Saturday, May 17, 2008

The Housing Time Bomb Forum

I have recently added some articles for everyone to read. I put a feedback section in there. If you guys want the Forum to be continued let me know.

I will scrap it if everyone prefers to comment on here. The link for the forum is at the bottom of the blog or in the upper right hand corner.

here is the link

Mort Zuckerman/Jim Rogers Speak!!

Its video Saturday! The first video is Mort Zuckerman on NBC discussing why we are in so much trouble.

Please note: These commentaries are from March but I find them both to still be very relevant. I find it fascinating how some of their predictions like Jim Rogers warning about inflation are playing out just like they had expected.

This is a great rant by Jim Rogers. I advise everyone to listen to this whole video.

Friday, May 16, 2008

Market Update/The Fed's Dilemma

Well the week ended quietly with stocks finishing slightly red for the most part. I think there is a lot of data that the market is trying to digest right now.

You have energy stocks that continue to soar as oil rises which is helping to hold up the DOW.
The horrible news regarding the consumer and housing is putting downward pressure on the DOW via financials and the retail/consumer stocks. The end result is a pretty flat market.

We have been trading this way for most of the week. The big question the market is now asking itself is what are oil and the dollar going to do going forward?

The Fed interest rate policy going forward is going to affect this trade. It will be reaction of the speculators that you need to look at. The Fed interest rate changes pretty much mean nothing now from a borrowing perspective because the banks don't want to lend.

The Fed is not helping liquidity for the average home buyer because interest rates are no longer reacting to the cuts.

The only effect the rate cuts have are on savers and the banks. Savers make less money on fixed income, and the pigmen make more money because they make a bigger spread on loans and have to pay out less interest to their customers.

Inflation changes the picture

Now that inflation has entered the picture the Fed has a dilemma. Do you keep rates low and risk losing the consumer and the economy due to price inflation? Or do you risk your financial system and housing market by raising interest rates to protect the consumer?

There is a great piece hereon Bloomberg that discusses this.

Here are some comments from the article:

The argument to raise rates:

"Tying Hands
``Inflation is constraining the hand of central banks,'' said Tim Drayson, global economist at ABN Amro Holding NV in London. ``They are starting to realize that they will have to see weaker economies to control inflation.''

Some traders are increasing their bets the Fed will reverse recent cuts later this year. Fed funds futures traded at the Chicago Board of Trade signal a 22 percent probability the Fed will raise its main rate to 2.25 percent by the Sept. 16 policy meeting, compared with 7 percent a week ago.

While U.S. consumer prices rose less than forecast in April, signs that financial markets are improving have prompted policy makers to reappraise the risks facing the economy. Bank of San Francisco President Janet Yellen said May 13 that rate cuts to date ``could lead to higher inflation expectations and an erosion of our credibility.''

The argument to cut rates:

"Nevertheless, a further deterioration in credit markets will deal another blow to the global economy, requiring more policy action. Vincent Reinhart, a former Fed economist and now a scholar at the American Enterprise Institute in Washington, cautions against a ``premature'' end to rate cuts.

Reinhart's Warning

"If credit markets deteriorate again and growth falters, ``central banks will have to roll back talk of future tightening and may even ease,'' he said.

King on May 14 said it's ``quite possible we may get the odd quarter or two of negative growth'' and further ``shocks'' could make matters worse. While Bernanke said this week that tensions in markets have eased, conditions are still ``far from normal.''

Bottom Line:

The Fed has some difficult decisions to make and one wrong move could have catastrophic results. Its no fun walking on a tightrope!

Do we cut or do we raise rates? Tough question isn't it? I wouldn't want to be Ben Bernanke right now.

Economist Myron Scholes: Worst Crisis since WWII

Good morning everyone. I wanted to mention Myron Scholes comments this morning. This guy won a Nobel Prize in economics in 1997 and is considered to be one of the better economists out there. Here are Myron's thoughts from Bloomberg:

"May 16 (Bloomberg) -- Myron Scholes, chairman of Platinum Grove Asset Management LP and 1997 winner of the Nobel Prize in economics, said the worst of the crisis in credit markets may not be over.

``From my perspective, I think that we don't know if the storm has passed or if we are still in the eye of the storm,'' Scholes said in an interview with Bloomberg Radio yesterday. ``Are there other shoes to drop and new events or new shocks that will come to the fore?''

Scholes's warning reflects financial markets that Federal Reserve Chairman Ben S. Bernanke this week said remain ``far from normal.'' Financial institutions have been reluctant to lend to each other, driving up bank borrowing costs, since a flight from risk in August sparked by defaults on subprime mortgages.

``In my view, this is probably as bad or worse than the 1989-1990 crisis and may even rival the worst crisis we've seen since the end of the Second World War,'' Scholes said. Former Fed Chairman Alan Greenspan has also said the turmoil is the most ``wrenching'' since the war."

Quick take/Market News:

Interesting thoughts from a very smart guy. Notice that more and more thought leaders are coming to this conclusion. This could change investor sentiment in coming weeks.

Oil hit $127 a barrel on a Goldman Sachs report speculating that oil will go to $141 a barrel based on Global demand.

Consumer confidence just rocked the markets as it hit a 28 year low of 59.5. Wow that's a bad number. Could be a very red day today.

Latest Housing Stupidity

Fannie Mae came out with this new down payment plan in distressed areas:

"May 16 (Bloomberg) -- Fannie Mae, the largest U.S. mortgage- finance provider, will stop requiring bigger down payments in regions where home prices are dropping, responding to criticism from consumer and industry groups who said the company is exacerbating the housing slump."

Huh? We also had this news this morning on building permits:

"Building permits, a sign of future construction, rose 4.9 percent to a 978,000 pace, reflecting gains in both single- and multifamily units.

Economists Forecasts

Economists forecast starts would fall to an annual pace of 939,000, according to the median 73 projections in a Bloomberg News survey. Estimates ranged from 875,000 to 1 million.

Building permits were projected to fall to a 915,000 annual rate, according to the Bloomberg survey.

Starts increased in three of four regions, led by a 24 percent jump in the Midwest. Construction rose 19 percent in the West and 3.6 percent in the South. Starts dropped 13 percent in the Northeast.

Toll Brothers Inc., the largest U.S. luxury-home builder, said May 13 that revenue declined for an eighth straight quarter and that most housing markets remain depressed.

The number of potential buyers at its developments was the ``worst we've ever seen,'' Chief Executive Officer Robert Toll said on a conference call.

A jump in foreclosures, as values fall and adjustable-rate mortgage costs rise, is adding to concern. Foreclosure filings climbed 65 percent and bank seizures more than doubled in April compared with a year earlier, according to figures issued this week by RealtyTrac Inc."

My take:

Ok so let me get this straight. Fannie Mae is going to lower down payment requirements in distressed areas. For what reason? So its easier for buyers to make the biggest financial mistake of their lives? Why in the hell would Fannie make it easier to get into a house that's dropping in value?

This will do nothing but destabilize the housing market. Lending standards need to tighten so prices come down and people can afford the houses they purchase.

All this will do is provide a temporary bump in housing activity that will keep prices at levels that are unaffordable.

Many of these buyers will end up walking away down the road when they realize they are so far underwater. Remember everyone, housing prices are accelerating to the downside. This is equivalent of Fannie offering low priced tickets to climb aboard the Titanic for a boat ride.

The time to do this is when prices have bottomed. We are no where near this point. Stupid stupid stupid.

Now lets get to the building permits. We now have eleven months of inventory which is the highest in history, and what do the builders do? Increase their permits to build. What sense does that make?

Bob Toll says at the bottom of the article noted that the number of potential buyers is the worst he has ever seen!! Why are they building more houses? Stupid stupid stupid!

I had a banker once tell me that builders only know how to do one thing. BUILD! He explained to me that as long as they get financing they will build because its what they do.

However, they are shooting themselves in the foot by building more homes because its only going to put more pressure on housing prices.

Bottom line:

All of these housing solutions are doing nothing but delaying the inevitable pain. Houses MUST come down in value and the banks MUST take their losses before this economy can move forward.

Thursday, May 15, 2008

Freddie Mac's ABS Portfolio Debacle/Discount Window

So how bad are home loans performing? Lets take a look at Freddie Mac's ABS loan portfolio. Kudos to Karl Denninger's forum for picking this up. Please click on the chart below, and make sure you are sitting down when you do because you might pass out after seeing how ugly this is.

No these are not typos. Still feel like buying financials? This chart is horrifying. This is the portfolio that Freddie moved over to the Level 3 asset land of "make believe". I would have moved this piece of garbage over there too if the accounting rules allowed it.

Lets break down these #'s.

First of all, 100% of these loans were originally securitized as AAA paper.

60 Deliquency rates rates:

Oh my god this is bad. 27% of the subprime loans are 60+ days delinquent. 10% of Alt A's are 60 days plus late. This was AAA paper guys!!! How does this happen?

Whats funny is only 6% of the HELOCS(home equity loans) are late. I guess its easier to pay that $300 HELOC payment versus your $2500 mortgage!

It doesn't even matter because the HELOC loans will never be paid back because they are second in line for payment after the original loan. This is why the HELOC paper is being bid for pennies on the dollar in the credit markets.

% downgraded from AAA

42% of the subprime loan securities have been downgraded from AAA. You think maybe the ratings agencies realize you have a little problem when almost a third of your loans are 60 days plus late?? Uhhh.... yeah! Notice an additional 29% have been put on the watchlist for a possible downgrade. As these delinquencies continue to rise, expect them to be dropped down from AAA as well.

THIS IS ALT-A DATA IS KEY. Look at the watchlist for Alt-A. 31% of the portfolio is on the watchlist! Do you realize how many Alt-A loans that were done? Every speculator used this loan as well as every other buyer who bought a house that they couldn't afford! I thought this was only a subprime problem?

Oh no guys and gals its much worse than that. The average 60 day delinquency rate of this whole $142 billion dollar portfolio is now at 10%. Its only going to get worse as housing prices continue to drop.

So the Alt-A loans are now performing at 98%. BUT 10% are now 60 days delinquent which is about to force these Alt-A securitizations to be downgraded from AAA. Can you say shoe drop???

When a securitization loses its AAA rating it obviously drops dramatically in value. The subprime securities are probably almost worthless with a 27% delinquency rate.

Almost every loan that is 60 days late will likely end up in foreclosure. Once you are that far behind, its pretty evident that you can't afford where you are living.

Bottom line:

This is a $142 billion dollar loan portfolio that is disintegrating right before our eyes. Now you see why this portfolio was moved over to the Level 3 asset category. This is flat out fraudulent activity in my opinion. How long can these accounting games be allowed to go on?

Now you see why its so hard to get a loan these days. Its obvious the banks have very little capital.

This is why you saw record borrowing from the dicount window as seen here:

"May 15 (Bloomberg) -- The Federal Reserve's direct loans of cash to commercial banks climbed to the highest level on record in the past week as money-losing lenders increasingly turn to the central bank for funds.

Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said today in Washington. Separately, the Fed's loans to Wall Street bond dealers rose by $75 million to $16.6 billion."

This credit crisis is far from over. Your proof is up above. Freddie's stock actually rose 10% after announcing these earnings. HA! What a joke. This goes to show you how irrational the market is acting. Denial is a powerful emotion.

The cooking of the books continues. This type of fraud needs to be stopped or housing will never stabilize.

Wednesday, May 14, 2008

George Soros: Worst Economic Crisis in 75 Years

Its going to be a George Soros morning here on The Housing Time Bomb. Although I am not a fan of his far left politics, I must admit he is right on in terms of what's going on in the economy.

I found two great interviews with Mr . Soros. The first interview is from Money. Here are some of his quotes:

"Question: In your 50 years in finance you've seen any number of crises. Why is this so bad?

Answer: Because two bubbles are deflating at once. There's the collapse of housing prices, of course. On top of that there's the end of what I call the superboom of credit expansion that has been going on for 25 years. That was made possible by a stable global financial system in which the dollar was the world's primary currency. Now, for many reasons, the system is in question and nothing has taken its place. That has created great uncertainty.

Q. And for us regular people it means...?

A. The days of rapid financial wealth creation are over. We're now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances.

Q. Don't feel you have to sugarcoat your answer just for my sake.

A. Since the 1980s, the global financial system has been dominated by an ideology I call market fundamentalism - the idea that markets are perfect and regulations are always flawed. But markets aren't perfect. Left to their own devices, they always go to extremes of either euphoria or despair. The Federal Reserve and other regulators should recognize this, since they've had to bail out the markets in crisis after crisis since the 1980s.

Q. Can't the Fed just bail us out again?

A. The Fed's first duty is to prevent the financial system from collapsing. It's shown it can do that, and the markets are breathing a sigh of relief. But we can't avoid the fallout in the real economy. We're facing not only recession but also inflation and a flight from the dollar. To fight recession, the Fed needs to increase the money supply, but that only makes the dollar weaker and inflation worse. That's why I think this crisis is so serious. The Fed's power to intervene is limited.

Q. And the lesson in that?

A. It's important in life and in investing always to question yourself. Understand that you may be wrong, especially when you believe too firmly that you're right."

My Take:

Mighty sobering words aren't they? I will say it again. I love listening to guys who are not working for Wall St. and speak their mind versus talking their book. These are the guys you need to listen to in times of crisis.

I have been discussing all of these issues on here for the last few months, and its nice to see the mainstream media is now staring to pick it up.

Anyone that thinks this crisis is over has made a big mistake. I thought his last quote was very insightful on investing. The great bull market has had its way for over 20 years now, and feels unstoppable at this point.

The bulls continue to insist that the roaring bull is coming back after a little pause here. The facts tell you otherwise. Once this reality is realized its going to be ugly.

The bulls think the FED and Wall St. are invincible, and they are investing based on "the bull comeback" thesis.

As Soros explains above, the FED can only do so much and their ability to intervene is limited. Fighting two bursting bubbles will simply be too much for the economy to withstand.

Soros #2

Here is another interview with Soros from the USA Today. He talks here about his reflexivity theory. I find this to be very interesting. We do not act like Quant computers when we invest. Investing often involves emotions. Wall St.'s computer models never included this side of investing when setting up these investing instruments. Some points from the piece:

"In his latest work, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, Soros traces a straight line between today's financial turmoil and what he says are fatally flawed conventional assumptions about how markets behave. If banks, investors and regulators had embraced reflexivity years ago, there never would have been a financial crisis, Soros insists.

To Soros, the conventional approach is rubbish. Instead of a world of near-identical actors, coolly assessing their economic interests and acting with clear-eyed precision, he sees a world (and markets) governed by passion, bias and self-reinforcing errors. Because fallible human beings are both involved in, and trying to make sense of, this world, they inevitably make mistakes. Those mistakes then feed on themselves in "reflexive" ways that, when taken to extremes, result in situations such as the now-deflating U.S. housing bubble.

Standard economic theory is flawed, Soros says, because it treats markets populated by thinking human beings as if they operated according to the natural laws that govern atoms and molecules

What does this have to do with house prices in Las Vegas or credit availability in Tampa? Plenty. Only people who were overly confident about how markets operate could have come up with the innovative financial instruments — such as collateralized debt obligations (CDOs) — that ultimately proved so toxic. The banks that developed and sold these products did so comforted by arcane mathematical models that ostensibly demonstrated how these securities would behave under various scenarios.

The only problem was that when the crunch hit, the securities didn't behave the way the models said they should. That came as a surprise to the bankers responsible for the models. Soros said it wouldn't have come as a surprise to anyone who believed in reflexivity.

He anticipates further sharp declines in housing prices and says, when pressed, that Americans ultimately won't escape this episode without suffering a noticeable decline in their standard of living.

"I'm afraid that will be the case, and it will be hard to take," he says. "And it will be politically unpalatable, and it will probably give rise to all kinds of populist political appeals (for) a way out that will also be very dangerous"

Bottom Line:

People are human and will always make mistakes. Wall St. underestimated this when putting together the housing/credit boom game. Money should have never been so easy to acquire. People will hang themselves if you give them enough rope. The housing boom is a perfect example of this. The result of this according to Mr. Soros will be devastating.

Enjoy our bubbly standard of living for now because we are in for a rude awakening as this debt bubble bursts. Get out of debt and batten down the hatches!!

We have a financial storm coming of the likes we haven't seen since the 1930's.

The Economy: Lets put some Lipstick on this Pig!

Good afternoon everyone!

Wow today was a serious window dressing day on Wall St. Stocks are up today because guess what everyone? There is very little inflation!!! Yeah right and I just saw a pig fly by my window.

Lets start with the CPI number today. Here is the CPI from Bloomberg:

"May 14 (Bloomberg) -- U.S. consumer prices rose less than forecast in April, reflecting cheaper costs for cars and hotel rooms that offset the biggest jump in food in 18 years.

The consumer price index increased 0.2 percent after a 0.3 percent gain in March, the Labor Department said today in Washington. So-called core prices, which exclude food and energy costs, climbed 0.1 percent, compared with 0.2 percent.

Food prices, which account for about a fifth of the CPI, jumped 0.9 percent, the most since January 1990. The increase was paced by rising costs for fresh fruits and pork.

The government said yesterday that prices of imported goods rose 1.8 percent in April and were up 15.4 percent in the last 12 months, the most since records began in 1982."

My Take:

Well the headline number you see in the news is inflation rose only .2% which was lower than expected. What you need to focus on are the things I highlighted above.

Remember the CPI excludes food and energy. My question is how on earth does this CPI number mean anything in today's economy?

Think about what you spend you money on each week. You go to the grocery store so you can eat, and you fill your gas tank up so you can go to work and pickup the kids etc. You also go shopping for clothes and things for the house. Almost all of these goods made in another country like China.

It seems like almost all of Walmart was made in China!!

So look at the real numbers above. Food prices rose .9% which is about 11-12% annualized. Imported goods are up 15% over the last twelve months. The average raise for an American right from their job is around 3% or less. A lot of the data recently is showing wages are flat.

When wages grow 0-3% and everything is going up by 11-15% you are getting poorer and poorer each month! Still feel like there is no inflation when you break it down? I know I feel it hurting my wallet.

Of course the stock market just runs with the headline number and bids up the market. There will be a day where this data manipulation will stop because the consumer is going to be so weak that he can't afford anything anymore!!

The economy will then tank, and the CPI will start becoming a joke that no one pays attention too. If the Government was smart, they would throw food and energy back into this number to make it more indicative of whats really going on.

Lipstick #2: Freddie Mac

Well we need a big lipstick to make this pig look pretty. Freddie Mac came out with earnings today and only lost $151 million which was the lower then analysts expected. The stock rose 10% on the news. Sounds great right? Now lets take a look at the real numbers:

"Freddie Mac rose as much as 10 percent in New York Stock Exchange trading after reporting a first-quarter net loss of $151 million, or 66 cents a share, beating the 84 cent average analyst estimate in a Bloomberg survey.

Without the use of two new accounting rules, Freddie Mac would have posted a loss of at least $1.7 billion, analysts said. A change in the way the company values some assets that aren't traded reduced credit losses by $1.3 billion, while a separate rule that lets the company pick and choose which assets to measure contributed an equal amount as well, Freddie Mac said.

Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren't traded. Freddie Mac increased its Level 3 assets under FAS 157 to $156.7 billion, or 23 percent of its assets, from $31.9 billion as of December. The company also adopted FAS 159, which lets it pick which financial assets and liabilities to measure at fair value through earnings.

The first-quarter results also benefited from a change in policy for buying seriously delinquent loans, 120 or more days past due, out of the mortgage pools Freddie Mac guarantees. Under accounting rules, the company must book the decline in the value on loans bought from pools at the time of purchase. Freddie Mac ended that practice in the first quarter, cutting such losses to $51 million from $736 million in the fourth quarter."

"Credit Suisse analyst Moshe Orenbuch, who has an underperform rating on Freddie Mac stock, said the accounting changes made the company's performance look better and was skeptical of the surge in its stock price.

``Obviously people liked it,'' Orenbuch said. ``Management was selective as to how they applied certain accounting principles.''

My Take:

My god how shady is this? So the real loss was $1.7 billion! However, with a little accounting hocus pocus, they got this number down to $151 million. What amazes me is investors are stupid enough to push this stock higher when the earnings are a complete sham.

Look at the amount of money moved to Level 3 assets. They increased their pool of level 3 assets from $31 billion up to $157 billion! These are assets that are in the "hard to value" category, and the accounting rules as of right now are not forcing them to be valued. The investment banks love level 3's. Its a great place to hide your garbage!

The level 3 assets are the equivalent of taking your losses and throwing them into a closet and pretending they don't exist. Do these assets have value? Of course they do. But until they are sold off no one knows what the true value is.

Trust me, if these assets were worth what they are stated for then they would be on the books or sold off. Instead, they just become a skeleton in the closet.

In case you were wondering, Freddie has around $40 billion in capital. Any change in this level 3 accounting rule and Freddie could technically become insolvent. Now would the government ever allow this to happen? Who knows. I know one thing. I wouldn't want to be a shareholder with that kind of risk.

Bottom Line:

The games continue on Wall St. I have never seen so much fraud and corruption in my life on the street. Everyone is desperately trying to prop up this economy as we suffer from the biggest housing/inflation/economic crisis in the last 70 years.

Congress needs to get involved and force Wall St. to takes its losses.

If they continue to ignore this issue, then we will be looking at a lost decade similar to what Japan experienced. If they follow through with the SEC mandate that I discussed last week, then we will have a bad recession, but it will be much shorter and we can then get back to being a healthy growing economy.

Sadly as of right now, the pigmen continue to get their way.

Tuesday, May 13, 2008

Market Update/MBIA/SWF's

Hey guys and gals. What a news filled session we had today. I may be a little more news heavy today because there was lots of data released. Stocks were mixed as the market digested all of the news and await the CPI tomorrow.


Well we hit an all time 26 year low for price declines year on year according to the National Association of Realtors:

"Single-family home prices dropped 7.7% in the first quarter in the largest year-over-year decline since the National Association of Realtors began reporting prices in 1982.

The median sales price fell to $196,300, down 4.8% compared with the last three months of 2007.

In California, according to Yun, homes bought with jumbo mortgages - more than $417,000 - accounted for 40% of all sales before liquidity for these loans dried up during the summer of 2007. Since then only 10% of sales in California involved jumbo loans.

In California, Sacramento prices plummeted 29.2% to $258,500 compared with last year and Riverside prices fell 27.7% to $287,100. Prices in Las Vegas fell 20.2% to $247,600 and those in Phoenix dropped 15.4% to $222,200."

Quick take:

What can I say other than these numbers are horrifying. Notice only 10% of sales since summer of '07 in Cali are jumbos versus the 40% rate during the bubble. The reason for this is interest rates on these have sored to 7-8%. Banks want nothing to do with these loans anymore.

My question here is how will any homes in LA/San Diego ever get sold when almost everything that's worth buying is over the $417,000 non jumbo limit? Can you say disaster? Expect many to drop under the $417k level. You can say the same for Nevada and Florida as well.


Like a nervous mother looking over her children, Moody's is again worried that they may have to take away both mortgage insurers AAA ratings. Here is the Scoop:

"May 13 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said.

The first-quarter losses reported by the companies in the past two weeks elevate ``existing concerns about capitalization levels relative to the Aaa benchmark,'' Moody's, unit of Moody's Corp., said in a statement today. Armonk, New York-based MBIA and Ambac, the two largest bond insurers, tumbled in New York Stock Exchange composite trading and their credit-default swaps rose. "

Quick Take:

I have been saying for months that these companies are worthless. Its now up to Wall St. to decide if they want to bail them out again. The banks will be forced to take huge writedowns if these companies fail because the AAA rated CDO crap sandwiches that MBIA/Ambaq insured will have to be written down.

I have read that the banks will take a $70 billion dollar hit if the insurers fail. Time will tell if they will live to see another quarter. The insurer's business model is now dead since their are no more CDO's to insure so don't expect them to be around long.

Carlyle Capital's Rubenstein: SWF's are down almost 50% on their investments.

I wanted to bring this article to every ones attention because Rubenstein has been a bull for a long time until recently. I thought his comments were surprising at a recent conference:

"May 12 (Bloomberg) -- U.S. and European banks and financial institutions have ``enormous losses'' from bad loans they haven't yet recognized and may have a harder time wooing sovereign-fund rescuers, Carlyle Group Chairman David Rubenstein said.

``Based on information I see,'' it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn't name any companies.

``The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions,'' Rubenstein said. ``Many financial institutions aren't going to be able to survive as independent institutions.''

Rubenstein said sovereign wealth funds are becoming wary after losing $25 billion on their investments in struggling banks and securities firms worldwide.

Rubenstein said about $60 billion of that capital was provided by sovereign funds last fall, and their investments today are worth about $35 billion."

Quick Take:

Anyone notice how quiet the sovereign wealth funds have been recently? This is why. They have gotten their asses handed to them. Where are the banks going to go for capital going forward? Remember all of the bulls cheering how there was unlimited foreign capital that was going to refinance Wall St? Ooops! maybe not.

I guess Citibank doesn't look so appealing to the arabs after they have lost billions of dollars investing in banks.

Notice that the recent run of capital investment taken in by these banks has been from this country at guido rates versus the SWF's. Where is Wall St. going to go if they burn this new set of investors?

Wall St's banks are quickly running out of cash, and they are now running out of suckers to keep feeding them so they can stay alive.

Bottom Line:

If housing prices continue to slide this fast then this debacle going to spiral out of control. The financials are running out of options, and everyone involved in housing from builders to mortgage insurers is holding on by a thread.

Its not going to take much more pressure until this housing time bomb goes off. I didn't even get to Toll Brothers earnings today. Guess what? They were

Until tomorrow!

Meridith Whitney Slashes 2nd Quarter Bank Earnings

At first glance, when you see Meredith Whitney cut her earnings outlooks on banks, you may say there goes Meridith beating up the banks again.

After researching why Meredith decided to do this, I found a startling new accounting change that is forcing banks to mark assets to what they are now worth at current market prices. This change occurred in February and could have a dramatic effect on 2nd quarter bank earnings.

Here are the details from Reuters:

Some highlights:

Oppenheimer cut its earnings estimates on some U.S. brokers based on its outlook on the capital markets and sizable estimated revenue reversals due to a new accounting rule that allows companies to change the way they value financial securities. "We expect that most of the gains booked in the first quarter will be reversed in the second quarter," analyst
Meredith Whitney said in a note to clients.

The Financial Accounting Standards Board (FASB), which sets
accounting rules in the United States, adopted a fair value
option in February that allows companies to irrevocably choose
to record the value of certain financial instruments on their
balance sheets based on what that instrument could be traded
for in a current market transaction.

Q2 new Q2 '08 new '08 '09 new
Goldman Sachs (GS.N: Quote, Profile, Research) $3.48 $4.09 $14.65 $17.35 $16.30 $22.25 Lehman Brothers (LEH.N: Quote, Profile, Research) $0.72 $1.10 $3.45 $4.43 $4.45 $5.53 Merrill Lynch (MER.N: Quote, Profile, Research) $0.20 $1.00 -$0.45 $1.15 $4.05 $5.25 Morgan Stanley (MS.N: Quote, Profile, Research) $0.94 $1.44 $5.00 $5.85 $5.80 $6.55"

My take:

As you can see this is going to hit earnings pretty hard in the second quarter. Merrill's earnings will basically be reduced by 80% in the second quarter. The other IB's are seeing anywhere from 15-45% reductions.

Who knows what additional writedowns these investment banks will have to take in addition to these losses. Any regulation of these banks should be viewed as a negative for the banks.

Libor Shakeup:

Another piece of regulation news also hit the wires around the Libor rate. It looks like the English regulators are now going to do a full review of the Libor rate. This may include changing the way in which Libor is calculated. Here is the Libor story:

"May 13 (Bloomberg) -- The benchmark interest rate for $62 trillion of credit derivatives and mortgages for 6 million U.S. homeowners faces its biggest shakeup in a decade as lawmakers question if banks are understating borrowing costs.
For the first time since 1998, the British Bankers' Association is considering changing the way it sets the London interbank offered rate, according to Chief Executive Officer Angela Knight, who appeared before a parliamentary committee in London today. ``We've put Libor under review,'' Knight said in an interview yesterday. The BBA will announce changes May 30, she said."

Quick Take:

This could dramatically increase the Libor rate if the regulators find that this rate has been totally manipulated. Anyone with an adjustable mortgage needs to take notice of these potential changes.

It sounds to me like the banks ignored the British regulators warning a month ago. It looks like they are now taking matters into their own hands.

Bottom Line:

These are all positive steps in my eyes as the banks will be forced to clean up their act. We have a long ways to go, but I think the SEC and the FASB are finally starting to clamp down on these financial institutions.

Monday, May 12, 2008

Yawn: Boring Day in the Markets/Jamie Dimon Speaks

The markets were higher today on the lightest volume day of the year. We barely traded 1 billion shares. Needless to say, this move really means nothing based on the volume. I don't see any conviction by the bears or the bulls right now.

The market seems to be trading in a pretty tight range. It was quiet today because there is a ton of big news later in the week including the CPI inflation number. This could be a big market mover.

Jamie Dimon made some interesting comments at a conference today. Here are his comments on Bloomberg:

"May 12 (Bloomberg) -- JPMorgan Chase & Co., the third- biggest U.S. bank, will post lower earnings from investment banking and credit cards this quarter as the U.S. recession gets under way, Chief Executive Officer Jamie Dimon said.

``The recession is just starting,'' Dimon said. ``I don't know if it will be mild or severe.'' The chances of it being ``pretty bad'' are about one in three, the 52-year-old CEO said.

Dimon said the capital markets crisis sparked by last year's collapse of the subprime mortgage market is about 75 percent over.
In home lending, New York-based JPMorgan expects to lose $200 million to $250 million in the second quarter related to subprime mortgages."

My take:

I have a question here. Ok Jamie, if the recession is just starting, and it could possibly be a severe one, then how can the credit crisis be 75% over? Is it just me or does these sound completely retarded.

Wouldn't it be more prudent to see how bad the recession is going to be before declaring the credit crisis being 75% over?

Housing price deterioration is accelerating and they have shown zero signs of slowing down.

How can you you possibly declare the credit crisis 75% over when the trends are worsening? What are those CDO's that you hold going to be worth if housing drops an additional 20% to the downside Jamie?

What if homeowners start walking away by the millions when they realize their house is worth 60% of what they paid for it and realize it may take 20 years until they break even?

When you are struggling to pay a mortgage on a $600,000 for a house that's worth $400,000 it seems logical to me that people are going to say screw this and throw in the towel.

Taking a 5 year credit hit makes a hell of a lot more sense versus being a slave to a house for the rest of your life. Once this reality sets in and people realize that housing isn't coming "back", the masses that overpaid will start mailing their keys back to the bank. Credit crisis over? Bull****!

Bottom Line:

The banks are interested in only one thing right now. They want you to believe the coffers are filled with cash and remind you that banks continue to be a very safe place to hold your money. The reality is they are weak, and as housing continues to worsen, they are getting even weaker.

Bank runs are the last thing they need right now and the "credit crisis is almost over" PR campaign is to make sure that you keep your money right where it is.

I wouldn't have any money in any bank right now if it wasn't for the FDIC insurance. Why would you risk your cash when CD's are paying only 2%.

Pay attention to the CPI later this week. Inflation is what everyone should be focusing on right now.

Sunday, May 11, 2008

Speculator Loses 9 Homes as Prices Plummet

I thought I would throw a little comedy on here this morning after the gloomy weekend posts.

I wish the data looked better everyone! Trust me, I love bull markets as much as the next guy. They are much easier on the stomach versus trying to predict where this manic market is headed. This is what bear markets are like. There are lots of rallies on hope and selling on panic.

Many day traders will go broke because its easy to get caught on the wrong side of the trade. You simply can't predict when the FED is going to come out with a stick save and rally the markets. You also can't predict where the next time bomb is about to go off sending the DOW down 400 points.

Playing defense with your portfolio is the best way to protect yourself. Cash is king during turbulent times like these.

Anyway, enjoy the following speculator story. I am amazed at how stupid some people are when bubbles are being blown up.

100% neg am loans. What was he thinking!

My favorite quote:

"I knew I was sitting on time bombs," Forgaard said. "I knew the market was going to go soft and I knew that property values would decline. But I figured that I had enough equity to survive the storm and sell or take the loss and refinance.

"I didn't anticipate a downturn of epic proportions such that home values are 40 percent less than they were," he said."

If thats not the understatement of the year. This is why it will take years and years to cleanup this housing downturn. Buyers were never this reckless during any other housing bubble. Speculators also never had the ability to borrow so much money with leverage like they did from 2003-2007. Leverage is great when prices are going up. However, it can put you into BK in a heart beat on the way down. Mr. Forgaard found this out the hard way.

This is why you are seeing the biggest price declines in the history of the housing market.

Thank your lucky stars this isn't you!!

Inflation: The needle that pops the Debt Bubble

Happy Mothers Day to the moms!

I read an excellent commentary over the weekend from Bill Fleckenstein that I wanted to share with everyone today. He discusses the new worldwide inflation threat that isn't going anywhere anytime soon. I put this in the must read category. We have discussed many of these issues on this blog, and the economist in the article expects a blowup most likely within the next couple years.

Here are some highlights:

"One major force helped hold inflation at bay during the 1990s: globalization. As Jim Grant points out in a brilliant essay titled "The Close of the Era of Peace and Quiet" in the current Grant's Interest Rate Observer (subscription required): "Between the early 1980s and the late 1990s, an estimated 2 billion new pairs of hands had joined the global labor force. Employers never had it so good, especially so in countries like the United States, where relocation to low-cost meccas of the East was no idle threat, but an actionable business plan."

Cheap labor, when combined with the technological advances of the late 1990s -- which were powerful, though no more potent than those we'd seen in the 1920s and 1960s, for instance -- helped offset the Federal Reserve's money printing.

However, in the wake of the stock bubble, that money printing set off the U.S. housing boom and began to cause different consequences.

Exacerbating those inflation trends is the synchronized economic boom that the world has enjoyed for the past couple of decades, which is a major focus of Marc Faber, the editor of the Gloom, Boom & Doom Report (subscription required).

Combining Grant's and Faber's views, we see that the first decade of the global economic boom and the attendant expansion in the labor force held inflation in check. Now those laborers all over the world want more money, and economic expansion in countries everywhere is creating a tremendous drain on the world's resources, leading to higher commodity prices."

Quick Take:

So we have been enjoying the deflationary cheap labor from China over the past couple of decades which has helped fuel a massive global expansion. However, workers in these countries are now demanding more money, and higher food prices are fueling this demand.

Back to the commentary:

"The president of the World Bank, Robert Zoellick, speculates that inflation has pushed 33 countries to the edge of civil insurrection. If globalization has made one world economy out of a myriad of national economies, it follows that inflation is a world problem, not a localized one."

The world itself could be looked at as one economy in the late stages of a business cycle -- in which capital spending is exploding, especially in fast-growing regions such as Asia, the Middle East and parts of South America. Inflation is rising, and certain sectors are starting to have problems.

The U.S. can be considered one of those sectors, with the burst real-estate bubble already starting to impact demand in the world while inflation is eats away at the world's ability to consume.

Faber points out a major concern: The debt-burdened U.S. economy may have reached "zero hour" -- that being when a dollar of new debt has no incremental positive impact on U.S. gross domestic product.

For the past 30 or 40 years, it's taken increasingly larger amounts of debt to increase GDP. From 2000 to 2007, total credit market growth was $21 trillion, and nominal GDP growth was only $4 trillion. We have reached the stage where a dollar in debt produces only 20 cents or so in economic growth (versus about 90 cents produced in the 1960s).

That leads to one of Faber's conclusions: "It is quite likely that the current synchronized global economic boom and the universal, all-encompassing asset bubble will lead to a colossal bust."

For the past 30 or 40 years, it's taken increasingly larger amounts of debt to increase GDP. From 2000 to 2007, total credit market growth was $21 trillion, and nominal GDP growth was only $4 trillion. We have reached the stage where a dollar in debt produces only 20 cents or so in economic growth (versus about 90 cents produced in the 1960s).

An economy that reaches Faber's zero hour is one in which increasing debt creates no growth. It only increases prices.

The unanswerable question is how long the world debt markets will allow inflation to ratchet up before they start to decline, as they price in, say, a 6% inflation rate and 2% to 3% of "real" yields!

Faber offered that either the debt markets will have to crack or commodity prices will have to break."

My Take:

Well this article basically explains why we are heading for a economic disaster. The inflation described on here will be the needle that pops the debt balloon in my opinion.

We already know that deflation WILL hit the debt markets as inflation takes away discretionary spending. Remember folks, inflation and deflation can happen at the same time.

When you smack the already weakened consumer with a fat dose of inflation, you are asking for big trouble. The housing bubble has already brought the consumer to its knees. This second blow(inflation) will knock them out.

As you can see above, the GDP can only be Ponzied upward so much with debt until it stops growing because we can no longer afford to service the debt. According to the data above, the debt game has almost completely stopped working.

Consumers are overwhelmed right now between mortgage payments and rising prices. The way the Fed measures inflation is a joke(excluding food and fuel). Eventually, the bond market is going to wake up and crash as they start to realize inflation is really at 6% and the debt game no longer works.

This will force a massive blowup, and the economy will go through a massive reset where everything becomes synchronized. Affordability will then be back, but not before a ton of financial pain in the stock market.