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.

Pending Home Sales

The pending home sales is going to be out at 3 pm. It is expected to be -2 percent.

The market looks to rebound as Walmart reported strong sell (Although, I would think that more people are going to Walmart as they can not afford other places).

Home Depot reported a 27% drop in earnings. I would think it's going to get worse before it gets better as we still have a long way to go for housing.

I will be back with updates later on.

The Loan Crisis on LI

Newsday has a special series on "The Loan Crisis on LI"
It is a multi part series talking about loans and it's effects in the past, present and the future. You know it's bad when Newsday (MSM) starts talking about these issues.

Regardless of greed, ignorance, or wishful thinking, anytime someone loses a house, it's pretty sad. Some of the stories are really sad.
The story talks about the Schels who had to refinance. I have no idea why they had to refinance. But Larry Schel has cancer. The story did not seem to mention they had to refinance because of the cancer. If that was the case, it would be understandable. So I am assuming they took the equity out for other reasons.

Another story talks about the effects of mortgages are having on businesses as people do not have the Housing ATM. One of the owners of a restaurant talks about Schels frequenting their restaurant five to six times a week. This kind of things bother me. How about SAVING BEFORE you have a problem? How about going to the restaurant only two to three times a week to save some money?

I am going to look at the story about how businesses are being effected tomorrow.

http://www.newsday.com/business/ny-enreal-gallery,0,7230934.storygallery

Recession Already Here?

Usually when there is a recession, economists are the last one to find out. But David Rosenberg, chief North American economist at Merrill Lynch, says we may already be there. I tend to agree with him. Looking at all the consumer data, it seems they are tapped out. And with no Equity or equity loans, no more housing ATM.

Wholesale inventories are rising faster than economists had expected. It rose .8 percent in September compared to .2 that analysts had expected. It's a 5.2% increase from year ago. August was also revised up .6%.

The American consumer has been pronounced dead too many times before. So it's hard to believe unless we actually see it. But from the numbers and previous posts on credit data, it would be hard to see if consumers can revive the economy this time.

http://www.reuters.com/article/reutersEdge/idUSN1246297620071112?pageNumber=3


Here is a quote from US Census Bureau

Inventories. Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $404.5 billion at the end of September, up 0.8 percent (+/-0.3%) from the revised August level and were up 5.2 percent (+/-1.8%) from a year ago.The August preliminary estimate was revised upward $2.3 billion, or 0.6 percent. End-of-month inventories of durable goods were up 0.7 percent (+/-0.5%) from last month and were up 1.3 percent (+/-2.3%)* from last September. Inventories of computer and computer peripheral equipment and software were up 2.0 percent from last month. End-of-month inventories of nondurable goods increased 1.0 percent (+/-0.5%) from August and were up 12.2 percent (+/-3.6%) compared to last September. Inventories of farm product raw materials were up 9.6 percent from last month.

Day of Reckoning...THE WORLD IS COMING TO AN END!

Seeing an article with this title, you would guess this is another bad news blog. But it's truly scary when this article is in Barrons. The article asks whether Ben B is truly clueless or whether he is just pretending to be confident. I would think the latter.

The Fed has talked hawkish too many times and been dovish in action. At some point, the market may lose total confidence in Fed. So while being honest may mean a drop in short term, it's going to build confidence in the fed.

http://online.barrons.com/article/SB119465234453288545.html?mod=googlenews_barrons

...and seemingly not have a clue about what's happening to the economy, let
alone what, if anything, to do about it.

At one point or another, he ventured that the economy would soldier on, if somewhat slowly for the next few quarters, unless, he cautioned at another point, it didn't; that inflation was a threat, but not a reality, at least not yet. And that the economy was perking along, nicely negotiating the shocks of the housing collapse, even as evidence to the contrary -- plunging consumer confidence, weak retail sales, dragging auto demand and all the grisly et ceteras -- mounted as he spoke.

All things considered, a Clueless Ben, we suppose, is preferable to an Easy Al, but incorrigible optimist that we are, we had hoped for something better. It's always possible, to be sure, that Mr. Bernanke knows more than he lets on. Certainly, the way the Fed has been opening the monetary spigot suggests that he may entertain greater anxiety than he's willing to exhibit publicly. Which may be effective in keeping the natives from getting restive, but it doesn't exactly enhance his credibility.

E-Trade Falls

E-Trade Financial fell 50% today. Citi Analyst Prashant Bhatia downgraded the stock to sell. He said that there is a 15% chance that the company my be forced to declare bankruptcy.

There are also worries about a run on the bank. If everybody was so worried about ETrade, they may start pulling out deposits.

http://biz.yahoo.com/ap/071112/apfn_e_trade_out_of_the_gate.html

Countrywide Financial Corp

More downgrades coming for Countrywide? All three rating agencies "have placed our ratings on some form of negative outlook, " the company noted in it's quaterly filing.

And if it is downgraded it would be downgraded to Junk Status. It would lead to higher rates and cause it to loose bank deposits.

http://online.wsj.com/article/SB119465817460188744.html?mod=googlenews_wsj

Once again, I wonder if all the analysts, along with Bill Miller are still think there is great value here. I just would not want to catch a falling knife.

Interesting day

With all the losses we've had last week, today is going to be a big one. We've had more bad news from HSBC about Subprime loans.

Blackstone had losses due to "lack of liquidity in the financing markets."

So today is going to be a huge day. Remember that in 1987, the Black Monday was setup after losses in the previous week.

Countrywide Financial Corp 10Q

Countrywide just released it's 10Q. I have not had the time to read the whole thing. But while I was browsing I found the following interesting.



It seems they are holding more of negatively amortizing loans. Remember the earlier blog about them changing some of assets to "held for investments". These are assets they can not away for free. So naturally they have no choice but to keep it on their books.



Following is a summary of negatively amortizing ARM loans held for investment by Banking Operations:

82% No-doc, and 3.19% deliquency.

More to Come.

Sandy

The deepest correction ever!

Reuters is reporting that according to Lehman's chief global fixed income strategist, Jack Malvey, this is going to be the "deepest correction" ever in structred finance.

Fasten your seat belts, we are in for one hell of a ride.

"This is the deepest correction we've ever seen in structured finance,"
Malvey said in an interview on Friday. "This is now worse than Long-Term Capital. This is so dispersed, so interlocked and the relationships among the various entities are not as evident. This is a painful lesson in financial engineering."

http://www.reuters.com/article/bondsNews/idUSN0937458120071109

$1million Fannie/Freddiie Loan?

As if cutting rates is not ennough, Helicopter Ben is suggesting Fannie Mae and Freddie Mac to buy mortgages upto $1 million. Currently the limit for the agencies is $417,000.

Yes folks, let's have government take on excess risk. Let's get dig deeper into this hole by providing more mortgages.

Of course Charles "I want bigger mortgages" Schumer is going to run with the idea. Mr. Schumer, it was excessive lending that created the problems. Throwing more mortgages is not going to solve the issue. Also, Freddie and Fannie already have their problems. In case you did not get the memo, Mr. Cuomo is already investigating the agencies.

The government is already lending more than trillion dollars. You can read more about it here

http://housingdepression.blogspot.com/2007/11/your-tax-money-at-work.html

"That would be, I think, of some assistance to the mortgage market," the Fed
chairman said. "From the federal government's point of view, it would be taking
on some credit risk, which you may or may not be willing to do." He added, "It
would be a good idea to make the GSEs ultimately responsible for some, any
excess losses, or some part of excess losses, relative to the premiums that are
paid."

http://online.wsj.com/article/SB119455499562686966.html?mod=hps_us_whats_news

Countrywide Financial Corp more losses in the closet

Jonathan Weil talks about how Countrywide and Washington Mutual changed classification for billions of dollars. Countrywide transferred $12.32 billion from "held for sale" to "held for investment". Held for investment would mean they have to carry the assets on balance sheet at market value. But by moving to held for investment, they don't have to take the hit right now.

I guess this is how they plan to be profitable in the fourth quarter. Just stuff all the losses in the closet.

That's because mortgages classified as held for sale must be carried on the balance sheet at cost or market value, whichever is lower, with any declines hitting quarterly earnings. Mortgages held for investment, by contrast, need be written down only if they have suffered an ``impairment'' that is ``other than temporary,'' which can mean different things to different people.

A loan's real-life value, of course, won't stop falling just because the accounting treatment changes. Yet by reclassifying loans as investments, banks can postpone big losses, hoping the values rebound later. The problem is they might not, in which case investors could get blindsided.

Countrywide, which reported a $1.2 billion net loss for the third quarter, transferred $12.32 billion of prime mortgages to held-for-investment, after first marking them down by $418 million. The loans all were of the ``non-conforming'' variety that don't
qualify for sale to Fannie Mae and Freddie Mac -- which in this market means there are few, if any, buyers. The biggest U.S. mortgage lender finished the quarter with $30.86 billion of loans held for sale and $83.56 billion in the investment category.

http://www.bloomberg.com/apps/news?pid=20601039&sid=a5Ag3FekeR.s&refer=home

In an another article, WSJ talks about Countrywide extending employees' stock options by one to two years. The extensions are on $32-$39 range options expiring as early as April 2009. I guess they are not confident that the stock will hit that level.

Of course then you have Bill Miller who thinks the stock is worth in the $40 range. Hey Bill, please tell Countrywide to not extend this option as the stock should be trading at fair value by 2009.

Angelo and company are the biggest scammers. They scammed all the analysts to believe that they will be profitable in the fourth quarter.


http://online.wsj.com/article/SB119430931303883273.html?mod=todays_us_page_one

http://www.businessweek.com/investing/insights/blog/archives/2007/11/bill_miller_has.html


Note: I am shorting Countrywide using Jan Options.

Who stole my HATM (Housing ATM)?

Why is is so hard for people to live within their means? And by that I mean INCOME. Not your housing equity!

People are finding out that their houses are upside down (worth less than the mortgage) and can't borrow anymore.

I guess these people will be the crying when their housing are foreclosing. But buying a new truck because I did not like the color? The article says Anxiety reigns. No Shit Shirlock.

Mr. Whittey once seemed an unlikely member of that cohort. A sales manager at a flooring and tile company, he exudes the unflappable air of someone raised amid the easy money of the casino world. Until recently, he and his wife regularly embarked on shopping sprees of $1,000 and up.

He bought a 21-foot boat and two flat-screen televisions for their home. He sold his old truck and bought a new one, he said, “just ’cause I didn’t like the color.” Mr. Whittey could live in such fashion because his company was making good money and his house was
appreciating.

But today, the value of his own home, which reached $500,000,
has fallen and a separate investment property he bought seems likely to fetch far less than the $580,000 he owes the bank. His commissions have diminished, so his income is down. His neighbor recently fell behind on house payments, prompting the bank to foreclose. Anxiety reigns.

http://www.nytimes.com/2007/11/08/business/08borrow.html?pagewanted=2&_r=1&hp

$500 billions of loses?

Royal Bank chief credit strategist Bob Janjuah wrote in a note that Level 3 loses reporting is just the beginning.

`This credit crisis, when all is out, will see $250 billion to $500 billion of losses,''

That's right, upto $500 billion of Level 3. Then there are Level 2 assets. Level 2 assets are just as bad.

Level 3 assets are based on "unobservable" inputs reflecting companies "own assumptions". Yes, just make up a price. Seems like we have many Enrons on our hand. Level 2 is mark-to- model, an estimate based on observable inputs and used when there aren't any quoted prices available.

How bad are those numbers?


Here Are Level 3 Numbers relative to Equity. (Thanks Bernard from rgemonitor blog for the numbers).

Here are Level 2 + Level 3 Numbers.

The PPT In Action?

The trading patterns have been very weird since last Friday. It seemed like the markets were going to take a dive. All of a sudden the markets pare the loses.

I was listening to three different stations on radio this morning. And all of them thought it's going to be an interesting day (in a negative sense). Yet the market opens lower and starts paring their losses when the trading starts.

So could the PPT be doing this? It seems like PPT was a sleep on Thursday when the markets were down 2% (may have something to do with the Jet Lag from India Trip).

There has been more and more talk about the Plunge Protection Team. And each day the market seems to defy the odds and either goes up or does not go down as much as it should.

Here is a quote from Bill Fleckenstein's article. It seems odd that they were actually denying they were buying indexes.

An item that I felt folks would find most newsworthy is that the president's working committee on financial markets, known by some as the PPT, or Plunge Protection Team, now has about 20 outsiders who attend certain meetings to advise the committee. One of them is none other than noted short-seller Jim Chanos, who left Grant's conference early last Tuesday to attend a PPT meeting. In response to my question as to why the committee had chosen him and others, he cited one reason: that the panel was worried about adverse publicity and wanted to communicate that there was no nefarious buying of S&P futures, as is constantly rumored.

It could be that some hedge funds are doing this. But I find it hard to believe that a single hedge fund would have the power to manipulate the market.

http://www.bloomberg.com/apps/news?pid=20601039&sid=a87VERwuZP8c&refer=bondheads

http://www.minyanville.com/articles/index.php?a=14607

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/RecessionIsntAnIfButAWhen.aspx

Bye Bye Dollar!

We have seen this so many times, it is not even news any more. Thanks to the Helicopter and Hank "I Support Strong Dollar" PaulSIV, the dollar is dropping again.

Gold is up to $850 and oil is about $98. Can you say $100 oil? Just to remind everyone, Goldman told everyone to take profit at $93 oil.

Now the Chinese are talking about diversifying out of the dollar. Note to Congress: Be careful what you wish for. At this time, we should be begging the chinese to keep the peg. Instead, in a world where the Chinese are the only one buying dollar, we are telling them to sell the dollar. Shows how smart our politicians are.

It's kind of like you having 9 credit cards with high interest and 1 credit card with artificially low interest. So now we start complaining to the credit card company that the interest is too low!

Hey Ben, the street wants another cut.

http://www.marketwatch.com/news/story/dollar-slumps-top-china-official/story.aspx?guid=%7B49785919%2D0D1E%2D4E6A%2DBF51%2DD1DD1D2A874E%7D

Ron Paul sets one-day GOP Fundraising Record

He has done it! And the MSM is noticing Ron Paul also.

Ron Paul raised more than $4.2 million in nearly 24 hours!

Don't stop now. Keep donating and remember to vote for him!

It's time to stop corruption in DC. It's time to stop the Fed and Treasury using our money to prop up markets and Wall st.

Continue to Donate.

http://www.msnbc.msn.com/id/21646939/

Interest Rate Cuts Not Helping Those Who Need Them Most

According to WSJ, the interest rate cuts by the fed are not effecting the savers and borrowers as much. The savings product are quick to cut the rate when the Feds cut the rate. The rate cuts have also not brought down the rates on home-equity loans and auto loans.

If dollar keeps falling, the treasury will have to have a higher yield in order to attract foreign money.

Here are the highlights from the article
SLOW TO MOVE
Here's how the Fed's recent rate cuts have played out for consumers:

• Banks have been slow to reduce rates on many deposit accounts, benefiting savers.
• Rates on new home-equity and auto loans haven't dropped as quickly as expected.
• Some homeowners with adjustable-rate mortgages that are about to reset will see some rate relief.

The banks may start cutting the savings rates, but until then this is good news for all the savers.

http://online.wsj.com/article/SB119431231354883361.html?mod=hps_us_whats_news

You Want More Rate Cuts?

Justin Lahart in Ahead of the Tape column writes about rate . It seems pretty obvious to most people that rate cuts will not solve the biggest problem out there which is Housing.

The rates will also weaken the dollar and increase commodity prices. That will increase "Real" inflationary pressure (Not the fake CPI stuff).

The problems in housing are less related to high interest rates now than to the hangover after a period of feverish speculation spurred by low rates before. No matter how low rates go, many of the people who would have qualified for mortgages when banks were lending recklessly aren't going to qualify anymore. With home prices in many areas declining, no matter how low rates go, many people will be reluctant to buy -- using borrowed money to purchase a depreciating asset isn't an obvious step to take. What housing really needs is time to heal its wounds. The Fed can't drop that from helicopters.

http://online.wsj.com/article/SB119422200754581966.html?mod=todays_us_money_and_investing

Wall St. in Charge

There is an article in Bloomberg about Henry Paulson and his focus on Subprime issue. As per the article, he wants to ensure that "yesterday's excesses" aren't repeated. These are the problems that were created while he was the CEO of Goldman. But you will never hear him say I helped create this problems.

The article also talks about one of the themes we have been talking about...When main st. needs help, these people don't care. When Wall St. needs help, they stop talking responsibility and they start talking about bailing them out for the greater good!

BTW, these issues are still largely "contained."

``He should admit to having been involved in creating the problem that we
have now,'' said Representative Brad Miller, a North Carolina Democrat, who
introduced a bill Oct. 22 to make firms packaging subprime mortgages liable for
bad loans in some circumstances.

``I can't help but notice that when middle-class homeowners were losing
their homes to foreclosure, he was pretty nonchalant about it,'' Miller said of
Paulson. ``But when Wall Street CEOs start seeing trouble in their absurdly
complicated financial instruments built on the mortgages of middle-class
homeowners, he feels their pain.''

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5IcbvTr6oaM&refer=home

Fleck talks about the Ben bowing to Wall St. Pressure. The fact that Fed and Treasury are helping Wall St. is not even a secret any more. Fleck quoted the fed saying they need to cut because Wall St. is expecting a rate cut!

Hnew moniker for the dollar is xera.

"Both courses of action have risks. Perhaps the biggest is that the market's
certainty that rates will be cut creates a burden on the Fed to deliver.
Ordinarily, meeting market expectations isn't a goal in itself for the Fed. But
the current environment is more fragile than usual, and thus the consequences of
disappointing the market are potentially more damaging."

Thanks to the suggestion put forth by a reader of my daily column, I have come
up with the new name for our currency. Henceforth, it shall be called the xera.
That's a combination of Xerox, for the piece of Xerox paper that it is; lira,
which in the past was one of the world's chronically weak currencies; and, most
importantly, the fact that it sounds like zero. That is ultimately where the
xera is headed.

Citibank faces additional $6-$10 Writeoff

CNBC is reporting that Citibank is facing additional $6-$10 billion writeoffs.

http://www.cnbc.com/id/21601044

The size of Citi's write-off is still being debated, though a source told
CNBC that Citi's board is pressing company finance executives to clarify the issue. The firm's audit committee is also scheduled to meet Sunday, in advance of the emergency board meeting.

NYT is Reporting Robert Rubin to be Interim Chairman

NYT is reporting that Robert Rubin is going to be interim Chairman at Citigroup. Considering he has been there all this time, I am not sure he is any different from Prince. He has been Princes biggest supporter.

He has been there eight years. How is he not resposible for the current mess? Vikram Pandit would have been the better choice. You need to bring in someone from the outside.

And he has long been adamant that he has no responsibility for the
decisions made by Mr. Prince and Citigroup’s other leaders.

“You have to ask yourself why he would be temporary chairman if all these problems happened under his auspices,” said Douglas A. Kass, a hedge fund investor at Seabreeze Partners Management in Palm Beach, Fla. “Four or six months ago, I would have said it would be a great remedy to replace Prince with Rubin. Now, I am not so certain.”

http://www.nytimes.com/2007/11/04/business/04bank.html?_r=1&ref=business&oref=slogin

Countrywide Financial Corp Director's In Mozilo's Pocket

There is an article in WSJ about how well the Directors of Countrywide are paid. Their compansation in 2006 ranged from $344,000 - 477K plus $71K which equals 410K to 540K! That is more than double the median which was $204K.

Note to Stock Holders: WAKE UP.

The article talks about how Angelo Mozilo put his credibility on line by suggesting a modest profit in the current quarter. I don't know what credibility he has left after dumping the Countrywide stock like there is no tomorrow. And his reason for selling more than $132 million? Education for his grand children! I know CPI under reports the inflation numbers, but $132 Million for Education?

After the last conference call, I heard many of the analyst say the management knows what they are doing and this is a great company. I wonder if they still think that because the stock price is back $14.35. It was as high as $17 after the conference call. It looks like another pump and dump operation from the analysts. Pump the stock while their institution dumps the stock.

Countrywide rewards board members so well that "at some point, you cross the line between paying for services provided and a very lucrative thing where board members aren't going to challenge management," says Mark Reilly, a partner at 3C, Compensation Consulting Consortium. "I do think they have crossed the line."

"If you have been to board meetings with the CEO for 14, 15, 16 years, then your ability to act entirely independently is becoming compromised," Mr. Hodgson says. "It's too cozy a relationship."

More Writedowns and SEC Investigation

Chales Prince is going to resign tomorrow at the Board meeting.

They also seem to have more writedowns and an SEC is also reviewing
Citibank practices(SIV's that Mr. PaulSIV is trying to rescue).

The SEC is reviewing how Citigroup accounted for certain off-balance-sheet transactions that are at the heart of a banking-industry rescue plan, according to people familiar with the matter. The review is looking at whether Citigroup appropriately accounted for $80 billion in structured investment vehicles, or SIVs, these people said. SIVs are off-balance-sheet entities that have invested heavily in mortgage-backed securities. A plan pushed by Citigroup and other banks would set up a new "superconduit" to buy assets from SIVs.

The board is expected to discuss whether Citigroup should
update the amount of write-downs that it has taken on certain securities to reflect their deteriorating value, according to people familiar with the matter.

How about a Subprime CEO Implode-0-Meter?

1. Stan O'neal
2. Charles Prince
3. Bye Bye James.....?

Bye Bye Prince

WSJ Is reporting Citi's Prince plans to resign. If this is only the news, and no further writedowns, the stock may bounce on Monday.

http://online.wsj.com/article/SB119403363814780742.html?mod=hps_us_whats_news

Hello Vikram Pandit?

More Writedowns??

Citigroup is holding an emergency board meeting this weekend. Looks like there are more writedowns coming.

Here is the Text from WSJ:

It wasn't immediately clear what the meeting would address, but the subject
of further writedowns could come up

The music may have ended for Charles Prince.

What do you think?

A. More Writedowns.
B. Bye Bye CP
C. Both of the Above.

More Loses Still to Come

Wall Street Journal has a story on how Merrill has been trying to delay the losses on the mortgages. Merrill was trying to sell the mortgages to Hedge Funds with a guarantee to by it back at a fixed price. That's right. I sell it to you, you sell it back to me. Now the price of security is whatever I want it to be.

You just gotta wonder what kind of losses are at the other firms. I would think there is alot more of this from Bear Stearns, Lehman, and Goldman.

This just may be the tip of the iceberg.

Goldman has $72 billion in Level 3 assets. That is twice their capital of $36 billion. If you take a 20% loss on the $72 billion, that would be $14.4 billion.

In the third quarter, Goldman had a net gain of $2.94 billion from Level 3 derivatives. The gain was unrealized because they did not sell any of the securities.

The worst part of all this is that Henry PaulSIV's Super SIV idea is similar to this. By having the Super SIV fund buy the these securities (which they claim to be AAA. But at the rate that these securities are getting downgraded, AAA could quickly become BBB or worse), the institutions don't have to sell those securities to open market.
When Japan was doing similar things in the 90's, Robert Rubin was telling them not to hide loses. I wonder if he has a diffent opinion this time around now that he is on the Citigroup Board.

http://online.wsj.com/article/SB119396956371280131.html?mod=hps_us_whats_news

Your Tax Money at Work

The Fed seems to lending so much that billions and trillions don't have any value.
The Fed just pumped $41 billion into the US financial system today. At $41, it is the fourgh largest intervention.

http://biz.yahoo.com/ap/071101/fed_markets.html?.v=2

And how about the Federal Home Loan Banks? These banks were established during the Great Depression to provide funds to make mortgages more affordable. Yes, that's right the Great Depression. They have $1.15 TRILLION of debt out standing! Here is the excerpt from Bloomberg.

To meet the sudden demand, the institutions sold $143 billion of short-term debt
in August and September, according to the FHLBs' Office of Finance. The sales
pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that
may become a burden to U.S. taxpayers because almost half comes due before
2009.

So who is taking all the risk for all this debt? You guessed it! It's the tax payers. We subsidize the Financial Institutions (As per the article, it saved private banks about $1billion).

If others were unable to meet the liabilities, taxpayers would be on the
hook, they said.

U.S. lawmakers need to ensure ``the institutions don't blow up in the
taxpayer's face,'' Representative Christopher Shays of Connecticut, a Republican
on the House Financial Services Committee that is responsible for oversight of
the system, said in an interview.

And what are you doing to ensure that it doesn't blow up? We will leave that for the next generation.

Kevin Depew has an excellent primer on the FHLB mess. Read point # 2 in the followin link.
http://www.minyanville.com/articles/index.php?a=14693

How about paying the tax payers for taking on these risks? How about cancelling the Countrywide dividend to pay for at least part of it? How about taking away Mozilo's stock money?

More on the Rate Cut

The Fed is in a bind. Because, despite the strong GDP report yesterday (Inflated GDP because Inflation was deflated by the Fed), it looks like we have stagnation - Both Inflation and slowing of the economic growth.

Unlike anytime in past, we have the US slowing down, but the other markets (ie. India/China) are still growing. This means US does not have the pricing power on the Oil it once did. Which is one of the reasons oil shooting up even as the US economy slows down.

As for the housing market it keeps getting worse. And now the dire predictions are showing up in the MSM (NY Times). Many blogs have talked about how bad the Housing Market is, but until now, the MSM has only been reporting as if it's only a small correction. Now it's changing.

Ian Sheherdson, the United States economist for High Frequency Economics, a
consulting firm in Valhalla, N.Y. said "This is not a housing correction.
It is a massive, once-in-three-generations bursting of a housing bubble.
It's catastrophe, not a correction."

The fact that the Feds were pressured into rate cut is also getting noticed by MSM.

Had the central bank decided to leave interest rates unchanged, the stock markets would most likely have plunged into a panic — exactly what Fed officials wanted to avoid.

So folks there you have it. The reason for the rate
increase was to avoid a panic. The question is... Have they avoided
the panic or just delayed the inevitable.

http://www.nytimes.com/2007/11/01/business/01fed.html?pagewanted=2&_r=1&ref=busines

It's gotta be bad for the fed when even the Wall St. Journal Opinion piece is killing the FED. Here is the link to the Opinion piece (Dollar Ben) which talks about the fed killing the dollar, and risking inflation.

http://online.wsj.com/article/SB119387944491678507.html?mod=todays_us_opinion

In the Ahead of the Tape column in WSJ, Just Lahart talks about the Fed being pressured by the market.

"It's like monetary policy is being affected by the tantrums of Wall
Street," says James Paulsen, chief investment officer at Wells
Capital Management. "As every parent knows, the worst thing you can do is
give in to a tantrum, because then you get five more of
them."

Isn't this what I talked about earlier? What happens if the market pressures the Fed again?