keskiviikko, 19. syyskuu 2007

Inflation concerns

Although the subject is worth writing an article, I just write shortly as my schedule is killing me. Nevertheless, FED is fighting against the credit crunch by lowering interest rates as expected. This short term relief boosts equity markets but is only a temporary relief. The chain reaction has begun as liquidity increases rapidly i.e. in addition to lowering interest rates new carry trade positions are opened etc. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

EUR/USD X-rate is already unbearable and probably forces ECB to lower interest rates and therefore let the inflation to increase. Lowering interest rates in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Europe will set currencies to balance but let inflation to run reflecting by increase in commodity prices. We are probably going to see oil breaking 100$ soon.

Would you pee in your panties if you would be freezing? Probably not, but FED does.



perjantai, 7. syyskuu 2007

Another breaking research from Finland - Not

A recent doctoral dissertation argues that there is no bubble in house prices in the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Helsinki metropolitan area. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

According to study, the development of house prices can be easily forecasted by observing certain fundamental factors like stock market development, credit base and historical prices.  I have not read the piece but obviously this is based on some statistical evidence from historical price data. But, as we know, future is uncertain and when subjective and objective probabilities are considered, we can not say that history repeats itself.

According to study there is no bubble what so ever. Rapidly risen prices are explained by heightened income level, increasing population, and the fact that, at the same time, lending to households is increased. I am not professional in economics, but how in the earth, increased lending can indicate that there is no bubble in the prices. I think there is a bubble which is due to that particular increase. If you have, for example, valued a stock and come up with result that it is overvalued, does the fact that you can borrow money easier justify the overvaluation? And yes, I am familiar with supply and demand theory. In fact, I do not know is the most important fact mentioned in the study, which is that supply side is restricted due to big constructors who control the supply! This has created the overvaluation in prices – the problem which can be solved only by politicians. The study says it is the sea that is restricting the increase of house base. I wonder is the author familiar with the Vuosaari harbor project.


tiistai, 28. elokuu 2007

Finnish students are among the laziest according to study of work life expectations

Trendence Institute's study shows that Finnish student's are among the laziest in terms of expectations of work hours in their first job. (link to the HS acticle)

I wonder if it has something to do with the fact that marginal taxes in Finland are among highest in the world and purchase power is the lowest within the old EU countries, especially what comes to persons with higher education. Second, with our curren educational system, with no incentives what so ever, what can you expect. Is that causality so hard to figure out?

If there still is somebody stupid doing long hours - stop it! (except if you are a blue collar construction worker)

tiistai, 28. elokuu 2007

Place your bets

According to Financial News, an anonymous investor has placed a bet on an index of Europe's top 50 stocks falling by a third by the end of September.

The mystery investor has bought put option contracts on the DJ Erostoxx index that will result in a profit if it plunges to 2,800 or below by the end of September. Based on the 2,800 strike price, the position covers a notional €6.9bn, and potentially even more using a market price of about 4,100 when the trades were done on Tuesday and Wednesday.

According to Bloomberg, the September put option with a 2,800 strike was the most popular DJ Eurostoxx 50 contract that day.

In U.S. an anonymous trader sold 10K contracts on EVERY S&P/Y "strike" shorts stocks "in the money" effectively selling all his SPY holdings for cash up front without pressuring the market downward. This is an enormous and dangerous stock option activity. If it goes right, the guy makes about $2 Billion. If he's wrong, his out of pocket costs for buying these options will exceed $700 Million! The entity who sold these contracts can only make money if the stock market totally crashes by the third week in September.

Allthough these trades are not naked, but a part of poppably some hedge funds' complex contract structure in oder to cut losses or hegde gains, the market seems to prepare itself to a decline.


perjantai, 24. elokuu 2007

About the housing market in Finland

Some recent estimates describe the situation in U.S.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The National Association of Realtors lowered its 2007 forecast for new and existing home sales for an eighth time this year. The <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Chicago- based group forecast that new home purchases will total 852,000 this year, down from 1.05 million in 2006.

Toll Brothers Inc., the largest U.S. luxury homebuilder, said that its fiscal third-quarter profit fell 85 percent as it was forced to write down property values. Revenue from traditional home sales declined 21 percent and order cancellations jumped 18 percent.

Homebuilding continued to fall at the start of this quarter. An Aug. 16 Commerce Department report showed housing starts fell 6.1 percent in July to an annual rate of 1.381 million, the lowest level in a decade.

How things are in Finland?

Finnish (or European) housing sector is not in that bad shape as in U.S., not even close, due to better credit quality and tighter credit scrutiny.  However, heightened interest rates should make people to become aware of the true price of their house purchases -roughly, a 30-year mortgage loan doubles the price. Many large loans taken during the time of extraordinary low interest rates have become unjustified in terms personal economical flexibility and borrowers have ended up paying solely interest payments instead of paying the principal. I used the word "should" because the universal truth is that, in average, people are too stupid to act rationally.

Some argue that, in the Helsinki area, the need of apartments is high, and this need keeps prices high. Let's make one thing clear, there is a huge difference between "needs" and demand. If all needs would be fulfilled, everybody would have a mansion next to sea, and that is possible only in communism, although mansion would not be the right word in that case. I remenber one article written about rental levels in Helsinki and how candidates often offer rents above the proposed amount in order to get the apartment. What burned into my memory was some "expert" stating that he is concerned about this kind of development because, in this case, the person who is willing to pay most will get the apartment. Maybe we are not so far away from communism after all. The magic word (in so called market economy) is a purchase power of each individual which together with the personal needs define demand on particular price level. In other words, the law of demand, an inverse relation of quantity demanded and price asked. Should not be so hard to understand the basics. 


Most of the residential apartments in Helsinki yield 4-5 percent excluding capital gains – the level of risk free investments. If I would own a residential apartment, I would highly consider going short with it as there are assets providing better expected return with the same risk level (or same return with lower risk). For most individuals, the house is the biggest investment during the whole life, but when people start considering it as one.


Development of rents:




Development of apartment prices: