September 2007

Here is a chart from the NY Times covering the resale price of existing homes.


The chart is adjusted for inflation. While the purpose of the chart is to say that some people saw the bubble coming… that’s not why it is interesting to me.? There are two other points worth noting.

1. Prices declined from 1989 to 1996 — a whopping 7 years.

2.While prices have fallen, they have not fallen by that much.

So far since the peak in this index, prices have fallen around 6%. Back in the early 90s, prices fell approximately 15% (a guess, I don’t have the energy to dig up the original data series).

I’d probably want to look at a longer data series to draw any additional conclusions from this chart. But, as we’ve discussed before, there are a lot more ARMs that need to reset before the selling pressure subsides…

FYI, MM rates on many banks seem to be heading down. NC SECU just changed their MM rate from 4.5% down to 4% even (on 9/20/2007), ING went from 4.5% down to 4.3% (sometime in Sept). Makes sense though, since the banks will need this extra capital as the foreclosures and credit crunch continues to play out and I’m sure the Fed’s dropping of the discount rate helped further justify this drop. I expect a further slide in the coming months ahead. On a positive note, MM funds like Vanguard’s VMMXX are still holding steady and unchanged, promising a returning 4.97% after expense ratio is accounted for…

I ran across some interesting points in a post titled Buyout Bingo Reversal Continues at Mish’s blog… the big private equity buyouts that were so prevalent only a few months ago include “breakup fees”, meaning fees that need to be paid if the buyout doesn’t go through.

In the case of Harmon International, the fees were $225 million. That means that KKR and Goldman Sachs (the buyers) would owe Harmon a rather large amount of money if the contract is honored. They do claim that their (KKR and GS) businesses have undergone “a material adverse change” and thus they shouldn’t be bound to the contract any more.

The Sallie Mae buyout apparently includes a whopping $900 million breakup fee.

Mish sums the case up pretty well:

None of these deals made any real economic sense but the deals did pad the pockets of the underwriters like Citigroup (C), Merrill Lynch (MER), Goldman Sachs (GS), Lehman (LEH), etc, with lucrative fees at least up until now.

With buyout bingo in reverse, underwriters are paying breakup fees to keep the large loans off their books. As long as investors were willing to take on risk (buy junk at insane prices), the underwriters danced the tune.

It’s telling that Citigroup, Goldman, etc, do not want the deals if they have to provide the funding themselves. Not only do they not want them, they are willing to pay breakup fees to get out of them. That should be enough to tell you who has been and remains the sucker in the deals that do go through: hedge funds and individual investors that buy into them. After all, if Goldman and Citigroup don’t want the deals or the debt, why should you?

Pretty graphics from WSJ (the map on WSJ’s site is interactive and in the free section):


Here are some books that I consider pivotal in my financial education:

  • Fooled by Randomness by Nassim Nicholas Taleb – I’m also currently reading his new book, The Black Swan, that is somewhat a sequal to FbR and promises to be just as good.
  • Education of?A Speculator & Practical Speculation by Victor?Niederhoffer -?Not all teachers need to be successes.
  • Option Volatility & Pricing?by Sheldon Natenburg – The ultimate reference for options. It saddens me that his recent release is such crap fluff.
  • The Trading Game by Ryan Jones – While I finally concluded that the exact method of?position sizing?taught in this book is often not the best, it brought my attention to the importance and?complexities of position?sizing.?
  • The?Options Edge?by William Gallacher?- Forever changed the way I thought about options and helped me to think outside the box. Sends all the “greeks” home on the slow boat to Greece.
  • Evidence-Based Technical Analysis by David R. Aronson – A cold, slap in the face. Teaches you to apply the scientific method to any trading ideas you may have.
  • Running Money by Andrew Kessler – Reads like a novel and opens the mind. Worth it just for the thesis on the modern economy alone.
  • When Genius Failed by Roger Lowenstein – I can only hope and try not to repeat these mistakes. Are we doomed to?
  • All Your Worth by Elizabeth Warren & Amelia Warren Tyagi – You can’t forget personal finance. This is the clearest, most original & effective approach to personal finance and budgeting that I’ve come across. It does away with line-item budgets and instead focuses you on balancing your money. This way you always live well and live well within your means.
  • The 4-Hour Workweek by Timothy Ferriss – Work less, earn more and live anywhere. Yeah right! Live it, if you dare.
  • The rest of my influence comes from the world of academic journals. There are too many to mention but I generally recommend that you make a regular habit of scooping as many free research articles about finance off the web as you can.

From this list, you might think I’m an options trader but I’m not really. It just seems that some of the strongest writing and thinking about markets has come from options traders. And I know it’s a short list, but there is so much trash in financial writing that it makes sense to me that, at the end of the day, only a few gems would shine.