Saturday, March 29, 2008

Federal Bailout of Housing?

The Washington Post reported today that Bush looks to be changing his position and supporting a Federal bailout of housing by having the FHA work with lenders to forgive a portion of their loans to home buyers. From the Post:

"The Bush administration is finalizing details of a plan to rescue thousands of homeowners at risk of foreclosure by helping them refinance into more affordable mortgages backed by public funds, government officials said.

The proposal is aimed at assisting borrowers who owe their banks more than their homes are worth because of plummeting prices, an issue at the heart of the nation's housing crisis. Under the plan, the Federal Housing Administration would encourage lenders to forgive a portion of those loans and issue new, smaller mortgages in exchange for the financial backing of the federal government."

"If enacted, the plan would mark the first time the White House has committed federal dollars to help the most hard-pressed borrowers, people struggling to repay loans that are huge relative to their incomes and the diminished value of their homes. That may offer encouragement to the banking industry and help silence Democrats, who have accused the White House of rescuing Wall Street investment banks while ignoring distressed homeowners. But it could agitate conservatives, who are likely to view the FHA plan as yet another government bailout."

My take:

Well it looks like Bush saw the economic data this week and realized he has to support a bailout. I had previously supported the idea of the FHA reducing the loan amounts of problem mortgages and making the banks realize this loss as the most logical way to get out of this mess. The problem that I have with this new legislation is the Federal backing of reducing the loan amounts. The details have not been released but it sounds like the Fed is going to bailout the banks by covering the balance of the loan that was reduced.

If this is true then Wall St. gets saved by the Fed and the taxpayers get screwed by having to pay for their fraudulent behaviour. This also bails out the home buyers who made poor decisions by buying houses they couldn't afford.

If this happens then how does anyone learn from their mistakes? What about the moral hazard?

Also, I believe this will totally freeze the housing market. Why would anyone buy a house as the Feds starts reducing loan amounts? The banks win in the short term, but going forward they will lose because housing will not be nearly as profitable for them. Paulson came out today saying the whole mortgage industry will be regulated going forward. The housing game will then be officially be over!

The fact that we may possibly have to pay for this greed is disgusting. However, if it saves the financial system then it may be worth it. If this goes through then housing will become very affordable again very quickly.

Your take home pay however will drop due to higher taxes as we pay for Wall St.'s greed. The stock market would still suffer IMO because Wall St.'s most profitable game would officially end. With new mortgage regulations we would most likely go back to old school lending of 20% down, excellent credit, and buyers qualifying for houses that are about 3x their income. This will not be good for the investment banks profits.

Stay tuned for the final details of this bill. Expect a rally in the financials Monday with the discussion of these bank bailouts. The rally will be short lived in my opinion as the reality of new mortgage regulations sets in. This will hurt the financials in the future because the ponzi game is over. The securitization of loans will be smaller and the ratings agencies most likely will not be paid by Wall St. This will result in more conservative CDO ratings and AAA rated bonds will actually be AAA bonds instead of being junk!!

The housing time bomb will explode even faster if this legislation passes. It would result in an automatic reset of all housing prices. The fact that we may have to pay for it instead of Wall St. is very dissapointing.

Friday, March 28, 2008

Stocks Slump for the 4th Consecutive Day

TGIF!! I hope everyone had a better week then the stock market did.

Just a few comments on the markets. What you are seeing is very typical of a bear market. Low volume days due to a lack of confidence among buyers that the worst is over.

IMO you will not see any major rally in the markets until the financials show their losses, housing finds a bottom, and the consumer recovers. The builders came out this week after earnings and admitted they still don't see the bottom yet! I would be selling into any rally moving forward. Use these bear market rallies as a way to get rid of stocks that you don't like or that don't do well during recessionary times.

Your investing strategy needs to dramatically change when a bear markets hits. You need to stop playing offense and start playing defense with your investments. Some like to call this a period of "capital preservation". What you try to do in bear markets is protect what you have so when the cycle changes back into a bull market you will have money to take advantage of it.

The key thing to realize right now is we are still in the middle of this crisis. I would say we are in the 3rd inning of this bear market. The S&P drops 28% during the AVERAGE recession. We have only dropped about 15 percent from the highs of summer '07. If this recession is only average this means we still have another 50% to the downside. I believe this will be a very bad recession.

The key to being successful during times of crisis is to not try and call a bottom yourself. Do not listen to the talking heads on CNBC that are telling you that we have seen the worst of it. Remember, Wall St. only makes money when you purchase investments. CNBC has to put these stock pumpers on TV because they have no show or inside scoops without the cooperation of Wall St.

You need to continue to focus on the fundamentals and tune these people out during bear markets. I can remember analysts after analyst on CNBC calling Nasdaq bottoms during the late 1990's tech boom at Nasdaq 4000, then 3000, 2000 etc. Do your own research and read quality finanancial publications like Bloomberg, Barrons or the Financial Times from the UK. Its very boring staying out of the markets but its worth it if you avoid losing 50% on stocks during a bear market.

Trust me, I want to be a bull. Its much easier to invest in a bull market. Buying mutual funds and having them rise 15% a year during bull cycles is great but if you don't protect your wealth when the cycle changes then you haven't realized any gains. There was an article called the lost decade this week that talked about how the S&P has only risen 1.3% in the last 10 years. If your money was in a CD during this decade it would have earned 4 times that.

I would advise getting into some fixed income and protecting your wealth. Save your equity for the next bull ride. Wait until Wall St. is forced to become transparent before investing. The fraud that we have seen in housing is something we may never see again in our lifetimes. To think that we get out of this debacle with only a 15% loss is a bet that I would not take.

Housing Downturn Takes its Toll on Consumers

Happy Friday everybody!

Well there was more data that came out on the consumer and it revealed that they are tired! Feb. consumer spending rose only .1% after rising .4% in Jan. this represented the biggest drop in consumer spending in over a year. An economist take from Bloomberg:

The 0.1 percent rise in spending followed a 0.4 percent gain in January, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation rose at the slowest pace since June.

``With flat real consumer spending, we're going to be in a recession,'' said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts, who correctly forecast the rise in spending. The inflation number suggest that ``even though there are pressures on import costs, there is very little capability to pass those on to consumers.''

Another sign of the consumer slowdown was seen when JC Penney Co warned that sales were down in the high single digits in the 1st quarter. They reduced earnings estimates by about 30%.

My take:

The weakness in the consumer is pretty much confirming that we are in the middle of a recession. The good news here is that recessions help control inflation because the demand for products drops thus keep prices down.

The tough part right now for companies is inflation is still running high(around 2% in Feb.) which increases their costs and they are unable to pass it on to the weak consumer. This will eat into profits. I noticed this earlier this week when Valero which is a refiner missed earnings on the thesis that gas prices cannot go up much more without effecting consumer demand. This is putting pressures on refiners like Valero to eat some costs in order to keep gas around $3-$3.50 a gallon.

The concern we need to be focused on now is DEFLATION not inflation. This is the scenario the Fed is drastically trying to avoid by injecting massive amounts of money(liquidity) into the system. They need us to continue to spend spend spend like drunken sailors because if we don't then the music stops and the party is over.

The fear of deflation is that the consumer stops spending and borrowing which can turn into a death spiral that destroys the economy. Remember 70% of the economy is based on consumer spending! Without the consumer the economy is toast.

Thursday, March 27, 2008

Meredith Whitney on CNBC

I watched an interview today featuring analyst Meredith Whitney from Oppenheimer & Co. She is a rising star who made her mark when she predicted that Citi would lower its dividend. She has been very accurate with her calls on financials and continues to offer some of the best research in this area. Read a little about Meredith here .

Her take on the financials right now is that there is still a ton of pain to come. One thing that stood out with me while listening was how fast the financials are self destructing. She admitted herself that the debt owned by banks is dropping in value so fast and so quickly due to the housing blowup that she has to keep revising her estimates. She explained that since November she has had to revise here estimate 30 TIMES on the financials. 30TIMES!!!

She admitted its tough to come up with estimates on financials because the banks refuse to sell any of their bad debt because they don't believe they are getting fair value for it(yeah right). Ms. Whitney thinks the exact opposite. She believes the value of this debt is dropping not rising because of this crisis and the pricing will only get worse because she predicts everyone will run to the exits at the same time to sell this debt. Supply and Demand anyone?

Her final take was financials are still priced 2-3 times book value. She said Merrill is worth around $29 versus the $41.90 it closed at today. She valued Citigroup at $10 versus the $21.79 close.

Meredith explained that if these companies would just sell all of their bad debt and clear their books then they would be worth buying after the stock prices adjusted. I believe that most of the banks don't have the capital to mark to market and would go under if they were forced to. I would guess Meredith thinks the same thing but she just can't say it. She advised the listeners to continue to stay far away from the financials. I agree.

Citi/Merrill to Face Massive Write downs in Q1

The financial sector continues to get battered by the deepening housing crisis. Many on the street expected the majority of the financial write downs would be taken in the 4th quarter of last year. Well as the numbers start coming out it looks like 1st of '08 is going to be just as bad.

Meredith Whitney of Oppenheimer, who is become a star analyst on Wall St. because of her accurate calls on the financials, predicts in a report today the following write downs:

"She said Citigroup's first-quarter write-down could total $13.12 billion, and that write-downs in the sector could top $50 billion.
"Many expected the fourth quarter to be the 'kitchen sink' for the industry," Whitney wrote in a separate report dated Thursday. "First-quarter results (will) be a rude awakening."
In October, Whitney correctly predicted that Citigroup would cut its dividend and raise $30 billion of capital. She expects more banks to seek new capital, with Citigroup "most needing of the swiftest and largest capital raise."
Whitney now expects Merrill to lose $3 per share in the first quarter, and tripled her projected write-down from $2 billion. She had previously forecast a profit of 45 cents per share. The analyst also cut her 2008 profit-per-share forecast to 20 cents from $4."

"UBS, meanwhile, may suffer a first-quarter loss of $2.75 per share, Whitney wrote. She previously forecast a profit of 72 cents per share. The analyst cut her 2008 profit per share forecast to 45 cents from $3.70.
Whitney wrote that UBS faces write-downs of $6.86 billion on CDOs, $3.19 billion on Alt-A loans, $650 million on leveraged loans and $355 million on commercial real estate."

These numbers are staggering: $13 billion in writedowns for Citi, $6 billion for Merrill, and $11 billion for UBS. Expect this to force banks to hoard more cash and make lending standards even more tough. They will also be pressured to raise capital. This is being shown in the Libor rate today as it has hit its highest level since March 14th according to Bloomberg. This higher rate is another indicator to use that tells you banks are hoarding cash instead of lending.

As these foreclosures continue to rise so will the write downs at the banks.

Also today:

The foreclosure rates on subprime were also released by the Fed on CNBC today for the fourth quarter. The Fed said that there were 180,000 subprime foreclosures in the 4th quarter. The 90 day delinquency rates on subprime were at 24%!!!. So 1 in 4 subprime loans is now 90 days past due.

This data shows that the end seems to be nowhere in sight. Expect many of these 90 day past due homes to be foreclosed on shortly. this as a result will further depress housing prices as it just adds to inventories and banks are forced to sell these foreclosed properties at a huge discount. The crisis continues to deepen in the housing market and the time bomb keeps ticking.

Wednesday, March 26, 2008

Oracle Misses/Congress warns the Fed

Oracle missed earnings and the stock dropped 7% after hours. This is a bellwether stock and is a good indicator to see if companies are spending money. From Bloomberg:

"Customers are trimming their budgets on concern that the economy is slumping. Growth in U.S. information-technology spending this year will slow to 5 percent from 7 percent in 2007, according to a Goldman, Sachs & Co. survey of 100 executives"

The Bear Stearns fallout continues to have rippling effects. Lawsuits by shareholders trying to block the deal have started, and Paulson went on TV defending the deal saying that a Bear Stearns BK would have threatened the economy.

More importantly, Congress is starting to ask questions and seemed to send the Fed a warning about using taxpayer money to bail out Wall St.

"Senate Banking Committee Chairman Christopher Dodd today asked Bear Stearns Chief Executive Officer Alan Schwartz, JPMorgan CEO Jamie Dimon, Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox to testify at an April 3 hearing on the issue. "

Finance Committee Chairman Max Baucus, a Montana Democrat, and Iowa Senator Charles Grassley, the panel's top Republican, today sent letters to those involved in the deal.
The senators are trying to determine whether the arrangement sets a precedent ``for federal involvement when other firms overextend themselves'' and ``whether taxpayers will lose money here,'' Grassley said in a statement.
``Americans are being asked to back a brand new kind of transaction, to the tune of tens of billions of dollars,'' Baucus said in a statement. ``With jurisdiction over federal debt, it's the Finance Committee's responsibility to pin down just how the government decided to front $30 billion in taxpayer dollars'' for the deal, Baucus said.
Dodd said he scheduled the hearing to explore the ``policy rationale'' behind the Fed's action, the impact of the original and new sale agreements on investors and the markets, and the implications for U.S. taxpayers and regulation of U.S. financial markets. "

If this investigation gets legs then Wall St. could be forced to expose their losses. Its about time Washington got involved. I think if the economy and the dollar continue to deteriorate then the Fed will take further heat from Congress and may be forced to change its policies. Stay tuned on this one. I don't think the government liked watching CNBC today and watching protestors storm Bear Stearns headquarters asking why Wall St. is getting bailed out while Main St. suffers with houses they cannot afford. Civil unrest and lawsuits will always wake up Congress. Remember its all about getting re-elected.

Once the Fed realizes they can't continue to bail out their banking buds the shoes will start dropping as these financials will suffocate underneath all of their bad debt. See Mish today and take a look at a piece of WAMU's AAA rated paper. Over 3% of it is already owned by the bank, and the 60 day past due deliquency rates are 22%. This is AAA rated paper folks!!! This is a disaster and is not supposed to happen. This is what many loan portfolios probably look like at other banks.

When the banks finally open their books it will be time bomb time for Wall St. The Fed is running out of moves both politically and financially as they have thrown half of their reserves at this crisis already. Even CNBC debated today wether or not the Fed could go bankrupt fighting this crisis. Oracle should set a negative tone on the markets tomorrow.

Recession Looms as GDP falls and Housing Slows

Sorry for the delay today. Lots of information to digest. Well all eyes were on the Feb. GDP number today and the number came in at a MUCH weaker then expected 1.7% drop versus the expected .7 % positive growth expected by economists. This is the second consecutive monthly drop following January's negative 4.7% print. This all but asssures that the first quarter will show negative GDP which puts us half way to an official recession which as you know is two consecutive quarters of negative GDP growth. Some analysts are conceding that we are in the middle of one:

``We're right in the teeth of the recession,'' John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Radio interview. ``The recession's going to be characterized as the first half of 2008, and waiting for recovery in the second half.''

The new spin coming out of Wall St. is they are conceding that we will have a recession butthey predict it will be mild and we will snap back in the second half as John Silvia says above. IMO I see no reason why we will be coming out of it in the second half. I predict this recession will last at least through 2008. The most alarming news from the GDP number was that it showed companies are pulling back on their spending. This was the main catalyst for the last recession and the bulls have been touting the strong balance sheets of companies as one of the big reasons why we will not have a recession. Ooops bad assumption.

So why will this recession be a long one? I see no catalyst going forward. The financials are a mess and 2 of the investment banks have been put on negative watch by S&P as they are starting to worry about how these financials will make money going forward. Bank earnings should continue to fall as M&A activity slows and their biggest cash cow which was securatizing housing debt is now non-existant. Some of these financials won't make it through this downturn. Financials represent 26% of the S&P 500. Without the financials it will be hard to show growth in the economy.

Another reason this will be prolonged is the housing downturn. Bloomberg reported today:

"Economists had forecast new-home sales would decline to an annual pace of 578,000, according to the median of 71 forecasts in a Bloomberg News survey. Estimates ranged from 560,000 to 600,000. Purchases in January were revised up to 601,000 from a previously estimated 588,000 pace.
Purchases declined in two of four regions, led by a 40 percent plunge in the Northeast, the biggest drop since 1996. Sales improved in the South and West.
The report did contain one bit of positive news. The number of new homes for sale at the end of February dropped to 471,000, the fewest since July 2005, indicating builders are making headway in clearing out the inventory glut.

Still, the decline in sales kept supply at 9.8 months, the same as in January and the highest since 1981."

The fact that builders slowed their building to its lowest levels since 2005 will be another recessionary pressure as this will cost the economy jobs. Notice inventories stayed the same which will continue to slow down building activity.

Housing also has a huge ripple effect into other areas of our economy including retail, finance, and technology. This also will slow consumer spending. Think about the effects of a contracting housing market on places like Home Depot and Lowe's, furniture stores, cable companies etc. Growing our economy without housing will be extremely difficult. To expect this contraction to be done in 6 months is virtually impossible.

So consumer spending is shrinking due to high debt loads from housing and credit cards. The financial's business models are now broken other then their brokerage houses. They are contracting and hoarding cash. Some are inslovent due to horrific lending standards and sitting on billions of dollars in bad debt. Housing is in a flat out depression.

So where is this second half recovery going to come from? I just don't see it. some think the $150 billion dollar rebates that the government is throwing from the helicopters will increase GDP growth. I think most of this will go towards paying down debt rather then put into the economy. My prediction is 2008 will be a long prolonged recession that might spread into 2009. More tonight on things coming out of DC.

Tuesday, March 25, 2008

The Credit Crunch's next victim: Clear Channel

In another confirmation that the days of cheap debt are done, the WSJ reported late today that the private equity buyout of Clear Channel Communications is bordering on collapse. Translation: The banks are running for the hills and trying to back out as they continue to hoard cash. This buyout was supposed to be at $39.20/share and cost a total of $19.5 billion. The shares are now trading after hours at $26.10 following the WSJ article.

IMO this deal is dead and its just a matter of negotiating the termination fee to get out of the transaction. You may recall the flurry of activity last summer when almost everyday there was an announcement of a private equity buyout as the DOW soared to 14k. Now as the credit crunch deepens, many of these deals still have not closed, and the banks are now trying to back out as they struggle with meeting capital requirements and higher borrowing rates.

It will be interesting going forward to see how many of these deals get killed. This will not be good for M&A revenues at the investment banks and it leaves companies like Clear Channel in a tough position. Clear Channel now has to rapidly restructure itself from a buyout candidate back to a stand alone company. This could be very disruptive from an earnings standpoint as they try to switch gears.

In other market news, the US dollar is tanking as other countries begin to expect more Fed rate cuts as the consumer confidence report strengthens the belief that the US is in a recession. From Bloomberg:

``The market is taking a reality check: No, nothing has changed,'' said Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, the world's largest asset custodian, with oversight of $23.1 trillion. ``The economy in the U.S. will deteriorate further.''

"Start of `Run'
The dollar's decline against the euro ``appears to be the start of a run'' to a range of $1.60 to $1.625 over the next two to three weeks, according to Andrew Chaveriat, a currency strategist at BNP Paribas Securities SA in New York. Chaveriat, who uses historical patterns to predict currency price moves, included the forecast in a note to clients yesterday. "

This "run" on the dollar could be catastrophic to our economy. Last night Bloomberg was discussing the use of our currency as a carry trade. The last major economy to see this was Japan and look what happened to their stock market(dropped from 38,000-14000 and now sits at 12,600). We seem to be heading right toward the same Japan deflation scenario.

The Fed is basically destroying our currency to save Wall St. If they continue to take junk at the discount window from the investment banks and cut rates then the dollar may crash. The market will not continue to ignore this "magic act" of hiding the losses from bad lending and not restoring trust back into the markets. Until these losses are realized, our economy will continue to suffer and so will our currency.

Goldman also said today that total subprime losses may add up to $460 billion which is four times larger then the losses that have been already written down by the banks. Dow Jones reported last night that Merrill Lynch may take an $8 billion dollar writedown this quarter.

New Home sales # comes tomorrow. The word is this number an annual pace of 578,000 units which would be the the lowest pace since 1995.

S&P/Case-Shiller Index shows record 10.7% drop

The Case-Shiller Index reported that home prices fell 10.7% versus a year ago as the housing crisis continues to deepen. 19 of the 20 cities included in the index reported price drops with Las Vegas and Miami leading the way with a stunning 19% drop in prices versus Jan. '07. This represents the largest price drops in the 20 year history of the index. This now makes it 13 consecutive months of price drops for the index.

The end seems no where in sight as housing prices continue to free fall. The price drops seem to be accelerating as builders and buyers are now starting to show signs of panic. I read yesterday that 30% of the sales in California in Feb. were foreclosures. Banks are dumping these properties at huge discounts which will further accelerate the price drops. We still have another $460 billion of subprime resets which will take the foreclosure rates even higher and push prices lower.

Around 10:00 Consumer Confidence came in at a 5 year low. The frightening part of this report was the gauge of expectations number for the next 6 months measuring how the consumer feels going forward. This number came in at 47.9 which was the lowest number seen since 1973! From the report:

"The Conference Board's gauge of expectations for the next six months slumped to 47.9, the lowest since December 1973, when the Watergate scandal rocked the Nixon administration and an embargo by a group of Arab oil exports was in effect, the report showed.
Stock prices extended declines following the report."

"The proportion of people who expect their incomes to rise over the next six months fell to 14.9 percent, the lowest since record keeping began in 1967, from 18 percent. The share expecting more jobs dropped to 7.7 percent from 8.9 percent."

Again more record lows. So as housing prices plummet, consumer confidence drops right along with it. The correlation we have here is as people lose equity in their homes they feel less wealthy and as a result spend less and feel worse from a confidence perspective. When you combine this with the fact that 85.1% of people are expecting flat incomes going forward while simultaneously inflation continues to rise due to the Fed rate cuts, people will feel even less wealthy. This is the perfect recipe for an economic disaster.

I have not even included the fact that the average savings in this country is 0 and the average American is about $10,000 in debt. We have never had a big slowdown with the average American in such a vulnerable position with zero savings. If we see a big jump in unemployment which is highly likely as the economy slows then we could see things that we haven't seen in this country since The Great Depression. Bread lines and Hoovervilles could be back in a hurry if we don't start saving and spending within our means.

The 20 year period of the roaring bubbles seems to be coming to an end. CNBC will continue to tell you how great the economy is. The data continues to say otherwise.

Monday, March 24, 2008

Is Irrational Exuberance Back in the Markets?

Well to steal a line from Greenspan we had another day of "irrational exuberance" in the stock markets. It seems like the worse the data gets the higher stocks go as everyone now thinks the Fed will save the markets after last weeks intervention.

This move upward was based on two pieces of news. JP Morgan raised its offer from $2 up to $10 for Bear Stearns and existing housing sales unexpectedly rose 2.9% to an annual rate of 5.03 million in February.

Ok so lets look at these two spectacular pieces of data that took the markets higher by 1.5%. JP Morgan basically said today we will give you a nickel instead of the two cents we offered you on Sunday. Bear Stearns was a $160 dollar stock a year ago! It was about a $100.00 stock in December! Losing 90% instead of 98% isn't exactly great news in my book. The majority of Bear Stearns stockholders feel like jumping off a bridge right now. The fact that we had to have the Fed broker a deal after our 5th largest bank has gone insolvent should not be taking the markets higher when its being given away at a 90% discount of its value from 3 months ago.

Now the housing number. Home builders and every mortgage related stock moved higher because sales grew for the first time in seven months. What the financial news has failed to highlight is prices dropped 8.7% versus Feb. 2007 which represents the largest drop in 40 years of record keeping. That's right, the biggest drop in prices EVER seen year on year for one month!!!

Look what happens when you drop prices...Sales go up!!! A quote from Bloomberg:

"Purchases increased 2.9 percent to an annual rate of 5.03 million, the National Association of Realtors said today in Washington. The median price of single-family homes dropped 8.7 percent from February 2007, the most in four decades of record keeping.
``It looks like this may be a temporary pause,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The price declines have helped, and people are still getting financing, though not on the good terms they could before. We're still a long way from a recovery in housing.''
The real estate market is unlikely to rebound quickly as a glut of houses on the market depresses property values and lenders toughen mortgage even more requirements to stem credit losses"

My man Nigel hits the nail right on the head with what to look for going forward. Expect prices to continue to free fall. One month of data does not show a trend. Sales were up to 5.03 million in Feb. but keep in mind in 2005 we were selling at a 6.6 million annual clip. This is a big drop in volume from the peak. Inventory still remains at 9.6 months which is way over the historical averages. This is why you need to sit back and wait. Prices are dropping at the fastest rate on record and inventories are still high. Prices will only continue to move downward. Why the market cheered this news is beyond me.

The data in housing tells me the housing time bomb is starting to implode! I can't wait to see the Case/Shiller index tomorrow which also looks at housing prices. I will be here tomorrow to give you the scoop.

JP Morgan may up bid to $10 for Bear Stearns

In a surprising move, JP Morgan will most likely raise its bid to $10/share for Bear Stearns according to Bloomberg. This appears to be a smart move by JP Morgan because there was an angry mob of Bear Stearns shareholders that seemed ready to go down kicking and screaming. The question that I have about this whole takeover is why were there no other offers for Bear Stearns from competing banks or private equity?

I find this fact very interesting and IMO it says a lot about how poor the balance sheets must be at our financial institutions. Bear Stearns building alone in NYC is valued at $1.2 billion. If Bear's offer is raised to $10 share then JP Morgan is buying Bear Stearns for about $1 billion. This is less than Bear Stearns headquarters alone is worth!!! Its not like Bear Stearns shareholders haven't been trying to find another buyer as Bloomberg explains:

"Lewis and James ``Jimmy'' Cayne, Bear Stearns's 74-year-old former chief executive officer, are trying to recruit investors to counter JPMorgan's offer, the New York Post reported last week, citing people familiar with the situation.
The two have approached private equity firms including J.C. Flowers & Co. and Kohlberg Kravis Roberts & Co.; banks including Barclays Plc, HSBC Holdings Plc, Credit Suisse Group and Royal Bank of Scotland Group Plc; sovereign wealth funds and China's Citic Securities Co., according to the Post."

So BSC shareholders went to everyone including the banks, SWF's, and private equity and found no takers. So the question must be asked: Is this a sign that Bear Stearns books are that bad and its completely worthless or are its competitors in such bad shape themselves that they can't even afford to take on Bears risk and cough up the $1 billion dollars in cash? My guess is its somewhere in between.

The fact that the Fed was pushing to get this deal done at $2/share shows you the lack of confidence that the Fed has in the financial markets right now. A comment from Jay Moghe:

Jay Moghe, who helps manage $160 million as the Singapore-based head of Opes Prime Asset Management Pte. ``It would look quite embarrassing to the Fed now if the situation results in there being a bidder at a higher price, seeing as they have underwritten the deal at $2.''

The Fed pushing for a deal at $2/share when the final number ends up at $10 a share tells you they are in full panic mode. Imagine the data they are able to see that we can't. Please take these developments a strong warning sign that this crisis is nowhere close to being over and invest accordingly.

Sunday, March 23, 2008

Wall St. Begs for a bailout

The bailout chatter continues and seems to be the new battle cry from Wall St. Bloomberg ran another piece on this tonight quoting some of the biggest names on Wall St. It seems that the sentiment of the street has gone from "We need more Fed rate cuts!" to "Bail us out! We see no other alternative that works!".

Some of the quotes from Bill Gross and others from the article:

"The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing the some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.

``An RTC-type structure is interesting, and it may not be that much of a burden on taxpayers in the long run,'' said Barr Segal, a managing director at Los Angeles-based TCW Group Inc. who helps oversee $80 billion in fixed-income assets. The government should purchase the mortgages and reissue ``debt that's backed by the U.S. government and there you go, you've unclogged the drain,'' he said."

A March 13 proposal by Senator Christopher Dodd and Congressman Barney Frank that the Federal Housing Administration insure refinanced mortgages after lenders reduce the loan principal to make payments more affordable to homeowners ``is the next step,'' Senator Charles Schumer, a New York Democrat, said in a Bloomberg Television interview on March 19. It's a ``broader step, but not as broad as RTC,'' he said.

Pimco's Gross that's not enough. ``If Washington gets off its high `moral hazard' horse and moves to support housing prices, investors will return in a rush,'' he wrote in a note to investors published Feb. 26. Gross, who runs the $122 billion Total Return Fund from Newport Beach, California, didn't return calls seeking additional comment.

A few observations:

The problem we have here is this is a 6 trillion dollar problem. Wall St. wants only the bad assets bought. Well as prime loans and Alt-A loans continue to fail, who is to say that all $6 trillion of these mortgage securities will not end up being in trouble? Having the government buying this garbage is a huge risk to taxpayers if this bubble pops as badly as I expect it to.

The second question I raise is can the government even afford to do this in the first place? I say there is no way when the Fed has $800 billion in reserves which is now down to $500 billion after spending $300 billion trying to clean up this mess.

My final point is highlighted in the last paragraph. Bill Gross makes the statement that investors will be back in a rush if Washington supports housing prices. I say bull****. Why would all of these investors rush back into housing whem many of these speculators got burned BADLY? Where are the families that are going be able to afford houses at these insanely unaffordable prices?? Who are all of these investors that will be beating down the door to get back into flipping??

Bill Gross is one smart cookie and it seems more and more apparent that the great minds on Wall St. are trying to get bailed out in order to save their own asses versus trying to fix the problems of the financial system. Having Washington buy this debt helps Wall St. not the average American. Its obvious to me that Wall St. now realizes they can't fix this problem through rate cuts. They got in too deep and they are now trying to play the bailout card.

I love how quickly they try to dismiss senator Dodds proposal of lowering the loan amount to an affordable level. God forbid Wall St. takes a loss on a loan.

If you want to fix this crisis its pretty simple. Leave it alone and let the free market work it out on its own. Use the resources of the Fed to keep the markets orderly as the system resets. The companies that took too many risks will go under and the strong ones like JP Morgan will pick up the pieces. We then go into a prolonged recession where equites will fall back and we will lick our wounds and then start a new business cycle built on trust and transparency. The market will then start moving higher. Its time for Wall St. to be taught a lesson and I hope the government gets out of bailout mode. We will see how this plays out.

Home Sales Plunge in Fourth Quarter

Happy Easter to anyone celebrating this holiday today. I thought the data above released by the NAR was a great way to show how dramatic the drop in home sales has been.(Click to enlarge)

I have discussed previously how tighter lending standards and affordability issues have grinded home sales almost to a halt. This is finally starting to show up in the data. Demand for housing is there and will always be there as our population grows. The problem is people can no longer qualify for the loans. The early data in the 1st quarter shows that these trends are continuing and the spring season has already been a bust.

As these large banks like Bear Stearns start to go under it will only make lending standards tighter as the remaining banks continue to get hit by foreclosures which eats away at their capital ratio's. They will need to hoard cash in order to keep these capital ratio's within their guidelines.

The Fed is now spending like a drunken sailor and is attempting to bailout everyone and offer unlimited liquidity to Wall St. Rumors like this one seen on Bloomberg continue to swirl that the government is now talking about buying bad loans. This would be a huge mistake because it would send the wrong message and reinforce bad behaviours. We should allow capitalism to run its course and take down the companies that went too far and made housing so unaffordable. It remains to be seen on how the government will react as this housing crisis deepens. More on this tonight.

The housing time bomb keeps ticking and if sales remain this low you will start seeing prices move to the downside. As builders keep building and home sales drop dramtically, inventories will continue to rise. The sellers will need to start increasing sales and whats the best way to do that? LOWER PRICES!!