“Credit derivatives…finally being tested…are performing poorly.”

From the Financial Times:

Subprime woes hit credit markets

The cost of insurance against credit defaults hit record levels on both sides of the Atlantic on Monday amid concerns that some investors were being forced to sell assets to cover losses on subprime mortgages.

Investors rushed to buy contracts that would protect them against corporate credit defaults after it emerged that more European institutions had suffered losses following the crisis in the US subprime mortgage market.

IKB, a German lender specialising in providing credit to smaller companies, and Commerzbank, the country’s second-biggest bank, both warned they would be hit by losses from risky US home loans to borrowers with poor credit histories.

In spite of the heightened risk aversion in credit derivatives markets US stocks rose. The S&P 500 was up 1.2 per cent in late trade, after a sharp tumble on credit market concerns last week. The safe haven of government bonds also gave up some of last week’s gains with the yield on the 10-year bond 5 basis points higher at 4.81 per cent.

Analysts warned that the financial markets could stay jittery in coming days, since the credit turmoil could force more financial institutions to offload troubled assets.

“At a minimum, credit travails are apt to create a higher volatility environment across all asset classes for much of this year,” said Alan Ruskin, global strategist at RBS Greenwich Capital. “Credit derivatives liquidity and risk management characteristics are finally being tested in a crisis and are performing poorly.”

The speed of the swing in the credit derivatives markets has shocked many investors, particularly since it has not come amid a sharp deterioration in the macroeconomic background. Some traders consequently blame price swings on hedge funds that may have been rejigging their portfolios before the end of the month.

However, there are also mounting concerns that some investors are being forced into liquidations because prime brokers are trimming credit lines to groups with heavy exposure to subprime mortgages.

This entry was posted in Economics, National Real Estate, Risky Lending. Bookmark the permalink.

226 Responses to “Credit derivatives…finally being tested…are performing poorly.”

  1. James Bednar says:

    From Bloomberg:

    MGIC, Radian May Write Off $1 Billion Joint Venture

    MGIC Investment Corp. and Radian Group Inc. said turmoil in the subprime mortgage market may require the companies to write off their combined $1.03 billion stake in a venture that invests in subprime mortgages. Shares of MGIC fell as much as 9.8 percent in after-hours trading. Radian dropped as much 3.6 percent.

    The market for loans to risky home buyers started deteriorating in February, with “dislocations accelerating to unprecedented levels” in mid-July, Milwaukee-based MGIC said in a statement today. The venture, Credit-Based Asset Servicing and Securitization LLC, buys mortgages with overdue payments, aiming to improve collection rates before selling packages of the debt at a profit.

    MGIC planned to sell a portion of C-Bass to fund a share buyback later this year, once it completes its planned acquisition of Radian, a smaller mortgage insurer. MGIC Chief Executive Officer Curt Culver said as recently as July 19 that he was encouraged by the list of potential bidders.

    MGIC’s second-quarter profit plunged 49 percent to $76.7 million on higher claims costs as borrowers defaulted at high levels in California and Florida, the company said July 18.

    Through the close of regular trading, MGIC stock has fallen 27 percent this year, while Radian is down 25 percent.

    MGIC and Radian said they hadn’t determined the range of their writedowns, though each said the upper boundary may be the entire investment. MGIC’s investment in C-Bass was approximately $516 million as of June 30. Radian’s was $518 million, the Philadelphia-based company said in a separate statement.

  2. James Bednar says:

    From the APP:

    Subprime impact lingers, but OceanFirst profit up

    OceanFirst Financial Corp. returned to profitability during the second quarter, but the impact of subprime loans made by its subsidiary lingers.

    The Toms River-based parent of OceanFirst Bank on Monday reported a profit of $277,000, or 2 cents a share, for the quarter, compared with a profit of $4.9 million, or 41 cents a share, for the same quarter a year ago.

    OceanFirst, the largest bank based in Ocean County, had posted two consecutive quarterly losses after its subsidiary, Columbia Home Loans LLC of Valhalla, N.Y., made millions of dollars in loans to home buyers who had spotty credit histories.

    Once the housing market retreated, some of those loans went into default, leaving OceanFirst in a precarious position. It needed to repurchase some of the loans and discount other loans to sell to investors.

    As a result, the company lost $6.8 million during the fourth quarter of 2006 and the first quarter of 2007, and it closed Columbia’s headquarters in a process expected to be completed by Sept. 30.

    John R. Garbarino, OceanFirst’s chief executive officer, said on a conference call with investors that the subprime loans were made by “renegade” lenders who operated without OceanFirst executives’ knowledge.

  3. James Bednar says:

    Can someone please post any *new* articles they feel are relevant?

    Very busy here, no time to get online..

    Thanks!
    jb

  4. chicagofinance says:

    Been saying it forever….bankers get paid in cash. Who was it over the weekend lecturing us about the financial services sector…….such a newbie….

    WSJ
    THE GAME
    By DENNIS K. BERMAN

    Best Bet Against Risk Further Down the Road
    May Be Wall Street Gig

    July 31, 2007; Page C1

    The best arbitrage play on Wall Street may simply be working on Wall Street.

    Bankers and traders get their big bonus checks every 12 months. But the risks created by their work are spread over a longer time frame. By the time the risks are revealed, be they bad loans or bad deals, it’s too late for real accountability. The checks have been cashed, and the charters booked for Nantucket.

    Overreaching is an American pastime, and virtually a Wall Street birthright. And that’s fine, given that ambition drives innovation. But this current credit mess — or “equilibrium-finding” as the hopeful put it — dredges up an issue the Street has yet to solve: just how to pay short-term for long-term performance.

    Last year, bankers were praying for the deals market to “just hold on” until bonus season. They got their wish, passing around the biggest pot of fees in history, some $79 billion split among the investment banks, 20% higher than during 2005.

    The prayers were even more fervent this summer as the deal business was reaching a record-setting crescendo. Only now are the gambles becoming embarrassingly evident, with the Street scrambling to finance some $220 billion worth of leveraged buyout deals.

    Some bankers talk publicly as if the inventory will vanish after a few weeks of vacation. In private, though, the mood has gone from Nantucket holiday to Bataan Death March. As one top merger banker put it on Friday: “I’m underwater on every single loan on my book.” Translation: He’s stuck with deteriorating loans that he was supposed to sell to others.

    Despite the fallout, both bank and hedge-fund investors are willing to pay upfront money without seeing back-end results. The consequence is a free-rider’s paradise, where individuals can stack up the short-term benefits for themselves, while letting the institution bear the brunt of their actions.

    The result is a banker getting handsomely rewarded in January for making a loan that blows up in August. The hedge-fund manager, meanwhile, is able to buy up billions in suspect subprime real-estate loans and derivatives, clipping a 2% management fee along the way.

    There is a market trade-off to these high rewards. Bad decision-makers can get yanked from their jobs at a moment’s notice. But this can have the effect of creating still more incentive to land the big score.

    Given the dollar amounts in play, that’s getting increasingly possible, says Alan Johnson, managing director of Johnson Associates, which advises Wall Street firms about compensation. “The sums are getting bigger and bigger,” Mr. Johnson says. “You’ve got young people doing aggressive things that have never been done before. What if it turns out really badly? It’s what keeps CEOs up at night.”

    The effects of the arbitrage were on display at Citigroup during the earlier part of the decade. With stock analyst Jack Grubman in the mix, the bank was able to carve out an immense and profitable practice helping telecom companies underwrite initial public offerings and do M&A deals.

    It turned out that market position was supported by a host of practices — “spinning” IPO shares to select executives, for instance — that would later cost the firm dearly. By 2004, Citigroup had reserved some $6.7 billion to pay fines and settlements for both its work in telecommunications and for the doomed Enron. That ate up one out of every three dollars of the investment bank’s $19.5 billion net income from 1998 through 2001, according to data compiled by CapitalIQ.

    The original structure of investment banks tried to control for these bleak scenarios, according to research out of Oxford University and the University of Virginia. The banks were set up as private partnerships, where employees had ownership stakes that were very difficult to sell. That forced partners to concentrate on maintaining the firm’s reputation. There was no way to dump shares.

    Banks today try to create similar conditions, pumping their most important people full of stock grants and options. That’s supposed to keep them thinking about the overall health of the firm, of course.

    Still, today’s compensation game does little to discourage the short-term score, says Mr. Johnson.

    “How do you assign blame when loans go bad?” he asks. “The hardest thing is holding people accountable because of the time lag. Six different layers of management signed off on it. And four years down the road, who remembers what happened?”

    As ultimate economic animals, banks are no doubt aware of these risks. And so far they’ve proved both either unwilling or unable to install some sort of “clawback” features on their ever-mobile employees.

    All of which suggests an important bit of career advice: If you’re ever offered a chance to make short-term profits without any long-term risk, grab it and don’t let go. It can be a beautiful gig.

  5. chicagofinance says:

    Don’t get bent out of shape by this headline. It is literally true, but let things stabilize.

    http://www.bloomberg.com/apps/news?pid=20601103&sid=afHmD6FZ2Wpw&refer=us

  6. chicagofinance says:

    note…..

    Pimco Buys

    That may be a signal to buy, said Moon. Bonds of brokers are “attractive” because yields have widened so much compared with Treasuries, he said, declining to comment on whether he’s adding them.

    The growth in credit-default swaps allows finance companies to hedge more of their risks than a decade ago, Moon said. “I don’t think it’s a disaster because, quite frankly, the institutions have become more sophisticated about their risk management practices.”

    Pimco bought bonds of banks and brokers in the past two weeks, expecting them to sustain earnings growth and benefit from global mergers and acquisitions, Kiesel said. Profits at Bear Stearns will rise to $14.53 a share this year and $15.66 in 2008 from $14.27 in 2006, according to the average estimate in a Bloomberg survey of 16 analysts.

  7. Frank says:

    JB,
    How’s Poland?

  8. BC Bob says:

    “U.K. Consumers Cut Back on Beer, Shoes as Mortgage Crunch Looms”

    “Ben Craster says he’ll be drinking less beer this summer, and Christine Baines is cutting back on clothes and cosmetics. They’re among the millions of Britons preparing for a mortgage crunch”

    “We have a fixed-rate squeeze coming,” said Alan Clarke, an economist at BNP Paribas in London. “Consumers are going to bear the brunt of a slowdown.”

    “Cheshunt, England-based Tesco, the U.K.’s biggest retailer, said in June that 2007 will be a “tougher year” partly because of the mortgage crunch. Stuart Rose, chief executive officer of London-based clothing retailer Marks & Spencer, said on July 10 that sales will be “very challenging.”

    http://www.bloomberg.com/apps/news?pid=20601109&sid=ajbnu9l2U8XA&refer=home

  9. BC Bob says:

    “Core inflation rises moderate 0.1% in June
    Real consumer spending flat in June, while disposable incomes rise 0.3%”

    http://www.marketwatch.com/news/story/us-core-inflation-falls-3-year/story.aspx?guid=%7BE5017BC1%2D8A47%2D4F77%2DA28D%2D5F3F8A8297D2%7D

  10. RentinginNJ says:

    J&J to Restructure Businesses, Cut Staff

    Johnson & Johnson to Restructure Pharmaceutical, Stents Business, Cut Staff by 3-4 Percent

    http://biz.yahoo.com/ap/070731/johnson_johnson_restructures.html?.v=5

  11. RentinginNJ says:

    Consumer Appetite to Spend Cools in June

    Consumer Spending Rises at Slowest Pace in 9 Month

    WASHINGTON (AP) — Individuals took a shopping break in June, boosting their spending at the slowest pace in nine months as high gasoline prices and fallout from the housing slump made people think twice about buying.

    High gasoline prices have left people with less money to spend on other things. The housing slump and weaker home prices have made people feel less wealthy and thus less inclined to spend as lavishly as they had during the five-year housing boom.

    With income growth outpacing spending, Americans’ personal savings rate — savings as a percentage of after-tax income — improved.

    The savings rate rose to 0.6 percent in June, up from 0.4 percent in May. Even with the better showing on this measure, economists caution that the picture of savings isn’t quite complete. The savings rate doesn’t capture gains from such things as real estate or financial investments.

  12. Mortgage Observer says:

    U.S. S&P/Case-Shiller Home Price Index Declined 2.8% in May

    By Bob Willis

    July 31 (Bloomberg) — Home values in 20 U.S. cities fell the most in at least six years as a glut of unsold properties, mounting defaults and higher mortgage rates suggest the housing recession has yet to touch bottom.

    The S&P/Case-Shiller index of home prices in 20 metropolitan areas declined 2.8 percent in May from the same month a year earlier, led by Detroit and San Diego, according to the report issued today by Standard & Poor’s and MacroMarkets LLC. It was the fifth straight year-on-year drop and the biggest decline since the index started in 2001. The drop was less than economists had forecast.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aRT2l0Qx0IPc&refer=home

  13. REBear says:

    Home prices fall 2.8% from previous May: Case-Shiller index

    http://www.marketwatch.com/news/story/home-prices-fall-28-previous/story.aspx?guid=%7B52449931%2D81AC%2D4022%2D9D44%2D6A32B4091C24%7D&dist=hplatest

    Home prices in 20 major U.S. cities fell 2.8% in the past year, while prices in 10 cities fell 3.4%, Standard & Poor’s reported Tuesday. The decline in the 10-city index is the largest since 1991. A year ago, prices were rising at a 9.8% pace. The Case-Shiller price index tracks repeat sales on the same homes, so it’s not influenced by the mix of homes sold in a particular period, as are some other gauges of home prices.

  14. bairen says:

    #4 chgfin,

    i’m really shocked. Imagine wall st types acting in their own self interests instead of their employers. If things go right in the short term, employees score big, if things go bad, employer takes losses, some people get laid off. they then switch to another firm, blame quants or analysts, fed, martians, anyone but themselves, repeat said behavior. Ain’t it beautiful.

  15. REBear says:

    M/I Homes sales fall, withdraws forecast

    http://www.reuters.com/article/topNews/idUKBNG4847920070712?rpc=44

    M/I said second-quarter home sales fell 24 percent to 755 from 987 in the year-ago quarter. Orders for new homes dropped 10 percent to 688 from 764.

    The company’s backlog of homes on order and awaiting construction declined to 1,694 at the end of June from 2,889 a year ago. The value of the backlog was $554 million, down from $1.025 billion.

    The average sales price of a home in backlog was $327,000, compared with $355,000 at the end of June 2006.

  16. ac says:

    chifi (4)/ bairen (16),

    This is how the sales desks operated for years. Nothing new here. If you look at senior management in any bank/brokerage, I can almost guarantee that majority come from previous sales rather than trading backgrounds. There isn’t any impetus for change as such.

  17. SG says:

    A New Jersey man who built his own 35-foot windmill in his backyard as a means to lower his energy costs now has new bills: legal bills, to be precise.

    The International Herald Tribune reports that 61-year-old Michael Mercurio of Beach Haven Terrace, N.J., was able to use his home-built windmill to cut his utility costs from $340 per month to $114. However, two of his neighbors filed a lawsuit charging the local township was in error by issuing Mercurio a building permit for the windmill. The township subsequently agreed with the neighbors’ complaint.

    Last week, the New Jersey State Superior Court suspended the lawsuit against Mercurio and ordered him to seek a zoning variance from the township’s land use board.

    Mercurio told the International Herald Tribune that the legal actions are weakening his retirement savings and are also contributing to pollution: he took up chain smoking to relieve the stress of the lawsuit.

    http://www.aer-online.com/e107_plugins/content/content.php?content.666

  18. Rich In NNJ says:

    From MarketWatch

    Chicago PMI drops to 53.4% in July

    Business activity in the Chicago region worsened in July, according to a survey of corporate purchasing managers released on Tuesday. The Chicago purchasing-managers’ index dropped to 53.4% in July from 60.2% in June. The number was below economists’ expectations. Readings of more than 50% indicate that more companies were expanding than contracting.

  19. scribe says:

    IndyMac Net Tumbles
    Amid Subprime Defaults
    By LINGLING WEI
    July 31, 2007 8:47 a.m.

    IndyMac Bancorp Inc., the nation’s second-largest independent home lender, on Tuesday posted a 57% drop in second-quarter net income as soured loans more than tripled, and it expects profit pressures to persist into next year.

    Net income fell to $44.6 million, or 60 cents a share, from $104.7 million, or $1.49 a share, in the year-earlier quarter.

    Revenue declined 21% to $297.8 million. Mortgage production rose 12% from a year earlier to $22.5 billion, but it fell by the same percentage from the first quarter.

    The mean estimates of analysts surveyed by Thomson Financial were for earnings of 54 cents a share on revenue of $280 million.

    “We anticipate that the second half of 2007 and 2008 will continue to be challenging for the mortgage and housing markets and for IndyMac,” said Chief Executive Michael Perry, echoing the recent projection by its larger competitor, Countrywide Financial Corp. But Mr. Perry refrained from the lender’s normal practice of offering earnings forecasts, citing “the significant current uncertainties in the housing and mortgage markets and, in particular, in the secondary market.”

    Record defaults on “subprime” mortgages, or home loans to people with poor credit, have significantly dampened investor demand for mortgage-backed securities in recent months. The resulting reduced liquidity in the secondary market has narrowed profit opportunities for home lenders in general.

    IndyMac specializes in offering so-called Alt-A mortgages, or loans to borrowers whose credit is deemed good enough to forgo proof of claimed assets or income. The Pasadena, Calif., lender said nonperforming assets jumped 342% to $516 million in the quarter, representing 1.63% of its total assets. A year earlier, non-performing assets accounted for 0.49% of its total assets.

    “While our recent guideline tightening has improved the quality of our loan production, additional deterioration in the housing market could further increase our credit costs,” Mr. Perry said.

    Return on equity, an important measure of profitability, came in at 8.6% in the second quarter, compared with 24.1% a year earlier. When the company released its first-quarter results in April, IndyMac projected a return on equity of “roughly” 10%.

    Mr. Perry attributed the ROE shortfall to the delay of a $24 million pretax gain to the third quarter instead of the second quarter. Mr. Perry said the second-quarter ROE would have been 11% if the $24 million gain was recorded in the second quarter.

    IndyMac recently laid off 400 employees, or about 4% of its work force, to cut costs amid the persistent housing slump. “This action is all the more painful given our long-standing and openly stated philosophy of being opposed to layoffs,” Mr. Perry said in an email sent to employees.

    IndyMac shares, which closed Monday at $21.69, have been down 52% this year.

  20. vlad says:

    Does anyone have thoughts on resale value for Morris county vs. Bergen County? Current number of months inventory, etc.?
    thanks

  21. Rich In NNJ says:

    Due to having two links in my post I’m in “moderation”. So here they are with out the links.”

    From MarketWatch

    Consumer confidence index highest since 9/11

    The consumer confidence index rose to 112.6 from a revised 105.3, ahead of expectations of a gain to 106.0.

    The present situation index rose to 139.2, also the highest since August 2001, from 129.9 in June, while the expectations index rose to 94.8 from 88.8.

    U.S. construction spending down 0.3% in June
    Outlays on private residential projects down for 16th straight month

    This is the first drop in construction outlays since January. Despite the string of increases, construction spending is weaker so far this year than last. During the first six months, construction spending was 3.5% below the same period in 2006.

    Economists had anticipated an increase of 0.1% in June, according to a survey conducted by MarketWatch.

    More at the links above, Rich

  22. Rich In NNJ says:

    crap, italics off

    Sorry, Rich

  23. 3b says:

    324 Rich Kind of strange, consumer appearing to be bipolar in economic outlook.

    On one hand concerns on the down turn in housing, and yet consumer confidence high.

    Sounds likt the consumer does not which way to go.

  24. bi says:

    26#, 3b,
    > Sounds likt the consumer does not which way to go.
    consumer knows which way to go – buying something and improving quality of life. they knows holding money in the bank is worst even at 5% interest rate today. They are smart to know that we are living in the environment of global inflation in every asset classes (equity, oil, gold, RE, FX and etc.)

  25. make money says:

    Consumer confidence index highest since 9/11

    The consumer confidence index rose to 112.6 from a revised 105.3, ahead of expectations of a gain to 106.0.

    The present situation index rose to 139.2, also the highest since August 2001, from 129.9 in June, while the expectations index rose to 94.8 from 88.8.

    I’ve posted here in the past that we shoudl never underestimate the American Consumer. We are all astupid bunch of materialistic gotta have beings and we’ll borrow untill the cows come home.

    We have no economical sense as a nation from the feds, state, and local gov’t to the Wall street folks and all they way down to mechanics and folks working for minimum wages.

    Consumer will continue to keep buying and housing bust is viewed as a challange or a small obstacle and consumer will figure out how to borrow some more so that they can buy some more.

    Buy a Plasma at Best buy and make no payments with no interest for 12 months.

    Buy most new cars and pay no or low interest.

    It’s not just the lenders with the loose credit it’s also the manufaturers.

    My cousin who’s going in that house with 60% of his income into mortgage, with no savings, two mortgages, one salary, and 15K in cc debt says ” I don’t know how I’m gonna pay for the mortgage but I’m gonna have to do it somehow”

    That’s the All American Consumer Confidence at it’s best.

  26. 3b says:

    #28 MM: Believe it or not, I agree with you. That being said, it is no way to live, with all due repsect your cousin is insane IMHO. However,at some point the piper has to be repaid,a d the bill is going to be a shocker.

    And as time goes buy, less and less people will be able to do what your cousin is doing, if they cannot get financing for the house (as in the sub-prime meltdown)

    So they can buy the Plasma TV, just not the house to put it in.

  27. 3b says:

    #27 bi Except for real estate, as prices are dropping every day,as far as the rest of your post, it is incomphrensible as always.

    Consumer confidence,as in going out and buying stuff, has nothing to do with global asset inflation.

    And you call that smart? Prices are dropping bi, and will continue to;accept it and move on.

  28. skep-tic says:

    #27

    here we go again with the baseless cheerleading.

    Have you looked up the concept of risk adjusted return yet? Cash is not looking too bad on that basis.

    Consider:

    S&P is up 4.26% YTD. Volatility has spiked.

    Spreads between corporate debt and treasuries have been at record lows until recently. The quality of much corporate debt has been vastly overestimated. Bonds are undercompensating investors

    Residential RE is down for the year. REITs are down as well. Gold ETFs are not beating cash and are far more risky.

    FX is not a suitable investment class for non-professionals.

    So where exactly are you finding a better risk adjusted return than cash right now?

  29. Rich In NNJ says:

    “bi,

    Glad to see you’re back, maybe you can reply to my post from yesterday.

    bi,

    You’re comparing Alberta, Edmoton CA to West Windsor, NJ USA?
    Why?
    Aside from the fact that what someone ASKS for their home and what it sells for makes your comparision a moot point, the difference in tax stucture alone makes your comparison assine.

    Also, you never answered everyone’s question.
    What is the catalyst for prices rising 100% in “certain areas” in the next 5 years?
    Are you expecting 20% per year for 5 years?
    Also, what areas?

    Rich”

    And what ARE you trying to say in post 28 above?

  30. Rich In NNJ says:

    bi,

    I guess that would post 27 above due to my previous comment being in moderation.

    Rich

  31. HEHEHE says:

    Libel suit against Mortgage ‘Implode-O-Meter’ to proceed
    Judge rules lender may have been damaged by site’s postings

    http://www.inman.com/inmannews.aspx?ID=64048

  32. John says:

    John Says:
    July 31st, 2007 at 8:25 am
    Prices will drop. American Home Mortgage actually had a popular product that combined a 2/28 or a 3/27 with a teaser rate that was an IO that also allowed for neg am of the teaser rate in the first few years. In other words you did not even have to pay all the IO. You could borrow a million bucks for around $1,700 a month in this deal. Now flash forward to today where that loan will reset for a alt a guy that is leveraged into a 30 year at 8%. That loan goes from $1,700 a month to $8,000 a month. But even better the house fell in value so the homeowner has negative 100K equity so the bank wants to see you show up with a check for 100K at the refinance.This is the type of crap AHM has been marketing and is on their books which is why they are getting impaired big time on their mortagage holdings.

  33. John says:

    FYI in Canada you cant deduct mortage interest which automatically gives it a haircut of 20% to US housing prices, EHHHHHH

  34. thatBIGwindow says:

    I blame the “gotta have it now” on the baby boomers. Baby boomers were raised by parents who for the most part had very little. Boomers became parents and raised kids to have what they didn’t as kids.

  35. Theo says:

    #37

    So really you are blaming the “Greatest Generation”TM.

  36. BC Bob says:

    bi [27],

    How did global inflation fare when Volcker was at the helm.

    By the way, if you bought the S&P’s in early 2000, and held, you are under water. Now figure in real returns, down 20%? The nasdaq is approx 50% off its 2000 highs. Real returns? How’s that for your global inflation scenario.

  37. scribe says:

    30 years ago, credit cards weren’t in such wide use for every day purchases.

    When I got my first Visa 25 years ago, I had to go through a lot of hoops, even though I had substantial cash in the bank and no debt. They wanted me to open up department store credit cards to establish a credit profile before I could get a Visa – from the same bank where I had substantial cash on deposit.

    Even in the early 80’s, credit cards were more for business purposes. I needed one because I was starting to go on business trips.

    Also true – 30 or 40 years ago, there wasn’t the same sense that it was OK to go deep into hock to fund undergraduate or graduate degrees, unless it was law or medicine, where there was a surer payback.

    So many kids these days come out of school so burdened with debt.

  38. dreamtheaterr says:

    #37 and #38,

    If kids are brought up in McMansions with the ‘gotta have it all now’ values being passed down by their parents (some of who are presumably living beyond their means), what do the kids do…. they go and buy a BMW straight out of college. Which leads me to my next question – how much satisfaction can you next derive from trading up further in another 5-10 years when you’re already driving a BMW in your 20s? How much more debt needs to be incurred to continue fulfilling this voracious consumption?

    I am not blaming anyone; just trying to figure out the rationale behind this conspicuous consumption.

  39. 2cents says:

    BC Bob(39) said:

    The nasdaq is approx 50% off its 2000 highs. Real returns? How’s that for your global inflation scenario.

    do not confuse paper assets with hard assets.

  40. skep-tic says:

    #41

    people tend to focus on the members of society who abuse debt to finance lavish lifestyles, but I think the majority use/abuse debt these days simply to maintain their standard of living in the face of rapidly rising prices for everyday items and stagnant or modestly increasing income.

  41. HEHEHE says:

    Scribe(40)

    There was an excellent edition of Frontline re the rise of the credit card industry that details what you are talking about. Basically documents how it went from being something that only those with good credit histories could obtain to a mass marketed debt expansion tool. Essentially the banks realized they could make more money on the late fees and monthly interest if they made it available to everybody than they’d lose in defaults. They go all the way fro the early 80’s through to the bankruptcy bill that passed a few years ago.

  42. Stu says:

    43: skep-tic… I disagree.

    In the past two weeks I have had two different friends ask me about mortgages. They both have piggy back Helocs since they did not put 20% down. They both live in nicer houses than me, they both drive nicer cars and they both have AGI’s that are at least 30% less than mine, not to mention credit card debt (of which I have none). I know most of my other friends have large credit card debt, but they brought their homes prior to the bubble so they managed to save and pay the 20% down.

    IMO, it is about these people having been spoiled when they were growing up and trying to maintain the lifestyle in adulthood (not to mention spoiling their kids) even though they can not possibly afford to without going into serious debt.

  43. BC Bob says:

    “do not confuse paper assets with hard assets.”

    2 cents,

    I don’t even know where to begin? Probably best to go back into the archives and read my posts regarding inflation, the dollar and metals.

  44. chicagofinance says:

    BC Bob Says:
    July 31st, 2007 at 11:42 am
    bi [27], By the way, if you bought the S&P’s in early 2000, and held, you are under water. Now figure in real returns, down 20%? The nasdaq is approx 50% off its 2000 highs. Real returns?

    Bost: shhhh…you are committing Bogle Vanguard sacriledge :( :( :O

  45. make money says:

    Americans have been spending too much for decades without any regards for long term consequencesand every year the bears were wrong predicting the doom and gloom.

    The same is happening now.

    I know this has to end at some point and this nation will go into a deep recession without ruling the possibility of a depression, however it doesn’t look like it’s gonna happen soon. Whether it’s the techs, housing, equities something is going to propel the consumer to keep buying.

    This time it looks like it’s gonna be global economic growth which comes at the same time as the super weak dollar.(coincidence).

    Pretty soon these emerging markets will need our services and you’ll see wall street guys taking jobs in Europe, Accountants going to India, Attorney’s going to China, etc.

    What I’m saying in a nutshell is that we are not going to see a recession anytime soon and maybe none in our lifetime.

    Bears will keep saying just wait until next year and bulls will keep MAKING MONEY!!!!!!

  46. Pooch123 says:

    I dont see the sacrilege. BC Bob is right…

  47. Bystander says:

    3b Says,

    Does the piper need to be paid? I have perfect credit, no FC/BK, full doc, 20% down and proven fiscal responsibility yet Mr. Stated/Stated with a 600 credit score, 0% down and a BK can wait out the market and eventually land a mortgage. His penalty should be renting the rest of his life but yet he competes against me for a home. The “piper” bases his decisions on the market and potential profit, not on reality. In other words, the piper wants to keep attracting the mice. Until the flute breaks completely, the piper will keep playing his tune. When the mice are not following, he changes his tune until the mice come back.

  48. BC Bob says:

    “Bears will keep saying just wait until next year and bulls will keep MAKING MONEY!!!!!!”

    Make,

    Can you be a little more specific; what asset class/sectors?

  49. dreamtheaterr says:

    #47 Chifi, no Boglehead would take exposure to the Nasdaq directly. Secondly, no Boglehead owns only the S&P 500 index as a holding. Most likely, it’s their core holding. And they have the option to tilt to small, growth and value. And go international. Either through active or index funds. Bogleheads are not 100% indexers, and neither was Jack Bogle.

    I don’t understand why you take any opportunity to diss Vanguard. What disservice have they done to the investing public?

  50. Bloodbath in Winter 2007 says:

    Mostly agree with the ‘if your parents spent above their means, you will.’ My Dad spent above his means. Gave us a great childhood, though. Mom was far more thrify, but still gave us what we wanted.

    I got out of college, had a good job, but it was low paying (yes, under 30k). My Explorer crapped out and i bought a brand new Jetta. loved the car. But i couldn’t afford it. Payment plus insurance was like $520 a month.

    Then i moved into Manhattan! Ha. I was a pauper building CC debt. Met the girl i would eventually marry. She was making more than me, and saving like crazy. I got rid of the Jetta, hustled for freelance work in addition to the full-time gig, and next thing you know, i was able to, in two years, save enough to flip a house (out of state). All i do now is save (one key – writing down every cent you spend).

    We’re renting now, looking to get something on the cheap in the winter. We’ll put down 20-30% and I’ll still have enough for a point A-point B car and furnish the house and have 6 months worth of mortgage payments in ING just in case.

  51. thatBIGwindow says:

    VW’s = nothing but trouble

  52. Mike NJ says:

    Stu

    There is not a doubt in my mind that the Generation X and Y (I am one of them) contributed to this RE run we all have witnessed over the last few years. We are certainly a society of instant gratification and the big banks have tripped over themselves to provide us all with the noose to hang ourselves with. No one wants the “starter home” anymore. No one will deal with saving for years and years before putting at least 20% down on a house purchase. Between Madison Avenue getting so good at what it does to all the techno gadgets that are must haves (iPhone anyone?) as well as the BMWs and Hummers (pre $3 a gallon gas that is) it is really pathetic. We are run not by ourselves but by the suits in corporate America and it shows every single day, from the RE market to the stock market to the Whole Foods Market. I wish I knew how to get out of it all but this is where I am at a loss.

  53. thatBIGwindow says:

    Keeping up with the neighbors. My neighbors drive a $90,000 BMW. No way I can compete with that.

  54. Stu says:

    #54 Bloodbath:

    Congrats on seeing the light. Eventually you will be wealthy and will have a great early retirement if you stay to the path of saving.

    I have no clue what the hell the rest of my generation is going to do when retirement comes. Perhaps investing in Whiskas might not be such a bad idea.

  55. Rich In NNJ says:

    Yahoo reports riskiest housing markets:

    http://promo.realestate.yahoo.com/riskiest_us_housing_markets.html

    Note the word “promo” in the URL and the following at the bottom of the page:
    A REALTOR® is a real estate professional who is a member of the National Association of REALTORS®

    So it’s not an article as much as it is a PR piece by the NAR.

    Rich

  56. 3b says:

    #57 tbw 90K for a car, that is insane, unless of course it was in prestigious River Edge.

  57. skep-tic says:

    old habits die hard. I was amazed when I read last month that the average person still gets a new car every three years (the same as 30 years ago)– despite the fact that today the avergage auto loan is over 60 months.

    I think most people approach purchasing a house in the same way. You get married, have a kid and sometime just before or after, buy a house. This is what people do, so they stretch whichever way they can to do it.

    I’m sure most people here have met with baffled faces when discussing housing over the past couple of years. Most people just think that you do what it takes to cover the cost of admission. To proceed otherwise is to them like trying to live in some alternate universe.

    Debt is what makes this all possible. Maybe nobody needed as much of it 30 years ago, but everyone does now, so it is normal.

  58. fanshawe says:

    There are two types of VW owners:

    Those that have been stranded in the middle of nowhere. And those that will be stranded in the middle of nowhere.

  59. 3b says:

    #50 bystander: The piper is changing his tune, with the rapid elimiantion of the liar, no doc, no money down loans.

    That is IMHO one of the reasons there is so much inventory for sale;these buyers are rapidly disappearing.

    Buyers liek you will becoem fashionable again.

  60. Rich In NNJ says:

    I correct myself. Matt Woolsey writes “real estate” articels for Forbes.
    Mostly fluff pieces like ‘Paris Hilton’s Hollywood Hideaway For Sale’

  61. dreamtheaterr says:

    VW= vaingloriously worthless

  62. skep-tic says:

    interesting news from the WSJ Deal Journal blog:

    “According to the credit-default swap market that traders use to bet on corporate creditworthiness, Goldman, Bear Stearns, Lehman Brothers and Merrill Lynch are no more likely to pay their debts than companies that are junk-rated. This story in Bloomberg says the CDSs of the firms trade as if they had credit ratings in the high non-investment grade range. That is as many as seven notches below their actual, investment-grade ratings.”

  63. 3b says:

    #48 MM “What I’m saying in a nutshell is that we are not going to see a recession anytime soon and maybe none in our lifetime.”

    That is delusional, possible no recession in our life time? I would not hold my breath on that.

    Sounds like the late 90’s, new economy, new paradigim, and all the rest.

  64. Stu says:

    #56 Mike NJ Says: Help me!!!

    Start small and go from there. Rather than wasting your time reading a real estate blog, check out fatwallet.com. That site alone has saved me thousands of dollars. But most important, don’t buy what you don’t need. I am now 36, have a prestigious degree from Montclair State College, but have made it to 6 figures in 13 years in the workforce. I started in 1993 and accepted a position where I was making $18,000/year. I bought my first car in 1995 (a new Honda Civic Hatchback) and I drove it to work today. I guess if there were 3 places that people waste the most dough, it would have to be their cars (which is beyond me why someone needs a fast car to sit in Jersey traffic), they eat out too often (my wife and I take our own lunch to work saving us $300/month and only eat dinner out with buy one get one free coupons) and frivolous multimedia purchases such as digital cameras, Ipods, cell phones, flat-screen TVs, video games, CDs, Broadband, Cable, etc. If you cut back on these three, you will probably save upwards of $1,000 a month. In 2 years thats $25,000 with interest. In 4 years you should have closer to 100,000 and a huge down payment on a better than starter home. If you start small and continue to increment your savings, you’ll find it addicting. And when your friends get foreclosed out of their homes, you can buy the home from them and offer to rent it to them ;)

  65. Robert says:

    just my daily test

  66. Robert says:

    “There are two types of VW owners:

    Those that have been stranded in the middle of nowhere. And those that will be stranded in the middle of nowhere.”

    Good one! I have a Honda, pretty reliable. When I had an accident and totaled another guy’s POS American made minivan, my car kept running even though the front was totally smasged up.

    FYI: The guy who owns that Mortgagae Impode O’ Meter is the one who just bought the domain name to Case Serin’s blog. I think he paid $20,000. I wonder what JB can sell this blog for. He should take the money and run, use it as a down payment for when he finally decides to buy a house!

  67. bi says:

    a chinese emperor asked his personal doctor: “how can i live longer?”
    “you should reduce sex” the doctor replied. The emperor shouted back: “what’s the point to live longer?!” and had the doctor killed on the spot.

  68. Stu says:

    #61 says “Debt is what makes this all possible. Maybe nobody needed as much of it 30 years ago, but everyone does now, so it is normal.”

    This is the problem in a nutshell. It is NOT normal to need debt, but you’ve bought into the mass consumption that is sold to you everywhere you look. You DON’T have to keep up with your neighbors, for when the credit hammer drops, it will drop on you as well.

    The answer is quite simple actually. Live within your means. When your means increase, save a little bit of it. Why is it so hard for people to comprehend this?

  69. 3b says:

    #72 Because other people will think they are poor, that is what is means to be successful today, not having others think you are poor.

    Howver, it is a malady of the middle to upper middle class, the truly wealthy know the value of a buck, its one of the reasons they are wealthy.

  70. dreamtheaterr says:

    Stu, thanks for your response yesterday on how to go about a mortgage hunting process. That tidbit on creating a PDF file was a gem.

    When I went hunting for finance for my first car, I initially got a 9.8% rate due to a low credit score because of minimal credit history. When I showed them my credit card and brokerage statement and said I can pay cash but prefer to finance to build credit history, they dropped my rate to 4.25%.

    I think people with finances on the edge leave more at the table since they have less room to maneuver.

  71. 1987 Condo Buyer says:

    #68 Stu

    Excellent!
    In addition to bringing lunch to work, my wife and I used coffee bags and free hot water to make coffee at work. I calculated it was $0.13 per cup cost.

    First new car at age 30. Got 10 years out of my last American car, now have Honda and Toyota, expect 10-12 from each.

    How does ever young woman afford manicures, etc?
    We nixed those from the budget 20 years ago!

  72. Robert says:

    Off topic for a minute…

    What all you guys said about buying in the Gold Coast is completely true. Don’t buy there. Everytime there is heavy rain, River Road goes completely underwater (banks require you to have flood insurance when you buy) and then there are construction issues. At last count, there are 2 condo complexes that are in danger of falling to the bottom of the Hudson River, one in Edgewater and another in Weehawken. And then there is my house, which might be sliding down a hill one day. Oh, and when you get hunry, don’t go to the Chart Restaurant on River Road, the parking lot is beginning to collapse and is failling into the water. When you go in to eat and come out, your car will be in the river!

    Of course, 99% of the buyers could not care less about the problems I stated above because all they care about is (quoted from hundreds of Kannekt posts):

    1. NYC Views
    2. Proximity to the PATH
    3. Did I mention NYC views?

  73. Stu says:

    I agree dreamtheaterr. Nothing is the key to greater savings than good credit. I took out a jumbo loan at 5.5% when I could have almost paid cash to buy my home. Why? Because I can get 5.5% back on my money from ING or in my case, the Apple Bank of NY. The mortgage deduction is just the gravy. The banks offered me $800,000! But what the hell would I do in a million dollar home. I only have a wife and a 2-year old son. I settled for a 2-family in Montclair where my tenants pay over 1/3 of my housing costs and I get to depreciate most of my other purchases/or at least a portion of it ;)

  74. Robert says:

    “But what the hell would I do in a million dollar home”

    A million dollars is nothing today. In an increasing number of Bergen towns, it buys you a teardown. I know of two teardowns in my town: one sold for $1.1 million in the first week it was on the market and the other sold for $2 million last year. Of course, they have NYC views so all the rules of real estate go out the window when we talk about buying with views.

  75. Devil's advocate says:

    #68 – that is one sad story. These never ending rants about spending, McMansions, River Edge, etc. are so boring – this blog is constantly losing its value. If you guys weren’t so house envious may be, just may be you wouldn’t feel the need to flaunt your savings habits.

  76. Mike NJ says:

    #68 Stu

    Thanks for the advice but what I really meant was “Help Us”

    I am pretty good about saving and I was able to live in the POS apartment for 8 years in Manhattan while saving up a couple hundred thousand for the DP on the starter home.

    I was mostly talking about the 99% of the population that has no idea they are being manipulated into a never ending cycle of debt that will leave them homeless and dependent on medicare/medicaid in their retirement years with no savings to speak of. By the mere fact that we are reading this blog it shows that we at least are interested in the world around us and economic impact of a deteriorating housing market. Those of us that save-save-save as much as possible will inevitably be hurt by the spenders around is in our later years. The train is on the track and it is not slowing down despite the collapsed bridge ahead.

  77. Robert says:

    #79

    I am not sure who here is flaunting their “wealth.” THe only thing I ever hear about on this site is POS capes. Not sure why a “rich” person would want to talk about POS capes all day long, unless they are planning on buying one for $600,000 in order to knock it down a build a McMansion. But most people here hate McMansions and anybody who hates McMansions is jealous they can’t afford one so this is a pretty poor site. We are all broke! Can you spare us some change?

  78. thatBIGwindow says:

    Robert, what is so great about McMansions? They are mostly cheaply and poorly constructed and that huge window showcasing the Home Depot chandelier on all of them is pretty ugly and repetitive. Give me a home constructed in the 1920s…oh wait, already have one!

  79. Stu says:

    I’m in a different place entirely. I hope that home prices drop enough so I can buy my 2nd home (at a fair price) and will rent out both units of my 2-family in Montclair. My biggest fear is property taxes and how it will impact my rental investment. Currently the home will be close to break even, but I can’t raise rent $500/year for each tenant and that is the speed in which my taxes are increasing. This problem I have taken up with my mayor and town council who spend like children in a candy shop. I have threatened to show up at a town meeting in nothing but a barrel.

  80. Bloodbath in Winter 2007 says:

    Actually, the VW was an awesome car. Wish i could say the same for the Ford Explorer … but I’ll never buy Ford again.

    Speaking of cars … just got back from LA and everyone out there has a luxury vehicle. It’s sickening.

    At times, it’s annoying to not have a new computer, flat screen TV, etc, etc … but what everyone seems to forget is that technology seems to reset each year now … so why buy a brand new camera for $500 when it’s going to be $300 in 12-18 months? Why buy a flat screen for $3,000 when in a year it’ll be $1,500?

  81. BC Bob says:

    “If you guys weren’t so house envious”

    [79]

    I’m not house envious. Just decided to get out of dodge when RE became as big of a mania as nasbomb.

  82. make money says:

    http://money.cnn.com/2007/07/31/news/companies/american_home.reut/index.htm

    Can you say asset liquidation for AMH.

    Wow last year they originated ove 60 billion in loans and purchased Flower bank in Illiniois and today they are selling assets for pennies on a dollar.

    What’s going on?

  83. Robert says:

    “Does anyone have thoughts on resale value for Morris county vs. Bergen County? Current number of months inventory, etc.?”

    Bergen is closer to NYC so it has better resale value. Of course, Bergen is a HUGE county so you need to narrow it down to a specific town.

  84. Robert says:

    “My biggest fear is property taxes and how it will impact my rental investment. Currently the home will be close to break even, but I can’t raise rent $500/year for each tenant and that is the speed in which my taxes are increasing. This problem I have taken up with my mayor and town council who spend like children in a candy shop. I have threatened to show up at a town meeting in nothing but a barrel.”

    If you actually show up in a barrel, can you bring a hidden camera and post the tape on YouTube? I would love to see that tape!

    When I lived in Edgewater, they would raise property taxes at 2 a.m. to make sure that none of the property owners could protest.

    And a $500 a year rent increase for each teneant does not sound so bad. That is $40 a month. You should raise the rent!

  85. was looking says:

    Not sure if anyone got this video from the street.com yesterday, doesn’t qualify as ‘news’ but rationale of a market insider. You will have to scroll the list of videos, 5th down or last posted from yesterday.

    Your House Is Down 20%? Walk Away

    07/30/2007 01:37 PM EST
    It’s smart to sell your home when it lacks equity, says Jim Cramer.

    URL long too:(

    http://videoplayer.thestreet.com/?clipId=1373_10371347&channel=Cramer+On+Demand&cm_ven=&cm_cat=&cm_ite=&puc=tscnav&ts=1185903607936

  86. Clotpoll says:

    Stu (72)-

    I have my own personal theory on this. Expanded a little, it also serves as an explanation for the general underestimation of risk so prevalent the past few years:

    It’s all about 9/11. After that event- the ultimate “bad day”- how can ANY possible outcome to anything be as bad? How can it not be easy to slip into a collective “live today, for tomorrow we die” mindset?

    I’m not saying this is a concsious choice on the part of individuals, communities or Wall Street. In fact, the unconsciousness of it is what makes it so insidious. It’s one thing to be self-aware; it’s quite another to have a mutation of bad attitude seep quietly into your DNA.

    I’d love to meet some brokerages’ risk managers and find out what their mindset was in the days following 9/11. Moreover, I’d like to be able to evaluate their decisions before- and after- that date. I bet you could extrapolate some very interesting patterns of behavior from the data.

  87. 3b says:

    #79 The River Edge thing is an inside joke, between myself and another poster. Has nothing to do weih jealously or knocking the town or anything else.

    This site was founded on the premise that there is or should I say was a housing bubble (its now bursting), if you do not agree with that premise, than as another poster said yesterday do not visit here, simple as that.

    If you believe as a Bull you have something of note to offer, than fine, but it appears you do not.

    You can join the other Bulls, who offer some of the following advice:

    1. Real Esate is always a good investment regardless of price.

    2. Real estate out perform all other asset classes.

    3. Property taxes and upkeep and maintenace do not matter.

    4. If you do not buy now you will be priced out forever.

    5. You are jealous.

    6. Hoping (and now seeing) price declines is evil, as some people are going to get hurt by them. So we are are wishing pain and grief on these people, even though for many it will be their own fault, but so what, we should pay for their mistakes.

    7. All posters here live in apartments, huddled together with their children (for those posters who have children)

    8. We bring down the neighborhood,and are less successful, and we probably have cooties.

    We have 1 poster who is obsessed with his house he is trying to sell on the gold coast (you know who you are)

    We have one poster who was one of us, but has now converted, who believes that there can be no decline in his town.

    We have another one who believes recessions my be a thing of the past (he is entitled to his opinion, but if we are accused of doom and gloom, I would rather that, than live in fairy tale land)

    And finally we have one who speaks in tongues, who made the now famoues statement that “prices in certain areas will double in the next 5 years before bursting”, but offers no explanation.

    So if the Bulls who do visit this site are tired of the same old, same old YAWN, perhaps you need better advocates for your postition. Because guess what we are tired of yours.

    Oh and I do not like McMansions, simply becasue I consider them ugly, nothing more.

  88. BC Bob says:

    “Wow last year they originated ove 60 billion in loans and purchased Flower bank in Illiniois and today they are selling assets for pennies on a dollar.”

    “What’s going on?”

    Make,

    Just refer to your previous post.

    “Bears will keep saying just wait until next year and bulls will keep MAKING MONEY!!!!!!”

  89. Read My Lips: Price are going down down down says:

    M-E-L-T-D-O-W-N COMING TO A HOOD NEAR YOU.

    No Refi’s to bailout you grubbers.

    hehehehehehhe

    BOOOOOOOOOOOOOOYAAAAAAAAAAAA

    Bob

  90. Read My Lips: Price are going down down down says:

    Strong financials OWN this housing market.

    Buyer pool has just been reduced by 2/3 .

    HEHEHEHEHHEHEHEHEHEHE!!!!!!!!!!!!!!!!!!!!!

  91. lostinny says:

    Exactly how many mortgage companies have to go under before people realize that RE is f*ucked?

  92. Read My Lips: Price are going down down down says:

    No more refi bailouts, no more dream prices no more housing ATM No More commish No more Spin No more Prime cut.L-E-A-N T-I-M-E-S ARE HERE.

    How’s the dog chow starving bunch?

    This one is for you. Young buyers with an attitude. It’s payback time Baby!

    hehehehhe

  93. make money says:

    July 31 (Bloomberg) — American Home Mortgage Investment Corp., the lender whose shares stopped trading yesterday after it disclosed a cash shortage, said it’s unable to fund new loans and may have to liquidate assets.

    The company has been cut off from credit and didn’t have money yesterday to make $300 million of mortgages it had already agreed to provide, the Melville, New York-based company said today in a statement. American Home said it anticipates $450 million to $500 million of loans probably won’t get funded today.

    American Home said it’s “seeking the course of resolution, in this environment, that is least disruptive to its business and to the many thousands of homebuyers to whom it has committed to provide mortgages.” The company said it hired Milestone Advisors and Lazard Ltd. to evaluate “strategic options.”

    Imagine you’re going to a closing and your mortgage company says it’s broke and can’t get a loan…better yet imagine if you’re a seller and were hoping to unload before sept 1st(clot’s deadline). This sucks.

    The management of this company are a bunch of crooks. They need to go to jail.

  94. Read My Lips: Price are going down down down says:

    Some grubber has gots to pay. And they ain’t know it yet!

    GOT IT

    GOT IT!

  95. scribe says:

    #76

    More parody?

    “At last count, there are 2 condo complexes that are in danger of falling to the bottom of the Hudson River, one in Edgewater and another in Weehawken. And then there is my house, which might be sliding down a hill one day. Oh, and when you get hunry, don’t go to the Chart Restaurant on River Road, the parking lot is beginning to collapse and is failling into the water. When you go in to eat and come out, your car will be in the river!”

  96. Read My Lips: Price are going down down down says:

    Prices are going down down down down going down down down down

    Young buyers with an attitude it’s time to start smacking your lips and rubbing your hands togehter.

    It’s payback time baby. You have been stepped on lied to and abused.

    Make’em pay!

  97. bi says:

    AHM at $1.45. down 86%. good time to make quick bucks

  98. Read My Lips: Price are going down down down says:

    hehehehehehehehehe!!!!!!!!!!!!!!

  99. Rich In NNJ says:

    bi,

    How about it? Care to make sense of your posts or should everyone ignore your statements going forward?

    “bi,

    Glad to see you’re back, maybe you can reply to my post from yesterday.

    bi,

    You’re comparing Alberta, Edmoton CA to West Windsor, NJ USA?
    Why?
    Aside from the fact that what someone ASKS for their home and what it sells for makes your comparision a moot point, the difference in tax stucture alone makes your comparison assine.

    Also, you never answered everyone’s question.
    What is the catalyst for prices rising 100% in “certain areas” in the next 5 years?
    Are you expecting 20% per year for 5 years?
    Also, what areas?

    Rich”

    And what ARE you trying to say in post 27 AND 71 above?

  100. bi says:

    104#, Rich, don’t you think tri-state area is cheaper when you compare these two houses? consider the income level and location. in addition, we have big tax benefits to offset higher property tax.

  101. bi says:

    104#, you assume you can take 20% off from ASKS for any property. that is not the case in current market. buyers jumped in when the price came down to the right value.

  102. Bloodbath in Winter 2007 says:

    Nobody takes Bi seriously, Rich, dont even waste your time.

    Same deal with the Troll … he just makes outlandish statements for the sake of it. And to try to get everyone made at him. These people like to be the center of attention.

    Had a friend email me that he’s close to buying a house. Fool! I told him a few things to do (all tips i have learned here) and to get back to me. He wasn’t even checking to see what the house previously was bought for!

  103. 3b says:

    #106 bi: who said take 20% fo any property, and one if they wanted to , could bid 205 off any property, does not eman it will be accepted.

    “buyers jumped in when the price came down to the right value”. Have no idea what you are talking about there

  104. BC Bob says:

    “AHM at $1.45. down 86%. good time to make quick bucks”

    bi,

    Nothing more than an option that does not expire. Can the firm say the same.

  105. Stu says:

    90: Clotpoll “It’s all about 9/11. After that event- the ultimate “bad day”- how can ANY possible outcome to anything be as bad? How can it not be easy to slip into a collective “live today, for tomorrow we die” mindset?”
    ——————————————-

    Interesting theory, but I think it was in play prior to 9-11. Just not so much in real estate. I worked close enough to the WTC to see the jumpers. I might be the anomaly, but if anything, witnessing the incident that day made me fear an economic recession brought on by the fear of additional potential attacks. You are entitled to your theory and it is interesting, but I don’t buy it.

    I think people KNOW what they are doing, but expect a bailout. They do this under the auspices of ‘everyone else is doing it!’ I’ll move to Mexico long before I pay for the foolish mistakes of my compatriots.

    Skep-tic made it very clear in #61 when he said “Debt is what makes this all possible. Maybe nobody needed as much of it 30 years ago, but everyone does now, so it is normal.”

    IT IS NOT NORMAL. It is foolish.

  106. njrebear says:

    No Booyah Bonus for Wall Street

    CRAMER – BONUS POOLS ON WALL STREET EMPTY

    http://videoplayer.thestreet.com/?channel=Cramer+On+Demand

  107. chicagofinance says:

    make money Says:
    July 31st, 2007 at 2:06 pm
    http://www.bloomberg.com/apps/news?pid=20601087&sid=aRYRpmo5xWEo&refer=home
    This is insane!!!!!!!!!!

    mm: why? Standard operating procedure. You simply do not usually pay attention when it is happening.

  108. chicagofinance says:

    dreamtheaterr Says:
    July 31st, 2007 at 12:44 pm
    #47 Chifi I don’t understand why you take any opportunity to diss Vanguard. What disservice have they done to the investing public?

    Yan: Vanguard and Fidelity – I look at them as one ball of wax, but for benefit of your question, I will focus on Vanguard.

    Vanguard and its marketing arm (a.k.a. Money Magazine) foist a mantra on the public about approach, fees, expenses – essentially they lay claim to the moral high ground. Immediately this should be a red flag.

    Morningstar database as of 6/30/07
    261 Vanguard funds, of which
    182 Equity funds, of which
    ONLY 13 5-Star funds

    Vanguard Capital Value – Large Value
    Vanguard PRIMECAP – Large Growth
    Vanguard Energy – Specialty-Natural Re
    Vanguard Cap Opp – Mid-Cap Growth
    Vanguard Pac Stk Idx – Japan Stock
    Vanguard Morgan Gr – Large Growth
    Vanguard Pac Stk – Japan Stock
    Vanguard Wellesley – Conservative Allocatio
    Vanguard Health Care – Specialty-Health
    Vanguard Prec Mtls Mining – Specialty-Precious
    Vanguard Energy Specialty – Natural Res
    Vanguard Global Equity – World Stock
    Vanguard Cap Opp – Mid-Cap Growth (note: considered large cap by Morningstar despite name)

    MY INDICTMENT: Vanguard has a serious deficit in intellectual capital devoted to financial valuation. As a result, a handful of individuals are charged with running heaps of money. It functions more as a trustee of assets that a true money management operation.

    Classic bait and switch – focus on low expenses, focus on the few funds that are strong performers. THEN – stuff everyone’s pockets with mediocrity offered on the cheap.

    Vanguard specializes in managing institutional money.
    – 401(k), 403(b), and savings plans
    – pensions
    – 529’s, government controlled investment pools

    EVIDENCE: go to any investment that you own that is run by Vanguard and examine it closely. You will see one or two of the above investments and a whole slew of other detritus.

    THE RUSE: Vanguard is X, Y, Z,
    John Bogle blah, blah, blah,
    altruism,
    dogs and cats living together in harmony,
    Kum ba yah, my Lord, kum ba yah

    THE CYA:
    I don’t understand why [INSERT STAKEHOLDER is] tak[ing] any opportunity to dis[respect] Vanguard. What disservice have they done to the investing public? [We made the most prudent and defensible choice for our stakeholders].

    TEFLON INVESTORS/FIDUCIARIES CHOOSE VANGUARD

  109. Rich In NNJ says:

    don’t you think tri-state area is cheaper when you compare these two houses?

    Why didn’t you pick some of the huge Canadian McMansions instead?
    And once again, you can’t use asking prices for a comparison. You need sold data.

    you assume you can take 20% off from ASKS for any property

    When did I say this?

    But I never had any questions about your Canadian comparison. I had questions about your other statements.

    What is the catalyst for prices rising 100% in “certain areas” in the next 5 years?
    Are you expecting 20% per year for 5 years?
    Also, what areas?

    Nobody takes Bi seriously, Rich, dont even waste your time.

    I’m leaning your way on this, I just want to give him a chance…

  110. John says:

    I laugh out loud at that idiot who is cheap with the Honda, first of all he had a gas guzzing Ford Explorer and then he bought a brand new Honda, which makes no sense as buying new is a losing proposition, then he thinks 10-20% is a good down payment, BULLSHIT. If a house cost 300K in 1999 and the average buyer put down 20% they had a 240K mortgage. Puting down 20% on that same house in 2007 leaves you with a $480K mortgage, you should be putting down at least 40% on a house. 12 cent coffee is stupid, I get if for free at work, if his boss nickles nad dimes him on coffee he should quit. My friend worked at tyco in 2000 when they were bragging about profits while Dennis K was stealing left and right. He quit when the company went from two ply to one ply in the toliets. If the company can’t pay for two ply toliet paper and coffee get the hell out

    The AHM play is some cheap perferred, you might have a chance at some of the divend or cash in liquidation, the common stock is cooked and will be on the pinks before you know it.

  111. bi says:

    110#,
    debt is a great vehicle so that you can spend future’s money. IMH we should spend as much as possible. 30% of the money you saved will go to IRS and most of it is going to social programs, including foodstamps to abbott districts. the more you save, the more you become step father (mother) of the people you don’t like.

  112. John says:

    AHM just hit One Dollar and two cents a share, sweet.

  113. Stu says:

    Their P/E is down to a quarter. That’s really cheap. I would buy them here!

    So sub-prime tanked/Alt-A tanked/anyone think prime is at stake and if so which companies?

  114. njrebear says:

    AHM as of Mar 31 –

    top institutional holder –
    GOLDMAN SACHS GROUP INC – 6.9%

    top mutual fund holder
    HOTCHKIS AND WILEY MID-CAP VALUE FUND – 3.2%

    http://finance.yahoo.com/q/mh?s=AHM

  115. skep-tic says:

    I would just like to point out that I said lots of debt is “normal” because that is what most people seem to think and behave accordingly.

    Saying it’s “normal” is not the same thing as saying it’s wise or good.

  116. Stu says:

    Gotcha

  117. Pooch123 says:

    Whoa, Chifi, that’s a lot to digest but here’s my thoughts.

    I think its unfair to judge all Vanguard and Fido investors, I don’t think most expect altruism and kum ba yah, etc. I was drawn to Vanguard because of low expenses so I guess I’ve fallen for the “bait.” But so far there has been no “switch.” I signed up to get access to a few low-cost index funds and no one has pushed mediocre actively managed funds on me. The two stock funds I invest in are NOT 5-star Morningstar mutual funds but they do give me exposure to the Total US Stock Market Index and the Total International Stock Market Index (4-star Morningstar funds, not that this means anything) for a fraction of the price of what competitors charge. Also, Morningstar’s rating system is based on past performance and past performance is not a very good predictor of future results. Finally, to an educated investor, the fact that a handful of people run heaps of money is not a bad thing. You don’t need a ton of people to run passive investment funds and so far Vanguard and Fido seem to have done a good job in that regard. And honestly, who reads Money Magazine?

  118. dreamtheaterr says:

    Chifi, I appreciate your alternate views and time taken for your response.

    “Morningstar database as of 6/30/07
    261 Vanguard funds, of which
    182 Equity funds, of which
    “ONLY 13 5-Star funds”

    You’re double counting and considering an investor, admiral and institutional class fund as separate funds to come up with 182 equity funds. Vanguard has approximately 75 funds for retail investors.

    “ONLY 13 5-Star funds”
    But Morningstar 5 star ratings over what time frame? 1 yr, 3 yr, 5 yr returns? Why not include 4 or 3 star funds? I wouldn’t buy a fund just because Morningstar assigns a 4 or 5 star rating since these ratings have zero predictive ability of future outperformance. How about some comparisons of Vanguard to other firms?

    Investors have a choice to allocate money – whether it be investing directly through Vanguard or broker-sold American Funds. I don’t think Vanguard ever lays claim to taking the higher moral ground. They just allow retail investors to instead vote with their wallets.

    Over the the long term, I still feel Vanguard, and other few firms I have mentioned before (Oakmark, Longleaf, Fairholme, T Rowe, Dodge & Cox) offer 95% of investors a reasonable way to have access to the equity markets without losing a huge chunk to broker up-front and trailing commissions, bid-ask spreads costs via active trading, taxable distributions due to excessive turnover, excessive annual expense ratios. Where is the net alpha being consistently created by other ‘money management firms’ after all these barriers?

  119. chicagofinance says:

    “Also, Morningstar’s rating system is based on past performance and past performance is not a very good predictor of future results.”

    should read
    “Also, Morningstar’s rating system is based on past performance and past performance is not [necessarily] a [..] good predictor of future results.”

    So in order to defend Vanguard, you are devaluing Moningstar?

    I understand defending Vanguard, but Fidelity is a different story. They are absolutely the worst. Even their signature funds are all growth style, so they have actually underperformed consistently for at least 5 years. Further, they play musical chairs with their PM’s, so you have no clue what you are getting. Style-drift abounds.

  120. chicagofinance says:

    Morningstar assigns a 4 or 5 star rating since these ratings have zero predictive ability of future outperformance.

    ZERO?

  121. Stu says:

    I agree Chifi. Morningstar ratings are pretty much based on the past annual performance. I read a study where funds that lead their class over the past 3-5 years did worse than the funds that trailed them. I wish someone would actually do a review of how well the MS ratings are in correlation to the funds performance.

  122. chicagofinance says:

    Yan: as you see in your own portfolio, you have to cherry pick and be vigilent. Follow the talent, not the brand.

  123. bi says:

    i don’t know why people still buy mutual funds from fido, vanguard and state street. there are so many etfs to choose from.

  124. John says:

    Banks like Chase offer Mortgages as part of their full service packages. The goal of retail banking and the branch system is simply to break even. It is a method of advertising for the bank and drawing in customers to sell their more profitable products to. In fact the branches are not even material to the financial statements. Stand alone mortgage shops are doom from the get go, they can’t lay off risk, are not diversified into other products and are competing with other banks who are ok with breaking even since they have cash cows elsewhere. It is a doomed business model. Almost as economically viable as offering Christmas Club accounts as a stand alone business.

    ETFs are in general a stupid investment, sure there are a few good ones, but there are thousands of them now and most make no sense.

  125. Pooch123 says:

    I did a google search for “morningstar” and “ssrn” and got some interesting results. A quick look at the abstracts in the papers that show up shows that there is a lot of disagreement in the academic community regarding whether morningstar is a good predictor of future results.

    Regardless my point about morningstar was somewhat tangential. I’d guess there are few, if any, 5-star index funds. The reason is the 5-star funds are the ones that outperform their relevant indices and every year there are going to be a bunch of funds that outperform their index. But over the long term, how many index funds consistently outperform their index? Not too many is my guess, there arent that many Peter Lynches and Bill Millers out there, and to the extent that there are, you can’t tell who they are today…

  126. gary says:

    I guess different strokes but I’ve got to be honest, I pulled out of different managed funds years ago because of flatline performance and diversified across the board with Vanguard and couldn’t be happier. A steady-as-she-goes approach has yielded me nice growth. Maybe I could have done better or maybe even worse but I’m really content with what I have.

    Eventually, I’ll pour some into the Hodges fund and some other funds I wanted to try but I feel very secure with Vanguard. Hey, at least I’m investing, right? Some people think buying a 5 series is investing. :)

  127. 1987 Condo Buyer says:

    About the $0.12 coffee…sorry but I guess my mutual insurer was not interested in providing “free” coffee to 40,000 employees on the policyholder’s “dime”….

    Thankfully I do know work for a NYSE traded company that give me free coffee.

    It was a point to contrast certain behavior types.

  128. njpatient says:

    #102 bi

    Presumably you have seen this?

    http://money.cnn.com/2007/07/31/news/companies/american_home.reut/index.htm?postversion=2007073115

    “American Home Mortgage’s future uncertain
    Shares crumble 87% after troubled prime mortgage lender said it may liquidate, retains investment banks to help it consider options.”

  129. Home Seller says:

    #39

    That’s a data mining example at its best.

    Noone I know dumped 50G’s in the S&P in Jan of ’00. If you did, you deserve to be slaughtered.

    If you have a diversified portfolio of stocks/bonds and your equity allocation was truly diversified, then the 00-02 bear market should’n’t have affected you that much

  130. Pooch123 says:

    Bi (128): there are no transaction fees associated with buying mutual funds. There is also some debate over whether, even after assuming free stock trades, ETFs outperform their rival mutual funds. WSJ recently published an article about how the answer is (surprisingly) no.

  131. John says:

    Market historians may want to mark last Wednesday, July 25, on their calendars to mark the end of an era. That’s the day the Cerberus-led high-yield debt offering for Chrysler collapsed. Or perhaps it’s July 19, the day the Dow Jones Industrial Average closed over 14,000. Or maybe it’s June 21, when private asset manager Blackstone Group went public. After last week’s stock market carnage and debt market paralysis, they already seem like distant memories.

    Let’s step back a moment from the subprime crisis, which morphed into a mortgage-backed-securities crisis into a collateralized-debt-obligation crisis into a junk-bond collapse and now a credit freeze. What should be clear by now is that global liquidity is part of one continuous stream, and when one of the springs that feeds it — in this instance mortgage money — dries up, the stream shrinks to a trickle.

  132. dreamtheaterr says:

    #124, Chifi, I absolutely agree regarding Fidelity and their manager and style drift. Playing musical chairs with fund managers is a sure way of shooting themselves in the foot.

  133. John says:

    Actually, Coffee is the one perk that saves the company money in increased productivity and less breaks for people to brew at desk or go down to starbucks. Your company is losing money by not buying free coffee.

    m1987 Condo Buyer Says:
    July 31st, 2007 at 4:04 pm
    About the $0.12 coffee…sorry but I guess my mutual insurer was not interested in providing “free” coffee to 40,000 employees on the policyholder’s “dime”….

  134. njpatient says:

    #134 Home

    Why am I so certain that in January 2000 you were explaining to everyone who would listen that there was no tech bubble?

  135. bi says:

    135#, pooch123,

    thanks,

    i don’t disagree with you on the performance. but are most mutual funds back-loaded? are they also have strict restrictions on holding period and higher manangement fee, especially for less liquid portfolio?

    Bi (128): there are no transaction fees associated with buying mutual funds.

  136. dreamtheaterr says:

    #136 John, is that your opinion or quote? Or are you actually Mr. Stewart?

  137. Home Seller says:

    #113

    Future performance of a mutual fund has nothing to do w/a star rating of a mutual fund. Vanguard funds will most likely never dominate the “5 star” ratings because as like most index funds they strive to achieve above average returns. Vanguard however is probably one of the top mutual funds for investors to invest their money.

    Whether you go Fido or Vanguard to me makes a lot less difference though than what your asset allocation is compared to your risk tolerance.

  138. bi says:

    10yr yield at 4.73, less than a quarter percent to my year-end target.

  139. John says:

    I am not Mr. Stewart, that is his quote. I used to love his Smart Money mag article and looked forward to reading it. But after that BOZO was 100% wrong on AHM and even after the fact he did not say sale, he should be drawn and quartered. Newsday today reported that he should make a statement about his huge wrong call and he has yet to do so. He is as bad as AHM.

  140. Clotpoll says:

    Pooch (132)-

    Index fund= sheeple bait.

  141. John says:

    FYI – I have been screaming sell AHM on this site for a week. So I am not on a bandwagon.

  142. Home Seller says:

    #139

    to be honest, in 2000 I had most of my taxable income in cash because I was going to purchase a home within a 2 year time frame. I’ve been 70/30 w/equities to bonds ever since DCA’ing for the long term.

  143. 3b says:

    #143 bi: And? The housing market coems back, prices go up? The Fed cuts and short rates drop to the floor again,and prices go up?

    No, No, and ah, No. Just like the cyelce played out ont he way up, it plays out on the way down. Guess this is the first time for you on the down.

  144. skep-tic says:

    So now we have a major Alt A / Prime lender imploding.

    This in the face of a healthy job market and high consumer confidence.

    It is scary to think what might happen should unemployment start to rise

  145. Home Seller says:

    #145

    Actually Clot, I’m well on my way to my goal of a financially successful retirement thanks to low cost mutual funds.

    Many buddies of mine who were so called “experts” tried to lure me into high expense/load funds in the past. I told them the vast majority of mutal fund managers underperform their respected benchmarks every year because of high fees. they HATED to hear that (truth). And also my crystal ball isn’t clear enough to tell me which ones will outperform over the next 10-20 years. If anyone can guarantee that, I have an 8 figure job for you on Wall St.

  146. Pooch123 says:

    Alas, clot, I don’t have the cojones to dabble with individual stocks. I do have a speculator in me that I gotta satisfy though. I’m currently watching the pumelling of Vanguard’s REIT index continue. Its currently roughly 25% off its high and yahoo finance tells me one of its biggest holdings, equity residential, is now down 20% in overnight trading. Given that real estate aint tech stocks, I dont see this thing dropping 80% from its high. Still, once I’m confident its sufficiently “settled” its something I’d like to add to my portfolio (in a tax advantage account, of course). There are plenty of actively managed REIT funds that outperformed Vanguard’s REIT index but I’m ok with being sheeple bait.

  147. Pooch123 says:

    The information on equity residential appears to be untrue, not sure why yahoo finance had false information on it, but that point was basically irrelevant anyway.

  148. Rob says:

    You have to look very carefully at Morningstar ratings for any particular fund. The methodology and peer groups are all over the place, IMO. But I guess even Morningstar is an improvement over the mindless return-chasing exhibited by the average investor.

    I am a big believer in low fees. There are lots and lots of dud mutual fund managers out there. Unless you’re sure that you have an “un-dud”, you sure as heck don’t want to paying him a big fee.

    ETFs are the cool and sexy thing right now, but I don’t think they make sense unless you’re a spaz that feels the need to rebalance his book 10 times a month.

  149. Rob says:

    bi:

    Yes, Vanguard does impose additional fees on certain funds if you don’t hold for a minimum period.

  150. UnRealtor says:

    Make Money sez:

    My cousin who’s going in that house with 60% of his income into mortgage, with no savings, two mortgages, one salary, and 15K in cc debt says ” I don’t know how I’m gonna pay for the mortgage but I’m gonna have to do it somehow”.

    What town? Could be a good deal coming up on the courthouse steps.

  151. dreamtheaterr says:

    Closet index funds disguised as actively managed funds are true sheeple bait.

  152. Hehehe says:

    #111

    You have to figure between the LBO/Private Equity deals freezing up (and I-banks having to hold the loans) and the credit derivative problems that Wall Street bonuses are going to take a hit. Those were major profit centers the past few years. Add to it the financial sector’s equities getting beat up and it’s a no brainer.

  153. Clotpoll says:

    Home (152)-

    I have no problem with no-load, low-fee, low-churn mutual funds as investment vehicles for those who have no taste for playing the game. It is amazing how many allegedly “conservative” investors discount the compounding of loss generated by years of loads, excessive trading, fees, capital gains and distributions. They are all wealth-killers.

    Indexing is a concept that is- as practiced by that type of fund- both counterintuitive and mathematically specious as an engine of superior return over time. The presumption, that a suspension of good human judgment- via the forced inclusion of sector laggards- is superior to a paradigm that allows a reasonably intelligent person to exclude from an index companies that clearly stink…is a pretty good working definition of financial insanity.

  154. Read My Lips: Price are going down down down says:

    I can feel it.
    how does the friskie taste?

    Young buyers have been used and abused for to long. Payback time baby.

    Make’em Pay.

    hehehehe

  155. Clotpoll says:

    dream (158)-

    I think ALL mutual funds cling to the indexing anchor to some degree or another.

  156. 3b says:

    #149 skeptic: Consumer Confidence= Whistling while walking pst a grave yard at night?

    Layoffs, are just around the corner, (and as far as Wall St layoffs are already happening), unless you believe we might never see a recession again in our life time.

  157. Home Seller says:

    #158

    “Superior returns over time”

    You nailed it on the head…

    I have no “taste” in playing the game of investing as you call it. I prefer boring, unsexy, outperforming mutual funds. I’ll rebalance twice a year but that’ll be as crazy as I’ll get…its worked well so far

  158. Rich In NNJ says:

    bi Says:
    July 31st, 2007 at 4:24 pm
    10yr yield at 4.73, less than a quarter percent to my year-end target.

    bi,

    You’re either a troll or need to learn a little more before commenting.

    Your prediction was for the Fed to drop rates but as BC Bob and JB previously pointed out the 10-Year in not controlled by the Fed but by the market.

    Rich

  159. New Investor says:

    “3b Says:
    July 31st, 2007 at 4:54 pm
    #149 skeptic: Consumer Confidence= Whistling while walking pst a grave yard at night?

    Layoffs, are just around the corner, (and as far as Wall St layoffs are already happening), unless you believe we might never see a recession again in our life time.”

    http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-18543668.htm

    They are here, and bound to keep coming. Hope this J&J layoff doesn’t hurt the NJ pharma sector too hard…

  160. Clotpoll says:

    Any time a mutual fund manager adds a stock to his portfolio that:

    1. Is a known underperformer

    2. Is dictated by index and not performance

    3. Is dictated by the fact that the fund has maxed out its investment in top companies in the same sector

    4. Is dictated by the need for the fund to invest in SOMETHING, rather than holding cash

    …then, that manager is playing Russian roulette with your money.

  161. John says:

    According to its most recent quarterly report, American Home had obtained financing from several lenders. Among them were Bank of America Corp. (Charts, Fortune 500), Bear Stearns Cos. Inc. (Charts, Fortune 500), Credit Agricole SA’s Calyon affiliate and UBS AG. None immediately returned calls seeking comment.

  162. chicagofinance says:

    Q: “….But over the long term, how many index funds consistently outperform their index?….”

    A: Theoretically ZERO. They return the index with hopefully a modicum of tracking error [see recent studies of ETF’s showing uncomfortably large errors], then you deduct expenses.

    By definition, you WILL underperform the index EVERY time period. If you consistently outperform the index, then you should sell the fund as they are deviating from their mandate.

  163. Pooch123 says:

    ChiFi, I meant to ask how many actively managed funds have consistently outperformed their relevant index over the long term. That typo was pretty obvious…

  164. chicagofinance says:

    Pooch: let’s be clear….to outperform means that your CUMULATIVE return over some said period beats the index. As opposed to those who point to Bill Miller as beating the index consistently EVERY period. Also, what index? S&P 500 only? Relevent index given the fund objective?

    I am going to do a perfunctory search.

  165. Rich In NNJ says:

    I figure right about now JB would be throwing this up…

    DISCLAIMER

    The information on this site is provided for discussion purposes only. Under no circumstances does this information constitute a recommendation to buy or sell securities, assets, or otherwise.

  166. chicagofinance says:

    OK – there are these two fields in the Morningstar database:

    “10 Year Annualized Return”
    “15 Year Annualized Return”

    The S&P 500 Index value for the 10 is 7.13%,
    and for the 15 is 11.19%.

    So should I do a search on all mutual funds that have a LARGE CAP BLEND orientation to see how many are great than 7.13 & 11.19 in those respective fields?

  167. gary says:

    chicagofinance,

    Just for haha’s, what would you consider a model portfolio for long term growth? Of course, disclaimers apply.

  168. Pooch123 says:

    Chi, there are many actively managed funds that outperform the index both every year and over the long term and there are many actively managed funds that don’t. The problem is knowing ahead of time which funds will outperform over the relevant period. This is a difficult task, and even if you “follow the talent” there’s no guarantee that the fund you pick will be a winner. Given that, indexing makes sense for me.

  169. Clotpoll says:

    Knowingly chaining yourself to low-performing companies in the hope of profiting is like smoking crack to get in shape.

  170. Pooch123 says:

    Clot, got any better alternatives?

  171. Theo says:

    #174

    Ok, so point us all to the low-cost index or other funds that only chain themselves to good-performing companies.

  172. chicagofinance says:

    10 Year Annualized Return
    “15 Year Annualized Return”

    The S&P 500 Index value for the 10 is 7.13%.

    Search on all mutual funds that have a LARGE CAP BLEND orientation to see how many are greater than 7.13%?

    Total records 2286….selected records 325.

    There are effective duplicates, so for argument’s sake, let’s say 175.

    NOTE…..A LOT OF FAMILIAR NAMES

    Also 5 [14 records and remove dups] of these names are Vanguard, but none returned greater than 7.88 annualized.

    Fidelity is a little messier, but in reality the answer is 3 funds.

  173. BC Bob says:

    “Ok, so point us all to the low-cost index or other funds that only chain themselves to good-performing companies.”

    NJ Vulture Fund?

  174. chicagofinance says:

    15 Year Annualized Return

    The S&P 500 Index value for 15 is 11.19%.

    Total records 2286….selected records 129.

    There are effective duplicates, so for argument’s sake, let’s say 100.

    NOTE…..A LOT OF FAMILIAR NAMES

    Vanguard has one fund.

  175. BC Bob says:

    hehe,

    If things don’t improve soon, bonuses will be the last concern.

  176. chicagofinance says:

    gary Says:
    July 31st, 2007 at 5:43 pm
    chicagofinance,Just for haha’s, what would you consider a model portfolio for long term growth? Of course, disclaimers apply.

    gary: I can’t answer that question in this forum because of what I do.

  177. gary says:

    chifi,

    Gotcha.

  178. Pooch123 says:

    Chi, what criteria do you use for deciding which funds are best in making investment recommendations? Best 1 year performance? 3 year? 5 year? 10 year? Historically solid fund family? Historically solid manager? Some combination of the above?

  179. chicagofinance says:

    ?

  180. chicagofinance says:

    ? – was to “gotcha”

  181. dreamtheaterr says:

    “Ok, so point us all to the low-cost index or other funds that only chain themselves to good-performing companies.”

    Falafel anyone?

  182. Pooch123 says:

    I still don’t get this falafel joke…

  183. gary says:

    chifi,

    What I meant was that I understand that you can’t give the appearance that you’re offering financial advice. I was just curious as to a broad-based long term approach.

  184. dreamtheaterr says:

    Pooch, Clotpoll referred to Jeremy Siegel (Wisdomtree ETFs) as a guy who resembles a falafel vendor next to Penn Stn….hence the joke.

  185. chicagofinance says:

    If you want to talk about my approach, then “solutions” or “implementation” is working backward. At least 75% of the time, I don’t even get to the implementation phase until 3-6 months into the relationship.

    However, I will focus on what you are asking. If the portfolio manager has not been in place at least three years, then the fund is out [there are exceptions]. We look at all of it, but ultimately we focus on 3 year and 5 year. There is a lot more. You want to keep your ears and eyes open to new information, and red flags, such as portfolio manager movement; management upheaval; “non-investing business initiatives”.

    Bottom line: don’t give up the chance to hear the PM speak or see them live. It really clears out any questions….believe me.

  186. Pooch123 says:

    Thanks Chi

  187. chicagofinance says:

    Also….be really careful. Due to all the hedge fund and PE poaching, there has been tremendous “brain-drain” FROM many money managers. All the more reason to cherry pick like Yan.

  188. Orion says:

    More on AHM:

    http://www.iht.com/articles/ap/2007/07/31/business/NA-FIN-COM-US-American-Home-Mortgage-Liquidity.php

    So, what happens to the people who were promised
    a loan from AHM? How will they close?

  189. chicagofinance says:

    WSJ

    Another Bear Stearns Hedge Fund Is in Trouble
    By KATE KELLY
    July 31, 2007 6:18 p.m.

    Bear Stearns Cos., already forced to shut two hedge funds that bet heavily on the risky subprime-mortgage market, is now facing big losses in a third fund that has roughly $900 million in mortgage investments, according to people familiar with the matter.

    The fund, known as the Bear Stearns Asset-Backed Securities Fund, ran into trouble in July and has refused to return investors’ money for the moment, according to these people. One of these people said the redemption requests were postponed in hopes that the fund’s assets would rebound in value. The fund contains a range of mortgages, but only a small slice of them that are considered subprime, the area that has given so many firms heartburn in recent weeks. Unlike the two other Bear funds that are being closed, this fund is not leveraged.

    The asset-backed fund was up about 5% between the beginning of the year and the end of June according to these people. But faced with a slew of mortgage markdowns in July, its performance appears to have plummeted. It is not known how much, if anything, Bear owns of the fund. Its shares were down about 5% Tuesday, to $121.22.

  190. Orion says:

    `Mind-Boggling’

    “It’s mind-boggling,” said Bradley Alford, a former investment manager at the Duke University endowment who runs Atlanta-based money-management firm Alpha Capital Management LLC. “This last week, the velocity of losses has picked up dramatically. The models work when they look at history, but not when history is all new.”

    Re-read the last sentence!

  191. njrebear says:

    Oddo to Shut Three Funds `Caught Out’ by Credit Rout

    http://www.bloomberg.com/apps/news?pid=20601087&sid=akF7dNjlTajI&refer=home

    Oddo & Cie, a French stockbroker and money manager, plans to close three funds totaling 1 billion euros ($1.37 billion), citing the “unprecedented” crisis in the U.S. asset-backed securities market.

    Oddo said it will wind down the funds within the “shortest possible time frame” because of a plunge in prices for collateralized debt obligations, notes backed by other bonds, loans and their derivatives

    source : CR

  192. Clotpoll says:

    Theo (176)-

    No such animal. Gotta buy individual stocks.

    I have now crossed the DMZ.

    All disclaimers.

  193. Clotpoll says:

    Orion (197)-

    “The models work when they look at history, but not when history is all new.”

    Just the kind of talk you expect to hear from a Dookie.

  194. Rich In NNJ says:

    Ho-Ho-Kus:
    ACT CLEVERDON RD $825,000 9/12/2005
    ACT CLEVERDON RD $739,000 3/28/2006
    ACT CLEVERDON RD $699,900 5/9/2006
    PCH CLEVERDON RD $649,900 8/1/2006
    ACT CLEVERDON RD $579,000 9/29/2006
    PCH CLEVERDON RD $559,900 2/24/2007
    PCH CLEVERDON RD $535,000 5/15/2007
    SLD CLEVERDON RD $517,500 7/31/2007

    Mahwah:
    ACT WAGON TRL $939,900 8/31/2006
    ACT WAGON TRL $887,500 4/7/2007
    SLD WAGON TRL $810,000 7/30/2007

    Midland Park:
    ACT N MONROE ST $615,000 6/30/2006
    PCH N MONROE ST $589,000 7/31/2006
    PCH N MONROE ST $559,900 9/29/2006
    ACT N MONROE ST $549,900 1/10/2007
    PCH N MONROE ST $529,900 4/16/2007
    SLD N MONROE ST $505,000 7/31/2007

    Ramsey:
    SLD WOODS RD $470,100 11/12/2004

    ACT WOODS RD $550,000 1/19/2007
    PCH WOODS RD $538,000 2/3/2007
    PCH WOODS RD $528,000 2/19/2007
    PCH WOODS RD $518,000 5/14/2007
    SLD WOODS RD $493,000 7/31/2007 (Less than 2%/yr)

  195. njrebear says:

    Hedge fund implode meter

    http://wasatchecon.blogspot.com/2007/06/hedge-fund-failometer.html

    count – 16 as of yesterday.

    Add the 4 from today.

  196. Rob says:

    Clotpoll, you better read about this thing called Modern Portfolio Theory before you dismiss “underperforming” stocks from your portfolio out-of-hand.

  197. njpatient says:

    #203

    Agree.

  198. njrebear says:

    ok ok
    There is one more for tonight.

    Macquarie Says Fortress Notes Value May Fall 25%

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aVFVrl_TE8Cg&refer=home

    Macquarie Bank Ltd., Australia’s largest securities firm, said investors in some of its high- yield funds may lose as much as 25 percent of their money amid the fallout in U.S. subprime mortgages

  199. dreamtheaterr says:

    “Clotpoll Says:
    July 31st, 2007 at 5:47 pm
    Knowingly chaining yourself to low-performing companies in the hope of profiting is like smoking crack to get in shape.”

    I confess – I am guilty of smoking crack. It’s served me well the past 3 years. Have been scaling back a lot this year, since I have derived less ‘value’ from it off late.

  200. al says:

    I believe nobody commented on this one:

    http://www.msnbc.msn.com/id/20050358/

    NEW BRUNSWICK, N.J. – Johnson & Johnson said Tuesday it would reduce its global work force by up to 4 percent in a restructuring to cut costs as a number of its patents expire over the next few years

    The health care company, which says it employs about 121,000 people worldwide, predicted the restructuring would entail pretax charges totaling $550 million to $750 million in the second half of 2007.

    How many more jobs will be cut in NJ – last 4 years J&J has been cutting jobs in NJ like crazy…

  201. 3b says:

    #207 Al: it does not matter, er are close to NYC.

  202. 3b says:

    #193 chgo Maybe they can come back now.

  203. still_looking says:

    Sorry if this question has already been posted. (I am trying to get thru all the posts today but got in late.)

    Can someone explain to me (I’ll admit ignorance on this one)

    Why are gas prices dropping if the $ per barrel of crude is at an all-time high?

    Are we hitting our reserves (albeit quietly?

    sl

  204. BC Bob says:

    SL,

    The refineries [gas] are back in operation. As gas production is now increased, more crude is required, to be refined. We are increasing gas and refining more crude to accomplish this. In the energies market it is called the crack spread.

  205. still_looking says:

    Pat and BC Bob, Thanks! was scratching my head over that one and didn’t know where to find the info!

    sl

  206. Clotpoll says:

    Rob (203)-

    I’ve read it…and Navellier’s amendments to MPT and much of Graham’s work.

  207. Home Seller says:

    #183

    Using past performance as a guide for the future is extremely dangerous especially w/managed funds.

    Look at Bill Gross the supposed genius..outperforming the S&P500 for 15 straight years. Well, unfortunately if you didn’t start investing until recently w/him your basically screwed. Look at his most recent history….costs are the most reliable indicator of future performance..

    “It’s certainly not helping his fund, which has trailed 89% of similar funds in 2007, 90% over the past year and 57% over the past three, according to Morningstar. Even over the past 5 years, Gross is in the middle of the pack, ahead of 53%, trailing 47% of similar funds. Over 10 years, living on past glory, Gross remains in the upper echelon, ahead of 86% of his peers. And he’s trailed his benchmark, the Lehman Brothers Aggregate Index, over all of those periods

  208. Clotpoll says:

    dream (206)-

    Are you lightening up because your portfolio had a “value” bias?

    Value had quite a run, but a growth orientation is beginning to take the upper hand lately.

  209. dreamtheaterr says:

    #216, yes Clot. Am rebalancing with a growth bias the last 3-4 months.

  210. bi says:

    215#,
    hs, i think you mean bill miller. bill gross is pimco founder and bond manager.

  211. Steve says:

    Due to all the hedge fund and PE poaching, there has been tremendous “brain-drain” FROM many money managers. All the more reason to cherry pick like Yan.
    _____

    ChiFi,

    Exactly… as I was reading through all these posts I was scrolling down to post just that.

    The pool of talent running mutual funds has been significantly degraded over the years, worsening the odds further. On balance, why would the up-and-coming investment talent bother w/ a mf shop or asset mgmt division ($500k-$1mil) when they could go the 2/20 route?

    For that matter, the talent drain has impacted all of Wall St- bulge bracket firms no exception.

    One can make valid arguments for and against low cost index funds, but IMHO I highly doubt most investors will have any shot at picking the few good active managers, who subsequently outperform on a long term basis.

    Wall St, esp the sectors focused on managing & selling products to the retail investor, are largely a scam. The fees, loads and conflicts of interest are simply outrageous, and the overwhelming majority of folks are just not equipped to find their way through the morass, or even to pick a competent advisor to help them navigate.

    Not saying index funds are always the answer, but telling family or friends to spin the wheel in the land of active mgmt seems to stack the deck right up front.

    Steve

  212. BC Bob says:

    “Asia Genesis Management, a hedge fund based in Singapore that manages about $450 million, said it is shifting some of its holdings to cash to avoid losses as the credit quality of U.S. subprime mortgages deteriorates.”

    “This is not the time to take more risk,” said managing director Chua Soon Hock. Many investors have been hurt as more hedge funds report losses and “the number will increase over time,” he said.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aS9l6t2NZUwo&refer=home

  213. Richard says:

    >>So now we have a major Alt A / Prime lender imploding.

    don’t make the assumption it has anything to do with a lender being in trouble that’s handing out prime loans. i know 1 senior manager and 2 other folks that work there and without divulging too much information that could get me in hot water the main troubles had nothing to do with the quality of the borrowers they lent to. wait for more info before you paint the broad stroke.

  214. RentinginNJ says:

    The models work when they look at history, but not when history is all new.

    I’ve said it several times here before. I work with econometric models. Their biggest shortcoming is that they assume all market participants make perfectly rational decisions, all actors have full access to market information and everyone has perfect foresight. Computers can’t really be programmed to act like an irrational human.

    A housing bubble (or any bubble), by its very nature is an irrational event. The models are worthless for situations like this. The analysts put way too much faith into these models.

  215. Theo says:

    #222 Yogi Berra had something to say about this: “In theory there is no difference between theory and practice. In practice there is.”

  216. ricky_nu says:

    riddle me this –

    how are high end market spec houses like in upper snotty (saddle) river keeping their bid?

    I see builders buying lots for $800k, spending $800k on structures, and asking $2.7m? I would suspect 20% is fair profit on such a project, so end price shoudl be

  217. UnRealtor says:

    Have a look at the 5th chart….

    Household Cash Less Liabilities ($Billions)
    http://www.contraryinvestor.com/mo.htm

  218. Rich In NNJ says:

    Richard Says:
    July 31st, 2007 at 10:17 pm

    >>So now we have a major Alt A / Prime lender imploding.

    don’t make the assumption it has anything to do with a lender being in trouble that’s handing out prime loans. i know 1 senior manager and 2 other folks that work there and without divulging too much information that could get me in hot water the main troubles had nothing to do with the quality of the borrowers they lent to. wait for more info before you paint the broad stroke.

    American Home Mortgage Investment Corp (AHM.N) said on Tuesday it can no longer fund home loans and may liquidate assets, putting its survival in doubt and sending its shares plummeting 90 percent.

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