And Another One Down

Now I am not sure my count is totally correct but if I am correct FDIC took down another 8 banks today. Friday is bank take down day and this Friday is the worst in terms of number of banks that I can remember. Certainly bigger dollars have been involved in past take downs but eight in one day is truly impressive. They are:


Sonoma Valley Bank, Sonoma, CA
Los Padres Bank, Solvang, CA
Butte Community Bank, Chico, CA
Pacific State Bank, Stockton, CA
ShoreBank, Chicago, IL
Imperial Savings & Loan Association, Martinsville , VA
Independent National Bank, Ocala, FL
Community National Bank of Bartow, Bartow, FL


Now if you place close attention you will see a pattern here. Go ahead and look, I will wait. Ding, ding, ding, you have it. Yes the taken down banks are by-and-large in states that built the real estate bubble. Go figure.

Disclosures: None.

Tootin' New Hampshire's Horn

A site called Daily Beast has released a survey ranking the states in terms of most corrupt to least. Most corrupt was a surprise to me - Tennessee. I have not had a lot of contact with that state but certainly have not read a lot about corruption there. Frankly, I thought Louisiana would lead the list. I apologize to some friends of mine from that state but I have read, and had experience with, regular stories out of Louisiana on corruption, both public and private, including a story this week on some official hiring his live-in girlfriend for a big job over many more qualified folks. In any event, Louisiana still ranks up there.

I am happy to note I am from New Hampshire and it ranked as the least corrupt state. And so, let me take a few paragraphs to sing the praises of my home state for the past 8 years.

NH is often noted as one of the states with the lowest tax burdens, which is probably due to no income tax and no sales tax (other than on prepared food). I am not sure why there is a tax on prepared food. You can buy a car and pay no tax but if you buy a burrito, watch out. There is a real estate tax, but after living in NY it does not seem too bad to me. Indeed, I moved here after 17 years in NYC and cannot believe how well NH does with so little after seeing how poorly NY does with so much.

Now part of this may be due to NH being a state among the highest median incomes in the country, and at least one year since I have been here the highest, but since income is not taxed, median income should not really impact how well the state does that much.

Somehow, NH has mastered the art of doing more with less. The state motto is live free or die, which probably initially meant personal freedom but these days stands as a very prominent anti-tax motto. Any politician not running on an anti-tax motto will not get elected. Despite having one of the lowest tax burdens in the country, us here in NH want even a lower burden.

Now I am not one to complain about paying taxes. I do appreciate that we need government and the services it supplies. I also appreciate that taxes are in some respects a redistribution of wealth, and that does not really bother me. But while I do not mind paying taxes, or even more taxes if it makes sense, I get a bit outraged if I think my tax money is being put to bad use. I will not go on further on this point other than to note Obama has given most of my tax dollars to support undeserving financial institutions who are in large part to blame for our problems and that outrages me. Moral hazard be damned. Again, taxes do not bother me nearly as much as tax money being wasted. Thus, I am happy to live in a state with low taxes with low corruption where I can see my dollars doing what they should do. If only every state could be this efficient. If only the federal government could be this efficient.

This Economy is Coming Home to Roost

Well, today was an interesting day. The trickle of bad economic news seems to have become more of a steady flow and the markets did not like it, not one bit. If you are reading this you already undoubtedly know about the bad unemployment numbers out today, worse than any of Bloomberg's surveyed economists predicted. Ask me if I am surprised? The "economists" being surveyed have been too optimistic on 18 of 21 of the most recent unemployment reports. Are these people paid to be wrong? Well, quite possibly.

The Philly manufacturing index down as well, from positive territory to negative in one fell swoop. Economists really did not see that one coming either.

Now you cannot say I have not been telling you about this. My timing has not necessarily been the best but I have been saying consistently for a year and a half that the fundamentals are simply not there. Stimulus certainly glossed over this fact but the fact is still there and now that stimulus is fading fast the reality is setting in equally fast.

Now I know I sound like a broken record as I keep spouting off the same stuff (which is a major reason I have been posting less of late) but the fundamentals are again worth noting, with a few more linked stats to support the situation:

Tonight I will limit myself to real estate. There is way too much property under water, unemployment continues to lead to more foreclosures, more foreclosures lead to more REOs sold at depressed prices, which in turns further lowers the price of RE, which puts more folks underwater on their mortgages, which leads to more foreclosures, and so forth and so on. Interesting cycle. As you can see in this link, the number of foreclosures continues to increase. Fannie, Freddie and FHA had an increase of 22% in Q1 versus the prior quarter, which is an increase of 59% versus Q1 2009, when RE was already sucking wind:

http://www.calculatedriskblog.com/2010/05/fannie-freddie-fha-reo-inventory-surges.html

Now some of this may be due to ARMs resetting, some due to unemployment, some due to continuing declines in RE prices in some areas, but some are due to banks, Fannie, Freddie and others holding off on foreclosures in the past and spreading them out. This was not just something they decided to do on their own, as now we learn the official government objective was to spread out foreclosures to give financial institutions time to deal with them. Call it extend and pretend or kicking the can, either way something right now is coming home to roost. I get this inside line from John Lounsbury who had the opportunity to hear it first hand from Geithner earlier this week.


http://seekingalpha.com/article/221249-further-thoughts-on-my-treasury-meeting?source=dashboard_macro-view

There is, however, a prospect for foreclosure rates to slow if the courts continue to hold that the mortgage industry screwed itself through MERS, an electronic recording system developed during the frantic housing bubble to make it easier for financial institutions to securitize mortgages and not bother with pesky time consuming and costly recording requirements. As it turns out, some courts are saying using MERS not only saved on fees but it ventured outside of certain legal requirements for documenting things properly. In short, there could be 62 million properties in this country where the current financial institution holding the mortgage cannot legally prove it - as in the homeowner could be free and clear on their mortgage whether they know it or not. This is by no means a legal certainty in any jurisdiction, but it is getting the attention of a few courts. For a lot more detail on the situation, I recommend the following link:

http://seekingalpha.com/article/221344-homeowners-rebellion-could-62-million-homes-be-foreclosure-proof?source=dashboard_macro-view

If the trend in courts continues, many financial institutions could once again find themselves on the rope.

Disclosures: None.

Resources

Let me address a topic I do not believe I have ever touched upon but that I do like to follow, and that is resources, as in the stuff we use. This includes fuels, metals, precious gems and pretty much anything you can dig up, pump up or shovel up. China has over the past decade been on a rampage buying all this stuff up. Indeed they have at least at the moment cornered the market on rare Earth metals (which are not so rare but difficult to process - and it takes many years to build the infrastructure to process them). We cannot compete with China but there are some investments we can still capitalize upon. Let me give a few options for you to chew upon:

• renewable energy is all the rage but most, if not all, cannot presently economically compete with oil. This will eventually change and the range of estimates on oil supplies is all across the board. Yet investing in some alternative energy areas can make money in the long term. Research it and pick your own entry point. I personally believe algae has the most promise. Yet there still needs to be a lot of research to make it work.
• Biofuels are another topic related to the last. A lot of issues were created when we tried to use crop land needed for food to make fuels. Food needs will win out in time so it is better to focus on biofuels that can be made without using crop acreage, crop water or crop fertilizer. By the way, algae meets these requirements
• Crops, by the way, are a very very important resource. Right now they are mostly grown with a host of fertilizers and water that is needed for other purposes. Thus, this week's multi-billion dollar bid for Potash. But there is so far you can go with fertilizer and water. Both are limited resources. In time we need to grow crops and feed an increasing population without them. And that will be difficult.

Disclosure: I have a few thousand, much less than I initially invested, in Valcent Technologies. It was in the algae field but has not done anything there for a while. It is more into hydroponic crops in vertical systems that use less water, fertilizer and the like. The crops can also be grown in urban areas, saving fuel. I have money in them because I believe in the idea but it could clearly be decades before it becomes popular.

Nationalize Mortgage Lending

Bill Gross, you know the big PIMCO guy, came out at a government sponsored idea-fest and recommended a novel idea - "full-nationalization" of the mortgage finance system. Now I agree with Bill much more than I disagree and I like to think that the feeling is mutual (or that he has ever read anything I have written), but on this one I am a bit mystified.

http://noir.bloomberg.com/apps/news?pid=20601010&sid=aQrLLpgud3rI

I am mystified because I thought our mortgage finance system was already pretty much nationalized. Seriously, there is no securitization market outside of Fannie Mae and Freddie Mac and banks simply are not lending unless they can pass the risk on to the Fannie or Freddie or they have insurance against loss from FHA. Fannie, Freddie and FHA represent 90-95% of all mortgages now being given and these entities are all government based mortgage finance. This will change in time but right now it appears that Gross has what he wants. Now he may want these government institutions to lower lending standards to support more mortgage lending, but that ain't happening, and it should not. Housing, whether the government supports lending or not, is going to take a few years to rebound. It is over-built, inventory is soon to go back to over a year, foreclosures are near all time highs, unemployment is a problem, underwater homes prevent people from selling and moving up (or down) and lending standards are much tighter than they used to be (including very conservative - newly so - folks doing appraisals). A housing recovery is not, and should not be, in the cards.

And let me add one more factor I have NOT read about; I do not think most people (other than investors) want to buy a house. Now I know housing prices have fallen drastically, interest rates are at record lows and it is in many respects an ideal time to buy. But there are some respected folks predicting a further decline in prices, foreclosures are at very high levels, folks see nightmares (not American dreams) among those that bought before and lending standards are much more conservative. For buyers on the edge who see what has happened financially to a large percentage of the population who are underwater, I have to think they are saying to themselves they are better off to rent. This seems to be proven in part by low home sales, I might add. Sure there are plenty of reasons to dispute this and say it is a good time to buy, but I am not about to argue with them. After all, rental rates are low too and with housing prices down they will need to continue to drop to compete. We will see.

Industrial Production Up

So the markets in the U.S. and, as I write, in Asia are up on unexpectedly high U.S. production numbers, not to mention decent results by WalMart and Home Depot. Add in a little bump by a purchase bid for Potash (I thought about buying some months ago, darn it) and you get a good bounce. Now I admit I would not expect a U.S. production bounce, not with poor economics, low consumer spending, the EU in doldrums, unemployment and inventory corrections largely done, but hey, what do I know. I do know that fundamentals, while gradually improving or at least stabilizing, have a couple of years to get there. Maybe a melt-down is not in the cards (though I predict a pretty big down-turn this fall absent major stimulus delaying same), yet even with no down-turn I do not see any real support for a major bounce or sustained rally from here either. Friday, with options expiring, should be interesting.

Disclosures: None.

Across the Pond

I raise the EU as things have been a bit silent on the EU front for a while. Seriously, they do a few hundred billion in emergency funds, tie it to some extreme austerity measures, hide the EU bank stress tests from any implication of sovereign debt issues and then cross their fingers and pray people ignore them for a very very long time. Because if people pay attention then they will notice things the EU does not want them to notice.

They will start seeing that austerity is extremely painful - on private and governmental basis. Extreme austerity, which is being required in Greece and certain other EU countries, can quite easily lead to significant GDP reductions. Don't believe me, ask Ireland, which has been seeing negative GDP due to its extreme austerity. The good news is that if you survive you will come out of the tunnel and be ahead of the game. In that respect it may make some sense, like Ireland, to dive in the pool early and get it behind you. The bad news is that if too many countries dive into the pool at the same time, especially a lot of politically and economically connected countries, then all boats take on water at the same time and no one is around to through the life ring. And so we wait and we will see.

Then again there are a number of countries, like Hungary, who said no. Yes, they said no. No to austerity and the authorities can take their emergency measures and shove them. We will see.

Now some of these problems have been building for a very long time. EU has certain sovereign debt versus GDP ratios that are required for memebership. As it turns out, various EU countries, with the assistance of certain financial institutions, have been hiding their financial issues for many years. And yet, right now, things seem a bit quite there. I suspect there are some major rumblings behind those closed doors.

http://www.nakedcapitalism.com/2010/08/satyajit-das-grecian-derivative.html

I have no new negative news on the EU to pass on just at the moment, but wait, it will come. Here is a piece on the EU bank stress tests not really doing much and how things might just do a little more poorly there than the tests suggests:

http://www.calculatedriskblog.com/2010/08/sovereign-debt-part-5d-european-banks.html

And here on this side of the pond, at least one well respected expert expects housing inventory to shoot up, perhaps to a year of inventory. Boy, that is going to suck.


http://www.calculatedriskblog.com/2010/08/one-year-supply-of-houses-and-other.html

Negative

I am just passing on a post I just read from Calculated Risk noting some negative news expected out. Before going there, this blog also has a nice, unofficial, problem bank list. While the FDIC has only taken down a couple of banks the past couple of weeks - well off their YTD average - that does not mean things are improving as the problem bank list ain't shrinkin'! Okay, that last sentence had just a tad of flashback to my wife's reunion recently in WV. It was a three day reunion and included one night with both of us and our two kids in the ER (though everything turned out fine.) But I digress. Back to the post of the negative news, which is mostly focused on real estate. As the link notes, expect some bad number in that category in the weeks and months to come. Also, expect a major downward revision to the second quarter GDP estimates. I have seen another article calculating that the GDP - originally estimated at 2.4% - will be reduced to 1.2% due in large part to the new trade deficit numbers out this week. Undoubtedly, when it is officially announced the market will react, but the numbers are already in so the result is expected.


http://www.calculatedriskblog.com/2010/08/negative-news-flow.html

I may post a bit more later.

Disclosures: None