Financial Crisis Affects Borrowers Worldwide

The current economic recession has taken its toll on homeowners in the United States. Property values for the 1st quarter of 2009 in the US were down an average of 14% over the previous year. This is after a decline of almost 10% last year in median home prices. States such as California, Florida and Nevada have been hit even harder by rising foreclosures and the limited availability of credit. Housing prices have dropped over 25% in these states and continue to plummet with no end in sight. Economists estimate that US home prices will decline another 10 to 15% before bottoming out.

The global financial crisis has hit the UK as well. According to research by PricewaterhouseCoopers (PWC), the credit crisis has wiped £1.9 trillion off the average level of UK wealth since 2007. Whilst the amounts vary considerably, PWC believes that this equates to a reduction of £40,000 for every UK adult over 18. This figure doesn’t even take into account the millions of retired people, not to mention those residing abroad, who no longer receive the income they once did due to falling interest rates. Economists estimate that over 50 trillion dollars of wealth was lost in 2008 alone. That number is staggering! The loss in asset prices was led by the decline in property values.

This is especially troubling because the average person’s wealth is tied up in one major asset, their home. Millions of people rely upon the equity in their homes to maintain their standard of living. Home equity loans are used to finance college educations, automobile purchases, medical costs and etc. As housing prices have declined many people have found themselves unable to borrow money from their homes to purchase needed goods and services. As a matter of fact many individuals that have purchased a home over the past 5 years may be surprised to find themselves “upside down”. This is when you have negative equity in your home and you actually owe the bank more money then you can sell the house for.

As foreclosures are rising, banks are lending less and tightening credit standards which is making capital scarce. Therefore consumers have less disposable income and are shopping less thus resulting in massive layoffs at corporations. These unemployed workers are unable to make their mortgage payments leading to more foreclosures and the cycle continues. Even local governments are feeling the pain of declining home values. State governments are collecting less property tax revenue and are having to layoff employees and cut essential services.

Market Thoughts

Oil has been on a rise over the past two months. Oil prices have risen over $60 per barrel after reaching a low of $35 earlier this year, I think that we could easily see oil at $80 per barrel by the end of the year. Decreasing supply inventories along with a slowly recovering economy should lead to a rebound.

Metal stocks are probably due for a pullback. US Steel, Alcoa, Freeport McMoran have seen a drastic rise in prices despite the lack of an increase in global demand.

A Dividend Play With a Great Yield

Every now and then I come across an investment that yields a solid return and has very little media hype. I found a smallcap dividend play about a year ago with a very healthy yield. The company is called Hatteras Financial Corp (HTS). Hatteras Financial is a real estate investment trust (REIT) that invests in mortgage backed securities that are guaranteed by the US government or a governmental agency. The company does have some risk as some of its securities are backed by Fannie Mae and Freddie Mac. The main risk in investing in Hatteras is that the US government defaults on its obligations. Hatteras offers little in price appreciation as the stocks has fluctuated between 15 and 25 for the past year. The dividend has been solid over the past year currently yielding almost 17%. Normally high yields such as this concern me but the company was able to pay out a double digit yield over the previous 12 months. The company does have a short dividend payment history but if the past year is any indication of the future; Hatteras may be a promising dividend play.

Facebook Worth 10 Billion

i just read a CNBC report that states that Facebook could be worth up to 10 billion dollars. Incredible. It makes you wonder. Why didn’t I think of something like that? I know that the guy who sold Myspace for 580 million must be kicking himself. Entrepreneurship is the number one money maker in America.

Expecting a Decline in The Dow

Bought shares of ProShares UltraShort Dow 30 (DXD) for my short term trading account. I now have 4 different ETF’s in my trading account that are for a short term pullback in stock prices. I bought these shares just below $51.

As stated before I am also taking some profits in General Electric. I probably should sell some Wells but that is one of my core long term holdings. If it drops as I expect most financial to continue to do I will use that opportunity to accumulate more shares. One of the main reasons that I believe that we are due for a major pullback is because people are not investing based on fundamentals but on momentum. When people see the market decrease they become afraid and that selling begets more selling.

Why I sold Gamestop

A year and a half ago GameStop (GME) was one of the largest equity holdings in my portfolio. For those who are not familiar with the company, GameStop is the largest video game retailer in the US. I had held shares of GameStop for over 4 years and was excited by the company’s growth potential. The stock consistently rose over the years and even split once. GameStop even gained market share by buying out rival Electronics Boutique a few years ago.

So if things were so great, why did I sell it? I started thinking about some of the factors that Warren Buffett looks for in an investment like economic moats, high ROE, profitability and consistent operating results. While GameStop performed well in many of these categories; I discovered that GameStop failed in one significant area. The company had a small competitive advantage with little to no economic moat. I felt that GameStop had no significant barrier to entry that could protect it against the likes of a Best Buy or similar competitor.

GameStop reminds me a lot of Blockbuster in the 90’s. Blockbuster dominated the movie rental business and was the largest chain store rental business in the US. Blockbuster was so large that the company became stagnant and never noticed a small upcoming online retailer called Netflix. Netflix changed the entire movie rental business and Blockbuster is struggling just to stay afloat. GameStop still earns solid profits through its new and used video game sales business. But the company is facing increasing competition from Best Buy, Wal-Mart and Amazon.com. I can’t help but think that over the next 5-10 years digital delivery will be the method of choice for consumers looking to purchase video games. Unless GameStop changes it business model and is the leader in digital delivery; the video game retailer will likely find itself obsolete.

BankUnited Fails

Troubles in the banking industry are not over and are just beginning for many regional banks. While the large banks have access to government loans and private capital, many of the regional banks must deal with the problem of becoming extinct. The latest victim is BankUnited FSB which is the 34th US bank failure this year alone. The total now exceeds the number of bank failures in the previous 2 years combined. BankUnited FSB (BKUNA) was officially closed and seized by the FDIC today. This is the largest bank failure this year only surpassed by the failures of IndyMac Bank and Washington Mutual last year. BankUnited was purchased by a combination of different private equity groups.

Sold SDS

Sold ProShares UltraShort S&P 500 (SDS) at $61 today. I bought SDS as a trade and made a $4 per share profit on the sale. I think the S&P may decline further but I have a lot of short positions in play and wanted to take some profits.

Bank of America Sells Stock

Bank of America (BAC) was able to raise capital to help strengthen its liquidity. The bank giant was able to raise 13.47 billion in a relatively easy fashion. There was great demand for BOA shares as the company sold 1.25 billion shares without a hitch. I have to admit that this stock market rally has lasted a whole lot longer then I originally expected. I don’t know how much more steam this rally but it appears that momentum has been driving the market higher day after day. At some point I still expect a significant pullback. Investors will realize that all of these equity offerings will be dilutive to existing shareholders and toxic debt will impair company earnings for the near future.

Buffett Buys Banks

Warren Buffett increased his stake in banking giants Wells Fargo and US Bancorp.  Buffett added 4% to his Wells Fargo stakeand 2% to his US Bancorp holdings. Buffett must have deemed financial stocks cheap during the 1st quarter of this year. Wells was trading at historic lows just below $8. Buffett also increased his positions in Johnson & Johnson and Norfolk Southern.