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Target, Saks, and Home Depot Wobble


So much for those stimulus checks...

Wednesday, August 20th, 2008 - By Steve Christ

Here's more evidence of a consumer led recession as the housing ATM shuts down and wallets across the country slam shut.

The Christmas season is starting to look like one that only a scrooge could love.

From the Financial Times by Johnathan Birchall entitled: Leading stores suffer from US slowdown:

"The breadth of the slowdown in discretionary US spending was underlined on Tuesday by quarterly results from Home Depot, the home improvement store, Target, the mass discounter, and Saks, the luxury fashion retailer.

Saks saw its shares fall over 8 per cent to $10.29 at the New York close after it reported a $31.7m loss on softening demand for its luxury ­clothing, shoes and

Saks also predicted flat or falling comparable sales for the second half of the year.

Over the first six months of the year Saks comparable store sales have increased just 2.7 per cent, compared to the high-single digit growth it saw before the economic slowdown started to hit higher-end consumers at the end of last year.

Steve Sadove, chief executive, said that the retailer had "experienced a softening across nearly all geographies and merchandise categories" during the quarter.

At the other end of the retail spectrum, Home Depot, the world's largest home improvement store, reported a 5.4 per cent fall in total sales, and a 7.9 per cent fall in comparable stores, as sales of products from paint to electrical goods fell.

Comparable sales of stores in California and Florida - the areas in the US most hit by the housing slump - fell by more than 10 per cent, mirroring results at Home Depot's rival, Lowe's.

Carol Tome, Home Depot's chief financial officer, said that, while statistics suggested that the decline in home improvement spending should be bottoming out, other factors such as the uncertain mortgage market and rising costs for consumers were continuing to weigh on the sector.

"We should be getting towards the bottom, but there's all this other ­uncertainty that cause us to remain cautious not just for the back half of 2008, but also into 2009," she said.

Target, the mass ­discounter which aims at a more prosperous customer than its market rival, Wal-Mart, also reported a fall in profits and sales, with net earnings down 8 per cent to $634m.

While new store openings pushed total revenues to $15bn, sales at stores open at least a year fell 0.4 per cent."

 

So much for those stimulus checks. Of course, can you imagine how much worse these numbers might have been without all of that "free money"?

Either way,three months from now we will really know just how bad the story is in retail—just in time for the holidays.

Until then, go short the Consumer Discretionary SPDR (XLY:AMEX) or even long the Consumer Staples Select Sector SPDR (XLP:AMEX). After all, cutting back has its limits.

By the way, here's a chart of the XLY, it's not one for the squeamish.

 

xly

 


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How Uncle Sam Fiddles with the Figures


The Real Numbers Are Likely Much Worse

Thursday, August 14th, 2008 - By Steve Christ

 

truth

 

Fuzzy Numbers. That according to Kevin Phillips is what the U.S. government is all about when it comes to official economic data.

In fact I wrote about Phillips in a piece published in May entitled: Uncle Sam's Phony Economic Numbers.

In a Harper's magazine story, Phillips wrote:

"Ever since the 1960s, Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the vigor and muscle of the American economy are measured.

The effect has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed.

The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range).

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession."

Since then I've come across, a continuation on this theme via a post on The Big Picture.

It's a video from Chris Martenson, and it explains how the government massages the numbers in ways that mere print never can.

So if you want to know how it all really works, I recommend you click the link below:

http://www.chrismartenson.com/fuzzy_numbers

Martenson's entire course, by the way, is well worth your time.

The cleat of reality is out there folks-just don't expect to get it from the government.

Ponder that while you consider the recently released inflation data. It was hot again.

From AP by Martin Crutsinger entitled: Consumer prices rise at double the expected rate

"Consumer prices shot up in July at twice the expected rate, pushed higher by surging energy and food costs. The latest surge left inflation running at the fastest pace in 17 years.

The Labor Department reported Thursday that consumer prices rose by 0.8 percent last month, twice the 0.4 percent gain that economists had been expecting.

It marked the third straight month of oversized inflation increases following jumps of 0.6 percent in May and 1.1 percent in June. And it leaves inflation rising by 5.6 percent over the past year, the biggest 12-month gain since January 1991.

Core inflation, which excludes volatile food and energy costs, rose 0.3 percent in July, slightly higher than the 0.2 percent increase that economists had expected. For the past 12 months, core inflation has risen by 2.5 percent, the highest 12-month change since February.

The battering of consumers continues as prices are rising for just about everything," said Joel Naroff, chief economist at Naroff Economic Advisors. "If you think things are going to get a lot better with the drop in petroleum prices, think again. The increases (in July) were broadbased."

The core inflation figure was driven higher by a big 1.2 percent jump in clothing costs, the biggest increase in this area since August 1998. Airline ticket prices, which have been surging because of higher fuel costs, jumped another 1.3 percent in July.

The big rise in inflation left consumers even more squeezed. The Labor Department said that average weekly earnings, after adjusting for inflation, fell by 3.1 percent in July compared to a year ago, the biggest year-over-year decline since November 1990."

The truth is out there....


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Greenspan Sees a Bottom, Foreclosures Soar


You Missed Again Alan

Thursday, August 14th, 2008 - By Steve Christ

 

 

greenspan

 

Alan, Alan, Alan.... you never learn.

That's what I thought this morning when I read Alan Greenspan has called out another prospective bottom in the housing market.

"Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," he told the Wall Street Journal.

And while it wasn't as awful as his Oct. 2006 call when he said the ``worst may well be over'' for the U.S. housing industry, it was pretty close. In fact, I'm a going to go on record and say that 2009 will make 2008 look very attractive by comparison.

So hold on to your glasses Al, the real "Age of Turbulence" is far from over. And try as you might, you will never be able to rewrite the history on this one.

Meanwhile, the bubble you created continues to collapse.

From RealtyTrac Staff entitled: Foreclosure Activity Increases 8% in July

"RealtyTrac, the leading online marketplace for foreclosure properties, today released its July 2008 U.S. Foreclosure Market ReportTM, which shows foreclosure filings - default notices, auction sale notices and bank repossessions - were reported on 272,171 U.S. properties during the month, an 8 percent increase from the previous month and a 55 percent increase from July 2007. The report also shows one in every 464 U.S. households received a foreclosure filing during the month.

"Bank repossessions, or REOs, continued to be the fastest growing segment of foreclosure activity in July, posting a 184 percent year-over-year increase - compared to a 53 percent year-over-year increase in default notices and an 11 percent year-over-year increase in auction notices," said James J. Saccacio, chief executive officer of RealtyTrac. "The sharp rise in REOs, combined with slow sales, has resulted in a bloated inventory of bank-owned properties for sale."

The Cape Coral-Fort Myers, Fla., metro area registered the highest foreclosure rate among the 230 metro areas tracked in the July report. One in every 64 households in the metro area received a foreclosure filing during the month - more than seven times the national average.

Three California cities followed in the metro foreclosure rate rankings: Merced was at No. 2 with one in every 73 households receiving a foreclosure filing; and Stockton and Modesto were in a virtual tie, each with one in every 82 households receiving a foreclosure filing.

With one in every 85 households receiving a foreclosure filing, the Las Vegas metro area's foreclosure rate ranked No. 5, followed by three more California metros: Riverside-San Bernardino, Bakersfield and Vallejo-Fairfield.

Fort Lauderdale, Fla., documented the ninth highest metro foreclosure rate, and the foreclosure rate in Phoenix took the No. 10 spot."

So where are you in the foreclosure morass? Here's the current foreclosure map from RealtyTrac.  It's getting redder every month.

 

foreclosure

 

By the way, according to a new report from the National Association of Realtors (NAR), the nationwide median existing single family home price plunged 7.6% to $206,500 in the second quarter, down from $223,500 in the same period of 2007.

You missed again Alan. Now go away.


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The Credit Crisis Enters the 3rd Inning


What Would Yogi Say?

Wednesday, August 13th, 2008 - By Steve Christ

 

berra

 

I've never been a big fan of the New York Yankees, but if there is one Bronx bomber you have got to love it's Yogi Berra.  After all, Berra could do it all in his day and and he certainly had a way with words.

In fact, if he were asked about it today I'm sure he would have something funny to say about the absurdity our current economic mess.

But since he's not taking my calls, I thought I would put a few of his famous words in the mouths of some other famous people. I hope he doesn't mind.

Here they are:

Something Ben Bernanke would say:

"It's tough making predictions, especially about the future"

Something Toll Brothers CEO Bob Toll would say:

"If they don't want to come, you can't stop them"

Something General Motors CEO Rick Wagoner would say:

"If you don't know where you're going, you'll wind up somewhere else" 

Something former Bear Stearns CEO Jimmy Cayne would say:

"The future ain't what it used to be"

Something short seller William Ackman would say:

"You can observe a lot by watching"

Something Bank of America CEO Ken Lewis will say to his shareholders one day:

"We make too many wrong mistakes"

A conversation between Richard  W. Fisher and Fed Chief Ben Bernanke:

Phil Rizzuto/Fisher: "I think we're lost."

Yogi/Bernanke: "Yeah, but we're making great time."

Something Economist Nouriel Roubini would say:

"It ain't over til it's over."

Of course, there is just one more:

"This is like deja vu all over again."  

That's is what the rest of us say every three months when banks release their earnings.

By the way, according to an article in Bloomberg bank losses have now passed the $500 billion mark: 

"Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.

The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.

The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half its forecast of $1 trillion for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini predicting losses to reach $2 trillion.

``It just keeps spreading from one asset to another, so it's hard to know when these writedowns will stop,'' said Makeem Asif, an analyst at KBC Financial Products in London. ‘The U.S. economy needs to stabilize first. But even then, Europe could lag and recover later. There's still a lot more downside.'"

 

I guess that makes it about the 3rd inning now. Let's hope it doesn't go extra innings.

 


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Paulson's Freddie and Fannie Hangover


The Worst is Yet to Come

Tuesday, August 12th, 2008 - By Steve Christ

 

 

paulson

 

In the annals of "too big to fail", there have only been two companies in my mind that had to be bailed out.

They are Freddie and Fannie, even though longer term they should be broken up into several much smaller pieces.

However, letting them go under in the blink of an eye would simply be unthinkable.

Without them, the housing market would go into a total deep freeze—-10 times worse than it is right now.

After all, Freddie and Fannie are the mortgage business these days with over 70% of the market. Besides if we stiff China on the $400 billion they have wrapped up in these two companies, they might cut us off completely. Oh my...now that would be unthinkable.

But despite the government's now explicit backing of these two miscreants, neither one of them is even close to being out of the woods yet—not by a long shot.

So when I heard Hank Paulson tell Tom Brokaw this weekend that ""We have no plans to insert money into either of those two institutions", I had to laugh.  It's preposterous on the face of it.

That's because what's going on at Freddie and Fannie is just like the rest of mortgage mess: It is a slow-motion train wreck that can't be stopped. And while Freddie and Fannie might not need any "money injections" today, at some point they surely will.

Here's why.

What first started with sub prime has now worked its way fully up the value chain. Alt-A is toast and now even "prime" mortgages are defaulting at an alarming rate.

That means that the worst is yet to come for Freddie and Fannie and Paulson knows it. 

Beacuse when "primes" begin to default in unexpected numbers, the results will push these two companies even deeper into the pit, since these will be new "unexpected" losses. The numbers of which will be staggering.

Unfortunately, that is exactly what is happening.

From CNNMoney by Les Christie entitled: The next wave of mortgage defaults

"Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.

"The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm.

Washington Mutual CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005.

Also last month, JP Morgan Chase CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier.

Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income.

Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport.

"Home prices will drop for quite a while - maybe several years," he said."

 

Paulson, by the way, also ruled out the idea he was going to stick around for another tour of duty.

He also told Brokaw, "I am very focused on getting everything done I can get done between now and January 19th. I look forward to doing other things next year."


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Stimulus Fails to Excite


More Pain Forecast

Friday, August 8th, 2008 - By Steve Christ

 

wake up

 

Oil is down.

The dollar is up.

The stock market is rallying.

So what's not to like?

Well, for one there is the consumer. They have one foot in the grave and the other on a banana peel.

Of course, it wouldn't be that big of deal if consumer spending didn't make up over 70% of U.S. GDP, but it does.

That is going to make for one rough fall in retail—-especially now that those stimulus checks have already been spent.

Here's the skinny in that regard from MSNBC. The gov't crack hand out has run its course.

It's in a story by John W. Schoen entitled: Stimulus spent, retailers face tough rest of the year

"With the bulk of some $100 billion in tax rebates now deposited in American consumers' bank accounts, the hoped-for boost in spending has proved disappointing for the nation's retailers. As chain stores reported July sales figures on Thursday, there are signs cash-strapped households may cut back even further in the second half of the year.

When the economic stimulus package was enacted in February, analysts debated just how much of the money would translate into new spending. Now that most of the money has been distributed, it appears that much of it went to pay down credit card bills or beef up savings accounts.

"We expected that as the checks fade, so would sales," said Goldman Sachs retail analyst Adrianne Shapira. "(Consumers are) filling up their SUVs, their home equity values are plummeting, and they're feeling a lot of pressures."

Those pressures may explain why the $100 billion worth of tax rebate checks didn't give retailers a bigger lift in July. Some 28 percent of consumers surveyed in July by market researcher TNS Retail Forward said they used the money to pay off credit cards; 27 percent said they used it to pay for everyday expenses like groceries and gasoline, and 20 percent said they put the check into a savings account. Only 11 percent said they used the rebate for discretionary purchases like a new TV or a vacation.

Now, with those rebate checks spent, retailers are warily looking toward sluggish sales through the rest of the year. Back-to-school shopping is already off to a slow start, especially for new clothes.

On Wednesday, MasterCard reported that sales of clothing and shoes fell in July, as consumers stretched to keep up with rising prices day-to-day staples like food and gasoline.

"We're continuing to see a divergence here in where the retail dollars are flowing," said Michael McNamara, an executive with SpendingPulse, MasterCard's retail data service. "They really seem to be flowing into the nondiscretionary areas like drugstores, food and gasoline, and it's really coming at the expense of some of these retailers such as apparel and electronics and appliances."

That doesn't bode well for the holiday shopping season, when many retailers look to make the bulk of their sales and profits for the year. With wages rising more slowly than inflation, consumers will have an even harder time making ends meet after their rebate checks have been spent.

"We think that when the stimulus checks end, which is this quarter, we're going to hit an air pocket and disposable income will take a negative hit relative to what we saw in the second quarter," said Brian Bethune, an economist with Global Insight."

 

So much for the escape from reality.

Now its time to wake up and smell the coffee. 


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The Lenders Sober Up


Dude, Where's My Car?

Thursday, August 7th, 2008 - By Steve Christ

hangover

 

Here's is a great story about what is going on in the "real world" of mortgage banking these days.

The lenders have sobered up and put away the booze.

From the USA Today by Anna Bahney entitled: Mortgage rules changes skewer some sales

"The deal was to close on June 27.

Drake Paul, a pediatrician, entered into a contract at the end of May to sell his two-bedroom, one-bath newly renovated house in Sparks, Nev., for $170,000. The buyer had lender approval, the appraisal was done, and the inspection checked out.

Then the lender called: Mortgage requirements had tightened, and the buyer no longer qualified for the 5% down payment for which he was approved. Only 48 hours before he was to sign the papers and get the keys, the buyer learned he would need to put down 20%, jacking up the initial payment from $8,500 to $34,000.

"Who can afford that?" asks Paul, 37, whose property is now back on the market after the deal collapsed. "A person that can afford a $170,000 house does not have $34,000 in cash. It just doesn't work that way."

Both buyers and sellers, such as Paul, are being caught off guard by a rippling wave of mortgage changes. Lenders are responding to the crisis in their industry by suspending mortgage products, raising required down payments and imposing a premium on loans in regions they deem to be "declining" markets. Even when they announce the changes, the message sometimes doesn't get to the mortgage broker until nearly the last minute."

"The underwriting has really tightened up," says David Olson of Wholesale Access Mortgage Research and Consulting. "Before, if you could fog a mirror, you got a loan. Now, that's not the case."

In Olson's estimation, at the peak of the housing boom, roughly 20% of the mortgage market was subprime, and nearly 20% was "Alt-A loans" - or "A-minus" loans, typically for those with good credit but with high debt-to-loan ratios or little or no proof of income. Both categories are now nearly extinct. That means about 40% of the residential mortgage market has all but disappeared.

"I don't have the hours in the day to read all the changes that come in every day," Olson says.

"Buyers come in with confidence, and once they have talked with a lending practitioner, it's like they've been hit over the head with a ton of bricks," says Dean Moss, an agent at Keller Williams Fox and Associates Realty in Chicago.

The result? Some buyers who planned to take the plunge and buy are heading back to the sidelines.

Moss says that an increased down payment on a typical $400,000 house in Chicago gives buyers significant pause: "Now, you have to put down $60,000. Buyers are like, 'I was scraping to get the $40,000. How am I going to come up with another $20,000?' "

"In my opinion," Moss adds, "the only people who have a shot in this market are those with no house to sell, who have a good income - maybe two professionals - and have a good down payment. They can name their own ticket. That's a small percentage."

 

So why am I so negaive on housing? It's simple.

People that can't borrow money don't buy homes.

This is one party that won't be repeated. 

 


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Fed Leaves Rates Unchanged


The Great Oz has Spoken

Tuesday, August 5th, 2008 - By Steve Christ

 

 oz

This one was baked in the cake, but the Great Oz has spoken.

Tough talk on inflation....no movement on rates....and the lone dissenter was Richard W. Fisher.

Go figure.

The good news is the markets liked it and the dollar has rallied of late.

Of course that doesn't mean that Dorothy is out of the wood yet..not by a long shot.

Even so, it beats a down market any day of the week. 

From the Federal Reserve:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting."

 

 


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