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  • Archive for August, 2007

    Deficiency Judgment

    Posted by Frugal on 31st August 2007

    At this time of home prices falling, and possibly not being able to roll over/refinance the home loan, it is important to revisit this older post of mine: Deficiency Judgment: Think Again Before You Walk Away from last year

    To the current homeowners: think again before you send the keys to the bank and walk away from the house. Do you think that when the housing prices fall, you can simply walk away from all the loans? Well, if you didn’t know, I am going to explain it to you. There are loans that you can walk away, and there are loans that you cannot. It’s called a recourse or a non-recourse loan.

    A non-recourse loan means that there is no other recourse available to the lenders besides taking back the home. A typical non-recourse loan is a home loan for purchase. If the house falls below the balance of the purchase loan, the buyer can walk away from the house without any serious consequences (maybe except a big blemish on the credit report). On the other hand, a recourse loan means that the homeowner is personally liable for any “deficiency” when the lenders cannot recover the loan amount by selling off the house. A typical recourse loan is a home equity loan or a line of credit from home equity. As far as I could research, I don’t think a refinanced home loan is definitely a recourse loan. But I’m almost certain that a cash-out refinanced loan is recourse loan. As far as the legal language is concerned, a refinanced loan obviously is not a loan made for purchase.

    …Click to read more….

    Again chances of judicial foreclosures are “usually” small. But you just don’t know what a badly hurt banker will do with a mounting losses on his back, especially with more and more home loan defaults. If it means that it will reduce his losses, he might as well create an off-the-book company to specially deal with lengthy foreclosure process with more money recovered.

    Posted in Mortgage, Real Estate | 5 Comments »

    Recession is coming

    Posted by Frugal on 29th August 2007

    I’m going to say it for the last time. SELL when you still can.

    From all the signs that I can see, markets are simply going to head lower in the intermediate term. Housing price is going to take a bigger fall. Credit markets are going to get worse. Credit card deliquency is going up. This article from gives an excellent view on the financial markets:

    the market will soon begin to realize that the credit card lenders have in essence become the consumer lenders of last resort. As consumers have been shut out of the mortgage and home equity world, the last available credit is plastic. One statistic that I have found very troubling is the degree to which credit card balance growth is running ahead of retail sales growth – a key sign that the consumer is stretched. In normal times, you would expect aggregate credit card balance growth to run about in line with GDP and retail sales growth. This year it is running almost 2.5 times that. Clearly consumers are using their cards for far more than purchases. And my guess is that for many Americans their credit cards have become the latest, but potentially last, source of financing available.

    The 50-day moving average is turning lower and lower. Each time you (and I) miss the selling opportunity, the next time is simply worse.

    Best luck.

    Posted in Market Pulses | 11 Comments »

    A funny picture

    Posted by Frugal on 28th August 2007

    Just saw this from, who got it from misstrade:


    It’s hilarious, but probably not so funny for the people who are affected.

    Of course, for all the Wallstreet genius, they thought they could pass off the hot potatoes in time, but I guess not.

    Posted in Miscellany | 4 Comments »

    Chinese market keeps making new highs

    Posted by ML on 27th August 2007

    I watched quite a bit of CNBC last week. Among other things, I caught the interview with Countrywide’s Angelo Mozilo who called for a recession in no uncertain terms. This of course, is the man who had steadfastly defended CFC’s business while cashing out some $250 million of options in the past year. Nonetheless, the CNBC anchors all went ga ga over this comment and actually put up several economists/strategists of the more pessimistic bend. Long time readers know that I have long held the same view; however, the very fact that the “R” word is mentioned on CNBC about once every 10 minutes may well mean that a short term bottom is in. Sure enough, Friday saw some nice upside action following a strong durable goods report.

    While I remain suspicious American consumer’s continuing willingness/ability to pile on debt, I give more credence to the other leg the bulls stand on: strong global growth. Nowhere is this more evident than in China. The Shanghai stock market made consecutive new highs last week to end at 5108. Again recall that not too long ago the ubiquitous worry was for an implosion in the China to bring down global markets. The fact is, since the July 19th peak in US and the rest of world markets, SSEC has gained over 25%. On Friday, FXI, the FTSE/Xinhua 25 ETF, also made a new high, finally confirming the move in Shanghai.

    Let me clarify my view on the Chinese market. Many have compared it to the Nasdaq bubble based on price trajectory alone. I will not debate that point. I will even grant that the Chinese market is in a bubble. But in my opinion, that misses the point entirely. Bubbles are grand money making opportunities, during both the expansion and implosion phases if you know which side of the market you’re on! So let’s put emotions aside and look at some relevant recent developments.

    First of all, let’s look at some negative factors.

    • Chinese exporters enjoy a rebate of value added tax. On June 20, China announced that it will reduce tax rebates on exports of high energy-consuming, resource-intensive and environmentally-harmful products. The measure will take effect around September/October. Given that Chinese exports amounts to 30-40% of its GDP, lowering the rebate is a far more effective way to slow down its red-hot economy than raising interest rates.
    • Of course, they can do both at the same time! Chinese CPI was a blistering 5.6% for the month of July. The index was paced by food, especially pork , prices. In response, the PBoC (People’s Bank of China) raised deposit rates by 0.27% to 3.6%, and lending rates by 0.18% to 7.02%. It was the fourth raise this year.
    • I’ve always held the non-convertibility of the Yuan as a positive since the individual investor has few choices besides the domestic stocks. For example, some key state owned enterprises have listing in both Hong Kong (H shares, aka red chips) and Shanghai (A shares). But the A shares are far more expensive than H shares because there is too much money chasing the same shares. Two weeks ago I would have said that the day that the Yuan becomes fully convertible would be the top in the Chinese stock market as individual investors diversify out of the country en masse. In a surprise move last week, China declared it would allow individual investors investing abroad, starting with Hong Kong. The news sent the Hong Kong’s Hang Seng index up 10% last week with broader Asian markets following suite. Of course, some capital will be diverted away from the A shares market; on the other hand, this is gradual approach eliminates future shocks. It cools down the domestic market and relieves some exchange rate pressure at the same time – a stroke of genius really.
    • The Bank of China (BOC, not to be confused with PBoC, the central bank) and its Hong Kong arm disclosed that they hold $11.25 bn of CDO’s based on US subprime mortgages. The Industrial and Commercial Bank is on the hook for $1.23 bn.
    • Recalls of Chinese products, from tooth paste to sea food to toys with lead paints, are grabbing headlines everywhere.

    The intriguing thing is that all these happened prior to last week where the Shanghai market had five consecutive up days. You can chalk it up to irrationality but the price action is to be respected nonetheless. In a way, it shows the power of liquidity since Chinese citizens are still pouring money stocks. Let’s now look a few positive factors.

    • One of the signs of excess that bears love to point to was the number of new stock trading accounts opened daily. It was somewhere around 100k before the last correction in May. Well, with the market at new highs, that number has increased to 150k or so – TDAmeritrade/eTrade, take that! Anyway, I never understood that logic behind that particular argument in the first place. Common sense says that the flow of money should peak well after the peak of number of accounts open. Besides, while 100k or 150k per day is a huge number, the number of potential investors in China is, well, huger!
    • If you’re wondering where all the juice in the Chinese market is from, just look at how fast Chinese wages are growing:

      Combined annual wages reached 2.34 trillion yuan ($308 billion) at the end of last year, up from 1.32 trillion ($173 billion) in 2002, representing an average annual rate of increase of 13.5% after inflation, according to a report from state-owned on official figures released at a meeting put on recently by the China Association for Labor Studies.

      Note this double digit increase is after inflation has been taken factored in. In coastal cities, annual wage increase in the high teens for the college-educated, 25-35 crowd is common. This increased wealth fuels the equity market both by fattening companies’ bottom line from increased consumption, and by channeling disposable income into the stock market.

    • Finally, while the health of the export sector may give investors doubts, recent advances in SSEC have been lead by RE developers/construction companies.

    Despite new highs in SSEC as well as a clear non-correlation between Shanghai and the rest of global markets investor continue to shun Chinese stocks as indicated by the growing discount in the MS A shares closed-end fund (CAF) that now stands at 20%. For whatever it’s worth, my own view is that aside from the threat of a weak Christmas shopping season in the US, the prospects remain rosy until the Olympics next August.

    Disclosure: I own FXI and CAF.

    Posted in Stock Market | 3 Comments »

    Be careful with your bond investments

    Posted by Frugal on 24th August 2007

    This is the chart from Vanguard’s high yield corporate bond mutual funds:


    You can see the credit crunch clearly. I got out of this position 1.5 years ago. Never intend to invest in bonds for the long term (I’ve several posts under bond sections on why).

    And don’t say that I haven’t told you this. Don’t invest in long term bonds. I think down the road, there may be a spike in the yield curve at the long end, and a corresponding drop in the the long term bond price. I don’t know when, 3 years or 8 years from now, but I can see it coming. Although it could take a long time before it comes, I don’t want to go to sleep every night knowing that my most conservative investment will blow up in my face.

    Posted in Investing | Comments Off

    Excellon Resources Followup

    Posted by ML on 22nd August 2007

    A while ago I wrote about a promising silver exploration company in production with positive cash flow: Excellon Resources. My conclusion then was

    …current valuation is largely supported by the test mining activities alone; therefore, investors are getting a near “free ride” on Excellon’s exploration potential.

    The company just issued two noteworthy press releases. The second described recent drilling results from hole ST-50. The grades were nothing to write home about especially in view of the high grade ore Excellon is test-mining now. However, in their chase for the “world class CRD (carbonate replacement deposit)”, this is the first time they did not draw blanks. Looking at the property map, ST-50 is located at the southern end of the Saultillera area, and more promising regions probably to lie further south.

    I have always been intrigued by the extraordinarily high grade region Excellon is mining now. I’m not a geologist, but if it were a singular occurrence, it would very much go against my understanding of physical nature. With the latest development Excellon should be able to follow the breadcrumbs instead of going on wild goose chases to pursue the CRD so to speak.

    Saultillera is sitting on the western edge of Excellon’s property. According to the first of the two press releases, Excellon purchased two pieces of land recently, with the location of the second and more expensive purchase not given. Let’s hope that management has some foresight and had spent wisely.

    Disclosure: I’m long this stock.

    Update: 8/22/07
    Today’s release was a pleasant surprise as I was not expecting so quick an answer to my question about the new land purchase. While the high grade holes between the Guadalupe mantos were entirely expected, I was very happy to see the map of the new land holding. It sits to the west and southwest of hole ST-50. Seems that Excellon management had spent wisely.

    Posted in Gold/Silver | 2 Comments »

    A few important notes on bank and money market accounts

    Posted by Frugal on 21st August 2007

    I think it is important enough to write a short post on this before you may lose money:

    1. Close your non-FDIC money market accounts RIGHT NOW, and move the money to a FDIC-insured account and make sure you have less than $100,000 in each institution. I know wells fargo bank has offered non-FDIC money market accounts since 1997. I don’t know whether they still offer it, but if you have money in those accounts that have a sparingly higher yield than the regular money market account, you should switch them to a FDIC-insured account right away. If you don’t know whether your accounts are FDIC-insured, you should confirm with your bank. Just last Friday, some non-bank money market accounts blew up. You don’t want to be in that situation. Also lots of money market mutual funds hold some mortgage papers that you don’t want to own.

    2. If you want to open a bank CD, you should do it RIGHT NOW. Fed is going to cut interest rates, and it won’t just cut once, but multiple times. Lock in your high bank CD rate while you still have a chance. And do me and yourself a big effort, don’t open this bank CD at Countrywide (CFC), Downey Savings (DSL), Fremont Investment (FMT). Just look at those stock performance, and you should know why.

    Safety first. You don’t want to lose your hard-earned money after you have been conservatively enough to put the money in a money market account.

    Posted in Banking | 12 Comments »

    Book-smart or Street-smart?

    Posted by Frugal on 20th August 2007

    I just went to a college reunion with a small group of my old college friends. After more than 10 years, it’s amazing how much has changed, and how much has not changed.

    I’m the youngest among all, because I’m the book-smart guy who took the same classes with them, while at a younger age. In fact, half of my friends is older than me for this very reason since high school and college days. Being younger in your friends has the advantage of seeing things farther ahead at your age, while being out-of-touch most of the time except academics.

    Among my college friends, one guy is 12 years older than me, but I always know him to be very smart. He is the street-smart type, and never paid much attention to class work. When he went to college with me, he only wanted to get a degree, but not really learn anything from it, only because he was so much older and his focus was not in academics anymore. Despite his lack of (interest in) book-smartness, I often relies on his advice (even now) for his street-smartness.

    And by the measure of his financial success, he is far and beyond on what I may be able to achieve. Before the age of 45, he already made enough money and has retired for 4 years. Now he is back in (a different) business, aiming to bring a company to IPO, with two billion dollar revenue in a couple of years. Amazing, isn’t it?

    This is not to say that book-smart is useless (at least, I’m a positive example of this category). Rather, being book-smart gets you to the basics, but it does not end there. However, if you hope to being street-smart and out-smart most people, you should stop hoping and take actions. No success can be built upon day-dreaming without doing your homeworks. One of the quality of success is that it is relatively infrequent or rare. And for obvious reasons, a rare event cannot happen without someone working hard to make it happen.

    Whichever type you are, you should work hard. But know that statistically, being booksmart gets you to above-average lifestyle more easily, while only few percentage of the people being streetsmart goes far and beyond. So if I were making the plan for my children (or myself), I would always ask them to acquire the basics first before “going for the extra bonus”.

    Posted in Career/Salary, Miscellany | 7 Comments »

    The Coast is Clear?

    Posted by Frugal on 17th August 2007

    Yeah, I’m still negative. This market I believe is going to be one of the most treacherous since 2000.

    The credit crunch caused by homeowners’ default is real. There is going to be no way around the deflationary force. The only way to combat it is by even more inflation. However, both inflation and deflation takes time to generate or unfold. And my own guess is that right in the middle, market will sink like a rock.

    Time-wise I believe, that middle point is still quite far from now. And therefore, I’m still negative.

    I’m going to watch the market closely. But for now I will probably not going to add more. The intermediate picture is simply not pretty, although short term rally has the potential to break the previous high.

    I cannot invest my money based on a short term picture, because under this volatile market, the money can be gone in a second. My lack of time to trade only allows me to invest for intermediate to longer term horizon.

    Best luck.

    Posted in Market Pulses | 1 Comment »

    Has everyone sold?

    Posted by ML on 17th August 2007

    After this afternoon’s miracle rally, a short term bottom in equities appears be in. Financials which led the charge downward were the big winner today. The Russell 2000 appeared to have made a double bottom with positive divergence. Small caps led the way down, and now they appear to be leading the way back up. It remains to be seen whether we’ll see new highs or just a relief rally. While the liquidity crisis may be slowly under control, I expect to see real losses in the financial sector. Likewise, should we have a recession, small caps will be hit much harder than their larger cap brethrens.

    Gold, far from being a safe haven, really took it on the chin today. It was down $25 at one point. HUI busted down an eight-month, slightly upward channel.

    Gold was part of a major sell-off in commodity related stocks today. The apparent trigger was the deadline for hedge fund redemptions. Anything that they were even suspected holding were sold down hard. The credit squeeze and the subsequent liquidity injection were the catalyst that gold bugs were hoping for to send the yellow metal soaring. So I’m left to wonder if that are anyone besides the most masochistic ones who hasn’t sold.

    For kicks, I looked up the Alexa traffic reach for Kitco, the preeminent gold website. I was amazed to see well resolved peaks corresponding to Dec 03 and May 06 – previous peaks in the PM complex. Traffic, and popular interest by inference, has steadily declined during the current correction and now stands at a level last seen in 2002. There may be a conclusion somewhere, but I’m too gun-shy to say it…

    Let’s remember that markets always do the right thing, just not at the right time.

    Posted in Gold/Silver, Market Pulses | 2 Comments »