Tuesday, April 29, 2008

Bill Gross/Foreclosures/Consumer confidence

Stocks fell slightly today as the news flow continues to show that the economy is contracting in a major way. Before I get into some news the following news on Citi just hit the wires:

"April 29 (Bloomberg) -- Citigroup Inc., the U.S. bank hit with writedowns on subprime mortgages and bonds, is selling $3 billion of stock two weeks after reporting its second straight quarterly loss.

``This was extremely disappointing,'' William Fitzpatrick, an equity analyst at Optique Capital Management in Racine, Wisconsin, said in a Bloomberg Television interview. ``I would say this is probably it, but I have said that before.''

How many more times does Citi plan on doing this? The stock is free falling in after hours trading. I wonder what price they are selling their shares at? It must be low if the stock is tanking. I thought the financials had bottomed?..Yeah right. Why anyone would want to own financials right now is beyond me.

As the foreclosures add up, expect many banks to continue to be forced to raise capital by diluting their shares or borrowing at guido interest rates.

This is going to happen over and over and over again everybody. The banks keep lying to investors saying they don't need to raise anymore capital. This sucks in more investors, and they get rewarded by getting sucker punched when banks like Citi announce this crap.

Do not trust the financials right now. They are sitting on billions of bad debt and will continue to pull these dilution stunts. You know what will happen if people decide to stop buying these shares after getting suckered one too many times? The bank will go POOF. Now is not the time to own financials.

Why does this keep happening?

Because the housing crisis is deepening. The news is getting really bad out there folks. Take a look at the foreclosure data released today.

"April 29 (Bloomberg) -- U.S. foreclosure filings more than doubled in the first quarter as payments rose for subprime adjustable mortgages and falling home prices left property owners unable to sell or refinance without losing money.

Almost 650,000 properties were in some stage of foreclosure during the quarter, or 1 in every 194 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of foreclosure data, said today in a statement. The number was 112 percent above a year ago. Nevada, California andArizona had the highest rates."

``This country needs a cleansing,'' billionaire real estate investor Sam Zell, chairman of Equity Group Investments LLC, said yesterday at the Milken Institute Global Conference in Los Angeles. ``We need to clean out all those people who never should have bought in the first place, and not give them sympathy.''

My Take:

Sam Zell is right. That 112% jump in foreclosures is flat out frightening. When this cleansing is done the stock market is going to be in shambles. This second half recovery talk is a joke. Analysts are already starting to backtrack on this recovery talk as the data gets worse and worse.

One of them was quoted on CNBC warning that if stocks hit the expected earnings growth of 14% in the second half, it would be the quickest rebound in the stock market in over 30 years. Anyone thinking this is going to happen without housing and the financials participating is smoking crack.

Consumer confidence Data:

So how is the consumer feeling?

"April 29 (Bloomberg) -- Confidence among Americans fell to a five-year low this month after home prices dropped by the most since at least 2001, signaling a deepening threat to consumer spending.
The Conference Board's confidence index fell to 62.3 in April, posting its biggest three-month slide since the last recession in 2001, the New York-based research group said today. House prices in 20 U.S. metropolitan areas dropped 12.7 percent in February from a year earlier, more than forecast and the most since S&P/Case-Shiller's records began seven years ago.
Treasuries rallied and stocks fell after the figures indicated no end in sight to the housing slump"

"Home prices will probably keep sliding as foreclosures push even more properties onto the market just as stricter lending rules limit the number of qualified buyers.
``This is just one more strain for consumers, in addition to high energy prices and tight credit,'' said
Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York. ``Prices are going to continue to fall, probably through the end of next year.''

Uhhhh not very good. The consumer represents almost 70% of the economy. I think these numbers speak for themselves. I think Michelle is about right. I expect this recession to last well into next year.

Bill Gross today: ``Lower Fed Funds? They would, in Pimco's opinion, likely do more damage than good from this point forward,''

Uh oh. How will the stock market go up without rate cuts? This has been the main driver for stocks since the data has been so bad. Lets buy because the worst is over! The bottom is in! What a joke. We are in the second inning of this mess.

Here is what else Bill Gross said today:

``Lower Fed Funds? They would, in Pimco's opinion, likely do more damage than good from this point forward,'' Gross said in commentary on Pimco's Web site. ``Foreign and domestic investors are being fleeced with negative real interest rates, and the weak dollar, stratospheric commodity prices and steadily rising import inflation are the result.''

``The better alternative is to initiate a limited mark-to- market write-down of private mortgage debt as envisioned in the Dodd-Frank Congressional proposal combined with government- subsidized loans at below market rates,'' Gross wrote. ``Surely Republicans, Democrats and Wall Street mortgage holders (Pimco included) can recognize that stability as opposed to freefall market clearing is the better alternative, especially if the pain is shared by all parties.''

Final take:

Pay attention to Bill Gross. Many think he is one of the smartest guys on the street. Now Bill Gross will talk his book so you need to be careful. He has placed huge trades betting that the government will eventually bail out housing.

Even with a housing bailout, Gross agrees that there needs to be a controlled reset on prices. I believe he will get what he wants, but at the rate housing is self destructing, it will be too late because the legislation would have to be approved by congress which will take time. The damage in housing will be mainly over with by the time the government gets a chance to step in.

As it was explained to me earlier today by an insider, its better for the government to step in when prices are way down because it will be cheaper to bail out.

Save your rebate checks for your down payment! The rate at which housing is crashing is stunning.

The bottom might be closer than I anticipated. Its still definately not the time to buy, but the panic stage of this crash is getting close and you need to be ready.


Minton Mckarkquey said...

A great financial summary of the day.

My thoughts:

1. You hit the nail on the banks. They're in a vicious cycle and using spin to short-circuit an inevitable crash. The great thing about leveraging is that it makes great profits when you're right. And when you're wrong, it destroys you.

2. The problem with "showing no sympathy" is two-fold:

- Many of the people who got into this mess did so at the behest of financial organizations that enabled it to happen. The moral hazard issue is still valid. If you let these people crash and burn, the downstream impact on the whole economy will be devastating. Having said that, I realize you can't keep their house prices at unrealistic levels, as noted in your excellent post yesterday, but what should we do?

- Ultimately, "showing no sympathy" means that these people walk from their homes and the system picks up the cost through foreclosures. Which causes more foreclosures. I can't help feeling that this is a rare time that when a little intervention could work... maybe.

Btw, I keep seeing seminars (the last one was in Hong Kong) to foreign investors advertising "a great time to buy". But I think we're in a classic asset bubble problem where, because the valuation is all wrong, it will continue in the spiral you describe.

Finally, in one (and only one) respect I'm glad. The housing boom had made housing out-of-reach for many young, respectable folk who just want a family and 1500 sq ft somewhere. When this all shakes out it should help these guys, presuming the lenders then don't forget why they lend in the first place.

I keep sending your blog to everyone I know - seriously this the best one out there. Every the WSJ isn't doing as good a job as you.

Jeff said...


Thanks for the kind words. I appreciate you spreading the word. I get more and more hits everyday. People are realizing that things are really bad out there economically.

I agree with you, the reset of housing prices will be painful, but it will be healthy in the long run.

Like you said, young home buyers will be able finally be able to afford something.

Investors will start to realize that the banks are nothing but lying thieves right now because they are so badly damaged and desperate.

When this realization happens, their stock prices will be evaluated based on earnings and fundamentals. Meredith Whitney values Citi at $9/share.

Once these banks are valued at book values, they are going to free fall!

Anonymous said...

Anyone that thinks we may be reaching a bottom in the housing market needs to take a look at this graph:


Right now we are at the end of that first little dip. This summer and into the fall are going to be a nightmare. The future? See the two large tan peaks out there in a couple years - these are the ARMs in which peoples' current payments do not even cover the interest and the unpaid interest is tagged onto the mortgage principle. Not so good when the value of your house is plunging.

Jeff said...


I love that chart. I agree. The reversal in the stock market was what I kinda expected might happen.

Working on a post right now. The Fed really screwed up today. The dollar shot down big time after the statement.

No catalysts now to take socks higher. Just lousy news. Its going to be a long summer.