Wednesday, September 26, 2007

Why you should not trust mainstream financial reports.

Many Jewish people live in Florida, especially older or retired persons who are depending on the values of their real estate and investments to sustain them. Therefore every now and then I look in on Florida's financial situations, because if these elderly and retired people get in trouble, the only place they have to go is back to their families up north.

One good resource is the September 23, 2007 newsletter from Mike Morgan.

The report is gloom and doom, basically, but that's not what caught my eye. In part of his newsletter, Mike was reviewing an article on a fellow analyst run by the Wall Street Journal. As part of that review, he talked to the interviewee personally, as she was known to him previously. Pay close attention to what she told him.

...Let’s forget about Ivy coming to the party late and failing to get out in the field at ground zero. Let’s look at the record. I asked Ivy why she didn’t come out and simply downgrade builders across the board. I asked why it seemed like she would downgrade one and upgrade another, and why she seemed to be almost neutral in her ratings. For those of you that know the game, her response will come as no surprise. Ivy told me she Credit Suisse required her to maintain an overall rating on the builders and she couldn’t simply downgrade them across the board. Maybe banking relationships are more important that coming out with what’s really happening and what the real long term fall out will be...

Did you see that? Credit Suisse, one of the largest financial institutions in the world REQUIRED her to have a set result! They wouldn't allow their analysis to tell the truth about the real estate market.

Wouldn't allow.

I can't even remember how many times I have told you, class, that corporations are not your friends. Corporations exist for the sole and express purpose of making as much money off of you as they can, and when there is a discrepancy between what's in their best interest and what's in your best interest, they're NOT going to choose your best interest.

I feel sorry for all of you out there who have been lured into investing in real estate in the past five years, or bought stocks in companies related to real estate in any way, because you're you're taking a bath and will continue to do so for the foreseeable future, as Mike's report also mentions.

Sales – ARA [note: American Realtors Association] has been filling your heads with “traffic” numbers. Sure, we saw traffic, but when I “ground-zero” this traffic, I get the real story. I’d say two thirds of the traffic is a false reading. Many of the folks I spoke with are neighbors that want a feel for what is happening to the price of homes in their back yards. Another segment of the traffic is people who have sipped the Kool-Aid. They think prices have fallen far enough, and builders are making such great deals . . . that they can now afford a home. I have news for them, they can’t. Prices are still higher than five years ago and mortgage rates are not what they appear to be. Even with the 50bps cut, mortgages are tougher to get and with that comes higher rates for the folks that do qualify. Let’s face it, subprime deals and all of the creative financing we saw is gone. I’d say Ara’s Deal of the Century will soon be known as Fake-Out of the Century, unless Hovnanian cuts prices further or buys down mortgages further. Personally, I don’t buy the numbers Hovnanian released. I was in the field during his Deal of the Century, and I didn’t see what his numbers portray. I challenge Ara and some of the others to spend a day in the field with me mystery shopping their communities and the communities of their competitors.

You should trust Mike's opinion because he actually does get out there and drive around Florida and other areas he's researching, talks to real people, not just the guides in the "parade of homes" tours, and collects real-time data on what is happening on the ground. The real estate situation in Florida is going to get very bad, class - much worse than it already is. The real estate and investments that many parents and grandparents are relying on to live are going south in a hurry. We have to be prepared for the realities of this situation, class.

For many of us, that might mean that our parents or grandparents are going to be moving back home - to live with us. Isn't that nice? That's the small picture.

The big picture is that the Baby Boomers in general have voted themselves a "retirement lifestyle" unknown in the entire history of humanity, and they expect to maintain it at our expense. When I see that commercial that has been running lately with the little kids spouting about how we should "keep our promises" I have to wonder if anyone mentioned to them that their parents and grandparents promised that they, those children, would have to give up half their income. Economic reality is not something the Boomers are interested in. When Social Security was first started, there were 19 working adults per retiree. Now there are 3, soon to be only 2. So each of those two will have to give up half their service-industry (read: near minimum wage) income to support the retirement of the Baby Boomers, who believe - really believe - they are "entitled" to the privileges of living separate from their families and being catered to in every way - a "Retirement Lifestyle" unheard of in generations past. They will fight tooth and nail to continue that unrealistic lifestyle as long as they can - at taxpayer expense, and then they will expect their families to support them in the style they've become accustomed.

And worse, the generation x-ers and y-ers have the strange idea that old people are supposed to "go away" somewhere and not be a "burden" to their families. They "expect" to be completely free of obligation for their elderly relatives. I don't see this ending well, class. Both sets of expectations are completely unrealistic, historically inaccurate, and financially impossible. Something's got to give.

In the meantime, what we will have is a lot of bewildered elderly people wondering where their "golden years" and their golf-communities and concierge service went. I hope our community has not lost touch so much with our past that we have adopted secular me-generation society beliefs, too.

So if your broker or your financial advisor is telling you that Credit Suisse or any other transnational banking and financial institution is telling them that everything's going to be ok, don't believe it. It's not going to be. And we have to deal with reality, not with the corporations save-the-ceo's-year-end-bonus at any cost strategy.

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