Saturday, May 10, 2008

Bank Failure: ANB Financial goes belly up/Prime Loans delinquencies rise

Good afternoon

I thought I would bring this to every ones attention. The FDIC just announced that ANB Financial just failed. They had over $2 billion in assets. Here is the link to the FDIC:

"On May 9, 2008, ANB Financial, NA, Bentonville, AR was closed by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

The FDIC has assembled useful information regarding your relationship with this institution. Besides a checking account, you may have Certificates of Deposit, a car loan, a business checking account, a commercial loan, a Social Security direct deposit, and other relationships with the institution. The FDIC has compiled the following information which should help answer many of your questions."

Quick Take:

This was a small one but none the less its noteworthy. Expect this to be the first of many. AND Financial was about 75% invested in real estate by the way. Anyone in a bubble area that has an account with a local smaller bank needs to be aware that this type of stuff is going on and will continue to happen.

As a reminder, the FDIC will only guarantee $100,000 for any one account. If you have more then this in any one deposit account then you need to take action immediately. Spread out your money into different banks and keep each account under 100k so you are fully protected.

Prime Loans:

This is another piece of information I picked up today on prime loan delinquencies:

:The first concrete evidence that delinquencies on mortgage bills have spread well beyond those with subpar credit shows that even prime borrowers have increasingly fallen behind on their house payments.

The figures remain relatively small so far. But if they rise further, delinquencies on prime loans — given only to those with good credit — could prolong the housing crisis.

About 2.3% of prime loans were 60 days' past due in February, the highest level in at least a decade, according to data from FirstAmerican CoreLogic LoanPerformance. That's up from 1.4% a year ago."

Still, even among prime borrowers, not just delinquencies but also foreclosures are up. From the fourth quarter of 2006 to the fourth quarter of 2007, the rate of foreclosure filings for prime adjustable-rate mortgages rose from 0.41% to 1.06%, the Mortgage Bankers Association says. The rate of foreclosure filings for prime fixed loans rose from 0.16% to 0.22%."


If this starts to get out of hand then all hell is going to break loose in the financial markets. Foreclosures have doubled on adjustable primes, and late payments are up significantly for prime loans in general. These rates are still relatively low but jeez oh man this could be bad.

You think maybe people got into homes they can't afford? Wow, I am shocked(not).

Does history repeat itself?

I thought this was a great piece on why we should be careful about who we take advice from. Bubbles have a way of making people think things have changed permanently. What we learn down the road is things stay the same but we keep making the same mistakes.

This is why you shouldn't listen to the hype on CNBC! Listen to your own common sense.

Friday, May 9, 2008

Market Update:Fed Ex Warns/Oil Keeps Rising

I hope most of you are reading this after coming back from happy hour. I am on my way after this post!

Well it was another red day on Wall St. as oil and the financials(thanks AIG) continue to pressure the markets. The market seems to be more obsessed with oil versus the financials. Oil is putting tremendous pressure on the transportation stocks as well as the consumer.

Fed Ex tried to sneak this little warning out after hours due to the pressure of higher oil prices combined with a slower consumer:

"May 9 (Bloomberg) -- FedEx Corp., the second-largest U.S. package-shipping company, said fourth-quarter earnings will be below its earlier forecast after surging fuel prices raised costs by at least $100 million more than estimated.

Profit per share for the quarter ending May 31 will be $1.45 to $1.50, compared with a March forecast of $1.60 to $1.80, the Memphis, Tennessee-based company said today in a statement. FedEx also blamed ``restrained demand'' for express and freight shipments because of the cooling U.S. economy."

FedEx's new forecast follows a similar reduction last month by larger rival United Parcel Service Inc. in its full-year outlook. UPS cited a ``dramatic'' slowing of the economy. Both companies are struggling with jet-fuel and diesel prices that have climbed to record highs. "

Don't you love how they try to quietly put these warnings out there on a Friday after hours? The more alarming part of this warning is the blaming of "restrained demand". This is a nice way of saying the consumer sucks right now.

If you want to see an economy stop right in its tracks then let oil go to $200 a barrel like Goldman Sachs predicts. The consumer is already buckling from their mortgage payments and credit debt. Throw $5-7 a gallon gas into the equation and it will be lights out.

Oil reached a new high today:

"May 9 (Bloomberg) -- Crude oil rose above $126 a barrel in New York to a record as the dollar weakened against the euro, prompting investors to buy commodities as a hedge against the currency's decline.

``Oil is a safe haven because of the weak dollar and how badly the financial sector has been doing,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts."

Final Take:

Something has to give here folks. If oil continues its meteoric rise then I don't see how the consumer doesn't fall to its knees. This will result in higher default rates on foreclosures, credit cards, and any other form of debt.

This in turn will put more pressure on the banks who will react by lending even less which will deepen the credit crisis. As oil rises, the Fed may have to step in and raise rates if the economy starts to collapse. This will then put huge pressures on housing prices forcing them way down. Housing and the financials then take a huge blow.

I really don't see how we can get out of this without a major correction/recession. The issues pressuring the economy are all intertwined and form a downward spiral that feeds on itself until we eventually have a blowup.

Oil is only one small component of this spiral. However, its the one component that can deliver a knockout to the consumer with one punch by going to $150-200 a barrel. If oil drops to $70 a barrel I don't think it will matter by then. The damage will have already have been done, and we will be in the middle of a consumer led recession which are always worse then business recessions.

If anyone has an alternative or thoughts please add a comment. Everything I read and hear on the street leads me to the same conclusion.

Japan Follows the SEC/Stimulous checks


Stocks are down today following the AIG news as expected.

I mentioned the Japan announcement in the comments section last night but I wanted to spend some time on it this morning. It looks like Japan is following the SEC in terms of forcing the banks to provide details on their assets and their subprime losses.

A Japanese regulator told Bloomberg the following yesterday:

"May 8 (Bloomberg) -- Japan's Financial Services Agency has called on major banks to disclose details of assets and losses related to subprime mortgages before they announce full-year earnings, Nikkei English News reported, without saying where it got the information.

The Japanese financial regulator has asked banks that hold collateralized debt obligations to provide asset balances for the subprime-related portions as well as details on guarantees attached to their holdings, the news service said.

Life and non-life insurance companies would supply the information by the time they report earnings for the first half of the year, Nikkei said. The FSA also plans to ask major brokerages that have already released full-year financial statements to make disclosures when they post first-quarter results, Nikkei said.

The FSA will use disclosure guidelines compiled by the Financial Stability Forum, which consists of monetary authorities from Japan, the U.S. and Europe, the news service reported. The FSA may take steps to urge improvements if financial institutions fail to comply, Nikkei said."

My Take:

This is another positive step towards providing the transparency that we need in order to start recovering from the housing debacle. Of course when the losses are announced its going to be painful for the markets.

Japan already knows what happens when you fail to force the banks to reveal their losses. The Japanese regulators failed to force them to become transparent in the 1990's, and the result was a lost decade where their stock market went down from 38,000 to the 13,000 level where it now stands.

The Japanese lost all faith in the banks and financial markets after the Nikkei plummeted over 60%. Their interest rates have been at zero for years up until about a month ago(inflation!) because of the lack of demand for lending due to lack of trust, and the pain of being burned so badly financially. It destroyed their currency and housing still is not back to where it was before the bubble burst almost two decades ago

Lets just hope our government also learns from this mistake and follows through with what the SEC announced on Wednesday. This cleansing of the system is going to hurt but it will be positive.

Economists: Rebate checks won't help

Economists are not expecting the rebate checks to be much of a help for the economy in the second quarter.

May 9 (Bloomberg) -- The Bush administration's tax rebates won't prevent the U.S. economy from stagnating in the second quarter as soaring food and fuel bills hurt consumers, a Bloomberg News survey showed.

``Consumers have gone into the bunkers,'' said Ken Goldstein, an economist at the Conference Board, the New York- based research group that tracks confidence. They ``fear that their budgets are getting squeezed tighter and tighter.''

The economy will grow at a 0.1 percent annual rate from April to June, the least since the 2001 recession, according to the median estimate of 54 economists surveyed from May 2 to May 8. Household spending may rise at a 0.5 percent pace, half the first quarter's gain and the smallest increase in 17 years.

``The economy continues to get tougher and the paycheck cycle is more pronounced for customers than in past months,'' Eduardo Castro-Wright, chief executive officer of Wal-Mart's U.S. stores, said yesterday in a statement. ``As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past.''

My Take:

Wow this is a shocker!..Yeah right. This was a dumb idea from the beginning. The government might as well just grabbed $150 billion and just threw it out the window.

What will $600 get you in this inflation ridden economy? 5 Tanks of gas for the SUV and a few cases of beer? Consumers are in debt up to their eyeballs so I expect the majority of this to go towards paying down debt, or into the savings account as people watch prices rise everywhere.

The end of the month drop off that Walmart talks about above is starting to get a lot of attention on the street. This is not a good sign folks. It means many are starting to run out of money before the end of the month and have to cut back spending dramatically.

This is another sign of weakness in the economy. I had a friend that went to TJ Maxx the other day and said it was a mad house. I guess the days of finding deals and wearing polyester clothes from a discount retailer are back.

Look at the bright side, at least you get to go back to that beautiful home that takes 50% of paycheck every month! You can thank Wall St. for being in this situation.

The greed of the pigmen the last 7 years has destroyed our standard of living and put our economy on the verge of collapse. We will be paying the consequences for years.

Thursday, May 8, 2008

AIG Shocks Wall St.:Financials Free Fall After Hours

Happy Thursday!

Well well well what a shocker after hours. AIG, one of the biggest insurance companies in the world, reported a $7.81 billion loss for the first quarter. This was double the loss that analysts were expecting. The news is all over the wires but here it is from Marketwatch:

"SAN FRANCISCO (MarketWatch) -- American International Group reported a $7.81 billion first-quarter net loss late Thursday as the giant insurer was hit hard by the credit crunch.

AIG shares dropped more than 7% to $40.75 in after-hours trading. Ratings agency Standard & Poor's downgraded the company and several subsidiaries to AA- from AA. AIG's big aircraft-leasing business was cut to A+ from AA-.

"Although we expected that AIG would have some losses in the first quarter, the level of the additional losses exceeds these expectations," S&P credit analyst Rodney Clark said.

The worse-than-expected results were driven by a $9.11 billion write-down on a credit derivatives portfolio and $6.09 billion of net realized losses from AIG's investment portfolio.

AIG also said it plans to raise $12.5 billion by selling new shares, equity-linked securities and fixed-income securities with a large equity component included.

Still, AIG increased its dividend by 10% and Chief Executive Martin Sullivan said the company's main insurance businesses continue to perform "satisfactorily."

A lot of AIG's problems are centered on collateralized debt obligations (CDOs), complex securities that are partly backed by mortgage securities.

The unit's credit derivatives portfolio had a net notional exposure of $505 billion at the end of September, as the mortgage meltdown was spreading into a global credit crunch. More than $62 billion of that was related to CDOs, mainly backed by subprime U.S. residential mortgage-backed securities, according Fitch Ratings."

My Take:

I thought the worst of the credit crunch was over?..yeah right. These numbers are horrifying. Whats even more frightening is the half a trillion dollar exposure they have in derivatives as of September. God knows what these are worth and how much is left on the books.

If they puked up $9 billion in derivative losses this quarter, what are the losses going to be on the other $505 billion as housing continues to drop in value? Notice this line from the article:

"As house prices have fallen and delinquencies and foreclosures surged, the market value of these securities dropped sharply."

Housing isn't done dropping ladies and gents. Not even close. The write downs will continue quarter after quarter as long as housing bubble continues to burst.

Something else to consider here is there are no Fed bailouts in insurance. This is not a bank. This company is on its own when it comes to handling these losses.

What cracks me up is they also announced they plan on raising the dividend. Do they think we are fools?? You lose $8 billion and I am supposed to be happy because u raised my divedend? Where does the insanity end?

Bottom Line:

Companies like AIG are not supposed to have losses like this! You can put AIG right up there with GE and IBM in terms of prestige. This is one of the strongest companies in the world.

This is a pure example of how devastating this credit crunch/housing collapse is. Anyone thinking they threw out the kitchen sink this quarter is sadly mistaken when you look at their potential derivatives exposure.

The price of these derivatives keeps dropping because housing keeps tumbling. No one even knows how to price a lot of this stuff. The whole thing is just a financial disaster.

Notice S&P almost immediately dropped their rating after seeing these earnings. The financials tumbled after hours after the AIG news hit the wires. Expect the financials to get punished tomorrow.

The financials were bold and full of testosterone as they threw risk out the window when the housing bubble boomed. We are now beginning to see the damage on the way down and the losses are staggering.

Market takes a Breather/Hovnanian

Good afternoon!

The stock market is taking a little breather today as the data this morning was fairly benign. Jobless claims came in at 365,000 which was down about 18,000 from the week before. Nothing earth shattering there. The claims are still high and show no real signs of improvement.

Retailers also came in mixed. Walmart and Costco are both doing well because the consumer is under so much pressure. Any low cost retailer is probably going to pretty well in this environment as everyone tries to simply keep their head above water. May's numbers will be market movers because we will see how much the stimulus checks helped the retailers.

The financials are still taking a beating after receiving the news about the transparency demand from the SEC yesterday. Europe also held rates which will continue to pressure the dollar.

The financials were also pressured by Nationwide and Fortress who reported terrible earnings.:


"May 8 (Bloomberg) -- Fortress Investment Group LLC said first-quarter profit tumbled 74 percent as gains from the New York-based company's private-equity and hedge funds all but dried up, sending its stock down the most in seven weeks."


"COLUMBUS, Ohio (AP) -- Nationwide Financial Services Inc.'s first-quarter earnings plunged 79 percent on an investment loss, the investment manager said Wednesday.

The Columbus, Ohio, company, which manages company retirement plans, said net income dropped to $44.5 million, or 32 cents per share, from $208.3 million, or $1.42 per share, in the year-ago period.

The latest quarter included a realized investment loss of $87.9 million, or 64 cents per share. A year ago that loss was $7 million, and the company booked a gain of $45.5 million, or 31 cents per share, from the sale of a unit."

Hovnanian Enterprises Inc.

There was some interesting news out of Hovnanian today that smelled of desperation. The stock was down 11% on this news.

"May 8 (Bloomberg) -- Hovnanian Enterprises Inc., New Jersey's largest homebuilder, fell as much as 9.9 percent in New York on plans to raise up to $191 million in a stock sale.

The company will sell up to 16.1 million Class A shares at the May 6 closing price of $11.87 each, Red Bank, New Jersey- based Hovnanian said yesterday in a regulatory filing. The offering would expand the outstanding Class A stock by as much as one-third to about 64 million shares.

``Hovnanian's financial position remains tenuous and the equity offering is a sign that fresh capital is desperately needed to support ongoing operations,'' analysts Frank Lee and Jeffrey Wichmann of New York-based CreditSights Inc. wrote in a report today. The cash would also ``alleviate the concerns of bank lenders,'' they wrote.

The company, headed by Chief Executive Officer Ara Hovnanian, reached an agreement with banks in March to modify borrowing rules. The accord allows Hovnanian's tangible net worth to fall to lower levels before the company is considered in default, reduces the amount of revolving credit to $900 million and requires collateral on the debt, the company said.

The new credit line was secured with first-lien mortgages on Hovnanian-owned properties, according to Chief Financial Officer Larry Sorsby. About $306 million of the $900 million was available for Hovnanian to borrow, he said.

If the underwriters don't buy the stock available to them, the offering of 14 million shares would raise $157.4 million, the company said."

My Take:

Uh oh, looks like someone is running out of money. I have been warning for weeks that you will see a string of builder go bankrupt as the housing crisis deepens. Hovnanian is one of the names rumored to be in trouble.

They must be in real bad shape from the looks of this stock dilution. Hovnanian now has less availability to borrow but the banks are allowing them to drop to a lower value before they are considered to be in default. Basically the noose is still around their neck, but the banks are giving them a little more time after they raised some cash.

I am curious to see what a Hovnanian home will sell for going forward. Sounds like its time for a home sale!!

Bottom Line:

If housing prices continue to drop, and of course they will, then Hovnanian and other builders will run out of options. They are operating on fumes and their crapboxes continue to not sell.

Something needs to give and it will eventually be home prices or these firms will go under. Companies that are already in this bad a shape will run out of cash.

Wednesday, May 7, 2008

Credit Card Time: The Consumer is about Tapped Out

Well ladies and gentleman I don't know how else to put this: We are in trouble. Welcome to the final leg of the debt bubble. We are down to credit cards now everyone!

Take a look at the credit card update on Bloomberg:

May 7 (Bloomberg) -- U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt.

Consumer credit increased by $15.3 billion for the month to $2.56 trillion, the biggest monthly rise since November, the Federal Reserve said today in Washington. In February, credit rose by $6.5 billion, previously reported as an increase of $5.2 billion. The Fed's report doesn't cover borrowing secured by real estate, such as home-equity loans.

Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

``Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. ``The days of extracting cash from one's home to spend on goods and services are long gone.''

Economists forecast an increase of $6 billion in consumer credit for March, according to the median of 34 estimates in a survey conducted by Bloomberg News.

Overdue payments at the six largest U.S. credit-card lenders reached the highest since November 2004, according to data compiled by Bloomberg. An average of 4.11 percent of loans were at least 30 days late in February and March, according to reports filed by American Express Co., Bank of America Corp., Capital One Financial Corp., JPMorgan Chase & Co., Citigroup Inc. and Discover Financial Services."

My Take:

Well now that the cash and home equity lines are gone we are now left with the credit cards.
Economists were expecting a rise of $6 billion for the month and we came in at $15 billion like the good little credit junkies that we are. In my opinion, the sad thing here is this credit cards were used to pay for gas and food versus the plasma TV's that we binged on last year.

If this isn't a screaming alarm that the consumer is close to being tapped out then I don't know what is. The credit card game will also come to an end as the defaults start to rise. Note we hit a 4 year high on defaults in February and March. I expect this rate to surge as the banks have cut off all other sources of credit.

Time to hit the panic button!! Pelosi is already discussing a second stimulus package. They know the lending game is over.

So I have a question for the bulls. How are we going to have a second half recovery with the consumer is tapped out?

SEC announcement rocks the street:

Equities tanked in the middle of the day as the SEC announced its "show me the money" time for the investment banks. Another question here for the bulls. If the banks are so well capitalized then why did equities tank when they were simply told they need to open their books? Let me answer that...Uhhh maybe because they are insolvent?

Here is the SEC's announcement on Bloomberg:

"The SEC is re-evaluating its oversight of securities firms after the Federal Reserve had to help rescue New York-based Bear Stearns in March to prevent a market panic amid a worldwide credit contraction. Concern that Bear Stearns was running short of cash prompted customers and lenders to desert the firm in March, forcing it to accept a takeover by JPMorgan Chase & Co.
Data on capital and liquidity will be required this year ``in terms that the market can readily understand and digest.'

``This move by the SEC is very helpful,'' said John Kornitzer, chief investment officer of Kornitzer Capital Management, which oversees $5 billion. ``Covering up this kind of dirt was never a good idea.''

Final take:

Well at least the banks now have some time to clean up their house before its show me time. Expect a ton of skeletons to fly out of the closet over the coming months as the IB's struggle to clean up their balance sheets.

The SEC is giving them time but by the end of the year we will finally see whats inside door #1. Expect this to rock the markets for awhile.

I hope you enjoy watching a financial train wreck. You are watching one happen right before your eyes. I thought the credit crunch was over? haha don't think so.

This train is gaining speed and losing control. Pay attention to the markets because we are nearing a point of potential capitulation of the debt bubble.

I don't believe the consumer can live very long on credit cards, and after those are tapped they are out of options. It will then be default time followed by a resetting of the economy.

Is Reality Beginning to set in? UPDATED!

Update 2:49: A huge banking bomb was just dropped on Wall St. This is huge folks. The SEC has had enough. This is why you are seeing a big selloff this afternoon:

May 7 (Bloomberg) -- The U.S. Securities and Exchange Commission will require Wall Street investment banks to disclose their capital and liquidity levels, after speculation about a cash shortage at Bear Stearns Cos. triggered a run on the firm, SEC Chairman Christopher Cox said.
The disclosures will be ``in terms that the market can readily understand and digest,'' Cox said today during a speech in Washington. The SEC will require the disclosures ``later this year,'' he said.

Back to the original Post:

Stocks are slumping today as the bad news continues to come in waves. Home sales slumped again in March. This sent the home builders down. Finally these suckers went down instead of up on bad news. Bloomberg and home sales here.

"The index of pending home resales fell 1 percent to 83, following a 2.8 percent drop in February that was larger than previously reported, the National Association of Realtors said today in Washington. The decline matched the median forecast of economists surveyed by Bloomberg News."

Now keep in mind March sales are supposed to rise dramatically during the spring season.

The Fed to start raising rates?

Thomas Hoenig from the Fed thinks so. From Bloomberg:

May 6 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said today ``serious'' inflation pressures may compel the central bank to raise interest rates.
``There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,'' Hoenig said in the prepared text of a speech in Denver. Consumers are gaining an ``inflation psychology to an extent that I have not seen since the 1970s and early 1980s.''

``A sharp slowdown in growth has put the economy at the brink of a recession while, at the same time, rising commodity prices have caused inflation pressures to rise considerably,'' Hoenig said to the Economic Club of Colorado. He isn't a voting member of the Federal Open Market Committee this year."

I think the builders may have dropped more on this news versus the pending home sales drop. This is the toughest talk I have seen to date on raising rates. Any significant rise in interest rates will destroy housing prices. I think as oil goes to the moon the Fed is realizing they are starting to lose control of the economy and inflation.

The consumer is on the ropes and we all know they are 70% of the economy. I was at Outback Steakhouse for dinner last night and it was a ghost town. The bartenders told me its been like this for a few weeks.

Declining Tax Revenue forces town into Bankruptcy

The housing slump is starting to slide into other parts of the economy. Vallejo California was the first BK victim as a result of declining home prices that have lowered tax revenues. From Bloomberg:

"May 7 (Bloomberg) -- Vallejo, California's city council voted to go into bankruptcy, saying the city doesn't have enough money to pay its bills after talks with labor unions failed to win salary concessions from fire fighters and police.

The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it near insolvency. The city expects a $16 million deficit for the coming fiscal year that starts July 1. Under bankruptcy protection, city services would keep running. It would freeze all creditor claims while officials devise a plan for emerging from bankruptcy."

We are near a tipping point in the economy folks. I continue to hear chatter that the Countrywide deal is not gonna make it. It seems many feel this company is worthless. Time will tell.

The banks are really starting to pull back on lending. Bloomberg reported that the banks are reducing home equity loans:

"May 6 (Bloomberg) -- Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers.

Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide

``It's really putting borrowers in a panic,'' said Kratzer, president of in North Palm Beach, Florida. The amount of credit frozen nationally may be $6 billion, based on an assumption that the 600,000 borrowers each had $10,000 available, he said."

My take:

The lack of HELOCS is going to put a hurting on the economy. This was a key driver for the consumer to spend like drunken sailors.

The fact that the housing slump shows no sign of slowing is starting to scare investors. Reality is starting to set in folks. This was the first day in awhile where bad news pushed stocks lower. When cities are going bankrupt it can send a chill down your spine. This isn't supposed to happen.

The debt bubble is starting to leak and there is no way to stop it once it bursts. The banks are shutting down the lending spigot and rates look to be moving higher. This is going to be a knockout blow for the consumer.

Expect a serious recession when reality begins to set in as the consumer hits the canvas..

Tuesday, May 6, 2008

The Insanity Continues/Market update

Hello everyone!

Well it was another psychotic day in the markets today as the denial continues.

Fannie coughed up a miserable earnings report today. They lost over $2.1 billion dollars or $2.57 a share vs. the .64 loss that analysts were expecting. That's a huge miss!! So what did the stock do? Up 9%. Huh?

Here is the earnings report:

"Fannie Mae rose 8.9 percent after the Office of Federal Housing Enterprise Oversight said it will lower surplus capital requirements to 15 percent from 20 percent to allow the company to buy and guarantee more mortgages, its biggest source of profit. Washington-based Fannie Mae reported a $2.19 billion loss, cut the dividend for the second time in six months and said it plans to raise $6 billion to increase capital. "

So you cut your dividend, you lose two billion $$ in ONE quarter, and you are forced to raise capital and the market reacts by rewarding you? This is absolutely insane. So what does Washington then do? Changes the rules so they can go out and buy more mortgages. Party on boys!!!

Anyone smelling a bailout as Freddie and Fannie buy up the whole housing market? I believe many on the street are betting this way. I think its too early in this disaster to conclude this.

They could easily go bankrupt first. These two companies have only $80 billion in capital between them versus trillions in debt. Will we end up footing the bill if they need to get bailed out? With our Santa Fed who knows. I am staying far away from both companies long or short.

What amazes me about this rally is how many suckers actually believe there is endless capital that will save the financials.

This is very very risky behaviour. There is still no bottom in housing, and according to Harvard economist Martin Feldstein the bottom means everything:

"May 6 (Bloomberg) -- Harvard University economist Martin Feldstein, a member of the committee that charts the American business cycle, said the U.S. economy is ``sliding into a recession.''
``This is a weakening economy,'' Feldstein, president of the National Bureau of Economic Research, said in a Bloomberg Television interview in New York. ``If you compare where the economy is now, with where it began at the beginning of the year, just about every indicator is down."

Feldstein, 68, said the biggest risk to the economy is a sharper downturn in housing.
Fed Rate Cuts
``It's really too early to tell,'' he said. ``Everything hinges on what's going to happen to house prices,'' and ``therefore the whole credit crunch.'' Home prices will ``come down somewhat more,'' Feldstein said."

My Take:

Mr. Feldstein also said that the deterioration of housing prices accelerated from the 4th quarter going into the 1st quarter and showed zero signs of slowing. The Case/Shiller Index shows the same thing.

This is the greatest housing slump since The Great Depression. The slick Wall St. traders that now speculate on Wall St. were not even born yet when something like this occurred.

These idiots are trading this financial crisis like its going to be another baby recession aka 1990 and 2001. Ben Bernanke himself has said no event like this has ever happened in housing since the depression. This is a once in a lifetime financial event!

Most of these guys were not on the street during the last serious financial crisis in the '70's. to expect them to understand the downside risk to what has happened is a rather large assumption. I don't know a guy on Wall St. who fully understands the financial innovation of derivatives and level 3 assets.

What I see right now is a lot of big money chasing bad companies. none of these financials have shown me how they are going to make any money going forward. Their business models are dead and they are bleeding red. I want to invest in companies that make money not lose it.

If housing continues to free fall, they are going to lose their ass. Until I see a capitulation in housing I will not touch any of these stocks.

Betting on a Bailout

This is also not a smart way to invest, and if you listened to Senator Charles Shumer screaming about Countrywide today you might be regretting that bet:

"May 6 (Bloomberg) -- Bank of America Corp. should consider cutting the $4 billion price it plans to pay for Countrywide Financial Corp. if the mortgage company's past profits were based on bad lending practices, U.S. Senator Charles Schumer said.

``These latest revelations should make Bank of America think even harder about how they want to proceed,'' the New York Democrat said in prepared remarks before a Senate hearing today on how Countrywide treats borrowers who've fallen behind on loans. ``These practices will not be allowed to continue.''

My Take:

More proof that the Countrywide deal is dead in my opinion. Can you say election year? It looks increasingly like the democrats are going to sweep all three houses, and this is the type of tough talk you are going to hear following the elections by the Democrats. Wall St. will not enjoy this new environment of higher taxes and more regulation.

Was this a warning shot from the dems Across the Bow to Bank of America telling them to stay away? Looks like that to me. I wouldn't want to be taking on $1 trillion of Countrywide debt if I was Bank of America's CEO after hearing this kinda talk from a powerful senator.

If Countrywide gets left at the alter it will be a watershed moment for the housing market in my opinion.

Let the insanity roll on!! We all know how this is going to end. Its just a matter of time.

Monday, May 5, 2008

What will Inflation do to Housing Prices?

This is a question that many are asking and I wanted to share my thoughts with you on this subject. I have discussed this with various people in the debt markets because this has become a hot button question.

The answer is actually quite surprising. Housing prices will continue to fall if inflation continues to rise. In fact, the more inflation you see in commodities and imports, the more deflation you will see in housing prices.

Now you may ask if everything else is more expensive why wouldn't housing prices rise as well? The reason is because they are not connected with one another. Inflation is a dollar based issue while housing is a debt issue. The two are not connected. This is a very important distinction.

In fact, as a home buyer is hit with higher inflation on everyday goods, it reduces the amount of money thats available to be used for borrowing. Because a buyer has less availability for credit, the home buyer is forced to pay LESS for a house.

This is what makes the debt bubble bursting combined with rising inflation so lethal. Its forces a death spiral/feedback loop type effect. The worse inflation gets the less someone can borrow. The less buyers borrow, the heavier the debt bubble becomes because it needs to be supported by more and more lending. Doesn't this sound like a game Mr. Ponzi invented?

When people get to the end of the loop where they cannot afford or have no desire to lend anymore, and combine it with the fact that the banks don't want to lend to you anymore anyway, you have the perfect storm for a bursting debt bubble.

The only way the economy is going to be able to heal itself is by totally resetting to a level where housing prices are drastically lower and people can afford to borrow again.

As the Fed continues to try and slow this process down, they are only making the problem worse. The best comparison I can think is a band aid. When you rip it off quick and fast, it is much less painful.

I realize this sounds horrifying and I wish I saw another way that this scenario could play out. Unfortunately, housing and all other debt is going to have to implode through defaults and reset before our economy recovers. Anyone on Wall St. talking about a big recovery is full of it.

We are going to fall into a deep long recession as we leverage the price of everything down to to affordable levels. Its going to hurt, but we will all survive.

There is only one other way this could play out. The government could try to inflate out of this mess through hyperinflation.

This scenario is highly unlikely because it would shatter our whole economy and infrastructure. Imagine the riots if a gallon of milk cost you $100. The politicians would also risk the threat of a revolution and we all know what politicians are all about. Getting re-elected!

Bottom Line:

Don't worry about inflation if you are sitting on the sidelines waiting to buy a house. Its only going to make your house cheaper! Pay off your debt while you wait. Having debt is going to get very expensive as the banks try to recover losses by raising interest rates on credit card balances.

Check out the comments on this post for some things to watch today!

Housing Lending Standards Continue to Tighten/Markets

Hello Everyone!

Well it was an interesting day in the markets. I wanted to talk about a bank survey that Bloomberg reported on today. What it showed was that banks continue to tighten up their lending standards in both commercial and home lending.

Here are some points from the article:

"May 5 (Bloomberg) -- The Federal Reserve said the share of banks making it tougher for companies and consumers to borrow approached a record after the subprime-mortgage collapse made them more reluctant to lend.

For home loans, the proportion of U.S. banks making it tougher for prime borrowers, those with the best credit, rose to about 60 percent from 53 percent. About one-fourth of U.S. banks reported slower borrowing for prime mortgages and 30 percent said nontraditional loans were weaker, both ``significantly smaller'' numbers of banks than in the January survey.

``I think we're back to 1980s lending'' in terms of acceptable credit records and down payments, David Kittle, the chairman-elect of the Mortgage Bankers Association, said today. Kittle, chief executive officer of Principle Wholesale Lending Inc. in Louisville, Kentucky, spoke at a conference hosted by the trade group in Boston."

The article also showed that the Fed cuts are not lowering borrowing rates:

"The Fed's rate reductions since September have failed to put much of a dent in the cost of a mortgage. The average rate on a 30-year fixed mortgage was 6.06 percent last week, down from 6.46 percent at the start of September though up from 5.45 percent in January, according to Freddie Mac."

My Take:

Well I guess after losing $318 billion by lending to anyone with a pulse, the banks have realized they better tighten up their lending standards. The brokers are now expecting borrowing to go back to 1980's standards. You know what that is folks? 20% down, a great credit score, and strong employment history.

This has big reprocussions for everyone involved in housing. The Fed is about done cutting rates. The last Fed cut has had zero effect on interest rates. As you can see, rates have actually climbed up a half a point up to 6.03% from 5.45% in Janruary. So we had lower interest rates BEFORE the Fed cut.

So I have a simple question. Why do we keep cutting rates and risk inflation when its doing nothing to lower borrowing rates? Oil hit a record $120/barrel today!! The only people benefitting from the rate cuts are the banks. The consumer suffers as a result with higher prices. A win for the pigmen and a loss for the middle class.

The most frightening thing about the commodities surge today was that the dollar was stronger. This spooked Wall St. because the trades that have been working the past few months was buy commodities with a weaker dollar and buy equities on a stronger dollar.

Well today we had a stronger dollar AND higher commodites. The market dropped on the dollar strength. Traders will now probably pause a little bit and re-evaluate what they are doing. Expect the bulls to to take a breather.

If this trend continues it could lead to disasterous inflation and a bad market if our economy continues to weaken. This is because the Fed would likely have to cut rates again which will drive up inflation and kill the consumer. This was only one day of trading so lets see if it becomes a trend.

Just as a reminder, anyone thinking they need to go buy a house because rates are going to rise needs to just relax. The price of housing will plummet so you will be able to afford your house. If you have a good chunk of cash to put down on a house then you are in an even stronger position.

The way things are going in housing, people with strong cash positions may not even need a mortgage because they will be able to pay cash! The housing disaster is speeding up. Rates should continue to rise as the credit crisis deepens.

Check out the comments section if you get a chance. I have a couple of good reads that I picked up this weekend.

Countrwide downgraded and given a $2 price target

Well it looks like Bank of America's announcement that they want to walk away from some of Countrywide's loan portfolio is finally hitting Wall St.

I warned everyone last week after seeing the Bank of America statement that this would eventually make waves on the street. The markets are taking a nice hit today on this news along with the Yahoo blowup.

Here is the scoop from Bloomberg:

May 5 (Bloomberg) -- Bank of America Corp., the second- biggest U.S. bank, should abandon its $4 billion takeover of Countrywide Financial Corp. because the mortgage lender's loans will hurt earnings, according to Friedman, Billings, Ramsey & Co.

Bank of America's proposed purchase of Countrywide, the biggest U.S. mortgage lender, may result in a writedown of as much as $30 billion, analysts led by Arlington, Virginia-based Paul Miller wrote in a note to clients. Miller cut his rating on Countrywide to ``underperform'' from ``market perform'' and lowered his price target to $2 a share from $7.

The lower price target ``reflects a high probability that Bank of America renegotiates the deal,'' the analyst said. "

Countrywide's credit rating was unexpectedly cut to junk on May 2 by Standard & Poor's, which cited doubt about whether Charlotte, North Carolina-based Bank of America will back the home lender's debt after a pending takeover is completed. S&P made the cut two days after saying it might raise Calabasas, California-based Countrywide's ratings."

My Take:

OK, lets read in between the lines here. Countrywide is basically worthless. If Bank of America hadn't come in and bought this company they would be in chapter 11 or out of business. Their S&P credit rating is now junk.

In my opinion, Bank of America no longer wants this company and the deal is dead unless the Fed bails out the $38 billion in bad loans that BofA wants no part of.

Its amazing when you think about it. The largest player during the housing bubble is about to go belly up. Countrywide was responsible for about 20% of all of the loans done during the bubble.

There is no way the Fed bails out Countrywide because the "moral hazard" is simply too great. If you take on Countrywide's bad loans, then every other bank in the country will want their bad loans bailed out as well. The Fed won't do this.

Countrywide will end up as a zero folks. The only way BofA takes on this Countrywide is through a deal where the other banks or the Fed agree to share in taking the $38 billion dollar hit.

Expect the Fed to pass. Its one thing to save 1 investment bank when there are only a handful of players. If you attempt to bailout 1 commercial bank when 1000's more have the same problems, you are asking for trouble.

The Fed has been acting reckless but I can't see them being this stupid. Without the bailout, the deal is dead, and it will be a real blow to the housing and financial markets. Without Countrywide in the game, the lending will only get tighter as the number of players shrinks.

Sunday, May 4, 2008

UBS is expected to announce $11 billion in writedowns

UBS may also layoff up to 8000 people.

Here is the link

The hits just keep on coming everybody. You cannot trust these banks right now.

From the Piece:

Winning Back Trust
``They've got to do something to win back the trust of shareholders,'' said Peter Thorne, an analyst at Helvea in London with an ``accumulate'' recommendation on the shares. ``I wouldn't be surprised if it's more'' than 8,000 layoffs, he said."

My Take:

Quarter by quarter the financials are slowly losing all credibility. How confident will the bottom callers be if the writedowns continue to be relentless over the next several quarters? There seems to be no end in sight as the announcements of losses keep coming. There is also no proof that the losses are close to being over.

The only proof that you have that they are near the bottom are the bank's CEO's promises. Remember how they keep telling you they don't need to raise capital and then a week later they announce thet they just raised capital?

This is the game on Wall St right now. Lie if you have to, just talk everyone into believing that everything is OK and the worst is behind us. This is a crisis of confidence folks. They are as scared as you are. The pump machine is in full force as they try to contain the fear.

If everything is so dam great then why did Buffet announce a $1.6 billion dollar writedown taken by Berkshire on Friday? This is the most conservative guy on Wall St. and even Buffet took losses on derivatives!

Just another warning guys and girls. Trust what you can SEE(fundamentals) not what you HEAR. The banks would simply open their books if everything was OK.

Microsoft also decided this weekend to pull the plug on acquiring Yahoo. Should be an interesting day in the markets tomorrow.

Look out Wall St.: Here comes Congress

After taking advantage of loose regulations for the past 20 years, it looks like Congress has had enough. Expect much stricter guidelines dictating how Wall St conducts business going forward.

This is what happens when you create a ponzi scheme that can potentially collapse the entire financial system. The politicians are as much to blame as Wall St. for the housing debacle because they simply haven't regulated them in any way.

The banks continue to hide all of their bad debt in things like level 3 assets, SIV'S, and other derivatives. The sad thing is, I don't even think Wall St. understands how to value any of the "financial innovation" that they created. Congress has continued to let them hide their losses and allow them to keep their books closed.

This is why the banks don't trust each other. They don't know how financially healthy each other are. I wouldn't want to lend to another financial institution if they could potentially be insolvent.

Well According to Bloomberg, it looks like Congress may put an end to the wild west of Wall St.

Here are a few highlights from the article:

May 2 (Bloomberg) -- The last-minute rescue of Bear Stearns Cos. by the Federal Reserve and U.S. Treasury may prompt Congress to let regulators move earlier to restructure or shut failing securities firms that run low on cash.

U.S. Representative Barney Frank, 68, chairman of the House Financial Services Committee, plans hearings this month and next on new controls on the $322 billion securities industry. He said today he thinks the panel will pass legislation putting securities firms under the same liquidity and capital requirements as commercial banks.

The result may be a law modeled on the 1991 Federal Deposit Insurance Corp. Improvement Act, or FDICIA. Such a measure would obligate regulators to step in when Wall Street banks fail to meet minimum capital requirements. Securities firms may also face new costs and disclosures in any regulations Congress passes.

``The Fed's going to demand greater transparency into these balance sheets,'' said Todd Petzel, 56, chief investment officer at Offit Capital Advisors LLC in New York, which oversees $5.2 billion. ``You can't have the Fed in a `trust-me' mode.''

Starting in March, securities firms were allowed to borrow from the Fed at the discount rate, now 2.25 percent, what commercial banks pay. The loans, available for at least six months, are the first to investment banks since the Great Depression.

While Fed Chairman Ben S. Bernanke told Congress April 3 that the central bank ``will have to take this window back'' when conditions return to normal, he said Congress ``will want to consider over time, should we make this a regular facility in the future?''
`Market Stability'

Proposals for new securities-industry rules have followed Treasury Secretary Henry Paulson's March 31 call for an overhaul of the financial regulatory structure, recommending that the Fed oversee ``market stability.'' Research groups including the Heritage Foundation, American Enterprise Institute and Brookings Institution are advancing their own plans in a discussion that may last years.

Starting in March, securities firms were allowed to borrow from the Fed at the discount rate, now 2.25 percent, what commercial banks pay. The loans, available for at least six months, are the first to investment banks since the Great Depression.

While Fed Chairman Ben S. Bernanke told Congress April 3 that the central bank ``will have to take this window back'' when conditions return to normal, he said Congress ``will want to consider over time, should we make this a regular facility in the future?''
`Market Stability'

Proposals for new securities-industry rules have followed Treasury Secretary Henry Paulson's March 31 call for an overhaul of the financial regulatory structure, recommending that the Fed oversee ``market stability.'' Research groups including the Heritage Foundation, American Enterprise Institute and Brookings Institution are advancing their own plans in a discussion that may last years.

``Commercial banks and investment banks can do similar things, but the commercial banks have a set of rules that the investment banks don't,'' Frank, a Democrat, said in an interview on Bloomberg Television's ``Political Capital with Al Hunt,'' to be aired today. ``It's kind of like trying to raise identical twins and you give one a curfew of 9 o'clock at night and the other a curfew of 11 o'clock at night.''

My Take:

There is going to be a rude awakening when the investment banks can't leverage up at 30-1 anymore. This will hurt their ability to make profit going forward. This is not tough talk folks. Its going to happen because of the drastic measures that the government has had to take to clean up this mess.

The Wall St. ponzi game is going to be shut down because Congress is starting to realize through the drastic actions of the Fed that the financial system is staring at the edge of a cliff.

The Wall St. profit machine is about to be down and out until the next scheme is devised. Once investor's realize this they will go looking for profits elsewhere. Anyone telling you the fininancials have seen the bottom is doing so on a hope and a prayer.