Danger Will Robinson…. Warning..Warning….Stay off the Road!
Recently, after I reviewed and wrote about the recent passage of the Housing Bill, I began to look at it more closely. I spoke with a few colleagues to try to understand what seemed to me to be a flawed plan. They agreed that something was afoul. Either the plan was rushed in order to get something on the books or some concessions were made to provide a benefit to a few of the financial firms that have been getting clobbered.
The truth is that I am disgusted with this plan as it has become a game where the winners have been predetermined – and we all know that they are not going to include you or me. Just the other day, in my quest to provide an easy and adequate answer to what is going on I tried to explain my thoughts to a client using metaphors.
I explained that what has been going on in the financial sector is can be somewhat compared to a time when you were driving down a straight road. Foot after foot, mile after mile, you drive flawlessly. When you are directed to accelerate, you speed up. When at a stop sign, you stop. Yield, turn, accelerate, stop, put your blinker on, pass a car, look left and right and continue on your way. All is fine with your driving. Then, you realize that the road you are on doesn’t actually exist. Panic sets in and then you see that it is there again, like it never left. So, you continue on your way with a scant remembrance of the bizarre occurrence.
When you pull into town and explain what happened, the Mayor tells you that they know that this is something that occurs, but they always fix it immediately to make sure no one gets hurt. So, you drive on. A few miles later the same thing happens. This time though, it last longer and is much scarier. Again and again, the same sequence of events unfolds and each time the road disappears, you get a Mayoral promise and so on…
The one day, you realize that the road is actually being pulled from under you by the Mayor himself along with help from the town council. Then, you find out that they have been aware of the occurrence from the very beginning and have been covering it up to try to protect you.
Think of it as the proverbial rug being pulled out from under the foundation of our financial system.
Metaphor aside, the horrible fact is that, for the time being, the road is not to be trusted. In real life, the road is the market and by now you know the rest of the players.
There are several disturbing items with the Housing Bill. First is the fact that according to reports, the White House had made no plans to have an official signing ceremony for the bill, though most major pieces of legislation typically receive such treatment. It appears that that they are not impressed with it either.
Here are a few takeaways….
• Voluntary for lenders to allow for write off/down of debt owed in order to refinance for debt holder
• Uncle Sam is partner in appreciation of property once refinanced
• $300 billion new money to FHA to help out about 400,000 problem mortgages.
• Increase the federal debt limit to $10.6 trillion.
This increased debt is accomplished by adding significant debt to the already massive debt we have as a country. (trying for record use of the word debt) In fact, the Bill provides for another $900 billion, which is on top of the $9.8 trillion that it was raised to in March, when the federal debt ceiling was increased by $850 billion through an emergency Fed action.
So, what do you do as an investor when this is the situation you are faced with? Simple: Stay off the road! No one says that you have to invest. There is no shame in following your instinct. Of course there may be a shortcut that could have you avoid the dangers, but in this situation I would have to assume that road is full of potholes and traffic jams. It just isn’t worth it.
I fully realize that this is “no fun”, but trust me, losing money is less fun. So, for now, I am proceeding with extreme caution with any new investments for portfolios. Now is the time to be skeptical.
So, I am laying the groundwork and watching for an entry points with the 50+ names that have come though the Quanta or screening process we use for client portfolios. Of those, only 10 have been qualified by the “Funda Discipline” and now we wait until we have good timing signals.