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  • Archive for July, 2008

    Just another documented housing fraud

    Posted by Frugal on 30th July 2008

    This is a story from OC register:

    Orange County property records show that on Oct. 29, Jose Castro bought 920 W. Camile from the Bank of New York, which took title to the home after it was foreclosed last year. On Nov. 16, Wells Fargo lent Castro $289,275 for the property.
    On Dec. 3, Castro transferred title of the house to Asset Disposition Venture Capital LLC, a West Covina company managed by Sergio Praslin, who signed documents on behalf of the company. Praslin did not return calls requesting comment that were left on his answering machine daily for the past two weeks.

    On Jan. 15, Praslin signed the deed selling the property to the Gomezes. Mario Gomez said he was surprised when it came time to sign the papers.

    “They lied to us,” he said of the sellers. “They said the house was really $500,000, but when I bought it, the papers said $625,000.”
    Gomez said someone else – he’s not sure exactly who – paid the $125,000 down payment.

    Documents examined by the Register, including papers in the Gomezes’ loan packet, did not show who paid the down payment.

    Emily Ralles, who served as escrow officer in the sale of 920, said she didn’t know or care who paid the down payment – as long as the check was good and the parties agreed to the terms of the deal.

    “It sounds to me like the seller helped out,” she said. “If someone gave them $125,000, what’s the problem? That’s a beautiful thing, if you ask me.”

    For the seller, the advantage of paying the down payment was getting Wells Fargo to cover the $500,000 mortgage – as much or more than the house would fetch on the open market.

    Wells Fargo spokeswoman Julie Green Rommel declined to comment on the Gomezes’ loan, citing privacy concerns. She said a homebuyer is free to receive assistance with a down payment as long as it is fully disclosed.

    “In many instances, borrowers are able to use gifts from family members or friends for a portion of their down payment, provided the amount and source of the gifts are documented,” she said.

    “I didn’t pay any money down,” Gomez said. “The man who sold it to me said, ‘No money, no problem.’ And later he told me I would get $30,000 for buying the house.”


    This property is only worth some $375K maximum (if the original loan was 80% LTV). The property was resold as $625K, with $125K down payment from a “mysterious” person/company. Since $125K is 20% of $625K, it would make the loan to be at “80% LTV”, while in reality, the buyer has no skin, and it’s really 100% financing. The seller got a net of $500K minus the $30K that he shared with the straw buyer. So the seller walked away of $500K – $30K – $375K (estimated property value) – $20K (for remodeling) = $75K profits. The buyer will walk away with $30K, and if the loan later gets reset and become unaffordable. At the end, WellsFargo will probably end up with $500K – $400K = $100K loss on the primary loan again.

    Actually, WellsFargo will probably resell this loan to Fannie Mae, which gets bailed out by taxpayers’ money. Fannie Mae will sustain a $100K loss, but in the name of propping up the mortgage & housing markets, it “would be okay”.

    You and I are obviously continuing to pay for all the fraudulent scams. These liars continue to roam free, game the system, and pocket massive amount of money at your and my expenses. And we have a Congress, Senate, President, and two presidential candidates, continue to bail out and pay for the mistakes and scams that all these liars have caused.

    I think the government should jail all these bankers, appraisers, real estate agents, and fraudulent sellers. Very unfortunately, the eventual effect will be a massive inflation thru a dramatic fall in US dollar, and cause everyone to suffer.

    Posted in Investing | 2 Comments »

    Merrill Lynch needs more money

    Posted by Frugal on 29th July 2008

    From bloomberg,

    In yesterday’s statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations — the mortgage- related bonds that have caused most of the firm’s losses — for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.
    ….
    Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.


    It’s just amazing how toxic these CDO bonds are. Selling 30.6 billions for just 6.7 billion dollars. That’s only 22 cents for every dollar. Furthermore, 75% of the purchase is seller-financed by Merrill. That means the buyer is only putting up 25% of the money, which is 1.68 billion. For obvious reasons, if the loss on the 6.7 billion is more than 1.68 billion, then Merrill will need to eat the losses. So after everything is said and done, Merrill Lynch only got a “cash infusion” of 1.68 billion from this deal. The rest are either loans, or being written down as losses.

    Furthermore, it’s selling 8.5 billion of stocks, and paying back Temaasek (the previous Singapore investor) 2.5 billion due to sale agreement. So that’s only 6 billion from stocks.

    For a 24 billion market cap, Merrill Lynch is raising about 6 + 1.68 = 7.68 billion of cash. I assume that the dividends will soon be all gone. At the current dividend rate of some 5%, that’s about 1.2 billion cash payout. I’m pretty sure that the money will not be there. I think all the new cash will probably be needed for further write-downs.

    Merrill Lynch is the 3rd largest broker. Looks like it will become smaller and smaller in size. Boy, the option ARM mortgage reset is not here yet. I can’t imagine how the whole thing will go bad to worse.

    Disclosure: shorting financials via SKF.

    Posted in Investing | 1 Comment »

    Pring declaring the end of bear market is close

    Posted by Frugal on 28th July 2008

    Martin Pring is one of the best market technician, and he is listing the following four reasons to be optimistic about stock markets:
    1. Low consumer confidence = Profits ahead
    2. Bull markets always follow bear markets
    3. Lower oil prices ahead
    4. Record cash levels on sidelines

    My personal While I do expect an intermediate rally starting sometime later in the year, my guess for the next intermediate top is less than 1420 in S&P 500. And it will be even worse for financial sector indexes.

    And I don’t believe that oil prices have peaked for good. $150 peak was probably the peak for the 3 of 3 Elliot wave. But the wave 5 is still yet to come. My current guess is that wave 4 will ends at around next April 2009, after which the general stock markets may start to go down with a 3 to 6 months lag. Certainly since that’s still quite far away, the bad news probably would be for the precious metal sectors. Although I think precious metals will bottom between now and next April 2009, that’s quite a long time by any measure.

    I have been seeing several good market technicians having some blind spots in their own analysis. Sometimes, it’s almost like they have made up the mind on certain assumptions before going into great length on analysis, probably myself included. The most important thing however is to realize that anything is probably possible. There are histories for precendents, and there are paradigm changes. The tough thing is to recognize the paradigm change.

    In any case, I believe that some sort of paradigm changes have occurred. I could be wrong totally. But we will see what stories the stock market will present.

    Posted in Investing | 5 Comments »

    Safety deposit box is NOT safe

    Posted by Frugal on 25th July 2008

    I have been thinking about getting a safety deposit box to store some jewelry. To my surprise, safety deposit box is not so safe at all. So many reports of thefts.

    I googled “safety deposit box theft” and came up with several horror stories. There were 3 different reports on thefts of WellsFargo’s safety deposit box (reports in the comment section, right after Mar 14 at Los Angeles, Oct 10 at Marina Del Rey, Jul 18 at Santa Clarita, and last one at Rancho Mirage, all four in California), and 1 report of a theft on more than 100 safety deposit boxes at Wachovia.

    I have also personally asked a WellsFargo representative about some details on their safety deposit boxes. I was told that “WellsFargo is NOT liable for the losses in the event of theft or fire“. By the way, FDIC insurance on the $100,000 does NOT cover anything stored in safety deposit box. NOTHING is covered in there basically. Getting any home insurance to cover your safety deposit boxes will be very tricky too, since they are not at your home.

    What’s worse is that it will be extremely hard for you to prove what’s in the safety deposit box. As for evidences, banks may or may not have any surveillence video tapes backup for investigation, and these crimes probably happen long before you discover that your precious items are gone. You can claim all you want, but since banks supposedly never check what’s inside, they would not have any knowledge of what’s in there.

    From the comments at the soundmoneytips.com:

    When you go to get in your saftey depos. box the teller asks for your key then she puts in both keys, turns both keys and pulls out your box. Upon returnig and locking your box all she has to do is position her body between you and the box insert both keys and only turn her key. She then hands your key back and you leave. She can now go in at any time and open your box because your key was never turned to lock the second lock. My friend understood this and said to the lady I am keeping my key I will insert and turn it to be sure my (the second) lock is locked.

    …that simple slight of hand leaves your box hers or his for the taking. She can then have a friend come in pretend to sign in and pretend to hand her a key and then empty out your SD box. Then the teller can claim the person showed ID and had the key so how was she to know it was not the right person.

    Another thing that you may want to know about homeland security confiscating safety deposit boxes. It is rumored that in the event of emergency, you cannot access your safety deposit box for any items such as gold, silver, guns, and cash. Just google “homeland security safety deposit box”, and you can find more than 20 articles reporting the same story over and over at so many different sites. But the fact is it is nothing new. The terrorist-related acts passed since 911 have put executive branch of the government in the supreme power. Since FDR (Roosevelt) has done it before, it won’t be surprising to do the same in the name of “national security and interest”.

    Posted in Investing | 11 Comments »

    There is a recession in the shopping malls

    Posted by Frugal on 23rd July 2008

    At my nearby shopping mall, things are clearly getting quite bad. You would think that people may buy less clothing or toys in an economic slowdown. But having more than one third of the food court eateries shut down is just beyond belief. The stores that were shutdown were a frozen yogurt store, a burger fast food restaurant, a japanese eatery, a chinese eatery, and the last one I can no longer recall its past existence.

    The other mall where I go often is in the higher income area, and it fares much better. Still the signs for sale are everywhere. Many stores are doing a lot of heavy discounts. A few are running back-to-school sales already. Back-to-school sales in mid-July! My wife said that more and more stores are front-running other stores a lot earlier than before.

    With credits tightened everywhere, American spending habits can no longer continue. Economists have always marvelled at the resilience of American consumers. I think they will be sorely disappointed this time (and going forward). Indeed, as long as you make credits available for big spenders, they will not think twice and spend it all. But the moment the banks pull back, you know very well that most American consumers simply don’t have cash sitting in the bank for spending. Without credit, consumers can no longer continue the game of rolling over/transferring debts via Ponzi scheme.

    In the past, I could always easily increase my credit limit. Not anymore. Not only I was refused for higher credit limits several times, but also I couldn’t charge my card before my bank payment was all cleared. I only had $6000 on one of my credit card. Due to my charity donation and other one-time spending items, I ran up my credit card balance to $4000 in previous statement plus $2000 in the current statement. I paid all $4000 in full, but the credit card company put a hold on my account for 14 days after I electronically transferred the payment over. The only reason was that the two statements added up to $6000 and a bit more. Even though technically I was below the credit limit, the bank was not willing to take ANY risk beyond $6000.

    I think credit card companies have been too lax in approving credits in the past. If I add up all the credit lines from all of my credit cards that aren’t cancelled, I have about $50,000 “available” to be used. How any combination of these companies can extend $50K to me is beyond my understanding. I cannot imagine myself carrying those debts while paying just the minimum payment. Maybe it’s just a choice of lifestyle.

    With less spending, less stores will be in the malls. Mervyn may soon file bankruptcy. I just bought a few last items at the bankrupt Sharper Image. Linen Things may make one LAST trip to bankruptcy for probably the third time, since I believe majority of the store bankruptcy going forward will be full liquidation only. Hold on to your cash in the wallet. There will be an unimaginable amount of bargains available to be picked up later this year, and next year, and probably next next year too.

    Posted in Investing | 4 Comments »

    Raw data on world oil production

    Posted by Frugal on 22nd July 2008

    The following data is directly from Energy Information Administration:
    Year 2000: 77.762 billions of barrels (bb), average price at $27.40 per barrel.
    Year 2001: 77.684 bb, $23.00
    Year 2002: 76.995 bb, $22.81
    Year 2003: 79.615 bb, $27.69
    Year 2004: 83.124 bb, $37.41
    Year 2005: 84.631 bb, $50.00
    Year 2006: 84.597 bb, $58.30
    Year 2007: 84.600 bb, $64.20
    Year 2008: estimated 86.48 billions of barrels (the first half so far is at the estimated rate of 85.85 billions of barrels), while the average price is at $102.70.

    Now can somebody give me an intelligent answer on why the oil prices have more than quadrupled since 2002, while the oil production only increased from 77 billions to about 85 billions, a tiny 10% increase? Economic laws of supply and demand are always valid in a free market. Because the supply is not increasing fast enough, the price HAS TO skyrocket.

    Why wouldn’t any oil company pumping out a lot more oil when the prices have gone up 4X? I can only think of only one logical answer, and it’s here in this link.

    The news on oil production is not in the headline yet. Here is the current headline: “Why the oil crunch may grow worse“. And you’d better prepared yourself before that. Once it’s in the headlines, the news is already old, and too late for you to do anything about it.

    Posted in Investing | 4 Comments »

    Freddie Mac may be selling shares for up to $10 billion

    Posted by Frugal on 20th July 2008

    Friday’s closing price of FRE valued the company at about 6 billion. If the company is not in trouble, one would never sell shares to raise money. In fact, if the shares are cheap, the company would buyback the shares instead of selling shares. That just makes economic sense.

    Obviously with FRE planning to sell shares, it can only mean one thing: it is strapped for cash liquidity. Selling 10 billion in shares will dilute the existing shareholders by 62.5%, making the new owners who paid into the 10 billion to own 62.5% of the company. That of course is assuming that FRE doesn’t fall from current price. Whenever a company raises such amount of money by selling a big chunk of itself, the most logical thing for a trader to do is to sell short the shares in advance and then “buy back” the shares in the financing round. With the new SEC rules, only market makers who are the investment banks are allowed to profit from such trades. SEC does know how to take care of its buddies.

    I still hold my opinion the same as the former Fed governor’s opinion by Poole. FRE and FNM are basically insolvent. With all the AA or AAA mortgage bonds falling so much already, and all the mortgage insurance companies pretty much walking dead, their insured or uninsured mortgages will be suffering tremendous losses. And without a doubt, whoever buys and holds through initial rounds of financing will end up getting diluted many times more. Only the last ones can retain their percentage of the shares of the company. But of course, FRE & FNM can only raise money for so many times thru issuing common or preferred shares, and/or debts. Eventually, no one would buy into the turnaround stories.

    Posted in Investing | Comments Off

    Comments from foreign investors

    Posted by Frugal on 18th July 2008

    There are some very interesting comments in this article from foreign investors: Sovereign funds cut exposure to weak dollar from ft.com.

    …. “The outlook for the US dollar is a significant issue for investors contemplating US-related investments,” Mr Shen said.

    …. Reacting to last year’s collapse of structured investment vehicles, the head of one Middle East fund said: “I thought the problem of off-balance sheet had gone away with Enron.”

    …. Still, dissatisfaction with the dollar peg is growing at the Abu Dhabi fund. “We are suffering. We are importing inflation for no reason,” says one ADIA staffer.

    In the first quote, it is obvious that foreign investors are quite concerned about the falling US dollar. But domestically, most US citizens who don’t have an international view on their finances only notice that prices of goods have gone up without understanding that the loss of purchasing power of US dollar is one of the major culprit.

    In the second quote, this is even more interesting. That was the first thing that popped into my mind about these banking losses. I have been wondering for quite a long time that why it was not okay if Enron does it by hiding all the losses in the off-balance vehicles, while it is okay for quite so many US banks to do the same thing. Why has there been no arrests at all so far for any of those banking boneheads, while those booted-out ex-CEOs are walking away with hundreds of millions of dollars parachutes?

    In the third quote, it is obvious that these countries have begun to understand what they are doing to their own citizens: importing US-based inflation into their own country via pegging to the US dollar (or closely track the currency to US dollar). Yeah, when we are creating and printing more money here, they get transformed into US debts (treasury bonds) bought up by foreign governments, which need to print the equivalent amount of their own local currency to sterilize the massive input of the trade deficit effect. The end results is that monetary inflation is showing up in their countries instead of ours. But it is extremely important to understand that the inflation effect is only postponed in the US, until the moments when those treasury bonds get sold back to us. Once or gradually as foreigners don’t want to buy our US debts, we will begin to take back our inflation. At that time, inflation will be even worse than now, through a flooding of US debts and US dollars, which drives the interest rates up, and the US dollar exchange rates down.

    I have been repeatedly telling my close friends that it is a mathematical certainty that US dollar will devalue. The question is never about whether it will happen, but when it will happen. (But of course, your overall ROI will be highly dependent on how good your timing on executing out the investment strategies).

    Posted in Investing | 6 Comments »

    Ripe for a rally?

    Posted by Frugal on 16th July 2008

    Todd Harrison at Minyanville.com seemed to have gone long in Freddie Mac and Wachovia. A few other technicians that I followed also are turning the corner from bearish to bullish. Are we ripe for a rally?

    I’m not going to try to catch the bottom here. But there is no doubt that you may double your money in some of the financial stocks if they decide to rally. If you are a nimble trader, you can definitely try. I however will just try to step aside on my shorts when it rallies. I have covered most of my direct shorting of shares. The rest is mostly shorting naked calls that are far out-of-money. I’m going to left them stand, since there are only 3 days left before they expire. But certainly anything can happen.

    Intel’s after hour action on Tuesday was positive. It certainly looks like the next intermediate term rally will be led out from tech. Financials will most likely be up too, but they are in the long term bearish market. Although I cannot understand the logic of tech stocks not submitting to the general bear markets, the stock market has proven to bears so many times that it can do many acrobatic tricks.

    Let’s take the market a day at a time. It will certainly turn up at some time, provided that there is not a cliff drop waiting out there. I think the cliff should come later though, not now. So let’s hold on to the roller coaster ride once more, and see.

    Posted in Market Pulses | 1 Comment »

    Ron Paul understands economics better than any other politician

    Posted by Frugal on 15th July 2008

    I just read the full article at DailyReckoning by Ron Paul. He has such a lucid understanding on the whole economic mess. It is a GREAT PITY that we don’t even get the chance to vote for him. I’m giving you some excerpts so that I don’t copy over everything here. Please go to DailyReckoning for the full text.

    ….
    It’s the post Bretton-Woods system that was responsible for globalizing inflation and markets and for generating a gigantic worldwide dollar bubble…

    Ironically in these past 35 years, we have benefited from this very flawed system. Because the world accepted dollars as if they were gold, we only had to counterfeit more dollars, spend them overseas (indirectly encouraging our jobs to go overseas as well) and enjoy unearned prosperity….

    But it was never destined to last, and now we have to pay the piper. Our huge foreign debt must be paid or liquidated. Our entitlements are coming due just as the world has become more reluctant to hold dollars. The consequence of that decision is price inflation in this country – and that’s what we are witnessing today. Already price inflation overseas is even higher than here at home as a consequence of foreign central bank’s willingness to monetize our debt.

    Printing dollars over long periods of time may not immediately push prices up – yet in time it always does. Now we’re seeing catch-up for past inflating of the monetary supply. As bad as it is today with $4 a gallon gasoline, this is just the beginning….

    I tried to explain the global inflation in my previous post on global economy in a nutshell, but I think Ron Paul did a MUCH BETTER job than I could have explained. It is such a pity that we have one of the best presidential candidates around, and yet the mass media pooh pooh on him all the time. It is so sad for American public, not being able to recognize the leader of their time. “Obama for change” sounds great. But changes cannot be just verbal. The United States seriously need changes. I’m not sure that it can be provided by Obama.

    Posted in Miscellany | 5 Comments »