Monday, June 16, 2008

Economic News Of Interest

SoCal Home Prices Plunge 27% in May

Housing prices across Southern California plunged a record 27% in May, signaling that more trouble lies ahead for builders and lenders exposed to the region.

Sales volume in the market fell 15% from a year ago, marking the slowest May in more than 20 years, according to DataQuick Information Systems.

The median price fell to $370,000 from $505,000 in the counties of Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura.

Sales of foreclosed homes repossessed by lenders continue to dominate many of the inland markets, such as Riverside County, where foreclosure sales totaled 57% of all home sales volume, DataQuick said.

As housing prices fall, the domino effect is that loan-to-value ratios are ballooning for many borrowers, which in turn creates more foreclosures as buyers find themselves unwilling to continue paying the mortgage on their houses.

This trend has already forced Wachovia (WB - Cramer's Take - Stockpickr) to increase loss estimates on its large portfolio of option ARM mortgages it has written in the state. Some analysts, and investors shorting the stock, say the company is still under-reserved for losses tied to loans going bad in the state.

Builders' confidence matches record low

Homebuilders' confidence in the weak housing market fell in June, matching the record low in a monthly industry assessment index, a trade group said Monday.

Sales volume will continue to erode in the months ahead and hurt the general economy, according to David Seiders, chief economist of the National Association of Home Builders.

"Obviously, this isn't terribly encouraging," Seiders said. "Housing still occupies a major place in the slowdown process ... putting pressure on GDP growth and the labor market."

The NAHB/Wells Fargo housing market index for June fell 1 point to a seasonally adjusted reading of 18, down from May's reading of 19. Economists surveyed by Thomson/IFR expected the index to rise to a reading of 20.

A reading below 50 indicates that more builders think home sales conditions are poor than those who think the environment is positive for sales. June's reading ties the record low level reached in December 2007.

Empire State Manufacturing Mayhem

Even as foreigners showed their confidence in the U.S. economy by purchasing Treasuries in April, manufacturing conditions in New York continued to deteriorate in June, indicating a weaker-than-expected U.S. economy.

The New York Federal Reserve Bank's Empire State Manufacturing Index fell 5 points to -8.68, the fourth negative reading in the last five months. Economists polled by Thomson Reuters IFR Markets had a median forecast of -0.5 for June.

Lehman Bros braced for 28% drop in British property prices

The troubled Wall Street bank Lehman Brothers is preparing for a 28% fall in British house prices in one of the gloomiest scenarios outlined about the impact of the credit crunch on the property market.

The bank is struggling to convince its clients that it has taken the most conservative possible approach to the value of its property-related assets.

Lehman made a $2.8bn (£1.4bn) quarterly loss - its first since the bank was spun off by American Express in 1994. Dick Fuld, chief executive, said: "I'm very disappointed with these financial results. We lost $2.8bn. All I can say is that's just totally unacceptable. This is my responsibility."

Analysts were briefed on a swingeing write-down in the value of its mortgage-related UK property interests.

Ian Lowitt, the bank's chief financial officer, said Lehman had $9.3bn in exposure to residential property outside the US, most of which is in Britain. About two thirds of this is through high-risk mortgages. He said Lehman had reduced the value of these British holdings to reflect a "peak-to-trough decline in house prices of approximately 28%". Prices have so far fallen by about 7%.

Oil prices hit a new record high

Oil prices have jumped to a new record near 140 US dollars (£70) a barrel.

Light, sweet crude for July delivery reached 139.89 dollars on the New York commodity markets, a jump of more than four dollars after the greenback weakened in value and a fire halted production on a North Sea platform.

The surge came despite promises from Saudi Arabia over the weekend to boost output by 200,000 barrels a day next month - a move that was widely hoped to have reduced some of recent upward pressure on oil prices.

Analysts blamed the latest hike on the drop in the value of the dollar against the euro, making oil less expensive to investors dealing in other currencies.

AIG chief Sullivan is ousted

American International Group Inc.'s chief executive has been forced out after a tumultuous three-year tenure marked by financial difficulties at the insurance giant and a plunging stock price.

AIG said Sunday that chief executive officer Martin Sullivan is leaving the world's largest insurer and the board, and will be succeeded by Chairman Robert Willumstad, a former top-ranking executive at Citigroup.

"During the tenuous reign of Sullivan as CEO over the past three years, the stock price of AIG has been on a downward spiral. As such investor confidence has waned," wrote Stifel Nicolaus analysts Michael Paisan and Mariza Costa in a research note Monday. "The change could signal that the financial crisis is taking a greater toll on the company than previously thought."

The company's profit has been squeezed by write-downs on the balance sheet, and some of its businesses have suffered as a result of exposure to the slumping U.S. real estate market.

Dollar falls back after G8 focuses on inflation

The dollar came under pressure Monday after a meeting of the Group of Eight finance ministers in Japan focused on inflation rather than foreign exchange, deflating expectations of a strong statement in support of the U.S. currency.

The greenback also lost a bit more ground after an index of manufacturing conditions in the New York region fell further this month. The Empire State survey index fell to negative 8.7 this month from negative 3.2 in May, indicating industry is contracting.

With inflation fears rising along with the price of oil and other commodities recently, the market has raised bets that the Federal Reserve will be lifting interest rates later this year, which would boost the dollar's appeal.

But with continued signs that the U.S. economy remains weak, and while a hike in rates in Europe "is almost a foregone conclusion," the dollar might be set to lose its recent firmness against major counterparts, according to Simpson.

"The dollar's rally has run out of steam for now and the risk appears to be to the downside," he said.

Bear Stearns Subprime Funds May Draw U.S. Charges, People Say

Federal prosecutors and the U.S. Securities and Exchange Commission may bring criminal and civil charges in a probe of Bear Stearns Cos. hedge funds whose collapse ignited the subprime mortgage crisis last year, people familiar with the investigations said.

The U.S. Attorney in Brooklyn and the Washington-based SEC may announce the actions as soon as this week, said one of the people, who declined to be identified because the case isn't public. Prosecutors told a New York state judge last month they would decide by mid-July whether to bring a criminal case against former Bear Stearns hedge fund managers Ralph Cioffi, 52, and Matthew Tannin, 46, a lawyer at the proceeding said.

``It was always a question of when the indictments would start rolling out, it was not a question of if,'' said Jacob Frenkel, a former federal prosecutor in private practice in Maryland. Indictments are inevitable ``because of the clamoring for accountability for anyone of note with what would be perceived as a substantial role in the mortgage-driven economic crisis.''

Fed chief still doesn't get it

Ben Bernanke's tough talk on inflation suggests the economy may be improving. He's wrong, and his comments will backfire.

"Helicopter" Ben Bernanke made a big splash last week when speaking before the Boston Fed. He opined that the risk of a "substantial slowdown" had diminished, and he talked tough about controlling inflation and inflation expectations. I suspect he will regret his comments.

After all, they were voiced by the same Federal Reserve chairman who was remarkably sanguine last summer and fall as the mortgage debacle was building a head of steam.

Bernanke has given sellers a green light to get out of stocks. He will not be able to ride to the rescue of the bulls until much more damage has been inflicted on stocks and the economy.

He understood neither the housing/credit bubble nor the ramifications of its unwinding. Now, he appears to believe the economy may be improving -- when to me it seems obvious that the economy is in a recession and will only get worse.

I cannot overemphasize the point that I've made many times and which lies at the heart of my book "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve": We bailed out an equity bubble with a real-estate bubble. The bulk of gross domestic product growth in the 2003-07 up-cycle was a function of mortgage-equity extraction, and 30% to 40% of new jobs were created in real-estate-related industries. Now that's all gone.

What's left are debts that people can't service (due to living beyond their means), further exacerbated by the inflation that's squeezing everyone's paychecks.

It's very important for people to understand that the world's financial system is deleveraging, a process that's starting to affect a lot of different markets. The price of credit will continue to rise (due to said deleveraging and inflation), even as global economies weaken.

Trillions of dollars of financial instruments will need to find homes. With supply outpacing demand, buyers of those instruments will be in a position of requiring lower prices (i.e., higher interest rates), causing more dislocations down the road.

Given that backdrop, I believe the chance of Bernanke raising interest rates is essentially zero. I think the Fed's next move will be to ease rates, though I don't know if that will be three months or six months from now.

What I do know is that Bernanke is not really serious about containing inflation, as is obvious by how far the Fed has let it climb. He cares only about avoiding a downturn. So, when it looks like push has come to shove, Bernanke will ease again.

Push is coming to shove, and there's nothing he can do to stop that.

US Recession hurting Mexico -- Mexicans sending less money home

The challenges the Chavollas face tell of a looming financial crisis that reaches across Mexico, where families who depend on money sent from relatives in the United States - called remittances - are opening up lighter envelopes or waiting longer to get them.

Jesus Cervantes, the director of statistics for the central bank, attributed the drop to reduced migration to the U.S., a crackdown on illegal laborers there and rising unemployment among those in the U.S., where construction jobs - which employ nearly a quarter of Mexican migrants - are in short supply.

Those problems are compounded by what Mexicans living in the United States say is a run-up in prices, led by increases in gasoline.

Martin Valdez, who owns a tortilla shop in Ucacuaro, said he is seeing a growing number of young Mexicans returning to the village. Some have been deported. Others couldn't find decent jobs in the U.S. Others found the search for work just wasn't worth the hassle.

"Personally, I know 10 people that haven't gone or . . . came back from the States," said Valdez, who graduated from Arlington Heights High School in Fort Worth. "A lot of them prefer to stay here and just tough it out here in Mexico."

If the number of returnees grows dramatically, that could be a problem for Mexico, said Rodolfo Garcia Zamora, an economist and immigration expert at the Autonomous University of Zacatecas.

"The Mexican economy is not prepared for a massive return of immigrants from the United States," Garcia said. "The government, on both the state and federal level, has not taken this problem seriously. In terms of social and political stability, it would be extremely delicate."

The remittance slowdown is sending economic shockwaves throughout Ucacuaro and surrounding villages. Salvador and Juana Pulido estimate that remittances from Texas cover half the costs of his small farming operation, now hit with higher prices for feed and fertilizer.

"I couldn't survive doing this without the help from my children," Salvador Pulido said.

Senate Budget chairman aims to undo special-treatment loan

WASHINGTON (AP) -- Senate Budget Committee Chairman Kent Conrad said Saturday he is donating $10,500 to charity and refinancing his loan on an apartment building after reviewing documents showing he received special treatment from Countrywide Financial Corp.

Conrad said it appears that Countrywide waived 1 point on his mortgage for a Bethany Beach, Del., vacation home. He said he would donate the equivalent amount of money to Habitat for Humanity.

Conrad said it also appears he was given special treatment on a mortgage when he was financing the purchase of a Bismarck, N.D., apartment building from his brothers. He said he would refinance that loan with another lender.

"I called (Mozilo). I said, 'I'm buying this property. Would you be interested in the mortgage?' And he said, 'Yeah. Call these people and we'll take a look,'" Conrad said.

"I did not think for one moment - and no one ever suggested to me - that I was getting preferential treatment," Conrad said. (My Comment: Yea right -- just another blatant example of Washington's rampant cesspool of a Quid pro quo favor system -- you greedy crook!)

Small Businesses hang on tight and fight to survive in tough economy

Small business is risky business these days.

Costs are rising, profits are shrinking and the ability of the big guys to keep prices relatively lower is drawing away customers.

Things are so bad that many small enterprises, which account for about 99 percent of the country's businesses, say they are hanging by a thread that may soon snap.

"We are basically losing money every month, about $1,000 a month. It's been about two, three months now," said Tom Weisbecker.

Weisbecker owns Isaly's in western Pennsylvania where patrons sit on green barstools at a Formica countertop and gobble the legendary Slammer, a sandwich stuffed with a half-pound of chipped ham and smothered in onions and cheese. Prices for many of those ingredients have skyrocketed in the past year.

"We know our customers are already feeling the pinch with the gas prices and when they go to the grocery store. We're trying to hold out, but we can't go on much longer," said Weisbecker.

The feeble employment market may be making consumers less willing to spend. Also, paychecks aren't going as far as they did before food and fuel costs rose.

"In a good economy, you can makes mistakes. But in a bad economy ... you can't afford to make a mistake," said Larry Lagattuta.

"I am three very bad decisions away from bankruptcy at any given time," said Lagattuta, who has been running Enrico Biscotti Co. on the Pittsburgh Strip for 15 years.

Over Christmas, he made hundreds of shipments; 2007 was his best year ever.

The last quarter was his worst.

A National Small Business Association survey of 500 small business owners in February found that sales and profits had dropped and job growth was at the lowest point in 15 years, problems that could have a significant impact on an already shaky U.S. economy.

Bank loans may become harder to secure

The credit crisis triggered by bad home loans is spreading to other areas, forcing banks to tighten credit and probably extending the credit crisis that's dragging down the economy well into next year, and perhaps beyond.

That means consumers are going to have an increasingly difficult time getting bank loans for car purchases, credit cards, home equity credit lines, student loans and even commercial real estate, experts say.

When financial analyst Meredith Whitney wrote in a report last October that the nation's largest bank, Citigroup, lacked sufficient capital for the risks it had assumed, she was considered a heretic.

However, Whitney was proved correct: Citigroup pushed out its CEO, sought foreign investors and slashed its dividend. Her comments now carry added weight on Wall Street, and she has a new warning for ordinary Americans: The crisis in credit markets is far from over, and it increasingly will affect consumers.

"In fact, we believe that what lies ahead will be worse than what is behind us," Whitney and colleagues at Oppenheimer & Co. wrote in a lengthy report last month about threats faced by big national banks, including Bank of America, Wachovia and others.

Whitney argues that the worst is still ahead because the financial tools that enabled credit to flow so freely to homeowners and consumers for most of this decade are likely to remain in a prolonged shutdown indefinitely.

"After years of inherently flawed underwriting, banks face the worst yet of the credit crisis — over $170 billion in write-downs and charge-offs from consumer loans," Whitney told McClatchy. The same kind of losses from housing may be ahead for credit extended to consumers, she said.

Higher borrowing costs are on top of tighter lending. The Whitney report estimated that by 2010 credit card issuers would withdraw more than $2 trillion in credit that they've been extending to consumers.

"We're already seeing examples of people seeing their credit limits reduced," said Joseph Ridout, a spokesman for Consumer Action, a consumer rights group based in San Francisco.

More troubling, he said, some banks are doubling interest rates on customers who are current on payments but considered a credit risk because of changes in their credit profile. The hikes apply to credit-card debt already racked up.

Las Vegas's $2B City Crossing mixed-use project files for bankruptcy protection

City Crossing, a $2 billion mixed-use development in Henderson, has filed for Chapter 11 bankruptcy protection.

The 126-acre, 6-million-square-foot project by the Plise Development & Construction broke ground last year at St. Rose Parkway and Executive Airport Drive.

Roughly $30 million in site improvements, including grading, utilities and roads, are now under construction.

On June 2, City Crossing 1 LLC, a Plise-controlled entity, filed to reorganize $180 million in debt. The project, which consists of 15 parcels, is secured by raw land near the Henderson Executive Airport.

Its current appraised value is $250 million, company officials said. But the housing market implosion has tightened credit markets and devalued real estate backed loans.

"We've been working to refinance the existing debt at City Crossing over the last several months," said Mitchell Stipp, Plise's chief operating officer. "All of our lenders, except for one local community bank, have been willing to work with us and negotiate mutually acceptable terms."

That's it for all the news that fits our economic reality!




Patrick said...

Airfare hikes, capacity cuts start to pinch Las Vegas

CHICAGO (MarketWatch) -- Soaring fuel prices are starting to hit home in Las Vegas as cash-strapped airlines hike fares and cut capacity at McCarran International Airport - Sin City's tourism lifeline - leading to pressure on room rates and lower spending levels by visitors.{F6045F48-C0C8-44ED-9CEB-FAF1E60E4D24}

Patrick said...

RBS issues global stock and credit crash alert

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

Randy said...

Thanks for the links Patrick