Saturday, October 31, 2009

Are You A Child of the Bubble?

Many investors – as well those in charge - have grown up without knowing or experiencing anything but a bull market in the U.S.  Since the 1950s America has been dominant and the expectation is that this dominance will continue.  As a result our leaders have made and continue to make choices that assume the continuation of trends of the past years.  Sadly, this is a reason why this recession and its consequences will last with us for a long time.

Let’s review some of the economic challenges that still lie ahead of us.

Option ARMs are a disaster – 30 day + delinquincies are reaching close to 50% of all outstanding option ARMs.  The St. Louis Fed has stated that they were concerned about Option Arm and Alt-A loan delinquency rates. Delinquencies have moved steadily higher with the 30 day + delinquency now reaching close to 50% of all outstanding Option Arms.

The thing about these products is that the minimum payment is at times less than half what a fully amortizing normal payment would be and the borrowers that chose these did so in the past few years and are now sitting on negative equity.  Loan modifications are not feasible in almost any scenario and the incentive is to walk away.  Housing has not bottomed by a long shot.

Sentiment Is Dipping .. came out of Gallup yesterday

Sentiment about the economy is starting to backslide, after a brief tip up.

Fifty-eight percent of those polled say the economic slide still has a ways to go, up from 52% in September and back to the level of pessimism expressed in July. Only 29% said the economy had "pretty much hit bottom," down from 35% last month.

64% said the rise of the Dow Jones Industrial Average didn't have much impact on their views of the economy. Just 42% said the economy will get better in the next 12 months, down from 47% in September. In contrast, 22% said things would get worse, up from 20%.

Bottom line, consumers are not feeling more confident about the recovery because they have not participated in the recovery.  The recovery has been driven by stimulus money which is finding its way into the banks and bonuses.  Does a 30%+ jump in Hamptons sales tell you where the money is headed?  It also explains why New York city has held up relatively well compared to the rest of the country.  But New York and Wall Street are not the economy.

We Just Had the 3rd lowest sales for September since the Census Bureau started tracking sales in 1963

Calculated Risk reports on New Home Sales.  The Census Bureau reports New Home Sales in September were at a seasonally adjusted annual rate (SAAR) of 402 thousand. This is a decrease from the revised rate of 417 thousand in August (revised from 429 thousand).

Even uber-bearish housing analyst Mark Hanson was taken aback by the shortfall in home sales this morning. Even he thought that the remaining homebuyer tax credit, plus all the other stimulus out there, would produce a rise in new home sales.

But no. September was the worst month since 1981.

Permanent Bailouts for the Top 20 Banks?

Paul Volcker and senior Harvard economist Jeffrey Miron both testified to Congress this week that the government is trying to make bailouts for the giant banks permanent.

Writing Wednesday in The Hill, Congressman Brad Sherman pointed out that :

In my opinion, Geithner’s proposal is “TARP on steroids.” Section 1204 of the proposal [the proposal being the "Resolution Authority for Large, Interconnected Financial Companies Act of 2009"] allows the executive branch to use taxpayer money to make loans to, or invest in, the largest financial institutions to avoid a systemic risk to the economy.

TARP was limited to two years, and to a maximum of $700 billion. Section 1204 is unlimited in dollar amount and is a permanent grant of power to the executive branch.

When I asked Geithner whether he would accept a $1 trillion limit on the new bailout authority (if the executive branch wanted to spend more, it would have to come back to Congress), he rejected a $1 trillion limit, insisting that the executive branch be able to respond without coming back to Congress.

That is a huge gravy train to the top 20 [financial institutions] because it allows them to borrow money at a lower rate. Think of what this does to moral hazard.

A sustainable recovery with 530,000 weekly claims?

That’s what we seem to be expecting based on the huge uptick in equities since March. While stock markets have long since moved it up a gear, the employment market is stuck in neutral. The latest seasonally-adjusted jobless claims numbers came in at 530,000. The widely-followed four week average is still 526,250 and is not coming down.

Global Economies Are Not Doing Any Better – Greece Downgraded

Last week, Fitch downgraded Greece's foreign and local currency ratings from A to A- due to a ballooning deficit that has spiraled out of control.

Now, Moody's is also considering a cut for Greece. It's an understandable move, considering that Greece's increasing deficit is already 12.5% of its GDP.

Moody's: "The deterioration of the fiscal position raises serious questions about the sustainability of Greek public finances and the problem will be compounded by a less favourable global economic environment going forward," says Arnaud Marès, a Senior Vice President in Moody's Sovereign Risk Group.

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