Saturday, June 21, 2008

RBS issues Global Stock Alert


RBS issues global stock and credit crash alert
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 12:19am BST 19/06/2008

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

RBS warning: Be prepared for a 'nasty' period
Such a slide on world bourses would amount to one of the worst bear markets over the last century.

RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.

US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit.

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.

Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.

"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.

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I got into TWM (the anti Russell 2000) about 3 weeks ago and have added more shares as decent entry points as the market started to turn down. TWM seems to have clearly bottomed and seems ready to break out. I would not be surprised to see a 40% return on TWM over the next 3 months. This is not a recommendation to buy or sell TWM - please do your own research. This blog does not take responsibility for any losses

courtesy of

Renting on the Rise


June 21, 2008
Rise in Renters Erasing Gains for Ownership
WASHINGTON — Driven largely by the surge in foreclosures and an unsettled housing market, Americans are renting apartments and houses at the highest level since President Bush started a campaign to expand homeownership in 2002.
The percentage of households headed by homeowners, which soared to a record 69.1 percent in 2005, fell to 67.8 percent this year, the sharpest decline in 20 years, according to census data through the end of March. By extension, the percentage of households headed by renters increased to 32.2 percent, from 30.9 percent.
The figures, while seemingly modest, reflect a significant shift in national housing trends, housing analysts say, with the notable gains in homeownership achieved under Mr. Bush all but vanishing over the last two years.
Many of the new renters, meanwhile, are struggling to get into decent apartments as vacancies decline, rents rise and other renters increasingly stay put. Some renters who want to buy homes are unable to get mortgages as banks impose stricter standards. Others remain reluctant to buy, anxious that housing prices will continue to fall.
The confluence of factors has largely derailed what Mr. Bush called “the ownership society,” his campaign to give millions of people — particularly minority and lower-income families — a shot at homeownership by encouraging lenders to finance more home purchases.
“We’re not going to see homeownership rates like that for a generation,” said Mark Zandi, the chief economist at Moody’s, a research company.
For many minority and lower-income families who viewed homeownership as a stepping stone to building wealth and passing it on to their children, the transition from owning to renting has been the unraveling of a dream. Burdened now by debt and bad credit, some of these families are worse off than they were before they bought.
“The bloom is off of homeownership,” said William C. Apgar, a senior scholar at the Joint Center for Housing Studies at Harvard University who ran the Federal Housing Administration from 1997 to 2001. “We’re seeing more dramatic growth in renters and a decline in the number of owners. People are beginning to understand that homeownership can be a very risky venture.”
Mr. Apgar said the Joint Center had predicted an increase of 1.8 million renters from 2005 to 2015, given expected population trends. Instead, they saw a surge of 1.5 million renters from 2005 to 2007 alone. In the first quarter of this year, 35.7 million people were renting homes or apartments, census data show.
“Even though we’re only looking at a short period, these trends are pretty powerful,” Mr. Apgar said.
Mr. Zandi said he believed that minority and lower-income homeowners had been hardest hit. Nearly three million minority families took out mortgages from 2002 to the first quarter of this year, housing officials say. Since minority families were more likely to receive subprime loans, economists believe these families account for a disproportionate share of foreclosures.
Tony Fratto, a White House spokesman, said that officials had hoped the homeownership gains would stick. “We’re disappointed that conditions in the housing market didn’t allow those gains to be sustained,” he said. “But we’re optimistic that they can return.”
The new renters include people like Tina Williams, a 43-year-old medical assistant who lost her three-bedroom colonial in Cleveland to foreclosure in March after her adjustable rate mortgage spiked and she struggled to find work.
Ms. Williams slept at a homeless shelter and at the homes of friends after five apartment complexes rejected her, citing her bad credit and history of foreclosure.
Finally, someone offered to rent her the third floor of their house. Her new $300-a-month rental has a bedroom, a living room and a bathroom, but no kitchen.
“People say, ‘Tina, how are you living?’ ” said Ms. Williams, who has cobbled together the semblance of a kitchen with a microwave, a minirefrigerator and an electric frying pan.
“I say, ‘I’m living on God’s grace and mercy,’ ” said Ms. Williams, who had dreamed of passing on her first home, bought in 2001, to her two grown daughters.
“My daughter says I’m living in a hole in the wall,” she said. “But I can eat every day. I have a roof over my head. When I found this place, I started shouting for joy.”
Nationally, rents have increased about 11 percent since 2005, when homeownership rates started to decline, though that growth is slowing, according to the Bureau of Labor Statistics. In 2005, vacancy rates for rental properties in Cleveland hovered around 10 percent, according to the Northeast Ohio Apartment Association, which represents landlords in the Cleveland area. Today, the rate stands at 5.2 percent.
Christopher E. Smythe, the association’s president, said the collapse of the housing market had improved the economic climate.
“Our apartment traffic is up, people are renting again and occupancies are up,” he said in a letter to members this year.
In other places, like Los Angeles, the slump in the housing market has begun to push up vacancies as condominiums are converted into rentals, according to Raphael Bostic, the associate director at the Lusk Center for Real Estate at the University of Southern California.
But those new apartments are often out of reach of struggling families. And since many owners of rental properties are also going into default, the foreclosure wave has resulted in fierce competition for affordable apartments in some cities.
In Rhode Island, 41 percent of the state’s foreclosed properties are multifamily dwellings, which would most likely have housed tenants, a recent study by the National Low Income Housing Coalition concluded.
“We’re seeing the displacement of tenants at the same time that we’re seeing former homeowners enter the rental market,” said Raymond Neirinckx, a coordinator at the Rhode Island Housing Resources Commission, which handles housing policy.
Meanwhile, some people who have lost their homes find that landlords view them with suspicion.
Steve Allen, 51, a Vietnam veteran in Seattle, was repeatedly rejected when he and his wife, Lesa, started searching for an apartment this month. Some apartment managers said no because they had lost their home to foreclosure. Others said their credit scores were too low.
Debbie Suber, 46, who lost her home in Cleveland last year, said she and her husband were lucky to find a landlord who was willing to consider their income, not their credit scores. “By the grace of God, that’s why I have a place,” she said.
Times are also tough for renters hoping to buy. Banks have tightened mortgage standards, insisting on good credit scores, proof of income and sizable down payments. Lez Trujillo, the national field director for Acorn Housing, a nonprofit group that helps lower-income families get mortgages, said a third of their applicants ended up with houses just a few years ago. Now, it is one in 10, she said.
Barbara O’Leary-Hatfield-Liberace, a 68-year-old retiree and an Acorn member, encountered such difficulties when she and some friends decided to buy a $340,000 house in Seattle.
The mortgage company they consulted said they needed to clean up their credit and come up with a $45,000 down payment, money they do not have.
So on most nights, when Ms. O’Leary-Hatfield-Liberace thinks about her dream house, she reaches for the rosary that she keeps under her pillow.
“I pray a lot and hope to heck we’ll win the Lotto,” she said.

Good luck with that lotto. During the recent boom in house prices credit standards were dramatically loosened. Mortgages once upon a time were given by neighborhood banks to people living in the neighborhood who were well known to the bankers. Globalization and securitization of credit ended this phenomenon and led to an unbelievable boom in mortgage availability to people with little or no credit history. Mortgages were given to people with no jobs and no source of active or passive income. Pick your monthly mortgage schemes were available to low FICO individuals. Well, the rooster has come home. Home prices are out of tune with historical rents. So either rents have to go up (by increasing demand for rent such as this article) or home prices have to come down (as we're currently witnessing in the Case Schiller index) or a combination of both. Inflation will also help and so will the falling dollar. Rising inflation means that home prices dont have to fall all that much! Ask yourself this question. You think your home price has doubled or tripled in the last 7 years? Is that in dollar terms or gold terms or in Euros? Gold (if you believe this to be the true holder of monetary value has quadrupled during this time). In gold terms, your home price has actually fallen. Expect credit availability to shrink (as bankers relearn the business of mortgages), rents to increase and home prices to fall in the next 3 years. Sometime soon, it will again become cash flow positive to buy a condo with 20% down and rent it out. Till then, the pain continues.