Wednesday, May 7, 2008

Some Things I'm Reading

Most of these items can be filed under the heading of "things the market doesn't care about as it races upward, trusting everything will be fine in 6 months" :) Myself, I am fascinated with the dichotomy between the real economy and the stock market economy; I believe in the coming decade the divergence could grow even larger as more money is concentrated in the upper classes of society and less profits are due to the US as each year passes. But to see it so early, is interesting and I think has to do more with the printing fest at the Fed.

We'll end this post with a bright spot... if you live in Forth Worth, TX

Real economy issues that don't matter to Wall Streeters

Credit Crunch Issue #1: GE to Stop Financing Boats, and Motor Homes (ironically 2 things I think are excellent shorts) I went on record last year saying 2008 would be the worst year in auto sales in 2 decades - you can toss boats and RVs right in there. Talk about discretionary big ticket items (with terrible mileage to boot) GE is just 1 company but a large company; keep in mind many of these large US companies have huge finance arms (the auto companies are another example) As credit dies off, so does much of the lifeblood of US "expansion".
  • The company told boat and recreational-vehicle dealers that it would cease taking applications by July and underwriting new loans Aug. 1
  • "We just really looked at a lot of different alternatives and are facing a challenging environment and ultimately came to the decision that we needed to invest our resources and capital in areas where we could see good return," Williams said.
  • The decision was a blow to the already hard-hit recreational products sector. Makers of boats and motor homes have had a rough year as rising gas prices, a tough housing market and fears of a U.S. recession caused many consumers to scrap plans to buy big-ticket recreational items.
  • The shares of Brunswick Corp., the world's largest maker of recreational boats, No. 1 motor home maker Winnebago Industries Inc. and leading U.S. boat retailer MarineMax Inc. are all down this year.
  • "The decision is another in a string of developments -- diminishing home values, higher gas prices, weaker consumer confidence -- that has 2008 on pace to be the worst year since 1992" for RV and boat makers, Robert W. Baird analyst Craig Kennison wrote in a note to clients.
Credit Crunch Issue #2: Countrywide, still the country's largest private lenders says no more home equity loans.... for almost any human living in Las Vegas. Should see this sort of thing extend to more mortgage companies and to more states (CA and FL next?). Just another step on the path to destruction for indebted Americans - after the credit cards are maxxed, and the 401ks emptied - then the real bankruptcies will happen - should see that wave circa 2009.
  • Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers, including the $60,000 Christopher Whipple says he needed to expand his cell-phone accessories business. ``I hope this doesn't break me,'' the 35-year-old retailer said. His credit score was 790 out of a possible 850, putting him in the top 40 percent of borrowers. ``It's going to hurt more than I thought.''
  • Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide, said Michael Kratzer, president of a Bankrate Inc.-owned Web site that's fielding consumer complaints. The lenders are targeting borrowers in cities where property values are falling, including Las Vegas, Chicago and Los Angeles, he said.
  • John Simon, 42, borrowed $35,000 on low-interest credit cards in 2007 to pay down his $63,000 credit line and save on the 11.75 percent interest he says Countrywide charged. He expected to be able to access the credit line later. When Countrywide froze the line, he wasn't able to get money needed to pay his bills.
Speaking of Vegas, the NYTimes says their are signs of trouble on the Strip, something we've predicted for a long time. After all a city that relies on Subprime nation really can't be that resilient when the bills start coming due... in a highly inflationary environment. Give it a year; this is just the beginning of this saga.
  • For decades, this gambling center seemed nearly immune to the economic swings of the rest of the country. But these days, the city built on excess is seeing a troubling sign: moderation.
  • Gambling revenue and hotel occupancy are down. Resorts are slashing room rates and offering coupons or free nights. Casino operators are firing hundreds of workers, and their stock prices have plummeted since October. Credit is drying up for hotel and condominium projects planned before the slowdown arrived.
  • Even the people still coming to Las Vegas are spending less. Julia Lee, 27, of Los Angeles said she normally brings $10,000 on her trips here to play blackjack. As Ms. Lee picked up show tickets the other night, she said she had brought less than half that on this trip. “My parents are in real estate, and we’re worried,” she said.
  • But Las Vegas has a huge inventory of new casinos and hotels due for completion in the next few years, and a long national recession could send the city reeling.
  • The Las Vegas outlook would be far worse if not for foreign visitors. They are taking advantage of the low dollar (do we repeat this on a daily basis? thank god for foreigners who actually have money?) But representing only 13 percent of visitors, foreigners can take up only so much slack. (Import those Italians, French, Saudis, Chinese direct into Vegas, charter planes - we can do this Vegas! Be creative!) Gil Colon, sales manager at the Villa Reale antique and furnishings shop, said his business was off a bit, and would be down more except for revenue from foreigners, whose purchases have jumped from 30 percent of his sales two years ago to 50 percent today.
  • To manage the slowdown, Las Vegas is revving up an overseas marketing campaign, and in the United States, it is pitching spontaneous Vegas escapes. “Do it without thinking!” says one television spot. (That campaign worked wonders for mortgages in 2005-2006, eh?)
  • But executives here worry this recession could be different from the last two — in 1990-1 and 2001 — when consumer spending was propped up by easy credit. Now credit is drying up. And high gas and food prices, declining home values and rising unemployment are keeping many Americans closer to home. (finally... finally... some mainstream publications are understanding.... better late than never)
  • More important, over the last two decades Las Vegas has shifted from a destination dominated by gambling to one with more appeal to middle-class shoppers, diners, golfers and others who can afford brief splurges. Whereas gambling represented 58 percent of revenue for Las Vegas Strip resorts in 1990, it represented only 41 percent of revenue in 2007, according to a Deutsche Bank report.
28 Million Americans are on food stamps, thats almost 10%, and it's rising - but with food prices going up so much; they are falling even further behind (no worries, buy stocks) I remember when I was a child, mother used to say, you better eat that, don't you realize that some hungry kid in China would jump at the chance? So in 10 years, can you imagine the Chinese mother saying... you better eat that, don't you realize that some hungry kid in America would jump at the chance? Nah, could never happen... nah.
  • For those on food stamps, higher prices for milk, eggs, bread and other staples often mean tough choices and empty bellies. Many are forced to forgo fresh vegetables and meat, while loading up on pasta and potatoes. Others are turning to churches, food banks and other charities, which are already strained by the increased demand.
  • One in 11 Americans receive food stamps, according to federal statistics. As the economy weakens, more and more people are turning to this support system (the world's "richest" country - if you exclude debt of course... )
Two stories on Fannie Mae and Freddie Mac - the gist is as we've been saying for months - the more the situation worsens in the mortgage market - the more these 2 entities are being ask to lever up. If they implode - your tax dollars will be hard at work doing bailing out.

WSJ: Are Fannie and Freddie Good as Gold?
NYTimes: New Price Drop Could Imperil Mortgage Agencies
  • Since March 10, the cost of insuring against a debt default by the government-sponsored mortgage companies has plunged by more than 60%. Fannie's stock has jumped 44%, and Freddie's 49%, though both are still near decade lows. In March, investors worried Fannie and Freddie would fall into the abyss, despite Uncle Sam's implicit backing. When J.P. Morgan Chase agreed to scoop up Bear Stearns in a government-officiated shotgun wedding, investors decided that government backing was as good as gold.
  • Washington officials are encouraging the GSEs to take on more mortgages to keep the housing market moving along. That could mean faster growth, and higher fees mean more income. Still, it's tough to swallow a bull case for Fannie or Freddie. Some 2.3% of prime loans were 60 days past due in February. That was the highest in at least a decade and up from 1.4% a year ago
  • The companies, which say fears that they might falter are baseless, have recently received broad new powers and billions of dollars of investing authority from the federal government. And as Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.
  • Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments. (now that's leverage baby!)
  • “We’ve taken tremendous risks by loosening these companies’ purse strings,” said Senator Mel Martinez, Republican of Florida and a former secretary of housing and urban development. “They could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.” (don't worry, "it's all priced in!"
  • Moreover, the companies are using their newfound clout to push Congress and their regulator to roll back the limits that were imposed after recent scandals over accounting and executive pay, according to participants in those conversations. (nice... )
  • It’s not irrational to be thinking about a bailout,” said that person, who requested anonymity, fearing dismissal.
  • A report released earlier this month by Mr. Lockhart, the regulator, noted that although Freddie and Fannie had a combined $19.9 billion of “unrealized losses” on mortgage-related investments, neither company had reduced its earnings to reflect those declines. That is because they judged the losses to be temporary — in essence wagering that the mortgage market would recover before those assets were sold. Such a wager is permitted by the rules but difficult for outsiders to analyze. (oh haven't we heard this song and dance before in our banking system?)
  • Both companies have also recently changed their policies on delinquent loans, which they previously recorded as impaired when borrowers were 120 days late. Now, some overdue loans can go two years before the companies record a loss. (when bad news hits, change the rules - it works for our government reports - is it any surprise it happens in our accounting?)
  • But the biggest risk, analysts say, is that both companies are betting that the housing market will rebound by 2010. If the housing malaise lasts longer, unexpected losses could overwhelm their reserves, starting a chain of events that could result in a federal bailout.
Get your wallet out for 2010. This should be at least $4-$10K for every man, woman and child no? Get your kids out there mowing lawns - we need his taxes... or better yet, could you please send him overseas to people who have real money? Because transfer of wealth from 1 American to another for services is not really any level of growth (although 70% of our economy is based on such farce).... we need those tax dollars folks...2010 is fast approaching.

Last, at least we have Fort Worth Texas - there is always a silver lining to all the other negative line items we always hear about (darn negative media, always trying to paint a dark picture to get ratings) Everything is fine in "new oil... err... natural gas" country! (p.s. this is also happening in parts of Pennsylvania - so we are creating some millionaires one way or the other at least) :)
  • "If you don't have a gas well, GET ONE!" implores the billboard on the interstate through Fort Worth, Texas. And in this amiable community (where, as it happens, I make my home), many neighborhoods are getting a gas well - whether they like it or not.
  • Welcome to Texas's newest boomtown, a city of 686,000 that just happens to sit on top of a giant natural gas field known as the Barnett Shale. With demand for natural gas rising (due in large part to demand from utilities) and the price spiking (it's doubled in the U.S. since last summer), exploration companies have kicked off a drilling frenzy in Fort Worth.
  • The upside is palpable around town. Once-struggling oilmen and big landowners are suddenly flush with gas money, while thousands of average homeowners are now collecting modest monthly royalty checks. According to an industry-funded study, an estimated 84,000 jobs have been created throughout the region by the drilling boom. "It's created a new wealth in our city," declares Fort Worth Mayor Mike Moncrief. "It's inoculated our economy. We find ourselves being an island in a sea of recession around us." (what recession?? - there is no RECESSION - source: Government) [May 1: Is it an Official Recession? NYPost Says it Should Be] Unfortunately - 80% of Americans have now been hoodwinked to believe it's a recession, ignoring how wonderful their situation are... damn media.
Conclusion: Buy stocks. Everything is priced in. Enjoy.

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