Deserves Got Nothing to do With It
Research for Online Investors

by John Dalt

6/18/2010

“Deserves got nothing to do with it” according to Clint Eastwood in the movie, "The Unforgiven."  Gene Hackman had just exclaimed that he was building a house, and he didn’t deserve to be killed. The house was made available for a new owner, courtesy of Eastwood’s character, William Munny.

Who among us has not been caught in a bad trade or investment, woke up in the middle of the night, and thought “I don’t deserve this!”   The same advice William Munny gave Little Bill in the movie applies to all of us.

The housing market in the U.S. has taught a huge swath of Americans that owning a home is not a right they deserve, but a financial commitment they may not be able afford. The “housing bubble” that burst in 2008 destroyed much wealth and pushed many homeowners into bankruptcy. Low interest rates and loose lending standards allowed the purchase of homes and rental properties with zero down payments and no verification of income to pay the mortgage.

In our personal lives, we try to learn from our mistakes.  Sometimes it takes more than one slap in the face, but we all remember lessons eventually.   Where is the housing market today?

The housing bubble is the ‘gift that keeps giving.’  In March, Meredith Whitney predicted “The housing market will surely double dip.”   Ms. Whitney recently put a sell on Goldman Sachs (GS).  GS lost over 10% in the next few weeks, so people pay attention to what she says.

Permanent employment is not improving and downward pressure on wages of those working seems to be creating the scenario to make her prediction true.  Municipalities and states are under budget pressure.  Faced with cutting spending or raising taxes, raising taxes always seems to get the nod.

Banks are working through their backlog of foreclosed properties that have built up over the past 20 months.  RealtyTrac’s CEO, James Saccacio said, “Defaults and scheduled auctions combined increased by 28 percent from 2007 to 2008 and another 32 percent from 2008 to 2009 - creating a build-up of delayed bank repossessions. Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed.”

Default notices, scheduled auctions and bank repossessions for May were for 322,920 properties, just above the totals for May of 2009.  While default notices and auctions were down, bank repos (REOs) jumped 44% over May 2009.   All 50 states showed increased activity.

Nationwide 1 in 400 homes received a foreclosure filing in May.  In Nevada 1 in 79 homes received a foreclosure filing for the highest rate in the nation.  Arizona came in second worst with 1 out of 169 properties receiving a notice.  The top five foreclosure states were rounded out by Florida (1 out of 174), California (1 out of 186) and Michigan (1 out of 233).

The next five states with high foreclosure rates are; Georgia, Idaho, Illinois, Utah and Maryland.  These 10 worst states account for 70% of the foreclosure totals in the United States.

As foreclosed properties are forced onto the market in auctions, adjacent property values decline.  Declining property values means lower property tax receipts, resulting in higher mill levies just to maintain local government and school budgets.

The $8,000 home buyer’s tax credit expired on April 30. Buyers are allowed until September 30 to close on properties that were under contract at the end of April.

Our trading idea for the day is the Proshares Ultra Short Real Estate ETF (SRS).  SRS seeks to double twice the inverse of the Dow Jones Real Estate Index (^DJUSRE).  It is bouncing off its lows and may see a sizable move higher if we get confirming evidence of a real estate slowdown, or in the case of a general market pullback.

Be cautious with SRS, it is an Ultra ETF, seeking to double the DAILY movement of the index.  Ultra etfs are not long term investment vehicles due to their inherent “tracking error.”  For more information on this, please reference our article in Investor Resources titled Ultra ETFs.

The New York Times has an article that explores the Obama doctrine of intervention, or taking over private business titled “Obama Twists Arms at BP, Setting off a Debate on Tactics.” This article addresses the political calculations by the White House as our article yesterday questioned the abilities of BP’s management.

To the Mailbox:
Your attitude is off the wall! I guess for you are for profits above all; screw the rest of the world  -subscriber J.S.

John’s reply:  I do not own BP shares, I do not have a dog in the fight.  If I was retired and had much of my assets in a company that recklessly endangered the value of the company, I would be mad.  If they then compounded the reckless action by giving away assets of the company beyond what was required by law, I would be mad.  I guess you are arguing that President Bush should have bankrupted the Airlines that had terrorist’s hijack their planes.  Remember, the airlines were in charge of security prior to 911, and liable.  I guess he could have taken them over to protect the union jobs.  It is not profits I am worried about; it is the rule of law and the capitalist system.   If we endorse an action by government that destroys free enterprise today, what will be left tomorrow?   I have kids.  I would wish them a better future.

Thank you so much for all the information about the BP oil spill.  I knew that the company had taken some short cuts but didn't know the details.---subscriber G.C.

WOW, you are one pessimistic, crabby old man.  Apparently you don't believe that BP has an ethical obligation to compensate the "SMALL" people of the gulf region that have been damaged by BP's failure to observe safe practices .---paid up subscriber D.W.

John’s reply:  Nothing in my article said BP should not pay for everything.  I do not believe they should have been subjected and pressured into a shakedown at the White House.  This is wrong.  The government is not their partner.  It is an adversarial relationship.  The government overstepped their legal authority.  BP should have told Obama to go to hell.  That was the point of my article.  If the government does not like BP's responses or actions they should go to court.  BP buckled, and not in the interest of their shareholders.  If we condone it, where does it stop?

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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