I have predicted a significant number of bank failures this year, which hardly took a crystal ball. Well, we are three weeks into the year and we have failure number three.
http://www.calculatedriskblog.com/2009/01/2009-bank-failure-3-1st-centennial-bank.html
Expect more. Local and regional banks are more heavily loaded with commercial real estate and small business loans. Lest you have not read about this, the CRE downturn followed the residential real estate downturn by over a year, but it is catching up. 2009 will likely be a terrible year for commercial real estate, if architect billings are any sign - and they usually are a good leading indicator. Billings by architects remain near record lows and they usually lead CRE construction by a year or more. Now the Obama infrastructure plan could kick start some idled projects, so it is difficult to read where things are heading, but I do expect that local and regional banks are in for a very tough year.
U.K. - Another Iceland?
I wrote briefly on this topic Wednesday, so it is worth noting an article by Nouriel Roubini on the topic. Nouriel does not think the U.K. is in as quite as bad shape as Iceland. Frankly, it would be very hard for a country as big as the U.K. to have banks big enough to get it into the same problem. Yes, RBS and Barclays are significant problems for the U.K. but they are not really comparable to the magnitude of the problem in Iceland. Unlike, Roubini, however, I do think things in the U.K. right now are looking a good bit worse than the U.S. and things are not quite rosy here.
http://www.calculatedriskblog.com/2009/01/roubini-uk-is-not-iceland.html
Disclosures: None
Saturday, January 24, 2009
Friday, January 23, 2009
Housing Bottom in Sight - Not.
So what happens if banks do a lot of foreclosures and hold off on putting a lot of them on the market, for one reason or another? It means a housing bottom is postponed, perhaps for a long time. I was truly dissapointed to see that perhaps as many as two-thirds of the foreclosures - at least in certain markets - are still not in the "for sale" ranks.
http://money.cnn.com/2009/01/21/real_estate/ghost_inventory/index.htm?postversion=2009012314
Now this may be geograhically oriented, but it is still problematic. Geographically oriented or not, the fact that a significant percentage of foreclosures are still off the market is staggering.
Think about it. We have probably hundreds of thousands of houses stilll off the market that need to be sold. Even if housing recovers, this will provide a big hangover for many months to come and could complicate any housing recovery. I am still sticking by my earlier predicitions but I am leaning a bit more toward 2011 for a real estate recovery. Too much to deal with here between ARM resets, increasing unemployment, underwater homeowners and now "ghost" inventory.
Disclosures: None
http://money.cnn.com/2009/01/21/real_estate/ghost_inventory/index.htm?postversion=2009012314
Now this may be geograhically oriented, but it is still problematic. Geographically oriented or not, the fact that a significant percentage of foreclosures are still off the market is staggering.
Think about it. We have probably hundreds of thousands of houses stilll off the market that need to be sold. Even if housing recovers, this will provide a big hangover for many months to come and could complicate any housing recovery. I am still sticking by my earlier predicitions but I am leaning a bit more toward 2011 for a real estate recovery. Too much to deal with here between ARM resets, increasing unemployment, underwater homeowners and now "ghost" inventory.
Disclosures: None
GDP - Apples and Oranges
I did a post yesterday on how the fourth quarter GDP growth rate in China, at 6.8%, could be misleading as it is based on a different way of computing GDP than used here in the U.S. Nouriel Roubini noted that computing it our way, which I explained yesterday, results in virtually a 0% GDP. I then concluded they are near recession, in our common definition of same, and are no where close to the 8% GDP growth they feel they need. Since then others have commented that the needed growth varies and is from 6-8% and someone with more experience noted that 8% seems to be almost gospel there in China, so let's go with 8%.
After reading some comments and thinking about it further, I realized my post is not only confusing, but possibly in error, so let me clarify. One point I realized is that China needs 8% growth in GDP probably in the way that China calculates GDP. Accordingly, for an apples-to-apples comparison, you need to compare a fourth quarter GDP of 6.8% to the goal of 8%. It is bad but not as bad as I noted, and their full year GDP growth was 9%, over the goal. Accordingly, in the way they compute growth, things are not as bad, but they are noticeably getting worse. Note, however, that the way they compute quarterly growth accounts for four quarters, so an annual rate of 9% and a fourth quarter rate of 6.8% suggests their rate of growth is falling off a cliff.
And the way China and the U.S. calculate GDP are not the only ways. Great Britain does it in yet a different way. Again, if you adjusted their method, which yielded a decrease in GDP in the fourth quarter of 1.5% in the U.K., you could read that as an annual rate of decrease of 6%. This is all explained much better in this piece by Calculated Risk, which focuses more on the fact that Britain is now officially in a recession - by their standard, not necessarily ours. Confused yet?
http://www.calculatedriskblog.com/2009/01/britain-officially-in-recession.html
All this is not to say that one country's way of figuring GDPgrowth is necessarily better than any other country's way of doing it. Each has its pros and cons. Some are more sensitive to recent changes, which can be a good thing or bad thing, depending on whether recent changes reflect a one time impact or a longer term trend change. I think that Roubini's point on China's GDP being close to zero was based more on the idea that in our current economic environment the U.S. way of calculating GDP is more accurate or realistic. The China method tends to mask how dramatic their drop was in that last few months of the year. This does not necessarily mean it is more accurate or realistic in other economic environments, but in this environment do not expect a fourth quarter growth rate of 6.8% in China to reflect their true pain at the moment. Anyone understanding this better than me should feel welcome to comment as I am certainly not claiming to be an expert on this.
Disclosures: None
After reading some comments and thinking about it further, I realized my post is not only confusing, but possibly in error, so let me clarify. One point I realized is that China needs 8% growth in GDP probably in the way that China calculates GDP. Accordingly, for an apples-to-apples comparison, you need to compare a fourth quarter GDP of 6.8% to the goal of 8%. It is bad but not as bad as I noted, and their full year GDP growth was 9%, over the goal. Accordingly, in the way they compute growth, things are not as bad, but they are noticeably getting worse. Note, however, that the way they compute quarterly growth accounts for four quarters, so an annual rate of 9% and a fourth quarter rate of 6.8% suggests their rate of growth is falling off a cliff.
And the way China and the U.S. calculate GDP are not the only ways. Great Britain does it in yet a different way. Again, if you adjusted their method, which yielded a decrease in GDP in the fourth quarter of 1.5% in the U.K., you could read that as an annual rate of decrease of 6%. This is all explained much better in this piece by Calculated Risk, which focuses more on the fact that Britain is now officially in a recession - by their standard, not necessarily ours. Confused yet?
http://www.calculatedriskblog.com/2009/01/britain-officially-in-recession.html
All this is not to say that one country's way of figuring GDPgrowth is necessarily better than any other country's way of doing it. Each has its pros and cons. Some are more sensitive to recent changes, which can be a good thing or bad thing, depending on whether recent changes reflect a one time impact or a longer term trend change. I think that Roubini's point on China's GDP being close to zero was based more on the idea that in our current economic environment the U.S. way of calculating GDP is more accurate or realistic. The China method tends to mask how dramatic their drop was in that last few months of the year. This does not necessarily mean it is more accurate or realistic in other economic environments, but in this environment do not expect a fourth quarter growth rate of 6.8% in China to reflect their true pain at the moment. Anyone understanding this better than me should feel welcome to comment as I am certainly not claiming to be an expert on this.
Disclosures: None
Thursday, January 22, 2009
China - Worse Than I Thought
I wrote last week that if China is not seeing its targeted 8% growth it is effectively in a recession. I did not explain it appropriately, so I got some less than positive comments. Well, as I understand it, their migration of workers from rural areas to urban factories and other businesses requires at least an 8% GDP growth rate to be maintained. Those that know better please feel free to comment. I only know what I have read.
Over the past few years they have had a GDP growth rate well into the double digits, which is well above the needed 8%. Now, they are at 6.8%, which is a quarterly growth rate base on YoY comparisons. Other countries, like the U.S., jude quarterly GDP basis on a quarter on quarter seasonally adjusted basis. Doing it this way for China would put their fourth quarter growth at virtually 0%. They could well be in a recession soon by our standard here, which is a complete disaster there. I am traveling there in a few months and will report more, but the odds of significant social unrest is increasing dramatically daily.
This is no small matter. This is a country with well over a billion people, with nuclear arms, with the third largest economy and with a host of problems. Their people for the most part started out with little to nothing so cutting that to any significant degree may lead to massive social issues. People should not starve and live without heat anywhere in this world. Those in the U.S. focus on the U.S. but we are all humans and we need to figure out a way to help other countries, despite our own dire straights. This will, by the way, pay off in spades in the long run, so do not be so short-sighted to consider this a bad idea. Think about it from the perspective of a citizen of China - "the U.S. did what they could to help us when they needed the money for themselves. Why would they do this?" This is not why I am recommending it, by the way. I do so because I believe it is the right thing to do, but having a political reason for it being the right thing does not hurt.
http://www.nakedcapitalism.com/2009/01/china-claims-68-economic-growth-for-4q.html
http://www.rgemonitor.com/roubini-monitor/255237/the_chinese_devil_wears_prada_why_0_growth_is_the_new_size_68
This to me is very problematic. We will see.
Disclosures: None
Over the past few years they have had a GDP growth rate well into the double digits, which is well above the needed 8%. Now, they are at 6.8%, which is a quarterly growth rate base on YoY comparisons. Other countries, like the U.S., jude quarterly GDP basis on a quarter on quarter seasonally adjusted basis. Doing it this way for China would put their fourth quarter growth at virtually 0%. They could well be in a recession soon by our standard here, which is a complete disaster there. I am traveling there in a few months and will report more, but the odds of significant social unrest is increasing dramatically daily.
This is no small matter. This is a country with well over a billion people, with nuclear arms, with the third largest economy and with a host of problems. Their people for the most part started out with little to nothing so cutting that to any significant degree may lead to massive social issues. People should not starve and live without heat anywhere in this world. Those in the U.S. focus on the U.S. but we are all humans and we need to figure out a way to help other countries, despite our own dire straights. This will, by the way, pay off in spades in the long run, so do not be so short-sighted to consider this a bad idea. Think about it from the perspective of a citizen of China - "the U.S. did what they could to help us when they needed the money for themselves. Why would they do this?" This is not why I am recommending it, by the way. I do so because I believe it is the right thing to do, but having a political reason for it being the right thing does not hurt.
http://www.nakedcapitalism.com/2009/01/china-claims-68-economic-growth-for-4q.html
http://www.rgemonitor.com/roubini-monitor/255237/the_chinese_devil_wears_prada_why_0_growth_is_the_new_size_68
This to me is very problematic. We will see.
Disclosures: None
Some Good News And Some Not So Good News
I am tired of being all doom and gloom. The markets and data call for doom and gloom, but at some point you need to start looking for those small points of light. So before I get all gloomy again, here is some good news:
Credit Improving
This is a good sign. Some credit indicators are showing that lending is easing and rates for the less than stellar borrowers are normalizing. I personally was a bit shocked by this given the difficulties of the financial companies as of late, but here it is. The A2/P2 spread has gone from records way down to 1.29. Still high by historical standards but significantly better than the 5.86 spread after Thanksgiving. What, you ask, is the A2/P2 spread? It is the difference between borrowing rates for low and high 30 day non-financial commercial paper, that's what. Hey, I didn't know what it was six months ago either. In any event, it represents that non-stellar, though still respectable, borrows are getting credit at more realistic rates, which is crictical at the moment. Again, this is surprising to me given the past week - and this data was as of yesterday - but it could be due in part to governments exerting pressure on lending institutions to provide them with stats on their lending activities in order to get more government support. Who knows? Either way, this is good news.
Another bit of good news is Apple reporting record profits. Obviously this runs against the headwind of Jobs medical leave, but someone still making record profits is a good thing.
And Now For the Not So Good, And There Is A Lot Of It!
Oh where oh where do I begin. There is so much here, and I am tired, so I will just provide basics on most of this.
Microsoft
When a company like Microsoft misses predictions - still very profitable mind you - people take notice. And notice they did. Microsoft hit a decade plus low today, down 12%. No one (except perhaps Apple) is immune.
http://www.calculatedriskblog.com/2009/01/microsoft-cuts-jobs-sees-lower-revenues.html
Samsung
Posted its first, yes its first, quarterly loss. Need I say more.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHXDodmmqlcM&refer=home
Japan
Their slump continues and their market is down three weeks in a row. Need I say more.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aryHlSvStHC4&refer=home
Rail Freight Down Significantly
Need I say more.
http://www.calculatedriskblog.com/2009/01/rail-freight-traffic-off-sharply-in.html
Weekly Unemployment Claims Rise
I hate to say this, but need I say more.
http://www.calculatedriskblog.com/2009/01/weekly-unemployment-claims-increase.html
Housing Starts at a New Record Low
Need I freakin say any more. (I actually consider this good news as we are now racing toward a housing bottom, which we need desperately to find, but most consider this bad news).
http://www.calculatedriskblog.com/2009/01/housing-starts-at-all-time-low.html
Architecture Billings Still Near Record Lows
Here, perhaps, I need to say a bit more. Architecture billing trends tend to lead trends commercial real estate by at least six months to a year. You need to design it before you build it. Some of this may change with Obama's infrastructure spending, as some architects are connected to these projects, but this continues to spell doom and gloom for commercial real estate ("CRE") in 2009. Specifically for CRE construction, not sales, leases or otherwise. For existing CRE, the fact that construction is at a halt is a good thing as we have too much supply and not nearly the demand. Our economy, in my opinion, is shifting to a lower spending level, so we need less commercial space. Overall, perhaps a good thing we are no longer building malls and buildings we do not need. Still, however, this will be a stress to those who build them.
http://www.aia.org/release_012109_abi
There is more, a lot more, but you get the picture.
Disclosures: None
Credit Improving
This is a good sign. Some credit indicators are showing that lending is easing and rates for the less than stellar borrowers are normalizing. I personally was a bit shocked by this given the difficulties of the financial companies as of late, but here it is. The A2/P2 spread has gone from records way down to 1.29. Still high by historical standards but significantly better than the 5.86 spread after Thanksgiving. What, you ask, is the A2/P2 spread? It is the difference between borrowing rates for low and high 30 day non-financial commercial paper, that's what. Hey, I didn't know what it was six months ago either. In any event, it represents that non-stellar, though still respectable, borrows are getting credit at more realistic rates, which is crictical at the moment. Again, this is surprising to me given the past week - and this data was as of yesterday - but it could be due in part to governments exerting pressure on lending institutions to provide them with stats on their lending activities in order to get more government support. Who knows? Either way, this is good news.
Another bit of good news is Apple reporting record profits. Obviously this runs against the headwind of Jobs medical leave, but someone still making record profits is a good thing.
And Now For the Not So Good, And There Is A Lot Of It!
Oh where oh where do I begin. There is so much here, and I am tired, so I will just provide basics on most of this.
Microsoft
When a company like Microsoft misses predictions - still very profitable mind you - people take notice. And notice they did. Microsoft hit a decade plus low today, down 12%. No one (except perhaps Apple) is immune.
http://www.calculatedriskblog.com/2009/01/microsoft-cuts-jobs-sees-lower-revenues.html
Samsung
Posted its first, yes its first, quarterly loss. Need I say more.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHXDodmmqlcM&refer=home
Japan
Their slump continues and their market is down three weeks in a row. Need I say more.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aryHlSvStHC4&refer=home
Rail Freight Down Significantly
Need I say more.
http://www.calculatedriskblog.com/2009/01/rail-freight-traffic-off-sharply-in.html
Weekly Unemployment Claims Rise
I hate to say this, but need I say more.
http://www.calculatedriskblog.com/2009/01/weekly-unemployment-claims-increase.html
Housing Starts at a New Record Low
Need I freakin say any more. (I actually consider this good news as we are now racing toward a housing bottom, which we need desperately to find, but most consider this bad news).
http://www.calculatedriskblog.com/2009/01/housing-starts-at-all-time-low.html
Architecture Billings Still Near Record Lows
Here, perhaps, I need to say a bit more. Architecture billing trends tend to lead trends commercial real estate by at least six months to a year. You need to design it before you build it. Some of this may change with Obama's infrastructure spending, as some architects are connected to these projects, but this continues to spell doom and gloom for commercial real estate ("CRE") in 2009. Specifically for CRE construction, not sales, leases or otherwise. For existing CRE, the fact that construction is at a halt is a good thing as we have too much supply and not nearly the demand. Our economy, in my opinion, is shifting to a lower spending level, so we need less commercial space. Overall, perhaps a good thing we are no longer building malls and buildings we do not need. Still, however, this will be a stress to those who build them.
http://www.aia.org/release_012109_abi
There is more, a lot more, but you get the picture.
Disclosures: None
Wednesday, January 21, 2009
England-Iceland, Both Perhaps Toast?
Well we know that Iceland - a country that two years ago seemed to be one of the best places on Earth to live - is now toast, so why would anyone put the UK in the same category? Don't blame me, blame a well known Brit. It would seem Ambrose Evans-Pritchard (known for his over-the-top doom and gloom predictions) seems to think a U.K. default is in the chips. I do not think the international community will allow this to happen, or that it will happen, but we are certainly testing some previously untested limits. Time to hunker down. By the way, there is a good argument to be made that certain moves by Britain in response to Iceland's problems actually hastened the demise of one of it banks, so there is a bit of irony to the situation.
http://www.nakedcapitalism.com/2009/01/is-sterling-about-to-tank.html
http://www.nakedcapitalism.com/2009/01/is-sterling-about-to-tank.html
China in Trouble
I am likely flying to China in the next three to four months and I am not sure what to expect. Their economy is definitely not doing well. Though the GDP is growing at a rate that would make us jealous, their need to supply tens of millions of new jobs each year to support their economy means these numbers for them are recessionary.
http://www.calculatedriskblog.com/2009/01/china-gdp-increased-at-68-annual-rate.html
Commercial Real Estate Still Hurting - Big Time
There is at least some hope that infrastructure spending will aid companies focued on commercial real estate. It will create demand for certain contractors, certain architects, certain raw material suppliers and so forth. Not everyone who had focused on commercial real estate, however, will be helped. So what do they have to hope for - not much. If you want to know about CRE activity in the future, one indicator is architecture related expenditures. Right now, not good.
http://www.calculatedriskblog.com/2009/01/architecture-billings-index-near-record.html
Disclosures: None
http://www.calculatedriskblog.com/2009/01/china-gdp-increased-at-68-annual-rate.html
Commercial Real Estate Still Hurting - Big Time
There is at least some hope that infrastructure spending will aid companies focued on commercial real estate. It will create demand for certain contractors, certain architects, certain raw material suppliers and so forth. Not everyone who had focused on commercial real estate, however, will be helped. So what do they have to hope for - not much. If you want to know about CRE activity in the future, one indicator is architecture related expenditures. Right now, not good.
http://www.calculatedriskblog.com/2009/01/architecture-billings-index-near-record.html
Disclosures: None
Just Trying To Help
I got a comment at Seeking Alpha today, and I quote:
"Can I start my very own blog by stating the obvious and then saying "I haven't a clue what to do with this info"?
Aside from the fact that the quotation mark should be outside the question mark (I had to go there to feel better), let me respond. This blog is not about individual advice on stocks. Unless you have not read my bio or the top of this blog page, let me note that I am not an financial advisor and am not qualified, in my own opinion, to give advice on individual investments. What I do try to do is provide what I think is relevant data for the decision making process and perhaps my take on same.
The above comment was in response to a post by me on an official at NAHB predicting a further decline in housing prices in 2009 of 29%. That to me is important, for the reasons I expressed in my post. First, insiders in the building industry are usually overly optimistic, so an insider being this negative is significant. If you need me to spell out why such as real estate declines lead to more bank problems, foreclosures, unemployment, etc. then you have not been reading this blog. Moreover, most of this is just simple logic. The comment above notes it is "obvious," but so what. If you missed the NAHB official's comment then I just gave you some potentially valuable information. Yes it is obvious, but if you missed it you just missed something that can "obviously" impact your investment decisions.
Now, admittedly, I noted I did not think the real estate decline in prices would be that bad and gave no explanation for this opinion, so I perhaps deserve some prodding there. This was me being lazy, which I will continue to be today. If you want the best data on real estate, I have long recommended Calculated Risk, the best real estate oriented site in my book. (Look there, I just provided more valuable information from my research). They certainly know more than me on this subject.
Finally, my post did give a take on the NAHB official's comment that was original to me, as far as I know, and I believe worth consideration. Everyone and their brother are lining up for handouts from the government. Perhaps if the real estate industry makes their problems look bad, they can convince someone in government to put them on the list for handouts. I am not saying this is the case, but a dismal forecast by someone who normally would be more optimistic might lead one to this conclusion. Otherwise, this is really bad news.
Bottom line, I try to pass on relevant information that I mine from my daily research and you need to decide what to do with it. I try to provide some logic for analyzing this data - or at least the logic I employ. Not always the right logic, but lately more right than wrong. Individually, I do make my own investment decisions on this information and I have made money in 2007, 2008 and so far in 2009. I worry sometimes about my own decisions for my own account, so I am not about to tell you how to invest your money. But for at least the past year the data I haved focused upon has been a good set of data to focus upon, and that is what I seek to contribute. Take it for what you will.
Disclosures: None
"Can I start my very own blog by stating the obvious and then saying "I haven't a clue what to do with this info"?
Aside from the fact that the quotation mark should be outside the question mark (I had to go there to feel better), let me respond. This blog is not about individual advice on stocks. Unless you have not read my bio or the top of this blog page, let me note that I am not an financial advisor and am not qualified, in my own opinion, to give advice on individual investments. What I do try to do is provide what I think is relevant data for the decision making process and perhaps my take on same.
The above comment was in response to a post by me on an official at NAHB predicting a further decline in housing prices in 2009 of 29%. That to me is important, for the reasons I expressed in my post. First, insiders in the building industry are usually overly optimistic, so an insider being this negative is significant. If you need me to spell out why such as real estate declines lead to more bank problems, foreclosures, unemployment, etc. then you have not been reading this blog. Moreover, most of this is just simple logic. The comment above notes it is "obvious," but so what. If you missed the NAHB official's comment then I just gave you some potentially valuable information. Yes it is obvious, but if you missed it you just missed something that can "obviously" impact your investment decisions.
Now, admittedly, I noted I did not think the real estate decline in prices would be that bad and gave no explanation for this opinion, so I perhaps deserve some prodding there. This was me being lazy, which I will continue to be today. If you want the best data on real estate, I have long recommended Calculated Risk, the best real estate oriented site in my book. (Look there, I just provided more valuable information from my research). They certainly know more than me on this subject.
Finally, my post did give a take on the NAHB official's comment that was original to me, as far as I know, and I believe worth consideration. Everyone and their brother are lining up for handouts from the government. Perhaps if the real estate industry makes their problems look bad, they can convince someone in government to put them on the list for handouts. I am not saying this is the case, but a dismal forecast by someone who normally would be more optimistic might lead one to this conclusion. Otherwise, this is really bad news.
Bottom line, I try to pass on relevant information that I mine from my daily research and you need to decide what to do with it. I try to provide some logic for analyzing this data - or at least the logic I employ. Not always the right logic, but lately more right than wrong. Individually, I do make my own investment decisions on this information and I have made money in 2007, 2008 and so far in 2009. I worry sometimes about my own decisions for my own account, so I am not about to tell you how to invest your money. But for at least the past year the data I haved focused upon has been a good set of data to focus upon, and that is what I seek to contribute. Take it for what you will.
Disclosures: None
Tuesday, January 20, 2009
More Pain On The Way
When someone intricately tied to housing says he expects prices to fall another 29% in 2009, he gets your (or at least my) attention. David Crowe of the National Association of Home Builders said it. Usually those in the industry try to give a bias in the positive direction, but maybe home builders, looking for a slice of the bailout pie, are slanting things in the other direction to garner government support.
Then again, he seems to have some support for his dismal forecast. I do expect more pain on the housing front this year and next with, hopefully, a rebound starting in late 2010 to early 2011, but another 29% drop in prices in 2009 was worse than I expected. We will see.
If housing continues this slump, as expected, there are a couple of things to watch out for. First, home builders will increasingly go belly up. I read a prediction today that, at least among small home builders, over 50% will go belly up. This is difficult to gage, to say the least. I have some neighbors who are home builders who are just trying to keep busy with other work for now and who will likely go back to it if demand returns. They are mostly general contractors and do not have a lot of permanent employees, which seems to be the norm in my area. In other parts of the country, home builders are bigger, more integrated, operations, which will undoubtedly have big problems. The trick for investors will be in picking the survivors. If you can do so, you are better than me. I am on the sidelines.
http://www.calculatedriskblog.com/2009/01/national-association-of-home-builders.html
Now for some (eventual) good news
It is inevitable that car sales will return in time. People need to get around and there is just so long that you can survive on maintenance. Eventually the math leads to buying another car. Well, Calculated Risk has some nice charts to suggest that this will indeed happen,and perhaps in the not too distant future. Temper you investing here as out of work people do not buy cars - they walk or take the bus - and there may be a bit of a new transportation dynamic underway with the whole new lower gas consumption/alternative fuel/green push we are seeing. Nonetheless, the car companies (that survive) will likely see a descent rebound in the next few years. You get to decide for yourself which will survive.
http://www.calculatedriskblog.com/2009/01/vehicle-sales.html
Then again, he seems to have some support for his dismal forecast. I do expect more pain on the housing front this year and next with, hopefully, a rebound starting in late 2010 to early 2011, but another 29% drop in prices in 2009 was worse than I expected. We will see.
If housing continues this slump, as expected, there are a couple of things to watch out for. First, home builders will increasingly go belly up. I read a prediction today that, at least among small home builders, over 50% will go belly up. This is difficult to gage, to say the least. I have some neighbors who are home builders who are just trying to keep busy with other work for now and who will likely go back to it if demand returns. They are mostly general contractors and do not have a lot of permanent employees, which seems to be the norm in my area. In other parts of the country, home builders are bigger, more integrated, operations, which will undoubtedly have big problems. The trick for investors will be in picking the survivors. If you can do so, you are better than me. I am on the sidelines.
http://www.calculatedriskblog.com/2009/01/national-association-of-home-builders.html
Now for some (eventual) good news
It is inevitable that car sales will return in time. People need to get around and there is just so long that you can survive on maintenance. Eventually the math leads to buying another car. Well, Calculated Risk has some nice charts to suggest that this will indeed happen,and perhaps in the not too distant future. Temper you investing here as out of work people do not buy cars - they walk or take the bus - and there may be a bit of a new transportation dynamic underway with the whole new lower gas consumption/alternative fuel/green push we are seeing. Nonetheless, the car companies (that survive) will likely see a descent rebound in the next few years. You get to decide for yourself which will survive.
http://www.calculatedriskblog.com/2009/01/vehicle-sales.html
That's Going To Leave a Bruise
So much for my anticipation of at least a short term Obama bounce. You obviously know the market was down sharply today. I am not surprised that the market is heading to new lows but a bit surprised at the timing. Then again, with all the dire news on financials, can you blame people?
Look at Bank of America, one of my favorite companies to post about. Down another 29% today, and roughly 50% over the past week. Ouch! Other financials not faring much better and some a bit worse. And according to Nouriel Roubini, the prominent UNY professor who has been amazingly accurate calling this mess, the financial industry in the U.S. is technically insolvent. He expects losses for U.S. institutions over all to go to $3.6 trillion (I am an thinking closer to $2.5 trillion, but either way it is well over the losses to date) and this level puts the financial industry nicely underwater. If he is right, we are simply kicking the can down the road with our supports to date.
So now that we have given these companies trillions in cash and backstops, we are shocked, just shocked, that they have not resumed lending. After all, that is what we wanted them to do. Ooops, I guess we failed to condition our support on them doing this. That's alright, we are going to correct this now by requiring these big institutions to tell us how much lending they are doing on a monthly basis, and if they are not lending then we will, well, we will, I mean we will, heck, I am not sure what we will do.
Even if we had some leverage, like a bluff that we will no longer support them, then what? Well, then . . . they will still not lend, that's what. They need every dime we can give them for survival.
Moreover, you cannot get blood from a rock. You cannot force them, after you gave them the money, to lend it. That should have been a requirement up front. But looking at how desperate most of them are right now, where are they going to get money to lend? They already have losses eating up the money we have given them so it is not there anymore. Lending is not happening, at least not from these institutions.
So I propose taking the taxpayer money and creating the Bank of U.S. Taxpayers. It starts with no bad debts, not toxic assets, no bad business and no desire to maximize executive bonuses. We give it the money to lend. Now we do have the problem of needing to hire people who know about finance and lending to run the operation, but last I looked there were a few hundred thousand of these looking for jobs. We then lend to good companies needing money to operate and take the failing, non-lending, insitutions out of the equation. Yes, we still need to figure out how to properly take down all these virtually insolvent financial institutions, but we do not let a lot of deserving companies in need of credit fold while we wait for these companies to fail. Just my opinion, which seems to be shared by more people daily.
Disclosures: None
Look at Bank of America, one of my favorite companies to post about. Down another 29% today, and roughly 50% over the past week. Ouch! Other financials not faring much better and some a bit worse. And according to Nouriel Roubini, the prominent UNY professor who has been amazingly accurate calling this mess, the financial industry in the U.S. is technically insolvent. He expects losses for U.S. institutions over all to go to $3.6 trillion (I am an thinking closer to $2.5 trillion, but either way it is well over the losses to date) and this level puts the financial industry nicely underwater. If he is right, we are simply kicking the can down the road with our supports to date.
So now that we have given these companies trillions in cash and backstops, we are shocked, just shocked, that they have not resumed lending. After all, that is what we wanted them to do. Ooops, I guess we failed to condition our support on them doing this. That's alright, we are going to correct this now by requiring these big institutions to tell us how much lending they are doing on a monthly basis, and if they are not lending then we will, well, we will, I mean we will, heck, I am not sure what we will do.
Even if we had some leverage, like a bluff that we will no longer support them, then what? Well, then . . . they will still not lend, that's what. They need every dime we can give them for survival.
Moreover, you cannot get blood from a rock. You cannot force them, after you gave them the money, to lend it. That should have been a requirement up front. But looking at how desperate most of them are right now, where are they going to get money to lend? They already have losses eating up the money we have given them so it is not there anymore. Lending is not happening, at least not from these institutions.
So I propose taking the taxpayer money and creating the Bank of U.S. Taxpayers. It starts with no bad debts, not toxic assets, no bad business and no desire to maximize executive bonuses. We give it the money to lend. Now we do have the problem of needing to hire people who know about finance and lending to run the operation, but last I looked there were a few hundred thousand of these looking for jobs. We then lend to good companies needing money to operate and take the failing, non-lending, insitutions out of the equation. Yes, we still need to figure out how to properly take down all these virtually insolvent financial institutions, but we do not let a lot of deserving companies in need of credit fold while we wait for these companies to fail. Just my opinion, which seems to be shared by more people daily.
Disclosures: None
Monday, January 19, 2009
I'll Become a Landlord
Southern California had real estate sales go up dramatically in December. Before you get too excited about it, over 50% was on foreclosure sales and the higher activity was in the areas with the most foreclosures. And I have read some articles indicating that there is some speculation here and some people buying rental properties.
Let's talk about rental properties. I am certain that this is geographically sensitive, so do not take this generalization as applicable in any particular area, but from what I have read, rents are down overall. This seems counter intuitive to me as people are losing their homes left and right, but I have read this in multiple places, so if you are buying to rent, be sure to check out the local market for rentals and know what you are doing.
http://www.calculatedriskblog.com/2009/01/apartment-market-weakens-further.html
Let's talk about rental properties. I am certain that this is geographically sensitive, so do not take this generalization as applicable in any particular area, but from what I have read, rents are down overall. This seems counter intuitive to me as people are losing their homes left and right, but I have read this in multiple places, so if you are buying to rent, be sure to check out the local market for rentals and know what you are doing.
http://www.calculatedriskblog.com/2009/01/apartment-market-weakens-further.html
I Hope You Enjoyed Your Honeymoon Mr. President - Now Get to Work
New Presidents are usually allowed an adjustment time to get used to the job before the public expects much of them. Indeed, Presidents rarely get blamed (or credited) with a lot of what happens for their first year in office as people attribute the results in that period to the acts of the prior Administration. Well, don't expect Obama to have this freedom. Obama at best is going to have a "quickie" for this honeymoon.
Nonetheless, I think there is some acceptance building for the notion that we are in this economic mess for at least a couple more years, despite what Obama does, so perhaps people will not expect instant results. Personally, I am just hoping to avert total economic melt-down, so if we can tread water on the economy for now I am one happy soul.
Whether it works or not, I was encouraged a bit about some of what I heard today on the eternally shifting Obama plan for our economy. This too can change, but here are some promising things I heard on the Bloomberg channel as I worked out at lunch:
Nonetheless, I think there is some acceptance building for the notion that we are in this economic mess for at least a couple more years, despite what Obama does, so perhaps people will not expect instant results. Personally, I am just hoping to avert total economic melt-down, so if we can tread water on the economy for now I am one happy soul.
Whether it works or not, I was encouraged a bit about some of what I heard today on the eternally shifting Obama plan for our economy. This too can change, but here are some promising things I heard on the Bloomberg channel as I worked out at lunch:
- there will be less emphasis on tax refunds. This is good as you cannot control how people spend their money, assuming they even spend it;
- money will be increased to unemployment and Medicade. We need to help those in need, so this is a necessity. At least the unemployed tend to spend what they receive, so it has a bit of a stimulus effect, and they spend it on necessities (we hope);
- more focus will be on a trickle-up effect and less on supporting the financial institutions that were key players in creating this mess;
- infrastructure spending, which we need anyway, is a key part of it, which will create jobs and, at a minimum, achieve some long term benefit;
- support for ailing state budgets. States, especially California, are in dire straights. This is the worst time to be cutting necessary benefits and services. Sure, cut back on the extraneous, but not on areas that are even more pressing in today's times. We need police, firefighters, teachers, student aid and the like. Cutting these, even in the short term, is a mistake; and
- alternative fuel investment continues to be a no brainer.
Overall, a more promising tone on where things are going than what I read last week, but with the ever-changing world of politics, it could get worse again. Obama may need to trade some of the good for some of the bad to get anything passed in short order. We will see.
By the way, I have suggested that the U.S. may run into problems with people - as in other countries - supporting the cost of our bailout. Well, I am thinking that the world overall right now is in so much hurt that the U.S. is starting to look pretty good in comparison. Not that we should be foolish in building debt or taking on more than necessary, but - crossing my fingers and toes - I think we may get the support we need, but not if we need a trillion or more per year for years to come.
Putin' His Budget Where His Oil Is?
Vladimir Putin has ordered that Russia redo its budget based on oil at $41 a barrel, not the previous budget expectation of $95 a barrel. I have mentioned before that low gas/oil prices are good for us and bad for others. And while we may love to stick it to the likes of the Middle East, Russia and Venezuela, there is a limit to how far this can go before these countries search for ways to stick it back. We do not want to build political or social instability. Then again, when it comes to oil prices, it is at least in part that supply/demand thingy, which is beyond control.
Any hoot, oil down to $35 a barrel today. Perhaps Putin needs to do a new budget again. Expect gas in the U.S. down to close to a dollar a gallon before this mess is over. Frankly, I would prefer a higher support as it is hard for alternative energy companies to stay alive at these prices.
Disclosure: I have a couple of hundred bucks (it used to be more) in an algae company.
"economic Pearl Harbor"
Once again Warren Buffet knows how to distill things to their essence. This is indeed an "economic Pearl Harbor." Every time it seems to be getting better it takes a dive for the worse and sets new lows - just one calamity after another. Word to the wise, get used to it. If you look at the long slow downturn during the Great Depression, which took years to bottom, you will see some similarities - sadly.
I spent several years litigating and arbitrating over reinsurance spirals. Let me explain. A company would insure a risk at a premium it knew to be too low, but it could bundle these risks and reinsure them (insurance for insurance) at even more ridiculous rates. Thus, you could pass on say 95% of the risk for 90% of the premium. Kinda like printing money.
Why would the reinsurer take that risk? Because capital was plentiful at the time and they knew they could reinsure their reinsurance (called a retrocession) at a profitable rate and that retrocessionaire could pass it on to another and so forth and so on. Each player passed on a large percentage of their risk for a somewhat lesser percentage of their premium, and each found buyers (for a while) as they all thought there would be another willing sucker to take it the next step in the spiral. Eventually, however, the buck has to stop somewhere. Given the nature of servicing insurance claims and reporting them up the ranks, however, it could take many years for the buck to start working its way up the spiral, so you may have years between the time the initial claim is made and the reinsurer at the end of the spiral finds out they are the stuckee. Now there was some fraud and collusion going on, and that is where the litigation focused, but the the process overall was not unlike some of today's intricate financial products.
In the reinsurance arena, there were a fairly limited number of usual suspects - probably less than 20 total - that were active players. The dollars at risk there were relatively small, just a few billion, compared to the dollars at play today. Yet unwinding these messes and figuring them out was incredibly complex and it is still being worked out today, even though the spirals I speak of were created in the 1990s. This does not bode well for the mess we face today, not in the least.
I am not sure what the answer is here. Nonetheless, we need some out-of-the-box thinking. For example, perhaps setting up an agency to take a look at credit default swap contracts, build a database of same, and figure out off-sets for winding them down. Some effort in this direction has already taken place but we need more. The next step may be some legislative effort to force the rest to be cancelled, commuted or otherwise taken care of for, perhaps, return of premium, plus gain. Those who have no underlying bond or debt they are protecting simply get return of premium and the contract is torn up. This process will undoubtedly take government support, but disposing of the CDS market and making it illegal going forward is a necessary step. These products have proven to be a road block to the recovery and I will be damned if this world should go into a depression over the sanctity of these particular contracts, many of which are simply gambling. We have still probably fifty trillion in notional value of these instruments out there and there is just no credible way for this mess to be cleaned up with these landmines still there, waiting to blow up. Clear the mine field first.
There are other toxic financial products that perhaps need to be addressed in similar fashion, but we need to start acting at the root of the problem and stop throwing money at institutions and hope in time all will be well.
Disclosures: None
I spent several years litigating and arbitrating over reinsurance spirals. Let me explain. A company would insure a risk at a premium it knew to be too low, but it could bundle these risks and reinsure them (insurance for insurance) at even more ridiculous rates. Thus, you could pass on say 95% of the risk for 90% of the premium. Kinda like printing money.
Why would the reinsurer take that risk? Because capital was plentiful at the time and they knew they could reinsure their reinsurance (called a retrocession) at a profitable rate and that retrocessionaire could pass it on to another and so forth and so on. Each player passed on a large percentage of their risk for a somewhat lesser percentage of their premium, and each found buyers (for a while) as they all thought there would be another willing sucker to take it the next step in the spiral. Eventually, however, the buck has to stop somewhere. Given the nature of servicing insurance claims and reporting them up the ranks, however, it could take many years for the buck to start working its way up the spiral, so you may have years between the time the initial claim is made and the reinsurer at the end of the spiral finds out they are the stuckee. Now there was some fraud and collusion going on, and that is where the litigation focused, but the the process overall was not unlike some of today's intricate financial products.
In the reinsurance arena, there were a fairly limited number of usual suspects - probably less than 20 total - that were active players. The dollars at risk there were relatively small, just a few billion, compared to the dollars at play today. Yet unwinding these messes and figuring them out was incredibly complex and it is still being worked out today, even though the spirals I speak of were created in the 1990s. This does not bode well for the mess we face today, not in the least.
I am not sure what the answer is here. Nonetheless, we need some out-of-the-box thinking. For example, perhaps setting up an agency to take a look at credit default swap contracts, build a database of same, and figure out off-sets for winding them down. Some effort in this direction has already taken place but we need more. The next step may be some legislative effort to force the rest to be cancelled, commuted or otherwise taken care of for, perhaps, return of premium, plus gain. Those who have no underlying bond or debt they are protecting simply get return of premium and the contract is torn up. This process will undoubtedly take government support, but disposing of the CDS market and making it illegal going forward is a necessary step. These products have proven to be a road block to the recovery and I will be damned if this world should go into a depression over the sanctity of these particular contracts, many of which are simply gambling. We have still probably fifty trillion in notional value of these instruments out there and there is just no credible way for this mess to be cleaned up with these landmines still there, waiting to blow up. Clear the mine field first.
There are other toxic financial products that perhaps need to be addressed in similar fashion, but we need to start acting at the root of the problem and stop throwing money at institutions and hope in time all will be well.
Disclosures: None
Got That (Not So) Slow Sinking Feeling
Can you spell "nationalization?"
Seems that folks at RBS are possibly going to learn how very soon - or at least their shareholders might. Thus, the stock was down 67% today. RBS is likely going to report the worse loss ever in British history, over $40 billion. Now that is saying something. In return, the U.K. is backstopping it conditioned upon RBS committing to lending six billion pounds to creditworthy customers. And the next step could be nationalization. I think at the moment that nationalization is the preferred step, but more on that later.
Let's also put aside for now the challenge these days in finding creditworthy customers and concentrate on the wisdom of the lending requirement. I agree there are some companies out there needing credit, needing to roll over debts, needing lines of credit, needing letters of credit, and so forth and so on. Credit is a necessary lubricant in modern business. Plenty of good businesses rely on it daily to support their business model. Top notch companies have debt. So what is wrong with requiring RBS to lend?
It makes little sense to me for them to take an insolvent institution and prop it up with a gun to its head to lend. Just nationalize it and if lending is needed use government funds to do that lending and then wind it down and sell off the good pieces. Mind you, you need to keep it on life support long enough to study the knock-on effects of winding it down as the CDS market is complicating the heck out of doing what is right. But there has to be a way to do it. Today there is not nearly enough business out there for all these financial institutions. If we start propping them all up, we will be doing so for many years to come and we cannot afford to do so. Better to make some hard choices now and remove some competition from those that should survive.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLtny16knr.s&refer=home
By the way, it seems I am not the only one with this opinion.
http://www.economist.com/blogs/freeexchange/2009/01/why_not_nationalise.cfm
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5549589.ece
I know this gets into the whole debate about how how anti-capitalistic the whole nationalization process is, but there are two sides to that story too. How much more anti-capitalistic is it subsidize these companies with taxpayer money and build moral hazard? Interfluidity makes a good case for how nationalization is not a bad thing even for a capitalistic society.
http://www.interfluidity.com/posts/1222502979.shtml
Now Bronte Capital has a different take on the nationalization gig, arguing for the company and shareholders to have time to find the capital on their own. I have two problems with this "due process" approach to nationalization. First, if they are knocking on the government's door they have already probably exhausted other means for raising capital. Second, most of these companies are already on the brink when they come to the government. They do not have weeks left to look for more capital. And when people find out that they went to the government for money, they are in over-night deep doo doo. Nice concept though.
http://brontecapital.blogspot.com/2009/01/slogan-for-new-administration.html
In any event, this all leads up to some comments I have been getting. I have been asked about a good price point to get into Citigroup, BofA or JP Morgan. I do not give advice on individual stock investments. All I can do is point out that nationalization is in the cards and with the new Administration, you know the chances. Just ask the shareholders of RBS. You decide for yourself, but I would rather gamble in Vegas where I better know the odds. I do expect added pressure on U.S. financial institutions in the short term, for whatever that is worth.
Disclosures: None
Seems that folks at RBS are possibly going to learn how very soon - or at least their shareholders might. Thus, the stock was down 67% today. RBS is likely going to report the worse loss ever in British history, over $40 billion. Now that is saying something. In return, the U.K. is backstopping it conditioned upon RBS committing to lending six billion pounds to creditworthy customers. And the next step could be nationalization. I think at the moment that nationalization is the preferred step, but more on that later.
Let's also put aside for now the challenge these days in finding creditworthy customers and concentrate on the wisdom of the lending requirement. I agree there are some companies out there needing credit, needing to roll over debts, needing lines of credit, needing letters of credit, and so forth and so on. Credit is a necessary lubricant in modern business. Plenty of good businesses rely on it daily to support their business model. Top notch companies have debt. So what is wrong with requiring RBS to lend?
It makes little sense to me for them to take an insolvent institution and prop it up with a gun to its head to lend. Just nationalize it and if lending is needed use government funds to do that lending and then wind it down and sell off the good pieces. Mind you, you need to keep it on life support long enough to study the knock-on effects of winding it down as the CDS market is complicating the heck out of doing what is right. But there has to be a way to do it. Today there is not nearly enough business out there for all these financial institutions. If we start propping them all up, we will be doing so for many years to come and we cannot afford to do so. Better to make some hard choices now and remove some competition from those that should survive.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLtny16knr.s&refer=home
By the way, it seems I am not the only one with this opinion.
http://www.economist.com/blogs/freeexchange/2009/01/why_not_nationalise.cfm
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5549589.ece
I know this gets into the whole debate about how how anti-capitalistic the whole nationalization process is, but there are two sides to that story too. How much more anti-capitalistic is it subsidize these companies with taxpayer money and build moral hazard? Interfluidity makes a good case for how nationalization is not a bad thing even for a capitalistic society.
http://www.interfluidity.com/posts/1222502979.shtml
Now Bronte Capital has a different take on the nationalization gig, arguing for the company and shareholders to have time to find the capital on their own. I have two problems with this "due process" approach to nationalization. First, if they are knocking on the government's door they have already probably exhausted other means for raising capital. Second, most of these companies are already on the brink when they come to the government. They do not have weeks left to look for more capital. And when people find out that they went to the government for money, they are in over-night deep doo doo. Nice concept though.
http://brontecapital.blogspot.com/2009/01/slogan-for-new-administration.html
In any event, this all leads up to some comments I have been getting. I have been asked about a good price point to get into Citigroup, BofA or JP Morgan. I do not give advice on individual stock investments. All I can do is point out that nationalization is in the cards and with the new Administration, you know the chances. Just ask the shareholders of RBS. You decide for yourself, but I would rather gamble in Vegas where I better know the odds. I do expect added pressure on U.S. financial institutions in the short term, for whatever that is worth.
Disclosures: None
Sunday, January 18, 2009
Occasionally my posts here get onto Seeking Alpha. That leads me to reading comments here and at Seeking Alpha. Not a problem as I do learn from comments, once in a while, and some I find amusing. Here is one from Seeking Alpha that I agree with from PrudentMan:
"Virtually all previous recessions were cause by high inventories as was the tech bubble of 2000. The Y2K demand wasn't there. This recession is more like 1929 as it is the result of too much credit. The difference, of course, is that technology has created the ability for credit to expand out of hand worldwide. We could say "we told you so" but, as we know, that will fall on deaf ears. So until people will learn that in economic terms they are only worth what they produce, we will maintain the unfortunate status quo. The fact is that the pie was made bigger by credit and is now reverting to reality. Unfortunately, most don't like reality and are creating more problems by fighting it. That is the result of a populace who believes they are entitled to consume but not required to produce. Welcome to the real world that we Depression Babies learned about at an early age and, consequently, can sit on the sidelines and listen to the whiners cry. You can't cure an illness or addiction until you admit you have one. The quicker the admission the quicker the cure and, unfortunately, we are not there yet and we will probably overshoot like a smoker who quit. "
Sage words. Thanks PrudentMan.
I plan on posting more tomorrow but I am tired right now, as is the news I am reading, so hopefully there is more in the morn.
Disclosures: None
"Virtually all previous recessions were cause by high inventories as was the tech bubble of 2000. The Y2K demand wasn't there. This recession is more like 1929 as it is the result of too much credit. The difference, of course, is that technology has created the ability for credit to expand out of hand worldwide. We could say "we told you so" but, as we know, that will fall on deaf ears. So until people will learn that in economic terms they are only worth what they produce, we will maintain the unfortunate status quo. The fact is that the pie was made bigger by credit and is now reverting to reality. Unfortunately, most don't like reality and are creating more problems by fighting it. That is the result of a populace who believes they are entitled to consume but not required to produce. Welcome to the real world that we Depression Babies learned about at an early age and, consequently, can sit on the sidelines and listen to the whiners cry. You can't cure an illness or addiction until you admit you have one. The quicker the admission the quicker the cure and, unfortunately, we are not there yet and we will probably overshoot like a smoker who quit. "
Sage words. Thanks PrudentMan.
I plan on posting more tomorrow but I am tired right now, as is the news I am reading, so hopefully there is more in the morn.
Disclosures: None
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