V A C A T I O N

I am on vacation this week, but had to say something today.

Got to keep the loonies on the path

Are the inmates running the asylum? An article in today's Wall Street Journal indicates that the no money down mortgage is alive and well and is, in some cases, being facilitated by the U.S. government, non-profits and home builders. What is going on here?

Some government officials believe that the no money don mortgage helps the FHA assist first-time home buyers. Home builders like these kinds of mortgages because it attracts buyers. One can almost excuse the FHA due to its stated mission, but is it wise for homebuilders (most whom are troubled) to attract buyers who cannot afford a down payment on the home of their choice. Non-profits may be well intentioned, but due to their specific agenda's care little about the overall effects of no money down financing.

Today's Journal quotes a new home buyer who said she couldn't have purchased her condo without down payment assistance from the seller. She stated: "I was having a hard time just trying to save because I was spending from week to week trying to live."

First off, maybe she shouldn't be purchasing a home. There is no divine right to homeownership. If one is not in the financial position to save any money, it is unlikely that person will be able to weather an unforeseen financial emergency.

Secondly, the ability of nearly anyone who can fog a mirror to get a mortgage pushes real estate prices to astronomical levels which often crater when easy money is no longer available and those who have nothing invested in their properties walk away at the first sign of trouble. Permitting no money down mortgages perpetuates what has been a troubling trend of foreclosures.


The Journal reports that there is a bill in the Senate which would eliminate the no down payment programs, but some senators are hopeful it will be able to continue, albeit with tougher provisions. Something must be done, easy money is what has led to the current financial mess. It is bad enough when financial firms take risk and blow themselves up, but it is worse when the government sponsors such poor financial decision-making.



Look Around You

Today's Wall Street Journal's Ahead Of the Tape column state the opinion that speculators have nothing to do with the rising price of oil. The article states that speculators are not hoarding oil and that prices have risen almost in line with non-speculative commodities such as cadmium and rice. Rice is a bad example as there has been much speculation and investigations are underway.

Other commodities, such as most metals, have not risen in line with oil. Also, not all oil speculation is done with supply and demand in mind. The weaker dollar is also attracting currency hedgers.

None of this is unethical or illegal, but it is a fact. Oil bulls consistently espouse the opinion that it is increased demand which is causing the rally in oil prices. There is much truth to this, but the oil bulls disregard ANY other influences to the rising price of oil. This smells like tech, housing and even tulips to us.

Also, oil bulls and the green lobby both deny that increased supply (drilling) will have any real effect on oil prices. This is mathematically impossible, unless speculators keep pushing up the price of oil. More supply should result in lower prices of demand remains constant and should moderate price increases should demand continue to rise. To say it has no effect is to expose one's agenda or lack of intelligence.

We are not saying that oil prices will drop to $30 per barrel due to new supply. We are not saying it will drop to $80 per barrel. However, the THREAT of new supply combined with a stronger dollar has to have a negative effect on oil prices, unless there is manipulation at work.

We look for the Fed to take a hawkish stance against inflation, just as soon as the financial sector is healthy enough. That could be some time on 2009.

One Is The Loneliest Number

Toyota could be lonely at the top in the near future. Current number one automaker, GM is about to engage in a round of rebates designed to increase sales. Higher fuel prices have cut into domestic (truck-reliant) vehicles sales during the past year. GM is, once again, forced to mortgage future sales and potential profit to ensure its survivability or its number one position. One could make the argument that being number one is nit the most important objective at this time, but GM has made staying number one a priority and survival is also on the minds of GM's board of directors.

During this entire oil spike, it has amazed us that car buyers have turned to foreign makes, not because of quality concerns, but because of the perception (which is in many cases false) that they offer better fuel mileage. Buyers have also turned to crossover SUVs which offer only minimal mileage gains over similarly-sized traditional SUVs and often get poorer fuel economy than even larger cars. Perception is reality. We see that every day with investors who purchase bonds and preferreds purely because of their deep discounts.

The Bargain?

Today's Wall Street Journal Credit Markets column discusses the possibility and implications of increased corporate defaults for the Junk Bond market. According to the Journal, Moody's stated that senior junk bond investors could receive an average of 68 cents on the dollar as opposed to the historical average of 87 cents on the dollar.

The reason for the potential decline is that many high-yield-rated companies used loans for financing instead of bonds in recent years. The result is that bondholders have a more subordinate claim on assets than in the past. In our opinion, this means that preferred holders, regardless of structure, could be left out in the cold. Cumulative means nothing in a bankruptcy.

Several FAs have pointed out that preferred investors in the California utilities were made whole and therefore, cumulative preferreds do have a high standing in bankruptcy. Not quite Macgillicudy. ALL bond and preferred holders invested in the California utilities were made whole because of legislation changes which made the companies profitable. Their reorganization plans allowed for this. Preferred holders did not leap frog bondholders and non-cumulative preferred holders were also made whole.

In a more typical bankruptcy, preferred holders, cumulative or non cumulative will receive little if anything in the way of recovery. Banks and bondholders will be entitled to recovery first.