Things are pretty quiet on the news front so far this weekend. I wanted to hop on real quick and give you an update on the credit spreads this afternoon. As you can see they continue to soar:
"Nov. 6 (Bloomberg) -- Walt Disney Co., the world's biggest theme-park operator, said fourth-quarter profit fell 13 percent, as a slowdown in U.S. consumer spending caused earnings to decline at four of its five business units. The shares dropped.
Net income declined to $760 million, or 40 cents a share, from $877 million, or 44 cents, a year earlier, Burbank, California-based Disney said today in a statement. Excluding one-time items such as bad debt from Lehman Brothers Holdings Inc.'s bankruptcy, profit of 43 cents missed the 49-cent average estimate of 19 analysts compiled by Bloomberg.
Profit fell at Disney's television and radio business, theme parks, film division and the merchandise unit. Park bookings have ``slowed meaningfully,'' Chief Executive Officer Robert Iger said on a conference call, as he announced discounts to attract visitors. Media competitors News Corp., CBS Corp. and Viacom Inc. have also lowered forecasts.
``The quarter was uglier than anyone anticipated'' at Disney, Janna Sampson, co-chief investment officer at Oakbrook Investments LLC in Lisle, Illinois, said in an interview. ``Going forward, it becomes a question of how long and how deep this economic recession will last. And that's very, very difficult to predict.''
Total jobless rolls rose to a 25 year high as initial jobless claims came in higher than expected:
"Nov. 6 (Bloomberg) -- More Americans than anticipated filed first-time claims for unemployment benefits last week and total jobless rolls climbed to the highest level in 25 years, indicating further deterioration of the labor market.
Some 481,000 workers filed initial claims in the week ended Nov. 1, the Labor Department said today in Washington, exceeding the 477,000 projected by economists surveyed by Bloomberg News. The number of people staying on benefit rolls was the most since February 1983."
There are clear signs of deterioration in all areas of the economy. There was so much bad news today that I really didn't know where to start. I mean for example, the 10-year yield rose on a day when yields should have dropped. As I have explained before, investors usually flock to the safety of treasuries when the market tanks. The fact that they are avoiding the 10 year tells you there are concerns about our debt and the economy in the bond market.
Another thing that was announced today was the Fed's balance sheet is now over $2 trillion dollars. No wonder the 10 year doesn't look so safe anymore!
California announced that it wants to raise taxes by $4.4 billion dollars. This is what you gotta do when your state is about to go bankrupt. This will put further pressure on the consumer as their take home pay takes a hit. The housing market and anything consumer related will take another blow if these taxes are approved. Homebuyers will have less income from which to buy a house. The California dreamin is slowly turning into the California nightmare.
Folks, its getting hard to even watch the news right now its so depressing. I think I need to start popping a Prozac before I start blogging. I didn't even get a chance to mention the big 3 auto summit with Nancy Pelosi that's going on tonight. GM is hangin on by a thread and losing more than $1 billion a month. They are on their hands and knees begging the government for help.
CNBC reported today that 2.5 million jobs will be lost if there is a 50% reduction in the automotive industry. That would be catastrophic for the Midwest. I would guess you will see a bailout here but that doesn't mean you won't see a 50 percent reduction among the big 3.
If people aren't buying cars then they aren't going to make them. They can get bailed out all they want, the production lines ain't going to be moving if there are no orders. Expect major job losses in this area as a result.
I wish I had better news folks. Now that most of the October numbers are in, we can officially declare that this month was a total disaster for the economy. We are now staring into the abyss and the market hates uncertainty. Investors are now asking themselves one question:. Was October the beginning of a depression or a one month anomaly?
Put me in the "severe recession/depression" camp in terms of where we go from here.
As for trading, I held my shorts into the close. I didn't add to my positions. There are no good entry points at these levels.
Tomorrow is all about the jobs report. If its horrific, we could plunge for a third day in a row. I would also keep an eye out for any automotive summit news. Oh and don't forget, keep an eye on treasury yields. I have deep concerns about the bond market.
What frightens me the most is I don't see how we dig ourselves out of this. Could we have another lost decade similiar to Japan that Jim Rogers warns of above? The answer to this is looking more and more to be yes.
Well its election day tomorrow! It looks like Obama has it in the bag. In my opinion neither candidate has the goods to get us out of this mess. The next president is almost assuredly a one termer as our economy heads into the abyss. There will be little that either candidate can do in reaction to this mess. The war chest is empty and the economic hand has already been dealt.
It will be interesting how the markets respond tomorrow. I think the next trade is shorting treasuries. Its becoming pretty clear that the government is hell bent on attempting to bailout the economy no matter what the price. An Obama presidency will most assuredly take this government spending to an even higher level.
As a result, its highly likely that investors will start backing away from buying treasuries until we either learn to control our spending or we default on ourselves.
Make sure you get out and vote tomorrow. Every vote counts!
Here is an expanded article from The Wall Street Journal on the loan modification program. It appears Bank of America is also involved:
" The plan comes amid intense national focus on a root cause of global financial turmoil: rising home foreclosures, and what the role of banks and government should be in helping struggling homeowners. The banking industry is under much political pressure address the foreclosure problem.
Rival Bank of America Corp. has two loan-modification pools in place, one hashed out with state attorneys general. At the government level, after other programs failed to halt the rise in foreclosures, the Federal Deposit Insurance Corp. recently floated a plan that could help three million troubled borrowers; it is being considered by the White House. The FDIC also is assisting strapped borrowers who had mortgages with IndyMac Bancorp, which the FDIC seized this summer. (Please see related article.)
"It doesn't make sense for us to wait" to tackle the problem, said a J.P. Morgan executive, Charles Scharf. "We've heard loud and clear and are listening to what some of the thought leaders around the country are saying." Mr. Scharf runs the retail division, which includes mortgages and branch banking, at J.P. Morgan, the largest U.S. bank in stock-market value.
The move also suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process. The bundling of loans into securities that are then sold to investors further complicates matters.
Nationwide, 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, about triple the usual rate, according to Moody's Economy.com, a research firm. Some 4.3 million of those are expected to lose their homes.
J.P. Morgan unveiled the plan days after receiving $25 billion in federal capital from the Treasury's program to shore up financial institutions and get credit flowing. Mr. Scharf declined to comment on whether the bank would use any of those funds for the mortgage overhaul. "The stronger you are, the more willing you are to spend money and do a whole series of things," he said, noting that the government cash "certainly makes decisions easier."
Of the two loan-modification pools at rival Bank of America, one targets 265,000 borrowers with all types of mortgages. The other was hashed out with 14 state attorneys generals and involves 400,000 subprime and option-ARM customers serviced by the big lender Countrywide Financial Corp., which Bank of America purchased July 1."
I think this is a disaster in the making as I said yesterday, but it may be the only move that the banks have left. One problem I see here is these loan modifications are only going to be able to be done by the banks that received money from the housing bailout. Notice that these programs weren't announced until the big banks got $25 billion apiece via capital injections from the Treasury.
This is where I see another big problem. The banks that didn't receive the money from the TARP aren't going to be able to afford to offer such a modification program. As these 7.3 million homes continue to get foreclosed on, the inability to modify will be the final nail in the coffin IMO for hundreds of banks that don't have access to the capital injections from the housing bailout.
Essentially folks, this article tells you the taxpayer are the ones paying for these modifications. The taxpayer now gets a chance to be bent over by greedy homebuyers. Are there any other ways that we can get screwed? I guess living within your means is turning out to be the wrong way to live. It appears committing fraud and lying about your income so you can qualify for a mortgage that you can't afford was the "right" thing to do in this twisted society.
Notice how JP Morgan had "no comment" when asked if the money they received from the TARP was going to be used for loan modifications. It doesn't take a brain scientist to read in between the lines on that answer. Remember these firms are all nearly insolvent. There is no way they could have done this without the government capital injections.
As I said yesterday, expect millions of homeowners that don't get modified to stop paying their mortgages. Taxpayers are going to get infuriated when this plan begins to be implemented. Wait until word gets out in a neighborhood that a neighbor's loan was modified by 100k which in turn drops the value of their own home by six digits. The guy who got modified better put a padlock on his door and buy a gun. God only knows what he might find on his lawn the next day!
This isn't going to end pretty folks. This could be the trigger that blows up the financial system. This is going to absolutely destroy the banks balance sheet. I predict you will see another massive injection of liquidity into the banks as more and more homebuyers walk away. This will put our government even deeper in debt as they continue to keep the banks alive. MBS debt will almost immediatly become almost worthless.
Perhaps this is why the cost buying a credit default swap(CDS) on the 10-year treasury has gone through the roof:
Think about this for a second folks. The cost to insure a piece of US government debt from defaulting via a CDS has risen 4 fold to 42 basis points in one year! Why would anyone pay to insure this? If this debt ever defaults the game is over because it means our government has defaulted on itself.
The soaring spreads tells you that Wall St increasingly thinks that a government default is a distinct possibility.