California Party is over forever ??!

6/11/09

I know recently I am kinda lazy to write too much here, but I do write analysis on chinese for another blog. Now, it is official:

California officially has a drop-dead date now. State Controller John Chiang told Arnold Schwarzenegger last night that the state has 50 days before it hits a financial meltdown. So in that time, it either needs a bailout, massive budget cuts, or a brand new bubble (green tech, Internet, real estate, something like that).

The tax revenue numbers are not at all good for the green shoots crowd:

Reuters: Underscoring the severity of California's cash crisis, Controller John Chiang, who has previously warned the state's government risks running out of cash without a budget deal, said revenues in May fell by $1.14 billon, or 17.7 percent, from a year earlier.

Additionally, the revenues of the government of the most populous U.S. state fell short of estimates in Schwarzenegger's budget plan by $827 million, Chiang said.

Of all three outcomes, we'd say the federal bailout is the most likely, since surely a California collapse would kill any recovery.

Were California forced to make significant cuts to its spending, the ramifications could be quite serious. School systems and universities would be endangered (which would threaten the state's long-term economic prospects). Increases in crime, homelessness, and serious poverty would encourage residents to leave. Service cuts could threaten key industries. In short, the recession could grow far more serious in the state than it already is. That would threaten recovery across the nation.

My comments: Let's count down 50days or less. My suggestion if any of you have any stocks, please get out now or before the deadline come. This is probably the cause for next big down leg started. Unless there has big change for the budget problem. However, despite the outcome whether California filed bankrupt or get bail out. It would surely delay any recovery hope for US. Watch out for US dollars...Good luck!! Do we still have any so called "Green Shoots" I do not think so.

Need another stress test?!

6/9/09

Earlier this morning, TARP panel chair Elizabeth Warren recommended running the stress tests again on US banks, but using a higher unemployment rate and for more years (including 2011 through 2013). This would include these higher commercial real estate defaults that everyone now sees coming.

We just went through a period of time where there was extreme negative emotion. That followed a period of time where there was extreme optimism. The extreme optimism lead to a period of time where stocks were selling substantially higher than their growth rates, but no one cared. When the extreme optimism failed, we had a huge sell off in the stock market.

- Emotion creates oversold phases.

- Emotion creates overbought phases.

Yes, Emotion is the factor. However, what push investors emotion?! Again, I do not see this is the new bull market start. When the optimism failed, market crash again and it happen very quick.

Housing Bottomed ??! Think again !!

6/8/09

The Past: Losses Mostly Behind Us:

• Wave #1: Borrowers committing (or the victim of) fraud & speculators, who
defaulted quickly. Timing: beginning in late 2006 (as soon as home prices
started to fall) into 2008. Mostly behind us.

• Wave #2: Borrowers who defaulted when their mortgages reset due to
payment shock. Timing: early 2007 (as two-year teaser subprime loans written in early 2005 started to reset) to the present. Now tapering off as low interest rates mitigate payment shock.

The Future: Losses Mostly Ahead of Us

• Wave #3: Prime loans (most of which are owned or guaranteed by the
GSEs) defaulting due to job loss and home price declines (i.e., underwater
homeowners). Timing: started to surge in early 2008 to the present.

• Wave #4: Jumbo prime, second lien and HELOCs (most of which are on
banks’ books) defaulting due to job loss and home price declines/
underwater homeowners. Timing: started to surge in early 2008 to the
present.

• Wave #5: Losses among loans outside of the housing sector, the largest of
which will be in the $3.5 trillion area of commercial real estate. Timing:
started to surge in early 2008 to the present.

Importantly, Whitney and Glenn believe that recent signs of stabilization in the housing market are a HEAD FAKE. Prices still have a 10%-15% to fall and won't recovery quickly.

Rather than representing a true bottom, recent signs of stabilization
are likely due to two short-term factors:

1. Home sales and prices are seasonally strong in April, May and June
due to tax refunds and the spring selling season

2. A temporary reduction in the inventory of foreclosed homes

– Shortly after Obama was elected, his administration promised a new, more
robust plan to stem the wave of foreclosures so the GSEs and many other
lenders imposed a foreclosure moratorium

– Early this year, the Obama administration unveiled its plan, the Homeowner
Affordability and Stabilization Plan, which is a step in the right direction –
but even if it is hugely successful, we estimate that it might only save 20%
of homeowners who would otherwise lose their homes

– The GSEs and other lenders are now quickly moving to save the
homeowners who can be saved – and foreclose on those who can’t

– This is necessary to work our way through the aftermath of the bubble, but
will lead to a surge of housing inventory later this year, which will further
pressure home prices

Here's what will likely drive future losses:

1. The Economy
• Especially unemployment

2. Interest rates
• Ultra-low rates have helped mitigate some of the damage
• But if the recent spike in rates continues, it could lead to an even greater surge
in defaults and losses

3. Behavior of homeowners who are underwater [Approx 30% of mortgages right now]
• Roughly one-fourth of homeowners with mortgages are currently underwater,
some deeply so
• For many, it is economically rational for them to walk – so called “jingle mail” –
but how many will do so?
• There is little historical precedent – we are in uncharted waters
• As home prices continue to fall and homeowners become more and more
underwater, they are obviously more likely to default, thereby creating a vicious
cycle, but what exactly will the relationship be? Have millions of foreclosures led
to a diminution of the stigma of losing one’s home?
• Our best guess is that there will be rough symmetry: for homeowners 5%
underwater, an additional 5% will default due to being underwater; 10%
underwater will lead to 10% more defaults, and so forth…

Whitney Tilson and Glenn Tongue of T2 Partners believe the housing-market collapse will have five distinct phases. In their opinion, we're just finishing up Phase 2 and moving into Phase 3.

My Comments: Even without the knowledge like T2 Partners, it is very common sense to see we have long way to see the real housing bottom. Folks, go to internet, you can find tons of houses around you for sale. Also, you are search there are more still in banks book and not pooling into the current market yet. So, housing bottomed and steady?! Think again.