Thursday, January 31, 2008

"and the labor picture is sure to worsen"

In my last post I said, "and the labor picture is sure to worsen". Here is a headline from a few hours later: U.S. stock futures point lower for second day, Labor Dept. reports large jump in weekly jobless claims, from 69,000 to 375,000

That is a huge increase - I guess all the retail holiday help got their pink slips!

"Already lower, futures for the Dow Jones Industrial Average more than doubled their losses after the government reported the largest gain in claims for first-time unemployment benefits since September 2005.

S&P Mulls $500B in Mortgage Downgrades

NEW YORK (AP) — Standard & Poor's Ratings Services is considering slashing its rating on more than $500 billion of investments tied to bad mortgage loans, the ratings agency said Wednesday.
The massive downgrade would threaten a broad swath of the world's finance industry, S&P said, ranging from Wall Street's trading desks to regional banks to local credit unions.

This isn't going to end any time soon. The commercial real estate market has to follow, and the labor picture is sure to worsen also.

"which is also concerning to us."

From Calculated Risk:

"Another effect we're having has been a challenge with the media and with consumer groups; and with consumers willingness just to walk away from homes. We haven't seen anything like this since Texas during the oil bust and people just willing to declare bankruptcy and walk away. We are seeing a lot of that similar type social phenomenon occur, particularly in California, which is also concerning to us."

Mark Hammond, CEO, Flagstar Bancorp conference call.

This really is the tip of the iceberg. As this kind of behavior becomes socially acceptable, there is going to be an avalanche of foreclosures. These houses will eventually, some way, come back into a housing market that is already flooded with inventory. This is starting to feel more like a 3 to 5 year event than a 1 or 2 year event.

Update: I listened to this call myself and made some corrections to the transcript above. If you want to hear this quote it comes at about the final quarter of the call.

MBIA Posts Biggest Loss, Considers New Capital Plans

From Bloomberg:

"Jan. 31 (Bloomberg) -- MBIA Inc., the world's largest bond insurer, posted its biggest-ever quarterly loss and said it is considering new ways to raise capital after a slump in the value of subprime-mortgage securities the company guaranteed.

The fourth-quarter net loss was $2.3 billion, or $18.61 a share, raising concern the Armonk, New York-based company will lose its top credit ratings. The loss came a day after FGIC Corp.'s insurance unit became the third company to be stripped of its AAA grade."

Robert Reich's Blog

We just added the feed from Robert Reich's Blog to the left hand column. I already mentioned in passing that the stimulus bill was garbage - he has a couple of recent posts talking about it, including this one:

"Perhaps the silliest part of an already silly stimulus bill is a provision giving corporations big tax deductions this year on the costs of new machinery, instead of spreading those deductions over several years, as is normally the case. The idea is to get businesses to invest in more machinery, which will stimulate the economy.

But accelerated depreciation, as it’s called, doesn’t work. Almost the same tax break was enacted in 2002 and studies show just about no increase in business investment as a result. Why? Because companies won’t invest in more machines when demand is dropping for the stuff the machines make. And right now, demand is dropping for just about everything."

Wednesday, January 30, 2008

Another big bond insurer in trouble

From Bloomberg:

"Jan. 30 (Bloomberg) -- Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, lost its AAA credit rating at Fitch Ratings after missing a deadline to raise capital.

Financial Guaranty, a unit of New York-based FGIC Corp., was cut two levels to AA, New York-based Fitch said today in a statement. The company had been AAA since at least 1991. Moody's Investors Service and Standard & Poor's are also reevaluating their ratings."

Instead of the Fed cutting rates, and the Government and Treasury Dept. coming up with some half baked "stimulus" package, they just should have put a trillion aside to save these bond insurers. Other people can buy up the bank shares - but who has got the money to save these bond insurers? The panic is not going to stop, and the credit markets are not going to function until all this worthless paper is exposed.

Wall St off high on CNBC bond insurer report

So Charles Gasparino ruined the party! Just when the market got another rate cut, and was up 100 points, he had to bring up something that was known yesterday:

"NEW YORK, Jan 30 (Reuters) - U.S. stocks pared gains in late trading on Wednesday after CNBC reporter Charles Gasparino said he believed that ratings agencies may downgrade bond insurers MBIA and AMBAC Financial Group Inc. as early as today."

Face it - these bond insurers are bankrupt. The paper is worthless - the model was bullshit. This is a trillion dollars worth of stuff here we are talking about. The bulls tried today, but this news wasn't the reason the market sold off late, it was just an excuse.

Update: Calculated Risk has more.

U.S. 10-city home price drop a record in Nov: S&P

Some housing news from yesterday:

"NEW YORK (Reuters) - Home prices in 10 major metropolitan areas fell a record 8.4 percent in the year through November, suggesting the housing slump is worsening, according to a Standard & Poor index released on Tuesday.

The decline in the S&P/Case-Shiller Home Price Index topped the 6.7 percent annual drop for October and was deeper than predicted by economists at Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. The consensus was for a 7.1 percent fall, Goldman economists said.

Home prices across big cities have now declined for 11 consecutive months and show little sign of bottoming, said economists, including Robert Shiller, a founder of the index and chief economist at MacroMarkets LLC. The decline in the index accelerated to 2.2 percent in November over October, from 1.4 percent in the previous month, S&P said."


So the Fed cuts another half point - pretty unreal. Why the market doesn't take this as "holy crap! things are really bad!" is beyond me...

Wall Street extends gains on Fed rate cut
Wednesday January 30, 2:37 pm ET
NEW YORK (Reuters) - Stocks extended gains on Wednesday, sending indexes up more than 1 percent, after the Federal Reserve slashed interest rates by a half-percentage point, boosting hopes that the economy would avert a recession.
The Dow Jones industrial average (DJI:^DJI - News) was up 56.58 points, or 0.45 percent, at 12,536.88. The Standard & Poor's 500 Index (^SPX - News) was up 7.97 points, or 0.59 percent, at 1,370.27. The Nasdaq Composite Index (Nasdaq:^IXIC - News) was up 11.28 points, or 0.48 percent, at 2,369.34.

I think that if the chips were on the table Citibank, Countrywide, maybe UBS, and others would probably be out of business. A real global financial disaster. So instead the Fed is going to keep spreading the cheap money around, keep propping these entities up, and hope that the country comes through it. Free markets - my ass.

UBS Takes a $14 Billion Hit

The hits just keep on coming:

"PARIS — UBS, the largest Swiss bank, said Wednesday that it would write off $14 billion in exposure to the troubled United States housing market and post a net loss for 2007.

The write-offs will result in a record fourth-quarter net loss of approximately 12.5 billion Swiss francs, or $11.4 billion, the bank said in a statement. It also said it expected to report full-year net loss of 4.4 billion francs, or $4 billion, for 2007.

The numbers "include around $12 billion in losses on positions related to the U.S. subprime mortgage market and approximately $2 billion on other positions related to the US residential mortgage market," the bank said."

Good morning -

From the RGE Monitor this morning:

"A recession is usually defined as two consecutive quarters of negative growth. A different meaning is attached to the concept of global recession, in a world where China, Russia and India account for half of global growth and are growing at an annual rate of 11.2%, 7% and 8.5% respectively. A 2.5% rate of global growth qualifies as a global recession. Big investment banks like Citi now expect 2008 global growth at a weak 3.2% while the IMF just adjusted downward its 2008 growth forecast from 4.8% – as in the October WEO – to 4.1%, the slowest in five years. "

You Walk Away

This just leaves me speechless:

A couple of people have already made extensive commentary on it - so I won't add much more. One thing I think Steve Croft left out of his 60 Minutes report though was the fact that with these 100% (sometime 100% plus - which he did mention) mortgages is that the home "owner" has no equity in their property. Without that down payment - without real tangible loss, why wouldn't people just walk away?

Tuesday, January 29, 2008

Early morning/overnight news

Good morning. Since we are posting from Europe we can give you a round up of things from late yesterday and early this morning:

UBS: $14 Billion in Mortgage Write Downs That is a lot of money - and not the first write downs for UBS.

Bond Insurers Face Downgrade Despite Call for Delay This is not a good story. It probably has to happen - the house of cards must fall - but this will be a disaster.

F.B.I. Opens Subprime Inquiry Was there actual criminal activity in the whole subprime mess? Probably, but I think it will be a tough case for the FBI to prove.

The dollar was down a tenth of a penny in early morning trading.

A round up of business and finance headlines from the NY Times.

Fed cut

Well like I said on our first post - I am an amateur in economics. I have no formal training in the field, and just about everything I know I have learned from reading over the past ten or twelve years. What I am getting to is that there was no Fed action yesterday as I said there would be - it was just day one of the planned two day meeting. So today (Wed.) will be the announcement on interest rates. I am sticking with my call of a small cut - probably only a quarter point - which the market won't like.

Is U.S. in Recession?

The Wall Street Journal has an interesting blog post up discussing this question:

"Stanford economist Robert Hall, chairman of the National Bureau of Economic Research committee that dates recessions, is far from announcing whether such an event has started. But he and his colleagues on the NBER’s Business Cycle Dating Committee have taken a key step: The usually dormant panel has started discussing the economic data."

They also have the National Bureau of Economic Research definition of a recession:
“A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

It is sort of amazing that the US is so accustomed to "constant growth" that a simple recession could be causing so much anxiety not only in the US but across the globe. I say simple recession here because it is not even confirmed we are in one, although most economists of all stripes are now agreeing we are heading towards one. The argument now is going to be how deep and long this coming recession lasts - but - again - I am still shocked at just how much a panic there seems to from the mere word. Recessions happen in capitalist societies/economies - they are normal and probably healthy. I think the real fear here is that people know or feel (even if they are not saying so) that there may be a realignment of the US economy to what I call a more mature economy - that is - an economy of slower growth and demand overall. With the ever rising price of energy costs and the end of cheap credit to American consumers (due to not only the crashing housing market but to tighter credit world wide), maybe the American economy in the next several years will look a lot more like the economies of the EU - and I don't think that would be such a bad thing.

Countrywide: 1 in 3 subprime mortgages delinquent

More great news from the nations largest mortgage company:

"NEW YORK (Reuters) - Countrywide Financial Corp (CFC.N: Quote, Profile, Research), the largest U.S. mortgage lender, on Tuesday said more than one in three subprime mortgages were delinquent at year-end in the $1.48 billion portfolio of home loans it services.

Countrywide said borrowers were delinquent on 33.64 percent of subprime loans it serviced as of December 31, up from 29.08 percent in September. It also said borrowers were at least 90 days late on payments on 17.25 percent of subprime mortgages."

I don't know - I had CFC shorted at $20 and got spooked out of it after the first rate cut. Now that Bank of America is buying it it has managed to sneak back to the $6 level and change. I think without BOA this business was gone. Some people are trying to give Mozilo credit for giving up some dough here at the end - I think he is a criminal. BOA probably forced this on him - what was he going to do? This is a CEO who has done nothing but sell his own stock. He (reportedly) never bought any shares - he always flipped all his options - especially last year as the whole subprime mess began to crack and Wall Street was still busy peddling securities backed by all these crap mortgages.

Strong rate cut hopes lift U.S. index futures

What the market is expecting this morning:

"LONDON, Jan 29 (Reuters) - Wall Street is seen opening slightly higher on Tuesday, tracking gains in Europe and Asia as investors around the world bet the Federal Reserve has another interest-rate cut up its sleeve to help avert a recession."

I'm not buying it - we'll see!

Fed meeting today

Predictions are for fools - here's mine on today's interest rate decision from the Fed: they cut only a quarter point and the market sells off hard.

Anyway - the Fed is not supposed to be in the game of "saving" the market - whatever that means. Many people think that the recent inter-meeting three quarter cut was a mistake anyway, driven by world wide collapsing stock markets - that now in hindsight may have been partly caused by the Société Générale scandal (see this).

My idea of only a quarter point cut is not as solid as it was over the weekend- the terrible housing news from yesterday actually gave the stock market fuel (economy really bad, must cut rates more = (somehow!) good news for stocks). Of course it is only the traders that are going to profit from this - if we are in a recession, corporate earnings are going to continue to suffer and so will stock prices. Those who can move big or small piles around quickly (traders, both of the institutional and day variety) are probably the only ones that are going to profit from today's decision. An economy this weak (real or perceived) is not going to spring to life because cheaper money is floating around.

Monday, January 28, 2008

Calculated Risk

Calculated Risk ( is a blog we have been turning to daily now for the last several months (they first started posting in 2005). This site is a great place to find news and informed commentary about the latest economic shenanigans - especially those involving the housing market and all things related. For example a post from today: New Home Sales: Cliff Diving

Hey there...

So there is a recession coming - or maybe we are already in one. This blog will attempt to track news and commentary on the coming global slowdown, with a bent on how it affects individuals in the real world. We'll point you to the best blogs on the subject, pertinent news articles, and offer our own (amateur!) analysis too - we welcome your comments.

Cheers -