A few months ago, I reviewed one of my favorite books titled “Why Business People Speak Like Idiots.”

I was reminded of that as I read the latest (I think) Subprime mortgage fallout article in which B of A announced that 4th quarter results will be hurt by continued “market dislocations.” While the bank did not provide an estimate of how large this impact might be, they at least were able to identify the culprit for their potential problems by name.

In their SEC filing, they further stated that “we expect these significant dislocations in the CDO (Collateralized Debt Obligations) market to continue, and it is unclear what impacts these dislocations will have on other markets in which we operate or maintain positions.”

Translation: We are losing money big time, but we don’t know how to stop the bleeding nor do we know much about the current value of the CDOs. However, we are sure that we can blame it on something called “market dislocations.”

As the Subprime pig make its rounds and affects more and more financial institutions, you are bound to hear more of these newly created terms designed to project an aura of control and sophistication, yet it is nothing more than epidemic bull.

Reading daily about write downs on Subprime related losses, now totaling some $45 billion, you may be wondering how this whole mess got started. How can it be that simple real estate loans have the power, when improperly used, to negatively affect some of the largest financial institutions in the world?

An anonymous reader submitted this hilarious video clip analyzing how a Subprime mortgage ends up as a SIV (Structured Investment Vehicle) on Wall Street. The British actors are superb in their interpretation of Wall Street investment bankers, and I like to thank the anonymous reader for submitting it so that you too can be exposed to Wall Street’s infinite wisdom.

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

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

The bears had a feeding frenzy this week as the major indexes took some heavy hits.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +4.25% above its long-term trend line (red) as the chart below shows:



The international index slipped -0.09% below its own trend line, keeping us in neutral territory.



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

News on continued problems in the Subprime area seem to pick up speed almost every day. The most recent articles point to Washington Mutual (WaMu) considering to set aside some $412 million to $2.1 billion in extra reserves because of a lawsuit brought on by New York’s state Attorney General.

The suit alleges that First American Corporation and eAppraisalIT colluded with WaMu to inflate the appraisal of homes. This is a serious charge which apparently goes way beyond subprime loan issues and focuses on appraisals of all kinds.

The potential repercussions could be grave indeed. If the suit holds up, poorly performing securitized loans could be put back to WaMu from bondholders on the basis of fraudulent appraisals. That means that WaMu would be forced to put the bad loans back on its balance sheet and then mark them to market.

Let’s look at some numbers. During the period in question, WaMu originated some $275 billion of real estate loans, of which some $172 billion were sold as mortgage backed securities. The article estimates that about some $33 billion could be put back to WaMu, which then might require some $412 million to $2.1 billion in reserves.

The latest figures released yesterday showed that credit losses could amount to $2.7 to $2.9 billion and WaMu did not expect much growth but higher expenses in the next year. Their most recent financial statement as of 6/30/07 showed assets of $312 billion and liabilities of $288 billion, which leaves equity of some $24 billion.

While that is a decent equity cushion, I am not sure how long that will last as Subprime exposed companies are moving through a time where obligations and/or losses seem to change by a few billion dollars on a weekly basis.

Worries about the extended impact of the Subprime debacle had the markets retreat and then recover over the first two trading days of the week.

Below please find the link to the most recent ETF Master list, which has been updated with yesterday’s closing prices. This will enable you to work with more recent data. You can download the file at:

http://www.successful-investment.com/SSTables/ETFMaster110607.pdf

Our domestic Trend Tracking Index (TTI) moved higher from last Friday’s close, while the international one moved slightly lower. However, both remain in bullish territory with the domestic and international TTI having moved above their long term trend lines by +6.81% and +3.43% respectively.

The Fed’s decision to cut interest rates by ¼ point has raised numerous discussions as to whether more reductions are a possibility or if that was it for the near term.

Michael Shedlock’s article “Rate Cuts: Is It Two and Done?” examines the effects of the rate cut on the economy, and he offers his thoughts on why he believes that more cuts are to come, but not for the generally accepted reasons.

Mortgage rates have not helped borrowers one bit, and he quotes Professor Linden as saying that it is now easier to arrange a golf outing with Tiger Woods than to get a mortgage. Don’t believe it?

Read this latest article in MarketWatch titled “Unprecedented tightening in lending standards.” Since the pendulum always swings from one extreme to another, I was not surprised to learn that even borrowers with the best credit have to jump through hoops to get approved.

If that trend continues, real estate sales will slow down to a crawl, prices will further decline and the economy and job growth will be affected very negatively. As always, Michael’s article provides good insight and is a must read.