Thursday, August 16, 2007

Who took the 'fun' out of fungible?

fungible
"Of or relating to assets that are identical in quality and are interchangeable. Commodities, options, and securities are fungible assets. For example, an investor's shares of Xerox left in custody at a brokerage firm are freely mixed with other customers' Xerox shares. Likewise, stock options are freely interchangeable among investors, and wheat stored in a grain elevator is not specifically identified as to its ownership."


Related stories:
Bank of Canada Provides Liquidity
Banks and Pension Funds Band together to provide liquidity to ABCP market


Notably, the TSX is down over 4.5% so far today in what I would term panic selling at this point in one of the most volatile days that I can remember. From the year's highs in July, the TSX is down approximately 14%. For comparison purposes, the Canadian Value Index is down approximately 11%.


24 comments:

freako said...

I betcha a million dollars that the financial industry pundits will talk about bargains etc etc as "nervous" investors act irrationally.

To me, it is just the chickens coming home to roost. This is not a random unfair blind side but a natural consequence of excess.

We have pondered in the past why the bond market seems to have priced in a housing bubble collapse, but not the stock market.

I don't have any special insights into the inner workings of the financial world, but when cabana boys in California can buy multiple million dollar properties with no money down I know that all ain't right. Most of us who have followed this in disbelief in the blogosphere are not suprised one bit. And looking at the quotes I see out of the financial world, these "wizzes" have a very shallow view of what they are dealing with.

I presume that high resource prices are more tangible, and can hold the TSE and our economy high. But do not underestimate marginal price sensitivity.

On that topic, there is an article in the Sun where the usual suspects are assuaging the public. Our prices won't go down because our economy is hot hot hot. It would take a catastrophic even to sink our prices, hence seven percent appreication in 2008. If they spent more time connecting the dots, they may turn the cause and effect with regards to house prices and the economy. Not to mention what a large portion construction plays.

Fencesitter said...

Why is this such a big deal? The TSX is still up 11% from a full year ago (28% until week ago?), and with such a bull run a correction has been expected for a long time.

Sure makes for some interesting times to watch though!

freako said...

I betcha a million dollars that the financial industry pundits will talk about bargains etc etc as "nervous" investors act irrationally.

Yup, didn't take long.

As overseas markets drop and the Canadian dollar goes for a bumpy ride, CIBC World Markets’ chief economist Jeff Rubin says the current troubles should be seen as a buying opportunity for equities.

freako said...

Why is this such a big deal? The TSX is still up 11% from a full year ago (28% until week ago?), and with such a bull run a correction has been expected for a long time.

If it was expected than why did it go up in the first place? Anyhow, large nominal declines make news and that scares investors. It just so happens that they should be scared.

mk-kids said...

"I betcha a million dollars that the financial industry pundits will talk about bargains etc etc as "nervous" investors act irrationally."

A co-worker emailed everyone this morning with an article that fits this exact description from galt global financial. It's really a propoganda piece... Called "Gaining Financial Smarts" here it is for one and all to take the piss out of...

Gaining Financial Smarts
Education Feature
by Adrian Brijbassi
________________________________________


While the stock market correction that has occurred during the past three weeks has cost many investors a fortune, there is opportunity to be had for others. The problem for most of us is we just don't understand how to take advantage of it.

Whether its the stock market or the real estate game, investing isn't for novices. That's why financial planners exist and why retirement accounts force us to store away money until we're, presumably, wise enough to know what to do with it.

According to Warren Buffett, the no-nonsense multi-billionaire who made his fortune on Wall Street, making sure you understand your own bottom line is just as prudent as watching your diet or regularly visiting a doctor. "Being smart with your money isn't a greedy exercise, but a healthy one. Wealth and prosperity gives us security," he has said.

So how do you acquire financial smarts? Buffett and many other money experts say security is gained through awareness of the rules of investing. Perhaps most importantly it's comprehending what works best for your individual lifestyle and goals. Financial advisors can explain to you about liability of ownership, risk management, leverage and diversification, but your job is to let them in on what your aim is for the wealth you hope to attain.
"One key way to know more about money is to learn about yourself.

If you can separate your needs from your wants, you'll be far ahead in the money game and the game of life as well," says Don Silver, author of "The Generation Y Money Book: 99 Smart Ways to Handle Money."
It also helps to understand the value of money and how it accrues, Silver says. While investing has proven to be a reliable way of getting rich, it's not like winning the lottery. Money takes years to mature, regardless if it's in real estate or stocks.

Investors need to be patient and discerning with their purchases while they wait for portfolios to pay off. And history says that in due time there will be a substantial profit.

Since 1978, the stock market has returned 11.5 percent to North American investors annually while real estate has averaged eight-percent growth, by many estimates. Despite the lower rate of return, owning your home seems to be the most convential route to financial security. The U.S. Federal Reserve says the average home owner is 34 percent wealthier than the average renter. A reason the stock market outperforms real estate, though, is often because of times like these, when wide-spread fear leads to buying opportunities. The key, of course, is knowing what to purchase and when, particularly in the coming weeks when shrewd traders will look to capitalize on the Wall Street downturn.

"If you keep your eyes firmly on the fundamental value of good stocks you know, you might be handed bargains on a silver platter - if you can control your emotions and buy at the right price, when everyone else panics," Avner Mandelman, the president of Toronto-based investment firm Giraffe Capital Corp., says in the Report on Business.

With the Dow Jones Industrial average plummeting 763.88 points since breaking the 14,000 mark on July 19, the volatility in the market has frightened many new and experienced investors. What's at risk is that all-important security Buffett speaks of. While a stock market slide can affect the economy in a variety of ways, it's impact is mostly felt by those financial professionals who trade on a daily basis. For the individual too busy with work and life to closely follow the markets, thinking about the future is what should drive financial decisions. Buffett once said, "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

So patience, fortitude, self-restraint and a vision of brighter days are among the keys to gaining money smarts. As Silver says, "See the big picture to get the will power to work toward your long-term goals."

freako said...

The spillover of fear into equities, high-yield currencies and commodities markets "look like tremors rather than a full-scale earthquake," said Rubin, adding that the 11-per-cent equity retreat in Canada is a correction often seen during a bullish trend.

Seriously, where is this Metaphor School? Every talking head under the school has got some awful ones. Reminds me Lereah's painfully bad ones.

mohican said...

Here is some interesting Technical Analysis comparing 2007 and 1987 that should put some fear in the mix.

http://tinyurl.com/2xz27p

1987 and 2007 have more similarities than many people would like to think. The 1987 crash was largely the result of the Savings and Loan crisis in the US and bears many similarities to the mortgage mess we are in today.

mohican said...

freako - I have not seen any increase in risk aversion since May in mortgage lending at the banks. It is pretty scary when I speak with some of my co-workers who are more involved in the mortgage side than me. They are baffled at some of the situations right now - especially the deals that come from mortgage brokers.

mk-kids - I can't stand how some people butcher Warren Buffett's comments sometimes. They add his quotes to fluffy marketing pieces with no regard to the rigourous financial analysis he performs on each of his investments. On the surface, his quotes sound great, but if you take his quotes BUT NOT the analysis then you are no further ahead.

Fencesitter said...

"If it was expected than why did it go up in the first place? Anyhow, large nominal declines make news and that scares investors. It just so happens that they should be scared."

Remember a couple of months ago when the Chinese market dropped 9%, and ours reacted accordingly? Wasn't there at that time a lot of talk about how the Dow and TSX, etc have been due for a correction?


Anyways, what are peoples take on what the current situation will mean for mortgage rates?

mohican said...

the current situation is:

- Bullish for short bonds, thus bearish for short rates

- Bearish for long bonds, thus bullish for long rates

The Bank of Canada is unlikely to raise rates in Sept now and this will raise inflation expectations and one would expect long rates to rise on these inflation expectations.

freako said...

Called "Gaining Financial Smarts" here it is for one and all to take the piss out of...

He mangles Buffett's philosophy using flowery in order to suit his argument. It is pretty simply. Buffett won't touch it unless it can be bought below it's fundamental worth. A couple of days of panic selling does not make stocks underpriced.

Sounds more like he is a cult leader trolling for converts than an advisor providing sage advice.

The U.S. Federal Reserve says the average home owner is 34 percent wealthier than the average renter.

Cause and effect, numb nuts. Those who own Ferraris are average wealthier than those who don't. Does that mean that buying Ferrari's is a road to riches?


While a stock market slide can affect the economy in a variety of ways, it's impact is mostly felt by those financial professionals who trade on a daily basis.


Yes, if you think that the stock market is a one way rocket to riches, and that the only setbacks are nervous nellie investors, yes. But if on the other hand, the stock market slide was caused by real world fundamentals, the impact is obviously felt.

Overall, the article makes some fair points, but I take exception to the timing and the stupid "handholding" as if we are all going through some undeserved crises together.

freako said...

They are baffled at some of the situations right now - especially the deals that come from mortgage brokers.

Baffled how? Could you elaborate?

mohican said...

Baffled how? Could you elaborate?

I can't elaborate into specifics but to expand a bit:

1) Most deals being done right now are from mortgage brokers rather than 'branch initiated' deals.

2) Mortgage brokers have some 'flexibility' in the way they present the deals to the banks credit and risk departments to ensure they get approved.

3) The branch staff are frustrated that they cannot get these same deals through the system and are many times surprised that they are approved at all.

Needless to say, I feel we are nearing the end of the line in easy lending here. The combination of rising rates, expiring pre-approvals/rate lock-ins and tighter lending criteria will dry up demand faster than most people expect.

Joel said...

All you get in the media here still is, 'don't worry, Canada has conservative mortgage lending practices', without much elaboration.

May be more conservative than the US was, but I am not convinced there won't be problems one day here too.

either way, it would look like there will be less people qualifying in the near future. What's the time frame for such changes, do you think the new directives for lending practices are being drafted and delivered as we speak?

WoodenHorse said...

mohican:

Who would be the ulimate holders of a Mortage Broker Brokered Debt?

Because if--like in the states--someelse is the bagholder, this sound to me like the banks here are saying "you drink the cool aid if you like, but we're full so thanks".

WoodenHorse said...

btw:

Anyone else get taken to the woodshed on the Venture exchange today? My mining holdings are off over 20% in this week. ouchie!

mohican said...

"Who would be the ulimate holders of a Mortage Broker Brokered Debt?"

I would direct your attention to the following links:

http://www.cmhc.ca/en/corp/faq/faq_001.cfm#1
http://www.cmhc.ca/en/hoficlincl/mobase/upload/r120e.pdf

In short, pension funds, mutual funds and individual investors are the holders of these mortgage backed bonds. This is no different than a bank-initiated mortgage.

freako said...

Needless to say, I feel we are nearing the end of the line in easy lending here.

And then we are also nearing the end of the line for appreciation.

And if we are nearing the end of the line for appreciation, we are nearing the line for speculative demand.

And if we are nearing the end of the line for speculative demand, prices will fall. And fall. And fall.

Any clue why the broker originated deals get an easier ride? Also, any anecotal evidence that we are indeed dealing with a rush of beat the expiring pre-approval buying spree?

freako said...

Anyone else get taken to the woodshed on the Venture exchange today?

Can't say I have. Cash is my thing at the moment. I have considered the TSE one of the most overvalued in the world, precisely because of resource stocks valuations.

mohican said...

"Any clue why the broker originated deals get an easier ride? Also, any anecotal evidence that we are indeed dealing with a rush of beat the expiring pre-approval buying spree?"

Broker initiated deals don't get special treatment. Brokers are savvy at pushing through applications in a way that ensures they get approved. They know the rules and they exploit them and sometimes they even lie - shhhhh . . . don't tell anyone.

My place sold to a pre-approved buyer - in a big rush. How's that for an anecdote!

freako said...

In short, pension funds, mutual funds and individual investors are the holders of these mortgage backed bonds.

Ok, but what if the demand for these dry up, even temporarily. I would not want to be exposed to a single Vancouver mortgage if I was holding the other end of the stick.

mohican said...

"Ok, but what if the demand for these dry up, even temporarily. I would not want to be exposed to a single Vancouver mortgage if I was holding the other end of the stick."

Fair comment but the CMHC MBS products are backed by the full faith and security of the Canadian government - pretty low risk to the investor - high risk for the taxpayer!

Banks and mortgage companies have nearly zero risk around mortgage lending so long as the mortgages meet CMHC criteria.

http://www.cmhc.ca/en/hoficlincl/upload/65407.pdf

freako said...

Banks and mortgage companies have nearly zero risk around mortgage lending so long as the mortgages meet CMHC criteria.

Well I learned something new. I thought that CMHC only covered the second mortgage, and the lenders were on their own for the rest.

But if this is true, then why do lenders even care about income etc? Are their hard limits? Seems very odd to pass risk on to the taxpayers. But this would definitely explain why there is a bubble.

mohican said...

"Well I learned something new. I thought that CMHC only covered the second mortgage, and the lenders were on their own for the rest."

I also did not know this until about a month ago but it is in fact the case that all bank originated mortgages must meet the CMHC guidelines. I learned this while doing a client's self-funded mortgage through their Self directed RSP account. I was a little miffed that their mortgage had to go through CMHC underwriting even though they were self-funding the mortgage.

The rule is - ALL mortgages/HELOCs must go through either CMHC or Genworth.

But if this is true, then why do lenders even care about income etc? Are their hard limits? Seems very odd to pass risk on to the taxpayers. But this would definitely explain why there is a bubble.

Check the link in my post above for the lending criteria.

PS - some (non-bank) mortgages fall outside the CMHC pools. These are by less than reputable companies who charge exorbitant rates - largely classified as 'subprime' products. Some of the ABCP in Canada funds these types of mortgages.