Saturday, June 7, 2008

Meredith Whitney Speaks!!

Everyone seems to love reading Meredith Whitney on here so here is an interview she about a week ago on Bloomberg TV.

She has been the most accurate analysts covering the financials IMO, and its almost freakish how this "consumer credit crisis" that she describes here is what seemed to worry the markets so much on Friday.


"Whitney: Credit Crisis Will Hit You Next
Friday, May 30, 2008 8:44 AM

Meredith Whitney, the bank analyst who was one of the first to trumpet the woes of Citigroup and other major U.S. banks last year, says the credit crisis is “far from over.”

Next on deck, says Whitney, currently a banking analyst at Oppenheimer & Co., is the consumer sector, which is about to get hit hard.

“A lot of the credit market problems since last July will bleed into the consumer,” Whitney told Bloomberg TV.

“There is so much investor sentiment to the effect of ‘Let’s just have it be over.’ The problem is that consumer losses will mount, so bank managements will be caught off guard and have to reverse revenue.”

Two basic issues arise for the banking sector and economy, Whitney says.
“First, there has been an over-reliance on consumer liquidity coming from the securitization market. For example, for every dollar of mortgages put on bank balance sheets since 2000, seven times that rate has been securitized,” she notes.

“So as a result of the securitization shutdown, consumer liquidity will be constrained.”

The second problem is credit cards, she says.

“Regulators who clearly gaffed on the housing bubble will make up for lost time,” she says.
“They will make it so prohibitive for credit card lenders to make profits, which may be a good thing in the long term, that they will take $2 trillion off consumer balance sheets.”

For example, the new regulations announced by the Fed to cut back on onerous practices from credit card issuers will simply lead them to reduce the amount they’re willing to lend to consumers, Whitney says.

“Consumers will get it from all sides,” she says. “Consumer spending will decline, and consumer defaults will pick up.”

That’s bad news for the economy, Whitney points out. “Everyone will get a higher cost of borrowing,” she says.

“There’s only $800 billion of credit card debt outstanding, but over $4.7 trillion of unused lines outstanding. So when you cut that back substantially, everyone effectively gets a pay cut. No longer can you manage your cash flow.”

And obviously this situation doesn’t bode well for the biggest credit card issuers: JPMorgan Chase, Bank of America, Citigroup, American Express and Capital One, Whitney notes.
“Credit card issuers can’t raise rates, so they will cut back on all loans. Credit cards will have meaningfully lower profit potential.”

Whitney says some of the securitization market will rebound but not enough to prevent the economy from taking a major hit.

“The vast majority of securitizations have been shut down since July,” she points out.
And what’s the impact of that? “Over the last four years the average quarterly run rate was over $200 billion in mortgages originated,” Whitney says. In the first quarter of 2008, that figure dropped to $33 billion.

“I don’t think that comes back,” she says. “If you’re a fund manager, will you invest in mortgage-backed securities when there’s such a tarnish on them? You will get sued by your clients. So there’s a buyers’ strike.”

Result: Tight money, tight credit, and an economy on the skids."

Friday, June 6, 2008

Oil Explodes/Consumer Debt Surges

It was a historic day in the financial markets. On a day when everyone thought the jobs report would dominate the markets, oil stole the headlines. Oil had its biggest one day move ever moving up over $10 to $138/barrel.

We finished down a whopping 400 points on the DOW. We also broke the key 1370 level on the S&P(more on this later).


Here is the news on the incredible move in oil today.

"June 6 (Bloomberg) -- Crude oil rose more than $10 to a record as the dollar weakened after the U.S. unemployment rate grew the most in two decades and Morgan Stanley said prices may reach $150 within a month.

Oil may ``spike'' because ``Asia is taking an unprecedented share'' of Middle East exports, Morgan Stanley analyst Ole Slorer wrote. The dollar weakened against the euro after the unemployment rose to 5.5 percent, signaling the Federal Reserve may be reluctant to increase interest rates. Oil also rose after an Israeli minister said an attack on Iran may be necessary.

Oil is ``being used as a hedge by speculative buyers for the weakened dollar,'' said Gary Adams, vice chairman of oil and gas consulting at Deloitte & Touche LLP in Houston. ``We are seeing that the price will continue to go up as investors look for alternatives.''

Quick Take:

Oil inventories are down and demand is up. Throw in massive speculation, a cheap dollar, and Israel threating to blow up Iran and it equals a historic $10 move up in oil.

If we go to $150-200/barrel in oil then this economy is going to get mashed. The consumer already is hanging on by a thread and spending their stimulus checks at Walmart. Throw in $175 oil and its lights out.

Consumer Debt Surges

Without the housing ATM card to draw from, the consumer has run to credit cards as a last way to spend money. This will be the final few puffs that get blown into the debt bubble before it bursts, leaving the banks with massive defaults.

Here is the new on the desperate consumer:

"June 6 (Bloomberg) -- U.S. consumer borrowing increased more than forecast in April as Americans racked up personal loans for everything from vacations to automobiles to education.

Total consumer credit rose $8.9 billion for the month to $2.56 trillion, the Federal Reserve said today in Washington. In March, credit rose by $13.1 billion, previously reported as an increase of $15.3 billion. The Fed's report doesn't cover borrowing secured by real estate.

Consumers used their charge cards less and personal loans more in April, in the aftermath of the credit-market collapse and the deepest housing slump in a quarter century. Weaker consumer spending, which accounts for two-thirds of growth, could send the economy into recession.

``The consumer is getting hit hard on so many fronts from rising gasoline prices and grocery bills that are going through the roof,'' said Chris Rupkey, chief financial economist at bank of Tokyo-Mitsubishi in New York.

In advance of today's report from the Fed, economists forecast an increase of $7.2 billion in consumer credit during April, according to the median of 30 estimates in a survey conducted by Bloomberg News.

The Fed is calling for lenders to consider forgiving portions of mortgage debt to help ease the housing contraction and stem a rash of home foreclosures and plunging in real-estate values. The situation ``is bad and it's getting worse,'' Sandra Braunstein, the head of consumer and community affairs at the Fed, told a meeting of the Conference of State Bank Supervisors at Amelia Island, Florida on May 22."

Final Take:

This is the last gasp of air that the consumer has left in the spending tank. After the credit cards get maxed out, there is nowhere left to go.

When you are out this weekend, take a look around and see how many people are paying in cash. I forget what money looks like its so rare in my neck of the woods.

I had a waitress tell me the other day that she hardly ever sees cash where as 5 years ago about 50% of her checks were paid with the greenback.

The consumer is now almost out of options. The next step in this cycle will be defaults and massive debt deflation on assets like houses.

Bottom Line:

The selling continued into the close, and we broke right through the key 1370 level on the S&P that was considered a key level for the bulls to hold.

The technicals on this break mean we most likely will move downward from here. If we had held that 1370 then a bounce was in play on Monday. If the pressure from oil continues on Monday things could get very ugly.

Stay Tuned.

Unemployment Rate Climbs to 5.5% largest Jump since 1986/Oil Exploding up $6 to $134/Barrel

A warning to everyone this morning. Today could be a deep red day. Oil is surging up over $6 to $134/barrel and is up over $10 in two days. Folks, you aren't supposed to see moves like this in oil. The oil pits are in an absolute panic this morning. Morgan Stanley predicts oil could get to $150/barrel by the end of the month which means $5 a gallon gas!!

The word is China is splurging on oil in reaction to the earthquakes and getting ready for the Olympics. A combination of a weak dollar, higher demand, and our horrific jobs report has created the perfect storm for oil today. Its an absolute frenzy in the oil pits as I watch CNBC right now.

Stocks are already down 150 points on the DOW in the first 15 minutes of trading.

Unemployment Report

This is what got the hysteria started today. We had the largest monthly jump in the unemployment rate since 1986 as it jumped from 5% upto 5.5%. Percentage wise(10%) you need to go back to the 1070's to see any type of jump in unemployment like this. Here is the unemployment news from Bloomberg:

"June 6 (Bloomberg) -- The U.S. lost jobs in May for a fifth month and the unemployment rate rose by the most in more than two decades, signaling that the world's largest economy is stalling.
Payrolls fell by 49,000 after a 28,000 drop in April, the Labor Department said today in Washington. The jobless rate increased by half a point to 5.5 percent, higher than every forecast in a Bloomberg News survey, as an influx of teenagers into the workforce exceeded jobs available.

Employers are cutting back to protect profits as raw- material costs soar and sales slow. A weaker job market is another blow to Americans hit by falling home values, scarcer credit and higher fuel bills, adding to the risk that the longest consumer-spending expansion on record will come to an end.

``The labor market is still deteriorating,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The story is, we're still on the verge of a recession'' and ``at best, the economy is growing very, very slowly.''

``We've never seen a run of negative payroll numbers like this without the economy being in a recession,'' Avery Shenfeld, senior economist at CIBC World Markets in Toronto, said before the report. ``We are in a mild recession. We expect to see a few months of declines that are worse than this.''

My Take:

My what a difference a day makes. Yesterday you would have thought we were getting ready to enter a new bull market. Today it seems as if all hell has broken loose. A half point jump in unemployment is a HUGE move.

The GDP may statistically say we are not in a recession. I bet Americans beg to differ. Most feel like they are already in one. CNBC reported that almost 800,000 people lost their jobs last month.

This tells me that the the GDP number is either a lagging indicator, or it is a huge disconnect between how well corporate America and Wall St. is doing versus the average American. Corporate America and Wall St. have a massive tailwind as the Fed slashes rates helping profits.

The lower rates unfortunately are a huge headwind for the rest of us. It causes inflation and wealth destruction. Ironically, what helps Wall St. now will end up killing them down the road because the consumer is going to die from this combination of inflation and unemployment. This will end up pushing us into a recession.

When the average American can't find work it will result in a drop in the GDP because they will be forced to stop spending. Like the analyst above described. You never see a jump in the unemployment rate like this without the economy being in a recession.

The stimulus checks may skew GDP over the next couple months but that effect will be short lived. The way oil is heading that $600 may only buy you a few tanks of gas and dinner at a restaurant. One month and that check goes POOF!

National City Bank

This news didn't help the financials this moring:

"June 6 (Bloomberg) -- National City Corp.'s banking operations entered into a confidential ``memorandum of understanding'' with U.S. regulators, in essence putting the bank on probation, the Wall Street Journal said.

The agreement with the Office of the Comptroller of the Currency, came within the last month or so, the newspaper said. Under such agreements, banks get the ability to work with regulators
to solve problems without panicking depositors, the Journal said.

National City has been drastically reducing its mortgage and home-equity lending, cutting its staff by hundreds, the newspaper said."

Quick Take:

This bank almost went under a few months ago before securing last minute financing. It looks like the regulators are trying to sweep this under the rug without creating a bank run. I would love to read that "memorandum of understanding". It probably look like a death certificate.

This sounds like another bailout but we will have to see.

Bottom Line:

More cracks are starting to show in the economy. We are now down 200 points since I started writing this post. Put on a helmet and hold on for dear life. Its going to be a wild ride today.

Thursday, June 5, 2008

Always Respect the Stock Market

There are days where you look at the market in disbelief. Today would be one of those days!

If someone would have told me this morning that the DOW was going to go up 200 points on a day where MBIA and Ambac lost their AAA ratings and oil rose $5, I would have asked them what drug they are on because I want to try some.

Its days like today where you have to respect the power of the market. The market beats to its own drum and sometimes it plays out of tune.

When it comes to investing, the minute you believe you are 100% right is the time where you must sit down and think in a rational manner.

How many investors bought houses in 2005 "knowing" that they were going to make huge returns by flipping them a year later? They realize today that they were wrong. Investing when you just know you are right is usually when you take your biggest losses.

Why do you think Goldman Sachs, the best trading desk on the street, has a risk management department that hedges against the trades that the firm has made?

Now have my views changed on the economy? Hell no. In fact I am more confident today than I was yesterday that this economy is going to blow up. Does that mean the stock market is going to go down tomorrow? No.

I have aways had long positions and short positions to hedge each other in crazy times like today. I do this because I am smart enough to realize that a highly volatile market will always be a step ahead of me. I am mainly in cash right now because the amount of speculation and desperation that I see out there are at levels I have never seen before.

This market frankly scares the hell out of me. I go to fixed income when I think the rug could get pulled out from under us at any second.

Consider the news today. Here are the links:

- MBIA and Ambac lose their AAA ratings

- Europe announced it may raise interest rates in July further pressuring the dollar.

- The Fed's Lacker came out today with this warning on Ben Bernanke's recent actions:

"June 5 (Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker, challenging Chairman Ben S. Bernanke's unprecedented actions to stem a financial panic, warned that lending to securities firms raises the risk of future tumult."

Does this look bullish to you?

It doesn't to me either. What scares me most is the Fed seems to be in "warning" mode versus saying everything is OK. Its very rare to see a Fed chairman talk so hawkish about inflation like Ben Bernanke did yesterday.

When they look nervous I get nervous.

Bottom Line:

The bottom line here is you should always have an investing thesis, but you should also diversify your risk because you might be wrong. There have been a lot of smart people that have been on the wrong side of a trade before.

Many millionaires on Wall St. go BK more than once because they are willing to take huge risks to make millions. That's the culture of the street. Most of the guys that do go broke end up being millionaires again down the road. I know a few personally.

This is a very dangerous market right now. Even the pros are having difficulty navigating it. The best thing for the average investor to do is go to some fixed income and ride out this storm.

Days like today always remind me to be rational with my investing. I think we are in deep trouble but the market looks like it doesn't feel this way. When you see the market trading irrationally remember that Cash is King!!

I will take my 5% return from bonds and jump into the market mayhem when I believe its trading more realistically.

Foreclosures hit a 29 Year High/ 2 year Credit Recession on the way?

A quick update today everyone. Well we have now officially moved past the 1990 housing bust in terms of foreclosures. Its back to the 1970's for comparable housing numbers!

Here is the data from Bloomberg:

"June 5 (Bloomberg) -- The number of Americans in danger of losing their homes to foreclosure rose to the highest in almost three decades during the first quarter as borrowers who fell behind on payments were unable to sell their homes.

New foreclosures rose to a seasonally adjusted 0.99 percent of all U.S. home loans, up from 0.83 percent in the fourth quarter, the Mortgage Bankers Association said in a report today. The total inventory of homes in foreclosure increased to 2.47 percent and the delinquency rate, loans with one or more payments overdue, grew to 6.35 percent. All were the highest since 1979, the Washington-based trade group said."

Quick Take:

The housing news continues to worsen. I am amazed at how we literally get bad housing news everyday! I expect foreclosures at its peak to set all time records. This ball just got rollin folks.

2 Year Credit Recession on the way?

This is the prediction reported by Reuters yesterday. Here are the highlights:

"NEW YORK (Reuters) - A "credit recession" sparked by the U.S. housing market downturn and excesses in structured finance may last more than two years, and the financial sector will undergo "massive consolidation," leading Wall Street strategists said on Wednesday.

The fallout from deteriorating subprime mortgages and the broader housing and credit crisis will eventually lead to a healthier market, but not until after a prolonged purging process, Jack Malvey, Lehman Brothers Holdings Inc's (LEH.N: Quote, Profile, Research) chief global fixed-income strategist, said in New York.

"We're going through a tough spell with regard to credit," Malvey said at a Securities Industry and Financial Markets Association conference.

The "subprime debacle" due to years of excess and easy credit will be followed by years of tight credit, Malvey said."

Quick Take:

The easy money credit days are coming to an end. This will be quite a financial hangover that we have to recover from.

The banks will be hit with regulation as the fallout from this subprime debacle needs to be cleaned up. I hope that something like this never happens again. but history has shown that it usually will. I hope its not in my lifetime. This is going to take several years everybody.

A two year recession to wring out the credit losses is well within reason. Anyone that is taking their home off the market thinking they can sell it at 2005 prices in a couple years is insane. There will be no quick turn around. These home sellers would be much better off dropping the price until they find buyers right now.

Lending is only going to get tighter going forward and you could find yourself in a worse housing market a couple of years from now.

Stocks are up today. We have been down everyday this week so we were due for a bounce. The big unemployment number is out tomorrow. Expect some major price action if we get a surprise.

The street will be pretty quit today anxiously waiting for tomorrows jobs number.

Wednesday, June 4, 2008

Fannie and Freddie at Risk? Mortgage Applications Hit a 6 Year Low

Lets get back to some housing news since this is the Housing Time Bomb. I realize I have been focusing on the markets lately. If you would like to see more housing related information please feel free to give me some feedback via e-mail or in the comments section.

I read a great piece in the Financial Times today about the increasing risks that Fannie and Freddie are taking with their lending portfolios. Make sure you click on the graph below because it blows up nicely.

There are too many areas to highlight in this article so I advise everyone to read the whole thing. I will quote a few paragraphs that were eye opening to me:

"Their market share has swollen since last year with the contraction of the market for “private label” mortgage-backed securities (MBS) sold by investment banks. Fannie and Freddie accounted for 84 per cent of total MBS issuance in the first quarter – up from 33 per cent at the peak of the US housing boom in 2006.
The sums involved are potentially enormous. At the end of March, Fannie and Freddie had total credit outstanding of $5,300bn (€3,400bn, £2,690bn) – $1,600bn in debt and $3,700bn in credit obligations – a total that is equivalent to the entire publicly held debt of the US government.

So what are the risks?
For a start, the two enterprises support their giant operations with only a thin cushion of equity capital – a combined total of $81bn. Fannie and Freddie are a “source of strength for mortgage lending and the housing market” but a “point of vulnerability for the financial system, because they are so highly leveraged”, James Lockhart, who as director of the Office for Federal Housing Enterprise Oversight (Ofheo), is their regulator, warned in a speech last month.

As the housing crisis has deepened, the expected loss in default has increased, along with the likelihood of default. The companies have credit protection on the higher loan-to-value mortgages – but this insurance is only as strong as the companies standing behind it (see below).

What level of house price declines would put Fannie and Freddie at risk in the absence of additional equity? Many analysts put that number at a further 10-20 per cent. “If a broad measure of house prices were to fall another 15 per cent from here, would these companies need to raise further capital in order to ensure they would remain solvent over time? Yes, absolutely,” says Thomas Lawler, head of the Virginia-based Lawler Economic & Housing Consulting.."

My Take:

There is much more meat in this article so please read it in its entirety. The graph and the numbers discussed in this article are alarming aren't they?

We are pretty much down to a one stop shop in the mortgage market. The banks have no desire to make loans that aren't backed by the government so as a result, Fannie and Freddie's market share has risen from 30% of the mortgage market a year ago up to around 85% now.

So lets do some quick math. These two companies now have $5.3 trillion in credit obligations and only $81 billion of capital. This is insane! The analyst above said that a 15% drop in housing would make them insolvent.

I think it would take a hell of a lot less than that to wipe them out. A 10% loss on credit obligations would be a loss of $530 billion dollars! This might be on the high side, but wiping out $81 billion in capital could happen with a 2% shift to the red on these credit obligations.

Gee do you think we might be getting setup for a bailout? How much is this tax bill going to cost us?

This is the type of stuff that should anger you as a taxpayer. There is no doubt we will be forced to clean up this mess, while Wall St. continues to get a free pass and is offered bailout after bailout.

I'm sorry I need to go on a rant right now because I am getting angry just thinking about how irresponsible this is. Sometimes I can't believe what I read.

These companies have taken insane risk in a housing market that's in the middle of imploding!!!

These numbers are mind boggling and its being done for one reason!

A socialized housing bailout. Whatever happened to free capitalism?? Remember this when you think about who you are going to vote for in November. I get infuriated when I see companies acting with zero responsibility and greed.

The government continues to let them get a free pass by first allowing them to do jumbo loans, and then reducing their capital requirements so they can continue to lend in an irresponsible manner.

I hope it sickens you as much as it sickens me. Our economy is going in the tank because of our addiction to cheap money and greed. Fraud is running rampant all over Wall St. with zero regulation.

These numbers are ludicrous! When your housing GSE's debt is equivalent to all of the publicly owned debt by the US government, I think its time to maybe re-evaluate things! This crap needs to stop!

Rant over!
One more quick blurb on Mortgage Applications and I am done

We hit a 6 year low for mortgage applications last week as interest rates jumped. Here are the mortgage application stats from Bloomberg:

"June 4 (Bloomberg) -- Mortgage applications in the U.S. last week dropped to the lowest level in six years, reflecting less refinancing as interest rates jumped.

The Mortgage Bankers Association's index of applications to purchase a home or refinance a loan fell 15 percent to 502.3, the lowest level since April 2002, from 593.3 the prior week. The group's purchase index decreased 5.4 percent and its refinancing gauge dropped 26 percent.

The housing market faces decreasing demand as prospective buyers wait for prices to stop falling and additional foreclosures force lenders to tighten rules for mortgage applicants. The real-estate slump will probably weaken the economy for the rest of 2008.

``We continue to view the residential real-estate crash as the most important factor underlying current recessionary conditions in the U.S.,'' said Maury Harris, chief economist at UBS Securities LLC in Stamford, Connecticut, in an e-mail note to clients. ``Home prices are falling at a faster rate, a signal of worsening supply/demand imbalance.''

Quick Take:

I bet these mortgage application stats keep Frannie and Freddie up at night as they watch housing crash.

The sad thing is they are probably sleeping like babies because they know in the end, it will be you and I that end up paying for it.

The Consumer Hangs in there/Derivative Traders are betting that the Credit Crunch will worsen

Well we got more benign data this morning on the health of the economy and the consumer. Stocks breathed a sigh of relief and bounced as the ISM data showed that the economic growth has slowed, but still barely remains positive.

Minus any Lehman news, expect a little relief rally today as the data released this morning showed that housing to date hasn't forced the economy into a free fall.

Here is economic data from Bloomberg:

"June 4 (Bloomberg) -- U.S. service industries expanded at a faster pace than forecast in May, signaling the economy is weathering the effects of the housing slump and record gasoline prices.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, decreased to 51.7 from 52 in April, the Tempe, Arizona- based ISM said. A reading of 50 is the dividing line between growth and contraction.

The report, combined with the group's manufacturing survey earlier this week, indicates``This report is consistent with very sluggish overall growth, but not anything resembling a free fall,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. `The economy will basically bumble along for the foreseeable future, growing by little, but also avoiding collapse.'' the worst real estate slump in a quarter century hasn't caused the economy to weaken further."

Quick take:

There is no reason for the markets to rally on such sluggish data, but as we all know, the markets are acting irrational right now. Our economy is basically at a zero growth rate. Why would you rationally take stocks higher without any economic growth?

The risks for contraction remain

Credit availability is tightening, HELOC's are disappearing, and housing values continue to drop. This housing crisis will take years to work through, and to say that we have weathered this housing storm is surely premature.

The last couple of red days and the Lehman panic tell you that investors are not confident that the credit crunch is over. Apparently, the derivative traders agree.

Derivative Traders bet the Credit Crisis will worsen

I thouhgt this was an interesting article from Bloomberg on how derivative traders are betting on the credit crunch.

"June 4 (Bloomberg) -- Interest-rate derivatives traders are betting banks' difficulties obtaining cash to fund holdings and shore up balance sheets will worsen.

The difference, or spread, between the three-month dollar London interbank offered rate and the overnight index swap rate on contracts beginning in three months and trading now in the forwards market is greater than spreads on those starting this month, according to data tracked by Credit Suisse Holdings Inc.

``The movement in the forward Libor-OIS spreads is telling you that the market is concerned that things can get even worse before they get better,'' said Carl Lantz, an interest-rate strategist in New York at Credit Suisse, one of the 20 primary dealers of U.S. government securities that trade with the Federal Reserve. ``Until all banks' balance sheets are cleaned up and they've re-capitalized, there is going to be funding pressure.''

My take:

The traders know that there are still many skeletons in the bank closets that have yet to be revealed. Billions of losses in housing have continued to be hidden by the financials, and until these are revealed, the financials cannot begin to heal.

Bottom Line:

Wall St. is getting up off the floor and buying today after having a Lehman heart attack yesterday. There was nothing bullish in any of the data today in my opinion. What I see is a slowing, sluggish economy that is slowly sinking into a recession.

Expect this relief rally to be short lived.

Tuesday, June 3, 2008

Lehman Brothers Under Fire!

What an interesting day in the stock market. It was rough session for the financials as speculation and rumors ran wild that Lehman Brothers was potentially getting hit with a run on the bank.

The market seemed to trade in tune with the stock price of Lehman for most of the afternoon. Lehman ended up down around 10% on the session. Stocks rallied back slightly after Lehman denied the rumors that they had run to the discount window to borrow cash from the Fed.

I gotta say I have a hunch that this story isn't over guys and gals. I found Lehman's denial to be very vague and carefully worded.

Here is the denial and the Lehman story tonight on Bloomberg. Here are the highlights including the denial from Lehman:

"June 3 (Bloomberg) -- Lehman Brothers Holdings Inc. denied borrowing from the Federal Reserve today and said the firm's cash holdings have increased, as the shares dropped to the lowest level in five years.

Lehman, the fourth-largest U.S. securities firm, had more than $40 billion of liquid assets at the end of the quarter, up from $34 billion three months earlier, Paolo Tonucci, treasurer of the New York-based firm, said in an e-mailed statement. The last time Lehman borrowed from the Fed was on April 16, he said.

``We did not access the primary dealer facility today,'' Tonucci said in response to speculation among traders that the firm had turned to the Fed for funds. The central bank set up a lending program for investment banks after the collapse of Bear Stearns Cos. in March.

``Equity investors are acting first and asking questions later,'' said Brad Hintz, an analyst at Sanford C. Bernstein in New York, who has a ``market perform'' rating on Lehman. ``Just the fact that Lehman would discuss the prospect of raising common equity capital nine months after the beginning of the credit problems is concerning to investors. Why take a chance in a difficult economic/financial environment?''

``Wall Street is starting to look like the boy who cried wolf, and investors are worried that we're not in the clear,'' said Billy Groeneveld, head trader at vFinance Inc. in Boca Raton, Florida. ``The bottom line is that we are still on shaky ground in the financial sector and it's not just Lehman.''

My Take:

Take a good look at the statement in bold above from Lehman. Ok, so their "liquid assets" rose from $34 billion up to $40 billion. Here is my question. How many "illiquid" assets do you now have on the books Lehman?

How many bad assets have you thrown into the abyss that you like to call Level 3 assets? On their March conference call noted here, Lehman admitted to having $38 billion in Level 3 assets. What is that number up to now? $40 billion in liquidity against and $38 billion in Level 3 assets is not where you want to be as a financial institution.

As you can see they are in a world of hurt.

Another question that I have is how many bad assets do you have on the books that are not in Level 3 lala land that you have to writedown over the next few quarters? All of the analysts are expecting Lehman to announce a loss for the second quarter.

Another problem that Lehman has is apparantly the hedges they used to balance out their housing exposure backfired as the financials have rallied since March. This has supposedly done furthur damage to the firm.

As houses continues to drop in value, the $38 billion in Level 3 assets that Lehman holds drop in value with each foreclosure. The reason being, a lot of these Level 3 assets are garbage CDO securitizations that Lehman hopes will come back when housing rebounds. Like that's going to happen anytime soon!!

I thought it was also strange how they only would say that "We did not access the primary dealer facility today". Well how about tomorrow? Sounds a little vague and lacking in confidence doesn't it? I recall how Lehman was full of piss and vinegar the last time this rumor started, blaming the shorts for trying to create a run on the bank. Quite a docile response this go around versus last time don't you think?

Bottom Line:

When you see price action on stocks like this there is usually a reason for it. Like the saying goes "where there is smoke there is usually fire!".

Wachovia: The Sharks start to Smell Blood

As the credit crunch continues to deepen, the Wall St. sharks are beginning to surround the weakest links. Rumors continue to swirl that Wachovia's poor loan portfolios have pushed them to the brink of insolvency.

There were two pieces in the Wall Street Journal that highlighted Wachovia's problems.

The first article is a piece on Michael Price explaining why he is shorting Wachovia. Whats interesting here is Michael Price usually likes to buy distressed financials and bet long. Seeing him short here on Wachovia is a major red flag in my opinion.

The WSJ a subscription but here is the link. I will hightlight the piece below:

"A Bear Claws at Wachovia
Michael Price Says The Stock's Floor Hasn't Been Met
June 3, 2008

Michael Price has made millions buying shares in battered financial stocks. But he isn't buying Wachovia Corp. And the bank's dumping of its chief executive doesn't change his mind.

Mr. Price, who led the Mutual Series funds group and later sold it to Franklin Templeton Investments, isn't one who delights in piling on to wounded financial firms.

At Wachovia, removing goodwill and other intangible assets, as well as preferred shares, gets to a book value of about $14.80 a share, after the most recent capital raise. That is well below Wachovia's closing price Monday of $23.40, down 1.7%, or 40 cents, in 4 p.m. New York Stock Exchange composite trading.

But Mr. Price notes that Wachovia deserves some credit in this calculation for its low-interest-rate deposits, for which potential acquirers likely would pay a premium. Assuming a 5% premium on the bank's $278 billion of low-interest-rate deposits, $6.60 a share would have to be added to the $14.80 a share in book value. This gets to an approximate share-price target of $21.40, not that far below Monday's close.

But the bank has $121.2 billion of adjustable-rate mortgages, most of which were taken onto its balance sheet when it acquired Golden West Financial Corp. Any value calculation for Wachovia has to take into account the losses the bank likely will have to book as it builds its loan-loss reserve against defaults on these mortgages.

Mr. Price believes a new CEO at Wachovia likely would be more aggressive in recognizing the ARM problems. "More losses are coming. They need to fess up," he said.

The financial pain from doing that could be intense. At the end of March, the loan-loss reserve for Wachovia's adjustable-rate mortgages was equivalent to 1.55% of the $121.2 billion total, which looks too low given how fast they are going bad.If Mr. Price is right, Wachovia's share price is wrong.

If Mr. Price is right, Wachovia's share price is wrong."

Quick Take:

The Paragraph in bold tells you how poorly Wachovia has prepared for losses on their massive $121 billion loan portfolio of adjustable rate mortgages. Now I don't know the breakdown of this portfolio, but we already know subprime is defaulting at about a 30% clip and Alt-A loans are about 10% delinquent.

When you have only 1.55% in your loan loss reserve to cover these losses, you are way under capitalized as these foreclosures mount. Say 15% of these loans end up going bad. That's about a $20 billion loss. I doubt Wachovia can handle that. We will see. Now lets move on to problem #2.

Wachovia's Construction Loan Dilemma

Here is the second link on Wachovia discussing their construction loan portfolio. Some highlights:

"While Wachovia Corp.'s residential-mortgage woes have gotten most of the blame for the ouster of Chief Executive G. Kennedy Thompson, another real-estate specter looms.

Wachovia has been the country's second-largest maker of construction loans after Bank of America Corp., with $23.9 billion of debt outstanding to developers of single-family homes, condominiums, office buildings, stores and other commercial projects at the end of the first quarter.

"A large part of the risk in Wachovia's portfolio stems from its higher proportion of single-family-construction lending," said Matthew Anderson, a partner at Foresight Analytics.

"It's no question construction loans are going to show increases in losses in the coming quarters," said stock analyst Dick Bove at Ladenburg Thalmann & Co., speaking about Wachovia.

Analysts expect a sharp increase in bad construction loans partly because many of them were made with "interest reserves," pools of money developers set aside to pay interest while projects get built. Once they burn through those reserves, developers of troubled projects can't pay debt service, forcing banks to classify the loans as nonperforming.

Analysts believe this is primarily because of Wachovia's high exposure to single-family-home development. Delinquencies on construction loans tied to such projects reached 15.1% in the first quarter, according to Foresight. By comparison, the industry average was 10.8%."

Quick Take:

So on top of Wachovia's home lending problems, they now have new construction loans blowing up at a 15% clip which is 50% higher than the industry average.

Wachovia was the number two player in this market with $23.9 billion in new construction debts. These loans are dangerous because when the music stops and the housing cycle ends, the builders can't pay the loans back because they cannot sell what they built.

This is when the bankrupties in the building sector start to rise. As a result, Wachovia will be left holding the bag.

So the question on Wachovia now becomes this. Can they survive this 1-2 punch? Capital will become more difficult to acquire as housing prices continue to drop, and many financials are forced to look for handouts. I would not be surprised to see Wachovia go belly up when this is all said and done.

It looks like Lehman needs to raise more capital

FYI. I find this amusing because a month ago they sais they didn't need to raise capital. Oooops!

Here is the link.

The Credit Crisis is roaring once again, and it looks like stocks have pulled back after a morning bounce.

I expect a Bear Stearns part two very soon. Wachovia and Lehman seem to be two of the weaker links. Of course Countrywide must be on this list as well!

Stay tuned.

Monday, June 2, 2008

WSJ: Foreclosures Soar to 660,000 in April

Good evening!

Well it was a rough day on Wall St. today. Financials ruled the headlines as two bank CEO's got the pink slip and S&P slapped the the big banks with downgrades. It was nice to get away from the oil obsession we have had over the past few weeks.

Before I discuss the foreclosure data, I wanted to point everyone to a great read that I found surrounding America's obsession of cheap money and the resulting debt bubble. The commentary is by Christopher Grey and I think you will enjoy it.

The Foreclosure Data

The Wall St. Journal reported the most recent foreclosure data for April, and the numbers are staggering. Here are a few highlights from the Wall Street Journal:

"Number of Foreclosed Homes Keeps Rising

Lenders Cut Prices To Jump-Start Sales As Inventory Grows
By JAMES R. HAGERTYJune 2, 2008; Page A3

The number of foreclosed homes owned by lenders continues to rise despite signs that they are increasingly willing to slash prices to sell those properties.

Lenders and investors in mortgages owned about 660,000 foreclosed homes in April, up from 493,000 in January and 231,000 in January 2007, according to First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks. The April total works out to about one in seven previously occupied homes available for sale nationwide.

With home prices falling, "holding the assets means further losses," said Mark Fleming, chief economist for First American CoreLogic. Some lenders now are cutting prices as often as every 20 days on homes that aren't selling, said David McCarthy, chief executive officer of Integrated Asset Services LLC, a Denver-based company that helps banks value and sell REO homes.

Meanwhile, long-term interest rates rose last week, marking another potential drag on the housing market. The average rate on 30-year fixed rate loans eligible for sale to government-sponsored investors Fannie Mae and Freddie Mac was 6.17%, up from 6.02% a week earlier, according to HSH Associates, a financial publisher in Pompton Plains, N.J."

My take:

Gee I wonder why financials are down today(not)? This data is eye popping. The number of forclosures is more than double the rate from last year, and up significantly from only three months earlier.

Anyone thinking we are through the worst of the credit crisis is crazy. Foreclosures are accelerating, and the financials are taking huge losses as a result. Its only getting worse folks!

What really caught my eye in this story was the fact that some lenders are now dropping prices on REO's every 20 days if they aren't selling. This is why you don't buy foreclosures now!!! In three weeks the same place most likely will be cheaper.

Any flipper buying at this time in the housing cycle is making a huge mistake. I gave you an example of a guy who got caught yesterday buying a house at auction that he can't sell.

On top of all of this, interest rates also rose last week up to 6.17% up from 6.03%. Remember that jump in the ten year in the bond market that I discussed last week? I am willing to bet this is the main reason you saw this rate jump.

Stay on the sidelines and ride out this financial storm. There are no signs of it letting up anytime soon.

Until tomorrow!

All Hell Breaks Loose in the Financials

Sorry I couldn't get on sooner today everyone. My site was so overloaded with traffic that I couldn't sign in!

Wow where do I begin today. The financials were absolutely murdered this morning. I have been trying to warn everyone that the losses on the books of these banks were mind blowing, and it looks like S&P has finally decided to let the crap hit the fan with massive downgrades.

Here is the S&P news from Bloomberg:

"June 2 (Bloomberg) -- Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. had their credit ratings lowered by Standard & Poor's on expectations the securities firms will be forced again to write down the value of their assets.

Morgan Stanley, the second-biggest U.S. securities firm by market value, was lowered to A+ from AA-, S&P said today in a report. Merrill Lynch, the third-biggest firm, was cut to A from A+, as was Lehman Brothers, the fourth-biggest firm. The outlook on all three New York-based firms remains negative, S&P said.

``The negative actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,'' Tanya Azarchs, an S&P analyst, said today in a statement.

S&P also said today that it revised its outlooks on Bank of America Corp. and JPMorgan Chase & Co. to negative. Citigroup Inc. was taken off review for a downgrade and given a negative outlook, while Wachovia Corp. was placed on review for a downgrade.

``The outlooks on the large financial institutions sector in the U.S. are now predominantly negative,'' S&P said in today's statement."

Quick Take:

My first reaction here is Duh!!! Where have these ratings agencies been during this whole crisis? It doesn't take a rocket scientist to look at the Level 3 assets of these institutions and conclude that they are in deep doo doo.

Housing is in the middle of capitulating, and these firms are in deep trouble if prices drop much further. The fact that S&P is downgrading all of this debt tells you that another round of massive losses are about to be announced in the 2nd quarter. It looks like S&P is finally trying to get ahead of this credit crisis versus sticking their head in the sand and hoping it goes away.

It will be interesting to see what happens to Lehman. This could very well be the next Bear Stearns. The PUT action on Lehman is overwhelming, and there was similar PUT action on Bear Stearns before they blew up.

Wachovia ousts their CEO

Another huge story this morning. I can only imagine what Wachovia's balance sheet must look like after telling their CEO to hit the road. Expect losses to be announced following his departure.

Here is the Wachovia news from Bloomberg:

"June 2 (Bloomberg) -- Wachovia Corp. fell to the lowest since July 1995 after the bank ousted Chief Executive Officer Kennedy Thompson, signaling the company may report a second- quarter loss.

Wachovia, the nation's fourth-biggest bank, dropped as much as 4.5 percent in New York trading, adding to a slide that has cost the lender more than half its market value in 12 months. Analysts speculated that the Charlotte, North Carolina-based company will be vulnerable to a takeover or other form of distress sale. Wachovia said today it isn't ``in crisis.''

``We figure since he's leaving there'll be a big loss provision for the second quarter,'' David Hendler, senior analyst at CreditSights Inc., said in an interview. ``They need to present a different picture on the company, which is, `We're in the restructuring mode.' ''

Quick Take:

Stay away from this stock. Consider this ousting to be a warning shot across the bow interms of what their earnings will look like over the next few quarters. Wachovia has always been one of the banks thats been rumored to be in trouble.

Washington Mutual's CEO also told to hit the road

Another banking CEO bites the dust this morning. Here is the Washington Mutual story:

"June 2 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, said Chief Executive Officer Kerry Killinger will step down as chairman after shares dropped 80 percent in the past year and the company reported $3 billion of losses during the past two quarters.

Killinger will be replaced by Stephen Frank, an independent director who previously ran Southern California Edison, the Seattle-based lender said today. Washington Mutual shareholders voted in April to remove Killinger as chairman after the company cut its dividend twice and said it may lose as much as $19 billion through 2012 on home loans."

Quick take:

I bet these two CEO's are on the phone with each other right now sharing tips on how to build a banking resume. That must be hard to do when the stock price of your company has dropped 80% in the past year. I hear Walmart is hiring!

Quote of the day!

``Everyone's trying to pick the bottom in financials, and what the news flow is showing you is that we're not there yet,'' said Paul Kandel, a New York-based money manager at Sentinel Asset Management, which oversees about $5 billion. ``Certainly the changing command at Wachovia isn't helpful and the downgrades aren't helpful.''

Bottom Line:

The negative news flow on the financials shouldn't be a surprise today. The only surprise to me is the fact that Wall St. is finally owning up to the fact that we are in deep trouble and not out of the woods. The "generational buy" calls by the analysts on financials since March were simply foolish. I wouldn't be surprised if many of these financials end up in single digits. Jim Rogers predicted this a year ago.

Think about it. The banks have practically no way of making money going forward. Housing was their "golden goose" and its completely evaporated. Poof! Gone! In the end, its going to put many banks out of business.

Housing just reported its biggest price drops in history. Inflation is soaring. Gas is at $4 a gallon. Consumer sentiment is at 26 year lows. Unemployment is rising. The fact that the cheerleaders on CNBC can sit there and tell you to buy stocks is disgusting in my opinion.

Remember today's warning from S&P. This tells you some bad news is about to come out of the financials. The dumping of two major banking CEO's is another ominous sign.

Until housing prices stop dropping, the financials are going to continue to bleed red. I see no recovery anytime soon. Bank runs are not out of the question if housing continues to free fall. Most of their capital is tied up in bad loans, and as these defaults continue to soar, the risk of BK's significantly rises in the financial sector.

We have seen these troubles in the past, and history repeats itself. A bad consumer led recession is on the way. Be prepared.

Sunday, June 1, 2008

Subprime Housing Crisis has now become a National Housing Crisis

There was a great piece in the New York Times today describing how the subprime crisis has morphed into a national housing crisis that is affecting home prices in all parts of the country. Foreclosures are up in many markets including traditionally conservative markets where homes didn't appreciate as much as the bubble areas did.

I advise everyone to read the article. It discusses the struggles of home buyers all over the country. The article also explains how this housing bust is now seeping into the high end area of the housing market.

Note the chart from the article below on foreclosures.:

This chart shows you how markets all over the country are seeing foreclosures. Some areas in Florida and California have seen foreclosures jump 1000%! Amazing. Check out your local market if you are looking to buy a house. This chart can tell you a lot about the financial housing health of your local market. Hold out on buying if you see lots of red in your local area.

I wanted to highlight a part of this article with my quote of the year from a flipper.

"Driving down the country roads near his horse farm in Oak Ridge late last year, David Tolbert spotted a sign announcing an auction by a local builder who’d run into trouble. He ended up buying the house — the four-bedroom that Mrs. Tillman is now trying to sell for him. “I bought it to flip, but the flippage part is not going so well,” he says."

Like the Schneiders, Mr. Tolbert had always quickly sold his past homes for more than he’d paid. Now, with the carrying cost running at $2,000 a month, he, too, needs to sell and is considering a price drop — though he has already lowered the price once, to $409,000. “We’d hoped to make a profit, but if it doesn’t sell by late this year, my profit will evaporate,” he acknowledges. “It’s a pretty good deal, but I haven’t gotten any nibbles.”

My Take:

I have been warning on this blog for months that its too early to be buying foreclosures or new houses at auction. As you can see by the foreclosure data above, there is too much inventory, and buying at these auctions won't make sense until inventories start to drop. Mr Tolbert's now stuck paying $2000 a month by trying to flip a house he bought at auction at the end of a cycle.

Buying a foreclosure or a house at auction only makes sense if you are getting an insanely cheap deal. When I say cheap I mean 50% off or greater.

I wouldn't offer anything for foreclosed condos right now because prices are plummeting, and the lending standards for buying them have changed.

The loans for condos in the bubble areas will evaporate as this housing crisis deepens because they are dropping so fast in value. As a result banks will start avoiding these loans due to the risk of losses.

Another risk you run with buying a condo is if the building is half empty, your HOA dues may go through the roof because the building has to be maintained. Its simply too risky to be buying condos in any bubble area.

Down the road, I expect many of these condos to be converted back into apartments and,who knows, some may end up being converted into section 8 housing due to the massive oversupply in areas like Miami.

Stock Market Weekend Update:

I want to switch gears here. Here is another article of note related to the stock market that I picked up this weekend.

Many investors have been confused as to why the market continues to hold or even rally in the face of horrible economic news. According to Bill Fleckenstein, it appears that quants may be taking over during low volume days in the stock market.

A quick highlight:

"Robot rallies

A friend who is very knowledgeable -- specifically, about quantitative-trading types -- recently weighed in on the stock market's amazing ability to ignore all the recent bad news. In periods when there isn't much news and not much volume, quantitative-trading strategies can rule the tape, which is sort of what we have been seeing. When I pressed him as to what kinds of strategies are being used, he said it's almost all about price action.

Thus those you might think of as normal buyers and sellers are sort of on the sidelines for a variety of reasons, allowing the computers -- which gauge value based on price action -- to ride roughshod and help create the rallies that help produce the illusion of prosperity. That, in turn, begets excitement on the part of more folks who don't understand the economic backdrop.

Bottom line: During the no-news period, which is roughly the middle eight weeks of any quarter when corporations are not reporting results en masse, the lack of data allows computers free rein. That may go a long way to explaining the maniacal behavior we've seen recently on the tape.

Of course, denial has a role in all this, too, as Wall Street would just as soon not see the big picture: the major trouble that lies ahead for the consumer and the economy, as the aftermath of the housing bubble continues its prolonged unwinding."

Quick Take:

Interesting theory isn't it? Its the most logical guess that I have read in a long time. Stocks are extremely overvalued right now relative to the state of the economy. I think the take home message here is when earnings start coming in, these quants might start selling as the price action turns negative on bad news and higher trading volumes.