The Rude Awakening
Laguna Beach, California
Wednesday, August 22, 2007 ------------------------- - How to quickly wipe-out half your wealth…and how to
protect it all, - Setting trends in music, fashion and foreclosures,
- Remember the fine print, a healthy aversion to junk
and more…
------------------------- Eric Fry, reporting from Laguna Beach, California… California is a trend-setter. Always has been. Without San Francisco's "Summer of Love" in 1967, for example, there would have been no Woodstock in 1969. The era of free love and psychedelic rock seemed to billow from the streets of Haight-Ashbury like smoke from a hookah…and float across the entire nation like…well…stardust. California also nurtured the trend-setting musical influences of artists like the Doors, the Jefferson Airplane, the Eagles and, of course, the Beach Boys. But California's "first-mover" legacy extends beyond free love and rock and roll. (Not too far beyond, mind you, but a little ways beyond). California led the national embrace of feel-good trends like meditation, health food, yoga, sushi…and second marriages. The Golden State has also led the nation in fantasy-creation. It is the land of Hollywood, Disneyland and Venice Beach. It is also the land of a thousand lesser flights of fancy…like growing oranges, despite an obvious lack of rainfall…or securing a home loan, despite an obvious lack of income. In California, anything is possible…or, at least, it used to be. At the height of the housing bubble in 2005, the underwriting of "No doc" subprime home loans relied upon imaginations and fantasies that would have chagrined Walt Disney. But as this Fantasyland morphed into Tomorrowland, California found itself at the vanguard of one more trend:
Foreclosures. California foreclosure filings totaled 39,013 in July - nearly triple the number of foreclosures recorded in July of 2006. Thus, the Golden State led the nation in foreclosures for the seventh straight month. Despite this trend-setting feat, however, the California economy continues to muddle along. Here in Laguna Beach, for example, signs of economic distress seem utterly invisible. Exotic cars still shimmer along Pacific Coast Highway. Swarms of surgically modified females still pack the bar at Javier's Cantina. Pricey restaurants up and down the coast still quote hour-long waits for a table. And Laguna's legendary gay watering hole, the Boom Boom Room, still booms until late into the evening. Absolutely no sign of economic distress or anguish invades Laguna's light-hearted atmosphere…at least not yet. But your California editor has observed that home prices are softening, as well as rental rates. He has observed a few specific instances in which home rental rates have dropped 10% to 15% below what they were last summer. The $4,000 rentals of 2006 are the $3,400 rentals of 2007…and they aren't renting! We do not know what these various anecdotes portend for the Laguna economy, but we are less persuaded by the town's crowded restaurants than by its empty real estate offices. Furthermore, the nation's unfolding credit crisis suggests that the real estate offices will remain empty for some time to come. More importantly, the nation's unfolding credit crisis suggests that the rules of the investment game have changed. Money market funds, for example, are not as safe as they used to be. In other words, cash is no longer cash in the traditional sense. It is "cash and cash by-products," which means that your savings might not be as safe as you assume them to be. The Survival Report's Mike Shedlock explains below… --- Mike "Mish" Shedlock's Tsunami Housing Report --- WARNING! Brace yourself for the most shocking money implosion of the last 76 years, as a "Second Wave of Housing Hurt" crashes down… Thought you were "done" with the property bust? Think again -- then get ready as a whole "second wave" of falling prices sparks the worst property-led recession of the last 76 years! The following triple-edged "housing hedge" strategy could shelter both you and your money, IF you let me rush it to you FREE as soon as possible…Read The Full Report Here ------------------------------------------------------ How Safe is Safe?
By Mike "Mish" Shedlock Consider the plight of Raymond Przybilinski: "He socked away $521,000 from a lifetime of driving trucks, working overtime when he could, and playing the piano or accordion late into the evenings at weddings, hotel bars, and social clubs… "The money was destined for his five children. But that was before more than half of the family nest egg disappeared on Feb. 2 as state banking regulators seized Metropolitan Savings Bank in Lawrenceville, citing 'unsafe and unsound' operations. When Mr. Przybilinski tried to take his money out, the man in charge of Metropolitan Savings' assets informed him that there was only $200,000 left to withdraw -- the amount protected by the federal government." Here are some school-of-hard-knocks lessons from Raymond Przybilinski's misfortune: 1) If a bank is offering above market rate interest on CDs and deposits, there is a reason behind it. That reason is risk. And with excessive risk comes eventual disaster.
2) With credit spreads widening, margin calls being issued, and absurd lending to build condos in Florida and other places smack in the face of record inventories, there are going to be more bank failures like this.
3) Know and understand the FDIC limits, or your life savings can be wiped out.
4) If you have money in a bank in excess of the FDIC limits, do something about it now, while you can.The above material was written on Aug. 8…Flash forward to Tuesday, Aug. 14, 2007: The USA Today headline reads "Sentinel Freezes Assets of $1.5 Billion Fund." What the headline does not say is that Sentinel is a money market fund. On Tuesday, Sentinel Management Group froze assets in a $1.5 billion fund, saying too many investors are trying to withdraw their money. "We have never experienced a situation quite like this one," Sentinel Management said. "Liquidity has dried up all over the Street." If you're looking for the source of the problem, here it is: "We have never experienced a situation quite like this one…Liquidity has dried up all over the Street." What happened is that Sentinel thought that just because it has not seen something yet, it could not happen. This is, in essence, the same thing that happened to the models at Moody's, Fitch, and the S&P, and various quant models. On Tuesday, Sentinel asked the U.S. Commodity Futures Trading Commission for permissions to halt redemptions. The request was denied. Check out Sentinel's letter to clients:
"Dear Client: "As you undoubtedly know, the credit markets, along with most other markets, have experienced a liquidity crisis in the past several weeks. Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade. We've all read the stories about one hedge fund or another suffering losses related to subprime exposure and closing down or being rescued. This fear, while warranted in some cases, has spilled over into the rest of the credit market, and liquidity has dried up all over the Street… "This liquidity crisis has caused bids to disappear from the market and makes it virtually impossible to properly price securities or to trade them. High-grade securities are trading like junk bonds as panicked investors dump names like General Electric at Tyco-like prices. "We had previously thought that the market would return to some semblance of order and that our clients would not join in the panic. Unfortunately, this has not been the case…"There were some interesting frequently asked questions on Sentinel's Web site. (Note: the above link may have been yanked by the time you read this): 1. "How can Sentinel consistently earn high yields on short-term investments without taking excessive risk?"
2. "How can I be sure my money is safe at Sentinel?"
3. "That is history. How can Sentinel ensure that such a record will continue?"
4. "Exactly what happens to the cash invested by Sentinel?" Proposed New Answers
1. We can't. No one else can, either. That is what risk is all about.
2. You can't. Liquidity has dried up and we just got caught. That's why we halted redemptions.
3. Part of our original answer was: "Sentinel is registered with three regulatory agencies: the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Congressionally chartered self-regulatory body, the National Futures Association (NFA)." You can easily see that now does not mean much.
4. "Sentinel clients have an indirect, undivided pro rata ownership interest in a pool of high-quality, liquid securities. Sentinel's Treasury Only Portfolio (TOP) consists of direct obligations of the U.S. Treasury. The 125 Portfolio and Prime Portfolio consist of money market securities issued by U.S. government agencies, corporations, or short-term bank time deposits, all of which meet Sentinel's requirements for liquidity and low risk." Those most at risk put their faith in the "125 Portfolio," and that's where the big problems are. One part of the Sentinel letter complained: "We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients." Excuse me, but doesn't the market determine "fair value"? Apparently, Sentinel thinks it knows what fair value is, but the market doesn't. Recall that Bear Stearns thought the same thing. Bear Stearns locked out clients who wanted to redeem all the way back in January. Those investors would have gotten something back, perhaps as much as 70 cents on the dollar. Bear Stearns locked those clients in, and the hedge fund went to totally worthless. While Sentinel does not like the current offer for those assets, there is no guarantee (or even likelihood) that the market is going to think more of those assets tomorrow than it thinks of them today. Should Sentinel have seen this coming? I think so, or at least it should have been alert to the possibility. Instead, it stuck with a now failed model that offers these excuses: · Investor fear has overtaken reason
· The market would return to some semblance of order
· Our clients would not join in the panic
· Securities are at deep discounts to their fair value. Some may be shocked by this, but readers of the Survival Report were prepared for this. The difference between shocked and prepared is, of course, paramount. In preparation of a "liquidity crunch" and a continued housing tsunami, we recommended leap puts on Countrywide Financial (CFC: NYSE) when it was trading near $36 and Lowes (LOW: NYSE) when it was trading in a range near $31-$32. Both options are doing extremely well as CFC is now trading near $22 and LOW is trading near $28. Individual investors need not buy put options, of course. But they do need to examine the safety of the investments that they believe to be safe. They need to read the fine print on their "guaranteed" investments. They need to read (or, at least, to understand) the statements on their money market accounts that stipulate in their prospectus very clearly that they can LOSE money and that NAVs (net asset values) can fall below a dollar? Unfortunately, most folks don't care about "the fine print" until it's too late? Free Tips
· Make sure you do not exceed the FDIC limits in any account. Just ask Raymond Przybilinski about the consequences.
· Do not panic over this. Just calmly make sure you know where your money is and that it exceeds no limits.
· Also make sure that any money markets you are in are not heavily invested in "junk-rated" securities.
· The higher the yield, the more excessive the risk is. Don't become another Sentinel victim. P.S. In my Survival Housing Report (the one in which I issued put options on Countrywide and Low) you'll find a surefire, triple-edged "Housing-Hedge." Time are rocky in the markets right now, especially for anyone overexposed to shoddy quant model fine print. Take a moment to read on below and ensure your money is adequately protected. The Survival Report Triple-Edged "Housing Hedge" --- Insure Your Wealth With Zero-Downside Gold --- Introducing a revolutionary investment… A "WEALTH INSURANCE" POLICY with a potential 201% upside in two years… and zero downside With the stock market gyrating wildly in recent days, wouldn't you like the security of an investment guaranteed to never lose money… while giving you the ability to cash in on a gold price that could reach $2000? I'm so confident about gold tripling in price and protecting your hard-earned wealth, I'll even make a triple-your-money guarantee… (But you have only until August 21, 2007 to act… or this "wealth insurance" may never be offered again.) Zero-Downside Gold: A Special Wealth Insurance Report --------------------------------------------------- Rude Endnote: With the markets treading unknown water for the last three trading days, some investors may be inclined to believe the Fed's strategy of pumping liquidity into the markets is paying off. But, as Eric opined in yesterday's Rude, "A 600-point rebound…does not make the national credit crisis any less of a crisis." The source of this credit conundrum seems only to be worsening. Addison chimed in from our Baltimore desk in yesterday's 5, "Foreclosure filings in the U.S. for this July nearly doubled from those in July 2006," he wrote. "Approximately 179,599 Americans filed last month, up 93% from this time last year. RealtyTrac, the purveyor of these findings, originally forecast a 33% increase in foreclosures from 2006-2007, but has since doubled it to 60% - up to 2 million foreclosure filings by the year's end." How long can the Fed keep bailing everyone out? How much more easy money is required to keep the market from sinking? It's simply too early to tell how long the bandages can stop the bleeding…or if they can buy time enough for the wound to actually heal. Investors are on hair trigger alert as they venture into these unknown waters. Stay tuned for the 5, arriving shortly, for the run on today's market movements. Cheers, Joel Bowman
Rude Awakening aussiejoel@the-rude-awakening.com | 
