11:40am - July 23 - In 2006 I wrote about the "Housing Hurricane" in Barrons. In April of this year Barrons published my piece titled "The Eye of the Housing Hurricane." You can read both pieces at www.Morgan-Florida.org  Today we are in the back half of what has just grown from a 100 year hurricane to a 500 year hurricane, and we still have yet to realize just how devastating this hurricane is and will yet be. Is there anything new to write about? It depends. If you are a client, this is old news. If you still believe the worst is over, read on.

- Million Dollar Plus Homes
- Short Term Memory? - Credit Default Swaps
- Subprime v. Credit Default Swaps
- More Memory Loss - Auction Rate Securities
- Paulson's Fraternity Bros
- Consumer Debt Exploding
- (F x 4)/ H + I(3) = Not a Happy Ending
- LENDER COLLAPSE
- Housing Bill Bail-Out
- Armageddon

Million Dollar Plus Homes - Here's something you haven't read about. For the past two weeks I had two of the most interesting residential clients I have ever worked with. This was a husband and wife team that is involved in international investing at a level very few people are exposed to. They were here shopping for a vacation home, purchasing 60 hours of my time in a block. As many of you know, when I do work with a residential buyer, I only do so with clients that retain my time, just like the financial institutions I work with when they retain me for research projects. For my residential clients, when they do close on a home, whatever commission the seller pays me, is turned over to my client. So on a two million dollar home with a $50,000 commission, even if my client purchased $30,000 worth of my time, my client still comes out ahead of the game.

But that is not what I want to write about this morning. I am explaining this process, so you will understand just how serious my clients are. I don't work with "lookers" unless they are prepared to shell out a minimum of $7,500 for 30 hours. So when I spend 60 hours with buyers looking at homes, they are real buyers . . . or they are sharp enough to gather information to make an intelligent decision about buying or renting. And that is exactly what happened here.
After two weeks of looking at homes in the $1.5 to $3M range, my clients decided NOT to purchase a vacation home, but instead to rent this coming season, and wait for prices to come down further. Very smart decision from the sharpest buyers I have worked with in several years. Here's what's interesting.

You've read so much about subprime and foreclosures and the general malaise facing the heart of American home ownership. But you have not read much about what is happening in the very high end markets. It is this part of my work that my Wall Street clients want to hear about. They want to know what I see on the ground with residential clients. They want to know what I see when I am out with analysts or hedgies researching commercial space. And what I saw during this two week field trip was an eye opener for me and my clients.

Second, Third and Fourth Homes - The market that we were looking at consists of homes that start at $1.5M and run all the way up to $10M. In the communities we toured, these are second, third and fourth homes for many people. Two years ago, there were a handful of these homes on the resale market. Today, the numbers of these homes on the market is staggering. Why? A little research into who the sellers are, spells a picture we have yet to grasp as a nation. Many of the sellers are financial executives that have lost their jobs. Some sellers are high net worth individuals that have purchased several of these homes to flip when the average Joe was buying condos in Miami or single family homes in Cape Coral. And some of the sellers are people that have simply overextended the good life to the point of breaking. Overall, it is the same story we hear at the lower end . . . just a different flavor.

The only difference between this market and the lower end, is the number of foreclosures and short sales. Oh . . . but wait. This is a very stubborn market. These are people that still believe the value of their homes can't go down 20, 30, 40, 50%. So a solid one half of these puffed up sellers are priced in the stratosphere. The folks, for the most part, will resist reality, because they are so out of touch with reality. And here's the catch. Even the sellers priced below the "market" are not getting bids. Once again, we have more homes than we have people to live in them. Moreover, when it comes to the level of home, the supply is even more staggering by percentages.

My clients decided not to buy right now, because they believe the global markets have not finished punishing those that are sucking on helium balloons and sipping the Kool-Aid being served up by Bob Toll, Cramer, Paulson, Bernanke, Roubini et al. So my clients will rent this season, and come back after a market crash forces these puffed up sellers to face reality. The lenders will have a new group of short sales and foreclosures to deal with, but with this group they will have their hands full of gooey stuff. We are not seeing it yet, but all the signs are on the wall. It is only a matter of time before this market gives lenders a new migraine. These owners have huge egos and jumbo sized arrogance. Unfortunately, that's not enough to keep their homes from falling in price, and even these wealthy individuals will eventually throw in the towel when they see just how expensive it is to carry these homes.

Short Term Memory? - Credit Default Swaps - Remember these? How soon we forget. Well, let Captain Mike poke you in the eye. Back in the first quarter of this year, these were all the rage as the next crisis to crush the markets. Some estimates put this market as large as $40 trillion, which is more than double the size of the entire U.S. stock market. A CDS is, or was, or is . . . insurance on securities like bonds and mortgage securities. Here's the catch. This market is not regulated. That should not come as a surprise. Moreover, this market was created by banks and hedge funds . . . stellar performers in the opera we are painfully living through. Allow me to continue. It gets better.

Credit Default Swaps are traded (swapped) from investor to investor (read: sucker to sucker). The protectors of our financial markets created Credit Default Swaps as another means to make money from nothing. Kinda like the Dire Straits lyrics . . . Get your money for nothing and the chicks are free. Don't laugh. Remember the folks I wrote about a few seconds ago with the second, third and fourth vacation homes? Many of them lived and will die by the Dire Straits lyrics. And how appropriate is the name of the band? Okay, back to CDS.

We haven't heard much about the CDS market since March. It didn't go away. It just reached the point where the banks have no clue what they own or what its worth. You've heard that before from me. That is the mantra I started hearing from my European bankers almost two years ago. Remember when I told you these guys were telling me the liquidity crisis was not a liquidity crisis, but a . . . Duhhhhhh Crisis, because these guys admitted they had no clue what they owned, and even when they figured it out, they had no clue what it was worth. And that has not changed much since then!

The top commercial banks hold more than a trillion dollars in swaps. But here's the catch . . . they are on both sides. I kid you not. This is a true story. Honest. Sometimes they were the screwer (insurer) and sometimes they were the screwee (insured). And from what I hear in the field, some of these clowns are on both sides of the same freakin' trade! By the way, two of the top five players in this market are BOA and Wachovia . . . two of the rising stars this past week.
Subprime v. Credit Default Swaps - No comparison. Subprime is a baby compared to the ramifications of the CDS market when it starts to unravel. And I love it when we keep hearing over and over and over about how we should not be comparing this market to 1929 . . . because we have more safeguards now. What? Huh? What safeguards? Greenspand did away with all of that nonsense. By the way, where is Greenspan lately.

Unfortunately, there are NO safeguards in place when it comes to the Credit Default Swaps market. None. Nada. Zipity Doo Dah.

More Memory Loss - Auction Rate Securities - Here's another area lost in the fog of deception. Or maybe it was just Bob Toll passing out enough Kool-Aid to fog over the memories of entire segments of the financial world after doing such a great fog-job in the home builder sector. But MadDog Morgan is here to bite you in the ass, just to make sure you don't forget about this one either. Auction Rate Securities were developed by none other than Goldman Sachs back in the 80's. I'd love to see a history of what's come out of Goldman Sachs over the years in terms of creative financing and guys like Paulson who reaped the rewards . . . and now want to tell us how to clean up the mess they created. By the way, don't you find it just a little funny that Goldman exec Kindrick Wilson is taking a leave of absence to go to Washington to "help" Paulson? Oh, and the new CEO of Wachovia, Robert Steel . . . you guessed it. He's another Golman/Paulson fraternity brother. C'est la vie . . .and we sit back and watch.

So Goldman Sachs created Auction Rate Securities as a means to . . . . . . . . well, they want you to believe it was a new form of liquidity for the markets, but if you look at it real hard, it was nothing more than a shortcut to disaster and huge fees for companies like Goldman Sachs. The problem with all of this liquidity we created, is that it was constantly being moved, just like the pea under the shell or the three-card Monte scam. For those of us that have been taken in by the shell game, you know there is no pea . . . and you can't beat the Monte scam. Well, that's the same thing we are seeing today in our financial markets. We've carved off so many pieces from the side of beef, that there is no beef in the game. Guys like Paulson, Rubin, Mozilla, and other have the beef socked away in their private meat lockers.

Okay, so I am straying again. But it has been awhile since I produced anything for the public, so allow me the luxury.

ARS in a nutshell was a way to trade long term debt like donuts. Strike that. I meant, like Miami condos. No, no. Strike that too. I really meant, like Credit Default Swaps. Naaaah. I'm just teasing to make a point. A point that only Senator Bunning seems to understand, but guys like Barnie Fife (Frank) turned on Bunning as if Bunning were the enemy. That's another story, so if you have no clue what I am talking about, Google Senator Bunning.

Back to Auction Rate Securities. They were created so long term debt could be traded like short term debt . . . with huge fees and expenses going to companies like Goldman Sachs for the privilege of playing the shell game. Other than the skimming that went on, the ARS has demonstrated that liquidity is totally controlled by the creators of the game . . . just like the guys on the streets of New York with the shell game and three-card Monte. When they want to play, they are taking your dollars. When you figure it out, they pack up shop and leave. Ah, hah. I think I just summed it all up in a neat and tidy package for you.

In February of this year, the Auction Rate Securities market failed, seized up . . . so the street boys packed up their shells and ran. The biggest players in this market declined to step in and support the market! When "investors" declined to bid on the securities the broker-dealers ran for cover . . . rates spiked and assets were frozen.

Oh, by the way, one of this week's financial stars is at the current heart of this investigation. Last week state regulators showed up at Wachovia to demand the documents they have been trying to obtain for several months. But it doesn't stop there. It gets worse folks.

Consumer Debt Exploding - Maybe Captain Mike needs to keep poking folks in the eyes, even though American Express did a pretty good job of that the other day. To understand who gets hurt on consumer debt, you need to understand the difference between American Express and Master Card and Visa. The latter two make money on fees. They do NOT lend money, so they don't care how much debt the consumer builds up. The more debt, the more fees. On the other hand American Express actually earns fees AND they take on the debt when card holders cannot pay off their monthly balance. For Master Card and Visa, their cardholders are racking up debt with our nation's banks. Yup, the banks again. Start adding it up and you will soon understand why my banker buddies keep telling me they have no clue how bad it is . . . but they know it is really, really bad . . . and it is getting worse. I don't need to see the statistics and the numbers and all of the keen stuff the analysts use to make their rear-view mirror calls. When my banking clients tell me they are in trouble and things are getting worse . . . and when I see consumers that have tapped out the housing ATM who are now juggling credit cards, I've seen and heard all I need to know.

Housing Bill Bail-Out - Bail Out what? How can you bail out two industries that are destroying themselves. I simply don't understand how the American public can be expected to bail out the banks and builders, along with the junkies that bought houses like they bought stock options. It;s interesting how the White House called the Housing Bill exactly what it was (a dud), and now is backing it. Paulson has the power. He's not looking out for our best interests, but for the best interests of his fraternity bros. And here's something to chew on. As credit card debt continues to explode, and people use credit cards like they used their homes to rack up debt, is Paulson going to bail-out credit card debt as well? Not likely.

(F x 4)/ H + I(3) = Not a Happy Ending - I haven't discussed some of my formulas for several months. And when I see all of the stuff coming out from Roubini and other prophets of economic wisdom, I feel a little left out. I've written extensively about my SSI Index, and my GOOBer Index, and my TTFN (Ta Ta For Now) Index, and some of my exclusively private formulas and indexes which have accurately predicted the level and intensity of the hurricane we are in. But I haven't shared Happy Ending with you, simply because it is NOT a Happy Ending, and I didn't want to burst the bubble of the folks still drinking the Kool-Aid. But the time has come to burst your bubble.

There are four "Fs" including fraud, fantasy, fiction and foreclosure. The first three are the foundation for the fourth "F." Enough said. We take this and divide by H + I, which represents Hype and Incompetence. Okay, so you don't need a discussion about the four "F's" or the Hype. But let me share a bit about just how severe the "I" factor is of total, absolute, and beyond any belief . . . Incompetence.

LENDER COLLAPSE - Over the last two weeks I have noticed a decisive shift in how lenders are handling foreclosed properties (REOs), or maybe I should say mishandling. There are three issues bubbling out of the Ooze of Incompetence at these lenders. First, they can't get deals done. The ship is headed for the rocks, and the captain has abandoned ship. He's sitting comfy on his own private island sipping cocktails with the Fat Lady in the thong. This is a very severe crisis in operations. Lenders are not responding to offers, and when they do respond, they make the process so convoluted, that the buyers often walk away and buy another property . . . at a lower price. Instead of jumping on contract and moving them through the system, the lenders have stalled the process to an agonizingly painful stand-still.

Second, over the last two weeks we have seen another leg down in pricing from some lenders. And the pricing makes no sense, because if they managed the sale process properly, there would be no need to slash prices. These two events are disturbing. We are essentially seeing a total collapse in the housing market. Unless someone sprinkles these guys with Smart Dust, they are going to destroy themselves. When you look at this, you don't think it can get any worse, but it keeps getting worse.

The third issue is financing. Its tough to put a deal together, and when you do, usually FHA is involved. The 3% down payment is a myth. Either the seller or the builder pays it, so you still have folks getting into homes with zero down. And the moment they close, they are into negative equity. Thirty days later, they could be 10-15% negative when you consider a falling market and the costs of a buy/sell transaction. When things go bad, as they are, it is the Fed that is eating the 10-15% plus another 50-60K in expenses to unload foreclosed properties . . . at a very minimum. If you want to hear more, you need to be a client. This is a very complicated subject, but it is at the heart of our crumbling economy.

If you take a moment to list it all . . . consumer debt, swaps, defaults, foreclosures, commercial debt and on and on an on, you will realize we are witnessing a complete collapse of our country's financial institutions. And all we are doing . . . or all we can do at this point is watch it all unfold.

Armageddon - I believe it is all but written into the screenplay at this point. The recent rally of 50-100% in banks and builders is indicative of the nonsensical days leading up to October 1929. What I am seeing in the field, is a crumbling of the builders and the banks, followed by retailers. But on Wall Street, Paulson is passing out the Kool-Aid and telling us we need protection from the short sellers. Let's face it, if the short sellers push the envelope too far, buyers have the right to step in and take advantage of the bargains. But when the Federal Government, or should I say Goldman Sachs (Paulson), take it upon themselves to change the rules, that's when you can bet Armageddon is in the cards. Over the next few weeks, we will all see just how much more pain there is, and the bag of garbage we just threw up in the air, will come back down harder and stinkier.

Crisis Investing - Please. If you are not considering it, you need to start thinking about it. If you want to buy into the rally and continue to sip the Kool-Aid, you will be devastated.

IN CLOSING . . . I wish I was a market timer with magic dust and a magical wand. For the folks that just joined me, there would have been less pain if I was a magician. And trust me, I feel it. My clients are like family. I have a bottle of Tums on my desk today, and I am still nauseous. I can take some relief in the nice emails I am receiving, and so far I haven't received any ugly ones . . . but I know some of you want to send them. You need to sit tight, and not let Paulson and his fraternity buddies shake you out. They are systematically shaking out the pension funds our municipal government accounts and so much of the wealth this country has built up over the last 200+ years. Unfortunately, the American public enjoyed the ride . . . and that ride is coming to an abrupt end.
Whether it is a week a month or a few months, our markets will be much lower and the financial crisis I have written about for the last four years will be reality. Unfortunately, it will not be a Reality TV Show that we can simply change the channel on.

Senator Bunning summed it up for us last week - "The Fed is the Systematic Risk."

By the way, even when the Housing Bill passes today, it will probably not have a positive effect on the markets. It is old news, and if you really look at it, the Housing Bill is bad for the economy and the markets.

Mike Morgan - Behind Enemy Lines - www.888Mike.com

Institutional Website - www.Morgan-Florida.org