Dow Monthly and Daily Charts after Today's Fall

Dow Loses 300 points Thursday, Makes Recovery, and Long Term Investors Who Haven't Sold in the Recent Panic are the "New Contrarians"

Earlier today I wrote a post on the Motley Fool board, "Macro Economic Trends and Risks" in which I "fessed" to being one of the few investors who hasn't been busy "churning" my account, trading in and out, like a nervous jackrabbit during the recent swoon in the Dow.

Yesterday, I posted a chart of the Dow in daily form.

Today, I post a new chart with the latest "Japanese Candlestick" now showing on the same chart.

(The daily chart I am talking about is the second of the two posted above.)

A certain trend reversal formation has formed on the daily chart. It is called a "hammer". The hammer is classified by a tiny "head" on top of a long "shadow". (Someone once described to me a "hammer" as looking more like a hatpin.) What this particular candlestick tells investors is a trend was decidedly "bearish" in a session, with the later part of the session turning bullish.

Notice on this daily chart that the "head" of the "hammer" closed above the 200 day moving average line AND my trendline. Although my trendline has now broken down (using Japanese methods of drawing trendlines NOT Western methods) I am still "bullish".

Which leads me to point out to Nervous Nellies who've been selling their Blue Chip Big Cap stocks in the face of what seems like an Armageddon event:

The Dow Monthly chart is still hale and healthy.

Look at the monthly chart (the top chart of the two).

That Dow chart shows a 25 year old trendline.

That's 25 years of 12 candlesticks per year showing the 1987 market crash and the 2000-2003 bear swoon including the dot.com meltdown and 9/11 and its bear aftermath (which reset the trendline to a less severe rate of rise).

Now I want to point out something to many of you out there.

My longterm trendline for the Dow starts out at 769.68.

That low for my trendline took place in August of 1982 . . . so we are talking exactly 25 years ago this month.

Next, I want to do a mental exercise where we shoot down a few hyper-ventilating Armageddon Sell analysts who are telling everybody to sell everything in the recent sell off of the Dow.

1. First, let's think about the Dow.

It's a weighted average of 30 of this country's greatest companies. It's the oldest "index" for the NYSE, or New York Stock Exchange.

Names you know, such as Verizon, Johnson and Johnson, Exxon, are all members of this Index. And these names, for the most part, have been neglected by buyers of stocks since the dot.com bust in 2001.

Big Cap Blue Chips have sorely "underperformed" the overall markets as I've pointed out in earlier posts on this blog.

To make money in any kind of investing, you must buy dollars for .40 cents. Go where the herd does not tred.

Hence, I think a "flight to safety", i.e., Big Cap Blue Chips, is exactly the kind of move all risk adverse investors should be making in these trying times.

Onward.

2. Using 770 (rounded off 769.68), most investors will look at that number and say "Aha, the Dow has gone up about 16 times in 25 years . . . therefore it is way overbought."

However, let's look at this 770 start point and double it.

That gives us 1540. The Dow first hit 1540 in January of 1986.

That's like 3 1/2 years for a double. That is above the "normal" mean where we seek to "double" our stocks's values every 5 years.

{Dr. Jeremy Siegel points out the 100 year average for S&P 500 type stocks is about 11% per year which would be a "double" every 6 1/2 years; however, through proper timing of your buys, I, Warren Buffet, and even Dr. Siegel firmly believe . . . and have empirical knowledge . . . that many investors can expect "normal" average returns of 13-14% and better. Meaning that I expect to "double" my stocks's gains (with dividends reinvested) every 5 to 6 years.}

Anyway, let's get back to our exercise.

So we hit 1540 sometime in January in 1986.

Our next double of 3080 takes place in December of 1992. Okay, instead of 3 1/2 years, this next double takes about seven years, from January 1986 through almost January 1993.

So, stay with me, the Dow doubled twice in 10 1/2 years total, right?

Our next double would be 6160. When did that take place?

This next double of 6160 took place in October or November of 1996.

This was our quickest "double" of the Dow yet. It took a little less than 3 years to take place.

Now, let's do one more "double".

We are looking for the first appearance of 12,320.

Guess what? This double took the longest of all, almost ten years exactly.

Look for yourself at the monthly chart. This new double of 12,320 took place in October or November 2006 . . . ten years after that last double in October or November of 1996.

So the Dow has doubled four times in the past 25 years.

Length in time for the Dow to double those four times in 25 years . . .

First double: 3 1/2 years

Second double: 7 years

Third double: 3 years

Fourth double: 10 years

Take Away on the above observation

If we are using a 25 year old chart of the Dow, then the next double of the Dow . . . 24,640 . . . will probably take place in less than five years if . . . I said IF . . . historical "norms" continue through thick and thin times.

The only thing to destroy my outlook would be a Worldwide Depression.

And if a Depression comes, I'm still not selling off my stocks which I've bought at undervalued prices.

As I said in a Motley Fool message board post today titled Contra Thoughts from Accused Perma-Bear . . .

I'm looking over my charts right now.

I'm seeing banks, many REITs and the currencies showing contra-moves against the overall markets. The Bank Index is up almost 4% today.

It's like the financials are expecting a "Greenspan Put" from Bernanke or they know something we don't know. (I still am too nervous to buy financials outright, although Bank of America is tempting me.)But, I'm not looking at financials as a buy as I don't trust their "off book" investments are doing.Hence, I am looking over other sectors.

Consumer staples are also doing very well in these down markets.

But it's not only that sector.

You can find a good bunch of Blue Chip dividend payers to start buying into today.

According to a great Barron's piece 8 weeks ago, the record margin is almost all hedge funds, mutual funds, etc. It's not us small investors getting the margin calls . . . unless . . . of course . . . you used margin on your own or you invested in a fund which relies on leverage.

Despite all the turmoil, my ports are still up for the year and dividends paid within the past two weeks are buying much larger hunks of fractional shares in solid companies which will not blow away in any market tsunami.

People got to eat, use gas, buy electricity.

Invest accordingly.

Call me crazy, but I believe now is a great time to begin buying Proctor and Gamble, Johnson and Johnson, Pfizer, Huaneng Power etc. Average up, average down. Let those dividends reinvest.

It seems everybody's on board the downbound train. Yeah, we know Kudlow and crew are perma-bulls, but like posters on this board have said about perma-bears (which I've been incorrectly called), even a broken clock is right twice a day.

This is a classic time, IMO, to start taking the contra view of seeking good solid companies whose shares were sold off by funds so the cash could pay off riskier losing bets elsewhere.

I'm not suggesting you go hog wild and throw all your dry powder into the markets today. I am simply suggesting you look over those great companies which you've been hoping would come down in price for an initial buy.

Buy some now.

Maybe the markets will continue down. Maybe not. Average down. Average up if the markets take off again.

Warren Buffet has to be going nuts with his cash buying cheap shares of his favorite companies. I know he recently doubled down on Johnson and Johnson. I can't wait to see where he's feasting while big players run for the exits.

Maybe September 15th will be the bottom via ajaskey's (note to blog readers, ajaskey is the alias of a regular Motley Fool poster) Gann Theory. And then maybe not.

Maybe the Dow will drop below it's longterm trendline breaking the y axis at 12,000. Maybe not.

Trying to time a perfect bottom is tricky business. It takes a lot of monitoring of LIVE software, charts and news to jump in and out of positions like a nervous jackrabbit.

I say everybody here should be rotating into solid great companies, begin sleeping like a baby, and go fishing.

The clouds we saw on the horizon in 2005 and which were ignored by 99% of investors are now storms taking out people stuck in the door jambs as the flood surge rushes above their heads.Don't lose yours to panic selling.

Use this time to begin buying where others fear to tread.

p.s. I think another 5% fall on the Dow is doable. I feel another 10 to 12% fall on the S&P is doable and would be good. And a 30% to 40% drop on the NASDAQ would not freak me out. But I could be wrong and all of my trendlines taken out by some major catastrophe like a Great Depression. So what do I do? Go live in a hole with an AK-47 and wait for Doomsday?

Nah, I bought great companies over the past four years and all of them will hit the "Return Accelerator" with their DRIPs if their shares fall dramatically.

Moreso, I believe there will be a natural flight to safety on great Blue Chips which have been the most neglected stocks of the past 10 years. A lot of my port is diversified into these great companies and I'll be buying more.

Just because I am still bearish on Housing, doesn't mean I can't see bargains in Housing developing. It's just Housing markets move much much slower than stock markets. Today, I see many real bargains in the stock markets. And obviously Warren Buffet, Bill Miller and Anton Van Den Berg see these same opps too.

This is a time for Value Investors to shine.

(end of Motley Fool post)

As I've state before, there is always something "on sale" in the stock market.

If you know your history, if you've read Dr. Jeremy Siegel's book "The Future for Investor's" and you grasp the beauty of compounding dividends through dividend reinvesting, and you buy quality companies when no one wants them . . . you too shall thrive while others are losing their minds jumping from one mania to another.

You remember the first official stock pick of this blog, Johnson and Johnson? While the Dow has lost about 10% in two months, JNJ is still at or close to our buy in point of $63.41.

In fact, JNJ dropped at one point in July to $59.72 low. During the June 15th through July 15th recording period for Insitutional buying, Warren Buffet doubled his position. During the recording period of July 15th through August 15th, Warren Buffet increased his position another 9.21% with a total holding now of JNJ stock showing 53,145,848 shares worth $3,257,840,000.

Mr. Buffet is wading in when others are fleeing in panic.

The smartest investor of all time has other companies he's buying . . . and several of these shall be discussed in upcoming blog posts.

Meanwhile, I assure you, Johnson and Johnson . . . despite the recent failings of its stent business . . . is a booming healthcare/consumer staples macro play. When you see the new "Band Aids" with Neo Sporin gel being advertised, that's your baby. When you see the new "Listerine Mouth Whitening Strips", that's your company too. Johnson and Johnson's consumer staples division has caught fire, and they are going to give Proctor and Gamble, Colgate, Unilever and others a run for their Consumer Staples bucks . . . just wait and see.

When you buy "safety" when it is extremely undervalued (as Johnson and Johnson, Proctor and Gamble, Pfizer, etc., are today) rewards shall be reaped by the patient.

Action to take: keep buying Johnson and Johnson and other quality Blue Chip Big Caps which will not blow away during any major Armageddon event.

As always,

Caveat Emptor

Rock

Mortgage Backed Securities Going Up in Flames: Burning Down the House

Wall Street Bankers to Lesser Mortal Homeowners:

"What, Us Worry?"

It’s time to travel the Watchworld to see what other watchers of the Liquidity Crisis and the Housing Crash are seeing from their perches looking down . . .

I think I will do this exercise more often . . . whereby I open three or four random links on my blog's margins . . . and see if I can thread them together as a mental exercise which might enlighten and educate.

So, let's get on with it.

From Jim Kuntsler’s Clusterfuck Nation latest “Margin Call”

“What you're seeing now is a simple matter of financial sector players trying desperately to evade the consequences of their own actions. The fake wealth generated by the synthetic securities they created is now being recognized for what it is: a swindle. The hallucination is over. The collective denial that supported that hallucination is dissolving. The losses are become manifest. Even worse, the losses are growing exponentially because the synthetic securities were used as collateral to leverage far greater multiples of "positions," bets, and plays in a casino-like global electronic trading arena.

This is what happens when investment gets de-coupled from real productive activity and becomes an end in itself. It has been terrifically enhanced by computer programming. But no amount of digital legerdemain --with the "sugar-on-top" of accounting trickery -- can now hide the fact that there is no "value" there. What's more, the losses are going to have to show up somewhere. If you try to suppress them in one area, they'll pop up in another. If the Federal Reserve tries to cover the losses racked up by the Big Fund Boyz by giving "cash" away, they'll only succeed in destroying the value of the cash itself, i.e. the US dollar.

The upshot is that we are going to find ourselves a poorer nation. There will be far fewer people with money. There will be far fewer buyers of repossessed McHouses, bass boats, etc. Even the houses in Sagaponak and the Manhattan apartments will go cheap. The effort to pretend our way out of a financial crisis will fail. Sooner or later the recognition will set in that all that "boo-yah" was dreamed up. The United States swindled itself. We became a nation of such greed-crazed clowns that we committed financial suicide in an orgy of self-deception.”

Whew. Don’t hold back, Jim. Tell us how you really feel.

From KRCA News in Sacramento, CA, we get this enlightenment about how the Housing Crash is playing out in California:

“A new report says Stockton's foreclosure rate is the worst in the country, and Sacramento is not far behind.

Foreclosures have skyrocketed in California, Ohio, and the Northeast. Nationwide, there are about 600,000 properties in foreclosure. By the end of the year, 1 million properties are expected to be in foreclosure.

Stockton isn't alone with this dubious distinction. Sacramento is No. 5 nationwide, Fresno checks in at No. 14. Oakland is No. 19 and San Francisco came in at No. 78

Homebuilding in the Central Valley skyrocketed in 2000 and home prices doubled over a period of four years, thanks in large part to Bay Area commuters.

"It was a cheaper source of housing, the investors, there was a lot of greed in the market, everybody got very greedy, and everybody wanted to make a quick buck," said Matt Davies of Partners Real Estate.

Stockton now has the highest foreclosure rate in the nation, more than 8,000 foreclosures for the first part of this year, which is one foreclosure for every 27 households. This is a 256 percent increase compared to the same time period last year.”

One out of every 27 households is in Foreclosure in Stockton? Can it get any worse? I think so.

Foreclosures sold at auctions will further depress Real Estate in neighborhoods with high foreclosure rates. Homeowners still surviving on hopes and dreams want a return to EZ Home Equity Loans and Slam Dunk Refis. But that nastiest of all four letter words, D-E-B-T, is now now on everyone's tongue. No one will buy your debt off you if they can't afford or no longer qualify for "Liars Loans".

The Ponzi Economy is collapsing, and what is happening in California's Housing Market will surely be trumped by what is about to happen in South Florida.

In a Huffington Post from Eric Linden, we are reminded on the One Truth which American Schools need to drive into the heads of all students . . .

Credit is NOT Money

Or as Linden explains it . . .

“We are in the beginnings of the collapse of a fiat currency. Actually, it's the collapse of a type of credit that has been treated as though it was currency, but it's rise and fall closely mimics the natural history of fiat currencies.

Back in the 19th century banks would issue their own currency, backed by government bonds that would be held as security by the Treasury Department. Starting in the 1990s, financial institutions began doing something like this again, although this time around the currency has been the triple-A rated tranches of mortgage-backed securities (MBS) and collateralized debt obligations (CDO). And, while our forbears in the 19th century could assure themselves that a bank note was supported by the credibility of the U.S. government, this new currency was backed by the paid-for opinion of the rating agencies.

Assured by Triple-A ratings that these instruments were money good and completely liquid, bankers thought they had discovered the philosopher's stone -- a risk-free, high-yielding asset -- and this new credit/money has found its way into every corner of the financial system from teacher's pensions to commercial paper to money market funds.

Moreover, once the printers of this new fiat currency realized that there was an appetite for their product among yield-starved institutional investors, they did what every unrestrained ruler with a printing press has done since the dawn of money: they began minting more of it.
In this case, credit/money was inflated through the re-securitization of already securitized assets. The Mugabes of hyperinflation in this case were the rocket scientists in structured finance, and the Zimbabwian extreme are so-called synthetic CDOs, arcane confections which invest in tranches of CDOs.”

(Rock’s note: there is an excellent, easy to understand video in the next link explaining how crap Mortgage Backed Securities of the highest risk, i.e. sub-Prime MBS’s, were bundled and then sliced into five tranches, the highest being rated AAA. Trust me. This short video will finally click on a lightbulb in your mind if you’ve had trouble understanding how MSBs were packaged and sold off in “tranches”. When you master this concept of MSB’s being slided into tranches, and how through alchemy, very risky securities were suddenly turned into AAA paper, you are on your way to understanding how the Ponzi Economy is built on air.)

Continuing on with Linden’s post:

“These "innovations" leverage the underlying subprime assets to dizzying multiples so that tens of billions of dollars in subprime originations might ultimately support a trillion dollars in CDO tranches. At the tail end of this whip, tiny variances from the assumptions about the performance of the underlying assets can vaporize the value of these supposedly rock solid assets.

This new fiat currency exploded during the period of skyrocketing home price appreciation, but it should be noted that almost everything worked during that period. What securitizers and holders are discovering, however, is that a fiat currency rests on nothing more than the willingness of someone else to accept it. And, now that the market, most ominously the vast commercial paper market, has discovered that credit is not money, the contraction has begun. The question of the moment is whether anything can be done to slow it, much less stop it?

If the Federal Reserve lowers rates, it risks a precipitous fall in the dollar and a big rise in long term rates, which would only worsen the situation for over-indebted consumers and homeowners. Similar risks accompany other Fed strategies by which they might inject liquidity (the only reason that the euro did not fall more after the ECB's massive liquidity injection was that central bankers around the world were all doing the same thing).”

Most likely, the best we can hope for is an orderly blood-letting with pain apportioned where it is deserved. The device that might help accomplish that might be a public-private corporation (largely funded by the big banks that promoted and profited from this mess) set-up to exchange currently illiquid CDO/MBS tranches for tradable notes in the enterprise.”

Rock’s note: . . . and who will force these big banks to fund such an effort? The Big Banks ARE the banking cartel which has the Federal Reserve operating in their behalf. Any bailout will surely have banks and the government, i.e., We the People, bailing out the wealthiest members of our society who took on the most risk, in my opinon.)

Linden ends . . .

“This will not solve the many other problems attending this credit contraction (including counter-party risk in the CDS market), but it will buy time, and time is everything when bills come due. We've done this before (Felix Rohayton's creation nicknamed Big MAC calmed markets during New York City's financial crisis in the 1970s), and it will help supply liquidity and price transparency in this vast market. A fix like this won't much reduce the pain for either investors or overstretched homeowners, but it could reduce the growing risk of panic, paralysis and systemic collapse. It will also minimize moral hazard by doling out financial punishment mostly to those who deserve it."

To which I will ask, “Where is Elliot Spitzer when we need him most?”

Lastly, I will link you to an excellent short video of CNBC’s Power Lunch. This short video segment, titled “Burning Down the House”, is an outstanding explanation . . . with simple flip chart graphics . . . showing how Mortgage Backed Securities are packaged, sold, and resold again.

Steve Liesman, CNBC’s Senior Economics Reporter, also explains how you can take the worst “junk” paper, i.e. sub-Prime loans, and repackage them with a twist so they got AAA ratings with high returns (while the Housing market was going great guns) and how these AAA rating products are now prone to major blow ups wiping out billions in wealth.

As I have yet to learn how to post videos directly to my blog wit a big start button, I will simply ask you to click on the following red highlighted title of the video short’s title here: “Burning Down the House”.

Good reading, good viewing, and good thinking.

And as always,
Caveat Emptor

Dow Industrials Daily Chart About to Break Important Support Trend Line?

(click on image to enlarge)

Dow Daily Chart Shows Today's Close Right on Important Trendline and 200 Daily Moving Average

Just an observation of mine which I've yet to hear anyone pick up and discuss on Bloomberg:

Click on the above chart. When it expands, look at today's closing Japanese Candlestick. At one point during the afternoon, the low of the trading session touched the trendline for a "reconfirmation".

If we were bullish on fundamentals for a stock with a similar chart, this would be a bullish indicator to buy near a historic "mean".

However, as we are on the Edge of Panic in our stock markets, what we want to watch tomorrow is to see if this trendline is pierced tomorrow for a breakdown of support.

Notice, too, the red squiggly line almost in perfect rate of rise with the trendline. That is our 200 day moving average line.

The 200 day moving average is an important indicator. If the Dow falls below it and closes below it sometime this week, this will signal day and swing traders that the breakdown in markets is going to bring more pain.

In these markets, especially with housing, lender, banking and insurance stocks being hammered, this could be the beginning of a new more serious downturn in the markets.

This chart is for all my friends on Motley Fool's "Macro Economic Trends and Risks" discussion board which is now FREE to access. Come join us.

France's Biggest Bank Halts Run on 3 Hedge Funds

France's Biggest, Bank BNP Paribas, Answer's the Question, "Liquidity Crisis? What Liquidity Crisis?"

“The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating” BNP Paribas

Rock Trueblood's Watchworld Adds the New "Hedge Fund Implode-O-Meter" to Its Links You Can Use

So I am waking up and I haven't even had my coffee and Bloomberg TV has talking heads talking about the 2.59% drop on the French Bourse of stocks because of the the BNP Paribas freeze of 3 of their managed hedge funds.

And I ask the TV, "WTF?"

So, playing catch up, I run to Bloomberg News on the net to get the story:

BNP Paribas Freezes Funds as Loan Losses Roil Markets

Aug. 9 (Bloomberg) -- BNP Paribas SA, France's biggest bank, halted withdrawals from three investment funds because it couldn't ``fairly'' value their holdings after U.S. subprime mortgage losses roiled credit markets.

The funds had about 1.6 billion euros ($2.2 billion) of assets on Aug. 7, after declining 20 percent in less than two weeks, spokesman Jonathan Mullen said today. The bank will stop calculating a net asset value for the funds, which have about a third of their money in subprime securities rated AA or higher.

BNP's announcement sent its shares down as much as 5.5 percent, pulled the benchmark European stock index lower by more than 2 percent, and helped U.S. Treasuries rally for the first time in four days. Investors are shunning bonds backed by home loans after late mortgage payments by borrowers with poor credit histories rose to the highest since 2002.

``The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,'' BNP Paribas said in a statement.

The French bank joins Bear Stearns Cos. and Union Investment Management GmbH in stopping fund redemptions. Dutch investment bank NIBC Holding NV said today that it lost at least 137 million euros on U.S. subprime investments this year.

No Surprise Here the Blow Up Has Moved Overseas

Our biggest Wall Street Banks sold the world on buying our risky Mortgage Backed Securities and Collateralized Debt Obligations. And now we have the biggest bank in France telling shareholders of 3 Hedge Funds that they can no longer liquidate their holdings. Yep, the world learned from the US, "You too can set up your own hedge funds with 10 or 15 times the leverage you'd get in a regular margin trading account and reap the same rewards."

The US Federal Reserve's Ben Bernanke just a few months ago . . . with his brethern from Wall Street's biggest banks . . . were assuring us that the "sub-Prime mess" was contained.

And then last month we had three Bear Stearns hedge funds stop paying out funds to investors trying to liquidate their holdings. In one fund alone, the hedge directors racked up 57% losses in the first month of Summer. With "Smart Money" management such as this, does it ever occurr to wealthy folks they could do better on their own?

"More of an image problem"

Chief Executive Officer Baudouin Prot said the bank's exposure to U.S. subprime was ``absolutely negligible'' when the company reported a 20 percent increase in second-quarter net income last week.

BNP Paribas Investment Partners oversees about 356 billion euros. ``On BNP's scale this isn't too significant,'' said Benoit deBroissia, an analyst at Richelieu Finance in Paris. ``It will impact clients. It's more of an image problem.''

The three funds are Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia.

The Hague-based NIBC, which is owned by a group including J.C. Flowers & Co., said ``severe instability'' in U.S. credit markets reduced the value of its U.S. asset-backed securities.

The company expects ``further mark-to-market losses."

So, what BNP Paribas told you last week about US sub-Prime not affecting their bottom line? Forget that. That was last week which is a really long time ago.

"Relax, Wealthy People, your money is safe with us. If you want your money back at any time, we'll call a meeting and ask everyone what they think your investment is now worth.

Keep dreaming, Mr. Trueblood. The sharks on Wall Street have already re-deployed that money as bonuses to buy expensive cars, vacations, homes, jewelry. You can't take candy from a baby who ate it all.

This "mark to market" crap is simply an admission that, "We don't know what your original investment is worth today, so, we must stop you from further attempts to liquidate so we can save you from yourselves."

What they are really saying is, "We can't afford a run on our bank which would put us out of business."

Crack Cocaine Accounting in the Ponzi Economy

More from the Bloomberg . . . just so you know I'm not making up the following:

Union Investment, Germany's No. 3 mutual fund manager, stopped withdrawals from one of its funds on Aug. 3 after investors pulled about 10 percent of the assets.

Frankfurt Trust, the mutual fund manager of Germany's BHF-Bank, halted redemptions from a fund after clients removed 20 percent of their money since the end of July.

Two hedge funds run by New York-based Bear Stearns filed for bankruptcy protection in the Cayman Islands on July 31 following subprime losses. The New York-based securities firm then blocked investors from withdrawing money from a third fund.

``For some of the securities there are just no prices,'' Alain Papiasse, head of BNP Paribas's asset management and services division, said in an interview. ``As there are no prices, we can't calculate the value of the funds.''

The 10 largest holdings of the BNP Paribas ABS Euribor fund on March 29 included bonds backed by U.S. mortgages to good-credit borrowers who could pay some interest by increasing their balances, and securities backed by U.S. subprime mortgages and risky U.K. home loans. Other holdings included debt backed by commercial properties in Singapore and U.K. credit-card receivables, according to information compiled by Bloomberg.

Wow. Another Hedgie admits to his dysfunctional business with that line you got to love, ``As there are no prices, we can't calculate the value of the funds.''

Yep, I don't know about you, but I got to have me some of that hedge fund action where real values are unknown and where for every $1000 bet, you can lose up to $15,000 or more.

Smack me for not "getting" how "Smart Money" thought Hedge Funds are virtually risk free when there is no SEC or comparable government Policeman keeping the Crack Cocaine Accountants at hedge funds honest.

Your Last Caveat Emptor and Understatement of the Day

Blocking investors from withdrawals ``was a very good decision because it avoids huge redemptions,'' said Jean-Edouard Reymond, who helps manage $63 billion at Union Bancaire Gestion Institutionelle SA in Paris.

``If they had had redemptions they would have been obliged to sell the securities they might have in their portfolio at very cheap market prices.''

Reymond doesn't hold any BNP Paribas stock, he said.

The funds had assets valued at about 2 billion euros on July 27, with 700 million euros in subprime-related investments.

Ha. Good thing I haven't made the coffee. I'd be spitting it out on the computer screen.

p.s. Please click on the new Implode-O-Meter-Hedge Funds link on the right hand side margin of this blog to follow the hedge fund blow ups. By the way, the Implode-O-Meter-Lenders link shows 114 USA lenders have now gone the way of tumbleweeds in a hurricane.

Meanwhile, as Hedge Funds begin to blow up and as Housing continues to crash, President Bush is telling the sheeple losing homes and money "America's economy is the envy of the world!!!"

Okay, count the President as our last Caveat Emptor of the day.

DJ Rock . . . Power Shields Down

Condotels Are Going to Hell: Cay Clubs Gives "Investors" Another Reason Not to But a Condotel Unit

Cay Clubs Non and Late Payments to 140 Investors Shows the Downside of Investing in Florida Rental Schemes

I have been alluding to big "local" developers' growing problems in the Keys. And as soon as I find time, I will be showing photographic proof how badly their bets are going.

Many of these developers tore down longstanding hotels which had high occupancy rates and built expensive condos in their place which people could buy and have the condo-management team . . . assembled by the developers . . . rent out for income producing purposes.

In the past three months, my brother-in-arms blogger in the Keys, Cayo Dave, alerted me to the problems of out of town developer, Cay Clubs, was having in the Keys with his short piece Has Cay Clubs Bit Off More Than It Can Chew? In this piece, Cayo Dave explained how Cay Clubs was forced to cut 80 jobs in the Keys due to what Vice-President of Operations, Dave Rego, wanted us to believe was an upcoming merger with Keys Acquistion Company Corp.

Cayo Dave quoted Dave Rego on Cay Clubs's intent to "go public" (i.e. list publicly traded shares of a company on a stock exchange) with the following, "It is a down market. Several developers across the country are going out of business," Rego said. "We need to make sure we can prosper through a down market so we're one of the companies that stay in business."

But as Cayo Dave and I both believe, there is a major systemic change for reality based Real Estate pricing in this crashing market. You cannot keep the Ponzi Scheme alive if inventory continues to spike upward, prices continue to contract, and consumers are stretched thin and cannot continue vacationing in Florida . . . especially at higher priced Condo and Hotel prices.

I reprint parts of Cayo Dave's blog to show how he was having none of the "calming effect" b.s. from Cay Club's VP of Operations.

As Cayo Dave so eloquently explained,

Cay Clubs is now among the largest developers in the Florida Keys. The question that we should be asking: "Have they bitten off more than they can chew?. And what effects will it have on the Keys should Cay Clubs and it's new parent company become financially unstable?"

Cay Clubs, only recently formed in the past decade, is betting that people will continue to buy expensive second homes, boat slips, and condominiums. Plus, they recently acquired the Turtle Kraals, Half Shell, and A&B Lobster House restaurants.

Remember, during the go-go-go real estate craze of the past few years, hotels in Key West were being bought up, closed, and turned from transient rentals to condominiums. Now that buyers are nearly non-existant, what will happen to the hundreds of hotel rooms stuck in limbo? What if the whole enchilada goes belly up....will we be left holding the bag?

With most of the Cay Clubs holdings in Florida, aren't they particularly sensitive to market shocks? Since Florida is suffering the biggest declines in real estate, should we worry about one of the largest developers here in our backyard? Think about this: in only the past 2.5 years, Cay Clubs has aquired at least 8 Florida Keys locations.

Well, let's look at today's Miami Herald to see how one lucky couple feels after buying the b.s. "investment theme" by purchasing a Cay Clubs Condo in Orlando.

The story is titled "Housing's ills imperil condo deals"

And here is the heartbreaking lead paragraphs directly from the story as written by Douglas Hanks of the Miami Herald:

Horacio and Patsy Parra cashed out two retirement accounts last year to buy an Orlando condominium they couldn't afford.

At the time, they weren't worried. The developer, Cay Clubs Resorts & Marinas, agreed to lease back the $307,000 unit for 15 percent of the sales price -- enough cash to cover the mortgage for nearly two years.

But the Parras now expect to lose their unit to foreclosure, they say, because Cay Clubs owes them about $40,000 in unpaid rent.

Let's stop right there.

The Parras only paid $307,000 for the unit up in Orlando which their friendly developer, Cay Clubs, agreed to lease back for two years at 15% of the purchase price. (I italicized the word only as most condos in the Keys are selling for above $1 million.) Cay Clubs would then "rent" out the condo to vacationers and keep anything over and beyond what they were to owe the Parras.

Doing simple math in my head, the Parras should have received over $45,000 in "rent" on their lease agreement with Cay Clubs and are claiming they are owed about $40,000 in back rent now.

Seems to me Cay Clubs may have started making payments but suddenly stopped. Why?

Well, as an observer of Key West condotel conversions, I'll bet what has gone wrong in Cay Clubs inability to pay the Parras what they owe them is vacationers cannot afford higher Cay Clubs unit rents in a town where they are already paying $100 a day or more for tickets to Disney World. And another point is this: inventory of rental properties is flooding the market. If you want to rent in Vegas or Orlando, there is so much oversupply of rooms to rent you need only go to priceline.com and name the price you are willing to pay, or, you can try hotels.com and shop for lower rates. I've seen ticket books for hotels advertised on I-95 advertising Kissimmee motels going for $39 a night.

The Internet is the new boxing ring for hotels and motels to slug it out to attract customers. Room rates on the many websites I've been surfing are fast coming down. In Marathon, Islamorada and Key Largo, for instance, Cay Clubs have dropped their prices on some units to $89 a night on weekends. In the Keys, Cay Clubs is now undercutting big chain hotels, hoping to put some heads in their empty beds.

(Next week I hope to show photographs of a rental management company with photos of long-term rentals in Key West where three rentals are now offering "first month's rent FREE".)

In other words, like most developers, Cay Clubs's future outlook in 2004-2005 was one where Real Estate would keep its hyper growth curves going with a fully opened up fire hydrant flow of cheap and easy available credit. In 2004-2005, too, Cay Clubs was looking at non-stop growth in tourism. Hence, selling small-time "investors" on lease-back programs where the developer probably showed over-confidence in making back their downpayment in two years was not the kind of "slam dunk" move you'd expect from savvier developers who know Real Estate does go down and up in cycles . . . similar to the stock markets.

None of the genius developers . . . or homebuilders . . . who were overbuying at the Top of the Housing Bubble ever looked back in History at how all manias end. Instead, they buried their heads in the sands of Florida, kept repeating the mantra "Real Estate in Florida will continue to double every 3 to 5 years," and kept building condos like Woodpeckers on Crack.

The Herald further documents,

Fueled by investors' hunger for resort condominiums, Cay Clubs vaulted from a small start-up in late 2004 to a major developer whose 14 properties and marinas include eight in the Florida Keys. The firm, whose billboards dot the Overseas Highway, says it manages nearly 3,000 condominium units and more than 900 boat slips.

Now, the nationwide real-estate downturn has brought a cash squeeze that forced Cay Clubs to lay off dozens of workers, slow redevelopment plans, and ask roughly 140 buyers like the Parras to wait for their rent checks.

The 'money is just not available to make the necessary payments and continue to maintain Cay Clubs' long-term viability during this down market,'' Chief Executive Dave Clark in May wrote to condo buyers awaiting lease-back checks.

Uh-oh. We've got a problem Houston.

Again, I will bet stinking Smathers Beach seaweed to dollars that there is diminishing revenue, a shrinking pool of condo buyers, and less of a chance to borrow a big hunk of money at privately held Cay Clubs (again soon to go "public" in a merger) but we cannot access the privately held books to back up my hunch.

Still, for this company to come out and admit that 140 "owners" of condos are suffering from Cay Clubs inability to pay on time the rents their investment units generated is the stuff of lawsuit prone Real Estate Attorneys.

Then Clark of Cay Clubs lays this egg in the next few paragraphs of the Herald story . . .

Clark says Cay Clubs' finances have improved since then. It has sent rental checks to about 20 buyers to cover one or two months' worth of mortgage bills. The company hopes to refinance its debt, and a pending merger with a publicly traded holding company would bring an additional $47 million this fall. ''Our problems are fixable 100 percent,'' he said.

But on Friday, Cay Clubs disclosed that this year's sales slowdown forced it to accept less lucrative terms for the planned merger with Key Hospitality Acquisition, regulatory filings say. Clark and his top deputy, David Schwarz, agreed to receive 46 percent fewer shares in the new company -- a loss of $197 million in value based on Friday's share price.

The troubles that the Clearwater company faces symbolize wider concerns about South Florida's battered condominium market.

Real-estate analysts say too many developers depended on investors who stretched their bankbooks buying condominiums during the housing boom on the assumption that others would buy or rent them only a year or two later.

Faced instead with anemic demand for real estate, those investors are left scrambling to pay the bills, said Jack Winston, a condominium analyst with Goodkin Consulting in Miami. 'It's the same people: `Hey, let's invest in some real estate! We'll flip
it. . . .' Then, all of a sudden, they find they have to reach into their pocket every month to cover the mortgage. And it's a shock.''

The company hopes to refinance its debt? Hope in one hand, Mr. Clark, and spit in the other. See what you get in this market of Credit Implosion and leveraged buyout deals going bust leaving major Wall Street banks holding the bag for junk bonds they could not sell. There is a major liquidity squeeze here on Planet Earth, Mr. Clark, and all the easy money has fled these types of companies such as your Cay Clubs.

Still, Clark claims this problem is "fixable 100%" and he's banking on the merger going through and giving his company $47 million to rectify the late rents it owes 140 "investors".

However, I must ask Clark the following questions:

How does one expect to increase revenue in a declining tourist market (the Florida Keys are in a Tourist Recession the likes of which we haven't seen since 1990) and how does one stay cashflow positive? There is not only a shortage of buyers in this downturn of Housing, but there is downturn of "renters" by-the-night in this downturn of Tourism.

Does Clark think his units in the Keys will rent as easy in late 2007 as they did just 12 months ago? It appears that fast falling rental prices at Cay Clubs up in the Middle and Upper Keys are telling us a story of sweat stains under the armpits of Cay Club execs's Hawaiian shirts. At least they are trying to compete by slashing nightly rental prices.

Does Clark ever walk Duval Street in Key West's downtown and take note of all the businesses closing their doors forever?

Has Clark not seen the two or three cars in the overpriced Santa Maria Condotel's parking lot (Santa Maria is a non-Cay Club Condo with $350 to $450 a night rooms and units which start at $1.2 million for buyers who cannot do simple math) on weekdays, while nearby motels and small hotels still charging only $99 to $150 nightly have plenty of rooms rented? I think Clark sees the writing on the wall: overpriced condo rooms will not rent during the week, and will only rent as the "last option" on weekends when maybe all hotels and motels are "No Vacancy".

Moreso, Clark has probably read the stories of Santa Maria condo owners who lost their $200,000 deposits but who are battling the developers with class action lawsuits. That has got have Cay Clubs especially anxious to close their merger and IPO deal. My advice to Clark and others in Cay Clubs executive offices if they close the deal to merge: get those options, cash out the day your "lockup" provision ends, and whistle a sigh of relief you made it before the Big Crash I expect in credit markets.

Lastly, who in their right mind would invest in a Cay Club Condo after this latest fiasco as highlighted in today's Miami Herald? I hate to say it guys, but maybe you should have sold off a couple of Lexus's, a vacation home, you know, take a hit on your own to make good on your promises. Now your name is mud and you can't unring that Bad PR Clock.

Cay Clubs needs investors to buy and then not demand rental revenues owed them in this Ponzi Economy which depends on a selling an overpriced asset at continuing higher prices. An important part of the funding program for Cay Clubs expansion was this lease-back program. The buyers of Cay Clubs's units are actually the small lenders which make the developments fly in a market of Condo oversupply. What Cay Clubs needs most is not just a major refi of big loans, but they need small "lenders" . . . i.e., mom and pop investors" . . . to turn over their retirement money and not ask for any of it back until the market returns and makes Cay Clubs's bet look good.

As the Herald explains:

Clark, the former head of a development company that built the Mariner's Club in Key Largo, launched Cay Clubs in 2004 with the goal of creating a chain of luxury vacation spots in soughtafter destinations.

Instead of shouldering the development costs alone, Cay Clubs adopted a familiar strategy in South Florida: selling off rooms in resorts as condo-hotel units to individual buyers, who could then share in the rental revenue. That financing mechanism helped others, such as Miami's Four Seasons hotel, Key Biscayne's Ritz Carlton and the new St. Regis in Fort Lauderdale.

But Cay Clubs gave the strategy a twist: The developer would contract to rent units back from buyers for two years, refunding as much as 15 percent of the sales price upfront. In those two years, construction crews would convert the property -- typically an apartment complex or budget motel -- into a top-tier resort, according to sales materials.

Condominium converters often lease apartments back from buyers to free the new owners from serving as landlords. The programs aren't common among condo-hotel developers, but more projects are turning to the tactic as a way to woo buyers in a cold market, according to the National Association of Condo-Hotel Owners. The group lists 13 Florida condo-hotel projects offering lease-back programs, mostly in the Orlando area.

Yep, the words "lease-back program" are the words anyone with retirement savings ready to invest in Real Estate should run away from at sprinter's speed, in my opinion.

I have never read a Cay Clubs brochure trying to sell an investor on the reasons he or she should buy such an income producing condo. One thing I can assure you we will never read in such a brochure wold be the following in big bold print:

Oh. By the way, we might not be able to make those promised timely rental payments to you if market conditions turn against our company. The company comes first. If we go bust, you will have no one to rent and maintain your unit. Capiche? So late payments are part of the "promise".

And a second thought. Nobody ever said Real Estate was a sure fire investment, did they?

Can you imagine anyone wanting to buy a Cay Clubs lease back property today after reading this Herald piece?

Can you imagine anyone wanting to buy any Florida condotel property built by anyone else?

And this vaunted "lease-back" program. Can't go wrong there, brother, as everytime someone rents your condo, you'll receive a check in the mail at the end of the month.

That's not the emphasis Cay Clubs gave in their advertising? Oh, really?

". . . virtually two years of FREE appreciation" and 90% of Cay Club Condo buyers opt for the lease-back option.

From the same Herald article:

Ricky Stokes, a top seller for Cay Clubs, touted the lease-back arrangement in a May 2006 online presentation as providing ''virtually two years of free appreciation'' because, for most buyers, it would cover ownership costs for 20 months. Stokes did not respond to interview requests.

Company executives said about 90 percent of Cay Clubs' buyers chose to sign a lease with Cay Clubs. They included the Parras, full-time landlords who have acquired 20 houses and apartments within a half-hour's drive of their Castle Rock, Colo., home.

Last summer, they accepted an invitation to a Stokes Web talk from a company called the National Association of Women Real Estate Investors.

''This developer has put together an unheard of package for investors,'' read the e-mail from NAWREI, which received finder's fees for Cay Clubs sales. ``Immediate equity. . . . Guaranteed rental income. . . . Anticipated appreciation.''

Even with their large real-estate holdings in Colorado, Patsy Parra says she and her husband do not have the extra income to handle another mortgage payment.

But they took out four loans to buy two Cay Clubs units: the one in Orlando and another in a planned Las Vegas hotel. They counted on 20 months of lease-back payments to cover the $4,500 in monthly costs for both. After that, the Parras needed appreciation gains to make the investment work.

''I'd have to refinance to get the next five or six months of payments,'' Parra said. ``They were supposed to be very valuable.''

Other buyers depended on the lease-back cash to pay their mortgages, too. ''I have clients that are filing bankruptcy because they can't afford their payments,'' said Gene Denton, president of Select Market Real Estate, a Colorado firm that sold Cay Club units through Internet presentations.

NAWREI wrote to Clark on June 7 that Cay Clubs owed members nearly $240,000 in back rent, leaving members ``facing personal financial hardship including bankruptcy.''

I've said it before, I'll say it again,

"Never trust any stranger who looks at you

as just their next commission check!"

Look at how Cay Clubs had ancillary marketers hosting Web conferences under the auspices of people who collected a commission for every sale generated by buyers not even seeing the properties being discussed.

This is the stuff of " . . . and I've got some (swamp)land down in Florida I want to sell you" sarcasm you heard during the Great Depression. Here I was feeling sorry for the Parras at the beginning of the Herald piece and then I read they owned 20 rental properties in the Denver area before making the worst Real Estate investment of their careers.

Let's re-read what the Parras 'fessed to:

Even with their large real-estate holdings in Colorado, Patsy Parra says she and her husband do not have the extra income to handle another mortgage payment.

But they took out four loans to buy two Cay Clubs units: the one in Orlando and another in a planned Las Vegas hotel. They counted on 20 months of lease-back payments to cover the $4,500 in monthly costs for both. After that, the Parras needed appreciation gains to make the investment work.

''I'd have to refinance to get the next five or six months of payments,'' Parra said. ``They were supposed to be very valuable.''

The Parras were experienced Real Estate landlords. Yet, they let greed get the better of them. They overextended themselves buying two Cay Club condos, one in Orlando, one in Vegas. They used four loans to make the purchases happen. And then they banked on Cay Clubs making 20 monthly payments to them for rentals on both units to help them make the $4,500 in monthly mortgages.

And now they, the Parras, cannot make those monthly mortgages?

And they already own 20 income producing rentals in and around Denver?

Hello. You own 20 income producing rentals and you cannot afford $4,500 in monthly mortgage payments on two losers?

Can anybody here explain how these folks are poster kids on "How to Make Millions in Real Estate"?

Again, "Where Are the Adults?"

Okay, I'm not pointing my finger at Cay Clubs exclusively. Although they marketed the miracle of having your condo leased back and two years of rental fees coming into your account to help pay monthly mortgage, I had to shake my head in quiet agreement at this last bit in the Herald article:

Cay Clubs executives question how buyers unable to pay mortgages out of their pockets could have qualified for loans in the first place. A Cay Clubs spokesman noted that the Parras' mortgages bar putting their Orlando condo into a rental program.

Even so, the company makes no apologies for giving real-estate investors a place to spend their money.''I think anyone who has been doing real estate in the last four years has been selling to investors, not end users,'' said Mike Matte, Cay Clubs' acting chief financial officer. ``I don't care what company you're talking about.''

Analysts largely agree, blaming the current nationwide housing slump on investors abandoning real estate this year. A July report from Fitch Ratings blamed a spike in rental vacancies across the country on ``investors who are biding their time before putting single-family homes back on the market.''

Clark, the chief executive officer, said Cay Clubs will be able to weather the downturn. Cay Clubs is negotiating with lenders to refinance its $87 million in loans and may sell off land to raise cash as it awaits the Key Hospitality merger scheduled for the fall. Meanwhile, spokesman Chris Brown said Cay Clubs is making ''Band-Aid'' payments to about 20 buyers, including about $4,000 to cover a month's mortgage payment for the Parras.

But Patsy Parra said Friday that she has no cash to pay the mortgage in July or August -- a scenario she said she never anticipated.''When we first bought these condos, I thought everything was fine,'' she said.

``I never in my wildest dreams thought something like this would go wrong.''

So, the company makes a point that any adult who qualified for a loan, should have been able to make mortgage payments on their own in the first place. Point taken. Yet at the same time " . . . a Cay Clubs spokesman noted that the Parras' mortgages bar putting their Orlando condo into a rental program."

The company is claiming the Parra's mortgages barred them from putting their Orlando condo into the lease-back program?

Somebody didn't do their due diligence, or somebody flat out lied. Who's at fault?

Point taken away from Cay Clubs.

But then the CFO of Cay Clubs says,

''I think anyone who has been doing real estate in the last four years has been selling to investors, not end users,'' said Mike Matte, Cay Clubs' acting chief financial officer. ``I don't care what company you're talking about.''

Well no joke, Sherlock. You guys are pushing lease-back programs on the Internet in Webcasts to "investors" who are promised they will make back their monthly mortgage payments in rental fees you will collect and disburse to them.

You are trying to tell me Cay Clubs bears no guilt for the way they've marketed their condotels to investors, not end users?

Clark, the chief executive officer, said Cay Clubs will be able to weather the downturn. Cay Clubs is negotiating with lenders to refinance its $87 million in loans and may sell off land to raise cash as it awaits the Key Hospitality merger scheduled for the fall. Meanwhile, spokesman Chris Brown said Cay Clubs is making ''Band-Aid'' payments to about 20 buyers, including about $4,000 to cover a month's mortgage payment for the Parras.

And Clark still thinks "lenders" are going to refinance $87 million in loans in this new climate of crashing leveraged buyouts where junk bond financing has stopped abrubtly and the Wall Street Investment Banks are now left holding the bag and owing over $30 billion (at last count this morning) on unsubscribed to debt they were trying to sell investors?

In a time of sub-Prime meltdown and now a similar routh in Alt-A loans, does anyone think a company which can't make payments to small lenders, i.e., buyers of their condos, is a safe company to refinance?

Not I.

Like Cayo Dave, I think Cay Clubs is deep in the doo. I don't see how they can possibly work their way out of their own hole digging other than to not only sell off some land for pennies on the dollar, but also sell off some of their completed projects.

The tailwind Cay Clubs and other developers enjoyed in 2004, has now changed to a hellatious headwind. (Just ask the developers of 20,000 new condos coming on line in Miami during the next 18 months in an area that has 75,000 housing units on the market at this moment.)

I expect to see many big scale bankruptcies on condo projects all over Florida. Cay Clubs is just the most notable taking a hit in the Keys. If they don't close their merger deal quickly, I believe these guys will burn up any remaining cash and be bought out from vulture funds.

But it's not just Cay Clubs: the hard rain is going to fall on bigger developers with local ties. I see the evidence all over. This is only the beginning of the Housing Crash and Credit Market Crash. It will affect prime borrowers as well as those in the sub-Prime sector.

Action to take: do not buy Florida Real Estate in Florida. The worst is to come. Wait. Amass cash. Buy only those "safe" Blue Chip Big Cap names in stocks which can weather any major crash in markets. Buy gold, silver and oil as hedges. Keep working hard. Make yourself indispensable to your employer or work at marketing your self-owned busienss better.

Be prepared for Hard Times. And be prepared to profit when Hard Times bottom.

Banking Sector Stocks to Drop Further? Discuss Every Day on Motley Fool

(click on images for expanded looks at charts)

Banking Sector Index Charts Showing a Break to Downside

This is simply a look at the monthly and daily charts of the Philadelphia Banking Index.

If you would like to discuss these charts and more macro-economics, I have a suggestion for you: instead of leaving comments on this blog . . .go to http://www.fool.com/ which is Motley Fool's opening page. Join the community of posters. Motley Fool is now offering FREE access to all their discussion boards, and their discussion boards are the very best on the Internet for anything to do with educating yourself financially. (I am not getting any financial remuneration for making this recommendation.)

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If you make it to that board, seek out WendyBG who is basically the caretaker of this great discussion board.

Today, Monday August 6, 2007 is going to be a day the board will closely follow the continuing saga of the Credit Market and Hedge Fund implosions . . . which many of us feel is a bigger story than the Housing Market Crash.

By the way, Motley Fool "polices" its boards. You cannot turn it into a Yahoo message board where trolls use bad language or issue constant threats on your life, etc. Yes, we have differing opinions and we sometimes have to sustain personal attacks, but usually the community will take a miscreant to task for bad behavior. However, if you really abuse the Terms of Agreement, you will be banned from using Motley Fool message boards. Therefore, once you get there, take in 100 messages in a row to get the flavor of how posters comport themselves . . . usually.

Hope to see you over there someday.

Rock