Financial Reality Will Sound a Wake-Up Call for the Federal Reserve and the American Dream In holding overnight rates steady at 2%, the U.S. Federal Reserve once again put forth its belief that, despite a cascade of horrific financial data, the economy is likely to continue to grow slowly and that inflation would moderate. Although wrong on both counts, this view is consistent with the relative optimism that prevails across the country. After nearly two decades of an uninterrupted consumption binge, most Americans simply refuse to believe that anything can seriously derail the American economy. It’s a pleasant dream, but the wakeup call can’t be too far off. The benign outlook on inflation is rooted in the hope that a slowing economy will pop the commodities “bubble” and break the back of inflation. Despite these pronouncements, most rational observers understand that inflationary pressures are currently intensifying, not abating. Rising commodity prices are not the cause of inflation, but merely the symptom of rampant monetary expansion from the Fed and other central bankers around the world.
U.S. credit system remains crippled a year after crisis erupted A year after the credit crisis erupted on Wall Street, one of the most important arteries of modern U.S. finance remains broken. And until it is fixed or replaced, analysts say, borrowers in the United States can expect to face higher than normal interest rates even as access worsens to home mortgages, student loans, auto loans and commercial mortgages. The problem - the drying up of financing for a vast swath of the economy - has intensified as bond investors have grown leery of the securities priming the pump. The inability to revive credit markets has served as a drag on both the U.S. and the global economies. Economies elsewhere are caught in the backwash, affected both directly by the financial problems emanating from the United States and the American economic downturn that has followed.
Bank Stocks Drop Anew Amid Worry Over Falling Home Prices $$ Stuck with a growing glut of foreclosed houses, banks and investors are shedding them at increasingly steep losses, potentially adding to the banking industry's red ink this year. Banks are selling foreclosed homes in some cases for less than half the price they fetched two or three years ago. The cuts are coming as the U.S. banking sector, slogging through its worst crisis in decades, bites the bullet out of fear that prices will keep falling.Financial stocks fell sharply Tuesday, following J.P. Morgan Chase & Co.'s warning late Monday that it expects "a continued decline in U.S. housing prices." The dour assessment included a roughly $1.5 billion trading loss related to the largest U.S. bank's holdings of mortgage-backed securities.
Retail sales drop for first time in 5 months July retail sales dip 0.1 percent as multiple economic woes blunt impact of stimulus checks Retail sales fell in July, the weakest performance in five months, as a variety of economic woes combined to blunt the impact of billions of dollars in government stimulus payments to U.S. households. The Commerce Department reported Wednesday that retail sales dipped 0.1 percent last month, the first decline since sales had fallen by 0.5 percent in February. It was a worse showing than the flat reading economists had been expecting. The weakness last month came after another big slide in auto sales as Detroit faced its worst sales month in 16 years. Automakers have been battered by the weak economy and record gasoline prices which have cut into demand for their once-popular sport utility vehicles and pickup trucks.
Oil rises on mixed dollar Oil rises on mixed dollar and ahead of US crude inventory data Traders bid oil higher Wednesday amid mixed signals on the strength of the U.S. dollar and ahead of weekly U.S. crude inventory data expected to show a slight increase in oil supplies. A weakening dollar has helped boost oil prices this year, because dollar-denominated commodities are often used as hedges against inflation and a falling U.S. currency. The euro rose Wednesday to $1.4919 but the yen was weaker against the greenback, trading at 1 U.S. dollar to 108.93 yen. Light, sweet crude for September delivery rose 23 cents to $113.24 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. The contract dropped $1.44 overnight to settle at $113.01 a barrel.
For banks, breaking up is hard to do UBS is looking at separating its prized wealth management arm from its investment bank, but its U.S. rivals' experience shows that splitting the company into parts could be very difficult indeed. For years, critics have called for banks like Citigroup to be split up, claiming their many separate businesses are too difficult to manage well. But dividing a bank is tricky because the individual units may need more capital separately than they do together. A bank's units can provide stability to one another, with some earning money while others lose money - precisely the reason a former Citigroup chief executive, Sanford Weill, cited when he tried to craft the bank into a "financial supermarket." Selling a unit would be difficult given the low prices these assets would likely fetch now, analysts said.
Bankrupt Retailers: Pushed to the Brink Changes in the law have sharply reduced retailers' ability to reorganize, driving many to liquidate quickly On Feb. 19 the electronic gizmo retailer Sharper Image filed for Chapter 11 bankruptcy protection. As part of its court filing, Sharper Image management committed to its lenders to close 90 of its 184 stores. But within weeks, newly appointed Chief Executive Robert Conway decided to liquidate the rest of the stores. Conway, who is a principal at turnaround specialist Conway, Del Genio, Greiss & Co., reached the conclusion that it would be nearly impossible to secure adequate financing to restock the remaining 94 stores. "We didn't want to delay the process to a point where there would be no value left, and we decided liquidation was the best option. The last few stores closed at the end of July," says Conway. But the final nail in the coffin for Sharper Image came three years earlier, when U.S. bankruptcy law was revised to add cash payments to utilities and other suppliers, and place a 210-day cap on the amount of time bankrupt companies have to decide whether to keep a lease.
Stock Pessimism Fades as Commodities Tumble, Bank Concern Eases Stock investors from Mexico City to Madrid are growing less pessimistic after oil tumbled 23 percent and concerns about bank losses receded, a survey of Bloomberg users showed. While most investors expect benchmark indexes to decline, fewer predict losses than in July for the Standard & Poor's 500 Index, the FTSE 100 Index, France's CAC 40 Index, Italy's S&P/MIB Index, the Swiss Market Index, Germany's DAX Index, Spain's IBEX 35 Index and Mexico's Bolsa, according to the Bloomberg Professional Global Confidence Survey. Brazilian investors were the most bullish for a ninth month. Only in Japan did they grow more bearish, last week's survey of 2,229 users showed.
Commodity Correction - Coming Into an Important Bottom? For the last 4 weeks, commodity markets have been shredded with prices moving steadily lower across the board. From the July highs, spot Copper is down 17.72%, nearby Gold down 17.03%, Spot Silver down 24.62% and spot Platinum down 26.54%. Within Energy, the damage is even more considerable with Heating Oil down 25.55%, Unleaded Gasoline down 20.93%, Crude Oil down 22.94% and worst of all, Natural Gas down an incredible 38.60%. In Crude Oil, the decline has lasted 21 days dating back to the high seen at $146.65 on July 11th. That means Crude Oil has been declining more then 1% per day for 21 days. In the table below, we have gone back and assessed what could be considered all of the other ‘substantial’ double digit corrections which have taken place in Crude Oil since the bull market began in 2002. Not surprisingly, at just over 20% the current decline in Crude is on par ‘as reasonable’ for a potential correction low given what has been this market's high level of historical volatility.
Why Today’s Bull Market is Tomorrow’s Bear Trap Depending on your perspective, U.S. equities are either at the edge of another cliff or at the dawning of a new bull market. We could make the case for either. But in as much as that would be an interesting exercise, the more relevant question is what the data suggests. Let’s take a look. Since their 52-week highs last October, the Dow Jones Industrial Average Index has lost 18.5%, the S&P 500 Index is off 18.2% and the Nasdaq Composite Index has fallen 15.1%. At the same time, the broader U.S. economic picture has darkened considerably with gross domestic product (GDP) a slim 1.9% and consumer confidence in the toilet bowl rather than the punch bowl. Adding insult to injury, sentiment is worsening. Even perma-bulls are tempering their expectations and volume remains decidedly concentrated on the downside.
Dollar Conundrum The long-term downtrend of the dollar has been a black eye for American pride, but it comes with a silver lining: the U.S. trade situation is improving as exports surge. On Tuesday the U.S. Commerce Department reported the trade imbalance dropped to $56.8 billion in June, down by 4.1% from a revised May deficit of $59.2 billion. It was the smallest deficit in three months and far better than the $61.5 billion Wall Street had been expecting. "Right now," said Joe LaVorgna, chief economist at Deutsche Bank, "the second quarter was one of the strongest trade contributions to the gross domestic product ever."
SEC short-selling ban on Fannie, Freddie to end A government order expires Tuesday that temporarily banned a certain kind of short-selling of the stocks of mortgage finance companies Fannie Mae and Freddie Mac and 17 large investment banks. The companies' shares have stabilized since the ban took effect July 21. The Securities and Exchange Commission says its order helped prevent stock manipulation, and that regulators will be able to analyze data to gauge its effectiveness. But some experts say that may be difficult to determine. The SEC instituted the emergency ban last month after a precipitous slide in the shares of Fannie and Freddie, the government-sponsored companies that together hold or guarantee more than $5 trillion in home mortgages - nearly half the U.S. total. The SEC on July 29 extended the ban until 11:59 p.m. EDT Tuesday, saying it would not be extended further.
Financial Shares Go Crunch Just when investors thought it was safe to go back into financial stocks, they heard a crunching noise and realized on Tuesday that the subprime crisis was still out there, eating away at their portfolios. The day began badly, with the market reacting to a mortgage-related warning from JPMorgan Chase, pitiful earnings from UBS and analyst downgrades for Wall Street's golden boy, Goldman Sachs. Then it got worse as a slew of concerns were raised about other companies.
Stocks fall sharply amid financial sector concerns Wall Street falls sharply as investors grow concerned about losses at financial companies Wall Street skidded lower Tuesday as downbeat news from JPMorgan Chase & Co. and other financial companies lifted the market's anxiety about the continuing impact of the credit crisis on the economy. The Dow Jones industrials fell nearly 140 points. The latest reminder of continuing troubles for banks and brokerages came when JPMorgan said late Monday it has incurred wider losses in its mortgage holdings so far in the third quarter than in the second quarter. The nation's second-largest bank by assets said in a regulatory filing it lost $1.5 billion, after hedges, in its mortgage-backed securities and loans this quarter, compared to $1.1 billion in the second three months of 2008. The losses were proof to investors that the financial sector's problems appear to be nowhere near a resolution. Meanwhile, Goldman Sachs Group Inc. fell after several analysts lowered their ratings and earnings estimates for the investment bank. And UBS AG, Switzerland's largest bank, reported further losses and write-downs of $5.1 billion during the second quarter.
PMorgan shares tumble on widening 3Q losses JPMorgan shares fall after bank reports widening losses related to mortgage debt in 3rd qtr JPMorgan Chase & Co. shares tumbled nearly 10 percent Tuesday as the bank's disclosure about escalating losses in its mortgage portfolio set off new concerns about the health of the overall financial sector. An analyst's lowering of the bank's earnings estimates and price target contributed to the decline. JPMorgan Chase plunged $3.88, or 9.3 percent, to close at $38.01. It has traded between $29.94 and $49.95 in the past 12 months. In a filing with the Securities and Exchange Commission late Monday, the bank said turbulence in the credit markets have caused it to lose about $1.5 billion, after hedges, in its mortgage-backed securities and loans to date in the July-to-September quarter. That's more than the $1.1 billion in losses JPMorgan incurred in its investment bank's portfolio during the second quarter.
Wall Street Losses Cut Tax Bill, Sap New York Revenue Wall Street's mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said. Some companies are seeking refunds from the city on taxes they paid ahead of time, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a "safe harbor," protecting against penalties for underpayment.
Freddie Mac Will Stop Buying New York Subprime Mortgages In its latest effort to deal with the fallout of the subrprime credit crisis, government-sponsored mortgage buyer Freddie Mac said it will not purchase subprime mortgages secured by properties in New York state with note dates on or after Sept. 1. The move is Freddie's response to recent New York legislation, effective Sept. 1, that creates a new category of subprime mortgages. The state has said the legislation is intended to curb abusive lending practices. But Freddie said the pending law "creates the potential for heightened legal and business risk exposures for the purchasers or assignees of these loans," including secondary market participants such as Freddie and sister Fannie Mae that buy mortgages.
A Bottom in Housing? You've Got to Be Kidding Many forecasters say just wait until early 2009 and home prices finally will start to pick up. Not so fast says my guest Barry Ritholtz, CEO of Fusion IQ and financial blogger for The Big Picture. Home prices rocketed well above trend in the past five years, says Ritholtz, and have only just begun to deflate to more normal levels. The housing market will either drop about 25 percent dramatically, or peter out for a decade. So which is it? Ritholtz thinks somewhere in between.
Calif. Bank Needs Capital Vineyard National Bancorp stated late Monday that it would need to raise capital and find new sources of liquidity to continue operating through 2008. Shares closed down 44% at $1.08 Tuesday. The $2.4 billion Rancho Cucamonga, Calif., holding company reported a net loss of $67.9 million for the second quarter, mainly resulting from a $40.5 million provision for loan losses, as nonaccruing tract construction loans mounted. This followed a first-quarter loss of $13.3 million. Vineyard's main subsidiary is Vineyard Bank, NA, which had total assets of $2.3 billion as of June 30. According to its preliminary Federal Deposit Insurance Corporation call report for the second quarter, as provided by Highline Financial, on Aug. 12, the bank remained well-capitalized as of June 30, with a leverage ratio of 8.28% and a risk-based capital ratio of 10.03%. However, according to Monday's second-quarter 10-Q filing by the holding company, the bank is no longer considered well-capitalized "as a result of the issuance of the Consent Order, among other things."
'Occupied to sell' is latest in staging If you pay attention to housing trends at all, you've heard of "staging"—the term for decorating (or re-decorating) a home to make it more appealing to buyers. Thom Scott says his company practices "staging on steroids," and business is booming. The Nashville-based firm, called Show- homes, not only fills vacant houses with furniture, but with people to live in them too. It's generally accepted in real estate that vacant homes take longer to sell and fetch less than furnished ones. Vacant properties—potentially weed-choked and the target of vandals—are a big worry: There are about 2.2 million of them for sale, according to census data. Showhomes stages and occupies pricier properties, and it—and its clients—are changing with the times.
GM to Crack Down On Health Coverage General Motors Corp., looking to trim its nearly $5 billion-a-year health-care tab, is cracking down on workers who are collecting medical benefits for which they aren't eligible. The auto maker is giving its 67,000 hourly workers until Aug. 20 to voluntarily remove dependents who shouldn't be covered from their health policies. After that, employees must prove that covered family members are eligible. If GM paid for health expenses it shouldn't have, workers may be forced to reimburse the company, a GM spokeswoman said. GM has audited its health-care rolls before, but the new effort is more extensive than in years past, she said.
5 Ways to Dig Yourself Out of Credit Card Debt How do you stop digging yourself deeper into debt? Americans carry a lot of debt, and it is easy for mounting debt to grow. Sometimes, it grows faster than you can pay it off, and that can be very stressful.
Here are five surefire strategies to help you help yourself: 1. Give yourself a 'time out.' 2. Stop using your credit cards 3. The $100 key rule. 4. Delete your cookies! 5. Count to five.
Japan on brink of recession as economy shrinks Japan said Wednesday its economy contracted in the second quarter as falling exports and weak consumer spending sent Asia's largest economy hurtling toward its first recession in six years. The slump reflects the rapidly deteriorating global economic climate, with fears of a recession in the eurozone also mounting as the fallout from the US financial crisis ripples around the world. Japan's gross domestic product (GDP) shrank by 0.6 percent in the three months to June from the previous quarter, the Cabinet Office said, marking the first time in a year that the world's second-biggest economy has contracted. The economy shrank by 2.4 percent on an annualised basis, matching market expectations.
BP Shuts Down Georgian Pipeline as Precaution BP PLC said it shut down an oil pipeline that runs through Georgia on Tuesday as a precautionary measure, but added that it is unaware of any Russian bombings on pipelines in the region. BP said the 90,000-barrel-a-day pipeline to Supsa on Georgia's Black Sea coast from Baku in Azerbaijan will remain closed indefinitely. Another pipeline operated by the London-based oil company in the former Soviet Republic, the larger Baku-Tbilisi-Ceyhan pipeline, is already out of action after a fire last week on its Turkish stretch. The BTC pipeline usually provides around 1 million barrels of Caspian crude to international markets. BP spokesman Robert Wine said that the Baku-Supsa line was closed because it runs through the center of Georgia, where there was greater risk of conflict.
U.S. refuses Israel weapons to attack Iran The United States has turned down Israeli requests for military hardware to help it prepare for a possible attack on Iranian nuclear facilities, a frontpage report in Israel's Haaretz newspaper said on Wednesday. The unsourced report said the Americans had warned Israel against carrying out any such attack and had refused to supply offensive military hardware. Instead they had offered to improve the Jewish state's defenses against surface-to-surface missiles. Interviewed on Israeli Army Radio, Defence Minister Ehud Barak did not deny the Haaretz story, but refused to discuss it. "It would not be right to talk about these things," Barak said. The West accuses Iran of trying to develop nuclear weapons. Iran denies this and says its nuclear program is only to generate electricity. It has vowed to retaliate against Israel and the United States if attacked. Israel, which is believed to have the Middle East's only atomic arsenal, says a nuclear-armed Iran could threaten its existence.
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