Bear Market? and Go Fly a Kite, Jim Cramer
I think Jim Cramer lost it, and I don’t quite understand what Jim Cramer is recommending.
In his “Stop Trading” segment on Street Signs today, Cramer said the nation’s central bank is “asleep” and should immediately “relieve the pressure” on financial firms and the nation’s home owners who are facing big increases in their mortgage payments as ‘teaser’ rates expire. Many thousands will “lose their homes,” he warned. “This is not the time to be complacent.”
He predicted a big rebound for the major stock market averages if the Fed does indeed lower rates
First is there damage out there? Sure there is. But is it Bernake’s fault? Only if you agree that Bernake should have pulled the brakes about year or two ago! Greenspan pushed the interest rates down very hard, and it worked. Likewise Bernake should have pulled the brakes hard to send a message that people are abusing credit.
Cramer and the investment bankers are panicking because they are loosing their bonuses. The gravy train is coming to an abrupt halt and they are crying. If these investment bankers REALLY cared about the “people”, and their houses then they would give up some of their profits to help the trouble loans. Ooops, oh yeah they are not doing that because that could eat into their year end bonus.
Lowering interest rates is not going to help anything. The problem is that people bought into a craze promoted by the real estate market and everyone surrounding it. A great post is the following at rain city guide. This couple wanted to get a 15 year fixed rate mortgage and found that they could not in Seattle and complained. What did the mortgage agent say?
Christy, Seattle is not too pricey for normal people…your 15 year fixed mortgage is.
This agent recommended the following:
Same payment with each scenario…except you’re able to buy $132,725 more home using a 40 year fixed over the 15 year fixed and $107,750 more home with the 30 year fixed mortgage. With an interest only product, such as a 30 year fixed rate with a 10 year interest only payment, the savings (or how much more home they could buy) would be even more substantial.
This agent recommended that you go longer in debt so that you can “buy more house.” This is the heart of the problem and will not be fixed by lower interest rates. What we need is for mortgage agents like this to stop recommending, “buy more house go more in debt.”
So when people like Jim complain I say, “Jim go fly a kite!”
So are we in a bear market? I am tempted to believe no. There will be people who think now is a time to buy value, and they will start buying.
That tells me that good stocks (and sectors) are being sold off with the bad, and that has me patiently looking for values. One of the places I’m looking is sectors (and stocks) that–even with massive selling–are holding their valuations, staying off my list of fresh 65 day lows.
In the book Trading for a Living the author makes the case that there is no such as value. Price is perceived value, and is what another person is willing to pay at the moment (pg 45). He illustrates over and over again how prices will dramatically change even though the company and cash flow has not. In the 1929 crash a 100 USD stock was sold for 1 dollar because that was all somebody was willing to pay. In the 80’s United Airlines went from 300 to 100 because that was all people were willing to pay.
So this means we are in a bear market? I predicted a pullback in the beginning of the year, but it turned out to be a pothole. And then I did think that the high water mark was reached when Casey Serin stepped out. So while I can see the potholes the big drop has been elusive and it has confused me. But as per my blind spot blog entry I think the problem is that the big shoes have not hit the floor yet.
The problem we have is that the big investment companies are still too liquid still and too profitable. These little pullbacks are peanuts for them in the overall scheme of things. They are not hurting, and thus are continuing to pile on the risk. These investment houses think these pullbacks are potholes and continuing buying to “improve” their cost basis.
The problem and it was said on CNBC is that there are 750 Trillion dollars in derivative products floating around on the market. This is what will make or break the market. My thinking is that these products are only profitable if the market has direction, and that is why I am hedging that there will be no direction.
There will be too many people panicking, and too many people looking for value creating a market will go in no direction. With a directionless market structured products will loose money because the premiums used to “neutralize” risk will eat into the leverage. It will be those premiums that will cause the markets to unravel and wipe out many accounts.
The winners? Traders… They will love this market as it goes up and down and the traders will keep this market going up and down while others keep crying…
I am also thinking this is a Taleb Black Swan moment where trying to predict the outcome is completely hopeless.
Hello There Mr Roboto!
(the song and era says it all... http://www.devspace.com)
22 Comments Add your ownSubscribe
1. Jason | August 4th, 2007 at 10:53 am
Great, smart analysis. All I can say at this point.
I think it is obvious how lower interest rates will give money to people like Cramer and others with huge stock holdings. I think it’s less clear, as you say, how this will help people who are about to default on their loans. Are they supposed to be using stock earnings to fund their mortgage. Or is it that a growing stock market = growing economy = more jobs = less defaults. That’s a lot more connections than higher stocks = more money for money managers. So yeah…
Things do seem way more volatile lately, which should be good for smart traders. Time to brush off those day trading, TA, skills.
2. Rhonda Porter | August 4th, 2007 at 11:10 am
You really enjoyed this post…you’ve linked to it I don’t know how many times. And you’ve missed the point each time. A 15 year mortgage is an expensive option. A 30 year fixed is much more practical and a person could (should) invest the difference between the two payments.
I deal with consumers who need (or want) to take their equity out of their homes when if the structured their mortgage correctly to begin with, they wouldn’t need me for a refinance.
You can’t suggest one mortgage product for all.
And yes, I think Cramer has lost his mind, too.
3. Christian Gross | August 4th, 2007 at 12:26 pm
Rhonda: I have linked to it twice, maybe this time is the third time.
You say that I miss the point, but I disagree. If you read the couples original post their problem was:
“We’re good citizens and interesting, productive people. We’re just not, at this stage of life, willing to spend every penny on a house. We need to save something for retirement.”
These people are not interested in overspending. They are thinking about their future. Thus they want to stick to their 15 year mortgage. By recommending:
“except you’re able to buy $132,725 more home using a 40 year fixed over the 15 year fixed and $107,750 more home with the 30 year fixed mortgage.”
You know as much as I do that the longer you stretch the mortgage the more interest you pay. And while interest can be deducted the point is that you need to earn money to deduct the interest. Thus by recommending longer mortgages people have to fine tune their spending habits, which most people don’t.
The problem is that while you can quote numbers I feel it misses an underlying problem.
Let’s say like now a slow down or recession hits. It is during these times that the likelihood of you having to sell your property is the highest. But we are in a slow down or recession and thus will not get optimum price. If you opted for the longer mortgage then the likelihood that you will need to pay are higher than say getting a 15 year mortgage. Shorter mortgages buy ease of mind, and flexibility.
4. Rhonda Porter | August 4th, 2007 at 12:30 pm
The 40 year is really there for comparison sake. I have yet to provide a 40 year mortgage for my clients.
However, in the event of a receession, all the more reason to have a lower mortgage payment even if you can afford the 15 year amortized one. You need flexibility with your cash flow.
If you have a 30 year, you can still pay it off in 15 by appying addtional payments towards the principal. If you have a 15 year and tough times impact you, you’re stuck with that payment.
5. Christian Gross | August 5th, 2007 at 11:16 am
The problem with the 15 years, and the couple has been reiterated in the housing bubble blog entry with the following quote:
http://thehousingbubbleblog.com/?p=3209
““Many years ago, a 20 percent down payment for a home was the norm. But as prices escalated, fewer people could afford that. After all, 20 percent of $500,000, the cost of a middle-class suburban house in the Washington area, is $100,000.”
“No-down-payment mortgages came into play about a decade ago, at first for wealthy borrowers with stellar credit. The idea was to give those borrowers loans that allowed them to buy houses without having to liquidate other investments, said Sean O’Boyle, a VP at SunTrust Mortgage in Chevy Chase.””
The abuse of these loan types has resulted in higher prices of homes. About a decade ago the price of a home was determined by the monies down, and lower fixed mortgage term. Then when no money down loans came, people “could afford more home.” Though as a side effect prices went up.
Then along came longer terms, and people could “afford more home.” Yet prices climbed again, and people could not afford more home.
Then along came interest only, and people could “afford more home.” Yet prices climbed yet again, and people could not afford more home.
Then along comes a couple who want to buy a home using the old mortgage terms and they realize that the costs have become completely unaffordable. They say, “Seattle is too expensive.” And what the couple ranted about is the fact that if they wanted to buy the house they wanted they would HAVE to go on longer terms, and other things that they did not want to do.
This spiral has been my point for all of my posts, and is why lowering the interest is going to do diddly. The core problem is that homes cost too much. Prices need to deflate. Sure there are still areas of affordability, but there are also too many areas that are too expensive.
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