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Mark's Market Blog

11-6-09: The Bubble Returns to Expansion

By Mark Lawrence

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The broad market recovered a bit this week, however financials remained depressed. Concern is starting to grow over commercial real estate loans, and the FDIC has closed about 8 banks in the last two weeks, bringing the year's total to 120. Next year will likely be harder on banks. Banks closures have cost the FDIC $27B so far this year, and that total is expected to reach $100B by the time this crisis has passed.

S&P 500 March 9 2009 to November 6 2009

Two weeks ago, "Raj" Rajaratnam was arrested for insider trading and about a dozen executives at various companies were arrested with him for insider trading. In a first, the FBI tapped phones to track this down. Raj's $7B hedge fund, Galleon, was liquidated last week which accounts for much of the drop in the Dow.

Unemployment surged to 10.2% by government standards, which is more like 17% by more normal counting. We need to create about 16 million new jobs to get unemployment down to a more normal 4% or so. Many question from where these 16 million jobs will come.

Fannie Mae, the largest provider of funding for U.S. home loans, said on Thursday bad mortgages and a federal foreclosure prevention program left it with a $18.9 billion loss in the third quarter, forcing it to tap the Treasury again to plug a hole in its net worth. This brings its total in bailouts this year to over $60 billion. Officials said the fourth quarter and next year are projected to be worse. Analysts said it will likely be 2020 before the government will be able to privatize Fannie Mae again.

The World Bank warned Tuesday that the sudden reappearance of billions of dollars in investment capital in East Asia is "raising concerns about asset price bubbles" in equity markets across Asia and in real estate in China, Hong Kong, Singapore and Vietnam. Also Tuesday, the International Monetary Fund cited "a risk" that surging Hong Kong asset prices are being driven by a flood of capital "divorced from fundamental forces of supply and demand." "This is the beginning of another big and excessive run- up in asset prices," said Simon Johnson, a former IMF chief economist.

Prices are surging across a host of markets. Gold, up about 44% this year, soared to a record high Tuesday. Copper is up about 50% in the past year. In the U.S., risky assets are rising rapidly in price: The risk spreads, or interest-rate premiums, on low- rated junk bonds have narrowed to about where they were in February 2008, before Bear Stearns and Lehman Brothers fell. In Hong Kong, high-end real-estate prices are soaring. A luxury flat is expected to sell for US$55.6 million, or $9,200 a square foot, said developer Henderson Land Development Co. Elsewhere, a bidder at a city-run auction to operate food stands at February's Lunar New Year celebration recently paid a record US$63,225 for the right to occupy a 400-square-foot stall to sell fish balls and other snacks.

Australian real-estate markets also have heated up. After a Melbourne property-research firm recently predicted that average home prices will double over the next 12 years, a news report in Australia's Herald Sun said: "The staggering prediction shows the importance of buying a home as soon as you can afford it because the longer buyers delay, the more chance there is that their dream will slip out of their reach." The Australian dollar has jumped about 35% over the past 12 months as investors borrow in U.S. dollars to purchase Australian currency. The practice is propelling stock and bond markets faster than in the U.S. and Europe. Currency traders are betting that the Australian central bank, which raised interest rates by 0.25% on Tuesday, the second rise in two months, will continue tightening.

Commercial real estate prices have plunged 41% from the peak in 2007, according to Moody's/REAL Commercial Property Price Index - worse than the 30.5% fall in the housing market from its 2006 apex. "We've never seen this extreme a correction as far back as the data go, which is the late 1960s," says Neal Elkin, president of Real Estate Analytics, the research firm that created the index. Adds billionaire investor Wilbur Ross: "Commercial real estate has gone from being highly liquid at sky-high prices to being extremely illiquid at distressed prices."

Obama has declared a national emergency for the swine flu. What can you do? We pick up flu viruses through our throats and noses, and it takes the virus about 3 days to get really established. If you attack the virus during that time, you can stop the infection. Here's a simple recommendation: gargle a couple times a day with mouthwash or salt water, and drink a lot of hot fluids like coffee or tea. This will either kill the virus directly, or wash it down into your stomach where the acids will take them down fast. Or I suppose you can try to get one of the CDC's mythical swine flu shots and pretend that they know what they're doing.

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