The Worst Centeral Banker in History?

Now everyone is asking questions about Alan Greenspan.  Where was he when the whole housing boom was going on?  The article in NYT looks at how the Greenspan, Bush and the whole goverenment were missing-in-action while the housing boom was going on. 

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

 

Don't tell us there was no housing bubble and there was nothing you could do about it.

 

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

"He never gave us a good reason, but he didn't want to do it," Mr. Gnaizda said last week. "He just wasn't interested."

MIA

An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry's excesses. Both the Fed and the Bush administration placed a higher priority on promoting " financial innovation" and what President Bush has called the "ownership society."

 

More worried about Wall Street than Main Street!

 

The Federal Reserve could have stopped this problem dead in its tracks," said Martin Eakes, chief executive of the center. "If the Fed had done its job, we would not have had the abusive lending and we would not have a foreclosure crisis in virtually every community across America."

 

The Fed sleep at the wheels

 

Mr. Greenspan, hailed as perhaps the best central banker in history when he left the Fed in early 2006, is now feeling defensive. In an extensive interview last week, he adamantly disputed the assertion that he could have prevented the mortgage bust.

And now the Worst Central Banker ever?  Calling the biggest housing bubble ever just froth?

Mr. Greenspan and other Fed officials repeatedly dismissed warnings about a speculative bubble in housing prices. In December 2004, the New York Fed issued a report bluntly declaring that "no bubble exists." Mr. Greenspan predicted several times — incorrectly, it turned out — that housing declines would be local but almost certainly not nationwide.

 

In 2000, Mr. Gramlich privately urged the Fed chairman to send examiners into the mortgage-lending affiliates of nationally chartered banks. Many of them, like Bank of America 's affiliate, had already come under fire from state regulators and consumer groups. Fed examiners, Mr. Gramlich argued, could clean up those practices from the inside.

 

Easy Al has been busy replacing one bubble with a bigger bubble.  His easy money policies have led to the spend like there is no tommorow culture.  When the fed chairman says ARMs would have been a better choice for last decade, he is basically recommending the ARMs vs. fixed rate mortgages (Financial Innovations.)

 

http://www.nytimes.com/2007/12/18/business/18subprime.html?_r=1&hp&oref=slogin

 

 

Out of Country

Hello All,

 

I will be out of the country over the next month.  So there will be less frequent posts.  I will try to post as much as possible.

 

Sandy

Inflation and Citigroup SIV

Inflation rose .8% in November.  That's a 9.6% YOY jump in inflation.  But don't worry because the "Core" inflation was only .3%. 

While inflation was up, the treasuries yields are going down as investors are opting for safety.  The yield on 10-year note dropeed to 4.169% yesterday.  That means the real return on the treasuries is -5%!

I feel sorry for all the seniors and savers.  If you are a senior, this is hurting you from both sides.  On one side your yields are going down and inflation is going up.  If you rely on social security, your costs are going up 9.6%, but the government will increase your payment by only .3%!  So if you are finding it hard to make ends meet, it's only going get worse.

While we have inflation sky-rocketing, our fed is busy lowering rates. 

 

http://online.wsj.com/article/SB119763743685729349.html?mod=hps_us_whats_news

Citigroup - Citigroup today announced plans to bring $49 billion worth of SIVs onto it's balance sheet.  This was a  move that was long overdue.  It's going to hit their already depleted capital base.  Congratulations to Vikram Pandit for bringing all the issues out into the open.  I guess now we can say goodbye to Mr. Paulsons MLEC fund.

This leads to antoher point.  This morning on Bloomberg radio, an analyst thought Citi taking SIVs on it's balance sheet means this is the bottom.  I may not be as smart as the analyst, but I would think there is a long way to go before this whole mess is resolved.  Remember that this whole mess was created by easy credit mostly in housing.  I would think there is a long way to go before housing has bottomed out.

 http://online.wsj.com/article/SB119759010104328237.html?mod=hpp_us_whats_news

Countrywide's November oan funding drops 40 percent

Countrywide reported Thursday that mortgage loand funding tumbled 40 percent to $23 billion in November. 

November daily mortgage applications fell 32% to $1.9 billion.  The mortgage loan pipeline was $43 billion in November compared to $62 billion last year.

Subprime mortgages fell to $17 million from $3.06 billion last year.  Adjustable-rate fundings fell to $3.33 billion from $14.3 billion.

With higher rates on their deposits, their retail deposits increased from $29 billion to $31 billion in November.  Thank god for FDIC.  And also FHLB!

 

 

Fed Providing Liquidity

What a  timing for providing additional liquidity.  The fed is working with other central banks to provide more liquidity. 

So even as there are more write-downs, the markets are up.  And so is gold.  I guess you can inflate your way of this crisis.

The Fed also said it had created reciprocal "swap" lines with the European Central Bank, for $20 billion, and the Swiss National Bank, for $4 billion. These will enable the ECB and SNB to make dollar loans to banks in their jurisdiction, in hopes of putting downward pressure on interbank dollar rates in the offshore markets, principally the London Interbank Offered Rate, or Libor, market. The inability of foreign central banks to inject funds in anything other than their own currency has been a factor creating the squeeze on bank funding in those markets.

The new loans will be auctioned off with a minimum rate linked to the expected actual federal funds rate over the duration of the loan. Since the federal funds rate is expected to decline over the next two months, when the loans will be outstanding, the loan rate could end up being close to or even below the current federal funds rate.

Nonetheless, its potential importance has grown given Wall Street's negative reaction to the quarter-point cuts the Fed announced Tuesday in the federal funds rate target and discount rate, to 4.25% and 4.75%, respectively. Blue chip stocks tumbled 2% and treasury yields plunged as investors bet the Fed would ultimately have to cut rates far more to catch up with a sinking economy.

It remains unclear whether the new operation will do the trick. But the early reaction was favorable: Treasury bond prices plunged and their yields shot up in early trading, a sign that investors are abandoning the relative safety of Treasurys and preparing to bid up riskier debt. Futures markets suggested stocks would rise at the opening.

 

Rate Cuts not Helping Many Borrowers

Although the fed has been cutting rates, many of the loans are tied to the Libor.  Libor has gone from 5.36% in June to 5.11%.  At the same time, the treasuries have gone from 4.8% to 2.95%.

The fed is finding it's helpless when it comes to the Libor rate.  So far, the spread has remained stubbornly high because banks are reluctant to lend to each other. 

Libor is frequently used to set rates for ARMs made to subprime borrowers -- mainly people with scuffed credit -- as well as many ARMs that fall into the "jumbo loan" category, which currently refers to most mortgages for $417,000 or more, says Keith Gumbinger, vice president of mortgage-tracker HSH Associates. Also, roughly half of non-subprime ARMs that were originated in recent years are tied to Libor, he estimates.

The higher Libor rates complicate the Fed's efforts to assist troubled borrowers and prevent problems related to the housing crisis from spreading further through the economy....

A recent report from the Federal Reserve Bank of New York shows that the six-month Libor rate will determine the reset rates for an estimated 99% of subprime ARMs and 38% of Alt-A ARMs in the U.S. that have been securitized. A further 1% of subprime ARMs and 22% of Alt-A ARMs will reset based on the one-year Libor rate. Alt-A is a category between prime and subprime that often involves borrowers who don't fully document their income or assets.

Fed Cuts by 25 basis points

As expected, fed cut the rate by 25 basis points.  The fed also cut the discount rate by 25 basis points.  Many analysts were calling for a 50 basis points cut for discount window. 

 

It finally looks like fed has woken up the inflation threat (Atleast they did not cut by 50 basis points)!

 

 

Hitting Prudent Borrower

So you have been a prudent borrower.  You have paid your bills on time.  You have a great credit score.  What do you get for being a prudent borrower?  More fees!

 

Fannie has already added a fee and soon Freddie will be adding fees for insurance on all borrowers.  Fannie added .25% up-front charge on all mortgages. 

 

These while the FHLBs are bailing out Countrywide.  Why is the federal government giving loans of $51 billion to Countyrwide?  Shouldn't the fed be charging a fee for the risk it takes just as the GSEs are charging us the fees?

 

Fannie is also raising down-payment requirements for some loans.  My question is why didn't they do this before?

 

We are finally seeing some sanity in the mortgage business.  Had the fed been awake, this would have stopped long ago.  Thank you Mr. Greenspan for the mess.

 

http://online.wsj.com/article/SB119733436109620199.html?mod=todays_us_personal_journal

 

 

Loan applications have been so slow lately, says Lou Barnes, a mortgage banker in Boulder, Colo., that it feels like "our client base today is limited to people who don't read the newspaper or watch television."

 

 

In a statement, Fannie said the new fee is needed "to ensure that what we charge aligns with the risk we bear." The National Association of Home Builders labeled the fee "a broad tax on homeownership." More than 40% of all mortgages outstanding are owned or guaranteed by Fannie or Freddie.

The fee is the latest in a series of moves by Fannie and Freddie that raise the cost of credit for some borrowers. Late last month, they imposed surcharges that affect mortgage borrowers who have credit scores below 680, on a standard scale of 300 to 850, and who are borrowing more than 70% of a property's value. For example, someone with a credit score of 650 would pay a surcharge of 1.25% of the loan amount for a mortgage to be sold to Fannie. On a $300,000 loan, that would mean extra fees of $3,750. The fee could be paid in cash or in the form of a higher interest rate than would normally apply.

 

Triad Guaranty Insurance Corp., Winston-Salem, N.C., this month stopped providing mortgage insurance on option adjustable-rate mortgages, which carry low introductory rates but can lead to a rising loan balance. Triad also said it would no longer provide mortgage insurance for loans that exceed 97% of a home's value. It set a 90% threshold for loans in four states where home prices have been dropping fast: Arizona, California, Florida and Nevada. "We want to look for people who have more equity rather than less equity" in their homes, says Triad Vice President Jerry Schwartz.

 

 

 

 

Bank of America freezing Money Market Accounts

Bank of America has frozen it's money market account for Institutional Investors.  CNBC says the fund is called Columbia Strategic Cash Portfolio and has assets of $12 billion.

 

 

http://news.briefing.com/GeneralContent/Investor/Active/ArticlePopup/ArticlePopup.aspx?ArticleId=SI20071210113129

Pending Home Sales

The pending home sales rose .6% vs. last month but declined 18.4% vs. last year.

 

More on home sales later...

Profit Slump and Recession Worries

Yet in another WSJ article warns of slumping profits increases recession worries. 

 

Worries about profits are spreading to businesses other than financials. 

 

"The recession in reported earnings has already begun," says David Rosenberg, chief U.S. economist at Merrill Lynch & Co. "The underlying cause is a combination of painfully high energy prices and the general lack of pricing power in many businesses, which is starting to crimp margins."

.....

 

Most economists expect things to get worse before they get better. "We're facing a tsunami of earnings downgrades next year," says

Mr. Rosenberg.

 

We have heard the warning from FedEx already.  

 

Richard Berner, chief U.S. economist at Morgan Stanley, expects a "significant and lengthy" contraction in earnings, even if the U.S. economy avoids a recession next year. That's because U.S. companies have far more operating leverage now than at any time in the past.

 

Of course all these stuff doesn't matter to the stock market.  It should be up..up and away as it these should add to the case for a bigger rate cut.

Consumers Pulling Back

In conversations with my friends who are dentists, they all have seen their practices slow for last three months. 

 

Yet again, we see more evidence of consumers pulling back.  The article in WSJ talks about slowdown in cosmetic surgeries.

  

Now these story confirms there is a slow down in breast-implants, plastic surgeries, and vision-corrections.

 

With food and energy inflating, they are becoming bigger part of consumer expenditures.  On top of that, we have house prices declining.  This is leading consumers to pull back.  Even the consumer index is at it's lowest since 1992.

 

On top of all these issues, we have increses in auto loan delinquencies and also in student loan delinquencies.

 

Credit card companies are raising rates even for those who pay on time.

 

http://online.wsj.com/article/SB119707327901017729.html?mod=hps_us_whats_news

The slowdown was a hot topic at the meeting of the American Society of Plastic Surgeons in Baltimore this fall. One breast-implant maker sees hints of a slowdown in demand. The number of vision-correction surgeries appears to be falling as well. "This whole mortgage credit crisis is making people think twice," said J. Peter Rubin, a Pittsburgh plastic surgeon. "It's something I've noticed and some colleagues have noticed as well."

Brad Tober of Buffalo, N.Y., recently got a notice that Capital One Financial Corp. was replacing the 9.9% fixed rate on his credit card with a variable rate of about 19%. The 21-year-old college student said he hadn't paid a bill late or done anything that he anticipated would lead to a higher rate. A spokeswoman for Capital One attributed the change to "business and economic" factors

Breast jobs and tummy tucks aren't covered by insurance, so patients need a chunk of cash -- or a healthy credit line. So far, the slowdown in some plastic surgeons' offices appears to be affecting big-ticket surgeries rather than less costly procedures such as anti-wrinkle facial injections.

Care Credit has, however, noticed a downturn in another popular procedure -- laser vision-correction surgery. Volume dropped 10% in October, the sharpest decline the firm has ever seen in such procedures, Mr. Testa said.

It's a buyers market..NOT

The Real Estate morons er agents think this is a great time to buy.  In a article article in Newsday the morons have advice for home buyers.  Although there might be a recession ahead, and prices will drop further, it's a great time to buy because the mortgage rates are at historical lows.

"Now that the prices have flattened, it's a great time to buy," says Dottie Herman, president and and chief executive of Prudential Douglas Elliman Real Estate.

Seriously, is there is any time that is not "a great time to buy?"  Oh yeah, all the real estate is local.

But while advising caution, many real estate experts say the time may finally be right for buyers who have been waiting to jump into the market. "In my 25 years in the business, this is by far the best buyers' market I've seen," says Steve Harney, a former owner of a large Long Island real estate firm who now specializes in negotiation and sales training.

 

There are no buyers because prices have a long way to go.  The sub-prime borrowers are out and the speculators/builders are out.  Builders used to create a floor on prices because they would buy a house in bad condition and renovate it.  Now with the prices going down, and many of them stuck with houses they can not sell, they are getting out of that business. 

 

Just because homes don't sell does not make it a "buyers market." The prices need to come down more before it becomes a buyers market.

There are six tips for buyesr.  Second tip is Buy when price is right.  I agree with that!  And it will be a while before the prices are right.

Third tip - Look at new construction.  Oh, but don't expect a big discount?  Buyers need to look for big discounts, especially new construction.

Fifth Tip - Seek 'motivated' sellers.  Duh!  I personally see the sellers motivation by their price, not by priting the word motivated seller.  There are many "motivated" sellers in LI who have been hanging onto their house for a long time.  They are not motivated sellers, they are motivated to sell at their price.

http://www.newsday.com/business/ny-bzspdn5489549dec07,0,1901551.story?page=2

 

Countrywide Isn't Out of Woods Yet

The article in WSJ says Countrywide still has many issues.  It's bonds are still treated like junk bonds.  It's bond yields 13.16%. 

It is increasing borrowings from FHLB and $2billion it recieved from BOA are the reasons for it's survival.  We have been telling you that the FHLB has been recklessly lending to Countrywide.  

It's collateral backing the $83.56 billion has been losing value.  And it's going to get worse as the housing slump gets worse.  Housing is so bad, Tan-Man is not considering even taking a guess as to when it turns.

"I don't know where we are in the cycle," Mr. Mozilo said at the conference. "I wish I did."

Countrywide needs to repay a total of $26.38 billion in borrowings over the 12 months ending Sept. 30, according to the latest quarterly filing. Countrywide officials have said they can meet these payments -- a point that Moody's Investors Service affirmed -- but may have to sell some mortgages or related securities to do so. Investors are so wary of mortgages that it is impossible to know how much of a discount Countrywide would have to offer to find buyers for these assets.

Remember that E-Trade sold mortgages for 27 cents on the dollar. 

 http://online.wsj.com/article/SB119699651215616733.html?mod=todays_us_money_and_investing

U.S. Mortgage Foreclosures, Delinquencies at Record, MBA Says

Mortgage Bankers Association said mortgages with payments more than 30 days late, including Prime and Fixed-rate loans, rose to seasonally adjusted 5.59.  Remember these are prime and fixed-rate.  The "freeze" plan is not going to help here. 

In addition, 20% of adjustable-rate subprime loans were delinquent.  In addition to that, 10% are already in foreclosure.

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aalYt3UzOuLU&refer=home

Housing Prices to Drop 30%

This is not us telling you.  We have been telling you for a long time that house prices are going down. 

Now Moody's Economy.com said on Thursday that some housing markets will crash and suffer price drops of more than 30%.  They also said it will not be until 2010 before a measurable improvement in sales, construction and pricing will emerge.

What does all these mean?  People who bought at the top, will have to wait 5-15 years just to see their homes reach their current prices again!

Remember, this is not a subprime issue anymore.  This has little to do with ARM resets.  More and more people bought houses they could not afford and with house prices going down, it's better to simply return the key and walk away.

Again, housing is declining even as the job market is in decent shape.  What happens when the job market takes a turn for worse?  It should be something that keeps you up at night.

 

http://www.cnbc.com/id/22125224

How about more bailouts?

WSJ is reporting that there is a surge in Auto-Loan delinquencies.  4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent.  And 12% of subprime borrowers were dlinquent on their 2006 auto loans.

If nothing else, more delinquencies means more problems for US Car makers as they rely more on cheap financing.  Although, according to the article, Ford and GM problems were less severe because they do not lend to sub-prime borrowers.

I wonder if this will lead to a new bail out from Washington.  How about lowering the rate of all people who bought a gas-guzzeling SUV in last two years? 

In another article, Student-loans are hit by higher default rates.

How about another bailout there?  Anyone with an average below C will not have to pay anything for next five years?

United Bailouts of America

 

 

Begging for Fannie and Freddie

In today's commentary in WSJ, Countrywide Financial Corp CEO Angelo Mozilo is now begging to raise Fannie and Freddie loan limits to $625,000.

First give out bad loans, then sell all your stock holdings, then borrow from FHLB's like there is no tom morrow. Then dump the current junk onto the GSEs.

We have a current mess in housing because loans were given to people who could not afford them. Raising the limit is just going to make things worse.

Even if they raised the limits, I am not sure that would help right now. Freddie and Fannie seem to have their own capital issues right now. These are the same agencies whose accounting evokes shades of Enron according to Bloomberg's Jonathan Weil.

But that does not matter because let's just dump the junk on tax payers. Let's go further into the black hole by giving out bigger more irresponsible loans.

http://online.wsj.com/article/SB119682399988414066.html?mod=todays_us_opinion

Fannie Mae Raises Home Price Decline Forecast to 5%

Now Fannie Mae is saying that home prices will decline 5%.  That's on top of the 3% through end of the year.  The drop is going to be nationwide. 

No wonder Fannie is cutting is dividend and planning a $7billion sale of preferred stock.

It said single-family serious deliquincy rates are increasing.  This will increase pressure on the pricing. 

If you ask the morons at NAR, they will tell you it's still a great time to buy. 

http://www.bloomberg.com/apps/news?pid=20601087&sid=azX1YZtWO_ns&refer=home

Fed Rate Cut Expections

WSJ has this on what the Fed is going to do at the next meeting. A 25 basis point cut is already expected. Since all fed officials have been openly talking about a rate, I would expect a 50 basis points cut. The fed like to surprise the market and they can only surprise with a 50 basis point cut. Also, remember they have been talking about "Equity" prices. If the market is down again, they will cut it 50 basis points.

Some analysts have also been talking about cutting the Discount rate or by lenghtening the loans.

http://online.wsj.com/article/SB119681606229313739.html?mod=hps_us_whats_news

How big a cut and what to say in the accompanying statement are likely again to be difficult decisions, as they were on Oct. 31 when the Fed cut its short-term interest-rate target to 4.5% and issued a statement suggesting no more rate cuts were likely.

Futures markets expect at least a quarter-percentage-point rate cut and see a two-thirds probability of a half-point cut. Fed officials will likely consider the larger cut, but some might find it hard to justify when just a few weeks ago they thought they were finished cutting rates.

Some analysts say the Fed is more likely to deliver a quarter-point rate cut and drop from its statement last month's characterization of risks of weaker growth and higher inflation as equally balanced. That would implicitly leave the door open to additional easing, without leading investors to presume further cuts were coming.

An alternative option would be to auction off credit at its discount window, as the Bank of England has done. Another would be to extend the term of discount-window loans to 90 days from 30 days.

Alt-A losses climb

Expected loses for loans originated in 2006 may climb to 20%.  Unlike what the fed and PaulSivReeze have been telling us, this thing is not contained.  This is just the beginning.

Alt-A loans are loans made to people with better credit score than Sub Prime but without income verification.  Yes, a janitor making $150,000 is fine.  How much mortgage do you want?

 

http://www.reuters.com/article/bondsNews/idUSN0452941320071204

Fannie Mae to Cut Quarterly Dividend by 30% to Conserve Capital

Fannie Mae to Cut Quarterly Dividend by 30% to Conserve Capital. 

 

And Angelo Mozilo wanted the GSEs Freddie and Fannie to help Countrywide!  Yeah right!

 

He is already getting help from FHLB who is loaning Countrywide $51 billion with junk collateral.  Now he wants the GSEs to help Countrywide while he dumps the shares. 

 

Time to cut Countrywide Dividend!

Unfreezing Florida Funds

Florida's state-run cash management fund is supposed to be safe and liquid. Instead, they have been investing in SIVs. With the credit turmoil, even the prime stuff is hard to sell. The fund has as much as 14% in "distressed" fund.

The schools which had the money in the fund don't have the money to pay salaries or pay for the electricity.

They might split securities and sell the prime securities first. But even the prime securities would have to be at a loss.

http://online.wsj.com/article/SB119673985690712810.html?mod=todays_us_money_and_investing

Solutions won't come easily. BlackRock officials said the fund could have trouble selling even its best-quality assets, given recent turmoil in bond markets. They proposed splitting the fund's $14 billion in assets into a "high-quality" fund and a "distressed" fund. The latter would include about 14% of the fund's total assets.

"I'm hoping that the electric company won't cut off the lights to our school," says Hal Wilson, chief financial officer for the Jefferson County school district, which had money in the fund. "We'd really be in a bind."

"We're starting to realize how pervasive these assets were," says David Watts, an analyst for CreditSights, an independent research firm. "When you package these securities they end up in all sorts of places you wouldn't have expected."

"We relied on the continued assurances from state officials that the fund was safe," Mr. Wilson says. "We're a small county; we can't call on outside money managers to assess the situation."

These officials also said they were looking for a creditor that might offer loans to government and school officials and use the fund's high-quality holdings as collateral. Some investors urged them to turn to the state's $137 billion pension fund to be that lender. But BlackRock officials suggested the pension fund wasn't an appropriate vehicle for that role.

Details of the Freeze Plan

Now we are getting more details on the bail out plan.  It looks like his MLEC plan.  It's not going to do much.

 

In order to qualify for the freeze, you would have to be current on the payments.  So if you are behind, you don't qualify.  And you have to be able to keep making payments at the introductory rates. 

 

In California, a similar plan will help only about 12% of the borrowers with ARMs.

 

There are also talks about investors suing if they are forced to freeze the rates.  As we have said before, this plan makes very little sense without government subsidy.  It's too little too late. 

 

http://www.nytimes.com/2007/12/03/business/03cnd-debt.html?_r=1&hp&oref=slogin

 

 

Where are the market heading?

In order to see where the markets are heading, WSJ article compares to other similar situations.  Here are the conclusions:

 

There will be a lot more write downs.  We have seen E-Trade sell Prime securities for 27 cents on the dollar.  MS has $5.7 billion more writedowns.  So there is a lot more writedowns to come.  According to the article, it takes about 2 years for the price discovery.  So if you thought the crunch is over, it's far from over.

 

Cheap does not equal value!  We've heard this many times.  Just because Citi or Countrywide stock is depressed, it does not mean it's cheap. 

 

Watch Lawmakers and Enforcers.  They are the last ones to arrive.  So I guess this means when Angelo Mozillo is in jail, we will know the bottom:). 

 

http://online.wsj.com/article/SB119663796725711104.html?mod=hpp_us_whats_news

Lennar & Morgan Stanely Deal

WSJ is reporting that Lennar Corp. has sold lots for 40 cents on the dollar.  They sold the lots for $525 million that was valued at $1.3 billion in September.  Lennar will have 20% stake with option to buy back lots.

 

Hedge funds and bankers want builders to have stake as they have the knoweldge.  So don't expect this from builders that are close to bankruptcy.

The deal, which closed with little fanfare Friday night, could be a catalyst for other "vulture" investors to swoop in and grab discounted land from other troubled builders. A wide range of investors have been raising money from pension funds and private-equity firms to acquire land.

"It's a good deal for Morgan Stanley" says Ivy Zelman, chief executive of Zelman & Associates, an independent housing research firm. "They are getting the lots at 40 cents on the dollar and Lennar will manage the venture and provide their home-building expertise for a fee." A Morgan Stanley spokeswoman declined to comment.

http://online.wsj.com/article/SB119664527659511255.html?mod=hpp_us_whats_news&apl=y&r=712196

 

 

Things are different this time

We keep hearing analysts who try to pick the bottoms.  People think that the financials are so low that they are a bargain. 

Remember that when trying to pick a bottom, you could be cought with a falling knife.  To me, trying to pick a bottom in housing and financials is like catching a falling knife.

An article in Barrons this week by Jacqueline Doherty discusses the same point.  Because in terms of Finacials, we are only at the beginning of the downturn.  Remember we have discussed in past about Credit Cards or auto loans and rising defaults.  There will also be rising corporate defaults.

Doug Krass is another analyst who thinks this is a dead cat bounce.

 

http://online.barrons.com/article/SB119646780833210138.html?mod=b_hpp_9_0002_b_this_weeks_magazine_home_right&apl=y

 

 

THE BOND MARKET is certainly signaling that all's not well. The London Interbank Offered Rate -- or Libor -- is what banks charge each other to borrow money. Last week marked the first time that a bank could borrow one-month money through the turn of the year. The rate on one-month Libor jumped from 4.82% Wednesday to 5.22% Thursday. Such stress hasn't been seen since 2000, when investors were worried about Y2K, and the Fed had to provide massive infusions of liquidity

As the banks and brokers deleverage, it's unlikely they'll be able to boost earnings. "This is the epitome of a dead-cat bounce," warns Doug Kass, the head of Seabreeze Partners, who has long been bearish on the financials. "People don't recognize how far bank and broker earnings will fall."

So, yes, there will be a time to buy bank and brokerage stocks... but it's certainly not right

Disclosures: Short Countrywide through puts.

Goldman Sachs newsletter and it's bets

Ben Stein has an article in New York Times talking about Goldman Sachs.  The article is mainly about two topics.  The first is about the newsletter that Jan Hatzius wrote about the economic disaster.  We discussed it here earlier in our blog.  The second topic is about Goldman shorting many of the CDOs they were creating.  He is comparing this to Henry Blodget and how he was pumping stocks that Merrill was dumping. 

 

He disagrees with Mr. Hatzius's newsletter that there is a economic disaster looming ahead.  He does not think the housing will go down 15 percent.  He believes there will be government intervention, which the newsletter failed to recognize.  The downturn in housing will lead to more CDO losses and the banks will be forced to curb lending. 

 

He also insinuates that the newsletter may be to help Goldman with it's bearish bets. 

 

It looks to me like Ben is missing the point.  This housing is alot worse than he thinks.  15 percent is just the beginning.  It's going to be alot worse than 15 percent.  He seems to think the fed can fix everything.  If the fed could fix everything, Citibank would not have gone begging to Middle Eastern countries for more capital.  The size of this mess is enormous and unlike anything we have seen before.

 

To me, MSM and Wall Street sells more good news than bad news.  We have seen this over and over again with Housing reports and how they make bad news into good news.  If MSM and Wall Street were more negative, the housing and credit downturn would not have been this bad.

 

In the second part, he argues if selling the product and shorting them are as illegal.  Goldman says it has disclosed everything it needs to. 

 

 

http://www.nytimes.com/2007/12/02/business/02every.html?ref=business

A Bailout for the Buyer

I have been saving my money for a decent size downpayment.  I have been waiting for the home prices to come down.  Yet in the Long Island area, the prices have not come down as much as everywhere else.  There are still people holding onto their homes thinking someday they will get the previous level prices. 

There are many developers who speculated they can improve a home and sell it for a higher price.  Now that they can't sell them, they are renting them out.  This bailout pisses me off because it is only going to help all those speculators keep their house a bit longer.  But eventually, they have to sell.  This bailout is only going to elongate the period of housing depression.

So I have a better solution.  I am looking to buy and this market needs more buyers.  How about giving me a 2 percent rate for next 10 years Mr. Paulson ( I am not going to call him PaulSIV because I am asking for his help:).  Instead of temporarily helping people keep their house who can not affort to, let me buy the house with a low Mortgage rate. 

We need to bailout the buyers!  The prices are still too high. 

Hope you are listening Ben B and Henry Paulson.

Here comes another bailout

After bailing out banks and lenders, they are now bailing out home speculators. Yes, the tax payer dollars to freeze resetting ARMs.

The worse part about this is it's only freezing the rate for a period of time. It's just putting the Armageddon into the future. So all the speculators who bought at 2 percent are going to have the rates frozen at 2 percent. I wonder if I get a 2 percent ARM, will I qualify?

Whatever happend to saving money? Putting down 20 percent, if not more.

One thing to remember is that the Fed only determines the Short term rates. The long term rates are determined by the foreigners investing in the US. When they stop buying, the rates are going to go through the roof.

Currently, China and Oil countries are buying the treasuries. If the oil prices go down, will the oil countries stop buying the dollar? Just yesterday, there were news of Russia pricing gas in Rubble. Will China stop buying the dollar after the olympics? It remains to be seen because they have as much to gain as the US does in keeping the dollar artificially low. But if the value of dollar keeps going down then what do they do?

It may take some time, but there is only one way for dollar to go in the long run...DOWN.

FHLB's bailing out Countrywide and other banks. Fed bailing out the stock market that is at record levels. Now the fed bailing out speculators.

Bailouts everywhere!

Ben B. Hints at another rate cut

Fed vice chairman yesterday said it yesterday.  Now Ben B is confirming the rate cut.  It was not like it was a secret. 

 

It is interesting that he thinks we will avoid a recession.  If they think we can avoid a recession, it looks like they are day dreaming.

 

 

Bernanke said he expects consumer spending will continue to grow and suggested the country can withstand the current problems without falling into a recession. But he indicated that consumers could turn more cautious as they try to cope with all the stresses.

 

http://www.msnbc.msn.com/id/22031502/

 

New-Home sales it's worse than you think

I was surprised to read the headlines that new home sales rose 1.7 percent. After reading the article, you realize the devil is in the details.

Economists were expecting 750,00 annualized home sales in October. The actual number was 728,000. That's right 25,000 lower than the economists were expecting.

The September number was 770,000 initially. But now they revised that number to 716,000. So now, we get a gain of 12,000.

As I have done in the past, I will again add the revised number to this month. What does that do? We went from 770,000 to 728,000. That is a drop of 5 percent. Now add up all the cancellations that we are going to see and you get the real picture.

The best part is Lawerence Yun saying the Sub prime borrowers are disappearing. Didn't he say yesterday that the price of existing home sales went down because of the affluent buyer? Looks like MSM is sleeping again.

http://www.cnbc.com/id/22024246

More on New Home sales later.

Bank of America's Countrywide Investment

It's no secret.  Most people already knew that Bank of America invested $2 billion in Countrywide Financial Corp in order to be able to buy Countrywide's assets at a distressed price.

If Countrywide were put up for sale, BoA would be given the first right of refusal.  According to article, Ken Lewis invested the money in order to get a better deal on Countrywide's product suite and loan-processing technology and also to keep competitors away from buying Countrywide.

Both companies also declined to comment on whether Countrywide paid the first quarterly payment that was due earlier this month.  That seems to me like a strong signal that Countrywide is insolvent. 

Of course, no need to worry.  The fed is there to loan Countrywide unlimited amounts to ensure it will not go into bankruptcy.  This is not me just me saying it, this is in the article!

 

It's unclear how serious Countrywide's problems really are. CEO Angelo Mozilo is adamant that Countrywide has ample cash and borrowing capacity to meet obligations and has predicted a quick return to profitability. Just last week, Countrywide was rocked by mortgage-related jitters, prompting it to take the unusual step of issuing a statement denying rumors that it was near bankruptcy.

Countrywide declined to comment for this article.

Even if Countrywide were to fail, Bank of America's stake still could have important value for the firm. One significant factor: In return for its $2 billion investment, Bank of America was given first right of refusal to buy Countrywide if it were put up for sale.

 

The first quarterly payment was due earlier this month. Bank of America and Countrywide declined to comment on whether it was paid.

 

The chances that Countrywide could have to seek court protection in the traditional sense seem remote to some bank analysts, in part because of the company's deep relationship with the federal government. The deposits in its banking arm are federally insured and it has borrowed heavily from the quasigovernmental Federal Home Loan Bank in Atlanta.

Regarding Countrywide, analyst Richard X. Bove of Punk Ziegel & Co. argues that if it were indeed to fail, the federal government would facilitate a sale to Bank of America, much as many believe that regulators encouraged Bank of America to take the stake in the first place.

Housing Depression

How bad are things in the housing markets?  As I have said before, it is going to get alot worse before it gets better.  But even now, people are calling it housing depression. 

 

Here is a quote from WSJ:

 

That light at the end of the housing meltdown tunnel appears to be an oncoming train… Problems in the West are the greatest and the sales rate in that area is off by 33% over the year. That is on beyond recession and into the depression stage. Sales in October were down in the Midwest but flat in the Northeast and South. The big problem is inventory. We have nearly as many homes on the market as the annualized sales pace. If no more listings appeared, it would take nearly eleven months to clear out the inventory. That's about 2½ times as many homes as we should have. –Naroff Economic Advisors

 

 

Yeah, it's ugly.  But that's great for the Stock market because we can expect another rate cut.

 

http://blogs.wsj.com/economics/2007/11/28/economists-react-little-left-to-say/

 

 

 

Existing home sales plunge 20.7 percent from Last Year!

On the MSM you will hear the 1.2 percent number. That's just comparted to last month.

Compared to last year, the housing is down 20.7 percent. House prices declined 5.1% from last year.

Inventory was higher by 15.4% vs last year and 1.9% vs. last month. That's 10.8 month supply.

Looks like it's going to get worse for housing before it gets better.

Another Rate Cut Coming!

It looks like we are getting another rate cut.  The Fed's Kohn said this morning conditions have deteriorated.  I guess it's better than cutting after saying we are not going to cut.

The dovish fed is at it again.  The markets are going to pressure the helpless fed again.  But just look at the Libor rate and you realize there are more problems out there.  A rate cut is not going to help anyone except the big banks.  We've got rate cuts to help the banks.  We've got FHLBs loaning $51 billion to Countrywide and more to Citibank and Washington Mutual.  Bailouts everywhere!!!

 

"The increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and in October," Mr. Kohn said in prepared remarks to the Council on Foreign Relations, adding that conditions in term markets "have deteriorated some in recent weeks."

 

"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," Mr. Kohn added.

 

http://online.wsj.com/article/SB119625539512906475.html?mod=hpp_us_whats_news

S&P: Housing prices drop 4.5%

The S&P Case-Shiller housing index dropped 4.5% in the Quarter and 1.7% from previous quarter.  Both are records largest drops since the beginning of the index in 1987. 

Remeber we wrote yesterday that housing has a long way to go before it gets better.  And also remember this drops are before any recession.  If there is a recession, it's going to get ugly.

U.S. Consumer confidence also fell to 87.3.  Economists had expected it to fall to 91. 

The expectations for the state of economic activity fell to 68.7 from 80 in October!
 

http://online.wsj.com/article/SB119617163320005232.html?mod=hps_us_whats_news

 

 

Abu Dhabi to infuse $7.5 billion into Citigroup

Abu Dhabi to infuse $7.5 billion into Citigroup

After the infusion of $7.5 billion, ADIA will be the largest shareholder.  I wonder if Prince is going to have ego problems with this investment. 

Citibank is paying 11% interest rate.  That's right it's higher than the junk-bond rate.  Citi's tier 1 capital is below 7.5% so it needs to get capital in any way it can. 

Looks like Oil countries and China are taking the lead in everything these days. 

 

In exchange for its investment, ADIA will receive convertible stock in Citigroup yielding 11% annually. The shares are required to be converted into common stock at a conversion price of between $31.83 and $37.24 a share over a period of time between March 2010 and September 2011. The investment, which came together in about a week, is expected to close within the next several days.

Citi is paying a higher interest rate than companies that borrow on the high-yield, or junk-bond, market; currently they pay roughly 9% for straight bonds. Typically, convertible bonds pay lower interest rates than straight bonds, although a particular bond's structure could affect the interest rate paid.

 

http://online.wsj.com/article/SB119613039399104832.html?mod=hps_us_whats_news

 

State of the Housing

As anyone reading this blog knows, housing has a long way to go before bottoming out.  I have been thinking about this for a while.  What is truly scary about housing is not the fact that it's gone down.  But that it has gone down without any major problems in labor markets.

Now, there are rumors that Citibank is looking to layoff 45,000.  Just imagine what happens when there are more layoffs announced. 

Forget the ARMs for now.  Just think how many families are dependent on two incomes.  Even if one of them were to lose their job, it would severely effect them being able to pay the mortgage. 

Here is a story in WSJ today about a couple in Long Island, NY that is cutting down on gifts and vacations to save their house.  The story is kind of sad because of the sickness (multiple sclerosis) of the spouse.  Again, I wish they had saved their money early on so they would have been prepared for financial emergency. 

You can kiss goodbye to all those Equity ATMs.  That is going to curtail spending.  That will lead us to more layoffs.  That will lead to more downward pressure on housing. 

It's a scary downward spiral. Get ready for a roller coaster ride.

http://online.wsj.com/article/SB119603767388403471.html?mod=hps_us_inside_today

An Episode from Heroes?

This whole mortgage mess is playing like a Heroes episode. It's hard to distinguish the good from the bad.

Today, WSJ is reporting that Charles Schumer urged regulators to examine potential risks posed by a sharp increase in lending the FHLB.

"I am concerned that the loans being pledged by Countrywide to secure these advances (borrowings) may pose a risk to the safety and soundness of the FHLB system as a whole."

So Charles Schumer, who wanted to raise the maximum loan amount for Freddie and Fannie, is fighting to ensure that the FHLB is not using tax payer dollar to bail out Countrywide. You gotta love this stuff.

Go Charles!

http://online.wsj.com/article/SB119610325216704176.html?mod=googlenews_wsj

Home Builders downgraded

You have to love the buy side analysts.   Stephen Kim had just upgraded the home building sector in October (as he was trying to pick the bottom).   
He has now downgraded the sector.  I guess this is what they mean when they say don't try to catch a falling knife.

What is even more interesting is that his prices for the stocks are above the stock current price.  So wouldn't that make this an upgrade (from the current levels)?

He cut the price target for Hovnanian from $12 to $8.  Even before todays drop, the price of HOV was 7.27.  Shouldn't the target be lower as things are getting worse and not better?

"However, although the homebuilders subsequently traded roughly in line with the S&P for a while, in just the past two weeks, amid several high-profile instances of severe distress in the financial sector, the group has underperformed the market by more than 10 percent," he wrote.

Kim said two things have made it difficult to identify the lowest point the builder stocks will reach. He pointed to the fact that "the housing cycle's downturn has not coincided with the economic cycle," and noted that the "downturn in the existing home market is lagging far behind the new home market."

It is not that housing has coincided with the economic cycle.  It is the (biggest) cause  of the current economic downturn!

http://money.cnn.com/news/newsfeeds/articles/apwire/48b4f812f315935f815a589fb8799208.htm

Disclaimer: Shorting through options - HOV, TOL, BZH, CFC.

Countrywide and Federal Home Loan Bank in Atlanta

On Nov. 1, we wrote about the Federal Home Loan Bank and Countrywide.  Now, WSJ has this article about Countrywide and how FHLB is the only lender left who will make loans to them. 

The FHLB in Atlanta says they are lending huge dollars and doing it "safely".  Considering no one else is willing to lend to Countrywide, I would doubt it is very safe.  But if they are using the toxic mortgages as collateral, how good is the collateral? 

According to the Bank, the collateral is typically marked down by 10% to 50%, depending on the judgements about risk.  But Stuart Plesser of S&P's says "how good is the collateral?"

Mr. Dorfman said the Atlanta bank's lending policies are well-designed and "validated with very intensive modeling under various scenarios." The bank doesn't accept delinquent mortgages as collateral and is under no obligation to make advances if it thinks they are too risky.

Countrywide is reaching the ceiling of their collateral.  Countrywide says they are opening more kiosks to solicit CD and money-market accounts.  If they don't get that additional funding from those accounts?  I guess Mozilo does not need to worry, the FHLB is there to bail them out. 

The truly scary thing about the FHLB is that Countrywide is not their biggest borrower.  They are Citigroup and Washington Mutual!

 http://online.wsj.com/article/SB119603725035603459.html?mod=todays_us_money_and_investing

Housing Getting Worse

We are far from the housing bottom.  How bad is it?  Well it is so bad that Ben B is recommending Freddie and Fannie be allowed to increase it's portfolio size to $1 million.  Just a little less than a montha ago, he was against raising that amount to $500,000!

How bad is it?  Henry Paulson now wants to bail out the home owners.  He is asking the lenders to change to loans with better terms for homeowners who are at risk of default. 

The best plan was from Sheila Blair, chairwoman of Federal Deposit Insurance Corp., who wanted to freeze the interest rate on two million mortgages due to reset.  Yes, let's fix everyone to the introductor 2 percent rate!  I don't know which one is scarier - the fact that she is the chairwoman of FDIC or that she is the chairwomand AND this is her plan.  Remember FDIC is the one insuring our deposits at banks.

D.R. Horton swung to a loss in the fiscal fourth quarter.  And the company is looking to more price cuts.  I hope Lennar is listening.  It's pretty bad when the CEO Donald Tommintz says "It's going to be a little more painful for us in '08 than it was in '07."  No, it's not just us saying it anymore.  The homebuilders are saying it. 

Of course leave it upto the monkeys at NAR to come up with a positive spin on horrible data.  Existing Homesales declined in 47 states.  Compared to third quarter of last year, median prices fell 10 percent in Florida and California. 

"Some metro areas are hot while others are experiencing localized problems," Lawrence Yun, the group's chief economist, said in a statement. "Home prices in the vast midsection of America, from the Appalachians to the Rockies, are affordable and, perhaps, even undervalued."

How about putting your money where your mouth is Mr. Yun and buy some properties in the "undervalued" rockies?

All this bad news and the stock market is down only 1 percent?  Disconnect?  Manipulation?  I don't know what it is, but something is wrong here. 

Disclosure: I am shorting this market using put options (CFC and homebuilders and SRS (Ultra short Real estate and Ultra short Small Cap 600). 

Roller coaster

The markets were a roller coaster ride today.  But unlike a roller coaster, the last round was not a drop but up.  Dow went from 12,863 to 13,010 in the final fourty minutes. 

It's hard to understand the market rationale for going up.  It seems as if the market is expecting an emergency rate cut tomorrow.  We have already seen that the rate cuts have not helped.  Look at where we are since the last rate cut. 
It looks like there are people out there in denial.  I must be missing something because from here, the news looks pretty ugly. 

CFC was down as much as 20 percent but ended the day at 10.23 only 3.22 percent down.  Unless there is a bailout, I don't see how a rate cut would help CFC.  They also had a news release saying it has plenty of liquidity but they did not specify who it was.  I guess FHLBs are a pretty reliable lender.

Freddie Mac was down 28 percent and Fannie Mae was down almost 25 percent.  Weren't the GSE supposed to help ease the liquidity by lending more?  With them having capital requirement problems, you can forget about raising their limits ($417) because they can't lend until they find more capital. 

So what do you think was the cause of the sudden reversal in the market in the last hour?

Countrywide Financial Corp Bye Bye?

Debt protection costs soared around 160 basis points on Tuesday.  

 

It costs 900,000 per year to insure $10 million.  Almost 10 percent.  So except for FHLBs, no one is going to lend to them.

 

No wonder the stock has gone from $13.82 to $9 in just last week.  Today, it tested lows of $8.21 before moving up.  I wonder if Bill Miller still thinks this is good crap to buy.

 

http://www.reuters.com/article/marketsNews/idUKN2061187520071120?rpc=44

 

 

Freddie Mac Loss Widens

Freddie Mac came out this morning with a net $2billion of losses.  The latest quarter losses included $2.7 billion in Mark-to-Market and $1.2 billion in credit-loss provisions. 

 

It may cut it's dividend in half and needs capital right away to keep it's core capital above required minimum of 30%. 

 

So Ben B. and Mr. Schumer wanted these folks to give out $1 million loans.  I love how every politician likes to waste our tax payer dollar to help themselves.

 

Why does Mr. Schumer want to enable the GSE's with a higher limit?  Think this is about helping homeowners?  People who need help are the sub prime borrowers, not the rich.  By giving out $1m loans, you are only helping the rich.  But this is really to bail out the financial institutions behind this mess.  Look at his campaign contributions and you will see why.  In 2008, biggest contributions to his campaign were made by Finance/Insurance/Real-Estate.  They contributed 42 percent of his campaings money or $ $6,040,453 (42%).  For details, goto http://www.opencongress.org/people/show/300087_charles_schumer

 

The mortgage financier said its estimated regulatory core capital is almost below the regulatory minimum of 30%. In order to keep it from falling below that, it has engaged Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. to help consider "very near-term capital raising alternatives."

Freddie Mac is also "seriously considering" reducing its fourth-quarter dividend by 50%. If those measures are not sufficient, then the company "may consider additional measures in the future such as limiting growth or reducing the size" its retained portfolio.

http://online.wsj.com/article/SB119556248413999149.html?mod=hps_us_whats_news

 

 

Dollar in the bunkers

How far has the mighty fallen?  The news for the dollar keeps getting worse by the day.  Even as the feds are almost explicitly saying they wont cut (by now, the fed has fooled us twice so we know better). 

You've probably heard all the stories about dollar not being accepted at Taj Mahal.  With Rupee gaining 12 percent against dollar, it's no wonder they don't accept the dollar.

Maldives was another country where people did not like to accept dollar.  Brazillian Super-model Gisele Bündchen wants to be paid in Euro.  Jay-Z is flashing Euros and not dollar in his latest videos.

Now, some OPEC members want to switch to Euro as oil's pricing basis.  Iran and Venezuela want to switch currencies.  Iran is already accepting Yen from the Japanese.  While Irans and Venezuela's purpose may be political, it could have very negative effects on the dollar.

Saudi Arabia is against this idea, at least for now.  But with inflation rising fast, its own peg to dollar.

UAE and Qatar are already planning to switch to a bucket of currency to curb inflation.  Kuwait has already changed to a basket of currencies.

It looks like everyone is abandoning the dollar peg.  It's in danger of losing it's status as world currency.

I would think since so many people are shorting the dollar, there might be a little bounce.  But the bounce may just be temporary.  In the long run, there is only one way for the dollar - down.

 

Rich consumer feeling the pinch?

It's not just the poor consumers cutting spending.  Now it's the rich consumers cutting spending. 

People have been burnt so many times about consumers in America, it would be foolish to count them out.  But everyday, we get more and more evidence the spending is slowing. 

With shrinking stock portfolios, falling property values and smaller bonuses (unless you work at Goldman), it is effecting the rich consumer. 

High-end sales growth dropped to 3.3 percent from 10 percent earlier this year. 

The biggest surprise was from Nordstrom which reported a 2.4 percent decline. 

With housing prices going lower, the continuing credit crunch, if the affluent consumer spending slows down, it could get pretty ugly out there.

``Upper-income consumers are the bellwether,'' says Joseph Brusuelas, chief U.S. economist at IDEAglobal Inc., a Singapore- based research firm that advises central banks. ``When they begin to capitulate, that's when we all head down.''

That comes after five years in which the net worth of U.S. households ballooned by $19 trillion to $58 trillion, with most of the increase coming from financial assets, according to Federal Reserve figures.  

http://www.bloomberg.com/apps/news?pid=20601109&sid=aS8qyeqQhtXk&refer=home

Recession, Rate Cuts and the Dollar

Bond market is again asking for a double rate cut. Just remember that the fed has been saying there will not be a rate cut. As I have said before, the fed needs to keep quiet rather than talking hawkish and acting dovish. You loose credibility when you don't walk to walk.

Inflation will be out of control if they are going to cut again. Most people can already feel the pinch of the declining dollar. Cutting rates is not going to help those who need it the most - the home owners.

So this is the dillema they are in. Cut and inflation goes up. Don't cut and let the economy get worse.

Can you say Stagflation?

http://bloomberg.com/apps/news?pid=20601087&sid=afVq20BblU7w&refer=home

Sudeep Reddy in a WSJ article says weak dollar is not causing as much inflation as it has in the past. A dollar decline in mid 70s-90s, a 10% decline in dolloar would have meant 50% increase in import prices. Now, it means 25% increase in import prices.

Since the Chinese Yuan is pegged to dollar, the falling dollar does not effect imports from China as much. Also, importers are willing to not raising the prices and instead taking a smaller markup.

Also, exporters like BMW are accepting lower profits rather than increase the price.

But to me all there is a limit to how much businesses cut margins before they start raising the prices. After all, business are not going to take a loss in order to maintain their US marketshare.

http://online.wsj.com/article/SB119542708759397293.html?mod=todays_us_page_one

Countrywide financial corp is down 9 percent again today. It has gone from 13.72 on Wednesday to 11.00 (and still falling) today. It was as high as $17.30 after Countrywide forcasted a profit in fourth quarter. All the analysts were "imperessed" by the management. I wonder if this was another pump and dump operation. Could all the analysts have been fooled into believing CFC was going to be profitabe in 4th quarter?

Lowe's profit fell 10 percent in third quarter and cut it's outlook. And it cut it's outlook for 4th quarter and blamed it on housing. People who have been reading this blog have known about how bad the housing is for a long time. It's not suprprising anymore.

http://biz.yahoo.com/ap/071119/earns_lowe_s.html

Goldman downgrades Citi to 'Sell'. I Wonder if they have more losses coming. Hats off to Meredith Whitney who was the first to downgrade Citibank( and got death threats for doing it!).

http://bloomberg.com/apps/news?pid=20601087&sid=a6814IMk7imI&refer=home

$2 Trillion Crunch

Again, with a number like that, it would seem logical that the numbers came from a blog.  But this is from Goldman economist Jan Hatzius .

 

According to him, if there are losses of $400 million, then the lenders have to shrink it's balance to maintain it's capital ratio. 

 

For those who are not familiar, a bank needs to maintain 10% capital ratio.  That means if a bank has $100, it can lend $90 and must have $10 in order to keep it's capital ratio of 10%.  In order to maintain the capital ratio of 10%, it must shrink its balance sheet by $10 for every $1 in credit losses.

 

But most stock investors don't react aggressively to capital losses the way banks and other lenders do. A bank that aims to maintain a capital ratio of 10 percent would need to shrink its balance sheet by $10 for every $1 in credit losses, the note said.

 

That means that if lenders end up suffering just half of the $400 billion in potential credit losses, they could be forced to reduce the amount they loan by $2 trillion. Such a drastic credit crunch could have dire consequences for the economy.

The Coming Recession

Remember back when Walmart reported higher sales we said that this might be due to the trickle down effect.  As consumers are tapped out, more of them are going to Walmart to save money.

On Wednesday, we've had Macy's and Nodstrom cut it's fourth-quarter outlook.

Today we have Fedex cutting it's earnings outlook.   Part of the cuts were due to 8% increase in fuel costs (I am not sure what they are talking about because accordning to October PPI, energy prices were going down).

Starbucks also said that it's traffic in its stores fell for the first time since the company started keeping this figure.  And it lowered it's earnings and same-store-sales-growth estimates for 2008. 

As I have said before, everyone has pronounced the American Consumer dead many times before. But now you are starting to see some signs that they might be actually slowing down.  We've talked about the consumer credit at it's highest, housing market in shambles (taking away Home Equity Withdrawals along with it).

HSBC is confirming our earlier article about consumer credit being the next bomb. 

"Early stage delinquency rates in both cards and branch unsecured lending are also showing signs of deterioration" as falling house prices squeeze consumer income, HSBC said in a statement.

Wells Fargo is finally saying what we all know - Housing market is worse since the great depression.  Just imagine how bad it must be for a bank to quote something like that.  

 

40% Cancellation rate for Hovnanian Enterprises

Hovnanian Enterprises is reporting 40% cancellation. Hovnanian said sales "seriously deteriorated" in October. Compared to other like Beazer, 40% cancellation is a good rate.

"Deal of the Century" will also lead to more cancellations and once you sell a house you are setting a market price. If you signed a contract a week or a month before, you are likely going to cancel to get the new price. You are also not going to see more buyers unless you offer the same price to them.

Lennar it would be a good time to rethink mothballing. 2008 is going to be worse than 2007. It's going to be a while before we see real estate prices going up.

http://www.northjersey.com/page.php?qstr=eXJpcnk3ZjczN2Y3dnFlZUVFeXk3NDImZmdiZWw3Zjd2cWVlRUV5eTcyMTgxOTUmeXJpcnk3ZjcxN2Y3dnFlZUVFeXkyMg==

Home builders are struggling through "the most serious housing correction in modern times," Centex Corp. Chief Executive Officer Timothy Eller said Monday at a UBS conference in New York.

The cancellation rates of homes sold during the three-day sale were below normal, Ara Hovnanian said. That rate is expected to grow, he said.

"We had a concern that the Deal of the Century may lead to greater cancellations, because if you buy on a whim you may be more likely to walk away," said Nishu Sood, an analyst in New York with Deutsche Bank Securities Inc., which owns Hovnanian shares. "It still could come and we remain concerned that cancellations could go up next quarter."

NAR Lies

I wanted to do a post on retailers.  But then I saw a post about NAR and couldn't resist it.  We have seen how NAR has been downwardly revising their estimates.  We are at a point where no one listens to those shills.

 

But Seth Jayson, of Motely Fool has taken their numbers and put them in a context.  Their numbers will only get worse as time goes on. 

 

Great job Seth for showing NAR lies. 

 

Existing home sales have are 11.68% below their January estimate.  And new home sales are 15.99% below their January estimate. 

 

http://www.fool.com/investing/general/2007/11/14/charting-the-housing-spin.aspx

 

 

More Writedowns

UBS is expected to writedown $7.11 billion. Citigroup is exptected to have more writedowns after $8-11 billion and $1.8 billion.

Barclays is expected to writedown about $3 billion, which is better than the rumored more than $10 billion. Update - Barclays will writedown $2.7 billion.


http://online.wsj.com/article/SB119508846028193546.html?mod=djemheard

GE Bond Fund Problems

Update (11/15 - 9:30 am) - All outside investors have cashed out after the $200 million loss.

All outside investors, who together held ``several hundreds of millions of dollars'' in the fund, pulled their money, Chris Linehan, a GE Asset Management spokesman in Stamford, Connecticut, said yesterday in an interview. Most of the fund's money before the redemptions came from GE's corporate pension plan and remains invested.

Enhanced cash funds ``never promised to be stable value, though investors may have believed that,'' said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence Newsletter. There are a number these funds ``under duress,'' he said.

Barron's is reporting GE is offering investors the option to redeem
holdings in bond fund for 96 cents on the dollar. The fund has suffered losses
in mortgage and asset-backed securities.



The fund riskier than a money-market fund. The one year return on the fund was 5.49%.

The GE fund, totaling $5 billion, is an "enhanced" cash fund, meaning it seeks to provide a slightly higher yield than a money-market fund while preserving principal and maintaining an asset value of $1 per share.

In a Nov. 8 e-mail to institutional holders of the fund, GE Asset Management cited "extreme conditions in the credit markets" and told investors that "it will soon begin to sell certain securities held in the Fund which will result in realized losses and likely bring the Fund's yield to zero."

GE's pension and benefit plans could suffer additional losses in the fund as more securities are liquidated. It's unclear whether GE Asset Management plans to wind down the fund.

http://online.barrons.com/article/SB119499399633791914.html?mod=b_hpp_9_0002_b_online_exclusives_right

Mothballing And Bankrupt Builders

There was a story in yesterdays WSJ about builders mothballing.  Motballing means Not Selling properties until the housing inventory improves.  Lennar is not selling rather than sell at deep discounts. 

Lennar Chief Executive Stuart Miller recently called some price cuts (by Hovnanian and Standard Pacific Corp.) "unrealistic and maybe even ridiculous."

Locally, there are many developers who have rented out the property until the market improves.  Many could have sold last year for a small loss.  Now as the conditions have worsened, they are looking at a bigger loss. 

It almost seems like an investor in a bad stock.  You just don't want to let it go because you believe it will go up.  And everytime it goes down, you keep asking yourself it can't go any lower.

With more foreclosures and a recession looming, I would assume the problem is going to get worse before it gets better. 

http://online.wsj.com/article/SB119492391355890969.html?mod=todays_us_page_one
 

Another story in WSJ talks about the issues when a builder goes bankrupt and how it effects current home owners.

What are the potential problems?

In some cases, buyers may lose all or part of their deposit or wait a year or more for their house to be completed or the builder's financial troubles to be sorted out.

And you can forget about the swimming pools and Tennis courts they promised.

If you think a developer is in ANY danger of bankruptcy, you would have to think twice before buying from them.  I would think that would cause a problem for any builder that has a chance of going bankrupt.  Once people think you have a chance, people may stop buying or expect a deeper discount. 

• Here is a summary of the problems
• Losing all or partial deposit
• Wait a long time for home to be completed
• Warranties may not be honored
• Promised amenities may not be completed
• Vendors may have placed liens on the property.  For example, Levitt stopped paying vendors.  The vendors then put a lien on the property.  According to Charlotte Observer, Beazer homes has delayed paying vendors.

 

And the situation is likely to worsen in the first half of next year, says Ivy Zelman, an independent housing analyst. "We're in the first or second inning," Ms. Zelman says. "There are going to be a significant number of insolvent builders."

 http://online.wsj.com/article/SB119499896076692014.html

 

http://www.charlotte.com/business/story/356321.html

 

 

Financial Week: FASB 157 Partial Delay

The FASB has partially delayed mark to market assets and liabilities partially. But it looks like financial assets still have to be priced.

It should be an interesting trading day tomorrow.

Some observers questioned the decision. "It's a little puzzling that [FASB] did so at all in that companies will still have to apply 157 to problem financial assets, which is a good thing, whereas the non-financial assets get the deferral," said Jack Ciesielski, an analyst and principal in the firm of R.G. Associates.

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20071114/REG/71114011/1036

Inflation, Retail, and Foreclosures

The inflation numbers came out this morning and the core index is unchanged.

In the 12 months through October, wholesale prices were up 6.1%, while core inflation was up 2.5% over that period. Both annual figures were the biggest gains registered since September 2005.

Retail sales increased by .2%.

Unfortunately for the economy, analysts see consumer spending slowing, perhaps for several quarters. The surge in gasoline prices has taken money out of the consumer's pocket. Declining home values have made people feel insecure and that may lead them to save money, which would detract from consumer spending.

http://online.wsj.com/article/SB119504543100292732.html?mod=hps_us_whats_news

And on a small note, foreclosure filings were up 30% from last three quarters.

Among metro areas, the highest delinquency rate was found in Stockton, Calif., which totaled 7,116 filings during the three month period, one for every 31 households. Second was the Detroit area with one per 33 households and a total of 25,708. Half the cities in the top 10 were in California.

Several Massachusetts cities experienced huge delinquency jumps during the quarter. Boston filings soared 146 percent to one per every 220 households, Springfield's increased 151 percent (one per 172) and Worchester 122 percent (one per 150).

No inflation. Expect the fed to cut rates again. Markets should be up today.

http://money.cnn.com/2007/11/13/real_estate/no_abatement_in_foreclosures/index.htm?postversion=2007111405

Pending Home Sales..Down 22.7%

The NAR press release says the "seasonally adjusted" pending home sales were up .2 % and down 20.4% from last year.

But when you look at NOT seasonally adjusted, you get a better picture of what is going on. The index fell from 94.6 in Augujst to 77.9 in September! That is a drop of 17.7% and 22.7% from last year.

You think you are going to hear that number in MSM? Probably not.