Incentives, Inventory and the International House of Pancaked Leverage

Let's talk Inventory and Leverage today

Recently, on the Motley Fool's "Macro Economic Trends and Risks" board, I wrote the following in a post.

Before I cut and paste it, I will make a point about a change in the look in this blog: from now on, when I cut and paste from and outsourced link or quote people in long form, I will no longer indent first and then change the formatting to "justified", i.e., where left and right hand margins are even.

I will no longer indent.

I will continue to highlight in blue anything taken from another source.

I will use quotation marks to help set off the cut and pasted words from a source.Then I will justify that blue print to help set it off.

Using the indent feature on this board is too time consuming, and I find I don't spend time writing when I look at the indenting and "look" of the blog as a chore.

So, to speed things up, I'll use the new look.

Here is the first use of my new look, a cut and paste from that post I left on the Motley Fool.

Sign of the Times

1. In Key West, signs of the fast fall in rents are cropping up on windows of property management companies. For the first time in my 17 years down here, landlords are tossing in "First month's rent FREE" to find longterm renters.I've seen 3 bedroom 2 bathroom houses renting for less than my one bedroom, one bath home I'm in now.

2. High priced condotel units (look at the Santa Maria) are not selling at all. To add insult to the developers injury, these higher priced rooms are always the last to rent. Usually, Sunday through Thursday, these rooms aren't even hitting a 15% occupancy. On good weekends, if all the cheaper rooms in town are rented out, then people double up and rent these expensive condos.

3. Many housing developments on the Ronald Reagan Turnpike which have been completed for two years still have a majority of their inventory unsold and unrented. Lennar and other Developer Communities are suffering from graffiti bandits and vandals tagging and destorying empty homes which haven't sold in 2 years time. It's amazing to drive by these once former "pristine" developments and see doors off hinges, windows smashed, weeds on fence lines, graffiti spray painted on the backs of brand new homes never lived in.

To make this all the more surreal, billboards are enticing people to buy homes in communities where vandals are knocking out windows, stealing fixtures, etc. The enticement is in the way of "incentives". One billboard just outside the Top of the Keys on US1 shows granite counter tops, stainless steel kitchen appliances, whirlpool baths, and enclosed pools as "incentives". You still pay the same price for your home ("In the 220s!") but you now get more than what your neighbor paid for at full price back in 2005. A brand new home for $220,000 is unheard of in the Florida Keys, but the fact that homes this cheap and cheaper exist unsold, un-rented on the tip of the mainland says volumes about how hard housing has hit a wall in Florida.

4. Signs on condos and housing developments in and around the Miami Airport, Hallandale, Cutler Ridge, Homestead, and elsewhere are showing this new leniency on rents: townhouses are renting for no money down, no security or low security deposits, and, many signs have that "First Month's Rent Free" added to the them with banners flapping in the breeze.


The Take Away

It's way too early to buy real estate anywhere in Florida, unless you fall into a deal which can be justified as a money maker today, not built on future expectations.

Rents are coming down everywhere in Florida. This is probably one of the biggest mis-told or under-reported stories of all at this time: landlords are begging for renters. And the war to get houses, condos and apartments rented is obviously heating up into a cut throat war in pricing.

Do not believe a damn word coming out of Bubblehead Economists, NAR flacks, Realtors and the like about rents going up. Know that Florida, the canary in the coalmine for the Nation's Housing woes, is now in a beginning war of Rental Pricing. There is no other way to describe what is happening in Southeastern Florida.This war will certainly spread to other areas of Florida, and then nationally to California, Las Vegas, Arizona, New York City, and elsewhere.

Sales prices are coming down quickly in used housing, but the pressure to keep up "appearances" in "new" inventory is leading to distorted median prices due to "incentives" thrown in to keep "new home" pricing higher than it really would fetch as a used home.

Despite some owners taking properties off the market to sit out this crash, real inventory continues to rise. "Hidden" inventory is not admitted to or talked about by Real Estate agents quoting the already sorrowful inventory reports of official MLS listings. This is another under-reported story by the mainstream media which will come home to roost when enough homeowner realize all these new condos, For Sale by Owner homes, repossessed homes, foreclosed homes, etc., are not being shown on the local Multiple Listing Services.

We've got hundreds of new condotel units for sale in Key West (think the new Spottswood projects) none of which are showing on the MLS. That's a big hunk of hidden inventory for sale.

And there is not only hidden inventory, there is hidden sales: Most banks down here do not list their short sales so as to freak out surrounding homeowners.

We have one Key West developer who is being sued for forcing depositers of $200,000 to either walk away form their deposits and/or either take over their finished units which were not built in time and which are worth a lot less today than they were when ordered.

These "units" . . . the cheapest ones . . . sell for only $1.2 million. The rooms are renting for $350 (the cheapest ones Monday through Thursday) to $475 on internet sites where you are looking for "deals" in hotel rooms (again I am speaking of the Santa Maria condotel project) and the parking lot sits empty during the week.

Meanwhile, cheap motel rooms a half block away for $119 to $150 a night are doing good business despite the decrease in tourism.

Question: how does any developer hope to entice buyers of overpriced condotel units which simply must command higher nightly rentals to help pay the excrutiatingly high mortgage payments in a time of diminishing liquidity and even Prime loans? How can any developer hope to "make the numbers work" for potential buyers if the market is showing consumers will not rent by the night at $400 a night averages?

Here's another Real Estate reality all over the country: sales are slowing. (You know the difference between a Realtor and a cadaver? They both make no money, but a cadaver rests in peace.)

According to a local Realtor, two years ago 600 registered Realtors worked in Key West. Today, that number is 300. Sales are slowing all over Florida. Fewer qualified buyers are able to score a loan, means fewer properties will move at current pricing.

More new inventory is coming on the glutted market. New homes sit empty all over the place still showing 2005 prices to keep up appearances on the Potemkin Village facade so current homeowners won't freak, while out back of houses for sale across the street, crews are adding swimming pools, putting in fancy add ons, and what not to keep the prices artificially high.

Think about the 20,000 to 25,000 new condos coming online in Miami in the next 18 months: who will buy one of these at 2005 prices . . . unless you toss in a yacht or a couple of Ferraris as "incentives"?


Things to Consider Before Rushing Into Florida Real Estate

1. The number one thing all people must think about before buying Florida Real Estate: insurance.

2. The number two thing all people must think about before buying Florida Real Estate: taxes.

3. The number three thing all people must think about before buying Florida Real Estate: maintenance fees.

4. The number four thing all people must think about before buying Florida Real Estate and the most important one of all: can you buy a home or condo with a mortgage, insurance, maintenance fees and taxes all figured into a nice monthly payment which could be paid for by someone renting the property from you should you need to move? If the answer is no to this question, and it usually is these days, then don't buy.

Our papers are filled with stories of Floridians wanting to move elsewhere into a home for which they've contracted, but their purchase is contingent on them selling their Florida homes at the "right price".

This Banana Republic Crash is turning otherwise sane productive adults into shells of human beings. We are turning into a Zombie Republic of Debtors. We've got a bunch of people who want to leave and who can't afford to leave . . . they are owned by their Florida "homes" or condos in which no sane buyer can make the math work.

Lastly, there is only one way to get the Real Estate market moving again in Florida: prices must fall another 25 to 50%, or incomes must double. And if incomes double, so too will consumer prices, meaning, it will cost more to buy a Big Mac, razor blades, milk and gasoline . . . things which our politicians don't know the price of and some of which are not included in their convoluted Consumer Price Index.

I think the only natural way out of this mess is for pricing to come down to the 100 year old historical median. And right now, in the Keys and South Florida t at least, we are about 100% above the median. Hence, I feel we need another 50% fall in South Florida Real Estate prices before we get back to norm.

Denver Billboards for Subdivisions Banking on Incentives Just Like Those Outside Miami

Almost 2 weeks after I posted the above on the Motley Fool's board, I found a link from Time Magazine titled

"Ground Zero of the Real Estate Bust" which sounded as though I had written the lead paragraphs.

The article (printed one day after my Motley Fool post I might add) starts out with a similar description of billboards promoting new home subdivisions. Except this is describing suburbs outside Denver, Colorado . . . not Miami.

Here's how the article, written by Barbara Kiviat, begins:

"First come the billboards. As you head north, away from downtown Denver, they flip by like flash cards, advertising houses by Lennar, KB Home and Richmond American, from the $100s, the $170s, the low $300s. What they don't tell you is that should you wander into one of the new subdivisions popping up from the prairie, you're likely to be offered tens of thousands of dollars in incentives to buy, and to buy now. At a recent conference of Colorado builders and real estate agents, one speaker counseled salespeople to stop acting so desperate. "It sends the signal that the market is bad," he said, "and to wait for the bottom."

Rock's note: I remember during the dotcom and 9/11 stock market crashes, Wall Street analysts were telling investors to keep holding onto companies with no earnings and to wait for the bottom to buy more. Meanwhile, these bastards were selling their "lockup" shares from IPOs out the backdoor like there was no tomorrow. A recent example? Check out the CEO of Countrywide Finance who has sold hundreds of millions of dollars of shares from options as he was braggin Countrywide would weather the storm.

"Yet as Denver richly illustrates, there is plenty of bottom left to wait for. It's a far cry from the days of double-digit home-price gains and mass speculation in hot markets like Las Vegas--where 40% of the houses up for sale now sit vacant."

Rock's note: I drove into a couple of brand new Homestead, Florida sub-divisions up by the Nascar track recently. What was amazing was how small the yards were. Houses were less than 12 feet away from one another. I saw home after home with no curtains in the windows, no furniture inside, and no For Sale sign out front. These are your classic "vacant" for sale homes where homeowner associations don't allow for sale signs in the yard, or, the developer is still carrying the home on inventory.

. . . back to the Time Magazine story:


The International House of Pancaked Leverage

"What's astonishing about this particular real estate bust, though, is the way the damage has pinballed across the financial universe: mortgage companies in Los Angeles, banks in Seattle, hedge funds in Australia, the European Central Bank, Wall Street investment houses and Main Street stockholders have all had the American real estate market fall on them.
Call it the international house of pancaked leverage, built on the proliferation of subprime and exotic mortgages that did away with many of the safeguards built into the classic 30-year fixed rate with a 20% down payment. Riskier loans originally designed for a narrow band of home buyers--interest only, adjustable rate, balloon payment, no documentation (of income, that is)--took off broadly in the last rising market, and Denver was one of the many areas where they were hot.

The demand was coming not so much from borrowers as from Wall Street, which packaged the loans into securities to sell to investors looking to pile into "low risk" real estate. So mortgage brokers found ways to squeeze buyers into first and second mortgages even when their finances were questionable. Consider the appellation NINJA, used to indicate a buyer with no income, no job and no assets. "Capital was made available to every Tom, Dick and Harry," says Zachary Urban, who runs the Colorado Foreclosure Hotline.

Urban is now dealing with the fallout: 18,000 calls in the past 10 months. Calls from people like Essie Kemp, who lives in the hard-hit neighborhood of Montbello. Kemp is faced with losing the home she has lived in for 23 years, since she can no longer make the payments on her refinanced mortgage. She wanted to have money to buy an air conditioner and fix her pipes. What she got was an adjustable-rate mortgage that spiked after two years. It wasn't until she went to see a housing counselor that she realized her income was listed as $4,000 a month--more than twice what she was making from a part-time job and Social Security. "I've done all I can do to keep my end of the bargain," says Kemp, "but it just didn't work."

Rock's note: in a great piece on Countrywide Finance this week, the NY Times talked about how loan officers were pushed to sell the riskiest loan schemes as these generated the highest commissions.

I hope to highlight that article later this week as it was an excellent source for discussion on Motley Fool.

Back to the Time Magazine piece:

" . . . about 25,000 people who will receive a first notice of foreclosure this year in the seven-county Denver metro area, according to the housing-analytics firm the Genesis Group. That's about half the number of people who could be expected to put their homes up for sale in a normal market. The most distressed neighborhoods are seeing foreclosure rates rivaling those produced during the state's oil and gas bust of the 1980s--except these days, there aren't mass layoffs to blame. Just flat house prices and tighter credit standards, which make it harder for homeowners to sell or refinance their way out of trouble.

Green Valley Ranch, to the east of downtown Denver, is one neighborhood having a particularly tough time. Houses are still going up in the massive multiphase development, but within the new construction lurk bus benches advertising foreclosure assistance. Many of the people who have run into difficulty are first-time buyers who jumped into mortgages they couldn't afford in the long term. Now, as they endure the heart-wrenching saga of slowly losing their homes, the whole neighborhood suffers: according to a study by Dan Immergluck at the Georgia Institute of Technology, a house loses 1% of its value for each foreclosure within an eighth of a mile (200 m)."

Now there's a formula for the ages in that last sentence.

So if 8 homes foreclose say at the Key West Golf Course (I've seen that many and more on RealtyTrac) then homes surrouding the foreclosures should lose 8% of their value right off the top. Interesting.

Some Unaffected Areas to Feel the Ripples of Sinking Developments?

"Denver is just one pin on the national map. Looking across the country, the foreclosure problem is worst in areas where house prices went wildest (southern Florida, California), where local economies are depressed (Cleveland, Detroit) and where regulators paid little attention during the go-go years (before a new law took effect in January, mortgage brokers in Colorado didn't have to be registered). But it is important to point out that while Colorado has one of the nation's highest foreclosure rates, according to property tracker RealtyTrac, many parts are doing just fine. Prices in Denver's newly hip Highlands neighborhood, a community full of bungalow homes and yuppies, were up 13% last year, according to listings data crunched by real estate agent Ed Tomlinson. And ski resorts like Copper Mountain can't build enough pricey condos.

But troubles that exist in distinct pockets can ripple outward. In the northern suburb of Thornton, Stephanie Brown is trying to sell her four-bedroom house for $445,000, just enough to break even on her investment, since she's eager to move closer to her new job. Yet in a month on the market, she's had only a single showing. On one side, she is up against home builders who are knocking $100,000 off the price of houses similar to hers. On the other, she faces a market flooded with foreclosed properties, like the hundreds up for sale at two different auctions in Denver on a recent weekend, some of which started with bids of half the estimated market value. "It's hard to sell a house if you can't even get people in the door to look at it," says Brown."

Rock's Note: Look at the highlighted sentences in that paragraph above.
Here's a woman trying to sell her home for "breakeven" yet she's up against the market dynamics of:

1. Home builders knocking off $100,000 off prices for similar homes to hers.

2. The market is flooded with foreclosed properties.

3. Hundreds of foreclosed homes are being auctioned off, some of which are receiving bids of half off current market appraisals. (Sounds familiar. We've had two auctions in Key West with similar results . . . except owners wouldn't sell for less than their minimum bid . . . none of which were hit.)

4. Lastly, the woman, slowly coming out of the state of denial says, "It's hard to sell a house if you can't even get people in the door to look at it."

Ms. Brown's comment in point 4 tells me she hasn't dropped her selling price enough to compete with points 1 through 3.

It's like this: Say I owned shares of American Home Mortgage before they went bankrupt. Say I woke up one morning and saw the share price had opened 25% down from yesterday's close.

Question: If I needed to liquidate my holdings and I wanted out, what do I do to sell my American Home Mortgage shares?

a) Click in an order to sell at a "limit price" 10% above where American Home Mortgage shares were at the moment?
or
b) Sell at "market prices" wherever they are, take the loss, and clap my hands together than I had something to show before a further fall in American Home Mortgage's fall in share price?
Holding onto a home or condo in a crashing marke

It is similar to Chinese Water Torture. The drip, drip, drip of depreciating value cannot be stopped without underselling all your competition.

Look at it this way:

I'll guarantee a buyer can be found for any Key West home today if only the seller will cut his price by 50% for just one day only.

In Capitalism, there is a right price for everything.

Supply and demand.

If supply is too high, the only way to move inventory is to drop prices like a Macy's Basement Sale. First 10% off. If that doesn't work 15% off. If it still won't sell, try 25% off. I've seen stuff in department stores marked down 7 or 8 times til it ended up in my shopping cart.

All of us know the drill.

To move inventory, prices absolutely must come down.

On the other hand, if demand is too high, sellers can adjust condo and home prices by the hour as people camp out in lines before ground has broken. (How Realtors must long for those heady Bubble days of 2003 through 2005.)

Smart buyers never buy in a mania and expect to make big gains.

I don't care if its stocks, coins, cars or houses, smart people don't buy simply because someone they know, like their cab driver from the airport, tells them how he has made millions buying and flipping Key West condos.

How a Chase for Huge Gains Stoked the Insane Leverage in the Credit and Housing Bubbles

"This local malaise, repeated in city after city, has ballooned into trillions of dollars in losses around the world, thanks to the magic of Wall Street's financial engineers. Blame it on one of the Street's recent innovations, the collateralized debt obligation, or CDO. The recipe: buy home loans, blend them, then slice up the result into different securities (reflecting different levels of risk) to sell to investors. Many such securities carry AAA or "investment grade" ratings despite subprime mortgages being in the mix. From there, things get really complex--CDOs created from other CDOs, synthetic CDOs crafted from credit-default swaps, none of which had experienced a down market. "The problem is that CDOs were untested. There was not much history to suggest CDOs would behave the same way as AAA corporate bonds," says Richard Bookstaber, a hedge-fund manager and author of A Demon of Our Own Design, who views market palpitations as a predictable by-product of complex financial products like CDOs. (For the author's take on the subprime disaster, go to

time.com/bookstaber.

Now that the foundation is shaking, there are scant buyers for the lower-grade issues built on top of the pooled mortgages, and the values of those CDOs have plummeted. Losses in the subprime market drove Bear Stearns to declare two of its hedge funds, once topping $1.5 billion, all but worthless, and banks as far afield as Germany and France have frozen funds or received bailouts because of exposure to U.S. mortgages."

Will 2008 be worse than 2007 for Housing?

Last week, Countrywide Finance CEO Angelo Mozilo was interviewed by CNBC. Mr. Mozilo called the current credit crunch “one of the greatest panics I've ever seen in 55 years of financial services.” He also said we will most likely see the whole country slide into a Recession due to these problems.

Time Magazine's article is in synch with Mozilo's new gloomy look.

The Looming Disaster

"FOR REAL ESTATE, NEXT YEAR COULD BE EVEN worse if interest rates don't fall. In 2008, some $680 billion worth of adjustable-rate mortgages are due to reset, according to Bank of America. That's $165 billion more than this year, and of those loans that are likely to carry higher rates, nearly three-quarters are subprime. Since many adjustable mortgages change rates after two or three years, the loans due for reset would have been written in 2005 and 2006, the years underwriting standards were bent the most. "It's clear that the performance of loans will be worse," says Mark Adelson, recently departed head of structured finance research at Nomura Securities, "but it's not yet clear how much worse."

One way to think about it is to consider how much more homeowners will have to pay to keep their mortgages current. According to an analysis by First American CoreLogic, a firm that tracks real estate and home loans, a typical subprime first mortgage that was originated in 2004 to 2006 will face a monthly increase of $407, and a typical teaser-rate loan, the type often sold to people based on their ability to pay the introductory rate and not the reset, will see monthly payments jump by $1,512."

Rock's Note: How does any sane Realtor, CNBC Bubblehead, Lender or Homebuilder make the economic assumption Housing is bottoming now?

How does a taxi driver, hairdresser, waitress, bartender, deejay, etc., suddenly find $407, or $1,512 or even $3,250 extra a month to stave off the Mortgage wolves at his/her front door if wages and salaries are not increasing quick enough to meet the new realities of a reset mortgage?

Will Florida or the US Congress Take Colorado's Lead and Make Lenders Do More Due Diligence?

"Back in Colorado, people are reacting. This summer, three laws went into effect that, among other things, require anyone selling a home loan to make a reasonable inquiry into the buyer's ability to repay it. In recent years, as a growing percentage of loans have been generated by brokers rather than the banks that ultimately owned the mortgages, best interests have been at odds: brokers can make more money with higher-rate loans, even if buyers qualify for a better deal. And that doesn't even touch the lending arms of home builders, which come with their own special conflicts of interest once you consider pressure from shareholders to get people into houses and book those profits. Establishing a fiduciary duty for mortgage sellers, which Congress is considering as well, is meant to realign interests. In the meantime, many banks are working with homeowners to renegotiate loan terms to avoid foreclosure. Still, the EZ Credit addiction is tough to cure. Drive through Green Valley Ranch, and you still see signs for 0 DOWN PAYMENT, 100% FINANCING.

In early August, American Home Mortgage, a mortgage lender with little subprime exposure, declared bankruptcy, stoking speculation that troubles are bound to spread to securities backed by higher-quality mortgages. It didn't help when lenders Countrywide and Washington Mutual subsequently issued dire warnings about losing liquidity because so few people want to buy mortgages on the secondary market right now.

"One of the most interesting things is, we don't know who's going to suffer," says Karl Case, a housing economist at Wellesley College. "Obviously, the people who get foreclosed against suffer. That goes without saying. But who bears the losses ultimately is really complex." We can start with the stock markets around the world, which have surrendered $3 trillion in value over the past month, thanks in large part to the mortgage monster beginning to come undone.

But houses don't trade like stocks, so when it comes to correcting the system when it gets out of whack, we're talking years, not weeks. "Real estate," says housing economist Thomas Lawler, "is a slow, tedious process." In July, after the two Bear Stearns hedge funds first ran into trouble, bond guru Bill Gross of Pimco wrote a foreboding investment outlook, pointing out that hedge funds tied up in trading are the top layer of the problem, not the root. That can be demonstrated in the Mile High City and, as Gross wrote, "in the Summerlin suburbs of Las Vegas, Nevada, and in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida." It's a big problem. How big, we're still waiting to find out."

To which I will add one last tip to the reader of this blog: Bill Gross has recently called for government bailouts of 2 million Americans who bought housing at the wrong moment in time.

I am totally, 100% against any government bailout of corporations, farmers, stock shareholders and yes, homeowners.

I would waste words explaining myself about my new disrespect for Bill Gross, but no one has written about this better than Michael Shedlock, aka "Mish", on his blog.

Read Mish's

"Bill Gross Wants PIMCO Bailout" for an excellent analysis of Bill Gross's crocodile tears for two million American homeowners who might face foreclosure. Like Jim Cramer, his real tears are for the well heeled, especially himself.

Mish knocks this one out of the park and I hope all small shareholders of PIMCO funds or bonds take time to open this link to learn how Gross has piled on risk in the past few years in his chase for better gains.

I also hope you will open up some of the 256 comments this post of Mish's has elicited.

I'll give you some from the top to show you how investors are feeling about PIMCO, Gross and bigwigs calling for bailouts:

Mish -- great write up. I use to respect Gross but now I see he was waddling around in some of those 6 inch stilettos along with everyone else. He should pull up his shirt and show us his tramp stamp. If you are going to be crying for money to the poor, I think you should indicate that a big chunk of it is going to you. All, I can say is this is getting to be so typical. Makes me puke.Like this comment? [yes] [no] (Score: 17 by 17 votes)

LJ, I agree with you 100%. As I stated before, he was one of the only traders I thought made a good deal of sense. However, it seems like Gross has just shown himself to be a selfish little piggy just like the rest.Like this comment? [

yes] [no] (Score: 5 by 5 votes)Liberal JohnFriday, August 24, 2007[delete]

And Gross hires Greenspan. Message to Bernanke: I'll pay you a tidy little sum to be my advisor, too, once you retire for a Bernanke put.Like this comment? [

yes] [no] (Score: 3 by 3 votes)HappyThoughtsFriday, August 24, 2007[delete]

He wants another RTC? I lived through the RTC when I lived in Colorado Springs. The result was that the home owners were out on the street, but the big defaulting developers got to buy their properties back from their real estate agent buddies, who handled business for the RTC, for dimes on the dollar. Simply put, the big guys defaulted, and then got their properties back for less than half the value of the loans they walked away from, thanks to tax-payer subsidies. Of course, this time around, because we have a much more honest government, there will by no crony capitalistic deals with any government created bail ou organization. So please, just tell me where I sign up. I want to be in the front of the line when the feeding trough opens.Like this comment? [

yes] [no] (Score: 5 by 5 votes)threadkillaFriday, August 24, 2007[delete]

if there is a bailout i'm gonna be one pissed off mofo!!!Like this comment? [yes] [no] (Score: 2 by 2 votes)Dr StangeloveFriday, August 24, 2007[delete]

Excellent piece Mish. Very good work. I used to like Gross but this behavior by him is criminal to say the least. Does make you wonder just how bad things really are though to get this desperate. He's been on the inside for a very long time. He has to know the criticality of the situationLike this comment? [yes] [no] (Score: 1 by 3 votes)

The Fifth Stage of Key West's Development?

In 2983 . . . Atlantis we shall be?


The above headline is a play off Jimi Hendrix's cut from the Electric Ladyland album titled "1983 ... (A Merman I Should Turn To Be)".

Combining Hendrix's lucid dream type lyrics with freethinking out the box, I've assimilated some "down time" observations of other blogs and news to come up with a sci-fi fantasy future for Key West.

Here's what started this latest thread of blogs and news:

Ocean waters are rising more quickly than Al Gore's "Inconvenient Truth" showed . . .

An online Reuter's story headlined "Antarctic ice thawing faster than predicted" raises more alarming evidence that glacier melt is happening more quickly than scientists were thinking just seven years ago.

Just recently, I watched a National Geographic special on HDTV. Photo after photo showed glaciers melting more quickly than they were at just the turn of this new century. As far as I know, this National Geo special was the first scientific study to show Al Gore's movie is actually now dated and understating the effects of global warming.

For instance, the image below is a before shot of a famous glacier in Peru from 1980, followed by another shot of the same location in 2002. In the new National Geo special, we saw incredible shots of glacier melt in Antarctica and Greenland.

National Geographic had specialists explain how glacier caps which are over ocean water are not going to raise the ocean water. One specialist explained this by reminding viewers that a glass with ice cubes and a drink will not overflow the glass when the ice cubes melt. It's a simple law of solids/liquids called "displacement".

However, as National Geographic painstakingly showed, glacier melt from land . . . such as Greenland and the Antarctica landmass proper . . . will raise ocean seawater levels dramatically.

If all of Greenland's icecap were to melt, National Geographic says sea levels would rise 22 to 23 feet.

The National Geographic special also pointed out that if Antarctica's glaciers were to melt completely, ocean levels would rise another 200 feet above where they are today.

According to this same special, in 2005-2006, glacial ice melt all over the planet was at the rate whereby sea levels would rise one meter in the next hundred years. Since there are 39.37 inches in one meter, we are talking about a rise of sea levels of a little over one inch every three years.

The National Geographic special was well documented by their own Scientists and with longterm lookbacks in history to photos of Venice, Italy, which is sinking so quickly now that Venice is erecting higher walls around its city center and trying to come up with inflatable ocean barriers which will keep seawater from rising too rapidly at high tides.

As it is now, many Venice, Italy homes's first floors are now flooded and unusable, whereas early 20 century photographs of some of these same homes show highest tides only reaching their doorsteps.

Despite National Geo's well documented research, I read many posts on Motley Fool from people who claimed the research was slanted, biased, and political.

The Reuter's story is giving credence to what National Geographic scientists were the first to alert us to.

(Photo of Peru glacier in 1980 on left; same glacier 2002 on right)

The Reuters story said:

By Alister Doyle, Environment Correspondent
NY ALESUND, Norway (Reuters)

A thaw of Antarctic ice is outpacing predictions by the U.N. climate panel and could in the worst case drive up world sea levels by 2 meters (6 ft) by 2100, a leading expert said on Wednesday.

Millions of people, from Bangladesh to Florida and some Pacific island states, live less than a meter above sea level. Most of the world's major cities, from Shanghai to Buenos Aires, are by the sea.

Chris Rapley, the outgoing head of the British Antarctic Survey, said there were worrying signs of accelerating flows of ice towards the ocean from both Antarctica and Greenland with little sign of more snow falling inland to compensate.

"The ice is moving faster both in Greenland and in the Antarctic than the glaciologists had believed would happen," Rapley told Reuters during a climate seminar in Ny Alesund on a Norwegian Arctic island 1,200 km from the North Pole.

"I think the realistic view is that we will be nearer a meter than the 40 cm" in sea level rise by 2100, Raply said. The U.N. climate panel in February gave a likely range of 18 to 59 cm this century, for an average around 40 cm.

Asked at the seminar what the upper limit for the rise might be at a probability of one percent or less, he said: "At this extremely unlikely level the maximum would be two meters."

Skeptics often dismiss such low probabilities as scaremongering. But many scientists note that people take precautions such as to insure their homes against far lower risks, such as fire.

If Key West sees a one meter rise in the next 93 years, many of our streets in New Town will be underwater unless New Orleans style dikes are built.

If ice melt accelerates at a faster clip, in a worst case scenario, a two meter rise of sea water by 2100 will make many Key West condos and homes uninhabitable . . . unless a series of New Orleans dikes are constructed completely around the island.

My question to all is this: how can we afford to simply wall off and grow Key West dikes vertically when the whole coastline of Florida will be suffering the same predicament? Does the US Federal government send in the US Army Corps of Engineers for a wall longer than the famous Wall of China?

Will mainlander US citizens want to pay the bill for those who want to remain in a below sea level Paradise?

Stay with me for a flight of fantasy . . .

What's easier to market, the next Maccau/Las Vegas or diving the next Atlantis?

Cayo Dave once put up a video on his blog of what Key West and the Upper Keys would look like with rising sea waters. As I have yet to learn how to post the videos directly to my blog with a big button to hit, I simply ask you to click on this red highlighted link titled "Florida Keys Flooded by Global Warming."

The Key West segment is about :44 seconds into the video. Part one shows the effect of a one meter rise of sea levels on Key West. Part two shows what a Category 2 storm surge on top of a one meter sea rise would do to Key West. (A tip of the cap for Cayo Dave and his excellent blog for orginally bringing us this video.)

And then today I read The Real Key West Blog's "Four Stages of Development"

I've only recently discovered this blog and added it to "Links you can use" area of my blog.

Anyway, when you click on this link we are taken to a website with an opening page titled "The Four Stages of Development".

This website titillates the thinking with some photographic evidence and text describing a thought provoking exercise on the four stages of development.

I will list the four stages as put forth by the Key West Neighborhood Associations, but I think you will enjoy this more if you click on to the website to see the photos accompanying the text below:

1. Stage One - The area is in the process of being "discovered." It is frequented by a few adventurous individuals and an occasional travel writer.
2. Stage Two - More people come to visit. There are "Mom and Pop" type lodging places, and a few guest houses. Typically you will see a number of original locally owned eating places. Key West, for example, passed from Stage One to Stage Two with the arrival of Flagler's railroad. It stayed at this stage until the 1960's.
3. Stage Three - Chain motels begin to come in. As larger investors see the possibilities of development and growth, national restaurant chains begin to arrive. This part of the cycle ends with the arrival of resort condominium development. When the number of resort condominium units begins to exceed the number of traditional hotel/motel units, the original atmosphere which attracted the early visitors changes.
4. Stage Four - The area is overdeveloped. The original natural attractions are replaced by "novelty" attractions, i.e. museums, sideshows, T shirt shops, tattoo parlors, and "honky tonk" type attractions. There are demographic disruptions, as "regular people" are forced out by rising prices. This stage is typified by greater vacancies in commercial properties, a shrinking tax base, and a search for alternative sources of revenue. Business ownership tends to be concentrated in the hands of a few.

Putting all of the above together in a lucid dream, what would a fifth stage look like?

A fifth stage whereby we either make Key West a futuristic Las Vegas casino accessible only by hundreds of miles ferry rides from the new mainland of Georgia and Alabama, or a fifth stage where we let Mother Nature reclaim man's folly and we still take those catamaran rides . . . but for a different visit entirely.

The fifth stage of Key West could be either man made Rock of Gibraltar island which descends hundreds of feet below the sea and rises hundreds of feet above. Below would be a wall of dikes on top of dikes rising hundreds of feet from what used to be A1A, Roosevelt Boulevard, Eisenhower Boulevard, Palm Avenue, South Street, Waddell Avenue,and a wall around the perimeter of what is now Trumbo, Truman Annex, Mallory Square, etc.

How would we afford the seemingly unending building of a seawall which needs to rise meters per future century to keep seawater out?

Local property taxes wouldn't cover it unless the island is taken over by trillionaires. And we certainly can't depend on the state of Florida to bail us out when the whole state faces a sinking into the seas.

So what do we do to save the island from sinking?

We make Key West a gambling mecca such as the island of Maccau is to mainland China . . . and we build dikes and walls on top of dikes and walls, growing the island ever upward like the Hanging Gardens of Babylon . . . The wall would reach so high that sunsets would only be seen from top floors of the MGM Key West, Harrah's Sub Mariner Hotel/Casino, and the Hard Rock Hotel.

Key West would have to grow its gaming industry vertically like a miniature version of NYC meets Las Vegas meets Maccau.

OR

Three-hundred years from now, we may not be able to afford to wall off Key West and the whole state of Florida. American taxpayers might be so angry over government subsidies to people who make unwise life decisions that Mainlanders will look at coastal people as "On Your Own Owners of ex-USA Real Estate."

Anyway, three hundred years from now we will probably be colonizing new areas in outer space. The future will be out there, not saving the Earth from unstoppable climatic change.

So what do we do as Key West sinks into the ocean?

We let the sucker sink and turn it into an ultimate tourist destination . . .

We market Key West as the ultimate tourist destination whereby diveshops located hundreds of miles North on the new US mainland will ferry divers via solar/hydrogen powered speed catamarans to the hidden island of Key West . . . America's Atlantis.

Imagine this:

As a tourist in Key West's near future, you have to wear dive gear. You grab the anchor line of the cat which is tied off to what used to be Sloppy Joe's bar at 201 Duval. You dive down. You swim through the sidedoors or the two open front doors and see a plaque under green waters with sunlight dappling the words, "Still the best Party in town!"

You swim down and behind what used to be the bar. Instead of bartenders, you see schools of yellowtail, grouper, and several reef sharks. A giant sea tortoise swims off what used to be the stage. Underneath the stage where giant sub-woofer speakers were once mounted, a giant eel poke his head out. Sunlight is slanting down through green waters on the Green Street and through the side doors of old Sloppy Joes you see a pod of dolphin frolic by what was Guy Harvey's Restaurant across the street.

Outside, acroos the street at the old taxi stand in front of Rick's bar, battery powered submersiblewater taxis allow you to hold on to tow ropes. You and your friends float effortlessly behind touring the new underwater Duval Street.

There, in the 400 block, is the old La Concha hotel. You let go the tow ropes and drift up a few floors. Lolling about on its old sundeck near old swimming pool are barracuda sunning themselves in the sunlit ocean waters which are greener than the old pool water tinted with chlorine. Parrot fish, sergeant majors, grunts, yellowtail and other schools of fish are gliding in and out of missing windows and down former halls.

Over at Fast Buck Freddies, the windows are filled with permament mannequins pointing at old glass encased photos of Key West back when it was an island above the ocean waters. Divers take underwater photos of each other pointing at the photos to "prove" to the folks back home that they "dove" Key West. And underwater t-shirt purveyor is selling water logged merchandise which says "I dove Key West".

You swim through Fast Buck's front doors and you see other divers sitting in chairs smiling and gesticulating to others dancing on the ceiling upside down like an old Lionel Richie music video from the latter part of the 20th Century.

You get back to your water taxi and drive down to the old "butt plug" buoy of the Southermost Point. A new plaque is beside the old buoy pointing out that in year 2283, the "new" Southernmost Point is to be found in the hills of Texas . . . which by the way . . . is now beachfront property. Still, divers pose by the old buttplug mounument which says Cuba is 90 miles to the South.

The mountains of Cuba are now the only part of Cuba above water. The island is much tinier. And it is no more than 600 miles from the new US mainland.

After an hour, your crew rises from the depths, and the Catamaran sends a Zodiac to pick you up. You take a brief brunch on the Catamaran while it moves North to what used to be the Convention Center at the top of the old island.

You dive down to the Convention Center and swim inside a grand ballroom where an underwater band is playing and people in Scuba gear are smiling and dancing.

As a joke, some Catamaran tour guide placed a glass encased poster on an easel at an exit to the Convention Center. The poster is circa 2007, and it says, "There has never been a better time Key West Real Estate." Divers are standing by the sign smiling and having their photos taken.

Now all the condo rooms are filled with sea life, detritus, and sea grass, a hundred feet below the surface of the green waters. These rooms are Mother Nature's new birthing grounds for species which had all died out due to overdevelopment, overfishing, cruise ship pollution and inadequate sewage treatment in the "old days".

On the trip back to the mainland hundreds of miles away, whales were sighted over what was once Disney World in Orlando.

Back on dry land, divers tip the catamaran crew and tell the Georgians or Alabaman taxi drivers taking them back to their hotels how beautiful Key West . . . the new Atlantis, was.

Where will we go form here? I don't know, but I don't see Real Estate multiplying forever if the near future is an underwater Paradise.

Rock, under the sea, in an octupusses garden in the shade...

Key West Citizen Yesterday: "Bankruptcy looms over Keys Builder"

Key West Citizen Disappears

Top Headline from Yesterday

No post on this blog has fanned hate email like my recent post about Cay Clubs. The responses to the blog, listed right below my comments were tame compared to some of the stuff I received via email.

So, in an effort to throw a little gasoline on the fires of "Haterz" of Rock Trueblood, I have to ask this question: What happened to the Citizen's above the fold and top of the fold headline from yesterday screaming . . .

Bankruptcy looms over Keys Builder

Cay Club develops financial problems

I would refer you all to this article by Robert Silk, except for one minor problem: the Key West Citizen's online story has vanished.

See for yourself. Check the lineup from yesterday's headlines.

We find:

Restaurateur collects donations for hurricane victimsPublished on Wednesday, August 22, 2007

Family fun day focuses on child safety awarenessPublished on Wednesday, August 22, 2007

Curfew will be enforcedPublished on Wednesday, August 22, 2007

'Keep off' signs go up on WisteriaPublished on Wednesday, August 22, 2007

. . . but there is no entry for yesterday's biggest and best story about Cay Clubs. And this was the top headline you would see as you walked past a paper vending box.

Again,

Bankruptcy looms over Keys Builder

Cay Clubs develops financial problems

Yesterday, online, the story was there.

Today, it disappeared.

As Colonel Klink from "Hogan's Heroes" would say, "Veeeeeeeeeeeeery Interesting!"

When I started this blog, one of my first posts was "Realtors Wag the Key West Citizen Dog".

In that short post I simply posited the idea we can not expect the Citizen to be too observant on Housing in the Keys as the majority of its revenue comes from Realtors.

Why I think yesterday's top story is missing from the online edition of the Key West Citizen

All it takes is a threat to yank advertising dollars. It's that simple. I saw this "cave in" attitude time and again at a Clear Channel radio station where I worked for a short spell.

Key West is such a small town that the paper is inextricably dependent on advertising revenue to make up for its tiny circulation. And no ad revenue is bigger than Real Estate.

I feel someone, somewhere, with ties to Real Estate interests made a big ass phone call to the Citizen and asked, cajoled, pushed or even threatened a Citizen bigwig with the loss of ad dollars if that Cay Clubs article wasn't erased online.

I just googled the headline. No luck. No one anywhere saved the headline and story to an online "memory hole" that I can find.

What was in the article?

Well, here's the flavor of the article in the first sentence by Robert Silk . . .

"The company that became synonymous with the frenzy of redevelopment that swept the Florida Keys in recent years is now scrambling to stay our of bankruptcy."

Here are some of the tidbits discussed by Silk about Cay Clubs:

• An SEC filing by Cay Clubs for its pending merger with Key Hospitality Acquisition Corp. shows a $1.2 million dollar loss for the first quarter of this year versus a $13.8 million profit, year over year, for the same quarter.
• The company owes lenders $91 million, $74 million of which is due in the next year.
• One lender has already notified Cay Clubs they are officially $9 million in default.
• Cay Clubs is in arrears by $10.5 million to about 140 owners of condos who opted for the "lease back" program (as documented in this blog which incited hate emails to yours truly).
• Cay Clubs spokesman Chris Brown says the company is still trying to negotiate with lenders.
• Cay Clubs is still trying to sell off portions of its holdings for cash.
• Of note . . . and something I was not aware of . . . Cay Clubs "owns" 150 single family homes . . . along with 6 resort hotels (the Citizen should have printed condotels), 900 boat slips, and restaurants and other businesses. (I am wondering if the single family homes are really condos the company was forced to take back?)
• More interestingly, the deal to buy and manage the Half-Shell Raw Bar, Turtle Krawls Restaurant, A&B Lobster House complex and other businesses on the waterfront has not happened. The owner of some of these restaurants, a Gene Smith, has refused to answer any Key West Citizen questions since March of this year.
• Cay Clubs bid to purchase the former Marathon Manors nursing home fell through in April and Cay Clubs walked away from the deposit.
• In May, Cay Clubs fired 80 workers in the Keys.

Last but not least, this language from the SEC filing:

"Without additional borrowing and/or the refinancing of existing short-term debt, Cay Clubs will have to change its current mode of operation and may potentially have to file for federal bankruptcy protection."

Now I don't know about you, but if the company is putting the above in fine print on an SEC document, I think it's the kind of language which should be blown up into at least a 20 point font and given to potential investors in their leaseback program. I feel this flare gun warning should be stapled as a top page on brochures and prospectuses to show just how forthcoming Cay Clubs is with the public.

As always . . . caveat emptor,

Rock in Key West

p.s. Robert Silk, you have a beer with your name on it at my club. Bring Rob O' Neal and the new business editor for the Citizen. You three are on my personal Honor Roll for trying to tell it like it is.

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.