Friday, July 30, 2010

Economists project slower second-half growth

Many economists have lowered their expectations of GDP growth in the second half of the year due to slow job creation, a rocky housing market and sluggish retail sales. Today the government will release its report on output figures for the second quarter, and many economists predict an annualized gain of 2.6%, a dip from 2.7% in the first quarter and 5.6% in the fourth quarter of last year. The New York Times (free registration) (7/29)
Click heading for full story

Foreclosure activity up across most US metro areas

Households across a majority of large U.S. cities received more foreclosure warnings in the first six months of this year than in the first half of 2009, new data shows. The trend is the latest sign that the nation's foreclosure crisis is worsening as homeowners battling high unemployment, slow job growth and an uneven rebound in home prices continue to fall behind on their mortgage payments.
As I've said since the beginning of 2007 call me in 2013 and we'll talk about the bottom of the U.S. real estate market.

Click on heading for link to full story

Cities threaten to cut 500,000 jobs

NEW YORK ( -- Cash-strapped cities and counties have been cutting jobs to cope with massive budget shortfalls -- and that tally could edge up to nearly 500,000 if Congress doesn't step up to help.

Local governments are looking to eliminate 8.6% of their total full-time equivalent positions by 2012, according to a new survey released Tuesday by the National League of Cities, the National Association of Counties and United States Conference of Mayors
Click on heading for full story-- quite scary

Italy escapes a fiscal crisis despite its enormous debt

European policymakers are wondering whether they can learn something from the way Italy managed its public finances during the economic downturn, according to Der Spiegel. Italy's sovereign debt is 115.8% of gross domestic product, the highest in Europe, but the country was largely untouched by the euro zone's debt crisis. Italy has not bailed out banks, experienced a housing bubble or dealt with a bloated construction industry, Der Spiegel notes.
Der Spiegel

IMF: Reform law fails to simplify the complex U.S. regulatory system

The U.S. law to overhaul financial regulation leaves the fate of mortgage giants Fannie Mae and Freddie Mac undecided and does not simplify the complicated system that governs securities and banking, the International Monetary Fund said. How the law is implemented will determine whether it accomplishes its objectives, the IMF said. The New York Times. Ha, at last someone noticed this and we haven't even begun the myriad of studies that have to be done as part of this.

U.S. GDP Growth Slowed to 2.4% in Second Quarter

The U.S. economy slowed in the second quarter of this year and the government said the recession was deeper than earlier believed, adding to concerns over the recovery's strength. U.S. gross domestic product rose at an annualized seasonally adjusted rate of 2.4% in April to June. In its first estimate of the economy's benchmark indicator, the government report showed growth was lifted by business investments and exports. Consumer spending made a smaller contribution to growth.

In the first quarter, the economy grew by 3.7%, revised up from an originally reported 2.7% increase. But growth estimates all the way back to the start of 2007 were revised lower.

Thursday, July 29, 2010

U.S. banks are already finding regulatory loopholes

Bank analysts who worried that regulatory reform would cripple the U.S. financial sector have relaxed, after they looked over the law and saw opportunities to get around the rules, industry experts said. Dick Bove, a banking analyst at Rochdale Securities, said it won't take long for executives to show that they know more about how the financial system works than politicians who wrote the law. CNBC
Totally agree with that last sentence.

Credit card users benefit from those who pay with cash

The Federal Reserve Bank of Boston discovered in a recent analysis of credit card fees in the U.S. that they amount to a huge transfer of wealth from low-income to high-income households, accomplished through rewards given to big-spending cardholders. On top of that, merchants increase their prices to pay an interchange fee of 1% to 2% but don't compensate consumers who pay with cash. "As a result, cash customers are subsidising credit-card users," The Economist notes. "And because credit-card users tend to be richer, the transfer of wealth is regressive." The Economist
Pretty interesting stuff.

U.S. Needs To Articulate Credible Fiscal Consolidation Plan - Moody's:

U.S. government needs to articulate clearly a credible plan to tackle its bulging debt profile in order to keep its triple-A credit rating, Moody's Investors Service's lead sovereign analyst for the country said Thursday. The comments indicate
Moody's views on the U.S. have changed little since the ratings agency warned in March on the need for action, and hints a sense of urgency is required from the U.S. government to deal with its rising borrowing needs and interest costs. Dow Jones A sense of urgency?! Give me a break, they have the patience of Job. It is an outrage that the outlook for US is not negative in my opinion.

Tuesday, July 27, 2010

New York Banks compete for New Yorkers seeking jumbo mortgages

New York consumers interested in jumbo mortgages were recently being turned away by most large banks, but that trend has reversed this summer. Banks have been developing new products and offering attractive options for borrowers seeking jumbos, which are home loans too big to receive a guarantee from Fannie Mae, Freddie Mac or the Federal Housing Administration. The Wall Street Journal

Rating agencies' move reveals their Achilles' heel

Columnist Dennis K. Berman explains how a recent power play by the major credit rating agencies revealed their weakness. After the Dodd-Frank act passed, the agencies refused to let issuers use their credit ratings, which are legal requirements in the world of asset-backed securities. The move brought the market to a halt. "Yet what looks like a demonstration of political and market power is anything but," Berman writes. "In fact, it speaks to the raters' own weakness that their greatest leverage comes after an inconvenient, if unintended, short-circuiting of the bond markets." The Wall Street Journal

 Low interest rates start to hit profits at large banks

The Federal Reserve's monetary policy of maintaining low interest rates for an extended period has helped boost earnings at banks such as JPMorgan Chase and Bank of America. However, the policy is starting to make it more difficult for the major lenders to generate profit. "That's the gift from the Fed," Christopher Whalen, co-founder of Institutional Risk Analytics, said of the interest rate. "But at the same time, the cash flow on your assets eventually starts to re-price and match the low-rate environment. The zero-rate environment is eventually bad for everybody." Bloomberg

Can GE survive much longer?

Jeff Immelt at GE just surprised the Markets with "better than expected" results. Is it all flim-flam? Porter Stansberry thinks so and his comments are below...

GE surprised Mr. Market late last week. Now... Mr. Market has the wisdom of a four-year old hopped up on cotton candy, so surprising him is about as difficult as replacing a light bulb. We offer you a more substantial (and sober) review of GE's earnings, below.

Here's a preview: We are less than impressed. In fact, we view the whole charade as sad and tawdry. It's flimflam on a grand scale, from no less than what used to be America's greatest corporation...

Let's begin with the much-ballyhooed dividend increase. GE says it will now pay out $0.12 per share every quarter instead of $0.10. While it is true that $0.12 is 20% more than $0.10, we doubt this arithmetic is very meaningful to bona-fide shareholders, who were collecting a quarterly $0.31 per share until early 2009.

The last time GE shareholders saw regular dividends around $0.12 per quarter was last century – 1999 to be specific. So, while you may regard this dividend increase as a significant step in the right direction, you might also see this extremely low payout level as the result of a "lost decade" at GE.

No matter how you view the news – as an exciting surprise or as a disheartening reality – there is one objective way to measure the dividend: by the yield it will produce for shareholders. Assuming GE continues to pay investors $0.12 per quarter, and assuming you buy the stock today for $16 (where it's trading now), you will earn a grand total of 3% per year on your capital.

GE's managers also want you to know its earnings were up last quarter – by 15%, to $3.3 billion. The results are so good, the company has promised to "extend" its share buyback program.

We've never seen that term used this way before. GE's managers clearly believe it's good news for shareholders. But what it really means is the company never bought the stock it promised to buy back previously. So the deadline for purchasing the stock had to be "extended." Imagine if your employer told you, "Great news, Bob, the company made more money than we thought it would, so we're going to extend your bonus payment – the one we didn't send you last year – to 2015."

Oh... one more thing. It's true that GE's reported earnings increased. But what the managers didn't mention was the company accomplished the increase despite a 4.3% decline in revenues. As any pizza chef can tell you, skimping on ingredients will only carry you for so long. Sooner or later, you gotta actually make more dough.

Finally... here's what GE CEO Jeffrey Immelt definitely didn't mention along with the promised 3% dividend and the "extended" buyback program: negative amortization mortgages.

When you think of GE, you probably think of its slogan: We Bring Good Things to Life. What GE actually does, however, is run a huge, highly leveraged global hedge fund that's almost totally unregulated. And the upcoming losses from this enormous financial operation will almost surely overwhelm the company's ability to finance its matching debtload. Let's run down the real numbers...

GE Capital has nearly $600 billion in assets. That's roughly 75% of all of GE's assets. When we say GE is really a giant, unregulated, global hedge fund, that's what we mean: Three-quarters of its assets are committed to the hedge fund, which it calls "GE Capital."

GE Capital does what most banks do... It borrows a ton of other people's money, invests it in ridiculously risky projects, and pays out bonuses to its managers, who retire before anyone realizes how much money they've lost.

GE Capital's nearly $600 billion in assets include $333 billion in receivables (think credit cards, car loans, and mortgages), $53 billion in property (think commercial real estate), and $81 billion in "other." We have no idea what "other" represents and would challenge anyone outside the company to explain it to us, as GE Capital's reporting is entirely indecipherable. Here's a good example... In one of its dozens of summary pages regarding its real estate investments, you will find this footnote: "Includes real estate investments related to Real Estate only."

We've never found a company that couldn't make its business easy to understand if it chose to do so. Warren Buffett, for example, runs a business that's similar in scale to GE. He writes the annual report personally, going over every key business unit in plain, clear English. GE's reporting is complex because it doesn't want you to know what's happened.

In any case... even assuming all $81 billion of "other" is money-good, we still believe the company is likely to declare bankruptcy because of investment losses within the next three years. Here's why: The company's total tangible net equity is only $40 billion. Thus, if GE were to lose 7% across all of its investments, its equity would be completely wiped out. In truth, whole book losses of even 2% or 3% would spook the capital markets enough that GE wouldn't be able to roll over its debts. And its near-term capital needs are massive: $227 billion comes due before the end of 2013.

We think its investment losses will total more than $50 billion over the next two to three years. Here's why...

GE Capital's total European exposure is $95 billion – that includes credit-card debt, auto loans, and mortgages. Any significant decline in the value of the euro would cause massive losses in these investments. And even if nothing bad happens to the euro currency (and we believe the euro must soon either be significantly devalued or significantly restructured), GE is still likely to lose an enormous amount of money on these loans. The reason why is buried in a footnote on page 21 of its second-quarter credit-quality report. It says:

"...At origination, we underwrite loans with an adjustable rate to the reset value. 81% of these loans are in our U.K. and France portfolios, which comprise mainly loans with interest-only payments and introductory below market rates..."

What that means is that GE Capital invested heavily in interest-only, variable-rate mortgages in the U.K. and France. Most of these loans haven't "reset" yet. And when they do, they have enormously high default rates.

Specifically, in the UK, 24.9% of GE's mortgages are more than 30 days delinquent. In Spain, almost 30% of GE's mortgages are 30 days or more delinquent. On average, of $50 billion in non-U.S. mortgages, more than 14% are delinquent. We estimate that at least 50% of these loans will end up defaulting.

According to Wells Fargo, defaults on these types of loans have been producing losses of between 60% and 70%. So... if you assume half of the mortgages default and you assume loss severity of 70%, GE should see losses on its non-U.S. mortgage portfolio of between $15 and $20 billion – not including losses on its $160 billion American mortgage portfolio... not including its commercial real estate losses... and not including its exposure to a euro currency crisis.

For taking on all of these risks, Immelt is offering you 3% a year. Plus a share buyback that's been "extended." Any takers?

Trichet Challenges Inflationism

The Financial Times published the following article by Jean-Claude Trichet (Head of the European Central Bank)..cut and paste the link into your browser to read the whole story.

Doug Noland at has dissected it for you 2/3 down in the article linkrd above and the crux of his analysis is:
"Washington – or the states – can’t spend its way to fiscal recovery. Instead, we’re witnessing a fiscal train wreck. Our policymakers, economists, and pundits should read Mr. Trichet carefully and contemplate a course other than inflationism."

Click on the heading above and READ the whole thing...and ponder deeply.

Obama signs a bill that lets banks have US over a barrel once more

Another from The Telegraph. The article states that... "Last week, President Obama signed into law the Dodd-Frank Wall Street Reform bill – hailed as the most sweeping overhaul of US financial regulation since the 1930s." But reporter Liam Halligan thinks otherwise... "Based on sound-thinking courageous judgment, the Glass-Steagall legislation was only 17 pages long. Packed with wheezes and loop-holes, Dodd-Frank runs to 2,319 pages. Enough said."

Urgent: Real Estate Recovery is a fairy tale;Why Are Banks Withholding High-End Repossessions Over $300,000 From the Market?

The recently touted "recovery" in real estate sales (see post below) is a dangerous myth. At some point soon the Real Estate market will implode; and with it the banks holding the mortages to high end (More than $300,000 in price) foreclosed houses.
Bank Withholding of High-End Foreclosures from the Market is Nationwide

The Data from RealtyTrac reveal a clear pattern on the part of banks to withhold most repossessed homes from the market and nearly all of those listed on RealtyTrac for more than $300,000. Is this occurring throughout the nation?

Will this bank strategy keep the market for homes over $300,000 from imploding? Not a chance.

For example: In Bergen County NJ, just across the GW Bridge, there are 615 already bank repossessed homes, according to RealtyTrac. 31 (5%) are on the market currently, but only 4 (less than 1%)are priced over $300,000!

This is a better example; look at the article linked above for much worse numbers.

Fannie Mae now requires an average down payment of 30% for securitized loans which it purchases or guarantees. According to Fitch Ratings, mortgage delinquencies for prime jumbo mortgages soared to 10.3% in May as underwater owners walked away in droves. That spells serious trouble for the five states which account for 2/3 of all outstanding jumbo loans - California, Florida, New Jersey, Virginia and New York. The problem goes well beyond these states, however. Housing markets throughout the United States for $300,000+ homes are in for rough sailing and prices are extremely likely to be headed for a real plunge.

Lessons from History:The Death of Paper Money

From Ambrose Evans-Pritchard of the Telegraph. Click on header for full story. A very interesting read.

As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.
Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.
People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.

As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.

Ford works with the SEC on a sale of bonds backed by auto loans

Politicians, in their naieve zeal to regulate, have forced a pre-birth exception to the new law that is likely to become permanent:

Ford Motor Credit delayed a sale of bonds backed by auto loans last week because of regulatory uncertainty caused by the financial overhaul. On Monday, Ford sold a billion-dollar bond by working with the Securities and Exchange Commission. Ford and
the SEC created a reprieve to a part of the law that holds credit rating agencies liable for ratings they issue. "Clearly, the SEC recognizes the importance of the public [asset-backed securities] markets, and we are glad the staff is taking temporary measures to ensure public markets continue to be available by establishing a transitional period through Jan. 24, 2011," a spokeswoman wrote.
The Wall Street Journal

The SEC realizes the importance of keeping credit markets open; laws written by lobbyists and political operatives with no actual experience of real life business operations are inevitably going to harm the economy. They will force "exceptions" until the reality of daily business makes a mockery of the law now administered by an increased burocracy at immense permanent additional expense to the taxpayer.

Regulatory reform will affect municipal and corporate bonds differently

The overhaul of financial regulation will affect corporate bonds and municipal bonds differently, partly because corporate bonds are registered securities. That difference is meaningful as market participants work to unravel the law and its
unintended consequences, according to CNBC.

Report: Chinese local governments probably will default on bank loans

China's banks loaned more than $1 trillion to provincial financing agencies to stimulate the economy, but many of the loans are expected to go into default, according to Century Weekly, citing information from the China Banking Regulatory Commission. Almost a quarter of the loans are at risk of going unpaid, according to the publication. Many of the borrowers are of "questionable credit quality," a Standard & Poor's analyst said.

U.S. new-home sales rebound, but builders are forced to slash prices

New-home sales increased 23.6% last month compared with May, topping economists' forecasts, but the sales level, 330,000, was the second-lowest since the government started tracking such data in 1963. Builders were forced to keep cutting prices to get those sales. The average selling price dropped to $242,900, the lowest for June since 2003.
The Christian Science Monitor

Analysis: Geithner and Bernanke differ on a tax issue

U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke have been in sync on most issues during the past three years, but recent comments from the officials suggest they are on opposite sides of a tax issue, according to The Wall Street Journal. Bernanke told lawmakers that he supports continuing tax rates that expire early next year.
Geithner, on the other hand, said those tax rates should be allowed to expire.
The Wall Street Journal