Call Me Crazy . . .

but I think the proposal Ford made to Congress sounded quite reasonable. It is a loan for $9 billion that is there simply as a backstop should they need it. They are ending bonuses for now and selling five corporate jets. They are looking at ways to raise capital on their own, including a possible sale of Volvo. They are giving taxpayers stock warrants to protect the loan being repaid, if they tap into it. They are closing down dealerships and shrinking, and they are renegotiating with the UAW. The kinds of logical things you would expect for a company on the ropes. When you compare this to the boondoggle we got with the TARP, it makes you sick.

Seriously folks, this country has way too much of its GDP tied to consumer spending and not enough tied to things like manufacturing and export. Preserving major corporations that employ hundreds of thousands of American jobs is a good thing, especially when done right. I think the loan package for Ford is a bit of a no brainer. Congress might have a bit more difficulty with GM and Chrysler, as they are more desperate for immediate cash and GM, especially, is going to be needing big bucks. It is asking for $18 billion, but will likely need more.

GM is going to need all the help it can get. It just reported November sales down 41%. Ford sales were down 31% and Toyota 33%. Kinda like driving your car (company) into a brick wall.

http://calculatedrisk.blogspot.com/

In the interest of full disclosure, my grandfather used to work for Ford and my dad is a Detroit Tigers fan.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJQrO7TRuSjU&refer=home

It's A New World

I was thinking about this point this morning and then saw a Bloomberg note on it. Bill Gross at Pimco noted on his company's web site that equity investors should not expect stock valuations in the future to match what they looked like before the present recession. He gives various reasons, including less use of leverage, less appetite for risk, greater government regulation and higher taxes.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRr7ODbkNOQY&refer=home

I agree with his point but have another reason for my view, which I think is the most important to consider; the American consumer is under water. I've said it before and will again, the American consumer was at record debt levels in 2007 and until that corrects there will be no sustainable recovery.

http://captaincapitalism.blogspot.com/2007/09/household-debt-as-percent-of-gdp.html

And this is not limited to the US. Europe also has high consumer debt levels.

Yet even when we do get individuals to deleverage to an appropriate level, the economy is not returning to the pre-recession levels because those levels were inflated by the very debt that got us into trouble. Lax lending standards are not returning any time soon, so consumers here and abroad will have to learn to live within their means and probably have to increase savings to boot. We are in an economy that is over two thirds dependent on consumer spending for its GDP. That is a staggering amount. Like it or not, corporate America is not returning to the profit levels seen over the past few years for a very long time. Those levels were an illusion.

This is not to say that stocks will languish at their current lows forever. There are some nice valuations out there right now. I'm just saying that if X stock traded at $100 a share before the recession and it is now down to $40 a share, don't expect it to bounce back to $100 a share once the recession is done. Select stocks undoubtedly will return to pre-recession levels (especially those that are well capitalized and able to take advantage of this downturn by buying up other companies or assets on the cheap) but overall I don't think so. The economy was in hyper-drive before and now needs to assume a more reasoned pace. A pace that will lead to more reasoned valuations. This is a good thing.

Housing Is About to Bottom!! Not!!

I would love to tell you we have hit bottom in housing, but doing so would require me to ignore some key points. Point one is that unemployment is increasing. We have lost over 1.2 million jobs this year and the number is still rising. People without jobs cannot buy houses. People without jobs cannot pay their mortgages. People without jobs lose their houses, which then get sold in foreclosure at heavily discounted prices, which drives down real estate. It will be hard for real estate to recover with unemployment on the rise.

Point two, credit is still tight. Without Fannie and Freddie it would be pretty much non-existent. It is hard to sell a house when it is hard for the buyer to get credit.

Point three, prices are still high in relation to median income. We have come a long way toward reverting to mean, but not there just yet. And we will likely overshoot the mean, which is not uncommon in a correction.

Point four, a lot of people are underwater on their mortgages. Even if they can continue to make the payment, they may very well be in a situation where they cannot sell their house because there would be too much debt to cover. If you cannot sell the house you are in, you cannot go out and buy a new one. The immobility of millions of homeowners being underwater will have some impact on sales.

Point five, there are a lot of ARMs that will be resetting next year, which will lead to more foreclosures, which leads to more inventory on the market and reduced prices. Indeed, TransUnion, the credit reporting agency, studied its database of 27 million consumer records and estimates that delinquent mortgages will DOUBLE by the end of next year. Yes, you read that right. If they are right, time to "hunker down" for a long one.

Of course there is the old "location" thingy. Undobtedly certain parts of the country will bottom before others, but I think we have a ways to go before you can call a bottom anywhere.

http://online.wsj.com/article/SB122818894948271631.html

China - Bad and Getting Worse

We are not the only country with real estate problems. China is having a hard time of it lately and is bound to see worse before it is over. They have some money to deal with it, but it is not likely to be enough.

http://www.nakedcapitalism.com/2008/12/real-estate-woes-increase-depth-of.html

Recession - What Inning Are We In?

According to the NBER, the recession started a year ago, but that tells us very little about how far along we are at this point. Sure, you can look at the average length of recessions and say we should be done or nearly there, but tell that to someone who lived during the depression. I think you can guess where I am on this. Let's just say I have yet to buy my hot dog and beer. Others think we are early on as well. Based on housing, discussed above, I think they might be right, but you never know.

Junk Yards Are Going To Be Busy

Not much explanation needed here. 50% of U.S. companies have below investment grade credit ratings. The junk continues to get worse. And in case you are dense, this guy tells it to you in two languages.

http://immobilienblasen.blogspot.com/2008/11/number-of-day-percentage-of-us.html