Canaries at the Periphery

Please consider the following chart.

Mish note: I can not read what the text says but if you can please send me a translation. Regardless of what the text says, however, the universal language of the chart makes it quite clear that whatever is happening is not pretty.



Enquiring minds may be interested to discover that the above chart happens to be a graph of the Saudi stock market.

The Financial Times is reporting the Saudi market plunges 8% more.

The Saudi stock market plunged another 8 per cent on Tuesday, taking its fall over the past nine days to 26 per cent. The Tadawul All Share index was trading at 12,994 late Tuesday, compared with 17,557 at the close of trading on April 9. It has fallen 37 per cent from its February peak to its lowest level for eight months.

Analysts said it was a dramatic reversal after the oil-fuelled boom that led to spectacular share price gains in 2004 and 2005 and saw up to 3m retail investors piling into the market in search of quick wealth.

Oliver Bell, senior investment manager at Pictet Asset Management in London, said the market still appeared to be over-valued.

“We estimate the Saudi market is trading on a forward multiple of nearly 30 times 2006 earnings. Despite the correction, valuations are still at extreme levels compared to other emerging market opportunities,” he said.

Reuters is reporting Saudis go online to vent anger over stock crash.

Normally submissive Saudis turned to the Internet on Tuesday to voice their anger about slumping share prices. A 37 percent tumble in the Arab world's largest bourse since late February has transformed the Web from a popular source of trading tips to a forum for small-time investors to vent their spleen.

"The market has become a burial ground for Muslim money and slaughtered ambition," said an Internet user on one site, who identified himself as "the Living Conscience".

The Saudi market began to tumble in February when the regulator tried to narrow the trading bands allowed each day, angering speculators.

The regulator's decision to suspend dealers for market manipulation earlier this month only exacerbated the slide and shares plunged more than 8 percent to new eight-month lows on Tuesday.

"The index has been bleeding for more than 45 days. All we can do is watch and shed tears, tears and more tears," said Mohammed9009.

Perhaps the most interesting thing in the above report was that attempts to stop the slide by narrowing trading bands suspending those accused of market manipulation seemed to exacerbate the slide.

An Active Role

Interestingly enough, Reuters recently reported Central banks should be active in a crisis.

Financial markets suffer destructive gridlock in a crisis as investors bolt for safer investments, but central bank intervention can keep the system up and running, according to a study presented at the Atlanta Federal Reserve on Monday.

The paper, written by economists Ricardo Caballero and Arvind Krishnamurthy, studied a flight to quality as market players protected themselves from worst-case assessments of the risks, even though the danger in their own market was small.

It was delivered at a conference on financial markets and systemic risk chaired by Fed Vice Chairman Roger Ferguson.

"Agents respond to uncertainty regarding other markets by requiring financial intermediaries to lock up some capital to devote to their own market's shocks, regardless of what happens in other markets," the paper said.

"While each Knightian agent covers himself against an extreme shock, collectively these actions prevent intermediaries from moving capital across markets to expediently offset shocks as they arrive," the authors said.

Knightian uncertainty -- based on the work of Chicago University economist Frank Knight -- is a theory in economics describing risks that are impossible to measure, which is why market participants overreact in seeking capital protection.

"This inflexibility leaves the economy overexposed to (moderate) aggregate shocks that are manageable by the private sector in the absence of flight to quality," they said.

With that paragraph, the Mish telepathic thought lines were flooded with questions.
The typical question was something like this: "OK Mish what does any of the above have to do with 'Canaries at the Periphery'?"

Canaries

The answer of course is that problems start at the periphery then work their way towards the nucleus. That is simply the nature of the beast. Please consider Canaries in the Coal Mine.

Against a backdrop of strong global growth, two small Western economies have hit upon hard times: Iceland and New Zealand. Their experiences, in the context of their geography and financial characteristics, could be heralding the onset of a fresh global financial crisis.

But regardless of whether the Kiwi/Icelandic break was due to speculation or spending, there are certainly some broad financial discrepancies that are showing at least some signs of rectifying themselves. And as the Asians discovered in 1997-1998, such "rectifications" are rarely pleasant processes.

The Hindenburg Omen

Closer to home John Hussman is writing about Market Action and Information.

In a richly valued market with upward interest rate pressures, it's a particularly unfavorable sign when within just a few days of new highs in the major indices, leadership “flips” so that the number of individual stocks achieving new 52-week lows actually exceeds the number achieving new 52-week highs. That's exactly what happened last week. The S&P 500 achieved a fresh bull market high on April 5th, at 1311.56, yet new lows have already flipped above new highs.

Hindenburgs

I've noted often that a great deal of the information conveyed by markets is contained in “divergences” between securities. While investors shouldn't read too much into any indicator, there's an interesting signal that has enough validity as a measure of divergence that it's worth mentioning here. Think of it as slightly more than entertainment value but far less than a reliable guide to investment.

The signal is based on new highs and new lows, and is cheerfully called a Hindenburg (the actual name given to it by Kennedy Gammage is the “Hindenburg Omen” but that strikes me as far too, well, ominous, because it's certainly not a sufficient condition for a market decline). It's a relatively unusual event that has often preceded fairly substantial market declines with a fairly short lead time (usually within 30-60 days, including declines in 1987, 1990, 1998, 2000 and 2001), but has sometimes proved to be meaningless or insignificant as well (such as a cluster of signals in September 2005, among others).

The basic elements are 1) the market is in a rising trend, defined as the NYSE Composite being above its 10-week average, 2) both daily new highs and new lows exceed 2.2% of issues traded, and 3) the McClellan Oscillator is negative – meaning that market breadth as measured by advances and declines is relatively weak (there's some dispute, which I will not join, as to whether the Oscillator has to be negative that day or turn negative later). Peter Eliades added a couple of other conditions to eliminate signals occurring in clearly strong markets: 4) new highs can't exceed new lows by more than 2-to-1, and 5) 2 or more signals occur within about a month (he uses 36 days) of each other.

As it happens, we observed a Hindenburg on April 7th (just 2 days after the market high) and another one on April 10, so those elements seem to be in place here. We'll see whether anything comes of it this time around.

When a well respected fund manager like Hussman is watching Hindenburgs and other technical divergences, perhaps you should too. I do know that Brian and I are carefully watching those divergences at the Survival Report.

Our view is that the longer this grind up occurs in the face of rising interest rates, deteriorating fundamentals, and huge divergences, the deeper the resultant plunge. Rot is now chewing its way at the periphery. It's only a matter of time before rot works its way to the core.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Condo Reversions

The South Florida Business Journal is reporting Condo conversions revert to rentals.

Six communities with 1,571 units - three in Broward and three in Palm Beach County - have made the switch from condo conversion sales back to rentals.

Some are dubbing it "the great conversion reversion of 2006." It's a move to reposition rental communities, which were slated for condominium conversion sales, back to apartment rentals.

"It's an early-stage trend that will probably accelerate as the market slows even more," said Jack McCabe, CEO of McCabe Research & Development in Deerfield Beach.

Mike Morgan of Morgan Florida sent me a couple of emails recently and had this to say:

I was out with a client yesterday and noticed a rental sign up on one of our largest condo conversions in Martin County. The converters have failed at selling the condos, so they have decided to revert back to apartments. A year ago they tried selling the condos starting at $249,000. Lately they have been offering them as low as $185,000 . . . and still no sales. By the way, there are more than 50 condo conversions in Orlando alone. The new catch phrase here is “condo reversions.” These guys are going to crumble, since rentals are off by as much as 50% with tens of thousands of flippers trying to rent homes they cannot sell. We no longer take any rentals from clients!

We have a lot of high rise ghost towns. It is only a matter of time before these developers and converters start defaulting on their loans and walking away. The banks are not going to be landlords. They will sell at auction for whatever they can get. Banks like Corus of Chicago have billion dollar exposures in Florida. Corus may have the largest exposure. Moreover, it is an exposure they cannot recover from once the developers start to fail.

By the way, if you’re looking for a company to call about the condo market, the largest publicly traded builder of condos in Florida, is WCI. They not only have the largest exposure, but they are primarily in the runaway markets like Naples. Naples was rated as the most overvalued market in the United States with an overvaluation value of 82%. The other segment of WCI is general real estate sales through Prudential WCI and mortgages. They are batting 0 for 3 right now.

I realize the media is taking a hit for reporting on the negative issues, but you haven’t even scraped the surface of what is going on here . . . statewide. The snowball effect will be horrible. More than 30% of the jobs created in Florida last year were in construction. We are now in a strong negative mode for construction jobs. As builders slow down and shut down, these guys are out of work. They are trying to relocate to New Orleans, but there is no place for them to live there. Talk about a Catch 22. I attended a luncheon yesterday where the president of the US Chamber of Commerce spoke. She owns a construction company in New Orleans. It was an eye opener and you could have heard a pin drop in a pile of hay as she spoke for 30 minutes.

There is no longer any doubt that Florida is ground zero of the bubble bust. The only debate is how quickly the mess spreads.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Financial War Games

Before getting to "War Games" let's recap some past wisdom from the man formerly behind the curtain.

1996 - Greenspan warns about irrational exuberance in the stock market
2000 - Greenspan embraces the "productivity miracle" and says there is no stock market bubble.
2001 - Greenspan said bubbles can only be detected in hindsight
2004 - Greenspan says there is no housing bubble
2005 - Greenspan says there is no national housing bubble even though he admits we have "froth"

It's Different This Time

Here are some select comments from just released FOMC minutes from May 16, 2000 meeting shortly after the Nasdaq blowoff top:

Chairman Greenspan:
My own judgment, and what I plan to recommend to the Committee, is that we have an opportunity now to move the funds rate up 50 basis points, remain asymmetric, and effectively adjust our longer-term posture to a better position than the one we are in at the moment. The reason I am not concerned about moving the rate up quickly at this stage is that I think the evidence indicates that productivity, indeed perhaps underlying GDP, is still accelerating. I recognize that the staff’s estimate of productivity growth for the first [quarter] is 1-½ percent. I don’t believe that estimate for a fraction of a second. Indeed, using the available data on income and profits, which essentially reflect the unit cost structure of nonfinancial corporations, the productivity growth number that falls out of that system according to staff estimates is a 6 percent annual rate.

I think we are in a quite different environment than we have seen in the past. In such an environment real long-term interest rates have to rise, and indeed they have risen very significantly in the last several weeks. Real long-term BBB rates are up over 50 basis points after gradually edging higher for quite some period of time. This indicates that the markets are adjusting rapidly to the evidence that overall demand forces are becoming very strong, driven in large part by the supply factors themselves.

I think what we have is still the beginning, or perhaps we are well into it at this stage, of a significant long-term change in the behavior of the economy. I believe the risks in moving 50 basis points today are not very large because I think the underlying momentum in the economy remains very strong. What is going to happen in the future is probably going to be dependent on a number of developments that we can't really forecast.

Mr. Hoenig. Mr. Chairman, everything you said convinced me that a 1/4 point hike seems right. Inflation is not taking off and in fact a lot of the evidence suggests some easing off in the expansion. Moreover, I don't think we should be validating the market necessarily. I think we should be looking at what is in front of us, and 1/4 point with asymmetric language seems most appropriate. A year ago when we were at 4-3/4 percent on the funds rate, there was a better case for moving more aggressively in the sense that we had put in a lot of stimulus. And yet we were very cautious in moving up.

Is it possible for anyone to have been more wrong?
In one meeting he was wrong about productivity, the strength of the economy, where the risks were, and most importantly right after the start of the Nascrash came out with one of his most absurd statements ever when he commented "I think we are in a quite different environment than we have seen in the past." Hook line and sinker Mr. Greenspan bought into "It's Different this time" logic, right as the bubble was bursting in front of his own eyes.

Greenspan on Financial Stability

What should have everyone worried right now is this Greenspan flashback from May 5th 2005 when he spoke about Risk Transfer and Financial Stability

Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth. The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions, which was so evident during the credit cycle of 2001-02 and which seems to have persisted. Derivatives have permitted the unbundling of financial risks. Because risks can be unbundled, individual financial instruments now can be analyzed in terms of their common underlying risk factors, and risks can be managed on a portfolio basis. Partly because of the proposed Basel II capital requirements, the sophisticated risk-management approaches that derivatives have facilitated are being employed more widely and systematically in the banking and financial services industries.

As is generally acknowledged, the development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively. In particular, the largest banks have found single-name credit default swaps a highly attractive mechanism for reducing exposure concentrations in their loan books while allowing them to meet the needs of their largest corporate customers.

The greatest evidence of the benefits of derivatives is spectacular growth? That sounds like bubble logic to me. There is $17 trillion in derivatives floating around with $1 trillion bet on GM alone even though GM has a market cap of $20 billion or so. Is that a sign of a spectacular success or is that a sign of unbelievable speculative leverage? Obviously Greenspan learned nothing from the stock market crash of 2000. He is now claiming that derivatives have permitted the unbundling of financial risks. Have they? I have a couple of questions for you Mr. Greenspan that might bring you back to reality. Is there not a counter party to those trillions of dollars worth of derivatives? Has that risk been magically offloaded to Pluto or Mars? If not, who has that risk?

Clearly Greenspan was babbling nonsense in May of 2005 just as he was in babbling nonsense in May of 2000 and at nearly every other point in his career as well.

Liquidity Concerns

On April 11 the IMF warns over credit derivative liquidity .

Investors in structured credit products risk not being able to sell or obtain an acceptable price following a market downturn because buyers may shun the fast-growing market, the IMF said on Tuesday.

The risk of liquidity disturbances is "material ... (and) certain products and market segments are particularly vulnerable," the International Monetary Fund said in its annual Global Financial Stability Report. The secondary market, away from the biggest banks, was more likely to be at risk, it said. In addition, the Fund said, the rapid growth of the $17.3 trillion market raised concerns over the potential for operational failures.

The Fund welcomed moves by regulators to tackle operational issues, but said the industry should be "encouraged to pursue these efforts expeditiously in order to avoid potential disputes in the event of a default".

In some cases more credit default swaps have been written on specific companies than there are bonds of that company outstanding. After a default there is a need for a system to settle the contracts without conventional delivery of a bond.

Still, IMF concern over credit derivative liquidity was set in the report against a largely positive overview.

"Credit derivative and structured credit markets help to improve financial stability by facilitating the dispersion of credit risks," the Fund concludes, as "banks, especially systemically important institutions ... shift credit risk to a broader set of investors."

Leave it to the IMF to ruin a decent report with "Greenspanesque" talk such as "Credit derivative and structured credit markets help to improve financial stability by facilitating the dispersion of credit risks." There is little evidence of dispersion but there is mammoth evidence of speculation when hedge funds and others have massively leveraged bets on whether companies go bankrupt or not even when they have no vested interest. Even the mortgage market is insane with everyone attempting to pass the trash to Fannie Mae while trying to keep the "good loans" on their books. Even if everyone did miraculously manage to disperse the risk, will it be a good thing if trillions of dollars in bets vanish on some sort of blowup?

It seems to me there is some sort of uncertainty as to what might really happen in a derivatives meltdown. Back on February 28 The Bond Market Association announced a "New Bank" To Provide Crucial Liquidity In Emergencies.

The Bond Market Association announced that it has accepted an invitation by a private-sector working group established by the U.S. Federal Reserve Board to develop and lead the creation of a so-called ‘NewBank’, a standby bank that would only be activated if one of two existing clearing banks in the U.S. government securities markets was suddenly forced to leave the business. Both government officials and market participants have long been concerned about the possibility, even if remote, of one of the banks suddenly exiting the markets and have agreed the NewBank concept is an appropriate precautionary measure.

Since the mid-1990’s all of the major participants in the U.S. government securities markets have depended critically on one of two clearing banks, Bank of New York and J.P. Morgan Chase, to settle their trades and to facilitate financing of their securities inventory positions. Interruption of a clearing bank’s services has the potential to severely disrupt those markets, as was evident in the wake of the tragic events of 9/11.

"Securities dealers need a contingency plan in the event one of the clearing banks is forced to exit the markets," commented Micah S. Green, President and CEO of the Bond Market Association. "Establishing NewBank is a prudent market-based initiative aimed at mitigating any potential problems caused by the sudden involuntary exit of one of the banks."

Preparation for a Crisis

Over in the Europe, the Times Online is reporting that EU regulators are told to Be prepared for a crisis.

Financial regulators in all EU countries are to be asked today to prepare for the collapse of a big hedge fund or a similar sudden financial shock. EU finance ministers and central bankers, meeting in Vienna, were told that the collapse of a hedge fund could now destabilise European financial systems as well as the financial markets.

They have equally raised anxieties about the rapid growth of private equity. They fear that this could unravel if one of the key sources of funds or markets for selling on companies dries up. Officials also argue that many regulators do not understand the risks involved in the £10,000 billion market in credit derivatives, which are traded privately between banks rather than on public exchanges.

A private report drawn up by finance ministry officials of EU states says: “Hedge funds can contribute to market efficiency and sharing of risks but can also be a source of systems risks.” The report urges the central banks and regulators to monitor banks’ exposure to hedge funds, both as lenders and as counterparties to massive speculative positions in financial and commodity derivatives. Banks are also heavy lenders to private equity buyouts, which provide them with more profitable but riskier business.

War Games

Also in the UK I am pleased to report that Europe simulates a financial meltdown.

Europe's financial regulators have held a "war game" exercise, simulating a continent-wide financial crisis, amid fears they are ill- prepared to stop a problem in one country spreading across borders.

The exercise involved simulating the collapse of a big bank with operations in several large countries to see whether the European Central Bank, national central banks and finance ministries could work together to contain the crisis.
It is understood the exercise took place at the headquarters of the ECB in Frankfurt at the end of last week. One person involved said: "It is like checking whether a nuclear power plant can survive a plane crashing into it."

Europe's vulnerability to a cross-border financial crisis was revealed in a confidential report prepared by officials for the Ecofin council. Regulators are particularly worried about the risks to financial stability posed by the growth in hedge funds and credit derivatives.

It said that "progress has been insufficient in most of the member states" in putting in place national structures for crisis management, and urged national regulators to stage their own crisis simulation exercises.

The EU has rejected the creation of a single European financial regulator to manage cross-border risks, and has instead placed its faith in national authorities working together.

What we are saying vs. What we are doing

Here is a recap of what Greenspan said:

• Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth.
• The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions.
• The development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively.

Here is what we are doing:

• Creating a ‘NewBank’ to provide liquidity in emergencies.
• Simulating financial meltdowns caused by an explosion in hedge funds and credit derivatives.

I have three questions:

1. If the explosion in credit derivatives is making us safer why do we need to create a new bank to deal with liquidity issues?
2. If the explosion in credit derivatives is making us safer why are we simulating financial meltdowns based on those very same derivatives blowing up?
3. How long will it take before Greenspan is proven spectacularly wrong once again?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Sinkholes and Hurricanes

Following are some emails from George Pintye, yet another real estate broker contact of mine from Florida. A few links, comments, and one image were added by me.

I am a Real Estate agent in Hernando County, Florida and a confirmed Bubble-ite.

I'm writing in hopes you will consider addressing an issue of paramount concern for the Florida Housing market on your blog: the coming Hurricane season and the perilous position of the Homeowner's insurance industry in Florida.

It’s an item that doesn't get much coverage outside of Florida, but the consequences may be national if it comes to pass.

As you may or may not know, many major insurance companies have decided to limit their exposure in Florida over the past few years and have dropped policies in high risk areas. Allstate and State Farm in particular are proceeding with a systematic & orderly withdrawal from the state.

Its not just claimants of hurricane damage that find themselves dropped, often long-time policy holders who never filed a single claim, but happen to live along the coast get their notice of termination out of the blue. Many of us with private coverage are grateful we haven’t been kicked to the curb (yet) by our respective insurers and absorb the yearly hikes without complaint because we know the alternative of Citizens coverage is much worse.

Citizens, as you may know, was created as an Insurance company of "last resort" following Hurricane Andrew. It was never intended to be what it has become: the primary insurer of new & resale home purchases along coastal Florida. By all estimates, it is in trouble.

According to the Florida Insurance Council Citizens Property Insurance is now facing a deficit of more than $1.7 billion for the 2005 hurricane season, three times the $516 million deficit from 2004 that produced a 6.8 percent statewide assessment. In addition, the Florida Hurricane Catastrophe Fund confirmed it will face a deficit from 2005 as well, currently projected at $264 million. So, even without a single hurricane coming through this year, Citizen’s policy holders can already count on a bump in their premiums next year. Not like the 60-100+% yearly increases they’ve had to weather the past two years wasn’t bad enough.

Mish, 2006 might be a watershed year for my state. Even without the threat of an active Hurricane season, property values are destined to head south because of rampant overbuilding & irresponsible speculation. What will happen though if Citizens is overwhelmed by claims from a major catastrophe? They can’t keep passing the cost onto the policyholders, simply because those policyholders are already stretched to the limit financially, especially elderly on a fixed budget.

Will the federal government step in? Will the private carriers be forced back into writing policies? What happens to property values if the entire insurance industry collapses under the weight of a major catastrophe (or heck, even a couple of moderate ones) because loan availability declines significantly?

It won’t take much, I assure you, to push Citizens Property into insolvency. There are still people with outstanding claims from 2004 that have yet to receive their checks from the company, and here we are in 2006 facing a Hurricane Season that by all accounts will be just as active as last year.

I hope you can find the time to address this issue on your website, as it is already impacting the housing market in my state, and hangs like a specter over Florida’s future.

Thank you for your time,
George Pintye

George followed up with a piece on sinkholes. Some names and situations in the following email were removed or changed by me to protect the innocent (or do I mean guilty). I also added links and an image.

Since I emailed you earlier this morning, I found out that a good friend of ours just got a notice from his insurance carrier today. They will not be renewing his policy once it's up in June (guess they'll take a pass on this Hurricane season). He paid $1,500 last year for her policy just to give you some perspective. Many people are paying between $2-3k/year for coverage through Citizens, and we're a relatively average county with a median home price near $200,000.

In addition, our county has an inordinate number of sinkhole issues which are also causing the insurance carriers to run for cover. And these sinkholes are being made worse with the dry winter and spring we've been having. To my knowledge, if you buy a house in Spring Hill, FL you can't find a private carrier anymore. State Farm will put you on a waiting list that is about 2 years long.

Here's an article about a recent slew of sinkholes forcing families out of their homes.

SPRING HILL - The first sinkhole tore a 40-foot gash in the ground early Friday afternoon. Then another appeared across the street, and still another on a nearby property.

By the end of the day, six sinkholes had cracked roads, swallowed the back end of a cement truck and threatened the stability of as many as 10 homes in this southwest Hernando County neighborhood.

The sinkholes forced four families to evacuate and rattled other residents in an area already reeling from hundreds of sinkholes and the corresponding spike in insurance rates.



Oh, and did I mention we're a true bubble area? For years, Hernando County was a refuge for retirees. But in the last two years, home values have doubled and speculators have overbuilt like you wouldn't believe. We're running about an 18 month inventory of new (what I define as 2005-2006 built) houses, and that's just what's in our MLS. That number doesn't include the hundreds of builder spec homes, FSBOs, and homes still under construction.

And its not if my area needed this insurance fiasco. We already are destined to have a rough time during the coming housing downturn. Our main industry is, you guessed it, housing. We don't have much of a local economy save for service & retail. We don't manufacture much to my knowledge, and people certainly don't move here for the job prospects. We lost most of our Tampa area commuter-buyers last year when gas hit $3/gallon. Hell, its practically that high now. Many agents are already withering on the vine as the number of buyers dries up.

It’s the perfect storm of calamity for any real estate market, and we are at the center of it.

I appreciate you considering my suggestion for blog piece. In the future, I'd be happy to keep you apprised of the situation down here, though I think the two of us know which direction its headed.

Best Regards,
George

Just in time for Easter I received this update from George about Citizens.

Hello again Mish,

I wanted to send you a couple more articles on the calamity that is Citizens Property Insurance. I guess whenever you hand over the reigns to government, it will always find a way to screw things up. Compare and contrast Millionaires Bank On Citizens with Too much fraud, too few remedies for Citizens.

On one hand, you have the rich getting a discount, and on the other, you have the middle class getting squeezed out of homeownership. It’s truly mind-boggling. Why I haven't seen this issue brought to national attention is beyond me. It’s more intriguing than Enron ever was, and the fallout after a possible Citizens collapse would be even more devastating.

Thanks again and enjoy your weekend,
Best,
George

Thanks George!
And as long as we are talking about Florida, let's take a good hard look at Panama City Beach where Sales as hot as afternoon sand cool down.

Several developers have put plans on hold in this Florida Panhandle town, some after starting construction, waiting for better times. Condo prices have — hold onto your beach umbrella — stagnated or even dipped. Much of Panama City Beach is for sale.

A year and a half ago there might have been a handful of beach condo units on the market, real estate agents say. Now there is a backlog of over 2,200. More than 250 of them are listed for $700,000 or more. Look-alike half-million-dollar units are for sale up and down the strip.

Many blame a building frenzy that outpaced even the feverish speculative buyers who swarmed here from places like Birmingham and Atlanta, a six- or seven-hour drive away. The median price for condos sold in Bay County leapt 130 percent from 2003 to last year. But when the potential for quick profit didn't continue to soar, the market sputtered.

About three years ago, Darrin Quick, a Dunwoody software salesman, put money down on three condo units in planned towers.

He bought in early, in the low $200,000s, and watched the price of units like his triple and then dip, though he says they remain above what he paid. He still expects to be able to sell the condos — still under construction — at a comfortable profit.

He's not worry-free, though. He was glued to the Weather Channel, gut clenched, every time a hurricane twisted off the coast last year. He expects the towers to survive a storm, but he worries about temporarily losing the beach's brilliant sand and area restaurants. Hurricane predictors say a current cycle of stronger and more frequent storms could last 20 years.

"My other big fear is that they may be overdeveloping" the Panama City Beach area, Quick says. "You kind of hate to see it turn into a South Beach thing with high-rise after high-rise."

Real estate agents in the Panama City Beach area say some banks are putting fresh limits on pre-construction sales in hopes of avoiding investors' becoming overextended.

A few developers are scrambling to sell their in-progress projects or trying to recruit partners to get them over the financial hump, says Zepponi, the real estate agent. Other projects have been halted. Motels or other businesses that were closed after they were sold to make way for development sit vacant.

Miracle Strip Amusement Park, once a staple for beach tourists, is among the closures where construction of a development that includes condos has yet to begin. Club La Vela, a giant nightclub known for wet T-shirt contests, remains open after plans for a condo tower there fell through.

Says Janet Roan, a local real estate agent, "Now is the time to buy. It's a buyer's market."

Zepponi advises condo owners to avoid putting their units on the market now if they can avoid it.

"If people would stop this panic, things would turn around sooner," she says.

Check out some of the quotes from that article. They are priceless.

• "My other big fear is that they may be overdeveloping"
• ""Now is the time to buy"
• "If people would stop this panic, things would turn around sooner"

Where do these dimwits come from?

Now is NOT the time to buy. Perhaps 3 or 5 or even 8 years from now will be the time to buy but certainly not now.

Check out the fear that they "may" be overdeveloping. Is there any freaking doubt about it? By the way, his big fear is misplaced. Since that buyer's condos are still under construction his big fear ought to be that builder goes bankrupt and just walks away leaving a bunch of totally worthless half built towers standing as a monument to stupidity.

Stop the panic? Pray tell when did it start?

Let's make a list of Florida attractions.

1. Hurricanes. check
2. Sinkholes. check
3. Condo Mania. check
4. Unsustainable Appreciation. check
5. Clueless Snowbirds. check
6. Wells Running Dry. check
7. Earthquakes. no
8. Unbearable Heat and Humidity. check
9. Insurance Problems. check
10. Mudslides. no
11. Termite Problems. check
12. Severe Affordability Issues. check
    

Florida is ground zero for housing bubble fallout, but rest assured the problem will spread. Trapped buyers have not yet begun to panic. They will.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Customers For Life

For several months now I have been talking with Mike Morgan / Morgan Florida, a real estate broker serving the treasure coast area of Florida. In our most recent conversation Morgan tells me "prices have already fallen 10%, regardless of what median prices show. In addition transaction volumes have fallen off the cliff".

Unlike other brokers I have talked to, Morgan is expecting "further declines in the neighborhood of 20% or so, more on condos". He is advising his clients that "The market has changed and that sellers must accept that reality if they want to get their house sold". Realtors openly telling their clients to expect substantial further declines simply is not the norm.

Back in January and February Morgan said that "Centex was so desperate to close deals before their March 31 fiscal year end they were offering $60,000 select home sites that were not selling well. But that is just the start of it. Centex was also offering 6% commissions to the agency booking the sale plus an additional $10,000 selling bonus to top it off."

Obviously Centex was under extreme pressure to unload some properties ahead of their fiscal year end. A year or so ago builders were offering 1-2% at most to outside agents. Some homebuilders would not work with outside agents at all. On a $400,000 home that is an extra $24,000 in lost profit as compared to six months or a year ago. Factor in the $60,000 off then add in a $10,000 bonus and Centex made a whopping $94,000 less on those home sales than expected.

Those deals are now gone, but I suspect Centex and others will be forced to put them back on. The reason median prices have not come down that much is that builders are booking the full value of the sale, before these discounts were granted and calling that the sale. Discounts are attributed to advertising. Prices are now biased on the high side just as they were biased on the low side on the way up. Morgan assures me that "comparable prices have fallen 10% or so" regardless of stats that show otherwise.

Rising inventories are going to continue to add downward pressure on prices. Sentiment was steadily falling from August through December, but a sudden steep falloff in January and February (peak season in Florida), seems to have caught nearly everyone by surprise. Morgan was ahead of the curve by advising his clients to "take a little less" in November and December to "get the deal done". It seems that was sound advice.

How does a Realtor Survive?

So "how does a Realtor get business in this type of environment?" I asked Morgan. He explained there are three kinds of Realtors:

1. Those that tell a customer what he wants to hear just to get the listing
2. Those that tell their clients the simple hard truth
3. Those that prey on the insecure hoping to profit from it by a quick sale

Morgan himself is losing business because he will not list houses for what the prospective client "needs to get out of it".

Now that's a scary thought: Clients "need a price" that the market simply will not bear. With all the cash out refis used to support consumption, more and more people are going to be trapped, upside down in their home, unable to sell it.

Is there any point taking a listing in this environment if the house is over priced? "It is a waste of time and energy" for the seller and the agent both, says Morgan. "Why bother?" At best there will be a loss of time, but the real risk is "walking the market down". Here is a typical example: A customer asks for $380,000 when he could only get $350,000. The house sits for two months and the customer now is willing to take $350,000. Opps, it's too late. The market price now is $335,000 but the customer wants $350,000, a price he could have received two months ago but can not get now. This process continues until the house is priced correctly or the seller needs to get more out of it than the market will bear and the listing is pulled.

Still, Morgan tells me that he is doing deals when others are not. I asked him how. He gave me an example using Centex. Centex offered $60,000 but that still was not enough to entice buyers so in several cases he gave his clients half of his $24,000 commission and half of that $10,000 selling bonus too. Those clients got houses for $22,000 cheaper than the discount offered by Centex. In effect, Morgan cushioned his clients against an extra 6-7% price decline. Who else is doing that, I wonder?

Like all brokers Morgan goes over recent sales and active listings. One thing he is doing that others are not is showing clients pending sales. Recent sales of even one or two months ago can be hopelessly out of date in a fast market. Pending sales are more likely to give a buyer or seller a better idea of what something is going for now.

When it comes to listing houses for his clients, he is recommending selling bonuses and very competitive initial asking prices to make sure the house gets shown. He is willing to give up his split of that selling bonus to get a deal closed. "With skyrocketing inventories, one must do something to stand out", he said.

I thought about this for a while and it became obvious to me that Morgan is attempting to create "Customers for Life" by treating them more fairly than necessary to get their business. Will they remember that? You bet.

How many places truly understand the value of a customer anymore? Service is now a buzzword. It hardly exists in practice. Proof of that is easy to come by. Call the customer service of any company and it is likely you will go through two minutes of automated voice transfers just to get to the wrong department.

In the short term it might seem that Morgan is losing $10's of thousands of dollars commission per sale. But is he really? By sharing his commission with buyers he might be closing a deal that otherwise might still be sitting on the table. Short term, half a loaf is better than none. Long term he is building up a client list for repeat business and referrals down the road. How many word of mouth customer referrals is he going to get by doing business the way he is?

Revised splits, selling bonuses, splitting commissions with clients, insistence on realistic pricing, and willingness to take half a loaf are what it is going to take to survive the bust. Those flexible enough to do that will be building customers for life.

The Mortgage Business

As long as we are on the subject of treating customers fairly I may as well address one of the questions that people send me time to time regarding a link to No Bull Mortgage on my blog. The typical question goes something like this: "Mish why are you sponsoring a mortgage company on your blog when you think an enormous real estate bust is coming?"

The answer is simple I have known Dave Donhoff, the owner of No Bull Mortgage for years and I know he treats his customers fairly. Regardless of what I think is about to happen to home prices, some people simply want to buy a home. Unlike other places, Donhoff does not steer his clients to pay option arms to make an extra % for himself. If a client is stretching too much for a house Donhoff will come out and say so, and if Donhoff does not believe a "stated income" he will point out the consequences of stretching the truth: potential bankruptcy as well as a possible fraud conviction. Like Morgan, Donhoff is attempting to build customers for life by watching out for their best interest. In the end both Donhoff and Morgan have both aligned their best interests with their customer’s best interests. There is simply no better way to build a business.

Compare and contrast those examples with a letter I just received from "WeDoLend". A clear window on the envelope was big and bold "RE: Merrill Lynch Credit Corp". It appeared I was getting some sort of update from Merrill Lynch about my mortgage. It was anything but. The letter itself started of with: "I have good news. ..... in addition to the mortgage obtained from Merrill Lynch Credit Corp you qualify for a fantastic opportunity...... Guess what? A new loan enables you to skip a mortgage and have no out of pocket closing costs". The bolding was theirs not mine.

Only in the fine print was it disclosed that what is being offered is a pay option arm, and only in the fine print was it disclosed that the offer was not from Merrill Lynch at all. I did call Merrill Lynch and they had already received several calls from customers but I was the only one that got to the fine print disclosing the details. Apparently this kind of nonsense is perfectly legal but what word better describes this kind of attempt to build customers than "sleazy"? It is all too typical of the anything for a buck crowd, and there are probably going to be a lot of suckers taken in by this ruse. I really do not know how some of these lenders can sleep with themselves at night. If I can do my part to steer people away from places like that, I consider it time well spent.

In the interest of full disclosure, I do not get a thing from Mike Morgan should any customers find him as a result of this article. However I may make a token amount if someone clicks on the link from my blog to No Bull Mortgage and takes out a loan through them.

I need to point out two things about this arrangement:

1) My relationship with No Bull Mortgage is in full compliance with the Real Estate Settlement Procedures Act (RESPA).
2) To date, I have not earned a single dime from it and I am not sure I ever. I simply do not expect many people reading about economic bust theories to be clicking on ads for a mortgage lender.

As long as we are in full disclosure mode, I have not made over $350 combined total in over a year's time off of the ads on my blog. It certainly is not a get rich quick scheme. For those that think there are lucrative advertising revenues to be had from blogging, rest assured that is not the case, at least not in my experience.

Customers For Life

In the end, this post is not about real estate or mortgages. It is about sales and customers and what it is going to take to get them regardless what business one is in. Those in sales might benefit by reading the book Customers For Life: How To Turn That One Time Buyer Into A Lifelong Customer, by Carl Sewell.

Looking at Amazon.Com I also see a listing for How to Win Customers and Keep Them for Life by Michael LeBoeuf. I have not read that book so I can not make a recommendation on it.

I did read Customers For Life in 1990. The author, Carl Sewell, is a luxury car dealer from Texas. The book details his experiences in selling cars. However, his book is no more about cars than this post is about houses. Sewell's advice is as true today as it was then.

Sewell's Ten Commandments of Customer Service

1. Bring 'em back alive.
2. Systems, not smiles.
3. Underpromise, overdeliver.
4. When the customer asks, the answer is always yes.
5. Fire your inspectors and consumer relations department.
6. No complaints? Something's wrong.
7. Measure everything.
8. Salaries are unfair.
9. Your mother was right.
10. Japanese them.

Sewell asks the question: "Are we going to make an extra effort for someone who might buy twenty cars from us? You bet." If you are in mortgages ask yourself what you are going to do for someone that might buy 2-3 houses from you over the course of their life in addition to recommending you to ten other people that might do the same. Are you doing anything special for them?

Let's compare those ideas to the real estate market today. A real estate agent can no longer just stick a sign on a lawn and expect to get a sale, nor can a builder just put up a tower and be flooded with condo buyers. Competition for customers of all kinds is increasing, and that goes well beyond the housing slowdown. Look no further than GM taking it on the chin from Toyota. I expect increased competition for dwindling customers will quickly extend beyond real estate and auto dealerships to nail parlors, upscale beauty salons, and even lawn care services.

Whether or not you are in sales, everyone has "customers" to take care of. I was in the banking industry for over 15 years but never sold a thing. My "customers" were end users in the credit card business. If you have not done so already, it's time to figure out who your customers are, what new customers you want (if any) and make sure you take care of them better than your competition does. Your economic survival may depend on it.

Mish Addendum:
I wrote the above about 14 days ago (April 2).
Whiskey and Gunpowder had first use right to it but did not use it April 14th (and it may not be on their archives until later this week). Since I wrote the above, the Florida market has gotten even tougher to deal with as I reported in Shoot the Messenger. More from Mike Morgan will undoubtedly be coming up.

As for now it seems that Florida is at the epicenter of the bubble busting with hurricane season rapidly approaching. I will have more comments on that later this week.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Subprime Lender Acoustic Goes Under

As of 4/14/2006 Acoustic Home Loans is no longer in business.

Acoustic will not accept new loan submissions after 4/13/2006; however, we will continue to process loans that are in approved status or better. Applications received after 4/13/2006 and loans that are not in approved status or better will be returned to the broker. If you are a broker with a loan in process, a borrower who has a loan with Acoustic, or the media please call our main number at 866.226.8784 and you will be directed to the appropriate person.

Hmmm. It seems the industry's first and only "Guaranteed Broker Contract" is no longer guaranteed. Acoustic was the 27th-largest nonprime wholesale originator in the nation.

Rest assured many more "guarantees" will be broken in the upcoming months.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Shoot the Messenger

Mike Morgan is telling me that his email basket is filled up with responses from the Wall Street Journal article Hot Homes Get Cold In Once-Booming Markets Such as the Florida Coast, Housing Sales Languish. April 12, 2006; Page B1

I was pleased to beat the WSJ to that story by several days in The dreaded "D" word surfaces Sunday, April 09, 2006.

Here is the latest report from Mike Morgan:

I’ve received a variety of emails and voice mails from people all over the United States today in response to a very minor mention of my name in the WSJ. 75% of the communications are people that think I am a sleaze for selling junk to my clients. Little did they know, my clients are fine. We warned about this more than a year ago.
Anyway, take a look at the email I received below. If that doesn’t drive home the seriousness of what is just only beginning to unravel, I will send you a dozen more emails I received . . . like the email I received from the Dad of a young wife that is getting a divorce because the husband lost it all at the craps table in Vegas – strike that – I meant to say the husband lost it all buying flip properties in Vegas. By the way. She has 2 young babies and is moving back home with Mom and Dad. Or the email from the couple (68 and 70) that were getting ready to retire to Florida in 3 years. Guess what? They’ll retire, but the husband lost so much money buying straddled foreign exchange derivatives on Italian lira – strike that – I mean to say five spec condos in Naples (Florida) to make some extra money to buy a special retirement home, that they are not going to retire in the style they thought. They still haven’t sold the condos, so they are in for a big surprise. As he put it in the email, the 40 years of trust built up in that marriage has been wiped out. He wanted to know what I could do to help him. I’m not the Easter Bunny.

I bought an $850,000 a year ago on a little less than a quarter acre of land and with barely 2000 sq ft. under air. I made the "wise" choice to purchase it with no money down! This home was just on the threshold of my affordability...even with the wife working. Oh did I mention I have an ARM mortgagte...so now my payments are going up up up! S@@@...we are paying more for the same house...but not building any more equity! This sucks! Then the wife comes home after just sending the daughter to the orthodontist to get her teeth fixed, and declares ..."Tom, did you see that the Klevelands just put their house up for sale?" "No, I din't, I thought they really loved the area"...so with a little digging, I find that they are asking $800,000 for their home...and it is just about the equivalent to ours. Then your mind races...what is going on? Then you realize 3 months latter that their house is still up for sale, with a neon lights above the realtor sign, that says REDUCED (to $750,000)...not only that, but there are now 20 other for sale signs up in your neighborhood...THAT IS WHEN THE SHOCKING REALITY SETS IN...you will never get that $850,000 out of your house, and all the interest you have been paying is just that...a fart in the wind...and sallys orthodontist bills are pilling up, and our credit card is maxed from all the new furnishings we decorated our $850K home with...not to mention that there are rumors at work, that the company is sending more jobs to India, to save a buck, and you panic. Now I am staring aimlessly into my newly adjusted mortgage bill thinking, "HOW THE F@@@ DID I GET MYSELF INTO THIS". So I will sell my useless home at a loss..upside down and all, move to a region with cheaper homes, maybe a "fixer upper" take a lower paying job with a commute and sell the sports car and the boat, so I can with a clear conscience look at little Sally with a mouth full of wires and crooked teeth and smile, all the while thinking, ok, now how the f@@@ am I going to pay for her college! I was one f@@@@@@@ idiot...I hope no one besides my wife ever finds out. This has just about destroyed my marriage. Oh, one more thing. Did I mention I bought another home in here as an investment flip that we closed on four months ago. I can’t sell it for what I paid. I can’t even find a renter. I haven’t had a showing in more than 2 weeks.

If you want to either buy or sell in Florida and want to know what is really happening, give Morgan Florida a call.

Stories like those are just starting. There will be more and more of them, and more than likely those affected will blame the media and messengers like Morgan. I have proof of that already. Here is a snip from the WSJ article above:

Some Floridians blame the media and even Wall Street for scaring people away. Mr. Linsley recalled a headline in a local paper declaring that the local housing market was overvalued. The headline type was so bold that it looked as if the nation had just declared war. "The media is killing the investors," Mr. Linsley says.

To Mr. Linsley I have some questions for you.

• Where were your complaints when the media was reporting about people like yourself snapping up 2 and 3 units at a time after a multi year boom in which prices had already doubled?
• Where were your complaints when the media reported that some people were camping out all night just to get in line to buy a condo?
• Was the media not reporting on that too?
• Shouldn't that have been some sort of sign of a top?

Perhaps Mr. Linsley if you want to know who is to blame for the crash, then I have four answers for you, one in the form of a question:

1. The Fed by slashing interest rates too far.
2. Fannie Mae and loose lending standards everywhere.
3. Congressional policies to make housing affordable. Those programs are now backfiring.
   
4. I suggest you look in a mirror and ask yourself "What the heck was I doing fueling a bubble like that by buying three houses at the peak of insanity?'

The Fed and Fannie Mae and lending standards provided the money, but you Mr. Linsley pulled the trigger. I have no doubt that sometime down the road when bankruptcies start soaring, there will be a Congressional investigation that ends up blaming everyone but those responsible.

To everyone: On behalf of the Easter Bunny, enjoy the holidays.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/