1 Year Later, What’s Changed?

Posted by Ray on September 6, 2009 under Main | Be the First to Comment

It has been perhaps the longest year of our lives where we witnessed the absolute collapse of the banking system, to the largest bailouts in history, one of the largest market declines in history, historical political elections, the largest stimulus in the history of our country, and the list actually goes on. There are a lot of history making events that happened over the last year and with those history making events we were promised change and a brighter tomorrow. However, what has really changed? Absolutely nothing, for the most part.

We are expecting the political establishment to address us in the upcoming week to tell us what a great job they have done in ‘saving’ our system and way of life. While they are patting themselves on the back and congratulating each other they know that they have merely postponed the inevitable. No matter how hard they try to hide the facts we know all is not well and we know that there is no way the epic stimulus packaged saved any jobs or created new ones. What our leaders have done is nothing short of criminal as they allowed us to go deeper into debt bringing our long-term liabilities to upwards of $55 trillion dollars.

The Banking System

Next they will tell us how the bailouts, no matter how distasteful, were necessary to preserve the way we live, which is so fatally flawed that defending it is impossible. The sad reality is that the banking system is just as insolvent today as it was last year this time. How could I make such a statement with the market screaming and banks climbing to 52 week highs? Simple, look at the economic facts:

1. Defaults have increased substantially year-over-year. If defaults broke the bank last year then surely twice the level of defaults must have inflicted horrible damage to the balance sheets of banks. However, mark-to-market is gone and mark-to-fantasyland is here and if they don’t have to mark the assets down or include SIV’s and the other BS then everything is fine. They merely postponed the inevitable problems to a future date.
2. Unemployment was nowhere near where it is today last year. If you really think we are at 9.7% ‘real’ unemployment then I have a nice CDO to sell you. The reality is we are closer to 17% real, real, unemployment according to how the government used to calculate the unemployment rate. This will lead to more defaults in credit and is the nexus of our problems.
3. Defaults across the board are sky high and will likely get much worse. Of course, as long as you get to market things to fantasyland does it really matter? No, not until it ultimately blows up on us, which it will.
4. Everything they told us they were going to do, they did not do. Banks will hold those toxic assets forever because they are worthless. Why participate in the PPIP if you have to sell the assets at market value versus holding onto the assets at fantasyland value? It makes no sense which is why the PPIP was scaled way down because no one wants to participate, except for the FDIC and Federal Reserve which is surely holding a bunch of that garbage.
5. The Fed is encouraging risk by allowing Goldman and the remaining investment commercial banks to borrow at the discount window and speculate driving earnings through the roof. At the same time the Fed is simply trying to re-inflate the same credit bubble that got us here to begin with. One wonders why anyone would think more debt is the answer to our already overwhelming debt load is the answer.

As far as banks are concerned, I would not touch them, period. Yes, they have the backing of the US government, but the bottom line is you have no idea what their assets are really worth. From a personal point of view I also wonder about their ethics, or lack thereof. When they came to Washington, hat in hand, for their bailout which Congress was ‘pressured’ to give, more than likely to save their largest campaign contributors, they received it, no questions asked. Now that these same banks are ‘healthy’ and allowed to pay back their TARP funds, presumably so they can receive their annual bonuses, while at the same time hiking their banking and overdraft fees from the very people who bailed them out.

The Federal Reserve refuses to tell the American people which banks received any special loans and what was taken in for collateral for those loans, if anything. We already know the banking system is fragile and that banks were in jeopardy of failure so there is little reason to not tell us who got what and how much. Of course, let us not forget that we have had 89 bank failures this year which means that the bailout was, in my opinion, a failure. Not to mention that by the time these failures end, some predict 1,000 bank failures, it is clear that only the Citi, BoA, and Goldman Sachs will be the only survivors left which leads us to an oligarchy banking system with only a very few big players left, who just happen to be the most politically connected I might add.

Even politics have not changed at all, with the exception of grander spending projects. Washington is still polarized and, from my perspective, we went from an inept president, who was utterly clueless, to another inept president who is equally as clueless. Even more disturbing is the fact that Congress is, mostly, the same as it always has been. When looking at the list of Congressmen and Senators you see that very, very, few are new names and the names you recognize have been there for decades. How in the world do you get change when you elect the same people every election? That has always bothered me about politics; you want change so you vote in the 18^th term congressmen? We get, at the end of the day, what we deserve.

I realize that speaking against our newly elected messiah is a one way ticket to being called a racist or, somehow, anti-American, but, frankly, nothing has changed. The Patriot Act is still alive and well, lobbyist are ever where, Iraq is still alive and well, Afghanistan is getting worse, spending is even more out of control and we are all still polarized between two parties who only care about campaign contributions. Nothing, and I mean NOTHING, has changed and to think otherwise is simply being delusional. If we now have a transparent government why are all the questions people want to ask always having to be pre-approved? Sorry folks, I am just pointing out the obvious here.

For all intents and purposes the country was blackmailed by the banks to bail them out so they can continue business as usual. It is perhaps the greatest heist in history and did nothing for the American people except tack on trillions of new debt. To make matters worse the industry is at it again coming up with a new securitized product for life settlements, perhaps the sleaziest way to make money. Life settlements basically buy life insurance policies from those who will die soon. They buy the policies for 40% or so of face value, pay the premiums and collect the difference when the person dies, only in America. Goldman Sachs, always ahead of the game, is even starting an index so you can bet on whether people, as a group, will live longer or shorter than expected, I always knew they were vampires, but this is taking it to a new level.

So as we come up on the 1 year anniversary of the Lehman Brothers collapse and we watch the politicians pat themselves on their backs, for doing nothing, we really need to ponder what has changed. As you think about where we were to where we are today you will see that nothing has really changed except for some accounting gimmicks that really never should have changed. Even though the industry and politicians threatened a complete collapse if they were not given money or unless the accounting rules were changed is complete hogwash. Elizabeth Warren who chairs the Congressional Oversight Committee over the EESA is not even convinced that a total collapse would have happened if we just said no to the bailouts.

To think anything has really changed is simply a matter of people not doing their homework or just buying what they are being told by the media. Based on the above, fairly quick, but accurate analysis, it is clear that things are still the same. We simply just postponed everything until a future date and that future could be tomorrow or 10 years from now, who really knows. What I do know is that we must vote out our leaders faster than every 10 or 20 years, when they die of old age in office that is simply just too long.

Consumer Credit Contraction

Posted by Ray on August 7, 2009 under Main | Be the First to Comment

The consumer credit contraction is now in its fifth month and shows no sign of slowing. In fact, the length and depth of the contraction has caught many analysts off guard and should weaken expectations of a consumer revival in the near-term.

According to Bloomberg, the credit contraction is the longest since 1991 and is a result of consumers not wanting to add to their already bulging debt burden. Consumer credit dropped $10.3 billion in June compared to $5.38 billion in May and there is little evidence to assume that this contraction will end anytime soon. While this certainly will impact consumer spending in the near-term it is better for Americans longer term as they will have less debt.

Economists had estimated that credit would contract by $5 billion, clearly the actual contraction was a surprising figure to most. Credit card fell by $5.25 billion while non-revolving debt, including auto loans and mobile-home loans, declined by $5.04 billion. Even though consumer credit has contracted government debt is sure to pick up the slack, to a degree.

I believe consumer spending declines have only just begun, but the current data shows a decline in spending by 1.2%. Personal incomes and real incomes have had steeper declines than most had expected and is probably a trend that will continue into the foreseeable future. Wages and salaries have also declines by 4.7% from June 2008 to June 2009, which is a record since the data has been collected.

With the markets and home values significantly lower Americans net worth has declined by $13.9 trillion which is just unbelievable. However, Fitch says defaults are falling for credit products and they believe we are close to a plateau on defaults. I have to disagree with that and believe that we will see higher than expected defaults in the near future, especially in the prime and jumbo mortgage area which has been trending higher lately. Not to mention that Fitch’s Prime Credit Card Index is 64% higher than it was just a year earlier at 10.79.

Consumers are stretched to the limit and that is bad news for GDP since we decided to become a consumer nation versus a manufacturing nation. While the rate of decent in credit defaults seems to be slowing I believe that it is the calm before the storm and the situation sill deteriorate. Based on what I see, which is beyond the headline numbers, there are growing, not shrinking, problems that have yet to come to light. Government spending will only create a short-term improvement before it is exhausted.

Behind the housing numbers

Posted by Ray on July 23, 2009 under cnbc, Economy, Main, Markets, The Federal Reserve | Be the First to Comment

The housing numbers do look better, but there are still major problems to overcome in this market. The first problem is the market wants lower prices on homes, but the government is keeping prices artificially high with incentives and low mortgage rates.

What the government is doing is postponing the inevitable by propping up prices. The recession will end and housing will recover, but not with government intervention. In fact, if we look at Japan they did the same thing we are doing now and their real estate prices are down 80% from their all-time highs. We have come off only 15% year-over-year and the market is telling us it wants prices to go lower.

Out of these impressive housing numbers we see that 31% of sales are a result of short sales and foreclosures. Supply decreased from 9.4 month supply, 3.82 million homes, from a 9.8 month supply reported earlier, historically existing homes have about a 6 month inventory. The reduction of supply is good, but prices are still falling which is a result of this over supply and it is clear that more houses are coming on to the market.
The west shows signs of improved sales, up 6.4%, but the Mid-west and the Northeast is sluggish with .9% and 2.5% increase in sales. What you are not being told is that banks are not putting foreclosed homes on the market, they are holding them or, in some cases, tearing them down which is suppressing supply. If those homes were on the market then these numbers would look worse than what we see.
Keep in mind home builders are pouring concrete as well which is adding to the supply, but not accounted for in these numbers. They need to build in order to make money, but new permits do not mean new sales and the builders are hoping for a rush of new buyers before the November cutoff for the government bribe, I mean bonus, to buy an overpriced home.
Mortgage rates also increased to 5.42% which is “high” compared to a few months ago. The funny thing is rates could be zero, it doesn’t matter because we have a credit problem, not a liquidity problem. If you are not a AAA rated risk the banks will not take you, period. That is coming right from a real estate friend of mine who has buyers, but no financing.
Also, to assume 5.42% mortgage rates are high is just stupid, my mortgage is 5.68% the difference is negligible at best and low rates is not the answer, it is the problem. To think we got here because no one was buying is incredulous, we got here because everyone was buying and they bought everything under the sun on credit. In order to come out of this thing, fast, and not repeat the same bubble again, which we are doing, we need to reduce credit and deleverage the consumer. If we continue this cheap money policy we will never fully recover and the next time this happens it will be sooner and much worse than what we saw starting last fall.
I know that many like Dennis Kneale believe higher stock prices, which is a reaction to the devaluation of our currency, means a recovery, but that is incorrect. Dumping mark-to-market rules to hide or not disclose losses is bad and, again, will merely postpone the problems. Unemployment is a leading indicator in this situation since people cannot find work they cannot pay their bills.

If they can’t pay their bills then defaults will rise on all credit problems, which is what is happening, i.e. Capital One, Advanta and others reporting record credit card losses. Plus, 500K a week initial job claims is not good, I do not know why everyone thinks it is, and once your benefits run out they do not count you as unemployed any longer. Earnings are all from cost cutting, not from real earnings or consumer demand. The firms who actually grow their sales, like Intel, are growing their business overseas, not in the US.

We may show some signs of stabilization, but this thing is not over by a long shot. If we have the next leg down, like I think we will, it will make last fall look like a party. We caused our own problems by becoming a consumer nation instead of a manufacture ring nation, I can hear some say we are still the largest exporter in the world, but we are not. We export technology, heavy equipment, financial services and knowledge which is more expensive than hammers and nails. That is why we are the largest exporter, it is based on dollars and not products.

I know CNBC wants us to believe Dow 9,000 means everything is fine, but it is not. They are having a Dow 9,000 celebration as I write this, they did this a NASDAQ 5,000 and Dow 14,000 as well. All I want from CNBC is for them to tell the truth about things instead of sugar coating everything and pitching “hope.”

I am a seller, not a buyer until I see some compelling evidence to the contrary. The dollar, thanks to our massive debt, will continue to drop in value, which may be the saving grace for stocks, but the dollars buying power is still reduced. While I am a seller of US stocks I am a buyer of foreign stocks and foreign debt which will benefit from a weaker dollar.

If you believe everything is fine then I have some ocean front property I would like to sell you in Iowa.

I do not hold any long or short positions in Capital One, Advant, Intel or any other firm mentioned.

Consumers Fall Behind on Loans at Record Pace

Posted by Ray on July 7, 2009 under Main, Markets | Be the First to Comment

Another example of credit troubles that are plaguing our economy. This is why we need to get our act together and get a manufacturing base back to the US. Yes, we are the largest exporter of technology, weapons systems and large machines, i.e. excavators and dump trucks. However, we do not export hammers, nails or other useful products, China does.

Here is what the ABA, American Bankers Association, said about credit; “the rate of consumer loan payments at least 30 days late to rise to 3.23 percent in the January-to-March period from 3.22 percent in the 2008 fourth quarter, the American Bankers Association said. Credit Card swipe

Fallout from a still deteriorating housing market caused the rate of consumer loan payments at least 30 days late to rise to 3.23 percent in the January-to-March period from 3.22 percent in the 2008 fourth quarter, the American Bankers Association said.

Delinquencies were the highest since the ABA began tracking the data in 1974. Late payments on home equity borrowings set records, rising to 3.52 percent from 3.03 percent on loans and to 1.89 percent from 1.46 percent on lines of credit.

The overall delinquency rate actually understates consumer pain because it excludes bank-issued credit cards, where credit deterioration was severe.

Delinquencies on the value of all card debt soared to a record 6.60 percent from 5.52 percent in the fourth quarter.

The rate of delinquent accounts rose to 4.75 percent from 4.52 percent, near the record 4.81 percent in the spring of 2005.

U.S. consumers ended March with $939.6 billion of revolving credit outstanding, a rough approximation of credit card debt, according to Federal Reserve data.

Delinquencies rose to 3.01 percent from 2.03 percent on direct auto loans, to 3.70 percent from 2.96 percent on mobile home loans, to 3.47 percent from 2.88 percent on personal loans, and to 1.52 percent from 1.38 percent on recreational vehicle loans.

They fell to 3.42 percent from 3.53 percent on auto loans made through dealers, to 2.04 percent from 2.35 percent on marine loans, and to 1.46 percent from 1.75 percent on property improvement loans.”

Green shoot or just shit? You decide.

One last thing to think about

Posted by Ray on July 5, 2009 under Main | Be the First to Comment

Citi, JP Morgan and, presumably, Capital One have or will be soon raising minimum payments on credit card debt. The minimums will increase from 2% of account balances to 5% which is a huge hike during the highest level of credit card defaults on record. This means that defaults will go sky high in 30 to 60 days which may cause major problems.

I realize that some may think this is not a big deal or that it is a good thing credit card companies are doing this, but it is not. They are trying to move marginal credit risk into default, for reasons I do not really understand yet, but it has to do with the new credit card bill or perhaps to get the defaults done now versus waiting for them to unwind.

Regardless, this will have unwanted consequences and will force defaults sky high, literally. As unemployment hits 10%, then 11%+, these higher minimum payments will not be met. Since this is a credit crisis, not a liquidity crisis, credit will be increasingly harder to get because of fear of default. This brings us to the possible “why are they doing this section?”

Simple, they are trying to finad any reason to not lend to consumers. The banks want to hoard money, some say because they are insolvent, which has some truth to it, but as they try to boost their Tier 1 capital and TCE the more they can hoard the better they will be. I have a few cases to illustrate this point.

1. Citi group has a $100M+ loan for a mall in Syracuse NY. The mall is supposed to rival the bigger malls in America. However, Citi says the developers defaulted and stopped payment on the line of credit. It is in court and there seems to be little merit for Citi to stop payment.

2. A person I know is buying a commercial building and they are putting down 25% of the value of the loan, its only $100K. Everything was a green light until the bank held things up, that is when they found an old paid off judgment on the buyer. The deal is off. Seriously an 8 year old judgment, that is paid, with 25% down is a relatively risk less loan for the bank, but so far it is a no go.

Banks want to hoard money and they refuse to loan, hey its their business, those ungrateful bastards. The point is the defaults are going to go up, period. This could prove dangerous to our fragile economy and it is our opinion that banks should really reconsider this endeavor.