Saturday, April 19, 2008

David Tice on the Debt Bubble

Below is a great video from David Tice/Manager of Prudent Bear explaining the debt bubble and why stocks are going to drop. This was filmed in November and its amazing to see how many of his predictions have come true. His fund BEARX is a nice fund to use as a hedge in any investment portfolio as we work through this crisis.

So How Does a Higher Libor rate impact Housing?

I have talked a lot about the Libor rate in the past week. The Wall Street Journal had a great article explaining how this affects the average homeowner. Here is a full copy of the article for those who don't have a subscription to the WSJ. I will highlite the areas to take notice of. Here is the link for the WSJ subscribers. Enjoy the full piece. Its a good read:

"A sharp and unexpected rise in a widely used interest rate is threatening to add billions of dollars to the interest bills of homeowners, companies and other borrowers around the world.

The London interbank offered rate jumped for the second straight day Friday -- two days after the British Bankers' Association, which oversees the calculation of the interest rate, said it was investigating the borrowing rates that banks had been providing to it.

The BBA started its review amid growing concerns among bankers that their rivals weren't reporting their true high borrowing costs, for fear of signaling to the market they were desperate for cash. John Ewan, a manager of the Libor system at the BBA, said Friday the association continues to believe in the accuracy of the Libor system.

Libor is one of the world's most important financial indicators. It serves as a benchmark for $900 billion in subprime mortgage loans that adjust -- typically every six months -- according to its movements. Companies globally have nearly $9 trillion in debt with interest payments pegged to Libor, according to data provider Dealogic.

If sustained, the past week's rise of Libor could add roughly $18 billion in annual interest costs on that corporate debt, or about $100 to the monthly payment on a $500,000 adjustable-rate mortgage loan.

John Waite, a mortgage broker in Appleton, Wis., said one of his customers, a house painter, faces a reset on his subprime loan next month and will be affected by the recent Libor gyrations. The painter's interest rate was fixed at 7.25% for the first three years of the loan, and next month the borrower will make its first adjustment based on a margin of 6.5 percentage points over six-month Libor.

With that rate around 3%, the painter's new monthly payment of interest and principal would be about $1,446, Mr. Waite said, up from the current $1,173. Six-month Libor was around 2.7% Monday. At that rate, the painter's new payment would be $1,408.

The Libor rate, which is supposed to reflect the average borrowing costs of banks, had been falling in recent months as the Fed lowered interest rates. At the same time, though, the gap between the interest rates central banks set and Libor has risen -- an indicator of increased concerns about banks' financial health. That, combined with this weeks' moves, counteracts efforts by the Fed to ease pressures on the economy.

While Fed officials see the rise in Libor spreads as predominantly reflecting pressures on European banks, they also see it as symptomatic of a broad reluctance by banks in the U.S. and elsewhere to lend money they think they may need a few weeks from now. They continue to study options for addressing the pressures.

One way might be to expand the Fed's "term auction facility," from the $100 billion it has currently lent to banks. It could also extend the term of loans made through the facility from the current 28 days, perhaps to three months or as long as six months.

Friday, the closely watched three-month U.S. dollar Libor rose 0.09 percentage point to 2.9075%, its highest in nearly six weeks.Between Wednesday and Friday, the rate rose 0.174 percentage point, an increase that hadn't been seen since August and the start of the financial turn down that has spread from banks into the broader economy. Meanwhile, the six-month U.S. dollar rate -- used as the basis for payments on most subprime mortgages -- rose even more sharply and was quoted Friday at 3.01875%, or 0.33 percentage point more than at the start of the week.

That could prove painful for many companies that are heavily reliant on borrowing, including finance companies and corporations that recently went private in leveraged buyouts.

In commercial real estate, the rise in Libor is bound to have a chilling effect, because many developers borrow heavily using floating-rate debt linked to Libor. Until recently, declining rates had benefited borrowers, but some lenders were growing wary. Banks have started to include a floor in Libor-linked loans, said Peter Fitzgerald, chief financial officer at Radco Cos., an Atlanta developer. That means borrowers' savings would be limited if Libor continued to sink, but borrowers can be hit by the latest rise.

"If Libor were at 4% instead of under 3%, there would be a disaster that would take years to unwind," he said."

My quick Take:

As you can see the Libor rate is very powerful and has a huge effect on subprime mortgage rates. Look at the change in payments for Mr. Waite's subprime customer. His payment went up almost $300 in one week based on increased Libor rates.

Almost one trillion dollars in subprime loans are priced based on the Libor. This move in ratesup to to 3% from 2.7% will put a lot of stress on subprime borrowers and push many into foreclosure IMO.

Imagine you have a loan resetting and because of a one week panic change in Libor rates, your new payment is several hundred dollars more then it would have been if your mortgage reset last week..

This puts even more pressure on prices in housing. The full effect from the Libor scandal could push the Libor to 4%. If this happens then subprime mortgage payments could rise an additional several hundred dollars. This will spike would push subprime defaults through the roof..

Sit back and watch this train wreck. The Libor story will have a huge impact on housing.

Friday, April 18, 2008

New Decoupling Theory: The Stock Investor and The Bond Market

Sorry its been quiet around here. I have had some business meetings the past few days.

Well the bulls were charging again today on Wall St. This market gets wackier and wackier by the minute. What I see developing late this week in the markets is something investors really need to focus on. The bond market is telling us they are about to lead the bulls right into a slaughterhouse

We all have been heard about the global "decoupling theory" on CNBS where the global economy will "decouple" from us and continue to grow and offset our losses as we head into a recession.

I now believe we have another decoupling going on right now in the markets. The bond market is starting to decouple from the the stock market and its investors this week.


Becsause the bond market is screaming FEAR at the top of its lungs. How is it screaming fear? Well all you need to do is take a look at the big move in the Libor rates this week and the huge jump in the prices of the 2 year treasuries. Remember the Libor story I shared with you from the WSJ and Bloomberg? Well the Libor rose dramatically as expected because the banks were lying to each other and the regulators put an end to it.

This made the bond market nervous because it shows them the banks are scared and not lending to each other. Then the bank earnings came out this week. After seeing these they went from being nervous to flat out being scared. This fear was seen in 2 year treasury note as it started soaring this week. This is not good.
Its described well here on Bloomberg:

"Two-year yields have risen 45 basis points this week, the most since November 2001, on speculation the Fed will reduce its target rate by a quarter percentage-point on April 30, instead of the half-point traders expected a month ago.

"The drop in two-year notes ``is related to the issue with Libor, and it's forcing down the short end of the curve,'' said Theodore Ake, head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York. ``People are really worried about the implications of the Libor mess; unlike the previous times when they didn't know what to do and bought two-year notes, this time they're selling two-year notes and trying to get into cash.''

Theodore explains it perfectly. People in the bond market are flying into cash. This tells you that the bond market has had enough of the Wall St. bank's accounting games. So as the average investor is flying into stocks as the talking heads on CNBC tell them we have hit the bottom, the bond market is running into cash. I will say it again. ALWAYS FOLLOW THE BOND MARKET because they almost always get it right.

So why is the bond market running into our cheap dollar? Well when the bond market starts seeing big companies like Citibank taking huge losses, they have now decided to run for the hills and head to cash instead of being a fool and chasing stocks that are falling apart. This flight to safety is telling you they think this market is deteriorating and they have lost confidence in it. They would rather be in cash versus owning treasuries.
Take a look at Citi earnings:

"Citigroup, the biggest U.S. bank by assets, reported almost $16 billion of trading writedowns and increased bad loan reserves as customers fell behind on home, car and credit-card payments.

"Revenue fell 48 percent to $13.2 billion, compared with the average estimate of $11.1 billion from analysts surveyed by Bloomberg. Results included $7.6 billion of writedowns and credit costs on mortgages and bonds, $1.5 billion on leveraged buyout loans and $1.5 billion on auction-rate securities.
The bank wrote down the value of assets it absorbed last year from so-called structured investment vehicles by $212 million and marked down the value of bond insurance contracts by $1.5 billion.

Standard & Poor's said today it is reviewing Citigroup's rating for a possible downgrade, noting that earnings may be further depressed by loss reserves on the bank's loan portfolio. Fitch Ratings lowered the company's rating one level to AA- from AA today, with a negative outlook. Fitch cited deteriorating earnings in the consumer business and investment bank losses."

These numbers are obviously terrible. Citibank also said they may have to raise new capital when they previosly had said there would be no need to. So how did the talking heads onWall St. react?

``Pandit is doing what needs to be done, focusing on capital management, allocating capital to areas that he wants to grow and exiting businesses that he doesn't think are core to the overall franchise,'' said Peter Kovalski, portfolio manager at Alpine Woods Investments.

``People are assuming the worst,'' Walter Todd, a portfolio manager at Greenwood Capital Associates, said in an interview on Bloomberg radio. ``Expectations are low enough that you can have some positive stock performance even off a bad number.''

Pandit ``is doing the right things in our eyes,'' said William B. Smith, president of Smith Asset Management LLC in New York, which oversees about $80 million, including about 66,000 Citigroup shares."

My Take:

Wall St. cheered the news while the bond market said "Oh my god look at these numbers" and ran. The bond market See's a company with a 50% revenue drop that may need to raise capital after taking huge losses. Wall St's sees these stocks as buys. The reactions above reactions are ridiculous when you look at the numbers. They are telling you to buy because the "Expectations are low enough that the stock will rise" and "Pandit is doing the right things". I guess I would say the same thing if I owned 66,000 shares of Citi.

I heard the same "buy because the bad news is priced in" a few months ago when Citi was at $30.

If the bond market is starting to fly into dollars then its telling you something. They realize things are ugly when you have massive write downs, rising libor rates due to fear, and 50% reductions in revenues in Citi. When they see this on top of a weak consumer, slowing economy, and rising inflation, things look even uglier.

After seeing a good chunk of the bank earnings this week, its obvious the bond market is questioning the solvency of these banks and probably earnings in general in the stock market and rightly so.

As Wall St. and the bond market are decoupling, decouple with the bond market. If they are scared then you should be as well.

Wednesday, April 16, 2008

US Dollar Continues to Freefall

Good Morning. I hope you slept well because while you were sleeping the dollars in your pocket continued to shrink during trading in Asia. From Bloomberg:

``The dollar will remain mired in weakness,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., Japan's third-largest bank by assets. ``The U.S. economy is already in a recession and won't be able to escape from it in the coming two years. This will force the Fed to lower rates to 1.5 percent.''

The dollar traded at $1.5934 per euro at 11:45 a.m. in Tokyo, after falling 1 percent yesterday and reaching $1.5979, the lowest since the European currency's debut in 1999. The U.S. currency may fall to $1.6020 a euro today, Kato forecast. The dollar was at 101.88 yen from 101.83 yen. The euro traded at 162.35 yen."

Bloomberg in the same piece also released the Philly Fed data:

"The Federal Reserve Bank of Philadelphia's general economic index was at minus 15.0 this month, completing a five-month contraction that was the longest since 2001, according to a Bloomberg News survey of economists. Readings less than zero signal contraction. The report is due at 10 a.m. New York time."

My Take:

The Philly Fed data is terrible. 5 straight months of contraction. I thought this was supposed to be a small short recession lasting 6 months? We better get a move on it and start consuming and partying like rock stars if we are at the bottom like Wall St. says we are.

One of the problems we have as we move deep into a recession is currency traders start to drool on themselves because they have an easy trade of shorting the dollar. They do this because they know the Fed will cut rates. The traders understand that we won't protect our currency like the ECB does.

This knowledge can also be used with other trades like oil. Is oil going up because of demand? Possible. Could the oil speculators be taking oil higher because they can make an easy trade by going long and blame it on the weak dollar? Possible. Combination of both? Most likely.

The problem with a weak currency outside of inflation and reduced pricing power is the risk you run with speculators in other markets. I think a lot of the commodities boom could be a combination of higher demand, a lagging US market, and the weak dollar.

My point here is if we protect our currency then we could at least rule out one of the causes of raging commodity prices. Oil touched $115 a barrel in futures trading last night setting yet another record. Everything we buy needs oil in order to be manufactured as a result it effects the cost of everything you buy. Its not just about how much it costs to fill up your car.

You could apply the same logic towards all other commodities. If you strengthen the dollar then maybe corn, wheat, and other commodities might soften a little in price.

Bottom line:

Everyone should be very concerned about inflation. A currency crash would DESTROY the economy immediately. The dollar has been nosediving day after day. Aren't you afraid of paying $5 dollars a gallon for gas this summer? I know I am. Something needs to be done to control prices because the average consumer cannot afford this on top of a $2500 mortgage payment.

The Fed needs to target inflation before the traders and the currency let it spiral out of control.

The Libor Lies: Smoke and Mirror Games Continue

Well it was rally time today as the market continues to try to convince itself that the worst is behind us.

I find Wall St. fascinating because so much of it is a game of psychology. Dr. Robert Shiller from Yale describes financial bubbles as mainly being a psychological event. Bubbles tend to start with excitement and profits, are fueled by manias, and then crash in a panic. In between the cycles you will see moments of denial as the people who got in too late refuse to accept that they were the last sucker at the top. Today's housing market and tech are good examples of this.

I view the stock market right now as being more psychological in how it reacts to news versus your old school technical market. There was a time in the markets where earnings were what mattered and markets were much more predictable as a result.

Today we have a much different market. You have financial TV news networks influencing investment decisions with 100 talking heads that have 100 different opinions. Today's market also has a much larger pool of short sellers which can make the market move more violently up or down. Finally and most importantly in today's market you have the the "financial innovation" of Wall St.

This new environment makes things very confusing for the average investor because there is so much information to digest. Its gotten to the point where its almost impossible for any investor(including myself) to predict where we are heading on a short term basis. However, in the long term, fundamentals ALWAYS come back to the market and stocks are then priced appropriately to earnings. Nasdaq 5000 ring a bell?

IMO, Financial innovation's have become the most dangerous change in the financial markets because it made the stock market more vague or "shady". Wall St.'s existance is based on trust and confidence. Without trust you would have no financial system. Would you give your money to a bank that you didn't trust would pay you back?

Because we have this new financial innovation, its easier for Wall St. to "keep the game" going because they can play with the books. Level 3 asset accounting is a good example of this. Goldman Sachs has $83 billion in level 3 assets which has risen significantly from 2007. This is more then the firm has in capital. Doesn't this make them technically insolvent? Why are they allowed to not be forced to price these assets?

This game of "smoke and mirrors" took a big blow today with an article that you probably didn't hear about today. CNBC "bubbleland" TV wouldn't dare bring this to your attention. The WSJ and Bloomberg reported today that the Libor rate is being misquoted by banks. The Libor is set on the marketplace based on what the banks tell them they paid to borrow. This rate is not set by regulators. The Libor rate is set on trust.

So the banks are lying and saying they are paying a lower rate when they really paid a higher lending rate. From Bloomberg:

"The British Bankers' Association will speed up the review of the process by which money-market rates are set daily amid concern that some contributors are providing misleading quotes.
The global credit squeeze has raised concern lenders have been manipulating the so-called fixing process to prevent their borrowing costs from escalating, the Bank for International Settlements said in March. Participants have complained about whether banks are submitting accurate information, said Angela Knight, chief executive of the London-based BBA.

The association, which held its annual board meeting today, said it will ban any member deliberately misquoting lending rates.

``At the heart of the problem is that this credit crisis has crystallized why we are referencing so many securities to an uncollateralized reference rate and not a market price,'' said Francesco Garzarelli, director of macro and markets research at Goldman Sachs Group Inc. in London. ``That is why the panel is being solicited to provide better quotes. Libor is a rate that has lost some of its reference value in the current crisis.''

``The most obvious explanation for Libor being set so low is the prevailing fear of being perceived as a weak hand in this fragile market environment,'' wrote Scott Peng, head of U.S. rates strategy at Citigroup in New York."

My Take:

Well well well Wall St. just took a big step back in the trust department. We are already in a credit crisis and this will just put more fear into the marketplace. Expect the Libor rate to rise as regulators stop these "smoke and mirror" games.

Some mortgage rates are based on Libor so expect them to go up as well.

Bottom line is there will be a point where this crisis of confidence will come to a peak and its going to be ugly when it does. The tough part is figuring out when the music stops. I have a strong feeling we are very close. Wall St. knows the debt bubble has to burst and the market needs to reset with affordable housing and low inflation.

Today they just lost one of their big "smoke and mirror" instruments. The question now becomes how many tools are left in the toolbox?

"Delusional" Stock Market Cheers Bad News

Well stock prices are soaring this morning as the Dow and the Nasdaq both are showing gains of over 1%. I see absolutely no reason for this. The dislocation between stock prices and the reality of the economy has reached new highs in my estimation.

The talking heads on CNBC will cheer the fact that the CPI came in at .2 which was what economists were expecting. They will continue to harp on the fact that inflation is only a "little bit" on the high side. In my opinion this is the worst thing that could have happened. The reason I say this is because the Fed now thinks they have room for another big cut. If they do this, we risk a potential crashing of our currency.

Why do I say this? Well look at what came out of Europe today. From Bloomberg:

"The inflation rate rose to 3.6 percent last month, the highest in almost 16 years, the European Union's statistics office in Luxembourg said today. The March figure is up from 3.3 percent in February and exceeds an estimate of 3.5 percent published on March 31.

``Concerns about upside risks to the inflation outlook are unlikely to ease quickly, leaving little, if any, scope for the ECB to soften its interest-rate stance,'' said Martin van Vliet, an economist at ING Group in Amsterdam. ``This may help push the euro-dollar to $1.60 in the short term.''

MY take:

This means that the ECB will not be cutting rates anytime soon. They are much more hawkish about inflation in Europe because their number one mandate is to control inflation. The Euro is up to almost $1.60 today as our dollar PLUMMETED to all time lows in the low 71's. Just a few days ago I was hearing about a dollar rally on CNBC and that the Euro couldn't rally over $1.59. Well you can throw that idea out the window.

Commodities also soared on the CPI number as the world knows we have no discipline towards protecting our currency and we will continue to cut rates as long as our CPI # continues to stay within expectations. Gold reacted by rising $16.00 and oil held its highs after soaring yesterday. More bad news for the consumer. Weaker dollar=less purchasing power.

The market also is soaring today because the financials came in at expectations. So JP Morgan profit drops 50% because of $5 billion in write downs and this is good news? Revenues fell by 11%. Here is what Jamie Dimon's said about things going forward:

``Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress,'' Dimon, 52, said in the statement."

Since when did a 50% drop in earnings mean things are looking just dandy. Some more "bullish news" came out of Washington Mutual. From Bloomberg:

"Washington Mutual said it could lose as much as $19 billion in the next three to four years on home loans depending on U.S. economic conditions. The top end of the forecast is ``well in excess of any historical benchmarks,'' the company said.

Washington Mutual yesterday reported a loss of $1.14 billion, or $1.40 a share, compared with profit of $784 million, or 86 cents, a year earlier"

19 billion in losses expected over 3-4 years!!! These numbers are hideous. Everyone needs to start looking at the fundamentals instead of listening to the analysts who have a vested interest in trying to tell you that Rome is not burning and we are through "the worst part of it". These bottom callers have repeatedly gotten it wrong since this crisis hit last March. The fundamental facts are earnings are deteriorating, the dollar is on the verge of crashing, and unemployment is rising. These are not signs of an economic recovery. these are signs that we are heading into a deep 70's style recession!!!

You want more data look at the housing data. Housing starts fell to a 17 year low.

This is good news compared to whats happening to housing in California From Data Quick:

"A total of 20,513 new and resale houses and condos were sold statewide last month. That makes it the slowest February in DataQuick's records, which go back to 1988. Sales were up 7.1 percent from 19,145 in January and down 34.3 percent from 31,228 for February last year.

The median price paid for a home last month was $373,000, down 2.6 percent from $383,000 for the month before, and down 21.0 percent from $472,000 for February a year ago. The median peaked last March/April/May at $484,000.

Around half the drop in median is due to shifts in the types of homes selling, and how those homes are financed. Last month 15.5 percent of the state's financed home purchases were purchased with "jumbo" loans over $417,000. A year ago it was 37.3 percent.

Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages is at a six-year low."

Foreclosure activity from Data Quick in California:

"Foreclosure resales - houses sold after being foreclosed on continue to dominate many inland neighborhoods. More than one out of three Southland homes that resold last month, nearly 38 percent, had been foreclosed on at some point in the prior year. This time last year such sales were only 8 percent of the market. At the county level, foreclosure resales ranged from 28.8 percent in Los Angeles County to 56.4 percent in Riverside County.

In recent months, foreclosure resales typically sold for about 15 percent less than other homes in the surrounding area. When these foreclosure resales dominate a market, accounting for more than half of all sales, they tend to tug home prices down by an extra 5 to 10 percent when compared with communities where foreclosure resales are less common."

My Take:

This California home sales data is stunning. First of all, you are basically $100,000+ underwater on your house on average if you bought in California in the 1st quarter of last year. The percentage of houses being bought with a jumbo loan dropped from 37% last year down to 15% this month. This tells you that the banks are tightening up their lending standards. This will only get worse as the banks continue to writedown huge losses.

Now the foreclosure activity. Again this data is shocking. 38% of Southland sales were foreclosures. These foreclosure sales will end up being sucker sales a year from now. The last paragraph pretty much tells you that. When you have an area with a high level of foreclosures, prices tend to get "tugged down" because there is more supply.

I would be nowhere near ready to buy a foreclosure in California with the rapid price drops and high foreclosure activity. You will be catching a falling knife if you decide to do this. Wait until 2009 at least before dipping into California foreclosures.

Bottom line:

Stocks are soaring but the fundamentals say otherwise. How many times have we seen this in the last 5 months? 300-400 point moves up in one day followed by pullbacks as reality sets in. I see this as another bear rally. Be careful out there and please ignore the CNBC bottom callers.

Tuesday, April 15, 2008

Inflation Hot Hot Hot/Housing Poll

Good late afternoon!

What a choppy day in the markets. The data was mixed. On the positive side J&J had a nice quarter and Intel hit earnings after hours tonight. We are very lucky that we have strong global growth heading into this downturn.

Who knows where we would be right now without Chindia and their exploding middle classes consuming everything in sight along with many countries building huge infrastructures. Global companies like the two above should be able to hold things together as the US economy slows to a trickle FOR NOW. GE showed on Friday that this global growth story may be showing signs of slowing. Lets see how long this global growth lasts as the US consumer continues to run out of breath.

On the downside today we had ugly an ugly inflation report when the PPI number came out. From Bloomberg:

"U.S. producer prices rose almost twice as much as forecast. Food and energy stoked the 1.1 percent gain in wholesale prices in March, the Labor Department reported today in Washington.U.S.

Excluding fuel and food, the producer-price index increased 0.2 percent, as forecast. From a year before, producer prices climbed 6.9 percent, compared with a 6.4 percent gain in February. Excluding food and energy, the increase was 2.7 percent from a year earlier, the biggest since July 2005.

So far this year, wholesale costs are up 10.2 percent at an annual pace compared with 8.4 percent at the same time last year. The core rate has increased at a 5 percent annual pace compared with 2 percent in the first three months of 2007.

Traders pared their estimate of the odds of a half- point Fed rate cut this month to 24 percent from 42 percent, futures prices showed. ``the Fed is clearly confronting some unpleasant inflation numbers,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland."

My Take:

This was a big number. Inflation basically rose on goods twice as fast as what was forecasted. This is what happens when the Fed drops rates and throws our currency to the wolves. Our pricing power is dropping at a rapid pace. What was interesting to me was how the bond market reacted. The traders in the bond market reduced the chances of a .50 point cut from the Fed this month from 42% before the PPI number to only a 24% chance after the PPI.

Some advice. Never bet against the bond market. They almost always get it right. So according to them the Fed may soon change its tune. The rate cutting is about over folks and the Fed will be forced to address the inflation issue. The bond market is starting to price this in.


Because inflation could kill the consumer. Americans are losing jobs due to the bad economy and their annual wage increases are not keeping up with the rise in the price of goods(see yesterdays wage chart). As a result, we are getting poorer every month because we have less money to spend after paying our bills that continue to rise month after month.

This will have many repercussions including higher mortgage rates because money will be more expensive to borrow. This will hurt financials as the banks spread on rates shrinks which then hurts profits . This will not be good for housing.

By the way, don't you love how the government takes out food and fuel when they come up with these inflation numbers? This is so ridiculous. That's like asking me to rate a dinner at a restaurant minus the appetizer and the main course. If I gave it a 4 Star rating it wouldn't mean much would it. Yet the talking heads on CNBC cheer when the number comes out in line with expectations like it did today.

The USA Today/AP Housing Poll:

I wanted to briefly discuss a poll of 1000 Americans and their thoughts on the housing woes that was in the USA Today. Some of the results of the poll:

"The Associated Press-AOL Money & Finance poll found that more than a quarter of homeowners worry their home will lose value over the next two years. One in seven mortgage holders fear they won't be able to make their monthly payments on time over the next six months.

Sixty percent said they definitely won't buy a home in the next two years, up from 53% who said so in an AP-AOL poll in September 2006. At the same time, just 11% are certain or very likely to buy soon, down from 15% in 2006.

The biggest worriers are those expecting to buy soon. Of that group 43% frets that their home's value will drop in the next two years, compared with 25% of those not expecting to buy shortly.

Gus Faucher, director of macroeconomics for Moody's, a consulting firm, estimated that 9 million homeowners owe more on their home than it's worth. "

My Take:

Well I am glad I am not selling a house!! We have a long ways to go with the housing downturn when 89% of Americans don't plan on buying a house soon. The other number that caught my eye was 1 in 7 homeowners are worried they won't be able to make a payment within the next 6 months. That's almost 15%! Yikes!! Imagine a 15% default rate on all mortgages?

Any bottom callers just need to look at these stats to realize we are still in the early innings of the housing time bomb. With mortgage rates potentially rising due to a potential rate rising Fed reacting to inflation, these stats could get worse IMO.

Another big inflation number is out tomorrow when the CPI comes out. Stay tuned!

Monday, April 14, 2008

Even Crocs can't avoid this Recession

How bad is this economic slowdown? Well I am sure all of you have seen or heard of Crocs. Its the trendiest clog in town and everyone wants a pair. Crocs shareprice tripled in 2006 as it became a must have shoe for every man, women, and child.

The Crocs story continued in 2007 as revenue continued to soar. Sales estimates were expected to stay hot as revenue growth for the 1st quarter of 2008 was expected to be 37%.

So how did they do for the quarter? Here are the results from Bloomberg:

"Crocs Inc., the maker of the namesake colorful clogs, said it will fire its 600 Canadian plant workers after lowering annual earnings and sales forecasts as consumer spending slowed.
Crocs, based in Niwot, Colorado, tumbled 28 percent after the close of Nasdaq trading.

The shoemaker will close its Quebec City factory to reduce expenses, said spokeswoman Tia Mattson.

The shutdown of the Canadian plant will contribute to a first-quarter loss of as much as 5 cents a share, Crocs said. Revenue will be as low as $195 million for the quarter. The company previously forecast profit of 46 cents a share on revenue of $225 million."

My Take:

I can hear the temper tantrums now as parents explain to their kids that they cannot afford to buy them the new Crocs styles this summer. Anyone put those things on BTW? Man they are comfortable.

Obviously -.05 cent loss versus a .45 cent gain is a huge miss and revenues came in more then 10% light. The stock plunged 28% in after hours trading.

Its always a surprise when a company like Crocs misses because its not a huge ticket item and their brand is extremely hot. Take notice when a company likes this misses. It tells you that the retail environment is horrific out there.

Earnings season should be interesting to say the least. We get Citigroup later this week and most of the investment banks next week. Expect more confessionals and additional write downs. Wachovia lowered their dividend after saying they had no intentions of doing this during their previous conference calls.

Goldman: Early S&P Earnings Season looks "awful"/Wachovia reports loss

Happy Monday everyone. Well as I write to you right now the market is bouncing from red to green and seemingly looking for direction. I wanted to talk about S&P 500 earnings today.

Goldman came out with a report today saying that early signs of S&P earnings look "awful", and they expect the earnings season to be full of disappointing results and lowered guidance going forward.

How will these "awful" earnings effect the stock market well here is a prediction from one of the Goldman analysts:

``Early signs are awful,'' a team led by David Kostin, Goldman's New York-based U.S. investment strategist, wrote in a report today. ``We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower in coming weeks.''
Kostin, 44, said last month that the S&P 500 may fall to 1,160 in the ``near term'' before rebounding to 1,380 by December, making Kostin among the most bearish Wall Street strategists tracked by Bloomberg"

My Take:

OK so lets do a little math here. If the S&P falls from the 1360 level that its at today down to 1160 you are talking about an additional 18% or so drop in the S&P 500. Add this to the 14% or so drop we have already from the highs we will officially be deep into a bear market. Bear markets are defined by a 20% drop in the markets. This would put us at about a 30% drop.

This is a prediction from Goldman Sachs folks, and everyone knows they are the premier firm on Wall St. So why is their forecast so bearish. Earnings expectations are simply too high. Some more from Goldman's Dave Kostin and other:

"Goldman said worst-than-expected earnings from General Electric Co. and Alcoa Inc. are a harbinger of more to come. Analysts have reduced expectations for S&P 500 earnings growth during the second half of 2008 ``only slightly'' even after cutting first-quarter projections by 17 percent, Kostin wrote. Forecasts for a ``speedy recovery'' in profits are too optimistic, and stocks will drop when investors start viewing estimates with ``appropriate skepticism,'' he wrote."

My take:

Now here is where I disagee with Mr. Kostin. Why does he predict an 18% rise in the S&P back to 1380 in the second half of the year when he thinks earnings projections are too optimistic? This seems to be a contadiction in thinking doesn't it?

I realize stocks are forward looking but what catalyst down the road does he see to make such a bold prediction? The $150 billion in stimulus checks? That's about the only positive catalyst that I see going forward and I expect most of this to go towards paying off debts versus being spent in the economy.'

Other analysts have the same ridiculous estimates for the second half of 2008. From Bloomberg:

"Analysts surveyed by Bloomberg have cut their projections for first-quarter earnings at S&P 500 companies every week since Jan. 4. They now predict a 12.3 percent drop, compared with an estimate for an increase of 4.7 percent at the start of 2008.
Analysts are currently estimating 2008 profit growth of 11 percent for S&P 500 companies, down from 15 percent at the start of the year, according to Bloomberg data."

OK so let me get this straight the analysts are now expecting a 12% drop in the first quarter but still predict 11% growth for the year?? Based on what? Is inflation going away soon? Is oil going back to $40 a barrel? Is housing going to drop 50% by the second half of 2008 which will then get the consumer going again? These earnings projections are are a joke and the street still is not pricing them into stocks.

Wall St. needs to come to the reality that this recession will be long and protracted. Housing is a mess, Wall St. is in bad shape, and the consumer is tapped. I see none of these issues turning around anytime soon. It will be at least a couple years in my opinion.

Speaking of the consumer I picked this up off of Itulip. How tapped are they? Take a look(click to enlarge):

The first graph shows us what our little friend inflation has done to our wage growth...or should I say wage loss. Pretty dramatic change since October isn't it? This is what happens when the dollar gets killed from the Fed cutting rates. Things like gas, food, and other imported goods all rise in cost. Its hits us right in the wallet.

The second graph shows us that the average American has enough cash saved to live only 18 days versus an average of 30 days in 2000. This is further evidence that the consumer it tapped out and inflation is making things worse. This is a frightening thought. Imagine losing your job and having 18 days of money to live. This is why saving and paying off debt must be your number one priority.

Well I ended up getting long winded as usual so a quick note on Wachovia which is our 4th largest bank. They had a huge earnings miss today and were forced to cut their dividend and raise capital. The financials continue to get beaten down. A quick piece from the article:

" Wachovia Corp., the fourth-largest U.S. bank, reported an unexpected loss because of bad California home loans, and disclosed plans to bolster capital by selling $7 billion of stock and cutting the dividend.

The first- quarter loss of $393 million, or 20 cents a share, compared with earnings of $2.3 billion, or $1.20, a year earlier, the Charlotte, North Carolina-based company said in a statement today. Analysts had estimated Wachovia would earn about 40 cents a share, according to a survey by Bloomberg. "

My quick take:

Ok so the analysts expected about an $800 million dollar profit and Wachovia lost about $400 million. This is a perfect example of how earnings estimates are way out of whack with reality. Until reality comes back to the stock market I would stay away.

Sunday, April 13, 2008

100 Days to the Moment of Truth?

Just a quick post. This could be huge. The G-7 met over the weekend. Here is one of their conclusions. From Bloomberg:

"100-Day Plan
Policy makers laid out a 100-day plan to strengthen regulation of capital markets. They urged financial companies to ``fully'' disclose their investments at risk of loss and boost capital as needed. They chose not to outline new monetary or fiscal policies other than promising action ``as appropriate.''

While the G-7's currency warning may help temper the dollar's descent, central banks would have to realign their monetary policies to reverse its direction, analysts said.
Since August, the Fed has lowered its main rate 3 percentage points to 2.25 percent, aiming to forestall a recession. At the same time, the ECB has kept its benchmark at a six-year high of 4 percent amid the fastest inflation in almost 16 years."

My quick take:

If the G-7 sticks to their guns and forces the financials to show all of their losses then all hell could break loose in the stock market. This is a very interesting development and it makes a lot of sense. I think many of the policy makers have come to the reality that until there is transparency in the marketplace, there will be no credit markets.

We could be 100 days from one wild ride in the markets. Keep an eye on this developing story.

The Next Time Bombs? Credit Card Debt/HELOC Loans

The collapse of housing has created tremendous pressures in other areas of the economy. When the suprime crisis began everyone thought that it would be contained to subprime. As things continue to deteriorate it became obvious that the credit crunch was spreading into all areas of financing.

I believe credit cards will be the next shoe to drop because home equity loans are being pulled from hundreds of thousands og homeowners as the banks continue to hoard cash to stay solvent. These loans(also known as HELOCS) were the housing ATM cards that allowed people to spend like Donals Trump when they should have been living within their means.

This is a big problem because according to the Fed. US consumers have about $880 billion dollars in credit card debt. I expect a lot of this debt to end up defaulting. We are already seeing signs that people are falling behind on their credit card payments. Here are some great examples from the Hoffman Brinker and Roberts law firms website:

"In 1968, consumers’ total credit debt was $8 billion (in current dollars). Now the total exceeds $880 billion.(SOURCE: Federal Reserve Bank)"

According to the Federal Reserve Bank, 40% of American families spend more than they earn.(SOURCE:

In October 2007, credit card debt that was at least 30 days late totaled $17.6 billion, up 26% from October 2006. Some credit card companies, including Advanta, GE Money Bank and HSBC, are reporting a 50% increase in accounts that are at least 90 days late compared to the same time last year(SOURCE: Rachel Konrad and Bob Porterfield, Associate Press Writers)"

So as you can see the problem is already bad. Notice that some banks are now reporting a 50% increase in accounts that are 90 days late.

Here is why it will get much worse.


Here is a nice graph showing how much mortgage debt the average American has taken on versus credit card debt. Look at the last 7 years. Can you say housing bubble?

The New York Times had a great article today describing how the banks are sending hundreds of thousands of letters to homeowners announcing they are slashing their HELOCS in half or more. Many of these letters are being sent to areas that have seen the highest price drops in housing due to the fact that the banks are worried that the equity is not there to support the home equity loan.

Some pieces from the New York Times followed by my take:

"Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure.

In the last 30 days, lenders have sent several hundred thousand letters advising borrowers that their home equity lines of credit are frozen, estimated Michael A. Kratzer, president of, a Web site intended to help consumers reduce fees on home loans.

Major lenders — including Washington Mutual, IndyMac Bank and the Greenpoint Mortgage Unit of Capital One — say that declining property values are prompting the decisions to cut off credit."

"But these actions are being taken even in areas where property prices are rising, Mr. Kratzer said. What’s worse, the letters provide no explanation for how the lenders determined that the property values underlying the equity lines had fallen."

Borrowers who have an excellent credit score may also find that status hurt when a home equity line is frozen. That is because when a lender suddenly caps a $50,000 line at $25,000, the borrower will appear to have tapped the entire amount of the loan, a factor that can reduce a person’s credit score."

My Take:

Wow isn't this a raw deal for the homeowner. Their HELOC'S are getting cut in half and on top of this it may hit their credit score because it looks bad on a credit report. As you can see from the graph above mortgage debt dwarfs credit card debt. A good chunk of this debt are HELOC's.

So what happens going forward? People will start running up their credit cards because their HELOC's were cut in half. This is going to crush consumer spending because people have lost significant borrowing power. Many will then be forced max out their credit cards because they can no longer depend on their HELOCS to buy their Hummer.

As these distressed homeowners who can't afford their mortgages lose their options for borrowing it will be be DEFAULT TIME! This will result in additional losses of several hundred billions on credit cards alone for banks at a time when they are already in distress or insolvent.

There will also be significant losses on these HELOCS because when a bank forecloses, the original loan for the house gets paid first first. The HELOC gets paid second. So if the foreclosure sells for less than the original loan amount then the HELOC never gets paid back!!

This is why this credit crunch is not over and shoe drops like these will further devastate the banks. This could wipe out many banks. It will also result in even tighter lending standards which will further drop housing prices. Sit back and relax folks. Your houses are getting cheaper by the day.