I have been talking about the economy and the repercussions of the failures in the financial markets for some time now. Back in 2007 I was discussing the effect that oil would have on the economy, and I hinted at how the sub-prime loans would affect banks from New York to China.

But in all that is the fact that while I was an experienced stockbroker, I am not an expert in mortgages nor real estate. With the bailout plan being debated and now finalized I wanted to get a more accurate view of what to expect. So I went out and found a more credible source of information to ask questions of.

The result is my interview with Mr. Gregg Cordero, owner and primary broker of Remax in the Binghamton and Broome County of New York State. The interview has been transferred to video for you to view. The interview took place on Thursday, and the delay was resulting from the limitations on getting the video edited and made into a video clip.

I expect that the conversation will provide some insight and answers for the questions homeowners, real estate owners, and those interested in any aspect of real estate markets might have. And I expect that particularly shrewd minds will be able to see their own opportunities and forecasts on the economy.

Labels: American economy, Binghamton, Gregg Cordero, Michael Vass, mortgage crisis, New York, real estate, Remax, sub prime loans

Don’t you love when the Government spends your money? And they do it on a scale so grand that you just have to stop and go wow.

Currently the Government has proposed the best deal Wall Street has ever seen. After having spent over a quarter of a billion dollars on Bear Sterns and mortgage loans and other financials (like AIG), it is now going to by every bad loan of every financial company. Oh joy!

Of course the stock market is flying. Every financial company will now have the chance to load up the Government with every single bad debt they can engineer to be connected to terms of the bailout. And the people working at these banks are far smarter than the Government agencies that will take over these debts. Instantly the books of each bank and brokerage and insurance company will look astounding. All relevant economic guidelines will look solidly in the black: book value, loan reserves, earnings per anything, and so on. All it took is what will be over a trillion dollars of taxpayer money.

Add to this the face that 799 companies in the stock market are no longer allowed to be sold short and you have a market that has no choice but to go up. Like I’ve always said the financials always lead the market higher. Sadly this is bollocks.

The market is artificially propped up right now. Without this bailout, which will hurt the economy for the next President (no matter who it is), we would have found a bottom. But that means once all the crap is done the market will eventually find that bottom, and then exceed it. Just like what happened after the internet bubble burst. Trying to cushion that lead to the real estate bubble and it’s bursting, and now this will lead to another bubble that will burst as well.

Perhaps my time as a stockbroker gives me better insight on this but this is bad. We are talking about over a trillion dollars that will grow and become a bigger problem the next time.

And the Presidential candidates are showing us how they will deal with that next problem now. Senator Obama is waiting for information, instilling no confidence in the market or for investors. Senator McCain is looking for people to blame, which has about the same effect. The only difference is perhaps the fact that since the President must look strong to give the markets any feeling of safety Senator John McCain is looking more Presidential.

But taxes look that they will get raised. It’s the only way to pay off $1 trillion dollars. That means Senator Obama will definitely increase taxes on everyone, massively. And Senator McCain will have to raise them to some extent.

Obama already wants to raise corporate taxes, and increase taxes of everyone from $31,850 and up at least 3%, and raise taxes on energy consumption, capital gains taxes, and payroll taxes. Add this bill and those numbers increase almost exponentially. He will undoubtedly equal or exceed the economic environment of President Carter.

For McCain we will see the likely removal of the President Bush tax cuts. Possibly increases on capital gains as well due to political pressure. This means slower growth in the economy and tough times – not like some want people to believe exist now but will actually exist by 2010.

Here is one thing that I would love to see. I believe that any owner or CEO of a company deserves whatever pay they can justify. There is no limit on what they can be paid, if they have created a profit for their company. But that does not mean they cannot receive a tax, similar to a luxury tax, for a bonus in excess of say $25 million.

If a CEO can grow a company 15% or more and thus ensure everyone connected with the company is safe that deserves a reward. If they retire and the company had netted a profit over their time at the lead, again they deserve a bonus. Because after becoming a CEO of some of the largest companies in the world is likely to be the last job they will ever have. But again the extreme bonus tax should exist. They will still receive millions, so they aren’t going to a poorhouse or changing their lifestyle.

But if a CEO fails to create a profit, they should be restricted in their pay as well. IF a company must be sold to save it, or is cutting workers to stay a float, then management has failed the company. If the company must be bailed out by the Government, the CEO has failed it. Again I can agree that the CEO deserves to be paid their salary, but not a bonus. And if they are leaving the company and created net losses their retirement package should reflect that. So instead of $100 million as an example they would receive say $1 million for each year they were on the job, and still have to pay the extreme bonus tax.

And when I say an extreme bonus tax I mean that say 50% of any bonus over $25 million dollars is split between the company and the Government. The split is 33% to employees, 33% to the corporation, and 33% to the Government. That scenario benefits the company and its employees, hopefully increasing profitability and shareholder confidence. It also benefits the nation. And I can’t see how any CEO that would have gotten say $34 million as a bonus would be upset because they got a $17 million dollar bonus.

But that won’t happen. Just like taxes won’t go up because of this bailout, or that there will not be another crash in the markets because the Government has intervened.

I predicted a 10,200 Dow Jones Index by December. I stand by that. I stated that 9,300 on the Dow in 2009 was possible, I still believe that. And I said that I think $160 per barrel of crude oil would happen over the winter, which may be overly aggressive but still possible. This bailout does not remove these possibilities, it enhances them. Greater regulation does not prevent future problems; it increases the cost of identifying them. Preventing short sales does not help the market, it hides the weakness. And none of these things prevents bad decisions which are honestly the key reason why we had the internet and real estate bubbles.

The only questions that are left are when will the next problem become evident, and how much will the Government spend to bail that out as well.

Labels: American economy, real estate, stock market, tax policy, Wall Street

Well how much fun are you having today? If you hold investments, it may not be a fun day at all.

Back in the 4th quarter of 2007 I said I believed the Dow Jones Industrial Index would hit 11,000. I thought this would be a move in the late 1st to 2nd quarter. I was wrong… on the timeframe. But this is not a pat yourself on the back kind of moment.

With Indy Mac having failed and fears rampant over whether Freddie Mac and/or Fannie Mae will follow there should be no doubt that the Dow will cross into the 10,800 area on Monday. Add crude oil prices that are continuing to rise on fears from Iran and you get a bad situation. But perhaps the real culprit for this current situation is the Fed (Federal Reserve).

The Fed has been providing banks extra money to ensure their solvency, but not requiring that loan reserves be increased. It’s kind of like stopping a leak in your tub by adding more water. The problem is not getting fixed and may get far worse. And all the panic about the mortgage industry seems to have done nothing but whip up polispeak from political candidates and political parties, each looking to sway voters.

Loan reserves must be raised at all financial institutions. That especially means Fannie Mae and Freddie Mac. And several institutions need to fail. That of course means that some people will lose their homes. Nothing can, or should be done about that.

When I some will lose their homes I don’t just mean the roughly 4% of homeowners that are in default. I include in that group those that will fail this winter due to the cost of heating oil increases. I expect that in total some 7% of homes are in danger of foreclosure this year. While it’s not a nice thing to say, they need to lose their homes for the economy to survive.

This is not unlike the enormous wash-out that occurred when the internet bubble broke in the stock market. Money was lost, as it should have been, and opportunities were created. Those that made bad financial decisions, whether corporate or individuals, lost and others benefited from that loss. It’s a standard cycle in the markets.

Of course what is likely to happen is that Congress (with it’s 9% approval rating – sure to go lower) will take taxpayer money and bailout homeowners and financial institutions alike. Thus more water will fill the leaky tub. Undoubtedly the current Administration will be blamed (even more than they should) and the war in Iraq (and possibly Afghanistan) will be identified as the cause of all these ills. Which is false.

The outcome will probably be a surge for Senator Obama, who prefers a bailout. This may lead to him being elected and higher taxes to pay for that bailout. And if anyone thinks a bailout of this size will be limited to just the top 1% of the nation they are insane.

I believe, looking at current factors several things are highly probable:

1. Confidence in all financial will go lower forcing the need for more liquidity
2. Several institutions will fail – focused mostly on those dealing with housing markets first
3. Interest rates will increase by 1pt by the end of 2008, increasing another 1pt early in 2009.
4. Crude oil prices will jump to maybe $160 a barrel by mid-September as winter starts, with a commensurate move in heating oil prices.
5. Gasoline will reach $5.15 a gallon
6. Home foreclosure will hit 5.5%
7. Bankruptcies will increase by 3%
8. Higher energy prices will be blamed for the further slowdown in corporate profits and significantly lower (negative) holiday sales in the 4th quarter.
9. A Democratic Congress will be re-elected
10. Senator Obama will likely be elected
11. Republicans will be blamed
12. Taxes will be increased for all incomes by 3% by 2009
13. Corporate taxes will be increased by 10% early in 2009
14. Inflation will soar unchecked by 3 - 5%
15. Unemployment will grow to 8.5% by December 2008

While each of these items may or may not happen they are all interrelated. I expect each item to happen, at least to the degree I stated, generally in the timeframe given.

As money tightens, gold will be a hedge and prices for all precious metals will soar again. Credit will get severely crunched, and credit card rates will fly. The debt load on the average American will increase from the current $6,000 to $8,500. Most of this increased debt will be from higher energy costs. Thousands of small businesses will shutdown.

As a result of all these things I expect that the Dow Jones will drop to 10,200 by December. If I am correct about Congress and Senator Obama – for the reasons stated – then I further expect a drop to 9,300 during 2009. A significant bear market indeed.

The main problem is that the solutions being looked at now raised taxes and increased liquidity, fail to resolve the actual problem. And the combination will weaken the dollar, to a point where holding U.S. bonds is unattractive. I won’t even mention the increase in retirees and Social Security.

But there is opportunity. I see the housing markets as a great buy, for those willing to hold for 5 years. Buys in the secondary city markets will probably do best having a lower purchase cost and holding value better.

Several financial stocks will be excellent buys. Some have far better balance sheets than others, but will be blasted by the same investor fears as those in bad shape. Companies like Citigroup are trouble spots as they reinsure their own loans and thus hide them better on the balance sheets. Financials will lead the markets down, but they also will signal the start back.

Coal will likely start to regain interest in the quest for alternative energy sources. I expect nuclear energy will also get a push, with at least 1 new nuclear plant being authorized to be built in 2009. I expect a call to switch to ethanol produced by grass and sugar to go initially unheeded until mid-2010. Further harming the ethanol push is the fact that there will be a glut of ethanol by mid-2009 through 2011.

Bond rates will be more attractive in 2009 than today with the likely increases in interest rates. Of course inflation rises will remove that benefit.

There may be other sources of opportunity but they will be guided by factors including but not limited to:

Iran
Iraq and Afghanistan wars
Crude oil prices
Heating oil prices
Inflation
Unemployment
Manufacturing and Industrial layoffs
Retiree growth rates
Healthcare costs
International political stability
Another terrorist attack on the United States

That is the outlook that I have based on what is currently ongoing in the world today. Some of this is just my on interpretation, some my deduction. But I believe that if only ½ of my expectations occur, the general outcomes as stated are accurate.

But look around and determine your own answers. Better to be prepared than taken by surprise.

Labels: Congress, Crude oil prices, Dow Jones Index, election 2008, ethanol, Federal Reserve, Freddie Mac, gold stocks, heating oil, real estate, Senator Barack Obama, stock market

Looking over the housing markets, and considering the negative sentiment out, I decided that this was a good time to purchase a new home. Rates are 5.875% fixed and many home prices are depressed currently. And I’m not alone in my decision to pick up some property. So I wanted to share my experience so far, and at the end of this post I have 2 questions for you my reader.

Many who have good to excellent credit ratings, and available cash are out looking for a new home or a first time buy. But don’t believe this is exactly a buyers market. Even in a dying economy that is the Binghamton New York experience, home prices have held firm if not risen up. In fact I would say that prices over the last 6 months have risen about $3,000 on median. Because many like myself are entering this troubled market.

Still there are bargains to be found. I am looking into a couple as this is being written, and is part of the reason why I have not been writing as much as normal for both of my blogs. [Of course having built and set up over 100 blogs in the past 2 months, the deal with TV One, and working out a deal with an upcoming magazine are factors as well.]

Part of the process in getting a home is the mortgage pre-approval process. For those that are unfamiliar this is the initial amount that you may be able to get a mortgage for, the loan rate, and all other terms you might run into. It is affected by your credit rating - heavily, cash on hand, and income as per taxes filed.

Now without giving away too much of my finances (some points I will deliberately extrapolate on – so the figures on income and pricing are inaccurate but the situation and rates are accurate) I will make you aware of what the world is like for me. You can decide if my skin tone and last name are factors or not.

My first stop in the process was my local bank, NBT, which I have had accounts with for several years. I believe I had 1 check bounce in the entire time I was with the bank, and that was because of a bank error in depositing funds into the proper account. I also know and speak with a couple of managers on a regular basis. Thus you can say my relationship with the bank is favorable to friendly.

I initially was given an indication that my pre-qual rate would easily be what I had asked for. My credit rating is 750 (after rebuilding my credit after a career change in 2001) with at least one agency ranking me at 766. That is considered good to excellent. It would normally grant a lower credit rating as I am a low risk. I also have no long-term debt. Thus the initial loan rate mentioned was 6.11%. I have a witness to this.

I was rather pleased.

But after looking at several homes, and having requests from the bank for additional tax records for my corporation and myself – which I provided promptly – I received my pre-approval line. 7.11% and a reduction in the dollar loan amount of 27% [ie. if I asked for $100,000 they approved $73,000]. But I was assured that this is not accurate and I could be approved for more if I found a home in the range I was initially looking. Though no mention was made of what interest rate would go with this higher loan dollar amount.

Now I am insulted. I went from a very good interest rate and a decent yet highly affordable mortgage (fixed rate 30 years) to a bad rate – 1% higher than initially suggested and documented and 1.235% higher than the national rate – and a dollar bracket that provided access to homes far inferior to what I had wanted.

I will add that I have an income that surpasses the local area average, in excess of 2x’s, and never had a bankruptcy. There was a surplus of cash in my bank account - as there has been for over a year - that easily surpassed the 3% required for the loan by the bank. I have been operating my business for 2 years, and have been in the field of work for over 7 as an independent consultant. I have never been sued and was a successful stockbroker for roughly a decade.

I believe the increase in rate and decrease in dollar loan amount is insulting. I was given a reasoning that my credit report had bad notations (which I have reviewed for well over a year and cannot find), I have inadequate cash reserves (which I noted above), I do not make enough money for what I was requesting (which I and the initial loan officer determined I had far in excess for the amount requested beyond the local area average), and I failed to have enough funds to meet the 3% closing requirement (which I had in excess of 7% sitting in the bank).

Now what factor could be the reason for the change? What could motivate such an extreme reaction?

The loan officer that questioned me, and needed additional documents, never met me. He did speak to me (getting my last name wrong a couple of times). So what changed? Could it be that my actual last name (which is Spanish and yes Vass is a registered alias I use for business to avoid racial prejudices since I was a stockbroker) was too ethnic? Was it that my income too far exceeded the income of most of the 3% African American population in this area – as well as exceeding the White population income average.

Obviously I went on to seek out a separate mortgage loan via a broker that is Hispanic, and the brother of a friend. My preference was not his background but that I knew his brother whom I speak with regularly.

It has been over a week since placing my documentation with him. He is quite successful in getting mortgage loans, and owns his own brokerage. He too had high expectations for my loan. His opinion was that my dollar loan amount was very reasonable and in my affordability range. He could not understand why a bank I had been doing business with for years could not provide me a better rate, which he believes will be in the 6.4 – 6.6% range. Based on my cash on hand he believe that he might be able to get that percentage down to 6.25% (obviously the difference [from 5.875%] is for his own operating profit, which I do not begrudge him. This is business after all and we aren’t doing this to not make a profit).

Why am I facing a delay? Because the bank has suspicions that I am hiding money. Because I own my own business the bank that the broker has gone to believes I may be laundering money. Now the United States Government, via the IRS, has had no problems with my finances. My income has been steady with a respectable increase to my top line revenue for years. Every dollar that comes in is documented, and every write-off is noted and within legal allocations. I do not make excessive amounts of money (Bill Gates, or even several stockbrokers I know, make significantly more), I am just a regular small business owner.

So what could be the reasons? My last name is the reason some friends have mentioned to me. I’m ethnic and not generic like Smith or Hannity, or O’Reilly. I am immediately identified as at least Hispanic, and noted on some government documents as Black and Puerto Rican. And I live in an area that is 95% White, and comparatively a small town. Not to mention that a high percentage of those in the mortgage crisis are African American and minorities – though why they were selected and focused into these one-time highly profitable (for the lender) loans is unknown (sort of).

What do you think? Can you imagine a reason why banks would have a problem loaning money to a low-risk, no debt, middle-class income, single, business owner, who normally pays taxes (no refunds for me) is in his affordability range and has never had a bankruptcy or problem with the IRS?

Do you think if I was White, with exactly the same conditions I would be treated the same?

Before you answer here is another fact. Less than 3 weeks before interest rates were lowered, and prior to my first loan query, I had a friend that was pre-approved for a mortgage up to 75% greater than what I asked for. They had a 750 credit report. They are a single parent. They make 50% of my own income. They had a gift provided to cover closing costs and down-payment (which I do not begrudge).They are almost 20 years my junior. And the final loan amount was for a home in the range I am seeking, with an interest rate of ~6.75% (closing after rates dropped).

The big difference between us? Besides the income, that I am a business owner and not an employee, my age, and that she is a parent is that she is a White woman.

And for those wondering what the big deal about an extra 1.235% is that over 30 years (which I can affordably pay off in 5-6 years) there is an extra $20 - $50,000 dollars in interest to be paid.

So now I ask, why do you think I have been treated as such so far? Is this something others are experiencing across the nation?

Labels: Binghamton NY, credit report, home buying, IRS, mortgage rates, NBT Bank, real estate, TV One

Well now that everyone has finished the turkey (minus a few leftover sandwiches), let it digest, and worked off the extra weight running around shopping at every store with a discount sale it’s time of me to get back to work. There has been a lot worth writing about, but let me start with a simple thought. The economy.

The economy is perhaps not the simple part of the thought. It has far too many factors involved, and minds far greater than mine have debated endlessly about what will and does make it move up and down. But as a man who pays attention to the events and has a decent hold on current events I’ll throw my 2 cents in.

I had a friend recently ask me what I thought would be happening to the economy, and my answer was it’s going to get bad. Perhaps recession bad. And I added that the current group of Democratic candidates may only make it worse.

I say this because of several factors. Not the least of which are, the housing crisis, the financial sector, the cost of oil, and potential tax ramifications based on the current plans announced by candidates.

Let’s look at the housing crisis. While there are estimates that state the maximum reach of the crisis is on 5% of homes, I think it fails to take a couple of things into account. While only 5% of home mortgages have failed now, I would expect these are the early defaulters. I would guess that there are another 10-15% of homes in danger of default. Given that the Fed has lowered rates, these homes on the edge have gotten a bit of extra time, but that does not fix their problem.

This leads us to the financial sector. Already several major banks are claiming huge losses due to the bad loans they have made. In order to recoup their losses and in hopes of preventing more credit is being crunched. This means that large- and mid-sized corporations will have less capital available to them, and some short-term loans may be called or canceled. That does nothing to stimulate growth. Plus variable loans to the riskier ventures will invariably go up to offset the losses in the home sector. Thus the purchase of houses must slow, the real estate markets will cease top be a haven for a while and money will have to flow into new areas for investment.

Now when you consider that the corporations are getting higher cost for loans, or being denied, this is happening at the same time that costs for fuel are going up. A lot. That hits profit centers fast. Thus profit margins shrink at the same time that retail is hitting its greatest need for the annual shopping rush of the holidays.

Keep in mind that small companies will be cut off from loans by banks since their credit and assets are too weak in a tight credit market. Add the higher cost of transportation and several small companies will fail to make it thru the end of the year, I expect. That will hit all the businesses that supply and help them operate.

Also keep in mind that as I recall the market virtually never rises, or even maintains its level without the positive performance of the financial sector. As I mentioned that sector is already failing. As the dominoes fall I expect them to perform worse near term. Thus that is direct downward pressure on the market. And while the holiday sales will help retailers absorb the cost of higher fuel, the consumer will likely spend less (or buy items with greater discounts) because the cost of heating their homes and electricity and mortgages are all up.

What’s the last piece of this puzzle? The Presidential race. We have a critical election where several nation defining events will occur. Already several Democratic candidates have expressed expanding entitlement programs. Those programs, like nationalized healthcare, must be paid for via taxes. Those taxes will come from companies making less profit and citizens with less discretionary income. (And a bailout of the mortgage crisis costs even more that needs to me recouped from taxes) This is beyond the fact that when Democratic candidates are elected (which could happen in 2008 – which is a bad thought) the markets normally react poorly initially, when looked at historically.

Add all that up and you have a stagnating market, with reduced sales, higher costs, shrinking profit margins, higher taxes, horrible bond rates, and depressed real estate values. I call that a real problem. Especially if the tight credit, higher fuel costs, and higher taxes cause more home mortgages to fail than just the 15% low-end estimate I posed earlier.

What’s the best plan? Well I used to tell my clients (back when I was a broker, years ago) that we can assume these events as facts and plan for the worse. Set up a plan to sit and wait for a couple of the trends to reverse, and take advantage of market overreactions where possible (the market is more emotional than fact driven even in the best of markets). Is that the best plan for you? I have no idea.

Discuss this with your financial professionals, read what better minds than I say, and make up your own mind. Just remember, it’s all connected, and there is never a perfect answer.

** This can also be seen at Economist Blog where I am an occassional contributing author.**

Labels: credit market, Democratic Party, election 2008, financial sector, heating oil, holiday retail sales, mortgage loans, Presidential race, real estate, stock market