Further Credit Crisis Thoughts

Some further thoughts on the current credit crisis:

- We have had something like this every 5 to 6 months or so, with the last one in Feb 07, before than June/July of 06. It seems to me to be due mainly, to overextended funds, if we didn't have funds leveraging, then there wouldn't be such a mass rush for the exits.

- That said, I think this one is a bit more scary than previous downturns, in that it is a real liquidity crunch, not quite the same as last year. Although similar, but a bit more severe. Further, I am not sure about overall economic growth, with the housing market slowing.

Homebuilders:

- In the housing market, I think the homebuilders (as I've followed homebuilders fairly intently for about 4 years) without leverage will make it through, and who haven't committed to these exurb-type developments, while the homebuilders who are overextended and rely on the mass community developments will have a tougher time -- many can go bankrupt. The overhang of houses is the most since at least the 70's. Mainly in the housing communities sector, in exurbs, etc -- "KB Home's new development, many cookie cutter houses which all look the same, 50 miles from downtown" isn't nice at all, long commute times, and now harder to get financing.

- Really, something like WCI should do ok over the long term -- if it wasn't for their leverage -- since they do luxury apartments, in or near city centers. I am not a fan of KB Homes or Pulte Homes, for example -- which do a lot of community developments.

- Further, on housing, it is odd to think that housing globally will go down. It is hard for me to see that happening -- in China, for example, interest rates are buffered from external developments, and people are used to spending upwards of 50%, more like 60% of their monthly income on housing payments. Demand is huge for housing there because the whole country wants to live in the cities. In the US, there should also be a vast difference between real estate valued in attractive areas -- financing will be easier to be obtained, and people will spend a bit more on monthly housing payments from a relatively low level as compared to other countries. Overall, if housing declines and interest rates go up, undesirable areas will get hit, but more attractive areas, people will pay up and not sell, and demand will still be there.

Thoughts on the Current Subprime and Liquidity Problems in the Markets

Some thoughts on the current market crisis in both subprime and overall markets:

- In and of itself, the subprime problem is a moderate problem, but not a huge problem. That said, not a lot of analysts know exactly to what degree many hedge funds are levered, and, if there are large losses from subprime loans, if they can meet their commitments -- and this is what is scaring investors. In other words, we would not be having these problems if funds were not highly leveraged. If I recall correctly, in the Long Term Capital Management crisis of 98, the main problem, was that the result of the 80 or so to 1 leverage to equity could cause a string of bank failures. Unfortunately we didn't learn from that crisis to pass laws that would limit leverage of hedge funds.

- The domestic Chinese market is oblivious to the liquidity problems here: (Shanghai) http://finance.yahoo.com/q/bc?s=000001.SS&t=6m&l=on&z=m&q=l&c=

But India is down a modest amount (but 4% today meaning 4/16) http://finance.yahoo.com/q/bc?s=%5EBSESN&t=6m

The reason I believe is that the Indian Rupee trades while the Chinese Renminbi is non-convertible -- so US and EU based funds can't withdraw money from the domestic Chinese market. This underscores that this crisis (and I think we are in crisis mode now) is a liquidity problem.

- Fundamentally, China and India are in good shape (I think) but the US, is certainly slowing, but to what extent, is difficult to ascertain. Personally, I have made sure to get rid of financial stocks, and retail, and of course housing related stocks, and actually opened some short positions -- might as well over this next month while the market doesn't have much upside but possibly -- and would venture to say probably -- some more downside as of 8/16/07.

- A clarification is needed, the Central Bank's "pumping in money" is not really sending in money into the banks without questions asked, but rather repurchase agreement sales -- so the central banks (Fed and other Central Banks) are buying mortgages for cash, in which the central banks expect to be paid back. So it is really trying to get the markets running again. A description is here: http://www.voxeu.org/index.php?q=node/466

So what the Central Banks are doing is completely appropriate. This seems to be misunderstood by the many members of the media.