The case for pent-up demand

There is a strong case pent-up demand building in the economy.

In 2007, demand had been exhausted by lower standards of credit.  In 2011, credit standards are tight, credit quality is high.

As time passes, the 2004 to 2008 loan vintages will become a smaller proportion of bank balance sheets.  Credit provisions should decline, adding theoretical value to bank balance sheets.  The average pre-payment speed is widely assumed to be 5 to 7 years.  We can assume the underwater loans will have a longer lifespan, on average.  Short sales, deed-in-lieu, third party sales are becoming more commonplace. Outside the District, former homeowners are keeping rental prices high.

There is a strong case for future growth in purchase-money mortgages in boom economies.  Declining inventories keep supply limited. Fewer housing starts and strong investor demand contributes to limited supply.  Healthy economies will see further migration and increased household formation. According to Census, immigration and minorities play a large role in population growth of boom economies.  Those burned by housing during the boom will inevitably put off purchasing for at least a few years to repair their credit.

Ranking the dictators (1900-)

Where does the "King of all Kings" rank?
http://www.scaruffi.com/politics/dictat.html

Theoretical floor in global economy

The markets have been a little crazy. Euro could unravel and the global economy could fall into another deep recession.

OR

There could be a theoretical floor, experienced during apocalyptic events such as the financial crisis, where certain companies will always produce X and earn Y at a constant currency rate. If you assume an inflation rate of 0%, XOM and JNJ and MO will always produce X goods and earn Y dollars in a functioning economy. The intrinsic value of services and goods provided will sustain a theoretical floor in the economy.

The theory is based on basic necessities of survival for a given population.  If the population were to decrease dramatically through a cataclysmic event, the bottom would be artificially lower, defined by a curve such as exp(-y). The exponential function was chosen because it represents the steepest slope on the population curve.

The financial crisis was one of the first events to test the theoretical bottom in the modern economy (1990+).
http://en.wikipedia.org/wiki/Exponential_function
http://en.wikipedia.org/wiki/World_population

Bernanke's Race to the Bottom

With two rounds of Quantitative Easing complete, the US economy appears to be looking for firmer footing. Ahead of Helicopter Ben's speach tomorrow, expectations are low for QE3.  Inflation expectations are bound to take hold, eventually. I advocate going against the recent grain, buying stocks on any dips.

Money supply is extremely high (http://en.wikipedia.org/wiki/Money_supply).  Banks will eventually move the cash off their balance sheets in search for higher yields, as soon as they find an asset class they can believe in.  My first guess would be apartment REITs as renters in high cost areas such as Washington DC pay extremely high rents.  I like Avalon Bay of Arlington, VA (http://www.google.com/finance?q=avb).

The debasement of the dollar through Quantitative Easing is Bernanke's race.  How quickly can the Fed chief single-handedly cause asset price inflation? Devaluing the dollar will have the following effects on the economy:
- asset price inflation
- cheaper exports, increased manufactured goods
- wipe away household debt (i.e. mortgage, credit card, stud loan)
- increased purchase of T-bills by China as they seek to retain the fixed rate of money exchange
- larger spread between actual and theoretical value of yuan, opens door to currency speculators
- less incentive to hold cash

At what point does M2 move through the system? My guess is the money moves to emerging markets and domestically into mixed-use commercial buildings.  After all, real estate is currently very cheap in many areas, making commercial and multifamily development more enticing.

Gold will eventually shatter. I was wrong buying puts at 1,000/ounce. Two thousand an ounce is very tempting.  The big picture is people don't trust governments to do what is in their economic best interests.  However, by the time the bus falls off the cliff, it will be too late. Does anyone remember oil in the summer of 2007? The only reason to buy gold is fear. If a country is forced into pulling out of the Europen Union, this may be your final chance to get out.  After all, a couple of hedge funds could easily have access to more capital than the Italian government. There is a giant game of chicken, and usually, whoever puts the most money on the table wins. Think Soros shorting the British Pound.

In June 1879, William Tecumseh Sherman gave a speech to the cadets of Michigan Military Academy.  There before a crowd of 10,000 people he had this to say,“…I’ve been where you are now and I know just how you feel. It’s entirely natural that there should beat in the breast of every one of you a hope and desire that someday you can use the skill you have acquired here.  Suppress it! You don’t know the horrible aspects of war. I’ve been through two wars and I know. I’ve seen cities and homes in ashes. I’ve seen thousands of men lying on the ground, their dead faces looking up at the skies. I tell you, war is Hell!”

            Hell is what we as a nation have been in for the better part of a decade.  But this hell had an upside.  During this last decade the United States has had to re-grow its’ military from the drawdown of the 1980’s - 1990’s to the state we are in today.  Prior to 9/11 the Defense budget was around $370 billion, today the Defense budget is $550 billion dollars.  This buildup in personnel and equipment led to many things; jobs and an industrial military complex that has benefitted greatly from America’s decade of confict. 

            The military has around 1.4 million men and women serving on active duty.  This is a far cry from the previous decades when there were over 2 million people serving on active duty (Defense Budget for FY2003: Data Summary", CRS Report for Congress). It is easy to do the math, since the end of the Cold War the U.S. has cut over 600,000 from its active duty force.  From this downturn the military has had to rely more heavily on defense contractors.  The last fiscal year alone the “Department of Defense has spent $316 billion dollars on contracts… and at the start of Desert Storm there were 50 people serving in the military for every 1 contractor over seas.  In Afghanistan now, there are approximately 100,000 contractors, a ratio of 1:1  (Singer, Peter W. "The Regulation of New Warfare", The Brookings Institution, February 2010.).  Cuts to the Defense Department are being felt on Military bases all across the United States.  Security officers on posts are getting laid off, soldiers with a spotty past that the military turned a blind eye to, as little as 3 years ago, are now being chaptered from the because they never could shake their criminal behavior.  It won’t stop there, soon it will be PT failures, or soldiers that can’t progress in ranks and if the Defense Department can’t meet it’s numbers from chapters then the cuts will come.

            Cuts too are already being felt in the defense industry.  “Honeywell, which sells aircraft engines and other kits to the military, expects the base budget to decline about 1 to 2 per cent a year over the next decade, resulting in a 2 per cent to 4 per cent annual decline in revenues for its defense unit for three years...expect these budget cuts to affect the large prime contractors and to ripple across the supply chain to smaller, specialized providers,” (Industry feels the sting of US Defense Cuts, By: Jeremy Lemer, Financial Times).  The talk now isn’t about when change is coming, because it has already.    

People today are tired of war and look at the military as the biggest offender of an overspent federal government.  They are tired of the nation building in countries that many of them will never set foot in. So politicians will go after the defense budget, because most of their constituents will clamor for that happen then to see cuts in their medicare or social security.  But the Defense budget has an unforeseen effect on these two programs.  The Defense Budget is what has made the American economy the powerhouse it is today.  We have freedom of the seas because of the power of the US Navy.

  The United States needs to be strategic in allocating future resources.  Human rights in developing and land-locked countries depend heavily on foreign assistance.  Better appropriations procedures and auditing can go a long way to ensure that mouths are truly being fed. Budget constraints will be felt on domestic and international economies.  It will be as Sherman said, "hell".    

Outlook for S&P/Moody's: 'Negative'

On August 8, 2011
Congratulations Standard and Poor's. You have created an enormous buying opportunity for anyone who cares to take notice.  As a matter of fact, the yield on US T-Bills declined today as investors flocked to US securities in search of a safe haven investment, whether it be AA+ or AAA or AAAAAAAAAAA, doesnt really mean anything as far as this blog is concerned. I would buy more deep in the money leaps (jan13 or later) on WFT, POT, PM, MO, XOM, CVX. I own call options on WFT and POT.

In light of Standard and Poor's recent rise to fiscal responsibility, I would like to formally request a copy of all bonds and securities rated since the year 2005. In this report, I am specifically interested in cash flows for mortgage backed securities originated between 2005 and 2007, the payoff date of the security, the interest payments expected to be received by the investor,  the actual interest received by the investor and of course the correspond 'official' rating.
http://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106192.html


On August 2, 2011

Moody's has posted an 'Outlook Negative' on the US credit rating (<http://finance.yahoo.com/news/Moodys-backs-US-tripleA-apf-2668047537.html?x=0&sec=topStories&pos=main&asset=&ccode=>).  I must think that too much austerity as the US is coming out of a recession is certainly not a good thing for the economy. At the same time, we need tax increases to close the deficit. The lawmakers did the right thing and got the debt deal done. Wasn't too good. Wasn't too bad. Good enough.  Let us move on.

I like how Moody's/Standard and Poor's are all of a sudden the steward of fiscal responsibility.  In Michael Lewis' book The Big Short,  he notes that anybody who doesn't get a job at a big investment shop has to settle for a job at Standard and Poor's, Moody's or Fitch.  He also points out that those betting against the housing market found plenty of ammunition in the pay to play scheme concocted in so called AAA ratings.  We should not forget that in the not too distant past a AAA rating was assigned to every subprime security in the TBA market.

The purpose of ratings agencies is to provide an opinion on the collateral that backs the debt of a corporate or government entity.  Typically, ratings agencies (and analyst opinions) are simply following the lead of bond investors in the market. They provide a reactionary opinion based on what has already happened based on bond yield spreads.  Since the subprime debacle, the agencies attempt to get out in front of credit problems of the US or European governments. They are simply translating what the bond markets are saying into plain English.

We should acknowledge the agencies in their plight to make themselves whole to the stewards of credit and simply ignore them when it comes to economic policy.  As they say, let the money do the talking; Bond yields will speak for themselves.    Even better, perhaps the ratings agencies should make statistics available on opaque securities that earn their stamp of approval, reference expected cash flows, debt percentages, and verify collateral to weed out fraudulent entities.

CIA vs. ISI

CIA vs. ISI

IN islamabad, the pakistani government approved of a joint ISI-CIA led taskforce to engage in sharing intelligence.  Yet, the government has refused the visa applications of their US counterparts.

It is clear that there are factions within the Pakistani ISI that support and operate in tribal areas with diplomatic immunity.  The only intellegent sharing happens to be when the Pakistanis tip off bombmaking factories before the so called 'raids'.  The pakistani armed forces actually ask permission before even entering certain tribal areas.  

The CIA asking the Pakistani armed forces to politely raid bombmaking facilities, clearly isn't working. A policy of identifying the facilities and asking permission is not exactly the US/CIA strongest quality.  It is at least evident in the media outlets that the internal leaks have identified targets on multiple occaisions that have been well aware of upcoming raids.  It was a good thing we did not use this policy before nabbing Bin Laden. 

Pakistan has always been insecure about its sovereignty with INDIA and used the tribal areas as a hedge against its fierce competitor. Will future terrorist attacks within the country change this view?  Or will extremist groups provide more hope, jobs, and opportunities for the youth of Pakistan? how much evolution is resisted before the step in the wrong direction turns to be catastrophic? 

A focus on economy, jobs, education and opportunities for the youth will yield the best return on invested capital.  

A war has never been won on a battlefield and lost in the economy at the same time. 

Human rights have never been won with diplomacy. 

Human rights are lost when economies are destroyed.  People who have nowhere to turn, usually find outlets on the extremes to vent their frustrations.  This happens in developed and undeveloped economies, equally.  Exhibit A, Oklahoma City Bombings.  

Government policy should take the following factors into consideration when attempting to evaluate the sovereignty of a nation:

- unemployment rate

- infant mortality rate

- regime structure

- economic output 

  - inflation

  - gdp per capita

- Healthcare/disease control

- water quality

- percent of homes with electricity

- percent of homes/land with running water

- military capabilities

- do they control their own territory efficiently? 

- overall happiness  

Many of these measurable outputs are psychological factors that affect a country's future path.


yahoo
ap news sources
<http://news.yahoo.com/s/ap/us_us_pakistan>

When has the market fully priced in the end of QE2?

Commodity stocks and inflation bulls have taken a nice hit the past week.  The Market appears to be pricing in the end of Fed QE2 monetary policy.  As the Board stops monetizing the debt by purchasing treasury securities, interest rates should rise, albeit slightly.  Keep in mind the Fed funds rate is still at 0-0.25% range (<http://en.wikipedia.org/wiki/Federal_funds_rate>).  I do not expect the target rate to be raised anytime soon.

At what point does the market have QE2 fully priced in?  Does the FOMC factor in Chinese inflation to their monetary policy decisions?

The exported inflation is essentially soaked up when China buys T-Bills to keep the currency peg in place.  If they stopped buying T-Bills and let the currency float, interest rates in the US would rise, increasing the cost of US borrowing.  This would also encourage US exports as they become more competitive in the global market.

Michael Fletcher of the Washington Post published an article in today's paper about manufacturing jobs in the Rust Belt (<http://www.washingtonpost.com/business/economy/in-rust-belt-manufacturers-add-jobs-but-factory-pay-isnt-what-it-used-to-be/2011/05/17/AFDmL55G_story.html>).  These jobs are a direct result of easy monetary policy.

How long will these manufacturing jobs last? When does the FOMC initiate the first rate increase? Do they miss the boat and increase 0.5%? Or do they gradually lift the rate by 0.25%?  What role does China play in the FOMC target rate decision?

The European Central Bank is consistently ahead of the Fed in terms of raising the target interest rate.  The ECB has too much political power concentrated within the German economy.  While America lowers its target rate to help the struggling economies of MI, CA, FL and NV;  the ECB raises its target rate as Greece, Portugal, Ireland and Spain pay higher interest rates to finance their debt.  If the entire Eurozone were as healthy as Germany there would not be a problem, but this is not the case.   

Are Drugs Really Illegal in America? A Bachelor's guide to strip clubs in Charm City:

Well, it depends on where you are. And the level of acceptance versus enforcement. I will get to the politics in just a moment.

I recently attended a bachelor party for a buddy from college. The destination of choice for these east coast kids: Baltimore, Maryland, AKA Charm City. Is there a better place for a bachelor than 'THE BLOCK' (http://en.wikipedia.org/wiki/The_Block_(Baltimore) ? They say this is the place where boys travel to become Men.  

Located a stone's throw from the inner harbor on East Baltimore Street directly beside the Baltimore City Police Station; the Block is a strip of all strips..lined with strip clubs.  Some, such as the Hustler Club are very nice, while others make you feel like you are getting ripped apart by a pack of pumas at night in the amazon jungle. On the block, this area is usually disguised as a basement entry strip club with a permeating smell of rank vagina.

Rule number 1: its always better to go to heaven than hell; so for your average strip club going male (once or twice a year), avoid the clubs leading down a long stairwell. If its free admission, there is a reason for it.

So we went upstairs to the Hustler Club and ordered a couple bottles of Absolut and watched in amazement as the employees climbed a three-story fire pole, only to drop themselves upside down by one leg and stop on a dime before ever hitting the floor. This my friends is quite a skill to acquire. And they somehow manage to perform this gracefully and fulfill their fiduciary duties as true professionals.  Two thumbs up and 5 out of 5 Stars.

After a few hours and a nice evening at Larry Flint's establishment, the group decided it would be a good idea to club hop. The first place, right next door, had the oldest and most worn out strippers you could imagine. These girls did not work regular hours or live day by day. They lived minute by minute, fix by fix, dollar by dollar. The pimps either stood near the door or located within shouting distance at the other clubs, just in case an unhappy customer tried to walk out on his tab (not that anything in here could or should cost very much). 


Luckily for me, I had grown the thickest beard possible in about 7 weeks, kept my head down attempting to avoid the stinch and getting eye fucked at the same time.  Part Mark Ruffalo (as I would say), part Unabomber, part guy from The Hangover (as my buddies would say).  The shadier you look, the better you fit in.  Black shirt, dark jeans, thick beard, grey newbies, black guess watch.

HBO's hit series The Wire portrays inner city Baltimore in a very chilling light. The show is a fictional tale based on experiences of a journalist and a former Baltimore city cop. The term 'eye fuck' is a very real term. For more information, watch the series or walk down East Baltimore Street and Gay Street at 2 o'clock in the morning.

After finishing out our rounds at heaven and hell, it was time to call it quits around 2am.  What better place to eat in the middle of a Red Light District than Subway, made fresh daily.  I ordered my club melt sub and proceeded to wait outside for the rest of the crew to finish ordering their late night snack.  I was half drunken, half sober after 14 hours of drinking, baseball, and strip clubs and watched the hoppers as they casually sold drugs on the corner in the middle of Gay street, between The Block and the police station.  Was this the real life Hamsterdam (http://en.wikipedia.org/wiki/Hamsterdam)?

After observing for a few more minutes, it was time for most of the establishments to close for the evening.  The people emptied onto the street.  One police officer was very eager to keep the crowds moving.  As I watched cars stop in front of the police station to buy drugs, the officer proceeded to spray pepper spray in the street to keep the foot traffic moving briskly.  Mission accomplished.  Tear gas grenades would have been slightly more efficient, but he still managed to got his point across.  After dealing with pepper spray in my eyes, three of us left to walk back to the hotel where the others joined shortly after. No arrests, no fights, no deaths, and one bachelor accounted for.  I would consider that a glowing success.

Rule #2:  No loitering. When the officer tells you to move at 2am, get the f*k out of there for obvious reasons.

The interesting question is, how on earth does this kid (probably no more than 16 years old) in a white t-shirt sell drugs on the corner in front of the police station?  I assume he was directing traffic to the corners where they could deliver and exchange payment, but it was blatantly obvious.  I just thought it was funny that I was the one getting pepper spray in my eyes.

From this experience, I pose a few questions:
What is the service fee for the turf in a high traffic, high volume corridor next to a police station?
Does Baltimore have De facto legalization?
Does the prevalence and high usage rates by residents influence the enforcement policies?
Can you measure the contribution of this black market to the local economy?
At what point does the government decide to collect tax revenues?

It is true the market exists.  Whether you support it or not, is not relevant.  The dollars that feed wars in Latin America could be used for filling budget gaps in cash strapped cities.  Depriving cartels of marijuana revenues have been conservatively estimated at 10 billion. This budget gap would force cartels to find other sources of revenue and deplete gangsters of their precious blood money egos.

If inner city and suburban youth cannot make money selling drugs, they will be forced to get an education to become successful.  Perhaps, they will then look up to the teenagers that are inspired to become pharmacists, engineers, financial professionals, and real business owners.

Conforming limit set to decrease October 1st

The maximum allowable loan eligible for sale to the GSEs is currently 730k. Beginning October 1st, this limit will decrease to 625k.

What does this mean for consumers?

Obtaining loans above 625 will be dependent upon institutions without the government insurance provided by Freddie Mac and Fannie Mae. This mean loans made by banks will either be retained on portfolio or sold into private label securities. In other words, higher down payments and higher interest rates are inevitable without the government guarantee.

Financing will become more difficult as banks will require larger down payments and higher interest rates. Financing for loan amounts between 625k and 730k will see the largest impact. These loans will pay jumbo rates similar to mortgages above 730k.

Higher interest rates in the future does not mean you should necessarily rush out and buy a home now or before the Oct 1st deadline. Sellers and agents will push for homes to be sold between 625 and 730k leading up to the deadline because financing will be tighter. The lower interest rate is essentially baked into the sales price of the home. In many cases, it may be in the buyer's best interest to wait for a price drop and take the higher interest rate. You can always refinance (if in positive equity). You cannot change the price you paid for the house. The higher interest rate means you will be paying down the principal at a slower rate. Interest rates will be reflected immediately after October 1, while it may take sellers a few months to adjust sales prices accordingly.

If supply and demand remained constant before and after October 1st, the monthly payment should not change. Do you want a higher interest rate and lower price? Or lower interest rate and higher price? Personally, I'll pay a higher rate for my mortgage if I get a better price on the house. The higher interest rates imply a smaller pool of buyers that can afford a home in the 625k to 730k range. Less people able to afford means less demand and less demand means prices need to adjust. This will have a larger effect in higher cost areas such as California.


For those calling for less government involvement in the mortgage market, this is one result.

Remember:
High land leverage ratio
Structures ALWAYS depreciate over time
Value is in location
If you can rent your property for the same price you pay the bank, it is probably a safe investment....

Bin Laden Killed in Mansion outside Islamabad

CNN reports that Osama Bin Laden was killed in a mansion outside of the capital city of Islamabad.  To what extent was the ISI providing security for his family and operations? Is it a coincidence that his home was so close to the Pakistani Capital and Military Academy?

CIA and Black Ops played a significant role in locating and ultimately hunting down the most sought after man in the 21st Century.  What will the response be from the Pakistani government? Was the ISI operating on behalf of both CIA and Bin Laden? How will the people of Pakistan view the operation?  I would assume that the ISI is large enough to have competing groups or sectors that could undermine each other's objectives.  How do Pakistani citizens react to the US involvement?

The official statements from Pakistan and US indicate a mutual respect for each others' work and accomplishment, as any diplomatic relationship should operate in a PR setting of this magnitude.  Multiple US news sources portrayed the Pakistani response as incompetent, while Pakistan attempted to spin the US actions as a team effort.

How did US gather intelligence to lead to Bin Laden's mansion?  Conservative news outlets and military rumors suggest 'enhanced' interrogation techniques were used to gather information from detainees.  Allegedly, a third party (or country) did the heavy lifting, while the CIA asked the questions.

At what point does a government lose the ability to control security operations within its own country? When does the US step up to provide security? How is foreign aid distributed?  How many people have to die before NATO, US or Allies step up to the plate to defend freedoms that our citizens so frequently take for granted?  Under what circumstances should NATO remove dictators from power? It is estimated that Joseph Stalin's killed regime executed anywhere from 2 million to 62 million citizens.  

FDA and ANDRO

When I played baseball in high school in eastern Henrico County in 2000, weight lifting was the focus of the offseason.  Certainly, if you played football, you would essentially live in the weight room on a year round basis.  It was practically a mandatory practice where you were expected to be there at least 2 days per week, if not 3 or 4. Baseball and football players alike would take Creatine (http://en.wikipedia.org/wiki/Creatine) or Andro (http://en.wikipedia.org/wiki/Androstenedione) on a regular basis in order to 'bulk up' and build muscle mass.

Andro was later banned by the FDA in April of 2004 for significant health risks commonly associated with steroids.  Were the people who purchased Andro prior to April 2004 doing anything illegal? Were they taking steroids?  Mark McGwire was the spokesperson for this product that was perfectly legal at one point in time.  Now it is not.

Whether it is 'The Cream', 'The Clear', 'Andro', the changes that occur in the pharmacology industry will always occur at a faster rate than the U.S. Congress.   This is a fact.  When Andro is developed by a pharmaceutical researcher, we praise the free market.  After it is banned, we crucify perfectly good people for fighting for the jobs and trying to be the best they can be at their profession.  If high school kids can do it to gain an advantage, major league baseball players will certainly be doing it.  That does not make the substance good for you, but is not a criminal act.

At what point did weight training become commonplace? When do we recognize the changes in support are because we pay super human athletes to do super human things and lift super human weights to do those things that we like to see.  

http://finance.yahoo.com/news/First-Person-Losing-Big-65-ac-2690070448.html?x=0
Kris, I'm sorry for your loss. However, there is opportunity and a positive outlook on life, depending on where you live. Even in real estate. 

My wife and I purchased a 340K fixer upper in Arlington VA in OCT 2008. At appraisal, 4400 square foot lot was valued at 270, and structure was valued at 90K. Our mortgage was 2300/month, with prin, 5.875% int, taxes, insr included. We have remodeled a kitchen, 2 bathrooms, stained hardwood floors, changed an electrical panel box, put down sod, painted etc. Altogether we probably have put an additional 35k into fixing it up. Accoring to zillow, we are estimated at 488K. Recently we refinanced at 4.375% 30 year fixed, dropping piti to a bit over 2000/month. I knew it was a good investment because rental prices in the area, high land leverage ratio, (tear me downs indicate land is undervalued), and we purchased well under the assessed value, all while the stock market was declining about 500 pts a day. We took a huge risk at an extremely opportune time and came out for the better. Counter-cyclical and counter-intuitive always creates the best opportunity. Hold your head up, you'll get 'em next time. livedevelopment.blogspot.com

My title is King of All Kings..

My name is Muammar Muhammad al-Gaddafi. I am badass. 
http://en.wikipedia.org/wiki/Muammar_Gaddafi


I am a close supporter of Ugandan President Idi Amin. In gratitude,  he even married my daughter while in Libya, but she then divorced him.

What exactly is the NCAA?

The NCAA is the National Collegiate Athletic Association, created to profit and exploit the individual rights of young adults at colleges and universities in United States of America. The problem of the NCAA would be easily solved with the creation of a minor league system that pays athletes according to the services they provide.  The cartel collects monies, imposes punishment, and violates the privacy of the members whose services they exploit.

The 14-year 11-billion dollar contract is evidence of the money that is involved in college athletics:
http://www.ncaa.org/wps/portal/ncaahome?WCM_GLOBAL_CONTEXT=/ncaa/NCAA/NCAA+News/NCAA+News+Online/2010/Association-wide/NCAA+signs+new+14year+TV+deal+for+DI+mens+basketball_NCAANews_04_22_10

ABC, CBS, ESPN, BIG10 NETWORK, COMCAST, TIME WARNER (I cold go on) provide services by broadcasting college athletics on television. They collect advertising revenue from NIKE, REEBOK, PEPSI, BUDWEISER, MILLER LITE, PG, GEICO, COCA COLA, and other sponsors to market their products to the public.

Some athletes are compensated fairly by receiving the free education, while others are clearly not. Do people believe we truly have free markets?

What is your favorite cartel?
OPEC
BCS
NCAA
NFL
GULF
SINALOA
TIJUANA
EUROPEAN UNION
FEDERAL RESERVE
IMF
WORLD BANK

The Gap Between Government and Private Securitizaton

The Gap Between Government and Private Securitizaton

Tom Toles' piece in the Washington Post today (<http://www.washingtonpost.com/wp-dyn/content/article/2011/02/12/AR2011021203363.html>)  neglects any mention of the gap between Public and Private Securization, as defined by the GSEs and FHA role in the secondary market vs. the private market.  The government dominates the secondary market today with over 90% of all securitization.  The gap between the two is what needs to be fixed.  During the Housing Crisis of 2007, the GSEs generated less than half  (HMDA, 2007, Loans Sold by Purchaser Type) of all  loans sold.  One of the differences was the standards for loans originated by the GSEs and private market. The securization function of buying whole subprime loans versus subprime securities also offered different results.  Although the GSEs leverage ratios were too high, they insure around half of all loans, they represent a much smaller portion of delinquent loans, and enable the market to provide lower interest rates with their funding advantage.  The creation of a government entity such as the FDIC acts to insure bank deposits would go a long way and play an important role in bridging the gap between the public and private market.

The gap between the public and private market could be bridged over a time horizon of 7-10 years, with the ultimate goal of reducing government involvement to less 50% of all insurance and new production of home purchase and refinance loans. The Consumer Financial Protection Bureau created standards for qualified mortgages to be insured by the public and private market.  Deviation from these standards would invite cream-skimming and cherry picking by private insurers (Calem, et. al), whose risks could become opaque over time, positively correlated with the rate of change in house prices. The trade off between government and private securitization is the insurance risk, counterparty credit risk, transparency, and funding costs involved in a given transaction.

Currently the funding costs are determined in bond auctions by FHLMC and FNMA securities. Liquidity considerations would need to be considered, given the function represented in the price.

http://www.washingtonpost.com/wp-dyn/content/article/2011/02/12/AR2011021203363.html

Information Asymmetries exists between counterparties in the securitization of mortgages.   These risks could be mitigated with additional transparency and information provided in the TBA market.  Complete transparency could be established in a bond trading over public exchanges providing details of a security. For example, a generic ticker symbol could represent all 30-year fixed rate mortgages with FICOs above 700 originated by entity Z in the state of NY.

All mortgages meeting this criteria would be packaged into this bond and traded in the open market, just like any other stock.  The securities would be grouped with similar loan amounts and other characteristics as deemed necessary and serve as a future proxy for the credit characteristics of new househoulds or U.S. consumers in a specific geographic region (U.S. national, Census region, State).

Currently the funding costs of mortgages are determined in bond auctions by FHLMC and FNMA securities. Liquidity considerations would need to be considered, given the function represented in the price.  The transition to an entity that combines the FHLMC and GSE securities to one entity could take a significant period of time given the infrastructure, technology and resources that enable them to insure 30 year fixed rate mortgages at significant funding advantages in the bond market.  The price passes through to consumers when they obtain a mortgage because of the governments ability to tap bond markets and baseline funding cost advantages.  


Throughout history, governments have always stepped in when markets (and other governments) fail.  The investment in U.S. military resources is the ultimate provider of insurance in the event of a crisis (Ferguson, N., Ascent of Money: Financial History of the World) . 

Market Information Asymmetry (M.I.A.) Hypothesis

The Information Asymmetry Hypothesis is a form of counter-argument to the Efficient Market Hypothesis.  In economics, information asymmetry occurs in a transaction when one party is privy to more information than the other.  The information may be collected voluntarily or involuntarily, but markets do not adjust to equilibrium until the information is disposed to both sides of the parties involved in the transaction.  In an asymmetric market, one could achieve returns in excess of the market average if they possess knowledge of information that has not been accepted by the public.

This information could be possessed in common knowledge with insiders. The ex-post structure of private label securities sold by Wall Street investment banks is an example of an asymmetric market. The  collapse of Bear Stearns is an example of a bank that profiteered and failed because of information asymmetries during the boom and bust that transpired from the Financial Crisis of 2007-2008.

When a bank such as BS (pun intended) sells a PLS rated AAA to investors, they are able to produce a profit from the asymmetric market.

In a crowd mentality, it may be difficult at first to convince the insider that security is not truly what it appears to be on the surface.  Only when the cash flows fail to materialize for a large cohort of investors with access to capital, does the information become transparent, at which point the market may or may not adjust efficiently. A sufficient time lag may exist between the point that cash flows and information passes through to the investors. The time lag is correlated with the remittance cycle of the security and the share of their portfolio that the security represents.  An investor with large capital position in a PLS security may/may not liquidate immediately. They could choose to act on their new information and buy a put option or credit-default swap as insurance.  The investor cohort creates a liquidity run and the market adjust to the information as it dissipates through the economic system.

The Efficient Market Hypothesis assumes that all information publicly available is transparent.  The information can be publicly available and opaque until the investor cohort acts on the information with real capital.  This creates even greater information asymmetries because of the large position and access to liquidity of the investor cohort in the failed security. The investor cohort has first mover advantage resulting in a cascading effect as the information transforms from translucent to transparent through market pricing.

The investor cohort experienced information asymmetry when they purchased and liquidated the PLS.  The herd mentality piggy-backs off the liquidation creating a liquidity run as the bottom falls out of the infected markets.
http://en.wikipedia.org/wiki/Information_asymmetry
http://en.wikipedia.org/wiki/Efficient-market_hypothesis

Ranking the jurisdictions: Power Outages in Washington DC

Dominion 1,944
PEPCO 29,000
as of 1/29/2011 at 9:00am

Spreads and Sports stuff

Here are my Unwritten rules for sports spreads -

1)  if the underdog has a good chance to win I feel more comfortable taking the points
2)  psychological element for people to be predisposed to take the favorite - with this rule i believe the favorite generally receives about 1-3 pts more than they would otherwise
3)  expectations theory - some teams play better as underdogs because they are not expected to win. the converse- some teams play worse when they are expected to win - avoid the team that consistently loses when favored.
4)  obvious: spread builds in 2-3 pts for home team favorite
5)  the goal of vegas is to have equal betting on each side. the spread moves to engineer the 50-50 split. therefore the house makes all money on transaction basis, aka 'the juice' - just like goldman sachs.
6)  first half of the nfl season is anybodys guess. things are so crazy because there is no recent history to go from. everything is based on last years performance - which may or may not hold true for the current season.
7)  if you honestly don't have an intuition of what team to take, just take the points (i.e. - greenbay and pittsburgh)
8)  second half of the season you have players 'checked out' when they are essentially out of it for the playoff chase. this may lead to weeks where blowouts are common.
9) always always expect the unexpected.

Online gambling ban in the U.S.
The brilliant lawmakers think that banning online gambling in the U.S. actually acts in the moral best interest of our citizens - we all know how prohibition worked out for Al Capone. Passing laws does not curb demand, it creates black markets. Markets that exist for activities the government has shunned because they do not act in the best interest of their constituents.  How much tax revenue could be made from online gambling in the U.S.? Not only does legalization allow regulation, but it will bring in billions of dollars in tax revenue, that would otherwise not exist (not to mention create jobs).  In England you can bet on the soccer (football) game, at the stadium!!!! Drugs are illegal, but that doesnt stop people from using. Alcohol used to be legal, but that didnt stop people from drinking. The markets exist, just not for the taxation and regulation purposes of the Federal Government.  The government can refuse to allow an service or industry to be a legal operator - but the government can only deter demand on the margin - the margin that would probably not be participating if it were legal. My reasoning is that many people who choose to gamble or do drugs only do so for the thrill.  Turning drugs or gambling into a legally sanctioned government regulated industry will more than likely strip away some of the glamor that exists. Just a hunch, but very obvious in certain industries that are exploited in movies, music, and media.

<http://sportsdirect.usatoday.com/odds/usatoday/odds.aspx>

Stocks I'm currently holding:
XOM Jan 2012, 60 strike Call option ( this will increase in value as pump price increases)

Stocks I like:
MO, PM, RSG, WM, TEVA, AVB, V, BAC

Economic trends:
asset price inflation
interest rates creeping up as recovery strengthens
double dip not probable until oil reaches 130+
slow and steady
pent-up demand for housing begins
house prices depend on rent, jobs, income, and demand

natural and adverse selection

Why hasn't the FHA received bailout money from treasury?

During the 2005-2006 housing boom, a government loan was simply not necessary because the private markets were allocating resources to crowd out their government mortgage product.  The banks provided lower cost alternatives with 100% financing, so it simply was not economical to use a government loan.  There was adverse selection among banks to cream skim the 'opaque loans'.

FHA's market share increased dramatically as house prices crashed an private capital fled.   The private markets were essentially acting perfectly cyclical to the economy, that I will argue is the opposite of capital flows from efficient allocators were doing. Because money was chasing the high returns creating a self fulfilling prophecy of higher and higher returns on capital, the most efficient capital with the best possible outcome is allocated at the bottom of the market.

If you had used leveraged (much like a home buyer uses leverage in obtaining a mortgage) your returns would have significantly outperformed some of the best corporations in the world, simply because your timing was right, while all corporations were teetering on the verge of bankruptcy.  

If  the Federal Reserve had not  provided emergency liquidity measures to banks, companies, and foreign countries, the fallout would have been catastrophic.  The crash of 2008 could have been (arguably) exponentially worse, and (arguably) more similar to the 'flash crash' of 2010; of course this hypothetical scenario occurs in theory only.

The rate of change in prices during the flash crash occurred over an insanely shorter time period, and buying opportunities were limited to those with super-computers and GTC orders in the system.  The pyschological effect was not felt because of the speed of the flash crash.  On the other-hand, the recession was analogous to the flash-crash but drawn out more slowly as banks reported flawed earnings and recognized the depreciated assets over a longer period of time.  

Corporations should always behave similarly to FHA and take the most risk (FHA is always taking the riskiest traunch) at the bottom of the economic cycle.  Banks and companies pulled back and caused the credit crunch because they had too much capital allocated at the top of the cycle.  Psychological factors contribute to buy/sell decisions and do not always allocate capital efficiently.  The government provides insurance liquidity as a last resort and arguably the most efficient capital flowing through the system is being cherry picked at the bottom.

Figure 1:
<http://economix.blogs.nytimes.com/2011/01/10/federal-reserve-worlds-most-profitable-bank/>