A Fab Way To Start

What A Fabulous Way To Start The New Year!

By Capital Multiplier | 21 January 2008

We predicted the U.S. housing bubble will burst. in 2005 when just about everybody on Wall Street and the mainstream media were predicting continued growth and blue skies ahead for the housing market. Also, ever since our June 30, 2007 market commentary, a full six-and-half months ago(!), we have been warning the U.S. mortgage debt crisis will lead to Hundreds of Billions of Dollars in losses for global financial institutions..

Similarly, in our June 9, 2007 commentary we described the U.K. housing market as one of the biggest housing bubbles of all time and predicted the start of a decline in British home prices (again at a time when hardly anyone on Wall Street was even thinking about the U.K. housing market)! Clearly, we have now made at least three of the most spectacularly successful market calls of this decade as seen from the following reports:

1) Citigroup Inc. posted its biggest loss ever after suffering a massive $18 Billion write down in the value of its mortgage portfolio! The bank cut it's dividend by 41% and announced it will be laying off 4,200 employees immediately and more later this year,

2) Merrill Lynch & Co. announced its biggest loss ever, after suffering almost $15 Billion in subprime mortgage-related write-downs,

3) JPMorgan Chase & Co. announced a 34% decline in quarterly profit after making a $2.5 Billion provision for loan losses on its portfolio of home equity and other consumer loans,

4) Wells Fargo & Co. announced a 38% decline in quarterly profit after making a $1.4 Billion provision for losses on its portfolio of home equity loans,

5) Bond insurer, Ambac announced that it will cut its dividend by 66% and book a $5.4 Billion loss on its credit derivatives portfolio. Ambac shares have plunged 95% from their 2007 high, and look set to fall further as Fitch Ratings cut Ambac's financial strength rating from AAA to AA on Friday. This is likely to have major negative ramifications for the municipal bonds market as the value of bonds insured by Ambac are likely to slide lower in the near future and that could result in at least another $100 Billion in losses for global financial institutions!,

6) Bank of New York Mellon announced that its quarterly profit fell 68% as it suffered almost $300 million in losses related to its portfolio of collateralized debt obligations (CDOs) and an investment conduit that it sponsors,

7) German commercial property lender Hypo Real Estate announced its annual profit fell 28% after it had to take a $440 million charge due to losses on it's of portfolio of CDOs,

8) Mortgage lender Indymac Bancorp announced it will be laying off another 2,400 employees as the housing downturn continues to hurt its business,

9) Similarly, Bank of America, Lehman Brothers and UBS announced plans to cut thousands of jobs in investment banking, mortgage lending and related areas.

We believe total job cuts at just the largest firms could be well over tens of thousands this year,

10) According to the latest report from real estate information services provider DataQuick Information Systems, home sales plunged 41.4% in California last month compared to the same period last year and the median price of a home in the Golden State has now plunged 17% from its peak levels!

11) According to the latest report from the Commerce Department, new home construction fell almost 25% last year registering the biggest annual decline in construction activity in about 27 years!, and

12) Sailfish Capital Partners' fixed-income hedge fund which managed $1.9 Billion six months ago, has reportedly lost about half its assets after its investment losses led to massive client redemptions amidst the crisis in the mortgage debt market. We believe the global hedge fund industry is likely to see some major blow ups this year, because in our view there are still plenty of hedge funds out there that are likely saddled with huge losses resulting from their exposure to various types of MBS, CDS, CDO, ABS and other "toxic" securities. Many of those securities have already plunged in value in a very illiquid marketplace but the securities are likely still being valued on the hedge funds' books on a "mark-to-myth" basis!

Global markets have just begun reflecting these major economic negatives by plunging sharply in recent weeks. Indeed the S&P 500® is down 9.75% year-to-date! Given that the S&P 500® is now down 15% from its 2007 high and considering the $150 Billion economic stimulus plan proposed by the Bush administration, many on Wall Street are calling for a "market bottom" here. For reasons outlined in recent commentaries, however, we believe any near-term market rally is unlikely to last and we expect to see another plunge in global stock markets soon.

Our Equities Model Portfolio remains 100% Short the small-cap sector and our holding in SHPIX is up 13.6% so far this year. So we are already beating the market by 23% this year! What a FABULOUS way to start the New Year!

Normxxx    
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