Too Many Holes, Too Few Fingers

I think Bernanke, Paulson and Bair are to the point where they are kicking their shoes off so they can use toes to plug some of the holes in the economy. They are apparently resisting attempts by the big three U.S. car manufacturers to plug that hole. Worked so well to let Lehman go under, why not the auto industry too! We can double our unemployment numbers over night. Just think how well the market will react if that happens. I do think they need to go bankrupt, but without government support any bankruptcy will convert to Chapter 7, which is not in our best interests. Chrysler even confessed that it looked at the Chapter 11 prepack route but it was not viable - likely due to an absence of DIP financing.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNUr0y4tunTM&refer=home

Singin' Those CMBS Blues . . .

Another hole that seems to be developing rather rapidly is commercial mortgage backed securities (CMBS). The housing lag started before the commercial real estate lag by several months. Commercial real estate, however, is now rather rapidly playing catch-up with problems of its own, be it hotels with low occupancy, office building with a shrinking tenant base, malls with stores liquidating or simply a pull back in construction. Calculated Risk covers the real estate side of things well and provides nice graphs to boot. This will simply add to the woes of financial companies.

http://calculatedrisk.blogspot.com/

And the Architexture Billings Index indicates that the future of commercial real estate is going to be quite painful for a while. It hit a record low last month from when it began in 1995. According to Calculated Risk, this indicator leads commercial construction by 9-12 months, i.e. this suggests commercial real estate construction will be significantly weaker next year than now, which will simply add further strain on CMBS. More pain ahead . . .

http://www.aia.org/ABI_Oct_08_111908

Good News Bad News

As is commonly the case, economic news is both good and bad, depends on how you look at it. Housing starts were at 791,000 in October, the lowest since records bagan in 1959. If you are a builder of homes, this is a bad thing (for now). But over the long run this moves us closer to the bottom as it will help to reduce the months of inventory. If you are trying to sell a home, this means less competition, which is a good thing. We still have a major oversupply of inventory, but a lot of that is due to foreclosures and foreclosure sales will help to bring prices down further, which is also a good thing (overall).

Again, the prices do need to fall further. I own a home and don't like it one bit, but the sooner we get housing stabilized the better. And we will not get it stabilized until prices revert to the mean, which they have not done yet. When they do, then all we have to worry about are the thousands of other holes in the levy.

http://www.census.gov/const/newresconst.pdf

Another good news bad news point is the record drop in the consumer price index (CPI) last month. Down a full 1%, the most ever in a single month. For consumers, this is good news (to a certain extent). We have more spending power, assuming our wages stay the same. For the companies selling the goods, perhaps not so good as they "may" have thinner margins due to price drops. I say "may," as a lot of this comes from continuing drops in fuel and commodities. Lower fuel prices helps most businesses and lower commodititis helps manufacturers to make things more cheaply. Fuel and commodity producers are taking it on the chin, but they had one hell of a great summer, so time to share the pain a bit.

But wait, there is a bad news aspect of this CPI drop that we need to discuss; this signals what some economists have been fearing - deflation. Why is deflation a bad thing? I will allow someone else to explain:

http://www.google.com/hostednews/ap/article/ALeqM5iYwB5yO5SxYP2KXGaD8TzRYofP8wD94HHQI00

But as we often see, nothing in economics is ever truly just a good or bad thing:

http://economics.about.com/cs/inflation/a/deflation_2.htm

What if they stop buying Treasuries?

I raised this prospect before and will undoubtedly need to again; we are dependent on the good graces of foreign countries to buy our Treasuries and fund our deficit spending. Next year will be especially telling as our deficit spending will shatter records. Last year foreign governments and central banks bought, I believe, around 40% of the Treasuries sold. But some of these countries, like Japan and China, have their own problems to worry about. And they see U.S. Treasuries as increasingly a bad investment, especially when we are buying far fewer of their goods than before. At a minimum, if they expect the dollar to devalue in the future, and most do, then why buy Treasuries now in U.S. dollars only to be paid back later in devalued U.S. dollars?

http://www.nakedcapitalism.com/2008/11/japanese-float-idea-of-treasury-selling.html

Remember last month when California sold bonds to help pay off its debt. It ran a fairly large advertising campaign aimed at getting citizens to buy the bonds, and it worked. I suspect in addition to Obama Bonds, noted in the article above, the U.S. might need to do a bit of advertising itself. Despite the economy, there are a lot of people with capital to invest and who would like to support our efforts at avoiding a melt down. Moreover, U.S. investors are not impacted by the devalued dollar issue as there is no currency exchange needed. Either we are going to be support the government through buying bonds or support the government with a tax increase. Let's see, low yielding fairly safe investment versus paying more taxes, which do I prefer?

That Bear Seems Awfully Hungry

Another bad day in the market. You can attribute it to the car manufacturers on the ropes or the CPI number dropping a record amount or record low housing starts or poor commercial real estate numbers or any of the dozens of other bad news items out today, but I link it to Paulson. He said that the U.S. has "turned a corner" in averting financial collapse. Given his track record on the economy and predicting how well we are doing, this is equivalent to an automatic sell trigger. I would not be surprised if some brokers have such triggers built into their computer systems. Paulson seems rosy today, sell, sell, sell!! For some of his rosy predictions, I refer you to Financial Armageddon, where yesterday Michael Panzner provided a few.

http://www.financialarmageddon.com/

Anyhoot, the S&P is closing in on being down 50% from its high mark. One more day like today and it will be there, so we could make it there tomorrow (hope not). This puts us squarely in keeping with other crashes, like the oil related crash of 1973 and the dot com crash 2002. If it breaks the 50% drop mark, it will be worse than these other two crashes for the S&P. Today it closed at its lowest level since 1997. Still well off from the Great Depression crash, but not far enough to give me much comfort.

"Strong and Stable"

Remember way back when - I believe last week - that Pandit at Citibank said they were strong and stable? If you call you stock price reaching a 13 year low strong and stable, then I guess you define these words a bit differently than I do. Could be worse, however, as GM's stock price hit its lowest since 1942. Of course, for GM, the stock price is not their biggest issue at the moment. There's that brink of bankruptcy thingy staring them in the face.