Lax lending standards were one of the prime causes of the Subprime debacle. One of the terms you most likely have heard is that many real estate buyers qualified based on “stated income.” What that means is that you can write down your income based on what you need it to be to qualify and not what it actually is—without verification. Where I come from, we call that fraud.

I was reminded of that when I read Bill Fleckenstein’s article “Home-loan house of cards ready to fall,” in which he mentions some examples of what borrowers went through to qualify for a home loan. Those efforts ranged from the above “stated income” to physically copying and pasting bank statements to elevate homeownership-at-all-costs to a new level. The unknown here is how widespread this practice was during the lending heydays; although my guess is that it was the rule and not the exception.

I agree with Bill’s assessment that the Subprime mess will pass through various stages with the damage lasting for years. The interesting part of his story is that he posted it on 1/15/07, some eleven months ago!

His observations are right on, and I especially agree with his thought to “not take your eye of Subprime for a second,” which is why I have harped on it for most of this year. It will change the investment landscape for years to come and, being aware of these potential problems is the first step to preserving your portfolio when the markets finally realize the true implications.

The Southern California area I live in is a hotbed of overleveraged real estate, leased automobiles and high-end lifestyles that for many have been financed via the housing ATM over the last few years. Sure, there are truly wealthy people who can easily afford that $3 million dollar home, but the masses made the switch to the fast lane lifestyle via easily available credit. The words moderation and frugality are not known here.

While this attempt of keeping up with the Joneses is slowly coming to an end with real estate values plummeting, reality has really not sunk in yet. Why is it that many have the uncontrollable desire to show off or at least give the impression of keeping up with the neighbors?

Shira Boss’s book “Green with Envy” tries to shed some light on this question and presents a whole new way to look at financial (un) happiness. It’s a fun read since the author looks into the lives and checkbooks of our neighbors and presents the shocking gap between public image and what’s really going on behind closed doors. The book features 4 scenarios:

1. The young couple next door. The pay cash for their apartment and go on shopping sprees. You wonder how they can afford it.

4. The baby boomer at fifty. He’s got kids in college and no retirement fund—and the clock is ticking.

It’s a compelling tell-all about what’s going on with other people, while presenting a new perspective on financial well being. I found it extremely timely given the fact that real estate is now in a prolonged slump, reducing wealth and causing many with big, inflated egos to face reality sooner or later.

Over the past few months, I have written my share of posts about the Subprime/credit/housing crisis and have cited many articles for clarification. All along, my goal was to find a posting from an insider who had actually worked in the industry and could add a better viewpoint to the discussion.

I lucked out when I found Herb Greenberg’s MarketBlog, which featured a dialog with Mark Hansen in “Straight Talk on the Mortgage Mess from an Insider.” Mark is a 20-year veteran of the mortgage industry and has sold billions of loans over the past 5 years. It’s a fascinating story and a must read for you to stay ahead and be aware of the likely changes in investment climate we may be facing in the next few years.

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

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

The government sponsored Subprime “solution” and anticipation of a 0.5% Fed interest rate cut pushed the major indexes higher.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +5.90% above its long-term trend line (red) as the chart below shows:

The international index climbed +0.86% above 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 residential real estate having been on a downturn, some readers have asked how they could play the short side of the real estate market. The bad news is that there is no ETF currently on the market that mirrors residential real estate activity.

However, if commercial real estate is doomed to follow the same downward trend, there is a way to participate, but only if you are an aggressive investor. Seeking Alpha featured a write up on an UltraShort Real Estate ETF (SRS), which is a bet against a basket of commercial REITs.

SRS has only been around only since March 07 and, while it can provide you with superior profits, it can also be extremely volatile. Yesterday, for example, with the S&P; 500 being up +1.52%, SRS was down -5.69%. It’s definitely not for the faint of heart and, since it moves 200% of the change of the underlying index, you need to work with a sell stop plan to limit any losses, should this market go against you.

We currently have no holdings in SRS but, given changing circumstances, I may consider adding some small exposure.

When markets begin to slide, or even slip into bear market territory, you will find many ‘experts’ in the media and on TV announcing a variety of investments deemed to be a good bargain at that particular time. It’s like everybody has a compulsive obsession with the need of having to be invested in something at all times.

The lesson learned from the last bear market (2000 – 2002) should be that it is perfectly OK to stand aside and be in cash while others get involved trying to catch the proverbial knife by picking investments on the way down.

Al Thomas had some good advice in his last newsletter about bear markets and evaluations. Here it goes:

“In a bull market it doesn’t make any difference what those secret formulas are because the stock would have gone up anyway. Again those great formulas will not save the best “undervalued” stock when the bear chews on equities. When the tide goes out all the boats go down.

The first rule of valuation is not to lose money so smart investors should not be mesmerized by mysterious valuation formulas. Cash is king during a bear market.”

Al’s observations go along with my experiences. I especially can’t stand the financial reality TV experts dispensing useless advice to justify their existence. They represent the perfect example of Frank Lloyd Wright’s definition of an expert: “An expert is someone who has stopped thinking because he knows.”