Mortgage Applications Drop to 2008 Low.
You have to love how the bad news about mortgage applications is hidden. Usually you see it first thing on Wednesday. But not today. I wonder why.
MBA said its seasonally adjusted index of mortgage application activity dropped 11% to 567 in the week ended April 25. That's lowest since Dec. 28. Mortgage applications are falling even as home prices are dropping.
http://www.cnbc.com/id/24382734
Economy grew at .6% in first quarter. Rising inventories helped prevent a slump. If we got a bump from rising inventories, we may get a lower reading in the next quarter.
Price inflation gauges eased in the first quarter. For instance, the price index for personal consumption expenditures rose by 3.5% after increasing 3.9% in the fourth quarter. The PCE price gauge excluding food and energy rose 2.2%, after increasing 2.5% in the fourth quarter.
Inflation seems like the biggest joke to me. It seems like we are the only country in the world avoiding high inflation.
Another component of GDP, housing, took a big bite out of the economy. Residential fixed investment dropped by 26.7%, reducing overall GDP by 1.23 percentage points. Fourth-quarter investment had fallen by 25.2%. The 26.7% plunge was the deepest since 35.1% in fourth-quarter 1981.
It's going to be a while before housing adds to GDP.
http://online.wsj.com/article/SB120955760584356061.html?mod=hps_us_whats_newsBusiness spending fell by 2.5%. Investment in structures went down 6.2%. Equipment and software outlays decreased 0.7%. Overall fourth-quarter outlays by businesses had climbed 6.0%
Inventories rose slightly in the first quarter. Stockpiles of all goods increased by $1.8 billion, after going down $18.3 billion in the fourth quarter and going up $30.6 billion in the third quarter. The acceleration boosted January-March GDP by 0.81 percentage point. But the small increase in inventories was likely unintended, fed by slowing demand, and could be followed by a second-quarter drop that detracts from GDP in that period.
S&P on Housing: 'No Sign of Bottom'
S&P's composite month-over-month index of 10 metro areas slid 2.8% in Feb to 190.58. Annually, it declined by a record amount of 13.6%.
"There is no sign of a bottom in the numbers," David Blitzer, chairman of the index committee at S&P, said in a press release.
Even with the decline, the invetories are too high. Add foreclosures, and we have a long way to go before we can even think about the bottom.
Housing still has a long way to go.
Home foreclosures fillings jumped 23 percent in the first quarter from 2007 Q4. First quarter fillings surged 112% from last year! Forget housing, we are not even at the foreclosures bottom.
"I'm more convinced that we haven't seen the peak of foreclosure activity yet, and the wave probably won't crest until late third or fourth quarter of 2008," he added.
That means no bottom in housing at least till 2009. Unsold inventories are still to high and foreclosures are adding to it.
Even Eli Broad, KB Home Co-founder, said he expects home prices to drop another 20 percent.
``I don't think we're anywhere near a bottom in housing,'' Broad told Bloomberg TV at the Milken Institute Conference in Beverly Hills, California. ``We're going to have a big inventory of unsold, unoccupied homes that's going to take three or four years to clear out.'' .....
The number of mortgage borrowers behind on their monthly payments rose to a 22-year high in December, according to the Washington-based Mortgage Bankers Association. The trade group estimated that 16 percent fewer mortgages will be issued this year compared with 2007.
http://www.cnbc.com/id/24363800
http://www.bloomberg.com/apps/news?pid=20601087&sid=aGKDdHK2T9eo
Vincent Reinhart, a scholar at the American Enterprise Institute, who retired from Fed last fall called the Bear Stearns "the worst policy mistake in a generation."
The action is comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, said Vincent Reinhart, a scholar at the American Enterprise Institute, who retired from the Fed last fall.
http://online.wsj.com/article/SB120941300416350473.html?mod=hps_us_whats_news
S&P's Bold Prediction
S&P sees oil prices at $91... +/- $50. Yes folks, Oil could be at anywhere between $41 or $141!
In another prediction, S&P Investment Chief says the worst for stocks is over. Never mind the consumer confidence. Never mind the economy is tanking. Never mind the housing is still tanking. But the worse is over.
Consumer sentiment plunges again! The sentiment plunged to 62.6 in April. That is the lowest level in 26 years. But I guess if you listen to the Wall Street analysts, this is good news becuase it's a contrarian indicator. Each month, they will keep telling us this means bottom.
The tax rebates are going out early. But most are planning to repay the debt rather than spend them.
New-home sales plunge 8.5%!
Just when you thought it could not get any worse. The new-home sales dropped to a 17-year low to 8.5%. This even as home builders were slashing prices by a record amount.
New-home sales are down 36.6% compared to last year. The supply rose to 11 months. Median sales prices fell 13.3% to $227,600.
People are not buying home even as the prices are dropping.
The fed seems to be getting ready for another quarter point rate cut. And the reason?
Some officials see a case for more insurance against a deeper recession
What about inflation? With food and energy prices running wild, the fed seems to provide only lip service to inflation. As everyone has said, the rate cuts won't help anyone (except may be the banks, I guess). The mortgage rates have risen in one week to 6.04%. If the inflation gets worse, the mortgage rates will rise further. That is going to make things worse than better.
Fed Chairman Ben Bernanke and his colleagues are unlikely to take rate cuts off the table entirely. The Fed did that in October by saying weak growth and inflation were of equal concern. Within weeks, deteriorating market conditions forced the Fed to signal a resumption of rate cuts.
....
Oil prices earlier this week reached a new high in futures markets of just under $120 a barrel. Mr. Meyer says the latest $10 increase in the price of oil per barrel would reduce economic growth by as much as half a percentage point. Its rise has hurt consumers as well as energy-sensitive industries such as airlines, which have seen their share prices slump and some small players file for bankruptcy protection.
Even while downside risks to the economy persist, officials remain unsettled about inflation. While they expect rising unemployment to put a cap on wages and prevent a wage-price spiral, they worry that inflation fears may be feeding a fall in the dollar and the rise in commodity prices, and that further rate cuts could aggravate that inflationary psychology.
Talk is cheap. They keep talking about inflation without doing anything about it.
More fundamentally, officials want to give the actions they have already taken time to boost growth. Fed governor Kevin Warsh said last week that as credit markets begin to operate more smoothly, more of the Fed's interest-rate cuts will filter through to the economy. "The problems afflicting our financial markets are indeed long-in-the-making," he said. "Time is an...essential tool of our policy response."
It looks like the only reason for a quarter point cut is to appease the market. You don't want to do anything "unexpected".
http://online.wsj.com/article/SB120899756185139975.html?mod=hpp_us_whats_news
How bad is it when Lawerence Yun of NAR is telling Ben Bernanke to be careful cutting rates further.
Yun offered a caution. “With elevated inflation, the Federal Reserve should be extra careful about further rate cuts,” he said. “Mortgage interest rates, which do not move directly with Fed funds rates, may rise measurably and hurt the housing recovery if inflation gets out of hand. Monetary stimulus is plentiful – what is needed more at this point is a home buyer tax credit to get buyers off the sidelines and prevent the market from overshooting on the downside.”
This is from the NAR Press release. It's hard to believe that Ben B. does not see the higher inflation that everyone else is seeing. If the fed cared about inflation, they would not have cut the rates at their last meeting.
The just released beige book report shows we are headed towards Stagflation. We have rising inflation and slowing growth.
It notes that consumer spending is softening. Reports on real-estate were "anemic". Labor markets are also weakening.
The lower dollar is helping bring visitors to the US. I guess that's good news that the stock market can run with. As today the dollar almost reached the 1.60 to Euro. More visitors!
Financial institutions also reported decelaration in consumer loan demand, and tightening lending standards.
http://www.federalreserve.gov/FOMC/Beigebook/2008/20080416/default.htm
JP Morgan Earnings Slump
J.P. Morgan Chase & Co. on Wednesday posted a 50% drop in first-quarter net income as it marked down $2.6 billion in leveraged lending and mortgages and quadrupled its credit-loss provision.
Chairman and Chief Executive Jamie Dimon issued a weak outlook for the remainder of the year, "or longer," saying that the massive bank expects the "economic environment to continue to be weak and for the capital markets to remain under stress."
While CEO's of Goldman and Lehman are calling an end to the credit crises, Dimon is saying this can go on longer than one year.
The results, while weak, were better than many on Wall Street had feared. The mean estimates of analysts polled by Thomson Financial were for earnings of 64 cents a share on $16.97 billion in revenue. That helped push the company's shares higher in premarket trading and push stock-index futures upward.
Of course, this is the new game on wall st. Lower the expectations so much that even a bad result seems decent.
Mr. Dimon said the weak economic environment and strained capital markets "have affected, and are likely to continue to negatively impact, our firm's credit losses, overall business volumes and earnings -- possibly through the remainder of the year, or longer." But he added "we are prepared to manage through this down part of the economic cycle, given the strength of our liquidity, credit reserves, capital and operating margins, and to successfully position our company well for the future."
Once again, through the end of the year or longer.
http://online.wsj.com/article/SB120832612354119021.html?mod=hps_us_whats_news
Goldman Sachs offloads debt at big discount
Goldman Sachs sold 100 million euros ($158.2 million) worth of senior debt tied to Bain Capital's 1.4 billion euro buyout of yachtmaker Bavaria Yachtbau GmbH at 65 cents in the euro in the largest discount offered by an investment bank in the credit crunch, the Times of London reported Monday. Goldman Sachs sold 100 million euros ($158.2 million) worth of senior debt tied to Bain Capital's 1.4 billion euro buyout of yachtmaker Bavaria Yachtbau GmbH at 65 cents in the euro in the largest discount offered by an investment bank in the credit crunch, the Times of London reported Monday.
Wachovia is hammering out the final terms on a deal to inject $6 - $7 billion from outside investor.
While final terms of the deal still were being hammered out Sunday night, the fifth-largest U.S. bank in stock-market value is expected to get $6 billion to $7 billion, with the Charlotte, N.C., company selling its shares to the investor group for roughly $23 to $24 apiece. That price represents a discount of more than 15% to Wachovia's share price on Friday.
Wachovia, led by Chairman and Chief Executive G. Kennedy Thompson, is structuring its capital infusion in a similar fashion to what Washington Mutual Inc. employed last week when it raised roughly $7 billion from buyout firm TPG (please see Breakingviews analysis). Instead of going to shareholders exclusively, banks and Wall Street firms are looking for a third-party vote of confidence, a role that so-called sovereign-wealth funds and private-equity groups have been eager to play.
Let's see if they cut their dividend tomorrow also.
http://online.wsj.com/article/SB120812795058911425.html?mod=hpp_us_whats_news&apl=y&r=861213
We have this mess because of financial engineering and absence of the rating agencies. Now Lehman is using the same financial engineering to use junk securities as collateral to borrow from the Fed.
In recent weeks, Lehman moved $2.8 billion in loans, including some risky leveraged-buyout debt that has been difficult to sell, into a newly created investment vehicle it named "Freedom," which in turn issued debt securities backed by the loans.
About $2.26 billion of the securities received investment-grade credit ratings from Moody's Investors Service and Standard & Poor's. Lehman then pledged some of the securities as collateral for a low-interest, short-term cash loan from the Federal Reserve, according to people familiar with the matter.
The result for Lehman: By repackaging unsold debt and turning to the Fed's new borrowing facility, it was able to turn loans that had been mostly shunned by investors for months into cash it could use to finance its business.
Just like good old "AAA" subprime securities. Mix subprime loans with a few prime and Alt-a loans and you got your self a "AAA" security.
But this is ok becuase this is to save the "System."
One person familiar with the matter said the vehicle was named Freedom because it was designed to give Lehman freedom to tap as much cash as possible if needed. The size of the borrowing from the Fed wasn't known, but the person said it wasn't "material" and was meant as a test of what the Fed would accept.
A number of Wall Street executives called Lehman's move "brilliant" and said they may follow suit. One senior finance executive at a rival of Lehman's said his main reservation with Lehman's move was that it might lead to criticism that Wall Street is taking its junk to the Fed for cash. Still, he noted that unlike many troubled mortgage securities, there is a discernible market for leveraged loans.
This was only a test. More of it is still to come. May be this can be the next profit center. Buy junk securities at 10 cents on the dollar and give it to fed.
I guess this is why Goldman has been transffering securities to Level 3. Just mark them to Fantasy price and give it as collateral to fed.
http://online.wsj.com/article/SB120788118712507147.html?mod=todays_us_money_and_investing
Goldman Sachs's Level 3 assets surged 39% to $96.4 billion in Feb from $69.2 billion in November.
While many subprime-related stakes that lost almost 100 percent of their value since July were categorized in Level 3, other holdings such as private-equity stakes, real estate and rarely traded corporate debt are also included because market prices for them aren't available. More assets have become difficult to value in the last three months as investors shunned a wider array of credit, reducing trading.
They seem to have some stuff here that has lost most of it's value. The question is going to be are they doing this to hide loses?
Securities categorized as Level 3 are marked to Fantasy. Goldman's ratio of Level 3 to total assets was 8.1% - highest of any of it's competitor. Morgan Stanely has 7.2% ratio.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a3N.I2aId51k&refer=home
WSJ - http://online.wsj.com/article/SB120768896446099091.html?mod=hps_us_whats_news
WASHINGTON -- The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.
Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed's name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.
No moves are imminent because the Fed still has plenty of balance sheet room for additional lending now. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the availability of such options largely eliminates the risk of exhausting its stockpile of Treasury bonds and thus losing its ability to backstop the financial system, as some on Wall Street fear.
The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates.
Another possibility is seeking congressional approval to pay interest on banks' reserves immediately instead of waiting until a 2006 law permits that in 2011. If the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level.
Moreover, the Fed is not operationally equipped to hold MBS and would probably have to outsource their management. Such holdings wouldn't help avert foreclosures much, since the Fed would have little control over the mortgages that comprise MBS.
UPS (NYSE: UPS) today announced it had lowered its first quarter earnings expectations to $0.86 or $0.87 per diluted share from a previously anticipated range of $0.94-to-0.98.
At UPS's investor conference on March 12, Chief Financial Officer Kurt Kuehn stated that UPS's earnings guidance for the quarter would be difficult to achieve if lower volume trends experienced in February continued through March. The U.S. economy has continued to weaken, causing a reduction in domestic package volume and a shift away from premium products. Significantly increased fuel costs in the quarter also contributed to the lower-than-expected results.
Martin Feldstein, president of NBER, said on CNBC that US is probably in a recession.
"I think that December/January was the peak and that we have been sliding into recession ever since then.
He also said, as he has in the past, that the recession could go on longer.
http://www.reuters.com/article/bondsNews/idUSN0747602120080407
Washington Mutual will get a $5 billion investment from TPG and other investors. TPG is expected to get one seat on the company's current 14-member board.
TPG's effort could be viewed as an encouraging sign for the nation's ailing banking system, and Wall Street will be watching to see whether it is an indication that the worst is over. It comes as virtually every large mortgage company in the country has hit financial distress. Countrywide Financial Corp. had to seek an emergency sale to Bank of America Corp. earlier this year, while others have gone bust amid mortgage losses.
Still, an investment could expose TPG and its partners to a financial hit if the mortgage-market shakeout continues.
While banking regulators were likely apprised of WaMu's plans, the government was not directly involved in forging a deal as in the recent purchase of Bear Stearns Cos., say people familiar with the matter.
As currently envisioned, the $5 billion investment would be structured as both a common- and preferred-stock offering. The preferred stock could be converted into common shares in the future, subject to a shareholder vote. TPG -- formerly Texas Pacific Group -- is expected to maintain a "substantial minority holding" in WaMu, said one person familiar with the matter, though exact terms weren't clear. The amount is expected to fall under 25%, a threshold that would require TPG to register as a financial holding company under government rules.
....
But relatively cheap investments aren't a guarantee for success, either. For example, private-equity firm Warburg Pincus agreed in December to purchase $500 million of the stock of bond insurer MBIA Inc. at $31 a share. The stock closed Friday at $13.61.
And there is the remaining question of whether a $5 billion investment will be enough to cover all the thrift's capital requirements in the future, especially if the mortgage-backed-securities market continues to deteriorate.
Fitch downgraded MBIA's bond insurance subsidiaries to AA because it is $3.4-3.8 billion short of financial resources it needs to maintain AAA ratings.
One question - Are S&P and Moody's still sleeping?
At the hearing today, James Dimon said "While we wanted to help, and I believe we were the only firm ultimately in a position to help, we had to protect the interests of our shareholders."
He said that the collateral offered to the Fed for the loan consisted of "investment grade" assets, and not the riskier batch of mortgage-backed securities and other soured assets held by Bear.
One simple question. If they are AAA, why wouldn't JP Morgan take it as part of Bear Stearns. Even if the $30 billion assets go down to $29 billion, it would not effect JP Morgan as it is taking the first $1 billion hit anyway.
In yesterday's ceremony, Ben B. said that "with the very glaring exception of the 1930s, the Fed has been an eff-ective market stability regulator..... At the time of the Depression, liquidationist theory was supported by the Treasury, and it was partly on the basis of that theory that the Fed stood by and let a third of the banks in the country fail. The financial stability that was not addressed was a major contributor to the Depression, not just in the US but abroad. Today we will not let prices fall at 10 per cent a year, we will act to keep the economy growing and stable. There are very great differences between the 1930s and today."
Despite the Fed cutting the short-term rates, mortgage rates are rising according to Bankrate.
The confirming 30-year fixed mortgage rate rose to 6.12%, the 15-year rose to 5.7% and the average jumbo 30-year rate is 7.52%.
Are inflation and mortgage risks catching up with the mortgages? For those who think housing has bottomed, we still have a long way to go.
According to Goldman Sachs, we are only half way there. Now just assume what happens if the mortgage rates go up and there are more layoffs.
http://www.marketwatch.com/news/story/fixed-mortgage-rates-cross-6/story.aspx?guid=%7B067E54F4%2D3F57%2D4385%2D8556%2D591232ECC8A9%7D&dist=msr_1
It really boggles my mind that the senate would be helping homebuilders instead of homeowners. The new bill passed in congress allows homebuilders to offset profits earned over previous five years instead of two.
This bill is designed to help those who created the mess in the first place. This bill is a proof that the government works for lobby groups instead of people.
The Laborers' International Union of North America has labeled it as $33 billion.
These law makers are bankrupting America. Please write to your local senate or represantatives regarding these issue.
http://www.reuters.com/article/governmentFilingsNews/idUSN0238599320080402?pageNumber=2&virtualBrandChannel=0
We probably are already in a recession. Remember that labor market is the only thing holding this economy up. And the tax rebates is not going to make any difference.
The biggest financial crisis has been resolved in the shortest time period. The markets would like us to belive there is no recession (or a short one).
Still, the rally, which was also driven by investors looking to put money to work on the first day of the quarter, only brought the market back to where it was a month ago. And credit markets remained frozen despite the efforts of central bankers to get banks to start lending again. The coming first-quarter earnings season is expected to bring yet another wave of billion-dollar write-downs by financial firms.The dividend rate is almost 8%. In this environment that is not a bad return.
Investors, however, also are expecting sour news at some U.S. regional banks, which will report first-quarter earnings this month. The expected bad news has put pressure on some to scramble for capital. One regional bank, National City Corp. of Ohio, is now considering a potential sale to hometown rival KeyCorp as a result, according to people familiar with the matter.
In one sign of growing investor confidence, strong demand for an issue of preferred convertible shares by Lehman Brothers allowed the investment bank to boost the issue to four million shares from three million, and raise $4 billion in new capital.
Global investors have been fooled by more than one false dawn since the financial crisis began last year. On Oct. 1, shares of Citigroup Inc. gained 2.2% after it announced a $5.9 billion write-down on its subprime-mortgage exposure. On Oct. 5, Merrill Lynch & Co. admitted to a $5.5 billion write-down, sparking a 2.5% rally in its stock. On Nov. 8, shares of Morgan Stanley gained 4.9% after it announced a $3.7 billion loss on subprime exposure. All of those rallies proved premature, as the falling value of mortgage investments forced the banks to take billions of dollars in additional write-downs.That is the point. How many times have we seen the market bottom? Is this the real bottom or is this just a bear market rally? We will find out answers in a few months.
UBS Writes Down Another $19 Billion
It seems like the news seems so bad that the market is laughing at it. UBS is up 10% on the news. I guess bigger the write-off means this is the bottom. I don't know how many times we've heard about The "Bottom."
Its shares climbed 9 percent as investors hoped the move marked a turning point for the firm that now leads the global list of banks hit hardest by the credit crisis.
http://www.cnbc.com/id/23892159
Lehman is raising $4 billion in capital. It's just to "Slience" the critics. Not that there is any need for it. We are paying 7.25% dividend just to show the market has confidence!
Lehman seems to be in have not announced ennough writedowns.
http://www.cnbc.com/id/23899075
Deutsche Bank to Writedown only $3.9 billion. As such, it's stock price is up only 3%. Note to CEO: Go Get a Bigger Writedown!
http://www.cnbc.com/id/23893686
Analyst at Financial research firm Celent expect financial industry to lose 200,000 jobs over next 12 to 18 months.
http://www.cnbc.com/id/23897422/for/cnbc/
