The latest market collapse

[Stormchaser]

Over the past little while i've been trying to keep myself in the economic loop regarding real estate and investing. There are a few things I don't understand regarding the latest stockmarket and economic mayhem.

http://www.bloomberg.com/apps/news?p...efer=worldwide

Aug. 10 (Bloomberg) -- Central banks in the U.S., Europe, Japan, Australia and Canada added about $136 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets.


How do the banks do this? Do they just give their money away knowing this is the better of the 2 evils?

Also, What is your forecast in light of what is happening / has happened?

-Do you believe prices on imported goods will go up? (from China etc.)
-What about the interest rate?
-What effect will this have on us in Canada?
-Are we on the brink of a recession?
-Does this change your investment strategy?

To me Canada seems to be in better shape than the U.S. , maybe just in part because our dollar has been so strong as of late. Here are some more sites i've come across. What do you think?


http://www.stockhouse.ca/mediascan/n...newsid=8862929

http://sfgate.com/cgi-bin/article.cg.../MNU2RG11T.DTL

[Vulcan]

The US has been skating on thin ice for a number of years and it's finally catching up to them. From what little I know, the Americans are allowed to deduct their mortgages from their income taxes. This is good, but how it comes out is the larger your mortgage, the bigger tax deduction you can claim. This also makes it unprofitable to pay off your mortgage so all these lenders are refinancing houses as the owners get more equity. The upshot is that lots of homeowners are overextended and can't pay, leading to banks and other lenders losing their loans and a glut of homes hit the open market, causing home prices to fall. There is going to be a correction, how far it goes, I haven't a clue but local lumber prices will probably take a hit.

[FLAMESRULE]

From what I know its the entire sub-prime mortgage lenders that are hurting in a big way. They are giving mortgages (and very large ones) to people that can't afford A mortgage let alone a big one for a short period, lower interest rate (hence the sub-prime). Eg. Prime is 6%, they get the first 3 years at 3% and then the last 27 years at 7%. When the banks come calling for the higher mortgages they cant pay. I hope these guys all go bankrupt. Its horrible and bad business.

These companies then collapse, which in turn causes the hedge funds and others to collapse. This causes the capital markets to really tighten up because so many of them are tied into hedge funds. I think the banks are trying to make capital more available for companies in terms of mergers, acquisitions, spending, etc. This should stop/limit the bleeding across the entire market.

I have been slaughtered lately and it still boggles my mind how a financial sector issue can absolutely crush resource companies.

[Flames in 07]

Originally Posted by FLAMESRULE

From what I know its the entire sub-prime mortgage lenders that are hurting in a big way. They are giving mortgages (and very large ones) to people that can't afford A mortgage let alone a big one for a short period, lower interest rate (hence the sub-prime). Eg. Prime is 6%, they get the first 3 years at 3% and then the last 27 years at 7%. When the banks come calling for the higher mortgages they cant pay. I hope these guys all go bankrupt. Its horrible and bad business.

These companies then collapse, which in turn causes the hedge funds and others to collapse. This causes the capital markets to really tighten up because so many of them are tied into hedge funds. I think the banks are trying to make capital more available for companies in terms of mergers, acquisitions, spending, etc. This should stop/limit the bleeding across the entire market.

I have been slaughtered lately and it still boggles my mind how a financial sector issue can absolutely crush resource companies.

Also, with the large mortgages, a slight turn in the economy and/or house value and folks realize that they owe more than what their house is worth as they borrowed 100% of a very high price.

So they walk away from their house. Forclosures are up 4X from this time 24 months ago, and if millions of americans are leveraged up like this it is like building a house from a deck of cards, a few negative economic indicators can bring the house down.

Now I don't really know how this will translate to Canada other than some selling pressure on equity markets. Overall I think Cgy has seen the majority of its appreciation in the burbs. This city is grown out and away from DT as much as it can without Cgy building some kind of tech center or something say south of Fish Creek Park.

If you are looking at investing, try thinking through how the city will look 10 years from now. For example I bought couple condos in developments just south of 22X because there will be a hospital going into Cranston and a tech center is being contemplated. The area north of Stampede park should be cool as well, UofC is planning a satillite facility out there and there will be quite a few condo developments with retail on the bottom.

[mykalberta]

I have a question about this. I have read/watch as many GnM BNN, NP articles as I can get and I still am not getting it.

In Canada, it appers that some company called Coventree is responsible for most of the problems up here. From what I can tell is that they own debt related to subprime mortgages (likely mostly in the US). And the problems started when Deutche Banc would refinaince their 400+mil ion debt notes.

So here is what I dont get. Why are we giving bailouts to Coventree. From what I can tell they made risky investments and now banks wont cover there a$$es. So why not let them declare bankruptcy. The subprime mortgages they own would be sold off for fractions of the dollars and Coventree would go belly up.

Yes that affects Coventree but so what, Coventree made their bed and now they should be forced to lie in it. This solution wouldnt work in the US as the problem affects them directly with more of an impact by why should my RRSP funds take a hit so Coventree can survive? Or is it that Coventree is like Fannie Mae or whatever its called in the US and Canada couldnt survive without it?

MYK

[Slava]

This is a complex situation to review in a thread, but basically to answer some of your questions from the initial post:

1. Interest rates are predicted to drop now rather than go up as was initially projected by many analysts. The drop in rates would be to spur the economy again.

2. I would think that a recession is unlikely; specifically for Alberta. Ontario and Quebec would get hit harder and faster. Canada's economy is strong enough though that it is quite possible to go through this without much harm.

3. This is a great time to invest. There are a lot of holdings which are dropping right now for no good reason. I saw one analyst say that "they are throwing the baby out with the bathwater" and he couldn't be more right. Over the past few weeks earnings were very high for a number of large corporations here in Canada. When earnings are high, the stock prices will follow.

4. If you are properly diversified right now, the best thing to do is wait it out or put more money in. Things will recover, and even in the US the economy is fundamentally strong.

[albertGQ]

Originally Posted by Slava

This is a complex situation to review in a thread, but basically to answer some of your questions from the initial post:

1. Interest rates are predicted to drop now rather than go up as was initially projected by many analysts. The drop in rates would be to spur the economy again.

2. I would think that a recession is unlikely; specifically for Alberta. Ontario and Quebec would get hit harder and faster. Canada's economy is strong enough though that it is quite possible to go through this without much harm.

3. This is a great time to invest. There are a lot of holdings which are dropping right now for no good reason. I saw one analyst say that "they are throwing the baby out with the bathwater" and he couldn't be more right. Over the past few weeks earnings were very high for a number of large corporations here in Canada. When earnings are high, the stock prices will follow.

4. If you are properly diversified right now, the best thing to do is wait it out or put more money in. Things will recover, and even in the US the economy is fundamentally strong.

1. Really? First I heard of this. So, the real estate market will be hot again???

3. You think so hey? I was going to invest more into MFs at the end of the year, but maybe I'll do this sooner rather then later

[the_only_turek_fan]

TSX is almost down 600 points right now.

[FLAMESRULE]

This is INSANE!!! I'm getting ready to jump off my building!! I am down 15% today on average.

[Bertuzzied]

Ugh! I'm down 150% in the past 3 weeks. Anyone want to buy a condo??

[Dion]

Originally Posted by FLAMESRULE

This is INSANE!!! I'm getting ready to jump off my building!! I am down 15% today on average.

If you look at this short term, then yes. I've lost money too but i'm not worried.

Markets WILL go up again. The trick is not to panic and bail out. In fact now is the time to buy more stocks

[Cowboy89]

Originally Posted by Slava

This is a complex situation to review in a thread, but basically to answer some of your questions from the initial post:

1. Interest rates are predicted to drop now rather than go up as was initially projected by many analysts. The drop in rates would be to spur the economy again.

2. I would think that a recession is unlikely; specifically for Alberta. Ontario and Quebec would get hit harder and faster. Canada's economy is strong enough though that it is quite possible to go through this without much harm.

3. This is a great time to invest. There are a lot of holdings which are dropping right now for no good reason. I saw one analyst say that "they are throwing the baby out with the bathwater" and he couldn't be more right. Over the past few weeks earnings were very high for a number of large corporations here in Canada. When earnings are high, the stock prices will follow.

4. If you are properly diversified right now, the best thing to do is wait it out or put more money in. Things will recover, and even in the US the economy is fundamentally strong.

Very good point. There's plenty of stocks that have been hammered just so some people can clear out some of their more liquid assets to pay off other positions. But yet on a NAV basis these stocks still look very attractive, especially at the prices we're seeing.

[Bertuzzied]

Originally Posted by Dion

If you look at this short term, then yes. I've lost money too but i'm not worried.

Markets WILL go up again. The trick is not to panic and bail out. In fact now is the time to buy more stocks

Yeah no kidding. It's like boxing day today. Too bad it's going to take another week for my home equity financing to come through.

[Bobblehead]

Sub-Prime Mortages are loans given to people with bad credit. These people can't normally get the best rates, but companies came along to offer these "high risk" people credit. Often it was for a low fixed rate for a couple years, then a higher variable rate after that.

People would make minimum payments, and when it came time to renegotiate they would have better credit history and some equity built up so they could get better rates.

But then the interest rates dged up and the housing market flattened (or even declined a bit). Suddenly people weren't able to make their payments, their homes had no equity (or negative equity) and they started to default. Now the company that offered them the mortgage now had a house that wasn't worth as much as they had intially loaned, so they loat money. Then it happened again. and again. Until finally a bunch of these companies went out of business.

But on the back end, these companies had re-packaged a bunch of this debt and sold it as bonds. Now these companies are gone and the bonds are worthless.

That has scared the markets. They are now examining all the money they have loaned out, and not wanting to loan out any more because a) they are going over any investment very critically and b) they already have a bunch of money loaned out at a much higher risk than they expected, so they need to cover their asses.

As a result, companies that need money are having a much tougher time getting it because the places they normally get it are already worried about the risk they are carrying.

The money "added" to the banking system is really just these banks allowing other institutions a little leeway, by allowing them to do things like synchronize payments due to coincide with when some of these payments they receive are coming due. It is like saying you don't need to pay your bills until payday, instead of mid-week.

The issue is these sub-prime loans are going to continue to come due and perhaps default for a few more years. And this whole situation hasn't happened exactly like this ever before, so economists aren't sure if this will put the economy into a recession, or if things will self correct (because housing prices fall, it makes it more affordable, more people are able to buy a house, and voila - things balance out).

[albertGQ]

So my question to you all is should I buy real estate now or should I buy stocks, mutual funds, etc??

What would be a better investment vehicle??

[Bob]

Wikipedia has some good articles on this whole sub-prime mess. I couldn't believe my eyes when I saw the TSX Venture Exchange down almost 15% earlier today. 15% in one day!? I really hope that this doesn't spiral totally out of control.

[nmhen]

Some thoughts from an American's perspective:

1. The Sub-prime issue is not nearly as big, nor as far-reaching as the media etc is making it out to be. Consider the following:

A. There are about 44 million mortgages in the US
B. Less than 14% of which are sub-prime mortgages (SPM) (roughly 6.16 million)
C. About 13% of SPM are late on payments (800k)
D. So 800,000 out of 44,000,000 (2%) of the total number of mortgages in the US are currently late. The number of mortgages actually in foreclosure is around 250k, or about 0.6% of the total number of mortages.
E. For 2006, the percentage of mortgages in foreclosure was about 0.5%.
F. SPMs, by definition, are smaller amounts than prime mortgages.
G. The average SPM is $200k.
H. The amount of foreclosed value therefore is somewhere around $7B.
I. The total household net worth in the US is somewhere around $53T.
J. Ergo sum: While the SPM issue plays well in the news, it is nowhere near the harbinger of the four horsemen that you would be lead to believe.
K. Unfortunately, perception is often reality, and so we have the current upheaval in the US markets.

However, the key here (as has been mentioned before in this thread) is that THIS IS A HUGE BUYING OPPORTUNITY pretty much across the spectrum of US investment vehicles. If nothing else, for the love of God, do NOT sell right now. I don't know when you'll recoup any lost principle from this years volatility. But I do know that once you lock in the loss it becomes MUCH, MUCH harder to get it back. Adding new money - even to your current investments - and lowering your cost basis makes much more sense than just bailing right now.

[Slava]

Originally Posted by albertGQ

So my question to you all is should I buy real estate now or should I buy stocks, mutual funds, etc??

What would be a better investment vehicle??

I have a bias here; but I think Mutual Funds. That way you have someone pulling the trigger on the good bargains as they arise that day. The good managers are buying now, no question about it!

[Bob]

Originally Posted by nmhen

Some thoughts from an American's perspective:

1. The Sub-prime issue is not nearly as big, nor as far-reaching as the media etc is making it out to be. Consider the following:

A. There are about 44 million mortgages in the US
B. Less than 14% of which are sub-prime mortgages (SPM) (roughly 1.96 million)
C. About 13% of SPM are late on payments (250k)
D. So 250,000 out of 44,000,000 (0.6

That's somewhat reassuring, but those 0.6% have already caused the downfall of many lending companies, and the biggest one in America, Countrywide Financial, may end up going bankrupt. Still, I hope you're right.

[Slava]

While its true that the subprime mortgages make up a small amount of the marketplace, the problem is that these mortgages were sold to a huge number of firms around the world. It was expected that rising house prices would cover any losses as a result of this practice....but then the housing market dropped.

In Canada we are much more stringent in our lending practices though, and we should be better protected.