And They Said it Wouldn't Spread...

Five articles of subprime spread.

The first: Subprime May Be Hitting Credit Cards, Too:

"Fallout from the mortgage mess and lower home prices may have started to creep into the credit card arena, judging from July payments and some initial moves by issuers to tighten the screws on cardholders."

The second: Mortgage Woes to Hurt Auto Sales:

"The ongoing slump in new-home sales and turmoil in the subprime mortgage industry will continue to hurt U.S. sales of light vehicles for the rest of the year and into 2008, according to an automotive market forecasting firm."

The third: Asian currencies led by rupiah dip as subprime losses spread:

"Asian currencies dropped yesterday on speculation global funds are exiting emerging-market assets as losses linked to US subprime mortgages spread."

The fourth: Layoffs Grow in Mortgage Industry:

"Brian Jurvis of Hazel Park wasn't surprised when he was laid off late last week from Countrywide Financial Corp.'s subprime lending division."

"Jurvis joined more than 25,000 workers nationwide who have lost jobs in the financial services industry since the beginning of the month -- more than half of them eliminated since Friday."

The fifth: Subprime pain spreads into office market:

"As business volume plunges for real estate firms hurt by the housing slump, they and companies that service them are abandoning office space and leaving landlords and surrounding communities suffering".

So far subprime problems have affected five other sectors or markets: consumer credit, auto industry, Asian markets, labor market, and commercial real estate.

Where else will this colossal problem rear its ugly head? Time will tell, but one thing is certain: the bubble is yet to burst. From Finance Markets.co.uk:

"In a recent CNN interview, Nouriel Roubini pointed out that current Federal Reserve estimates of the problem may be extraordinarily undervalued at $100 billion."

"Instead, he points out that minority equity is bundled with debt, which is then leveraged against further higher debts, which can in themselves then be set up as collateral against even yet higher debts."

"Any loss of value on the original equity value - ie, sub prime mortgages - leaves only debt sustaining debt - a house of cards that we are only beginning to see unravel."

Holy Deadly Debt, Batman! Does that mean we're in trouble??

Graduate School is a Bitch

I've been super busy with school the last ten days. I guess that's what I get for taking a mini-vacation. One more week and I'm done for the summer. Don't expect any new posts until then. I'd like to take this opportunity to drop the Brazilian ETF I trumpeted a few weeks ago, EWZ. The fund has lost 17 percent since my recommendation. Enough is enough. It's my belief that the problems we're seeing in the US economy has been spreading to the world economy; perhaps no country is safe. EWZ closed trading today at $56.62. I recommended it at $68.22.

I'll see you in a week or ten days. Be weary of the market!

Out of Internet Range

I've been out of internet range since yesterday. I have but one fleeting moment here, since I'm back in town for an hour. The market has been acting as irrational as ever. Up 100 points, down 200, it's been hectic. I will be back in range on Sunday to write all about the craziness and to recap July.

Enjoy the Weekend!

The Beazer Homes Rumor

There were some rumors flying around today about the possibility that Beazer Homes was about to file bankruptcy, citing claims that they've run out of cash and credit. Of course the company denied theses claims, but I think the rumors might hold more water than the homebuilder would like you to believe. If you'll recall, the company fired their Chief Accounting Officer last month for attempting to destroy records. If you've got an employee attempting to destroy records, you have got a serious problem. That why I recommended selling or short selling Beazer Homes last June 25th. But some investors took that news and interpreted it as a buy. You don't believe me? If you look at this chart of the stock's price over the last three months, you can see that there are are upticks on June 27th, July 6th and July 13th. It should be noted that the last date listed was Friday the 13th. I guess that's the way those investors who bought will interpret it as. Since then, Beazer has fallen hard. And why shouldn't they? There has been some serious turmoil in the company, possible attempts to defraud investors. It brings me back to the question: why was their Chief Accounting Officer attempting to destroy records? I made over fifty percent on my short sell, did you?

And then there's the story over at CNBC: "Options Report: Speculators Burned Chasing Beazer Rumors"

As Beazer shares tumbled to a low of $8.10 from an early trading day high of $14.01, the out of the money August 10 puts rose 30-fold from early trades of 10-cents to an intraday high of over $3 as implied volatility surged briefly to the 300% level. Once the rumors were refuted, and the stock rebounded, the puts quickly lost more than half their value from the spike-high of the day.

Any savvy investor would have dumped Beazer as soon as news emerged that they were dumping their Chief Accountant. Any time a company dumps a high level executive of finance or accounting for impropriety, you know the company has trouble. I realize that there are some risks involved with selling a company short, but when the news is right, it eliminates that inherent risk of infinite loss. So for all those investors out there who were "burned" chasing rumors, you should have chased the facts when they emerged one month ago.

Bear Stearns Has More Problems

In a shocking(?) turn of events, a third hedge fund managed by Bear Stearns is in trouble. Yesterday, they halted investors from bailing out:

"Bear Stearns Cos., manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to demand their money back."

Today, more Bear Stearns' hedge funds filed for bankruptcy:

"Two Bear Stearns Cos. hedge funds heavily exposed to the flagging mortgage industry filed for bankruptcy protection late Tuesday, two weeks after the company told investors one was essentially worthless and the other had lost more than 90 percent of its value."

"The funds were squeezed after Bear Stearns made wrong-way bets on the home mortgage market and was caught as loans to risky investors began to default."

"Bear Stearns is the nation's fifth-largest investment bank and specializes in mortgage-backed securities."

Is it only a matter of time before the company goes belly up? The more news that comes out, the more it looks that way. Meanwhile, investors have deemed other investment bank assets "junk":

"On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk."

"The highest level of defaults in 10 years on subprime mortgages and a $33 billion pileup of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms. Concerns about credit quality may get worse because banks promised to provide $300 billion in debt for leveraged buyouts announced this year."

I wonder what James Altucher thinks about all this? I bet he'll say that Goldman Sachs is a screaming buy.