Weekday NEWS to Comfort the Disturbed and Disturb the Comfortable.
Tues 07.29.2008
Americans remain gloomy about the economy Americans, squeezed by higher gas and food prices and a housing market that keeps slumping, remain the most pessimistic about the economy since the tail end of the last prolonged recession 16 years ago, a private research group said Tuesday. The New York-based Conference Board said that its Consumer Confidence Index for July stands at 51.9, up only slightly from the revised 51.0 in June and slightly better than the reading of 50 predicted by economists surveyed by Thomson/IFR. Still, the index remains about half of what it was a year ago.
Congress Mortgages the Economy's Future to Save Fannie Mae and Freddie Mac With President Bush no longer threatening a veto, the subprime mortgage and Fannie Mae and Freddie Mac "bailout" bill sailed through Congress. In anticipation of its enactment, Congress had the foresight to raise the national debt limit to $10.6 trillion. Who says that politicians don’t plan ahead? Once signed into law, which should happen sometime this week according to a White House spokesman, the budget busting legislation will hand the Administration a blank check to prop up the ailing home lenders. The ultimate cost is anybody’s guess. I believe that the price tag will be higher than just about anyone imagines. Treasury Secretary Henry Paulson's "Bazooka" will be locked and loaded with enough firepower to blow what’s left of our economy into the dustbin of history.
'It's Going to Get Worse Before It Gets Better,' says Global Crisis Fund Manager "Never bet on the end of the world because it’s only going to happen once and how are you going to collect?" Those words, from a longtime source, have stuck with me every time the market seems like it’s going to hell and a hand basket, i.e., times like these. Maybe it's foolhardy to bet on Armageddon but taking steps to protect your portfolio against a financial crisis certainly makes a lot of sense in the current environment. That’s the mindset at Penso Capital Markets, a firm that provides strategic risk management for institutions high and net worth individuals, which launched a Global Crisis Strategy fund in February. "Things are going to get worse before they get better," says Ari Bergmann, managing principal of Penso in the accompanying video. "We are in a long, protracted, difficult situation."
U.S. July Consumer Confidence Rose From 16-Year Low Consumer confidence in July stayed near a 16-year low as Americans worried about job prospects, a private report showed. The Conference Board's confidence index rose to 51.9, higher than forecast, from a revised 51 in June. A separate report showed home prices in 20 metropolitan areas dropped 15.8 percent in May from the same time last year. Job losses, smaller wage gains, falling property values and rising food and fuel bills may prompt consumers to scale back on purchases and vacation plans in the second half of the year. The report increases the risk that the economic expansion will come to a halt once the lift from the tax rebates subsides.
Fannie, Freddie On a Tightrope Mortgage Giants Navigate Market Volatility, Unique Role The collapse in the stock prices of Fannie Mae and Freddie Mac earlier this month, followed by an equally dramatic rebound, underscored the vulnerability of today's agitated markets to panic and the mercurial behavior of global traders. Financial experts said the drop, nearly 50 percent in a week, was precipitated by a series of alarming reports from analysts and in the media and was then turbocharged by a surge in short selling, bets made by investors that the shares would fall.
White House Predicts $482 Billion Deficit The White House predicted Monday that President Bush would leave a record $482 billion deficit to his successor, a sobering turnabout in the nation’s fiscal condition from 2001, when Mr. Bush took office after three consecutive years of budget surpluses. The worst may be yet to come. The deficit announced by Jim Nussle, the White House budget director, does not reflect the full cost of military operations in Iraq and Afghanistan, the potential $50 billion cost of another economic stimulus package, or the possibility of steeper losses in tax revenues if individual income or corporate profits decline. The new deficit numbers also do not account for any drains on the national treasury that might result from further declines in the housing market.
America must not act rashly over inflation The startling jump in US consumer price inflation over the past several months has sparked concern over whether the economy is entering an inflationary spiral similar to that of the 1970s. Lost in most of the commentary about inflation has been a careful inspection of its underlying mechanics. Almost all the recent increase in headline consumer price index inflation is due to rocketing energy and food prices. Inflation excluding energy and food is significantly lower. The increase in the core CPI over the past year was just 2.4 per cent, slightly above the Federal Reserve’s comfort zone of 1 to 2 per cent. The feeding through of food and energy costs to core prices did produce an uptick this past month. Over the coming year, however, below-capacity output growth and softening oil and commodity prices are likely to push core inflation back towards the comfort zone. Why care about headline inflation versus core inflation? Simply put, a sustained move of headline inflation to the levels of the 1970s is unlikely without an accompanying increase in the core component. The reason is simple: although they can be highly persistent, rapid increases in the relative prices of energy and food cannot go on indefinitely. Once this process dies down, as long as core inflation remains anchored, headline inflation must converge to it.
Oil Declines as Stronger U.S. Dollar Dims Commodities' Appeal Crude oil declined as the U.S. dollar strengthened against the euro, limiting the appeal of commodities as an inflation hedge. Oil has fallen 16 percent since its July 11 record as the dollar has strengthened against the euro. Futures rose earlier as Royal Dutch Shell Plc said it may suspend exports of Bonny Light crude from Nigeria after a militant attack in the Nembe Creek trunk line yesterday. "A stronger dollar translates into weaker crude," said Tom Bentz, a broker at BNP Paribas in New York. "The market is still kind of in this downward trend here in the short term and is having troubling turning back up."
Home Price Index Down 15.8% in May Home prices continued to fall in May across the country, a private group said on Tuesday, a sign that the housing slump may get worse. The decline in the last year is the steepest annual drop since the Case-Shiller index began two decades ago, according to Standard & Poor’s, which releases the index. Case-Shiller is a widely watched measure of the housing market that measures prices in 20 major metropolitan areas. From May 2007, prices have dipped 15.8 percent, falling 0.9 percent in May this year. The 10-city price index, which dates to 1988, dropped 16.9 percent. All 20 cities measured by the index had annual declines in home values, and 10 cities have suffered double-digit percentage declines in the last year. Miami and Las Vegas have fared the worst, with prices in each city dropping more than 28 percent since May 2007.
IMF says housing slump critical The International Monetary Fund (IMF) said Monday there's no end in sight to the U.S. housing recession and warned that deteriorating credit conditions for consumers and banks may prolong a period of slow economic growth. "At the moment, a bottom for the housing market is not visible," the IMF said in its Global Financial Stability Report, released Monday. "Stemming the decline in the U.S. housing market is necessary for market stabilization as this would help both households and financial institutions to recover." The IMF, which a year ago failed to foresee the depth of the subprime mortgage collapse, stood by its April forecast for about $1 trillion in losses stemming from the U.S. mortgage crisis. While U.S. policy makers have helped contain the financial losses, "credit risks remain elevated" and banks need to raise more capital.
A New Way to Generate Mortgages The financial establishment came together Monday in search of a new way for banks to come up with cash for home mortgages. Regulators, bankers and traders, led by Treasury Secretary Henry M. Paulson Jr., all pledged to do their best to get a “covered bond market” going in the United States. Covered seems to be a synonym for collateralized, but it also has other meanings that may be appropriate in this effort to salvage the housing market. Think of covered wagons, which can be circled in times of crisis. With banks reluctant to lend their own money for mortgages, and the private securitization market quiescent if not dead, the cost of mortgage loans has been rising even as housing prices fall, making a bad situation worse. At best, a covered bond market would provide a cheaper source of financing for banks while reassuring investors that their money is safe. Essentially investors would buy into a pool of mortgages that would be kept on the balance sheet of the bank that made the loans. These would be high-quality loans, and at the first sign of trouble in the underlying mortgages, those mortgages would be replaced in the mortgage pool. WE'RE LIKELY TO GET AN UGLY JOBS REPORT ON FRIDAY FINALLY, we should get some honest figures on the health of the nation's job market. On Friday the Labor Department will report the July payroll survey and the month's unemployment rate. Wall Street thinks that the nation lost another 75,000 jobs this month, with the headline unemployment rate rising to 5.6 percent. Unemployment was at 5.5 percent in June, showing a tremendous jump from 5.0 percent in May. And 62,000 jobs disappeared in June. In fact, the number of jobs in the US has declined every month this year. But as I've been explaining in this column for years, the number of jobs that are lost or gained each month has a lot to do with tricky statistics. Friday's number, while not perfect, will be the first monthly job report this year that isn't defiled by ridiculous assumptions.
Banks Act to Aid Mortgage Lending$$ 'Covered Bond' Plan Of Four Firms Seeks To Boost Financing Four of the nation's largest banks will begin issuing a type of debt the Bush administration has been pushing as a way to help reinvigorate the housing market. On Monday, Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co., said they would begin issuing so-called covered bonds, a popular method of financing in Europe that could make more mortgage financing available in the U.S. The move came as federal regulators announced a set of voluntary industry guidelines intended to provide clarity to issuers and investors about the types of assets banks must hold if they issue such bonds and how investors would fare in the event of a bank failure.
Worried Banks Sharply Reduce Business Loans 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. 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.
Gold futures fall, pressured by dollar's gains Gold futures declined early Tuesday, as falling oil prices and a higher U.S. dollar left traders inclined to sell the precious metal. Gold for August delivery fell $5.20, changing hands at $922.50 an ounce on the New York Mercantile Exchange. On Monday, gold finished little changed, ending up 90 an ounce. "The metal may struggle to gain significantly until either oil or the dollar can provide support," wrote James Moore, analyst at TheBullionDesk.com. "However, with fresh sizable writedowns being posted by the large investment banks, we expect investors to remain cautious and risk averse as a result, which should draw more safe-haven investment demand from longer-term players," Moore said in a note.
Merrill Aims to Raise Billions More Firm Dumps Mortgage Assets as Crisis Drags On; Another Big Write-Down Merrill Lynch & Co. agreed to sell more than $30 billion in toxic mortgage-related assets at a steep loss, hoping to purge its balance sheet of problems that continue to plague the giant brokerage firm. The move was described by a person close to Merrill as an effort to "lance the boil" that has resulted in more than $46 billion in write-downs since June 2007. Dumping the assets for just 22 cents on the dollar will result in a write-down of $5.7 billion. That is an ominous sign for other Wall Street firms and commercial banks trying to get rid of loans and securities in a market flooded with distressed assets.
Merrill to sell troubled assets, raise capital Merrill Lynch to cut mortgage-backed securities, raise new capital by issuing shares Merrill Lynch & Co., in a broad move to clean up its troubled balance sheet, said Monday it will sell a big slice of its toxic asset-backed securities and issue new stock to raise $8.5 billion of fresh capital. The world's largest brokerage, struggling to right itself as the credit crisis continues, said it will issue more than 200 million new common shares as part of the deal. Merrill said it will write-down $5.7 billion because of additional losses on the sale of mortgage securities and hedging contracts. Chief Executive John Thain, who joined Merrill Lynch last year, had vowed in the past he wanted to avoid using a public offering to raise money. The latest move comes just over a week after Merrill reported a $4.6 billion second-quarter loss, where he raised $8 billion of much needed capital from asset sales instead of diluting the stock by issuing more shares.
MGM, Dubai Fall Behind on $3.5 Billion Loan for Las Vegas Plan MGM Mirage and Dubai World are late in raising as much as $3.5 billion for their $11.2 billion CityCenter project in Las Vegas because banks saddled with debt to casinos and hotels are wary of making new loans. Deutsche Bank AG and Credit Suisse Group, the Zurich-based bank that advised Dubai World last year when it invested $5.1 billion in MGM, are among the holdouts, bankers with knowledge of the matter said. Funding was supposed to be completed by the end of June, MGM Chief Financial Officer Daniel D'Arrigo told analysts in May. President James Murren said Frankfurt-based Deutsche Bank has been part of every MGM loan since 1998.
Turning the American Dream Into a Nightmare for Taxpayers President Bush is about to sign a major bill to bail out 400,000 reckless homeowners who find themselves in the cross hairs of greedy lenders seeking to foreclose on delinquent mortgages… This bail out will also throw tens of billions of taxpayer money at Fannie Mae and Freddie Mac, two private corporations specifically created by Congress to bring stability to mortgage lending. Heaven knows, no one wants to see any American kicked out of his or her home. But this action is yet another punch in the stomach to millions of Americans who have chosen to live their lives responsibly and within their financial means. Given the government’s penchant for serving as Uncle Nanny when it comes to home ownership, why in Hades should any responsible citizen scrimp and save and work hard when those who are reckless and irresponsible can count on being bailed out with taxpayer money?
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