2007 was the year where most investors became acquainted with a variety of new terms created by Wall Street, some of them which by now have reached infamy. CDOs, RMBSs, SIVs and many others made it to the front pages of every financial newspaper and web site.

The better known ones are CDOs (Collateralized Debt Obligations), which have been around since the 1980s, but only more recently have been applied to mortgage backed securities. According to the WSJ, they were designed to provide investors with greater diversification and disperse the risk of mortgage lending. But so called mezzanine CDOs such as Norma actually served to magnify and concentrate the risk.

I like to thank the anonymous reader who provided me with the link to the WSJ that takes you through the five steps and explains how those CDOs were made. It’s a fascinating concept and will help you better understand the process of how your loan, along with millions of others, got sliced and diced and sold to institutional investors around the world.

It also makes you realize that the risk that comes with owning these CDOs has spread to many countries and it is unknown who holds how much of these now severely discounted or even worthless instruments. In a way, it’s time bomb because you simply don’t know who is next in line to come clean and admit losses that they can no longer absorb.

In the face of only negative real estate news for most of this year, as a result of the Subprime/credit crisis, the National Association of Realtors (NAR) managed to dispense any kind of information related to the topic with a positive undertone. I am not sure if that was out of sheer ignorance or a motivation to rally the troops.

Minyanville’s Kevin Depew had this to say in “Five things you need to know (item 4):”

In 2005, National Association of Realtors Chief Economist David Lereah released the book, “Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade – and How to Profit From Them.”

2007: “Why the Real Estate Boom Will Not Bust and How Foreclosures are Technically Part of the Continuing Real Estate Boom, In a Way.”

2008: “Why the Real Estate Boom in Distressed Properties Will Not Bust (except in certain local markets) and How You Can Use Leverage to Profit From It.”

2015: “Why Can I Maybe Borrow a Couple Dollars Off You Until the Real Estate Bust is Over?”

Recently, a reader asked for clarification about the differences between Closed End Funds (CEFs) and Exchange Traded Funds (ETFs). The WSJ describes the features as follows:

“Both exchange-traded funds and closed-end funds are baskets of stocks, bonds or other investments that typically trade throughout the day on an exchange. Traditional mutual funds, in contrast, are typically priced just once a day at net asset value, which is the value of all fund assets minus liabilities, divided by the number of shares outstanding.

Since a closed-end fund sells a fixed number of shares that then change hands on an exchange, its market price is affected by demand for its shares and can drift far away from its NAV. So an investor who buys a closed-end fund at a price close to its NAV may ultimately sell at a price well above — or below — the value of the fund’s holdings.

But in an ETF, large investors can assemble a basket of securities that mimics the ETF’s portfolio and use this basket to buy big blocks of ETF shares. Likewise, they can sell a block of the ETF’s shares back to the fund in exchange for that basket of securities. Since big investors can easily swap ETF shares for the underlying securities, the ETF’s market price tends to stay close to its NAV.”

I have to add that when trading either, you always need to look at volume to make sure that your orders can get filled quickly whether you enter a trade or want to exit one. I have found that especially with lower volume municipal CEFs, liquidation can be very slow at times, and you may have to chase the market price, especially on down days.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The assassination of the former Pakistani prime minister, along with weak housing data, pulled the major indexes slightly lower.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +4.67% above its long-term trend line (red) as the chart below shows:



The international index dropped to -1.62% below its own trend line, keeping us in a sell mode for that arena.



For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

With 2007 fast coming to a close, you will find the media gearing up for a variety of market forecasts and predictions ranging from the plausible to the downright outrageous. Be prepared to be fed this information on an almost daily basis for the next few weeks. Most of this “advice” is useless as I have written about before.

Nevertheless, I think it pays to look at other view points and opinions, even if you happen to disagree.

A different view about 2008 was featured in a brief interview on MarketWatch with William Knapp, chief investment strategist for MainStay Investments, who said that “investors should expect the economy to sidestep a recession in 2008 but, even if one occurs, consumers will barely know it happened.”

Wow; that’s about as optimistic of a view as I have heard. Given the variety of issues I have posted about for the past 8 months starting with the Subprime debacle, followed by the credit crises, the housing disaster and more recently the huge number of credit card defaults many banks are facing, I sure can’t agree with the above assessment. With none of these above issues even being close to being resolved, my personal view is far less optimistic.

However, whichever direction the markets will turn, there are bound to be opportunities we can take advantage of. Right now, certain sectors and countries appear to be on the upswing, and we are easing ourselves into those markets.

By only paying attention to trends, I don’t blindside myself to a certain viewpoint of what may or may not happen. If it ends up that Mr. Knapp is right, then the market trends will lead us in the direction of those areas that will move up given his outlook. If the markets adopt a more pessimistic attitude, then we will adjust accordingly and follow those trends that are supported by that scenario.

Bond guru Bill Gross of Pimco has made his share of forecasts, which usually do not sit well with investors. The one that caused a bit of an uproar was when he forecast the Dow to be falling to the 6,000 level, or thereabouts. I think that one was made sometime last year.

A few days ago, he said the recession had begun in December and that he’s been begging the Fed to cut interest rates, at least according to 24/7 Wall Street. I am not sure in what form that begging took place, but let’s not forget that Mr. Gross is somewhat biased in that lower interest rates will help his bond investments. Muni bond funds have had their worst year in seven, and Pimco’s own PML is down about -9.7% for the year. So yes, a recession and much lower interest rates will bode well for his stable of funds.

My point is the same that I have made before: Forecasting can’t be done with any accuracy at all. While I have written about the prospect of a recession as a result of the Subprime/credit fall out, we can’t make investment decisions simply based on that possibility alone. I will continue to watch the actual market trends and make my picks based on those ETFs/no load fund areas that are showing the strongest momentum figures.