Pension Problems Royale!

Personally I have avoided reading much about pension problems as neither I nor my extended family are dependent on pensions. Nonetheless, the stress in this area of retirement savings is hard to ignore, especially with GM and Chrysler going through bankruptcy. I am just passing this on for those perhaps focused on pension issues. Good luck.

http://pensionpulse.blogspot.com/2009/07/jerseys-jitters-omen-for-public-plans.html

Like many economic pictures, not good.

Turtle Crossing?

An airport closed by turtles? Yes it is possible, apparenetly.

http://www.telegraph.co.uk/news/newstopics/howaboutthat/5782121/JFK-runway-shut-for-crossing-turtles-delaying-flights-for-over-an-hour.html

If a plane take-off can be disabled by birds I suppose a landing could be interrupted by turtles, perhaps. My wife once stopped her car to save a family of turtles crossing the road. As she cleared one cars came by and ran over the others, mostly hitting the edge of the shells and sending them off into the roadside. Imagine, turtle after turtle shooting off into the distance as my wife tries do pull them off the road. And that, folks, is one of the reasons I love her.

Good night. No disclosures here unless you are investing in a turtle farm.

Green Shoot Wilting Fast

Headlines at Bloomberg not looking too good today:



•Yen Rises to Five-Week High Versus Dollar as Recession Spurs Safety Demand
•S&P 500 Slumps to Lowest Level Since May 1 on Concerns Over Tech Spending
•Bank of Japan May Extend Emergency Lending as Companies Struggle to Borrow
•Japan Machinery Orders Unexpectedly Fall for Third Month as Profits Slide
•Rio Says Chinese Authorities Detain Four Employees From Shanghai Office



Now that is a rosy picture, ain't it. Don't blame me, I am just the messenger. And I have been delivering this story for much longer than I have had any desire to do so. I just have not seen the fundamentals improving and apparently now some others are not now either. We will see.



Next Time - Let Them Fail



I know certain individuals in government - like those who came from big financial institutions (Paulson) or that received big pay checks for work for them ( Summers) - believed it was essential to save the financially too-big-to-fail to the tune of trillions of dollars, but the leading reason (as I understood it) was to unfreeze credit. Well it seems to be a bit unfrozen at the moment. One problem, those that need it still cannot get it and those that can get it are trying to reduce, not increase, debt. Sudden Debt explains this well:



http://suddendebt.blogspot.com/2009/07/memo-to-fed-and-ecb-raise-rates.html



Sure, there are plenty of other reasons to save these institutions, but incresingly there seem to be some reasons to regret saving them. First there was the continuing bonuses, apparently paid for with taxpayer dollars. Now I read recently that some were getting around the bonus restrictions the government has been seeking to impose by simply increasing salaries, so this equally has me fuming. Second, dividends. I wrote to my Congresspeople over a year ago complaining about us supporting corporations still giving out dividends. I got the usual form letters explaining to me how these were difficult times and, implicitly, I did not understand what the heck I was saying. I still am complaining that taxpayers have been giving money to companies that pass it on to shareholders. Rule one, no bonuses or raises for officers or directors of companies receiving taxpayer support. Rule two, no freaking dividends to their shareholders. Period.



And if all this was not enough to get your dander up (not sure what that means) now those very institutions we enabled to survive are now unwilling to return the favor and help out those of us taxpayers in need. They have announced that they are unwilling to take California IOUs and pay out cash in return. Either they are telling us that they do not give a damn about the taxpayers that saved them or they are still in such desperate financial condition that they need to conserve every little cent. I cannot think they have any doubt that California (or the federal government on its behalf) will eventually pay the IOUs. I just view it as another sign that we saved the idiots that got us in this mess and they are shoving it in our faces. If this were not a family oriented blog I would not mince words so much. Mish tells it in better detail here:



http://globaleconomicanalysis.blogspot.com/2009/07/tell-wells-fargo-bank-of-america-jp.html



Foreclosure News Getting Worse, Not Better



As Calculated Risk reports, the divergence between completed foreclosures versus default is mounting as a result of government intervention. Now I must add this is a report from one market, San Diego, which does not mean a national trend. Yet, perhaps disturbing if this is a bit more wide-spread.



http://www.calculatedriskblog.com/2009/07/more-evidence-of-foreclosure-backlog.html



How Can Someone from Lehman Be So Smart?



The CEO of Lehman in charge of the wind-down, Bryan Marsal, had some interesting comments during a CNBC interview. Scary thing for me is that I agree with pretty much all he has to say. So why did they fail? He had this to say in the interview:

"One of my partners said yesterday that we are going to call this phase the "extend and pretend" phase in our economy. Which is you extend someone's maturity - because they are going to default - and you pretend that business will come back or that leverage factor is going to come back.Then we'll enter phase two, which he said is the request to extend or "amend".Then "send". In other words send the keys.That is the phases we are in right now. Everyone is trying to buy time, as opposed to dealing with the leverage, they are trying to buy time. Whether you are a banker or a company, they are all trying to buy time. I don't see the leverage coming back, and I don't see the consumption of good and services coming back.

Bryan Marsal, CEO of Lehman Brothers Holdings.

I will end here as I cannot say it any better. Government stimulus has been desperately trying to simply buy time for many, many companies. And time is running out.

Disclosures: None.

Where is the Market Going?

Where is the market going? Well traders seem to fear more to the downside than the up. At least they are paying more for protection against the former than the latter.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAIJo685vdz4

Now I cannot blame them. The market increase has been rather spectacular. Much more of a climb much sooner than most economic recoveries after a recession, and it was the worst recession since the Great Depression. Go figure. I know the market was down drastically in March, but for good reason. It is the massive run-up that has me scratching my head.

That Fiscal Thingy

There is little I can say that can add or better summarize what is said in this linked piece, though I have to say it has me a bit worried on where the market is going over the long term. I for one am giving serious thought to moving to another country. Seriously, I love the U.S., but if it is screwed fiscally for the rest of my life then, well, why would I waste the rest of my life dealing with the problems? The world is big and there are places not in our pitiful state. Nonetheless, this is where I seem to be stuck for now, so I am going to continue to focus on it (and keep my passport up to date).

The best you can say today is that the U.S. is skating on fiscal thin ice. How far can we go before our lenders cut us off? Are we going to devalue our own dollar to screw our lenders? Will health care years from now make this the end of days for the U.S.? All legitimate questions. No answers here as the jury is still out. Nonetheless, they all present reason for pause.

http://www.nakedcapitalism.com/2009/07/america-fiscal-train-wreck.html

Do other countries fear America could go as California. I doubt it, but when our a (formerly) financially vibrant state is about to go under, they cannot be happy that it is happening. Giving out IOUs and getting a credit downgrade next to junk is not a confidence builder. How can the most populous state and biggest economy state get a near junk rating? Not hard to answer the question. Better question, how did we let ourselves get here? Either way, this must be a positive for the long term market - not.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aFtGuPKB2uWE

http://www.calculatedriskblog.com/2009/07/s-increases-loss-estimates-for-alt-and.html

Seven More Down

I took the weekend off, so forgive me if this is old news. The FDIC closed seven banks on Thursday (usually Friday but that was a market holiday). now without doing a lot of research I believe this is the most closings in one week since the S&L crisis. Certainly the most for the past several years. Now that has to be a good sign for the market?

Founders Bank, Worth, IL Millennium State Bank of Texas, Dallas, TX The First National Bank of Danville, Danville, ILThe Elizabeth State Bank, Elizabeth, ILRock River Bank, Oregon, ILThe First State Bank of Winchester, Winchester, ILThe John Warner Bank, Clinton, IL

http://www.calculatedriskblog.com/2009/07/fdic-bank-failures-by-week.html

Here is Another Good Market Sign - Rising Foreclosures

I have reported here on real estate market conditions, both residential and commercial, on a regular basis. The commercial side is just getting started on its bad news and I reported on it last week, so let me focus on the residential side again. For one thing, option ARMs (those adjustable rate mortgages that give people options on how much to pay - even an option to pay LESS than the monthly interest) are peaking late this year and next. And, apparently, subprime losses have still not bottomed out.

http://www.calculatedriskblog.com/2009/07/s-increases-loss-estimates-for-alt-and.html

For another, prime and jumbo mortgage defaults are on the increase. These are high value mortgages that cause a lot of pain. For a third, homes are under water at record amounts so there is jingle mail. And for a fourth, unemployment is still mounting. So banks, including (by FDIC closures) local and regional banks, are in a world of hurt for months to come. Yep, that bodes well for the market.

http://www.calculatedriskblog.com/2009/07/la-times-another-wave-of-foreclosures.html

And as I mentioned last week, commercial real estate is not doing well, not well at all. There exists many billions in refinancing need in CRE and the credit simply is not there. Yep, that bodes well for the market.

http://www.calculatedriskblog.com/2009/07/dc-office-market-vacancies-increase.html

http://www.calculatedriskblog.com/2009/07/cre-half-off-sale-in-san-francisco-and.html

So after all these very positive market signs I have to admit that I am mostly on the sidelines in my investments. There is no clear direction. I truly believe the worst is not behind us but the markets have solidly punished my expectations for a few months. Either way, I look at fundamentals and simply shake my head. I do not see the 2 + 2 that supports the markets recent rise or it staying there (and yes I know it is a fair amount off its recent peak). Let me know if you think otherwise.

Disclosures: None.

Simple Math

I have been trying to explain this in many ways, so now let me bring it down to my own 2+2 level. Let's say I am a worker in the U.S. and have been making $50,000 a year for several years. Back in the 90s I had a house I could afford and I was saving some money. I saved more than I spent on debt. I was in positive territory. Sure, I had a mortgage and credit cards but I was making my payments and keeping my head above water.

Now comes 2002 and forward. I am still making the same pay but my home seems to be going up in value and I am wanting something more than I have had in my life. So, due to the booming real estate market I have sold the old home for a nice profit and bought a nice new home for $500K, with next to nothing down. Not bad for a guy making $50K a year.

And now it is 2005 and my new home is still going up in value, so I take out a second mortgage to help pay the first and buy a car. This is great! And then, the bottom falls out in 2007.

Think about it. I now cannot afford to pay my mortgage, much less the second mortgage or the credit cards I have run up. Many people in my position are losing their jobs. My house's value is now toast and I could not afford it to begin with.

Thank goodness, the end is in sight; we have fiscal stimulus from the government and the banks are being saved. Everything is honky dory. If only I had a job.

Repeat story several million fold and we are done.

Disclosures: None

DEBT, DEBT AND MORE DEBT- GET USED TO NEGATIVE NEWS!!

It is almost comical that the headlines today are virtually the opposite of yesterday. I wish I had copied and pasted the Bloomberg headlines yesterday when the markets were up, but here they are right now:

•Asian Stocks Slump on U.S., Europe Unemployment, 7-11 Earnings; BHP Slides
•Yen, Dollar Advance Versus Euro as Stock Losses Increase Demand for Safety
•China's Zeng Peiyan Urges More Supervision of Reserve-Currency Countries
•Treasury Said to Start Distressed-Debt Program With $20 Billion of Funds
•Australia Facing `Full Brunt' of Global Recession as Exports, Lending Drop
•Lehman Minibond Offer Made by Hong Kong Banks After Outcry, Sing Tao Says
•Mukherjee May Increase Spending on the Poor in Indian Government's Budget
•Obama Calls Jobs Data `Sobering News,' Says More Time Needed for Recovery

Not exactly positive. Yet I have to say it is exactly the opposite of the way the headlines read just yesterday. Oh what one unexpectedly negative jobs report can do. Don't ask me if it was unexpected by me. The occassional positive news is what has me off guard.

Seriously, until our debt load decreases drastically, on an individual, government and corporate level, I see no real recovery in place. And our debt load right now could take a decade or more - optimistically - to get back to normal, i.e. sustainable. I am amazed at how everyone seems to be willing to ignore our still record debt levels. HELLO!! This bubble was built on debt. With unemployment obviously on the rise how in the hell is debt at any level (as a percent of GDP) coming down. Sure government stimulus spending can counter it a bit, which explains most the positive headlines the past few months, but at the end of the day we still have to address and reduce the debt. And I might add the government stimulus is adding to our debt, not reducing it. Whether you like it or not, reducing debt will be very a long slow process despite what the government does. I personally do not see any sustained economic rebound until the debt levels are seriously reduced. Debt spending by the government could cause temporary rebounds up to a year or two but we will, IMO, slip right back, in no small part due to government debt not effective in replacing personal or corporate debt - it is still debt. You have to address the fundamentals and we are not.

The Unemployment Surprise

I highly, highly recommend going to the Calculate Risk link below. It has a picture of an office of the National Assocition of Home Builders in D.C. trying to sublease some of their space. Telling, very telling. But the real significance of the post is that unemployment is now the second worst since WWII. And the link has numerous significant links on unemployment, bank failures (apparently there were 7 last week and not the 5 I reported), personal bankruptcy filings up 40% YOY, and other not so positive data. Get used to it. I have to say, I suspect the rate of bank failures will be picking up significantly as this year progresses.

http://www.calculatedriskblog.com/2009/07/another-involuntary-landlord-and.html

Government 125% FHFA Refinancing into Trouble

Undoubtedly the legislators thought the FHFA refinancing of up to 125% LTV was a good idea to help homeowners in trouble out. And undoubtedly it was pushed by some lobbiest or politician backed by some banks. As it turns out, in many instances this program helps the banks and screws the homeowners. For example, many in California may be trading a non-recourse loan (i.e. you can walk away and they cannot come after you) for a recourse loan and the banks make out quite well. Not exactly a nice deal for a homeowner obviously under water. Perhaps jingle mail is the better alternative to the government's latest plan. I want to know who sponsored this crap. They should be voted out of office.

http://www.nakedcapitalism.com/2009/07/is-new-affordable-fhfa-loan-program.html

http://www.nakedcapitalism.com/2009/07/freddie-fannie-to-provide-125-ltv.html

This is not humorous. There are people who will unwittingly use this program and screw themselves. They will tie their lives to homes that could take a decade or more to recover in price. And this is what the government considers to be help for mortgage holders. This is really getting me upset. The government is not only mortgaging my children's future through all the stimulus, TARP and other alphabet soup programs but now it is screwing us with programs that mask themselves as benefiting those under water. We need some outrage here!!! Let me repeat, the government is selling our childrens' and grandchildrens' future (SIGNIFICANTLY) and it is doing nothing to cure the problem in the long run. Again, I am outraged!!! Come on people, get with the program and see what is happening. I am seriously concerned on the future for my children. Are you?

Disclosures: None.

CRE and Autos

Let me start with car manufacturers. Though I think this economy - due to excessive debt levels - will be in a funk for years to come, at some point people need to buy a new car. There is just so long keeping the old one where maintenance is not too expensive before you have to move up and there are just so many late model used cars out there. A local dealership is advertising for late model used autos, even if you are not buying a new car from them, so I have to assume folks with older vehicles that are too expensive to maintain are looking for more recent vintage used vehicles because they cannot afford new ones. This will push buyers up the list eventually to buying new vehicles. There are an increasingly small number of used cars to go around.

Think about it, as Calculated Risk points out, we have twice the drivers we did in 1967 but sales of new autos are the same or less than then. Obviously this cannot continue for long.

http://www.calculatedriskblog.com/2009/07/graphs-auto-sales-in-june.html

Now I have to add that Chrysler and GM filing bankruptcy is complicating the picture a bit in terms of investment. One might think the survivors are better off but Chrysler and GM shedding some obligations in bankruptcy might make them much more competitive. Either way, a lot of their suppliers - which supply (for the most part) multiple manufacturers - will make this quite complicated to figure out.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYTT6_1EB3Yw

Nonetheless, an area to watch. Certainly there will be some winners here so it may be wise to spread the investment across the board. I have no investments here at the moment but am giving it serious thought.

CRE is Next

Commercial real estate (CRE) values - and mortgage defaults - tend to lag the residential market by up to a year. I mentioned the other day that the U.S. has twice the retail space of the closest competing country, well it appears on hotel space we are even worse. Go figure!

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYTT6_1EB3Yw

The CRE defaults, which are very significant, will likely not peak until next year. And as the linked post above notes, CRE has a long way to bottom. Not a good picture.

Disclosures: None

Buying the Farm

Let me begin with a full disclosure. I own a few hundred dollars worth of Valcent Technologies stock (it used to be much more valuable). With that out of the way, let's talk about buying the farm.

With a lot of Americans (and non-Americans) out of a job, consider farming. The world population is still growing at a realtively good clip, farm land has not been expanding, farmers (at least in the U.S.) seem to be retiring and in short supply, and in the U.S. it promises to be a key export for years to come, especially as our dollar gets trashed. Just a thought.

Now I say this not because I have a few hundred in Valcent stock. I originally bought it because it is into using algae as an alternative fuel stock - something I still believe is a leading contender for the future. And Valcent has a promising, yet still in development, technology for growing algae. Admittedly, the technology seemed more promising when gas was $4 a gallon, but we will return there eventually.

What excites me more about the stock now is their verticle growing system. It is expensive on a square foot basis, but if their claims on using significantly less water, having no nutrient runoff to the oceans and growth rates prove accurate, this is an excellent product. I happen to be in New Hampshire where we got six inches of rain in June but in places like Australia where they have drought conditions, a system that uses a fifth of the water is vital. Again, I own a few hundred dollars of the stock, so I do stand to make some (not) significant dollars if the stock goes up. It would have to go up many fold to get back to where I bought it on the algae bet (which could still come through with Obama). You never know, but one thing is for sure (beyond taxes and death) - people need to eat!!

By the way, here is a nice piece by Graham Summers at Seeking Alpha providing a good bit more detail on the food and farming issues we face. Judging by the comments, it is quite a contentious issue, but again, we all have to eat. Who can contend with that?

http://seekingalpha.com/article/144675-the-real-crisis-is-food-beginning-of-the-bull-for-agriculture?source=email

Tough week so I will say goodnight with this.