The Daily Ration
Recent Posts Archives

"The Worst is Yet to Come..."


Remember when the Merrill Lynch CEO said the subprime crisis was "reasonably well contained"?

Tuesday, August 19th, 2008 - By Ian Cooper

If I hear one more banking CEO reference baseball metaphors for how deep our financial crisis really is, I'll scream.  Truth is - we're no where near finished with the downturn.  Honest. 

Smart analysts like Meredith Whitney know this.  I know it.  And you know it.  It's just the banking world and the naïve that actually believe we're nearing a market bottom.

Richard Fuld, for example, once told us the worse of the crisis is "behind us." 

JP Morgan Chase's Jamie Dimond believed the market debacle is "maybe 75 percent to 80 percent over."

Remember when the Merrill Lynch CEO said the subprime crisis was "reasonably well contained"?

Or when FDIC Chairman Sheila Barr said we're in the 7th inning?

Or when Morgan Stanley said we're in the 3rd inning?

Or even when Morgan Stanley CEO John Mack says the 8th inning... maybe even top of the 9th?

Truth is we're lucky if we're in the top of the 6th inning of a double-header. 

But truth be know, "The worst is yet to come in the U.S.," according to Kenneth Rogoff, former chief economist at the IMF.

From Bloomberg.com:

"Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund."

"The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''

"The U.S. housing slump has triggered about $500 billion in credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Bonds of regional banks such as National City Corp. and Keycorp are under pressure on expectations of more fallout. Rogoff, 55, said the government should nationalize Fannie Mae and Freddie Mac, the nation's biggest mortgage-finance firms."

"Freddie Mac and Fannie Mae ``should have been closed down 10 years ago,'' he said. ``They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.''

"Banks repossessed almost three times as many U.S. homes in July as a year earlier and the number of properties at risk of foreclosure jumped 55 percent, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. U.S. builders broke ground on the fewest houses in 17 years last month, according to a Bloomberg News survey."

"Rogoff told a conference in Singapore today that the credit crisis is likely to worsen and a large bank may fail, Reuters reported earlier. He was the IMF's chief economist from August 2001 to September 2003."

"Like any shrinking industries, we are going to see the exit of some major players,'' Rogoff told Bloomberg, declining to name the banks he expects to fail. ``We're really going to see a consolidation even among the major investment banks.''

"The only way to put discipline into the system is to allow some companies to go bust,'' Rogoff said. ``You can't just have an industry where they make giant profits or they get bailed out.''

Oh, and don't forget that Option ARM resets, which will be worse than subprime, is right around the corner.

 "It shouldn't come as a shock when mountainous Option ARM and Alt-A loans begin resetting and the second leg of the credit crisis begins.

Alt-A loans were given to borrowers with credit scores of between 620 and 700, and included the option of interest-only loans, option ARMs, and no documentation loans that required little if any documentation for loan approval. Ninety percent of those that got an Option ARM in 2006 provided little or no documentation.

Ninety percent!

And it's estimated that only 60% of Option ARM borrowers make only minimum monthly payments. Others estimate that up to 80%.

Say a borrower makes minimum payments on a $600,000 loan. That loan could easily be a $750,000 loan within two years.

And we're supposed to be shocked when this problem ends in the second credit crisis?"

I'd love to hear what you think.  You can leave a message below.


Permalink | Comment on this

This Only Affects a Third of All Homeowners Who Bought Over the Last Five Years


And that's the best case scenario...

Tuesday, August 12th, 2008 - By Ian Cooper

"Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth," according to Bloomberg.com. And the numbers are rising fast.

But that may just be best case scenario. Implode-o-Meter says "it is widely thought the Zillow valuation estimates are high because they do not take in account many of the actual foreclosure related sales that made up some 42% of all sales in the state of CA last month and even a larger percentage in other ‘bubble states'."

What's scary is if the numbers are correct, housing prices and the broader mortgage market fiascos are going to get a lot worse before they get better.

Here's more from Bloomberg.com.

"Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.

Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.

Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss, Zillow said. That contributes to the foreclosure rate because some homeowners can't absorb the loss and end up surrendering their homes to the bank that holds the mortgage, said Stan Humphries, Zillow's vice president of data and analytics.

``For homeowners who need to sell, this is a gravely serious situation,'' Humphries said in an interview. ``It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices.''

The highest percentages of homeowners with negative equity were located in California. In four of the state's metropolitan areas — Stockton, Modesto, Merced and Vallejo-Fairfield — the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 percent, Zillow said.

In five more California areas — the Inland Empire (Riverside-San Bernardino), Bakersfield, Yuba City, El Centro and Madera — the percentages were more than 80 percent.

Foreclosure Sales

In Stockton and Modesto, more than half the sales in the second quarter were of foreclosed homes, Zillow said. Almost 15 percent of sales nationwide were foreclosures, the company said.

Prices fell on a year-over-year basis in 140 out of 165 markets, Zillow said. Pittsburgh, Oklahoma City and Austin, Texas, were among the markets that saw rising home values, the company said.

The 9.9 percent decline in home values was the largest on a year-over-year basis in at least 12 years, Zillow said. The median home price of $206,919 was the lowest since the fourth quarter of 2004, the company said.

``Sellers are starting to adjust their expectations,'' Zillow Chief Financial Officer Spencer Rascoff said in a Bloomberg TV interview. ``More sellers accepting a loss is actually a sign of optimism. It means that the transactions might start happening. There are so many sales contingent upon the buyer selling their home.''

The Zillow Home Value Index is the median valuation for a given geographic area on a given day and includes the value of all single-family residences, condominiums and cooperatives, regardless of whether they sold within a given period, the company said. The index at the national and metropolitan area levels is calculated using a weighted average of the median home value for each county, Zillow said."


Permalink | Comment on this

Why Banks Need to Get Real


Meredith Whitney's idea of "real" is drastic...

Monday, August 4th, 2008 - By Ian Cooper

Ever since Meredith Whitney downgraded Citigroup, I've been a fan... and for good reason.  Like me, Whitney believes the credit crisis is far from over, despite the clamoring talking head buffoons that think credit woes and housing debacles are bottoming.

Whitney even warned last year, and continues to warn, that the "incestuous" relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks' ability to recover."

Here's more from Forbes magazine:

"You're going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change."

"Whitney's bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be "unprecedented credit losses" for subprime lenders. The problem, as she saw it, was that loose lending standards and the proliferation of teaser-rate mortgage products had artificially inflated the U.S. home-ownership rate."

"A lot of the new homeowners were in over their heads, she believed, and would have trouble making their monthly payments when home prices started to fall and their teaser rates got bumped up."

Her current concern is that banks aren't cutting costs or losses in loan portfolios quick enough.  "On the cost side, she says, banks have yet to come to terms with the disappearance of the securitization market, which she believes will stay in hibernation for the next three years."

"Why does this matter? From 2001 through 2005, for every dollar of bank capital used to make mortgage loans, 10 were supplied via investors in mortgage securities. All that secondary-market capital is now sidelined, but the staffing levels of bank lending departments don't yet reflect it. "

"She also argues that banks need to "get real" about how they're valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar."

"Whitney's idea of "real" is pretty drastic. Whereas most banks are estimating 20% to 25% peak-to-trough declines in housing prices, the Case-Shiller housing futures traded on the Chicago Mercantile Exchange portend a much steeper 33% decline, she points out."

"In fact, Whitney thinks the actual declines will be worse - closer to 40% - because of the loss of the securitization market and the paucity of mortgage credit available. And that means more defaults: "The consumer's ability to refinance his way out of trouble has diminished greatly."

"Whitney's critics, and there are many among bankers and analysts, contend her bearishness at this point shows she simply doesn't now how to measure the remaining downside risk. "

"Her response: If she has no idea how to properly value bank stocks now, it's because the metrics don't work. Price-to-earnings ratios are useless when earnings are nonexistent. And valuing banks on price-to-book ratios is just as futile. Those book values - which reflect underlying assets and liabilities - are moving targets."

Well, that, and a lot of bankers and analysts, as compared to Whitney, don't have the guts to tell it like it is.


Permalink | Comment on this

White House Lowers Growth Estimates


Thanks to housing, energy, financial, and unemployment fiascos...

Monday, July 28th, 2008 - By Ian Cooper

Thanks to rising unemployment, housing, financial, and energy fiascos, the White House lowered its economic growth forecast this year and for 2009.  For 2008, 1.6%, as compared to February's 2.7% projection is expected.  For 2009, growth of 2.2% versus 3% growth rates is expected.

According to the AP:

""The U.S. economy has continued to expand, but growth has slowed as a result of the sharp housing decline, disruptions in financial markets and high energy prices," the administration said.

With economic growth slowing, the unemployment rate is projected to move up to 5.3 percent this year and to 5.6 percent in 2009. The administration's old forecast called for the jobless rate to climb to 4.9 percent this year and next. The unemployment rate averaged 4.6 percent in 2007.

"Because of the recent slower economic growth, the labor market is likely to remain sluggish for a period of time before returning to better performance," the White House budget office said.

The administration believes the jobless rate will drop back to 5.3 percent in 2010 and continue to dip in subsequent years, falling to 4.8 percent in 2012 and 2013.

On the inflation front, consumer prices are now expected to rise by 3.8 percent this year, up from the administration's old forecast for a 2.7 percent rise. Prices should calm down a bit next year, rising by 2.3 percent. Still, that's also higher than the old forecast of a 2.1 percent rise.

"Inflation has increased in recent years, in large part because of surging food and energy prices," the administration said. Oil prices, which had spiked to a record high of more $146 a barrel, are now hovering around $124 a barrel.

The new forecasts were contained in the budget office's updated look at the nation's balance sheets. A record $482 billion budget deficit is now being projected for next year, something the next president will inherit."


Permalink | Comment on this

"We're saying no to almost everybody"


Companies that rely on credit are now delaying and canceling expansion plans

Monday, July 28th, 2008 - By Ian Cooper

There's a heart-stopping article in today's New York Times about the changing commercial lending environment and the impact on the broader economy. 

"Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring."

"Companies that rely on credit are now delaying and canceling expansion plans as they struggle to secure finance."

"Drew Greenblatt, president of Marlin Steel Wire Products, figured it would be easy to get a $300,000 bank loan to finance a new robot for his factory in Baltimore. His company, which makes parts for makers of home appliances, is growing and profitable, he said. His expansion would add three new jobs to an economy hungry for work."

"But when Mr. Greenblatt called the local branch of Wachovia - the same bank that had been aggressively marketing loans to him for years - he was distressed by the response."

"The exact words were, ‘We're saying no to almost everybody,' " Mr. Greenblatt recalled. "This is why God made banks, for this kind of transaction. This is going to slow down the American economy."


Ouch.

Here's the full New York Times article, if you're interested.

"Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.

Drew Greenblatt of Marlin Steel Wire Products is having trouble getting a $300,000 loan to buy a robot for his Baltimore factory. "This is what a bank is supposed to do," he said.

Two vital forms of credit used by companies - commercial and industrial loans from banks, and short-term "commercial paper" not backed by collateral - collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

"The second half of the year is shot," said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. "Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit."

Companies that rely on credit are now delaying and canceling expansion plans as they struggle to secure finance.

Drew Greenblatt, president of Marlin Steel Wire Products, figured it would be easy to get a $300,000 bank loan to finance a new robot for his factory in Baltimore. His company, which makes parts for makers of home appliances, is growing and profitable, he said. His expansion would add three new jobs to an economy hungry for work.

But when Mr. Greenblatt called the local branch of Wachovia - the same bank that had been aggressively marketing loans to him for years - he was distressed by the response.

"The exact words were, ‘We're saying no to almost everybody,' " Mr. Greenblatt recalled. "This is why God made banks, for this kind of transaction. This is going to slow down the American economy."

Earlier this year, credit extended by banks to companies and consumers was still growing at double-digit rates compared with three months earlier, according to an analysis of Federal Reserve data by Goldman Sachs. By mid-June, bank credit was declining at an annualized pace of more than 6 percent.

That is a drop of nearly $150 billion, an amount much larger than the value of the tax rebates the government has sent to households this year in an effort to spur economic activity.

Financial industry executives say tighter credit from major banks represents a swing back to a realistic assessment of risk, after years of handing out money with abandon. Those practices produced a mortgage crisis whose losses could reach $1 trillion, by many estimates.

"Before, they wouldn't verify income and they were loose on the valuations of collateral," said John W. Kiefer, chief executive of First Capital, a private commercial lender. "Now they're tightening down on the ability to repay. They go off the reservation, and now they come back to basics. It's preservation for many of them at this point. It's survival."

But if the newfound caution of American banks is prudent in the long run, the immediate impact is amplifying the troubles with the economy. The Federal Reserve has been lowering interest rates aggressively to make money flow more loosely and to spur economic activity.

The financial system is not going along: As banks hold on to their dollars, mortgage rates are climbing. So are borrowing costs for corporations.

Some suggest that the banks, spooked by enormous losses, have replaced a disastrously indiscriminate willingness to hand out money with an equally arbitrary aversion to lend - even on industries that continue to grow.

"There's been a lot of disruption in the credit market, and a lot of traditional lenders have really tightened up," said Gregory Goldstein, president of Macquarie Equipment Finance, which leases computer gear and other technology to companies. "Before, some of the standards they lent on were weak, but we think they have overshot and gone too far on the other end."

Such was Mr. Greenblatt's reaction, as he learned that an infusion of credit for his Baltimore factory would not come easily. His company has been enjoying double-digit sales growth. This month, it received the two largest orders in its history, he said.

"It was jubilation," he said. "I was doing the Funky Chicken."

The initial call to Wachovia left him dismayed.

"I'm stunned," Mr. Greenblatt said. "God is smiling on this factory. We're at such an exciting inflection point, and this is what a bank is supposed to do. There's sand in the gears."

No loan meant one fewer order for the factory in Chicago that makes the robot Mr. Greenblatt wants to buy, and fewer hours for workers there. It meant less business for the truck driver who would have hauled the robot to Baltimore, and no help-wanted ads for Marlin Steel Wire Products.

Mr. Greenblatt eventually got oral approval for the loan, though after more than a week. He was still waiting for the money at the end of last week.

Wachovia, which lost $8.9 billion in the second quarter, declined to discuss the loan. But the bank confirmed that it has been reducing its lending in troubled areas of the economy.

"We've got industries that we consider to be stressed industries, and we're looking at those a lot harder," said Carlos Evans, a wholesale banking executive for Wachovia, listing as examples housing construction, building products and distributors for those goods. "Our loan growth slowing is more indicative of the economy than anything else."

Still, Wachovia's commercial and industrial loans grew by 13 percent in June compared with the prior year, Mr. Evans said.

"We're saying yes daily," he said.

But recent signs suggest that tight lending is spilling from housing into other areas of the business world. Companies with solid credit and profitable businesses can generally still get loans, but rates are higher and wait times are longer.

According to a survey of senior loan officers conducted by the Federal Reserve in April, 55 percent of American banks tightened lending requirements for commercial and industrial loans to large and midsize companies - up from about 30 percent in the previous survey, in January. About 70 percent of the respondents said they have made such loans more expensive.

"Banks will be much more cautious and keep raising the bar, and that will lead to an outright decline in total commercial and industrial loans," predicted Stuart G. Hoffman, chief economist at the PNC Financial Services Group in Pittsburgh. "Banks clearly have to rebuild their capital base. They're going to look a bit more nervously before they make those loans."

Until last summer, banks lent freely, banking experts say, because they sold most of the loans they issued, making them less concerned about whether the customer could handle the payments: If the loan went bad, that was someone else's problem.

But in the wake of the mortgage crisis, that system has all but shut down. Banks are now stuck with the loans they extend, making them more motivated to scrutinize their customers, particularly younger and smaller businesses.

"It's the small business guy who creates most of the jobs," said Mr. Kiefer, the First Capital chief executive. "If they can't borrow to employ people, then we've got a mess on our hands."

For the last six months, Saul Epstein has been trying in vain to get a $2 million line of credit for his company, Global Harness Systems. The company, based in Bala Cynwyd, Pa., has a factory in Mexico, where it makes parts for engines. The factory gets paid for its wares weeks after they have shipped, necessitating credit to finance the upfront costs of production - raw materials, labor and transportation.

Mr. Epstein figured that getting a loan would be easy. Since he became chief executive last year, Global Harness has gone from break-even to profitable. Sales should reach $20 million this year, up from $17 million last year, he said. But in this new era of caution, banks are focused on the fact that Global Harness lost money in 2005.

"They keep saying, the way the times are, we need a longer track record," Mr. Epstein said.

Mr. Epstein, forced to limit his production to what he can finance with his existing cash flow supplemented by his own money, has been tightening credit himself: He has been turning down orders from companies with any whiff of financial troubles, lest his company fail to get paid.

"The same way the bank is hesitant to lend to me, you're concerned about taking on a customer that might go into bankruptcy," he said.

George Rosero, president and chief executive of Atlanta Pediatric Therapy, has been trying for more than a month to increase his roughly $500,000 credit line to about $1 million.

His company, profitable for the last two years, offers therapy to children with speech and physical impediments, he said. Mr. Rosero aims to expand by adding four sales people. He wants to buy new software to better manage communications with patients and hire a consultant to improve the work environment.

All of that is on hold.

"Three or four years ago, I could just make a phone call and get an increase," Mr. Rosero said. "Now, they're asking me for a lot more information."

 


Permalink | Comment on this

The Non-OPEC Oil Peak


He said it's "imperative that governments acted urgently to reduce their dependency on oil..."

Monday, July 21st, 2008 - By Ian Cooper

While the International Energy Agency's oil supply forecast won't be released until November 2008, there's growing fear of a sharp downward revision in supplies. That means supply could be much tighter than previously thought, a nightmare scenario if proven true.

Any pessimistic IEA view will shock the market, spawning oil super spikes. We've already seen prices rocket to $130, doubling year over year. And it'll only get worse on a dismal IEA forecast.

For years, the IEA has said that crude supplies and other liquid fuels would keep up with rising demand, topping 116 million barrels a day by 2030. But now there's fear that the IEA, basing findings on aging oil fields, could revise sharply lower and warn of a struggle to keep up with 100 million barrel a day demand over the next 20 years.

That's called Peak Oil. And it's a dangerous situation.

But IEA pessimism is nothing new. Just last summer, the IEA warned that spare OPEC capacity could fall to "minimal levels by 2012."

Even the U.S. Energy Department is embarking on its own supply studies, which could be finished by summer. But they, too, may have nothing positive to say. They already suggest that daily 73 million barrel daily output will level off at 84 million barrels. To then reach 100 million barrels a day by 2030, we'll need a sizeable boost from other fuel sources.

Your best bet in this market. Buy and hold energy stocks. They're going much higher.

Listen, I've said this before. I'll say it again. We're not economically pessimistic at Wealth Daily. But we won't put on the rose-colored glasses, and tell you everything's okay. We're simply trying to profit from an eventual "blood in the streets" investing scenario.

Further energy bullishness comes from TimesOnline.com:

"Oil production in non-Opec countries is set to peak within the next two years, leaving the world increasingly dependent on supplies from the cartel of exporting nations, according to one of the world's leading energy experts.

Fatih Birol, chief economist of the International Energy Agency (IEA), said that falling production from key regions such as the North Sea and the Gulf of Mexico would leave international oil companies such as Shell and BP increasingly sidelined at the expense of national oil companies, such as Saudi Aramco.

The North Sea is one of the fastest-declining energy-rich regions in the world, with output falling by an average of 7.5 per cent a year since 2002.

"The days of the international oil companies are coming to a glorious end because their reserves are declining and they will have difficulty accessing new reserves," Dr Birol told The Times. "In future we expect most of the new oil to come from a very small number of national oil companies."

Dr Birol, who is leading an investigation into the condition of the world's largest oilfields, said that the world was entering a "new oil order".

"Demand growth is no longer coming from the US and Europe but from China, India and the Middle East," he said. "Because their disposable incomes are growing so fast and because of subsidies, high oil prices will not have a major impact on demand growth." This meant that prices would remain extremely high for the foreseeable future and that the fundamental dynamics of the global oil market increasingly were outside of the control of Western countries.

Dr Birol sidestepped questions over how close he thought Opec oil production could be to a peak. "Oil will peak one day, but we don't know when," he said. "There is a lot of oil in Opec countries and also unconventional oil ... I don't think oil will peak because of the geology ... but conventional, non-Opec oil is going to peak very soon."

He said it was imperative that governments acted urgently to reduce their dependency on oil and to address the issue of climate change. He said that the IEA would publish the results of its study of the world's oilfields in November."


Permalink | Comment on this

Pelosi on Bush


"The Bush plan is a hoax," she says.

Monday, July 14th, 2008 - By Ian Cooper

We came across this. Thought you'd find it of interest.

It's Nancy Pelosi on President Bush's announcement that he was lifting the executive ban on drilling in protected coastal areas.

Enjoy.

"Once again, the oilman in the White House is echoing the demands of Big Oil."

"The Bush plan is a hoax. It will neither reduce gas prices nor increase energy independence. It just gives millions more acres to the same companies that are sitting on nearly 68 million acres of public lands and coastal areas."

"If the President wants to bring down prices in the next two weeks, not the next two decades, he should free our oil by releasing a small portion of the more than 700 million barrels of oil we have put in the Strategic Petroleum Reserve."

"It's time to tell the oil industry: 'You already have millions of acres to drill. Use it or lose it.'"


Permalink | Comment on this

Late, The Fed is Here to Help


Better Late... Than Never.

Monday, July 14th, 2008 - By Ian Cooper

In a move to protect homeowners from "shady lending practices that have contributed to the housing crisis and propelled foreclosures to record highs," the Fed just approved a plan that would cut down on questionable lending practices. This includes subprime folks, or those with bad credit histories and / or low incomes.

Even borrowers who bought homes they couldn't afford would be protected.

Under the plan, lenders would be barred from making loans without proof of borrower income. This should've been in place from the start.

Lenders would be required to ensure that borrowers set aside monies for taxes and insurance cost.

Lenders would be restricted from penalizing early loan payoffs.

And lenders would be prohibited from making loans without first considering borrow ability to repay a loan from sources other than home value.

But it's too little, too late. The common sense approach to initiating a loan should've included these rules from the start. Lenders and borrowers, in my opinion, should be equally blamed for the crisis.


Permalink | Comment on this