A Few Observations

What That Guy Said . . .

There is a reason PIMCO is the largest bond fund the world - they have some smart folks in charge. And so I must agree with El-Erian, their CEO. His words are not shocking news or original to him. It is, however, always refreshing to hear someone who knows what they are saying to tell it like it is. I almost throw-up daily reading from those managing money about how the market is about to launch or the DOW will hit 13,000 by year end (I have not heard this for a couple of weeks, by the way), so hearing reality is a nice change. El-Erian's comments on how this time is different and how we are now finally addressing structural headwinds are dead on in my opinion.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aPcF.fPJgadU&pos=5

Here is a Surprise . . .

LBO junk bonds are falling like a duck covered from oil in the Gulf of Mexico. Seems greed never dies and people wanting to make money are willing to invest in junk even in dangerous times. Sometimes you get what you deserve.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQZkc.kesuig&pos=4

Did I mention . . .

we are back to S&P levels we were at in 1998.

http://www.calculatedriskblog.com/2010/05/market-update_20.html

Yep, a dozen years with no growth. Thank goodness interest rates and inflation were really low during that period, so investors lost a smaller chunk of their money than might have otherwise occurred. I suspect we will be going into the way back machine soon, as in the market will drop to levels last seen many years before 1998. With the S&P breaking some key technical barriers today at close, some folks are saying watch out below. Personally, I am not a big fan of technical barriers, moving averages, head and shoulders and such. Short term they may provide some guidance I prefer to focus on fundamentals and the market has been defying them for some time. Now this defiance was built on fiscal stimulus and I fully expect Obama and team to come out with some new stimulus package to arrest the current drop, so again we will kick this can down the road, but we will in time catch up to that can and be unable to kick it. Just ask Greece.

And the beat goes on . . .

I noted yesterday the dismal real estate picture, in terms of foreclosures, delinquencies, applications, CRE and the like. Not at all pretty. And unemployment showed a turn for the worse today. No surprise then that a lot of local and regional banks are getting more into distressful situations. A lot of them had heavy CRE exposure and that area is in dire straights at the moment, so no mistake that the FDIC list of Problem Banks has grown to the highest level since 1993 and we have had 69 bank failures this year in less than five months. By comparison, before the recent turmoil we had a couple of years with no failures.

http://www.calculatedriskblog.com/2010/05/fdic-q1-banking-profile-775-problem.html


Tomorrow should be interesting.

Disclosures: None.

Interesting Times

Let's Start with Real Estate - Not Pretty

Another day another record. Prime mortgages, in terms of delinquency rates and foreclosures, are at record levels. Since most mortgages fall into this category, that is problematic.

http://www.calculatedriskblog.com/2010/05/mba-q1-national-delinquency-survey.html

The continuing foreclosure problems, homeowners under water, unemployment and everything else is perhaps the cause for housing prices continuing to drop. My own house just appraised for 5% less than nine months ago, despite the fact the the housing price index for my region was only down around .5% in that period - go figure.

http://www.calculatedriskblog.com/2010/05/first-american-corelogic-house-prices.html

Of course things on the commercial front are no better, and might be regarded as a good bit worse. Down 42% from peak. Yeah, that is going to leave a bruise.

http://www.calculatedriskblog.com/2010/05/moodys-cre-prices-decline-05-in-march.html

And perhaps the most significant story on real estate is that mortgage applications are down significantly between April (when government incentives ended) and March. The Purchase Index actually dropped over 27% in one week, to the lowest level in 13 years. Looks like the incentives worked - while they were in place. Now we get to see how much benefit the economy gets from front-loading sales.

http://www.calculatedriskblog.com/2010/05/mba-mortgage-purchase-applications_19.html

And if you are keeping track, every link I have had in this blog so far has been from Calculated Risk, my favorite real estate oriented blog - though it is definitely not limited to real estate and daily has some amazing stats. I highly recommend it.

Time for Plan "B" - as in Take down the "B"astards

It would seem that politics has gotten in the way of government attempts at Wall Street reforms. Ask me if I am surprised? The bill aimed at enhancing regulation of Wall Street lacked the votes in the Senate to move it forward.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aN1_yEusVoQE


I suspect there are some significant lobbying dollars coming into play here. Either way, anything Congress passes will be watered-down and likely ineffective in the long run, so I am not sure how much this matters aside from election sound-bites.

So we are off the Plan B, which is the existing regulatory, corporate and litigation framework. I have spoken here about stockholders taking action by getting active in stockholder director votes (mostly driven by pension funds), about derivative suits and the like, so I will not repeat that now. The government action against Goldman is also old news I will not repeat. The greater promise is the government undertaking further investigations of suspect behavior and not being afraid to criminally prosecute where appropriate. There are a lot of stones to turn over and I suspect the government will find gold under many of them. One recent stone uncovered revealed some nice booty. It involves banks giving kickbacks to municipal advisors to get them to steer municipalities to investments that are not as good as they should be. Some institutions have already confessed. This should be interesting.

http://www.nakedcapitalism.com/2010/05/doj-banks-colluded-with-municipal-advisers-to-rig-bids-on-gics.html

I dearly hope the DOJ and state AGs keep up the pressure. In addition to all of our debt and other financial problems there is a massive moral hazard created by the financial bailouts the past couple of years and reports confirm that many of the same companies are back to their same old tricks. I hope the prosecutors feel free to go against individuals. The corporate form does not protect individuals from their individual misdeeds and they should all pay the price if they misled their clients, the public or the government. Only in this way might we have hope for deterring this insane behavior.

If the government prosecutors do not do them in, we can always hope they get hoisted by their own petard. The existing suit against Goldman demonstrates to its clients that it may have been selling them crap when it knew better and was serving the best interests of other "clients," if not actively betting (investing) against their own clients. Indeed, Goldman clients are a bit wary of what Goldman is telling them. They seem to be a bit concerned over conflicts and trading issues. Gee, why would I give them a lot of commissions if they do not have my bests interests in mind and, indeed, may sell me a sack of something.

http://www.nakedcapitalism.com/2010/05/goldman-clients-increasingly-wary-of-firms-conflicts-and-trading-orientation.html

It certainly does not help that Goldman has made profit virtually 98% of the days this year including every single day the first quarter, when seven of nine of its recommended top trades of 2010 have lost its clients money - and those making money were not doing so great either. It appears they have made their own bed.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aF5tV7uvY0FU&pos=12

Disclosures: None

Want to be Happy - Lose Everything and Start Over.

I just saw this post and found it rather incredible. It deals with the "positive experience index," which apparently surveys people in countries around the world to see who is the most content, as in happy with their lives. And the winner is . . . . Iceland. Those following the economic problems of the past few years realize that Iceland is to date the country most impacted, as in pretty much bankrupted, by the down turn. You see, their major banks (like three banks) seem to have gone quite crazy in the lending frenzy of the past decade, enough to bankrupt the entire country. And so they were perhaps the earliest to take their medicine and face austerity measures.

http://blogs.telegraph.co.uk/finance/edmundconway/100005727/which-country-is-the-smuggest-of-them-all/

So why are they so damn happy? Now one theory I have is that they took their medicine first and are at a point where they really have nothing left to lose. In other words, it is all up from here. Another theory is that the people there are just a happy lot and other than economic woes, they have a great life. Historically I think this is accurate. It is apparently a wonderful place to live. But my preferred theory is that they are wildly happy that they are able to dump volcanic ash on all of Europe and give a bit of pay-back for the economic pain countries there have imposed upon them. One almost thinks Iceland was planting bombs in the volcano to make it erupt to get even. I am open, by the way, to other theories.

Disclosures: None.

Death by Politics

A lot of people, including some advisors to our administration, have been seeing our current situation - as in the crisis for the past two to three years - for what it is. Volcker is one that comes to mind, but there are many others. And some recognize that the fundamentals are, if anything, worse than they were two years ago due to vastly increased sovereign debt. It does not take a genius to see that this train is still coming down the tracks. I had a friend over a couple of weeks ago for dinner and he asked me where I see things going. I said I have no idea on where the market is going - I have given up there - but I know the fundamentals still suck. And they do. This does not take a PhD. I link here a very informative post by Michael Panzner at Financial Armageddon where he goes through very thoroughly some of the issues facing us and it is not pretty at all. I highly recommend his books and his blog as he is one of the few that saw this train coming in 2006 or earlier and who, despite a meteoric rise in the market the past year and a half, still sees the underlying issues as insurmountable under our current approach.

http://www.financialarmageddon.com/2010/05/onetime-items-making-things-a-little-better-than-they-otherwise-would-be.html

Now I noted to my friend I have given up on any short term prognostications as you cannot underestimate stimulus from the government. When the market dove just a week and a half ago due to problems in Greece, I predicted a stimulus package would save the day. I did not expect the nuclear option that appeared, but I knew something was coming. You see, politicians cannot let anything happen that will hurt the chances of their party winning an election. Damn the people, the politics are what matters.

I see this happening a lot in the U.S. I agree that some of the earlier government actions in the financial crisis were necessary to avert immediate financial Armageddon, yet the government then did not stop the stimulus and did not focus on what mattered. They were not willing to entertain the thought that we needed short to mid term pain to have long term gain. They were unwilling to accept that we here in the good old U.S. of A. needed some of the same austerity measures that those in Greece are rioting against and that our money needed to go to paying down debt, not increasing it. Accepting this would have cost votes, which is unacceptable by both parties.

Now I realize that even if a political party had the will to do this they would be voted out in two to four years and the other party - on a mantle of "change" - would come into power and reverse all the good that had been done. Moreover, the austerity measures that we and the rest of the world need will take a good decade or two to achieve their goal and it is a smoke dream to think this will ever happen with elected politicians. We, as a people, will certainly vote out anyone giving us pain.

China, ironically, may have the ability to weather this storm the best - though so far they are not showing any gumption to do so. The government there has absolute say and they do not have to worry about re-election. Sure they do not want people rioting in the streets, but they can nonetheless take some rather draconian measures to put their economy back on better ground. If only they could enforce this for the countries to whom they sell stuff.

And so our politicians are forced into a trap. They cannot enact measures that will be painful and that will in a decade or two make things acceptable. Instead, they have to throw money at immediate problems and allow the next bubble popping to serve as the excuse for the problem and the painful cure. The problem needs to raise its head first as there is no political will to take our medicine and avoid it happening.

Make no mistake, we could decide to take extreme measures, reduce debt (both private and public) and live through a sustained period of recession. Unfortunately we seem unwilling to do so, personally or politically, so I suspect we are doomed to something even worse. The recession of 2007-2008 is about to become a walk in the park in my opinion. Hunker down folks as there is no politically acceptable option to a lot of future pain.

Disclosures: None.