's currency revaluation, Bernanke said in response to a question from the Senate Banking Committee following his twice-yearly Congressional testimony.”
Glad he shares the frustration of the American public. Well that can easily be remedied by raising the Fed interest rate. Of course this will pop the bubble. But why should housing pundits worry? They’ve mentioned that housing rose on its own merits without the crutch of easy credit. When asked if housing could face a hard fall, this is his response:
“"We think it remains a risk, we have an inventory problem,"
An inventory problem? Well isn’t that something! And here I was thinking that it was a pricing problem. The doublespeak gets better in this testimony. When asked about the overall state of the economy, Ben responded:
"The ongoing housing correction could prove larger than anticipated, and energy and commodity prices could continue to rise sharply" and that could "spread to other parts of the economy," said Bernanke. Therefore the "upside risks to inflation is [the Fed's] primary policy concern."
You’ll understand that political operatives love using the word “could.” Well I could make a million dollars tomorrow, or not. Well housing could correct, or not. And they keep calling it a “housing correction.” This is a bursting credit bubble! Call it what it is. All these convenient euphemisms make it seem like we are in a high school band class. So the primary concern is inflation. Excellent, at least we agree on one thing. Then what about the resounding housing inflation we have seen in the last few years? The Fed actually created this monster by lowering rates and creating excessive easy credit. This played perfectly into a society that has a very hard time saving for retirement or anything else. Not only that, it made everything you buy with credit cards easier. Even last year, it was incredibly easy to find 0 percent offers on credit card purchases. Try finding these deals now. Now they include a 3 percent transaction fee. Suddenly people can’t play the mortgage refinancing musical chairs game.
“"The most pressing issue facing the U.S. economy today is excessive and growing inequality,"Bernanke responded by pointing to other studies that show middle class Americans are generally much better off now than they were two decades ago.
But he also said better education training programs, as well as cheaper access to health care, are some things that could be done to lessen the income gap.”
Basically you are doing better if you aren’t buying your first home, eating food, don’t get sick, and avoid going to college. Aside, from that you are doing fantastic! Amazing double speak in face of the largest housing inventory in multiple decades.
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8 Comments:
I've been reading your blog for a long time, this is my first post.
Well stated, it seems to really pain these guys to give an answer that is either clear or concise. I do personally think he's correct about spiking energy and commodity prices. You don't have to be a Peak Oil freak (I read a PO forum once - sweet Jesus - those guys are convinced that the world is going to end tomorrow) to realize that the days of cheap energy are drawing to a fairly quick conclusion. Plus with the industrialization of 'emerging' economies and the lack of raw materials like, say copper and nickel, I can see some crazy times ahead.
In all honesty I should thank the housing/credit bubble; it's opened up my eyes, and really given me an interest in economics. I recently turned 31, make six-figures, no debt (car paid off, rent an apt.), and nearly 100k in the market excluding my 401k. What I have been reading lately further motivates me to continue the course of saving and having some fun trading. On the downside, Etrade is starting to cut into my Battlefield 2 time...
It still baffles me how people, at this point in the game, don't realize what is going to happen with prices. The question is, when does the Fed finally raise the rates?
Excellent comments, Doc. Again I offer a mental curtsey in your general direction.
I get the impression that the Fed has boxed themselves into a corner. How are they going to raise rates without causing a real estate depression?
ps: I remember back in the mid nineties that a mortgage broker warned me that my house payment shouldn't exceed one third my grross income and told me to pay down some debt before applying for a home loan. I wonder what happened to this form of common sense?
@mikey
pay off debt? why do you hate america?? i think it's going to take an external event, like a major sell-off in stocks, to jar the mindset of some of these homedebtors. the psychology has gone from 'real estate always goes up - buy now!' to 'real estate never goes down - wait it out!' but i think we need a shock to move it to 'holy crap, real estate CAN go down - sell now!' recent credit downgrades are now effecting AAA and AA loans so we may see the bulls take a pause to look around and realize, like wile e. coyote, that they've run out of cliff.
I saw the data on the main page... so, Riverside County saw a 4% price decrease in a single month.. soft landing my ass... hahahaha.. I father told me that many suckers committed suicide in the early 90's because they lost their jobs/houses. I wonder if some will do that again... inside their Leased Mercedes/BMW/Hummer.... muahahahahaha... BURN Mothersuckers... burn... ooopsss.. hehehe.. too much hate. Seriously, I hope it turns out true
What are the RE agents gonna do now that they can't sell houses any more ???
What will the Fed say one year from now when housing continues to decline ???
Hmmm... muahahahaha
Dr Bubble,
What did you expect Bernanke to do besides the double speak? Greenspan was the same during his time.
I think Bernanke learned his lesson on not to open his mouth too much after the whole Maria Bartiromo on CNBC thing a couple months ago.
Keep up the good job on the blog. Loving it.
@genius,
How dare Etrade cut into precious Battlefield 2 time. But you are doing the right thing by saving and investing prudently. There is a video online of Ron Paul grilling Big Ben about inflation and the negative savings rate. Amazingly, Ben agrees with everything but kind of leaves the question dangling. You almost feel like yelling “then what are you going to do about it?!”
@mikey,
We’re already heading to a market bust because Wall Street is looking at the numbers and the assets tied to many securities, and are scratching their heads wondering how low it will go. Again, this monthly nut mentality is problematic. I’ve seen 72 month car loans becoming more standard. $40,000 for a standard car with basic upgrades? But hey, only $600 a month. Even if the rate was zero percent, it’ll still be $555 a month. At a certain point you realize the underlying asset is not worth the drawn out price simply by convenient monthly payments. Death by a thousand cuts.
@hiphopapotamus,
It’ll be interesting to see in Q3 and Q4 of this year if Alt-A will stand the test of a decling market. If significant weakness is sensed, we will be heading toward a recession in a few subsequent quarters. Not the end of a world but a painful contraction.
@calhousing,
I’ve never seen housing divide so many people. We have a culture of those that are financially prudent (a minority – stats show this) and a majority of conspicuous consumers. Like you mention, many folks driving around in leased exotic cars without a cent in a 401(k) or savings account. I know many people that “upgrade” their car each year or two and pay ridiculous lease fees simply to have the latest model. You can buy a nice exotic used car for a good price. But they are addicted to the new.
Have you heard this line? “I have no idea how I got into $10,000 of credit card debt. I was buying only necessities…” You know the line. I always wonder how people in the depression bought things without credit. Oh yeah, they spent out of what they earned! Such a novel concept but in the last decade, paying to buy something out of savings is seen as odd and old school.
@joe,
Love that incident. The market freaked on his words with Maria. If anything, it shows how dependent our economy is on cheap credit that even a slight hinting of tighter policy sent the market down. Now after that scar, he is filling AGs shoes well by saying lots but not really saying anything. “Rates will go up if rates will go up. If they don’t they will go down after going down. If they don’t move, they simply won’t move.” Welcome the new era of financial LaLa land. I wonder how he’ll deal with a collapsing dollar, rising inflation pressures (even though the CPI is absurd anyways), and a declining housing market. Not exactly an easy place to be.
I listened to the hearing. The scariest line is "it is going to get much worse before it gets any better".
Also, the comments about college grads income not keeping pace is scary also. The steep rise in education costs is spiraling and the ROI of the time and money is slowing fast may leave many people to question whether it is worth it anymore. Then mix in high energy, food, real estate, etc costs and you have the makings for a fierce correction that puts everyone back in to reality.
UGH...
-SoCalWatcher
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