115 and Counting?

If my count is right and nothing more happens this evening, the FDIC took down 9 more banks today and I believe that is 115 for the year. Three or four years back we had zero closures for the year. Quite the change. Not S&P crisis levels in quantity, but the dollar values are right up there.

http://www.fdic.gov/


Continued Real Estate Woes

Remember Fannie Mae. You should because we own it. Lest you missed the news, virtually all new mortgages issued these days are ending up with the GSEs, either Fannie, Freddie or Ginnie. In any event, it would appear they are not doing so well. Below is a chart I have borrowed from Calculated Risk and I link here the actual blog, which I highly recommend. The best real estate site out there. As you can see from the chart, things are not going as well on the real estate front as the media would have you think. I cannot recall many charts this extreme.

http://www.calculatedriskblog.com/2009/10/fannie-mae-delinquencies-increase.html

What does this mean? I think it means the market was right to go down today.

Disclosures: None.

One Year Down

Happy Anniversary!

This week marks the one year anniversary of my blog. To celebrate, for those (two or three) of you that might be interested, here is a link to my very first post. Not too bad, if I say so myself:

http://financialspiltmilk.blogspot.com/2008/10/bad-october-bad-bad-october-go-sit-in.html

Looking back in retrospect, much of what I said - or at least repeated from others - was dead on. Okay, enough patting myself on the back, it's time to get on to other matters.

He is Sprott On - Dollar Destruction

One of the folks I like to follow is Eric Sprott. He does not do a blog or seek a lot of publicity, but he has had some of the best performing funds in Canada for many years running, so I like to occasionally go to his company's site (Sprott Private Wealth, LP) to read his monthly thoughts and those of his colleagues. Indeed, his group for at least the past year and a half has actively been recommending investing in gold and it just so happens that gold is setting records recently, so they hit that one on the head. Don't believe me, look at the articles by John Embry at the Sprott company site. He has for a long time been the biggest gold bull around, and apparently for good reason.

http://www.sprott.com/main3.aspx?id=55

Here is a link to Eric Sprott's September report on the U.S. dollar. Eric makes a very persuasive case for the dollar being toast. It seems we have been actively building our debt to the level we cannot hope to support even the interest payments in the future, especially when you throw in unfunded Social Security and Medicare obligations, so we have no reasonable alternatives. Bernanke is simply going to need to keep that printing press running full time, which will eventually and, probably, inevitably, lead to the dollar losing its status as the reserve currency. The value will continue to fall as well. This is no doubt why many are still recommending gold as a place to put your money.

Now, of course, I must add a caveat. Sprott has undoubtedly a lot of investments tied to the value of gold and the devaluation of the U.S. dollar, so keep this in mind in reading his thoughts.

http://www.sprott.com/Docs/MarketsataGlance/09_09_MAAG.pdf

And as Eric points out in his October report, the foreign appetite for U.S treasury purchases is decreasing sharply such that the Fed is becoming "the" market for treasuries, which is dangerous indeed.

http://www.sprott.com/Docs/MarketsataGlance/MAAG_10_2009.pdf

(Update: Save your comments about how the dollar index was strengthening today, up .4% as I write, and how gold is down. It does not change the long term fundamentals discussed above.)

Survey Says . . . (cont.)

Just yesterday I noted how people continue to survey economists for their predictions and economists continue to be too optimistic. So much so that on several recent forecasts not a single surveyed economist was sufficiently pessimistic to predict the correct result. Well, it happened again today on the housing numbers for new home sales. Forecasts ranged from 412,000 to 460,000 and the actual result was 402,000. Time to wake up and smell reality.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiUI.AF0m0.0

Now tomorrow we get government preliminary figures on third quarter GDP growth. The median economist forecast is 3.2%. Now I cannot wholly dismiss the impact of the cash-for-clunkers program or the first time home buyers incentive, but I think I am going to go out on a limb here and say 2.6%. Of course I should not ignore the fact that this will be a government preliminary number and some believe (you can guess where I stand) that the government cooks the books on the numbers. Nonetheless, 2.6% is where I stand. Feel free to add your vote. The winner will get special mention in my next post.

That Stock Thingy

I am shocked and dismayed. After a global 68% run in stocks and seven months of straight increases in the market we may - please, say it isn't so - have a month that ends down just a tad. Not a significant tad so far, but a tad nonetheless. How can it be?! The market can actually go down again?

I love this quote in the linked Bloomberg article that "The doubt and pessimism just won't go away." Seriously, we narrowly avoided a total financial meltdown seven short months ago and this is what this supposedly knowledgeable - quotable - person has to say. Unless Bloomberg is shooting for comedic relief, they need to be quoting better sources.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aFRrXflshgvQ

So back to the question of why the market after seven months of going up, some months significantly, might actually now have a slightly down month. Heeellllooooo! Why shouldn't it. Let me count, just a few of the ways (hold on to your hats):

1. Home building by any standard has well exceeded usual norms, compared to population and income, over the past several years - significantly. We are just now getting back to levels that are more sustainable, but we have the inventory overhang, increasing unemployment, existing housing sales and foreclosures, and multiple other problems facing home builders. Did I mention shadow inventory? If you do not know what that is, it is basically banks and homeowners who want to sell - foreclosure properties or otherwise - who are holding homes off the market. Look it up as some estimates of this shadow inventory are staggering. I refer you to Calculated Risk, the best site I know on real estate issues, both private and commercial.
2. Debt, debt and more debt. I refer you to one of my favorite blogs, Sudden Debt, that focuses on this issue. To put it short, under Greenspan and Uncle Ben our debt to GDP ratio climbed from 1.25X to 3.25X. Stop and think about that stat for a moment. And it does not include the incredible debt load the government has added this past 18 months. Boy is that a wakeup call. How did we do that?
3. I have written a lot lately about the financial bastards that brought us here. While I need not say more, I feel I must. The problem now is moral hazard. These institutions - according to numerous reports I have read of late - are returning to their risk taking ways. They are most certainly returning to rewarding officers and executives with handsome pay and bonus programs, despite these same individuals nearly causing the financial meltdown of the entire world. How can this be so soon - like less than a year - after we teetered on the edge of financial Armageddon? It is because the government stepped in with little to no conditions. And I suspect this was largely due to us letting wolves from the industry (who took on key government jobs, e.g. Paulson) guard us (taxpayer) chickens. You reward, or save, idiots for their idiotic behaviour and they will not only repeat it but build upon it. We folks, are building a much bigger bubble. In a few years you can quote me on that. And hey, I am not even an economist. No one surveys my opinion.
4. As suggested above, the government is making a substantial number of wrong moves. For one, they need to take apart the too-big-to-fail institutions. Instead they promoted them getting bigger and now we do not know what to do with them. I had the same advice in my very first blog a year ago, linked above, and stand by it. Take them apart and let the officers and shareholders share the pain. Do not support them at taxpayer cost. Now I see a lot more other commentators, including many who know more than me, giving the same advice.
5. Let me mention commercial real estate. One stat I read this year is that we have in the U.S. roughly 50% more retail space per person in this country than the second closest country. If you believe private real estate was overbuilt, you have not seen anything yet. Commercial real estate is still not near a bottom and it is incredibly overbuilt. We could be looking at a decade or more before this area of real estate comes back to where it belongs.
6. And did I mention adjustable rate mortgages (ARMs). I read a report this past week that over 90% of the option ARMs are yet to reset. These are the private mortgages where the borrower can choose to pay just interest or even less. There is some sense that the low rates now will help, which they will, but when you are resetting from interest only or less to interest payments and principal payments on an increased balance, then low rates are not going to save you. A lot of these will reset in 2010 and 2011, so we will see.
7. Shipping (Baltic dry index), trucking, port activity, shipping rates, and so on and so forth are all pointing to economic activity being negative. Not diving like we were earlier this year, but not rebounding.
8. Unemployment still increasing, not as fast but still increasing, and this has run on effects on retail spending, real estate and several other areas. As a side note I have to mention that a number of the bottom line improvements for companies this past quarter have been largely due to cost cutting (like layoffs) as opposed to increased sales. This does not spell recovery.

I could go on and on and in posts to come will do so, but the bottom line is that fundamentals are pretty much the worst they have been in my life time. Debt, government and private, continues to be my primary concern and you can easily see how many of the other areas noted above are closely tied to and - feeding or being fed by - that situation. Please feel free to add your thoughts, but I still have trouble sleeping at night - mostly because of my kids needing to deal with the stuff we are leaving for them.

Disclosures: None.

More of the Same - But Perhaps Some Are Listening?!

Finally, an honest banker among the big boys. Okay, he is retired, but that makes him a tad less biased, and as a former Chairman of Citigroup, the guy has major street cred and mojo, whatever that means. In any event, he agrees with Volcker - something I have been recommending for many months - that there needs to be a division between traditional banking and those that deal primarily with capital markets. And he agrees that more demanding capital requirements would help. Go figure?
http://www.nytimes.com/2009/10/23/opinion/l23volcker.html?_r=2

Hang Him High

If you ask me Stephen Friedman, who benefited by millions off taxpayers through what appears to be conflict of interest should repay it all. And the company for which he is a director should give us back around $14 billion. See, it turns out that Goldman made about $14 billion off of AIG's demise and that money came from the folks on the street - as in us taxpayers. Now they probably would have done okay without us, but that does not change the fact that they did even better with our money, just in time to start paying record bonuses again. Disgusted, I am, and I hope the prosecutors figure out a way to get the bucks back from Goldman one way or another. Friedman, on he other hand, deserves to be in jail in my opinion. He was playing both sides of the fence - director for the Fed of NY who approved AIG payments to Goldman and also director for Goldman - and to add insult to injury added his own multi-million dollar investment in Goldman before the Fed payment was announced to make sure he made out personally. I am ill again. Then again, I have been ill a lot lately. He claims he is being falsely portrayed, which is easy for someone with many millions of new found dollars to say.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a7T5HaOgYHpE

Must Read of the Month

And here is the must read of the day, week and month. I have mentioned before Jeremy Grantham of GMO. He is one advisor who understands what is going on. He is now out with his latest quarterly report. It is a long read - 14 pages - but do not skip to the ending. The tale is best read from cover to cover. Well worth the read and I highly recommend it.

http://www.gmo.com/websitecontent/JGLetter_ALL_3Q09.pdf

Disclosures: None.

Survey says . . .

The consumer confidence numbers came out this morning and they unexpectedly (depending on your expectation) dropped. Indeed, not one economist, of the 79 surveyed, was as pessimistic as the actual result - not one.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_xPp7Pzgs5E

I noted earlier this month how not one out of 80 economists surveyed was right or pessimistic enough on the jobs report on October 2 - not one.

http://www.google.com/hostednews/afp/article/ALeqM5jNat8FSYDU-6wVcrkdfTsuIylT4g

How is it we keep listening to these people? Very few of these "experts" forecast our current situation, yet we still like to survey them and some seem willing to believe them. Face it folks, the job market is in shambles, debt is off the charts (both public and private) and the current stimulus is running out of steam. What is there to be confident about? I am confident we are in for more pain, I just do not know when the markets will wake up to this fact and react.

Disclosures: None.

Are You Outraged Yet? You Should Be!!

A couple of days ago the market dropped due to an analyst downgrading Wells Fargo to sell from hold. Part of the reasoning was that the Wells Fargo profit was tied to mortgage servicing, which is not an income stream that is sustainable in the long run. As it turns out, however, the companies making the most from loan servicing include Bank of America, Citigroup and JPMogan Chase; go figure.

http://online.wsj.com/article/BT-CO-20091022-708579.html

So hey, you say, what does it matter where their profit comes from. Well, if you understand the situation, you are going to be just a little bit pissed off. Let's start with the fact the these financial institutions brought us the financial meltdown of the past year or two by playing a lot of financial games. We are talking derivatives and high leverage games that led to serious problems from which the entire planet is suffering. Next we move to the fact that we the people bailed out their collective arses at great cost. Our government debt is at record levels and our children and grandchildren will pay the price. Then we move on to how these too big to fail idiots continued providing big bonuses to themselves and dividends to their stockholders with our money. Upset yet? You will be. Now many of these companies are returning to profitability despite record numbers of Americans losing their homes due in no small part to the policies of the financial institutions. What do I mean by that?

Well, most banks securitized their mortgage portfolios and sold them off to investors. The loans were sliced and diced ad infinitum. Yet they remained the servicers on the loans, extracting fees for collecting payments and foreclosing on homes. As it turns out, many of the financial institutions that created the current mess are making loads of money off of the misery of those facing foreclosure. They are profiting from our pain and they are avoiding loan modifications because they can make more money through the foreclosure route. Are you outraged yet?

http://www.creditwritedowns.com/2009/10/why-mortgages-arent-modified-and-what-a-ruling-stopping-foreclosures-means.html

Disclosures: None.

I am Totally Doubting My Vote.

I voted for Obama. I have for years liked McCain but during the election he caved too much to the far right and made some rather radical statements, and then he had Governor Palin as VP and I had no choice. Not that I was adverse to Obama, but I was not totally sold on him and among Republicans McCain was one I felt I could support. I am still not saying I would vote for McCain, especially with his inexperienced Alaskan sidekick (not saying here that I like Biden, but he has some experience), but I would have many more reservations about Obama if I knew then what I know now. I did not vote for him in the primary and now I believe I was right.

So why so down on Obama? Well, he is paying attention on the financial front to idiots. You know, like Geithner, Summers, Bernanke, Paulson and the like. Meanwhile he is ignoring tons of respected economists who say to nationalize and break up the too big to fail idiots that brought us her. He is ignoring his respected advisors. He is building a new bubble, inspiring people to spend when they need to save. Building new problems, I suspect for political banefits, not benefits to the country. I am truly disheartened by his financial performance to date and truly believe we are financially in a very, very precarious state at this moment.

One man I respect is Paul Volcker. One reason I voted for Obama is that he had Volcker on his staff of economic advisors. Now the elected idiot is ignoring (and has for some time) his most knowlegeable and least biased advisor. WAKE UP OBAMA AND LISTEN TO THIS MAN!! HE IS SAYING THINGS FOR THE NATIONAL GOOD, NOT THE WALL STREET GOOD!! If this jerk does not wake up soon I will actively campaign against him in three years, probably sooner.

http://business.theatlantic.com/2009/10/volckers_quest_to_reinstate_glass-steagall.php#

Disclosures: I am a life long Democrat and doing this post was totally against my grain but someone has to do it.

The End is Near - Or at Least a Lot Closer!!

I am squarely back in chicken little territory (like I ever left). Nonetheless, I have this really bad feeling. It could be the market reversal between March and now being the most extreme since the Great Depression (what was so "great" about it) or it could be that consumer debt versus income is still at record levels and climbing.

Either way, we are into the old bubble pop territory. Yep, I am not feeling at ease about this recovery. You judge for yourself.

Disclosures: None.