Financial

Conflicts of Interest

It’s funny how the stock market works. It seems every week we have the fight of intraday bulls against the weekend selloff bears.

While scratched and bruised, neither of the beasts are winning.

As bright as the markets may look at times, there’s still a lot of economic issues that have yet to be fixed. From foreclosure troubles to unemployment, the markets remain shaky for all of the right reasons.

But have no fear…

The Story Without a Happy Ending

We’re about to be in for another shock.

Not too long ago, we wrote a story on the Crash of 2010. In that issue, we predicted the markets will correct itself later this year, with debt being the catalyst for our next economic and stock market decline.

That was a very bold statement considering the bull run we’ve been on. The market numbers continue to look good. Hedge funds continue to buy stocks. The markets continue to climb.

But as the old saying goes…

A Brief Explanation of Option Adjustable Rate Mortgages (ARMS)

An “option ARM” is typically a 30-year ARM that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment.[4]

These types of loans are also called “pick-a-payment” or “pay-option” ARMs.

A New World Currency? What the US Goverment Doesn’t Want You to Know

A report on the new world currency the government doesn’t want you to know about and shocking proof that even the US is beginning to doubt the Dollar

Obama’s Bank Stress Test: Government Plot or Apophenia?

Earlier this year, Tim Giethner presented a plan on how the administration is going to “fix” the banking system by subjecting the country’s 19 biggest banks to a series of dire what-if scenarios that assume ballooning unemployment and further GDP contraction: the Stress Test

The Treasury Department’s end game is to weed out banks that need more capital and to give Americans more transparency and accountability in the banking system. That would separate the weak from the strong and put the latter group of banks in the position to repay money they got under the Troubled Asset Relief Program (TARP).

The consensus has been that banks for the most part won’t need more capital, with a few exceptions.

The banks whose balance sheets look the weakest under those scenarios will have six months to raise new capital. If they can’t, they can convert their TARP preferred investment into common shares or raise new capital from the government under stringent terms.

Over the last week, I have heard many arguments and viewpoints on the Stress Test. Some argue that because much of the results in this test would remain ‘hidden” from public view, it defeats the purpose of the transparency and accountability goal of the stress test. Many arguments have been made stating that the test is not only useless, but may do more harm than good.

But has anyone ever considered the Stress Test as a government tactic to gain further ownership and control of the US banks in order to form Obama’s new democratic government?

Let’s face it, the US government is known for using wordplay, distraction and diversion tactics to gain trust and then unleash its hidden agenda.

Just think about it.

In order to pass the Stress Test, banks will have to clear the hurdle of a three per cent tangible common equity (a measure of financial strength that divides the value of outstanding stock by assets). Based on the tangible common equity (TCE) to risk-weighted assets in the first quarter, the stress-test banks that have already reported their profits should clear the 3% hurdle.

But here’s the problem. The government’s stress test is based on an assumption that unemployment will peak at 10%. Under these circumstances, it appears that most of the banks under this test should past.

Given recent numbers however, and based on the forecasts by many different analysts, the unemployment rate could very well reach past 10% and grow to as high as 12% from now until the end of 2010. Under these numbers, many of the banks, including Bank of America, Wells Fargo, BB&T, PNC Financial, SunTrust Banks, Regions Financial, Capital One and U.S. Bancorp may not pass the 3% TCE.

They basically have two simple choices if they don’t pass, both of which ultimately give the government a bigger stake in the US banks:

1) Convert their TARP preferred investment into common shares

Or

2) Receive new capital from the government

Citigroup, for example, has chosen door number one and in doing so will give the government a 36% stake. Keep in mind the administration has said that no bank will “fail” the test; those with big holes that need filling will have them filled at government expense.

So here we have a test from the government to weed out the bad banks, yet no bank under this test will fail. So if no one fails, what is the point of having a test?

It looks to me like the government is using the stress test as an excuse to gain further ownership of the big banks and thus begins their movement toward further control and ownership under Obama’s democratic government.

So is the Stress Test an act to raise accountability and trust from the banks or Obama’s government plot to gain further control and stake for his democratic government?

Call it apophenia, but I choose the latter.

The Truth About Real Estate and Obama on Working Through the Mortgage Crisis

In my part of town, developers are scrambling and offering major discounts on pre-sale homes giving up homes for up to 40% off their original asking price. And many first time home buyers are jumping at the chance and lining up early for their spot at making a bid for these drastically reduced luxury condos.

If you consider the battles and bid wars that many home buyers had to endure in the previous years, these offerings are their golden ticket to affordable housing.

This scenario is happening all over N. America and is even more apparent in the US. Sellers are using tactical advantages and mind games to lure more buyers into our currently depressed market by listing housing prices for well below market value to trigger bidding wars. And it’s working.

But should buyers be jumping the gun? Let’s take a look at both the Canadian and US housing market.

According to TD Economics, Canadian house prices have further to fall, while overbuilding in the residential market will prevent the sector from making a quick recovery from the current downturn in sales, prices and construction.

They also expect the average Canadian house price to fall to about $246,000 in 2009, down 24% from the peak of $324,000 in 2007. As of February, the average nation-wide house price stood at $282,000, down 13% from its peak. Based on those figures alone, it would appear that we still have another 11% decline to go.

The report also found house prices had been overshooting their fundamental value by about 9% since 2005 as speculation drove up prices and encouraged overbuilding, which I am sure every Canadian witnessed or participated in.

TD said Calgary and Edmonton had accumulated “worrisome” inventories of unsold single family homes, while the overhang of supply in Saskatoon’s was at a historical high. Montreal also had a growing inventory of unsold condos and apartments.

Although Toronto and Vancouver have so far avoided a major oversupply in inventories, TD said the large number of condos under construction in both cities raised the possibility of mounting oversupply this year.

As housing prices correct, the excess supply of housing in the market will continue to weigh on the sector throughout 2009.

However, Canada should avoid a housing crash like the US because the oversupply of housing is much smaller.

TD estimates the overhang of residential homes in the Canadian market is equal to about three month’s supply, compared to about 10 months in the United States – where conditions are much worse and likely to fall even further.

In RealtyTrac’s US Foreclosure Market Report™ for Q1 of 2009, an astonishing one in every 159 U.S. housing units received a foreclosure filing during the quarter. Foreclosure filings were reported on 341,180 properties in March, a 17% increase from the previous month and a 46% increase from Mar 2008.

According to Moody’s Economy.com, home value declines in Los Angeles for example, still have a long way to go. Based on historical balances of employment, housing sales, income, lending availability, foreclosures and vacancy rates, all dating back to 1982, home prices in the Los Angeles metro area still have 29% further to fall.

Total foreclosures are likely to be significantly higher in 2009 than they were in 2008, even with the mitigating effects of the Obama housing plan in the US. We also have to keep in mind that new home developments also compete with existing houses, whose inventories are still at very high levels.

Major lenders like Fannie Mae, Freddie Mac and JP Morgan have just recently lifted their foreclosure moratoriums which could signal the swelling of more cheap foreclosed homes this spring and summer.

The best real estate deals, it seems, are yet to come.

So take your time. This recession isn’t going away tomorrow. In my part of town, developers are scrambling and offering major discounts on pre-sale homes giving up homes for up to 40% off their original asking price. And many first time home buyers are jumping at the chance and lining up early for their spot at making a bid for these drastically reduced luxury condos.

If you consider the battles and bid wars that many home buyers had to endure in the previous years, these offerings are their golden ticket to affordable housing.

This scenario is happening all over N. America and is even more apparent in the US. Sellers are using tactical advantages and mind games to lure more buyers into our currently depressed market by listing housing prices for well below market value to trigger bidding wars. And it’s working.

But should buyers be jumping the gun? Let’s take a look at both the Canadian and US housing market.

According to TD Economics, Canadian house prices have further to fall, while overbuilding in the residential market will prevent the sector from making a quick recovery from the current downturn in sales, prices and construction.

They also expect the average Canadian house price to fall to about $246,000 in 2009, down 24% from the peak of $324,000 in 2007. As of February, the average nation-wide house price stood at $282,000, down 13% from its peak. Based on those figures alone, it would appear that we still have another 11% decline to go.

The report also found house prices had been overshooting their fundamental value by about 9% since 2005 as speculation drove up prices and encouraged overbuilding, which I am sure every Canadian witnessed or participated in.

TD said Calgary and Edmonton had accumulated “worrisome” inventories of unsold single family homes, while the overhang of supply in Saskatoon’s was at a historical high. Montreal also had a growing inventory of unsold condos and apartments.

Although Toronto and Vancouver have so far avoided a major oversupply in inventories, TD said the large number of condos under construction in both cities raised the possibility of mounting oversupply this year.

As housing prices correct, the excess supply of housing in the market will continue to weigh on the sector throughout 2009.

However, Canada should avoid a housing crash like the US because the oversupply of housing is much smaller.

TD estimates the overhang of residential homes in the Canadian market is equal to about three month’s supply, compared to about 10 months in the United States – where conditions are much worse and likely to fall even further.

In RealtyTrac’s US Foreclosure Market Report™ for Q1 of 2009, an astonishing one in every 159 U.S. housing units received a foreclosure filing during the quarter. Foreclosure filings were reported on 341,180 properties in March, a 17% increase from the previous month and a 46% increase from Mar 2008.

According to Moody’s Economy.com, home value declines in Los Angeles for example, still have a long way to go. Based on historical balances of employment, housing sales, income, lending availability, foreclosures and vacancy rates, all dating back to 1982, home prices in the Los Angeles metro area still have 29% further to fall.

Total foreclosures are likely to be significantly higher in 2009 than they were in 2008, even with the mitigating effects of the Obama housing plan in the US. We also have to keep in mind that new home developments also compete with existing houses, whose inventories are still at very high levels.

Major lenders like Fannie Mae, Freddie Mac and JP Morgan have just recently lifted their foreclosure moratoriums which could signal the swelling of more cheap foreclosed homes this spring and summer.

The best real estate deals, it seems, are yet to come.

So take your time. This recession isn’t going away tomorrow.

Hedge Fund ETF and Obama Goes Viral

As our economy wrestles to get back on its feet and rebuild a foundation of trust and loyalty in consumer confidence, the financial markets are once again seizing the opportunity to profit. Amidst the gloom and uncertainty of individual stocks bloom dozens of ETF’s ranging from resources to junk bonds to the newly created hedge fund ETF.

Word around town is that Direxion Funds, with their triple-leveraged and inverse exchange traded funds, just filed to launch 40 new funds with the SEC. But today I want to bring up a new ETF
which I found to be surprisingly interesting giving the recent Madoff Scandals and hedge fund failures.

Click to PlayWelcome to the world of the new IndexIQ’s Hedge Fund ETF called IQ Hedge Multi-Strategy Tracker ETF trading under the symbol QAI on the NYSE Arca. The fund attempts to reap the performance of hedge fund strategies and reap hedge fund-like returns but trades as an ETF, allowing investors who don’t understand the concepts of their strategies to make their bets. And with $5.5 billion in hedge fund outflows for the month of February (according to one of featured media users Charles Biderman of Trimtabs) can QAI make it?

Before the market collapse, only the richest and the well-connected had access to hedge funds. But now QAI is attempting to allow access to regular investors with minimal investment to become part of the elite. But let’s not jump the gun.

QAI doesn’t actually invest in hedge funds; rather, they analyze publicly available hedge-fund performance data and use this to match returns using ETFs and other liquid trading vehicles by creating an ETF-based index. The multiple strategies employed include long/short equity, global macro, market neutral, event-driven, fixed income arbitrage, and emerging markets.

This ETF-based investment approach allows QAI to provide intra-day liquidity, portfolio transparency, lower fees than the typical hedge fund, and the elimination of manager-specific risk. Or so they say.

Although the stated intent of QAI is to mirror the performance and strategies of hedge funds, there are obvious strategies used by hedge funds that simply cannot be duplicated with ETF’s. Things like merger arbitrage strategies which require taking positions in individual securities and convertible arbitrage can’t be duplicated using ETF’s. Nor can the flexibility of reconstitution and re-balancing be achieved.

But all that won’t stop me from following this newly formed hedge fund ETF. Because if I can get away with hedge fund returns without paying thousands of dollars to buy a hedge fund manager’s next Ferrari, I’d gladly give it a shot.

Take a look at their IQ Alpha Hedge Strategy Fund, a mutual fund that was down just 4.1% for the year, compared to an 18.2% loss in the S&P 500. The IndexIQ fund itself is down only about 12% since July 2008 compared to the S&P 500, which is down 38%. Not bad for an ETF created index.

With hedge fund managers requiring annual expenses of 2%, and many with a 20% performance fee charge, QAI could easily spring out from this crisis as the new hedge fund for dummies. But first I’d like to see how they fare in this market. But I can tell you that I will be watching these guys very closely. Very.

Financial Crisis Not So Bad

Comparing the Tech crash to our current financial crisis

Bush’s Speech on the Financial Crisis

U.S. President George W. Bush gave this much-needed speech on September 19, 2008.