To Catch a Dropping Knife

Two dramatic days in the stock market have been driven by renewed investor confidence.

Yesterday’s 200+ point advance was triggered by a $7.5 billion investment in one of our largest financial institutions, Citigroup. The source of this investment, the Abu Dhabi Investment Authority, generates questions from many philosophical, political and financial fronts, and at the same time encourages investors in both the debt and equity markets that the fundamental value of the US financial sector is still very real regardless of uncertainties in the near term. It also provides confidence that the Fed is not the only white knight out there with deep pockets.

Today’s 300+ point gain in the U.S. stock market was helped by comments made by Vice Chairman of the Federal Reserve Donald Kohn. He told the Council on Foreign Relations “uncertainties” in the markets “require flexible and pragmatic policymaking”. Wall Street interpreted these remarks to mean the Fed will cut rates again at their next meeting.

This is also reflected in the price action of the Fed Funds futures contracts which have long been an indicator of institutional investor sentiment on where short-term interest rates are going. That measure is currently predicting an approximately 80% chance of a Fed easing at the next meeting.

All this positive action in the face of a week of negative economic news:

1) 90% of companies in the S&P 500 have reported earnings and those earnings have shown an 8.5% decline in earnings versus the 3^rd quarter of 2006 in which there was an 11.6% year over year gain. The worst year over year comparison since the 4^th quarter 2001. Yes…2001.

2) The Fed’s Beige Book report out today showed slowing economic growth in October.

3) Orders for durable goods such as cars, computers and appliances fell .5% in October following a revised 1.4% decline for September. This, however, was in line with economic forecasts.

So, now what? The fact is that all those negative numbers are a snapshot in the rearview mirror. The near term future will likely bring more negative news as the Credit Crunch brought about by the Sub-prime debacle plays itself out over the next 12-24 months and individual investors will, as they always have, watch the “big money” to give them direction as to the next move up in the economic cycle. Granted, the best and brightest are a little more tarnished than in the past, but for better or worse they still run the game.

The $7.5 Billion investment in Citigroup by foreign investors is not their effort to “play the stock market.” They are not trying to take an educated risk on the direction of the stock market in the next 6 months. Additionally, these folks are certainly not “day traders”. But, they do know a bargain. An investment in Citigroup is an asset play that spans stocks, bonds and real estate. It may get a little uglier but even they cannot pick a bottom. There's a saying in the investment industry... picking a market bottom "is like catching a dropping knife." Who needs that? One thing is for sure, they would rather be in the game than standing on the sidelines. Can’t make money there… can you?

By: Ron Ojeda, Capital Development, Blue Moon Capital, LLC

Invesco to move HQ to Atlanta

A recent issue of the Atlanta Business Chronicle had an article about Invesco Plc (the global investment firm) relocating its London headquarters to Atlanta. Invesco is a global money manager with $2.41B in annual revenues; this move is projected to bring in 150 jobs. The article states "While heavy on on symbolism, the real benefits of Invesco's headquarters having an Atlanta address will play out in the years ahead."

Invesco is planning to combine its HQ and Atlanta office into one location... the new Two Peachtree Pointe in Midtown Atlanta.

Survey: 65% of IRA holders consider real estate as an investment for retirement

I found this article browsing google the other day and had to share it. It is from the Birmingham Business Journal, quoting a survey conducted by a firm called Guidant Financial Group. Real Estate has been and will continue to be a predictable investment for building wealth for retirement. We will see more and more traditional long-term hold strategies and a new wave of investors looking to rent property out for 5 years at a conservative 4% annual appreciation rate rather than flip a property for 30% profits in what used to be 20 days.

The article:

"Despite a slow national real estate market, a recent survey showed real estate is the No. 1 choice for self-directed investors.

Washington-based Guidant Financial Group conducted a survey of nearly 1,000 self-directed IRA holders and found that nearly 65 percent of the respondents said they were considering property as an investment for their retirement savings.

Nearly 60 percent chose rental property, more than 36 percent chose foreclosures and preforeclosures and more than 28 percent chose raw land.

"These numbers provide valuable insight into the minds of investors," said David Nilssen, president and CEO of Guidant.

"It demonstrates that, although the real estate market is experiencing a downturn, many still continue to view real estate as a secure and viable means to growing their nest egg."

Other choices, according to the survey, included: tax liens and deeds, 29 percent; business/franchise, 22.8 percent; hard money lending, 22 percent; notes, 19.3 percent; vacation property, 19 percent; foreign investments, 10.4 percent; and securities, 7 percent."

Alan Greenspan on 60 Minutes: Housing Market and Economic Forecast

Alan Greenspan was interviewed on CBS's 60 Minutes with an outlook on the US housing market and economic forecast.

Greenspan stated "... we're gonna get through this particular credit crunch... we always do..."

This is a reinforcement that the real estate bubble hasn't burst... it's just taking a well-deserved break.

An innovative vision: Residential Rental Real Estate as an Asset Class (RRRAAC)

Blue Moon Capital is more than a money manager, more than a real estate investment company/wholesaler/hard money lender/reo buyer/ turn-key opportunity provider... Blue Moon is an innovative company with a vision of creating "Residential Rental Real Estate as an Asset Class."

"Well I had always been fond of real estate, and i saw it was an opportunity to do something in the industry that nobody has ever done before... and that is create residential rental real estate as an asset class, which up until today nobody has ever realized that it has the potential that it does today primarily because the industry considers residential rental real estate as cumbersome, awkward, hard to manage but we look at a process whereby we can make it manageable..."

Blue Moon Capital Overview on YouTube

Calming Seas in the Credit Markets

It appears that most of the high profile news about the "Credit Crunch" is out there. At least this wave. Lenders have had some time to locate and identify enough of the subprime risk that is either currently in their portfolios, been packaged and sold to investors, or in the pipeline and being processed in order to evaluate and put some measure of quantitative valuation on their risk exposure. Some lenders have already started to add loan products back to their menus and some large lenders have decided to retain the loans in their own portfolios instead of selling them to the secondary market. By doing this they do not take the risk of having to sell the loans at a discount which would result in a loss to them. This also is giving them a competitive advantage over less financially sound banks by allowing them to make loans their financially weaker competitors cannot and consequently taking away market share ..

By: Ron Ojeda, Capital Development, Blue Moon Capital, LLC

It's a bird... It's a plane... It's... ... Bank of America!

Notable News:
Bank of America to invest $2 bln in Countrywide: WSJ
"NEW YORK (Reuters) - Bank of America Corp plans to invest $2 billion in Countrywide Financial Corp, the mortgage lender that has faced a liquidity crunch this month, the Wall Street Journal said on Wednesday." Source: www.reuters.com

WaMu leads the pack back in

After speaking with a number of mortgage professionals, I have gained knowledge that WaMu is once again offering stated income loans for W-2 borrowers.

While that may not sound like a dramatic announcement in and of itself, the mere idea that a large national lender is restoring loan products to their menu is a sign of a reversal of the trend of the last three weeks.

It should be considered that WaMu has one of the strongest balance sheets in the industry and this may be indicative of what other financially strong lenders, such as Bank of America and Wells Fargo, might do in the near future. -By: Ron Ojeda, Capital Development, Blue Moon Capital, LLC

Visions of Rollercoasters and "Dead Cats"

By Ron Ojeda, Blue Moon Capital

Debt and equity markets from Chicago to New York to overseas continued to react to the uncertainty created by an illiquid debt market. Last week started with three days of gains that were the best we’ve seen since March of 2003. But the lion’s share of those gains were experienced in a relatively narrow band of the S&P 500; financials, materials and energy markets were the sectors hardest hit since mid July.

With that lack of breadth, most savvy traders had one eye on the door. On Thursday when BNP Paribas, the largest bank in France, barred withdrawals from three of its’ asset backed securities funds, the broad selling started. Nine out of ten sectors in the S&P 500 were down more than 2.5%. By the way…that’s why it’s illegal to yell “Fire!” in a crowded theater. If it were not for the “dead cat bounce” on Friday with the market recovering late in the day from a 213 point drop to finish at down just 31 points, the market would have suffered its’ fastest 1000 point drop since the five days following September 11^th, 2001.

Given these events it is important to remember that the equity markets are simply the tail of a very big dog. That dog being the global debt markets. Friday finished the week off with a manic trading day driven by global central bank activity. The European Central Bank infused more than $130 billion into the markets on August 9^th, the highest amount since September 11^th, 2001, and an additional $84 billion on Friday with The Bank of Japan. The Bank of Canada and The Bank of Australia followed suit.

The Fed added reserves of $38 billion accepting mortgage-backed securities as collateral for overnight loans or repurchase agreements (Repos). The Fed will normally buy a combination of Treasury, Agency and mortgage-backed debt.

Bond investors, home mortgage buyers and jobless mortgage banking industry employees alike, who have been negatively affected by these events of the last month, have been anxiously looking for someone to blame. Unfortunately, this may be a time for them to look inward to see some of the culprits. Home buyers who stretched too far and borrowed against too much of their equity, mortgage brokers who sold inappropriate products to their customers and most importantly, the bond investors who enabled this activity by buying what Wall Street had to sell.

In the early 1990’s Wall Street was faced with a compelling problem. With a large wave of the population moving toward retirement, they needed an even larger amount of investment-grade income producing investments. With several money managers restricted on the quality of debt they could buy by their written investment policy statements, where were they going to find that investment?

Someone had a brilliant idea that would transform speculative paper into investment grade paper, "What if we bundle all these loans together into a pool? We can reduce the risk to the investor by diversifying his risk amongst all these loans.” Collateralized Debt Obligations were born and Large to small investors with mutual funds have been inadvertently feeding the beast ever since.

With the luxury of the big picture and hindsight as its’ benefactor, it appears the herd has had its’ way…again.

By: Ron Ojeda, Capital Development, Blue Moon Capital, LLC

Update: Lenders Tighten Belts

Signs of Change

It shouldn’t be a mystery that the lending industry is carefully rethinking their actions and changing their standards after last week’s crisis. So far, we have seen one of our several national lenders start to tighten their belt a couple notches in hopes of disqualifying more individuals for risky loan types such as the payment option loan, which is often sought after by investors looking to leverage for positive cash flow.

Blue Moon was advised early this week that the payment option loan type was still available to only strong borrowers with 680+ FICO scores, and with an additional 3 points at closing. To be fair, all loans are going to be requiring more “skin in the game” from the borrower, whether it be in the form of more points upfront or higher interest rates. The increased rates on loans across the board are a reflection of the lender’s uncertainty about what will happen over the next 30-60 days. Since they don’t’ have enough information to evaluate the risk at this time, they simply are charring above market rates to cover all contingencies.

Eventually, as it becomes more apparent as to what the real impact of the sub prime foreclosure chapter is, rates and underwriting standards will be brought into line. Today the impact to real estate investors is that they should expect tighter underwriting standards and additional costs, either upfront or over the course of the loan.

As we’ve seen in history, difficult situations in financial markets, being stocks or bonds, have brought opportunity to investors. The corrections in the global debt markets is no different. Experienced investors have made their fortunes during these market corrections. They simply have to know how to take advantage of the market by understanding what they are investing in.

Lending Industry Changes Will Affect Real Estate Investors

Press Release

Lending Industry Changes Will Affect Real Estate Investors

By: Ron Ojeda, Blue Moon Capital, LLC

Given the alarming events of the last two weeks encompassing the stock, bond and housing markets, it comes as no surprise that both investors and industry participants alike are trying to make sense of what has now become one of the most tumultuous periods over the last 20 years for the real estate and mortgage industries.

The past two weeks have fostered a clear contraction of the mortgage banking industry. Some very well known, and some not so well known, mortgage banks have closed their doors in the past 30 days, laying off thousands of employees while seeking protection from creditors within the bankruptcy courts. There is no doubt over the next 30 days we will witness more carnage and the number will swell as the investors who loan these mortgage facilities money to in turn lend to consumers, proceed to either temporarily cease all “warehouse lending” to those mortgage banks or severely reduce the “menu” of loan options they will allow a mortgage bank to underwrite. Negative amortization and other “pay option loans” (the ones which allow the borrower to choose the kind of monthly payment they would prefer and are popular amongst real estate investors) will either be eliminated or reserved for only the strongest of borrowers.

The credit crunch has not been restricted to home owners and small investors however. It is being felt all the way up the top of the borrower food chain with the likes of famed buyout firms such as Kohlberg Kravis Roberts (KKR) and buyout fund Cerberus Capital Management. Both firms were rebuffed by global debt markets in July along with forty-four other leveraged buyout deals in failed attempts to raise some $60 billion . “We are seeing a simple but extremely powerful de-leveraging of the global markets” observed Doug Cliggett, Chief Investment Officer of Dover Management.

Over the last few days, what started as a whisper thoughtout the industry has now become a clamoring for the Fed to step in, lower rates, and save us all. Unfortunately, this is probably not going to happen. The Fed’s responsibility is to provide one of the “one-two punch” that manages the U.S. economy, monetary and fiscal policy. Their use of monetary policy is a double-edged sword. If the overall economy is doing well today, which it is, lower rates will provide too much stimulus and drive long-term interest rates higher, thus killing the patient it sought to cure.

Current data, as of last week, provides us with a picture of a healthy, stable economy. According to Barrons August 6^th, 2007 article by Gene Epstein, Jobs Data: Goldilocks Lives, job trends over the past 12 months show that both overall and private payroll employment is up 1.4% since July of last year with the unemployment rate at 4.6% consistent with the flat trend in the unemployment rate. The recently released advance estimate for second quarter real GDP growth ran at an annual rate of 3.4%. More importantly, performance of the various components indicated that growth could easily run in excess of 3% for the next 2 quarters. Historically, real growth in GDP of 3% or more has been considered healthy and it compares favorably with growth of only .6% in the first quarter of this year.

So what about the stock market? After the correction of the last 2 weeks, some 800 points from its closing high of 14001 on the Dow is up 5.8% year to date. and the S&P is up a paltry 1%. Second-quarter earnings for the S&P 500 seemed on track to rise by 9% according to Thomson Financial. It doesn’t appear to be grossly inflated.

So what will the Fed do? We will have to wait until at least Tuesday when the policy-making committee meets. For as much pain as mortgage and real estate investors have either felt or seen in the past two weeks and for as much as we may see in the coming months, the Fed will almost certainly not act in haste. Based on the analysis of the facts presented here we believe the Fed will not change short-term rates. But hopefully we will see a change of bias that lets everyone know the cavalry is just over the horizon.

In closing, the mortgage and banking industry and Wall Street will bear the brunt of this credit crunch. It will feed on fear and uncertainty. Lenders can compensate for fear by raising rates or tightening underwriting standards. But, uncertainty can never be compensated for. If the loans you write in the future carry an indeterminable amount of loss, how can you hedge that risk? The bottom line… if you are going to borrow money to buy real estate, you better be ready for a much more inquisitive lender.

The blood is in the streets… and the money is in the air… Part III

What society realized is that real estate, under the norm, is not as liquid as stocks and bonds and the real estate market is a lot larger than equity markets. In the equity markets, liquidity is defined by the number of buyers willing to take ownership at a set price. In the real estate market, liquidity is determined by how willing the lenders are to lend money to buyers.

The fuel of the market boom was the availability of funding and the need to place it. Lenders created new products to introduce a new type of homebuyer- the subprime market, which would essentially increase the rate of homeownership. We saw the introduction of sub-prime option-arm loans (which were a bad idea from the beginning but no one raised their hand to question them). Today, many of these new-found homeowners are in an adjustable rate mortgage and do not have the income to cushion the anticipated fluctuating mortgage payments.

The over willingness of lenders to lend, and over lend, to the sub-prime market during this real estate boom along with the marketing practices of players, from mortgage brokers to direct lenders, caused irrational exuberance in real estate markets and real estate valuation. Today the real estate market is living with a “hangover” due to that behavior. Lenders are coming to the realization that the pendulum must swing in the other direction. There is a consensus in the residential mortgage industry that underwriting standards must be tightened to preserve the integrity of the overall industry and the valuation of U.S. residential real estate. The question today is: How far to the right must the pendulum swing?

The blood is in the streets... the money is in the air... Part II

The blood is in the streets… when did the leak start? Let’s go back in history for a better understanding of where the market is today.

Over the past two decades, Middle America became familiar with investments through the use of 401Ks and other types of retirement plans which introduced them into the stock and bond market. The equity markets were the new avenue to financial freedom and wealth.

However, because of the market corrections of the 1987 crash and the 1998 tech bubble, society was forced to become accustomed not only to the up’s and down’s of the market, but also to the extreme emotional distress of these market fluctuations.

Psychologically, those fears were reserved for those riskier types of investments and real estate was considered the new safe haven to asset diversification. Middle America started considering their own home as their investment with hopes in adding to their portfolio through purchasing a second, third, and so on.

Enter- the media. Books, tapes, DVD’s, seminars, Gurus, clubs, mentors, education- a new industry within itself- all with the common goal of showing society how they too can get rich in real estate… get rich quick.

Suddenly there was a high demand for property through the growing knowledge of how, where and when to buy. First it was California- home prices appreciating substantially by the week. Then followed Miami, Tampa, Phoenix, Las Vegas, until we got so bombarded by inventory in markets with double-digit appreciation that buyers were at a frenzy to make that $50,000 in two months.

What happened…?

To Be Continued...

The blood is in the streets and the dollars are in the air- Part I

The real estate bubble has burst. The nation has seen an overwhelming increase in residential foreclosures, markets have seen depreciation in home value, and developers are losing Millions in earnest deposits on land due to project fall-outs. Most of all, real estate speculators have returned to their rabbit holes leaving a nationwide surplus of inventory and lack of retail buyers. Oh, but wait- we’re not retail buyers. We’re investors. This is the introduction to a totally different story.

Working for a real estate investment company often has me defending my career from friends and family members who claim to be experts in the industry because they read Business Week and own their own home to know [think] that their home value isn’t going anywhere anytime soon. What they fail to know is that the “crash” of the real estate market is actually a good thing—for us investors at least.

This is the time to buy. There is a window for investors to purchase property while foreclosures are high, speculation is down, and lenders figure out how to fix their mistakes...