This post first appeared on Minyanville and Cirios Real Estate.
With mortgage rates at historic lows, housing prices plummeting, and Washington throwing billions at housing-market recovery efforts, why is it still so damn hard to get a loan?
And while the easy answer is that banks are flat-out broke, the real answer may lie in an esoteric corner of mortgage finance which has all but disappeared: warehouse lending.
In the heyday of the housing boom, small mortgage companies were able to compete with huge financial institutions by tapping so-called warehouse lines of credit. Using cash from their warehouse lender to fund loans at the closing table, as big banks do, these smaller mortgage shops could often provide better service than their bigger competitors, though at the same low rates.
Warehouse lenders, often big banks themselves -- remember Washington Mutual and Countrywide (Bank of America (BAC))? -- held onto loans until they were sold in the secondary market. Turnaround time could be anywhere from a few days to a few months for larger, more complex transactions.
The benefits to being able to finance one's own loans rather than just acting as a broker were numerous. Having a warehouse line gave mortgage bankers better control over the closing process, enabling them to beat out big banks in terms of response time and customer service.
By aggregating loans on a warehouse line, bankers could bundle them together and sell packages at a premium, rather than selling them off one by one. And since they could sell loans to any bank on the street, most such originators offered loan programs just as varied as those of even the biggest institutional lenders.
At the height of the boom, it was estimated that almost half of the over $3 trillion in annual loan production was first funded on a warehouse line.
As the mortgage market began to collapse, big purchasers stopped buying, and warehouse lines filled up with unwanted loans. Warehouse lenders began margin-calling clients, cutting off funding capacities, and capturing every penny they could from the few sales that actually went through.
The result, which can be plainly seen on websites like The Mortgage Lender Implode-o-Meter, was that hundreds of small bankers closed up shop.
Now, as banks scramble to handle the flood of requests for refinances at super-low interest rates, the mortgage industry is once again facing a credit crunch. By one estimate there's only $25 billion in available warehouse lines to support the $2.8 trillion in mortgages expected to be written next year.
Mortgage bankers I speak with say the only thing holding them back from giving out more loans is a lack of warehouse capacity.
According to the Wall Street Journal, one solution being floated by the Mortgage Bankers Association (or MBA) is for Fannie Mae (FNM) and Freddie Mac (FRE) to provide government-backed warehouse lines to the few intrepid mortgage bankers still eking out a living in this nightmarish market.
The MBA argues that, since big banks like JPMorgan (JPM), Citigroup (C) and Wells Fargo (WFC) don’t need access to warehouse lines, they’re pushing out the smaller guys and stymieing competition. There's little incentive for a Chase or a Citi to reopen its warehouse lending group, since the move would just allow competitors to grab market share from the very profitable business of originating loans.
While it makes logical sense for regulators to allow Fannie and Freddie to prop up this segment of the market, it may run contrary to other bank-friendly initiatives. Fees generated by writing new mortgages may be the only thing keeping the likes of Bank of America and Citigroup from tapping even more government support to stay afloat.
Tuesday, March 31, 2009
Monday, March 30, 2009
Homebuilders Hoping Size Doesn't Matter
This post first appeared on Minyanville and Cirios Real Estate.
The market for new homes is being decimated by rampant overbuilding during the boom, and by the flood of bank-owned properties now being sold on the cheap. Prices remain in free fall. Even as labor expenses and materials costs hover around recent lows, the business of building new homes is still broken.
But after 2 “positive” datapoints last week, and KB Home's (KBH) narrower-than-expected loss, many are wondering if the worst is now behind the beleaguered industry. Government-backed efforts to keep mortgage rates low and encourage home buying could save the builders. Maybe.
New home construction, for all its complications and intricacies, is a rather simple business: Sell homes for more than it costs to build them.
New homes have traditionally carried a premium to “used” ones; the median sale price of a new home is currently about 20% higher than that of one that's been previously owned. Builders relied on this premium to cover their construction and financing costs, not to mention to generate a healthy profit. But now that buyers can buy barely used houses at fire-sale prices, the allure of the brand-new is on the wane.
Here in the San Francisco Bay Area, banks are said to literally be giving land away for free: Builders will have nothing to do with it. The costs associated with owning improved lots (in other words, lots ready for the construction of a house) are too high for - even if they're offered for free. Building just isn’t an economically viable option - and it won’t be until housing prices rebound.
And that could take years.
Meanwhile, homebuilders like KB Home and rivals Centex (CTX), Lennar (LEN) and DR Horton (DHI) are struggling to rid themselves of unsold homes. Builders large and small are slashing prices, trimming staff, hawking vacant land for pennies on the dollar, and doing anything else they can think of to stay alive.
Many face an additional headwind this year: Tax rebates from previous operating losses will be drying up. Debt remains high, and cash is barely trickling in.
Ultimately, some big builders won't make it. The market, both for equities and default protection in the form of credit default swaps, is betting on Hovnanian (HOV), Beazer Home (BZH) and Standard Pacific (SPF) to be the first of the big dogs to fail.
Those hoping to survive are rapidly adjusting their strategies to adapt to the changing demands of the American homebuyer. As Minyanville's Terry Woo noted on Friday, KB Home's better-than-expected earings were partly a reflection of a switch to smaller, cheaper homes.
This is a positive trend: it's yet another indicator that Americans have a newfound love affair with thrift. And while we may lose a few builders along the way, I doubt we'll miss all those identical, pre-fabricated houses that had come to litter our landscape.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
The market for new homes is being decimated by rampant overbuilding during the boom, and by the flood of bank-owned properties now being sold on the cheap. Prices remain in free fall. Even as labor expenses and materials costs hover around recent lows, the business of building new homes is still broken.
But after 2 “positive” datapoints last week, and KB Home's (KBH) narrower-than-expected loss, many are wondering if the worst is now behind the beleaguered industry. Government-backed efforts to keep mortgage rates low and encourage home buying could save the builders. Maybe.
New home construction, for all its complications and intricacies, is a rather simple business: Sell homes for more than it costs to build them.
New homes have traditionally carried a premium to “used” ones; the median sale price of a new home is currently about 20% higher than that of one that's been previously owned. Builders relied on this premium to cover their construction and financing costs, not to mention to generate a healthy profit. But now that buyers can buy barely used houses at fire-sale prices, the allure of the brand-new is on the wane.
Here in the San Francisco Bay Area, banks are said to literally be giving land away for free: Builders will have nothing to do with it. The costs associated with owning improved lots (in other words, lots ready for the construction of a house) are too high for - even if they're offered for free. Building just isn’t an economically viable option - and it won’t be until housing prices rebound.
And that could take years.
Meanwhile, homebuilders like KB Home and rivals Centex (CTX), Lennar (LEN) and DR Horton (DHI) are struggling to rid themselves of unsold homes. Builders large and small are slashing prices, trimming staff, hawking vacant land for pennies on the dollar, and doing anything else they can think of to stay alive.
Many face an additional headwind this year: Tax rebates from previous operating losses will be drying up. Debt remains high, and cash is barely trickling in.
Ultimately, some big builders won't make it. The market, both for equities and default protection in the form of credit default swaps, is betting on Hovnanian (HOV), Beazer Home (BZH) and Standard Pacific (SPF) to be the first of the big dogs to fail.
Those hoping to survive are rapidly adjusting their strategies to adapt to the changing demands of the American homebuyer. As Minyanville's Terry Woo noted on Friday, KB Home's better-than-expected earings were partly a reflection of a switch to smaller, cheaper homes.
This is a positive trend: it's yet another indicator that Americans have a newfound love affair with thrift. And while we may lose a few builders along the way, I doubt we'll miss all those identical, pre-fabricated houses that had come to litter our landscape.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
GM Runs Out of Road?
This post first appeared on Minyanville.
Taking money from the US government isn't just risky; it can cost you your job.
Just ask Rick Wagoner, the now former Chief Executive Officer of General Motors (GM). After accepting billions in aid from the Treasury Department -- but failing to produce an acceptable restructuring plan -- Wagoner was forced out of the beleaguered automaker over the weekend.
The Wall Street Journal reports that, in addition to removing Wagoner, the Obama administration’s auto-industry team floated the notion that bankruptcy may be the best option for Chrysler and GM. Although the government said it doesn’t have plans to oust Chrysler CEO Robert Nardelli, it did suggest that it's growing tired of propping up the struggling company.
The shakeup at GM didn’t end with Wagoner: A large part of the board of directors was also asked to leave, and Chief Operating Officer Frederick “Fritz” Henderson was named Chief Executive. He, along with a new-and-improved board and management team, will receive a 60-day credit lifeline by which to devise a more rigorous turnaround plan.
After the AIG (AIG) bonus debacle, financial firms are scrambling to return TARP money, lest they be subject to similar scrutiny (or similar witch-hunts). Goldman Sachs (GS), JPMorgan Chase (JPM) and others have suggested they’re working on plans to repay billions in government aid.
Whether its bonuses at AIG, corporate jets at Citigroup (C), or executive-suite redecoration at Merrill Lynch (BAC), the federal government is taking a rather more active role in any company that's required federal money in order to stay afloat.
The US government now controls some of the biggest companies in the world. And if this weekend's actions are any indication, it plans to fully wield that power.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Taking money from the US government isn't just risky; it can cost you your job.
Just ask Rick Wagoner, the now former Chief Executive Officer of General Motors (GM). After accepting billions in aid from the Treasury Department -- but failing to produce an acceptable restructuring plan -- Wagoner was forced out of the beleaguered automaker over the weekend.
The Wall Street Journal reports that, in addition to removing Wagoner, the Obama administration’s auto-industry team floated the notion that bankruptcy may be the best option for Chrysler and GM. Although the government said it doesn’t have plans to oust Chrysler CEO Robert Nardelli, it did suggest that it's growing tired of propping up the struggling company.
The shakeup at GM didn’t end with Wagoner: A large part of the board of directors was also asked to leave, and Chief Operating Officer Frederick “Fritz” Henderson was named Chief Executive. He, along with a new-and-improved board and management team, will receive a 60-day credit lifeline by which to devise a more rigorous turnaround plan.
After the AIG (AIG) bonus debacle, financial firms are scrambling to return TARP money, lest they be subject to similar scrutiny (or similar witch-hunts). Goldman Sachs (GS), JPMorgan Chase (JPM) and others have suggested they’re working on plans to repay billions in government aid.
Whether its bonuses at AIG, corporate jets at Citigroup (C), or executive-suite redecoration at Merrill Lynch (BAC), the federal government is taking a rather more active role in any company that's required federal money in order to stay afloat.
The US government now controls some of the biggest companies in the world. And if this weekend's actions are any indication, it plans to fully wield that power.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Sunday, March 29, 2009
Keepin' It Real Estate: Housing Recovery? What Housing Recovery?
This article first appeared on Minyanville and Cirios Real Estate.
This week, 2 data points led optimistic market-watchers to declare the bottom in the housing is nigh: Indeed, one widely read trader-writer proclaimed, “The oversupply of housing that so plagues the market at present will be a figment of our memory a few months hence.”
The first: On Monday, the National Association of Realtors said existing home sales jumped 5.1% in February compared to the previous month, largely due to the high number of foreclosures being dumped onto the market by big banks like JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).
While indicative of buyers gingerly dipping their toes back into the market, existing home sales are still down 13.4% from a year ago.
The second: On Wednesday, the Commerce Department released data on February new home sales which showed a similar trend: Transactions bounced 4.7% from January, but remain a whopping 41% below sales this time last year. Nevertheless, shares of beleaguered homebuilders like Centex (CTX) and Lennar (LEN) had stellar performances this week, capping a nearly 100% gain since the beginning of the month.
Prices, however, continue to slide for both existing and new homes. And while median (and average, for that matter) price data is skewed to the downside due to the mix of homes sold in a given period -- in this case, more cheap houses than expensive ones -- property values remain in a decidedly downward trend.
But since transactions typically find a bottom prior to prices, the number of people who believe prices should stabilize in the near future is growing.
Examining the data, unfortunately, tells a different story. Below is a chart produced by my firm, Cirios Real Estate, showing home prices and sales transactions in for the eastern part of the San Francisco Bay Area. The East Bay is a fairly representative sample of California housing markets: A little high-end, a little middle-class and a little low-rent all mixed in.
Click to enlarge
The red line shows average home prices, while the blue line shows sales transactions, as measured by their change from a year ago. Notice how, even as sales have spiked from the previous year, prices continue to plunge.
Two things jump out at me on this graph (aside from the massive increase in transactions and precipitous decline in prices):
First, transactions began to ramp up as prices moved down toward levels where borrowers could get government-backed loans to buy homes. That means Fannie Mae (FNM), Freddie Mac (FRE) and the FHA have financed a whole swath of homes in the past 18 months that are now severely underwater.
Second, transactions bottomed in September 2007, not long after the market peaked. 18 months have passed and prices have dropped more than 50% since that time.
With that in mind, the current “euphoria” over housing data -- after a single month-over-month increase in sales, when year-over-year measures remain well behind even last year's weak totals -- seems a bit premature.
This is not to say prices will never stabilize, or that increased sales are a bad thing. In fact, the more sales we have, the quicker price discovery happens and the faster a true bottom can be found. Nor is this some proclamation that this part of California is a perfect proxy for home prices nationwide.
But given the backlog of foreclosed homes sitting on the books of the major American banks, continued price declines across the country and tight mortgage market conditions, calls for the devouring of supply by voracious home buyers causing an imminent housing bottom is downright premature.
To be sure, we may be one step closer to a housing bottom, but that’s one step on a very, very long path.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
This week, 2 data points led optimistic market-watchers to declare the bottom in the housing is nigh: Indeed, one widely read trader-writer proclaimed, “The oversupply of housing that so plagues the market at present will be a figment of our memory a few months hence.”
The first: On Monday, the National Association of Realtors said existing home sales jumped 5.1% in February compared to the previous month, largely due to the high number of foreclosures being dumped onto the market by big banks like JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).
While indicative of buyers gingerly dipping their toes back into the market, existing home sales are still down 13.4% from a year ago.
The second: On Wednesday, the Commerce Department released data on February new home sales which showed a similar trend: Transactions bounced 4.7% from January, but remain a whopping 41% below sales this time last year. Nevertheless, shares of beleaguered homebuilders like Centex (CTX) and Lennar (LEN) had stellar performances this week, capping a nearly 100% gain since the beginning of the month.
Prices, however, continue to slide for both existing and new homes. And while median (and average, for that matter) price data is skewed to the downside due to the mix of homes sold in a given period -- in this case, more cheap houses than expensive ones -- property values remain in a decidedly downward trend.
But since transactions typically find a bottom prior to prices, the number of people who believe prices should stabilize in the near future is growing.
Examining the data, unfortunately, tells a different story. Below is a chart produced by my firm, Cirios Real Estate, showing home prices and sales transactions in for the eastern part of the San Francisco Bay Area. The East Bay is a fairly representative sample of California housing markets: A little high-end, a little middle-class and a little low-rent all mixed in.
Click to enlarge
The red line shows average home prices, while the blue line shows sales transactions, as measured by their change from a year ago. Notice how, even as sales have spiked from the previous year, prices continue to plunge.
Two things jump out at me on this graph (aside from the massive increase in transactions and precipitous decline in prices):
First, transactions began to ramp up as prices moved down toward levels where borrowers could get government-backed loans to buy homes. That means Fannie Mae (FNM), Freddie Mac (FRE) and the FHA have financed a whole swath of homes in the past 18 months that are now severely underwater.
Second, transactions bottomed in September 2007, not long after the market peaked. 18 months have passed and prices have dropped more than 50% since that time.
With that in mind, the current “euphoria” over housing data -- after a single month-over-month increase in sales, when year-over-year measures remain well behind even last year's weak totals -- seems a bit premature.
This is not to say prices will never stabilize, or that increased sales are a bad thing. In fact, the more sales we have, the quicker price discovery happens and the faster a true bottom can be found. Nor is this some proclamation that this part of California is a perfect proxy for home prices nationwide.
But given the backlog of foreclosed homes sitting on the books of the major American banks, continued price declines across the country and tight mortgage market conditions, calls for the devouring of supply by voracious home buyers causing an imminent housing bottom is downright premature.
To be sure, we may be one step closer to a housing bottom, but that’s one step on a very, very long path.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Stimulus Creates Jobs... For Lobbyists
This article first appeared on Minyanville.
As details emerge about how the private sector can tap into President Obama’s new spending programs, companies are scrambling to line up at the government teat.
And lobbyists are wringing their slippery paws with delight.
Of the $787 billion to be doled out as part of Obama’s economic stimulus package, $77.6 billion is earmarked for clean-energy projects. In the San Francisco Bay area, the country’s venture-capital hub, green startups are pouring money into lobbying efforts to get their share. According to Bloomberg, hiring a Washington insider is now essential for new companies.
The lobbyists work both sides of the trade, so to speak. On the one hand, they help companies write grants and figure out which government programs they're qualified for; on the other, they sidle up to federal employees and convince them to design grants to suit their clients.
This shift in focus -- from private money to public -- reflects the old accounting axiom: Follow the cash. With private capital hard to come by, government funding is fast becoming the only game in town.
Companies that lack the resources or will to pander to federal and state initiatives will be at a severe disadvantage to those willing to navigate maze-like government bureaucracy.
Case in point: The recently announced Public-Private Investment Program, or PPIP.
Investors able to get cheap government leverage can bid more aggressively for distressed assets, pushing up prices. Meanwhile, those without access to federal programs can't afford the new, higher levels - and are summarily pushed out of the market.
This works out well for big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C), all of whom are eager to unload their "toxic assets" at favorable prices. Then again, that's the way the system was designed.
As the government takes an ever-growing role in our economic affairs, companies must become ever more nimble in order to tap into this program or that to optimize capital.
The President's new initiatives are ironically (or sadly) creating more work for the very insiders he promised to boot out of Washington. Lobbyists, it appears, aren't just here to stay - they're in higher demand than ever before.
As details emerge about how the private sector can tap into President Obama’s new spending programs, companies are scrambling to line up at the government teat.
And lobbyists are wringing their slippery paws with delight.
Of the $787 billion to be doled out as part of Obama’s economic stimulus package, $77.6 billion is earmarked for clean-energy projects. In the San Francisco Bay area, the country’s venture-capital hub, green startups are pouring money into lobbying efforts to get their share. According to Bloomberg, hiring a Washington insider is now essential for new companies.
The lobbyists work both sides of the trade, so to speak. On the one hand, they help companies write grants and figure out which government programs they're qualified for; on the other, they sidle up to federal employees and convince them to design grants to suit their clients.
This shift in focus -- from private money to public -- reflects the old accounting axiom: Follow the cash. With private capital hard to come by, government funding is fast becoming the only game in town.
Companies that lack the resources or will to pander to federal and state initiatives will be at a severe disadvantage to those willing to navigate maze-like government bureaucracy.
Case in point: The recently announced Public-Private Investment Program, or PPIP.
Investors able to get cheap government leverage can bid more aggressively for distressed assets, pushing up prices. Meanwhile, those without access to federal programs can't afford the new, higher levels - and are summarily pushed out of the market.
This works out well for big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C), all of whom are eager to unload their "toxic assets" at favorable prices. Then again, that's the way the system was designed.
As the government takes an ever-growing role in our economic affairs, companies must become ever more nimble in order to tap into this program or that to optimize capital.
The President's new initiatives are ironically (or sadly) creating more work for the very insiders he promised to boot out of Washington. Lobbyists, it appears, aren't just here to stay - they're in higher demand than ever before.
Too Big to Fail: Let’s Make it Law
This article first appeared on Minyanville.
In an attempt to institutionalize the concept that certain “systemically important” firms are too big to fail, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke are petitioning Congress for expanded federal powers to seize and dispose of certain non-bank financial institutions if they get into trouble.
The 2 top US regulators argue that important lessons have been learned in the wake of the disastrous federal takeover of American International Group (AIG). Bankruptcy laws, they say, don’t adequately protect public interests when fallout from the collapse of a big financial firm would do substantial damage to the system at large.
Geithner and Bernanke agree the power should rest within the federal government, but don’t see eye-to-eye on who that regulator of last resort should be. Bernanke suggests the responsibility could be handed over to the FDIC, already a specialist in dealing with failed banks. Geithner, on the other hand, thinks his Treasury department should handle such messy events.
Barney Frank, House Financial Services Chairman and always one to offer up valuable solutions to important problems, said this morning “We need to give somebody, somewhere in the federal government the power” to put failing non-banks “out of their misery,” according to the Wall Street Journal. Thank you Mr. Frank - the specificity of your suggestion is truly remarkable.
Ever since Bear Stearns collapsed just over a year ago, snatched up by JPMorgan Chase (JPM) for a song, courtesy of a $29 billion federal backstop, the Fed and Treasury have become skilled in the dark arts of ad-hockery to protect the battered American financial system. Scantily disclosed and hugely complex bailouts, rescues and guarantees have become the norm as officials scramble to prevent the collapse of certain key institutions.
As the world’s financial system has become more interconnected, big banks and other financial firms have grown increasingly dependent one on another for survival. Derivatives and round-the-clock trading have rendered the likes of Morgan Stanley (MS), Goldman Sachs (GS) and formerly AIG, as essential to the well-being of the global economy as big banks like Citigroup (C) and HSBC (HBC).
Meanwhile, outside the world of high finance, companies operating in the rest of the economy still live in what's left of the free market. Failure, a natural part of the capitalist system, means declaring bankruptcy and closing up shop. The system for disposing of failed firms may not be perfect, but allows for a healthy, needed cleansing of firms that didn't make it.
Allowing the government to control this process lends itself to immense political influences, likely dragging out rescues years longer than necessary. And as we're now seeing with AIG, once bureaucrats get involved in managing a business, contracts and other legal obligations become mere suggestions.
As Washington salivates at its ongoing power grab, taking increasing control over our economy, the free market dies - bit by painful bit.
In an attempt to institutionalize the concept that certain “systemically important” firms are too big to fail, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke are petitioning Congress for expanded federal powers to seize and dispose of certain non-bank financial institutions if they get into trouble.
The 2 top US regulators argue that important lessons have been learned in the wake of the disastrous federal takeover of American International Group (AIG). Bankruptcy laws, they say, don’t adequately protect public interests when fallout from the collapse of a big financial firm would do substantial damage to the system at large.
Geithner and Bernanke agree the power should rest within the federal government, but don’t see eye-to-eye on who that regulator of last resort should be. Bernanke suggests the responsibility could be handed over to the FDIC, already a specialist in dealing with failed banks. Geithner, on the other hand, thinks his Treasury department should handle such messy events.
Barney Frank, House Financial Services Chairman and always one to offer up valuable solutions to important problems, said this morning “We need to give somebody, somewhere in the federal government the power” to put failing non-banks “out of their misery,” according to the Wall Street Journal. Thank you Mr. Frank - the specificity of your suggestion is truly remarkable.
Ever since Bear Stearns collapsed just over a year ago, snatched up by JPMorgan Chase (JPM) for a song, courtesy of a $29 billion federal backstop, the Fed and Treasury have become skilled in the dark arts of ad-hockery to protect the battered American financial system. Scantily disclosed and hugely complex bailouts, rescues and guarantees have become the norm as officials scramble to prevent the collapse of certain key institutions.
As the world’s financial system has become more interconnected, big banks and other financial firms have grown increasingly dependent one on another for survival. Derivatives and round-the-clock trading have rendered the likes of Morgan Stanley (MS), Goldman Sachs (GS) and formerly AIG, as essential to the well-being of the global economy as big banks like Citigroup (C) and HSBC (HBC).
Meanwhile, outside the world of high finance, companies operating in the rest of the economy still live in what's left of the free market. Failure, a natural part of the capitalist system, means declaring bankruptcy and closing up shop. The system for disposing of failed firms may not be perfect, but allows for a healthy, needed cleansing of firms that didn't make it.
Allowing the government to control this process lends itself to immense political influences, likely dragging out rescues years longer than necessary. And as we're now seeing with AIG, once bureaucrats get involved in managing a business, contracts and other legal obligations become mere suggestions.
As Washington salivates at its ongoing power grab, taking increasing control over our economy, the free market dies - bit by painful bit.
Tuesday, March 24, 2009
Geithner Plan Puts Taxpayers on the Hook
This post first appeared on Minyanville.
The phrase “taxpayers will share in any upside” always makes me shudder.
And with good reason: Last September, as Fannie Mae (FNM) and Freddie Mac (FRE) crumbled under the weight of their massive loan portfolios, the US taxpayer ponied up $2 billion to rescue them, along with $200 billion in guarantees for future losses.
We were told that our investment would be well-protected, since the companies barely played in the subprime space: Their $5 trillion portfolios consisted of only the finest prime mortgages. One Wall Street Journal columnist even called Fannie and Freddie “a gold mine.”
Six months later, Fannie and Freddie have chewed through almost half their taxpayer-funded safety net. With delinquencies on prime loans rising, and home prices tumbling in high-end markets, losses are likely to keep growing - as will the taxpayer's obligation.
Then, just a week after the Fannie and Freddie rescue, insurance giant American International Group (AIG) took the national stage. Federal Reserve Chairman Ben Bernanke promised he had struck a hard bargain with AIG, and that taxpayer money had been shrewdly invested. The company was strong, we were told, and it was being unloaded at a bargain.
Three bailouts later, we’re collectively out almost $200 billion - and public outcry has reached a fever pitch.
$13 billion to Goldman Sachs (GS), $12 billion to Deutsche Bank (DB), and hundreds of millions to AIG executives: Not exactly what we signed up for.
Yesterday morning, in a long-awaited announcement, Treasury Secretary Tim Geithner said his Public-Private Investment Program “will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments.”
According to Geithner, private investors, alongside Treasury capital and Fed leverage, will jumpstart the market for the so-called “toxic assets” clogging up the financial system. Many hope the initiative will place a floor beneath the loans and securities that banks are unwilling to sell at prevailing market prices.
Geithner is encouraging private investors -- including pension funds -- to aggressively participate in the program. The assumption is that these distressed assets are trading well below their intrinsic value, and that buying delinquent loans and esoteric mortgage-backed securities at pennies on the dollar is an astute investment.
To be sure, certain well-connected private investors and the money managers chosen to coordinate the trades will make out famously. Meanwhile, Americans are being asked to blindly toss their tax dollars and pension money at the riskiest, most leveraged, least transparent securities the financial system has ever dreamed up.
If the federal government's track record as a steward of public funds is any indication of future performance, I'd welcome an opportunity to take the other side of whatever investments my tax dollars are about to be thrown toward.
The phrase “taxpayers will share in any upside” always makes me shudder.
And with good reason: Last September, as Fannie Mae (FNM) and Freddie Mac (FRE) crumbled under the weight of their massive loan portfolios, the US taxpayer ponied up $2 billion to rescue them, along with $200 billion in guarantees for future losses.
We were told that our investment would be well-protected, since the companies barely played in the subprime space: Their $5 trillion portfolios consisted of only the finest prime mortgages. One Wall Street Journal columnist even called Fannie and Freddie “a gold mine.”
Six months later, Fannie and Freddie have chewed through almost half their taxpayer-funded safety net. With delinquencies on prime loans rising, and home prices tumbling in high-end markets, losses are likely to keep growing - as will the taxpayer's obligation.
Then, just a week after the Fannie and Freddie rescue, insurance giant American International Group (AIG) took the national stage. Federal Reserve Chairman Ben Bernanke promised he had struck a hard bargain with AIG, and that taxpayer money had been shrewdly invested. The company was strong, we were told, and it was being unloaded at a bargain.
Three bailouts later, we’re collectively out almost $200 billion - and public outcry has reached a fever pitch.
$13 billion to Goldman Sachs (GS), $12 billion to Deutsche Bank (DB), and hundreds of millions to AIG executives: Not exactly what we signed up for.
Yesterday morning, in a long-awaited announcement, Treasury Secretary Tim Geithner said his Public-Private Investment Program “will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments.”
According to Geithner, private investors, alongside Treasury capital and Fed leverage, will jumpstart the market for the so-called “toxic assets” clogging up the financial system. Many hope the initiative will place a floor beneath the loans and securities that banks are unwilling to sell at prevailing market prices.
Geithner is encouraging private investors -- including pension funds -- to aggressively participate in the program. The assumption is that these distressed assets are trading well below their intrinsic value, and that buying delinquent loans and esoteric mortgage-backed securities at pennies on the dollar is an astute investment.
To be sure, certain well-connected private investors and the money managers chosen to coordinate the trades will make out famously. Meanwhile, Americans are being asked to blindly toss their tax dollars and pension money at the riskiest, most leveraged, least transparent securities the financial system has ever dreamed up.
If the federal government's track record as a steward of public funds is any indication of future performance, I'd welcome an opportunity to take the other side of whatever investments my tax dollars are about to be thrown toward.
Fed Fumble: Lots of Cash, No One to Spend It
This post first appeared on Minyanville.
But not so fast: While the Fed’s announcement might seem alarming, Chairman Ben Bernanke is fighting a forest fire with a water weenie.
Back in reality, the ongoing debt destruction and shift back toward savings is having a far greater effect on the American economy than a paltry few hundred billion dollars of “liquidity.” The Wall Street Journal reports that, although M2 money supply has increased 10% in the past year, the cash isn’t really going anywhere.
The more significant number -- what’s known as the “velocity of money” -- fell to its lowest level since 1991. The velocity of money simply means how quickly money is spent: It measures the amount of gross domestic product, or GDP, generated for each dollar of cash sloshing around the system.
When confidence is high, credit is loose, and spenders are running rampant, money flows quickly through the system, boosting GDP. When social mood turns, however, and savers hoard their cash, the velocity of money slows down - and GDP grinds to a halt.
So even though the Fed is injecting more money into the system, consumers are socking it all away in savings accounts or paying down debt. Banks, for their part, aren't doing anything with the money, either. Big banks like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM), still reeling from mounting losses on bad debt, are hording what little cash they have.
Until the bad debt can be destroyed -- and until savers can receive attractive returns -- higher prices will remain merely hypothetical.
Inflation, like other economic entities, is controlled by supply and demand. The velocity of money is one way to represent the demand for “stuff” - when it goes up, prices tend to follow.
Fears about inflation are based partly on the assumption that, as consumer demand picks back up, empty store shelves and warehouses will create shortages that could lead to rampaging inflation.
Maybe - all in due time.
As the Journal points out, consumers jumping back into the spending game en masse depends on people not only having actual money to spend, but on having the desire to spend it. And while consumption certainly won't stop altogether, this slowdown may be something more than a run-of-the-mill recession: It may be a structural shift away from the consumerist leanings of the past 30 years.
Maybe, instead of stockpiling oil and gold, we should focus on stockpiling cash.
But not so fast: While the Fed’s announcement might seem alarming, Chairman Ben Bernanke is fighting a forest fire with a water weenie.
Back in reality, the ongoing debt destruction and shift back toward savings is having a far greater effect on the American economy than a paltry few hundred billion dollars of “liquidity.” The Wall Street Journal reports that, although M2 money supply has increased 10% in the past year, the cash isn’t really going anywhere.
The more significant number -- what’s known as the “velocity of money” -- fell to its lowest level since 1991. The velocity of money simply means how quickly money is spent: It measures the amount of gross domestic product, or GDP, generated for each dollar of cash sloshing around the system.
When confidence is high, credit is loose, and spenders are running rampant, money flows quickly through the system, boosting GDP. When social mood turns, however, and savers hoard their cash, the velocity of money slows down - and GDP grinds to a halt.
So even though the Fed is injecting more money into the system, consumers are socking it all away in savings accounts or paying down debt. Banks, for their part, aren't doing anything with the money, either. Big banks like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM), still reeling from mounting losses on bad debt, are hording what little cash they have.
Until the bad debt can be destroyed -- and until savers can receive attractive returns -- higher prices will remain merely hypothetical.
Inflation, like other economic entities, is controlled by supply and demand. The velocity of money is one way to represent the demand for “stuff” - when it goes up, prices tend to follow.
Fears about inflation are based partly on the assumption that, as consumer demand picks back up, empty store shelves and warehouses will create shortages that could lead to rampaging inflation.
Maybe - all in due time.
As the Journal points out, consumers jumping back into the spending game en masse depends on people not only having actual money to spend, but on having the desire to spend it. And while consumption certainly won't stop altogether, this slowdown may be something more than a run-of-the-mill recession: It may be a structural shift away from the consumerist leanings of the past 30 years.
Maybe, instead of stockpiling oil and gold, we should focus on stockpiling cash.
Keepin’ It Real Estate: Going Green on Uncle Sam’s Dime
This post first appeared on Minyanville and Cirios Real Estate.
It’s starting to make economic sense to go green.
Last summer, with gas prices topping $4 per gallon and commodities of all kinds becoming more expensive, renewable energy advocates thought their day in sun -- so to speak -- had finally arrived.
Investors flocked to industry leaders like First Solar (FSLR) and SunPower (SPWRA), whose stocks leapt to new highs. On July 8, 2008, renowned investor T. Boone Pickens announced an ambitious plan to wean America off its dependence on foreign oil. Later that week, crude touched an all-time high of $147.02 per barrel.
Since then, oil -- along the rest of the commodity complex -- has plunged, dashing hopes that renewable energy would soon be as cheap, if not cheaper, than traditional, dirty fossil fuels. But now, with the economy in free fall and Washington scrambling to boost productivity, renewable energy has been taken off life support.
Part of the recently passed $797 billion economic stimulus package gives incentives to homeowners to adopt energy-saving appliances, solar panels and other eco-friendly add-ons. Increased tax credits for qualifying expenditures can reduce tax bills by thousands of dollars a year. The catch (and there’s always a catch when the government is involved): Benefits only arrive if you shell out big bucks for pricey green gear.
Tax credits are applicable on new expenditures, and since solar-panel systems run in the tens of thousands of dollars, the 30% tax credit isn’t exactly like socking money away in the bank. Still, green construction firms and solar panel installation outfits like Akeena Solar (AKNS) are eager snatch up new business.
Before the credit crunch and the ensuing financial meltdown, Akeena had actually partnered with Comerica Bank (CMA) to offer low interest loans for buyers of new solar-energy systems, a portion of which could be backed by the value of the home. Since monthly loan payments were easier to stomach than plunking down cash to buy a new system, these new lending programs could have made solar available to the masses.
But now that home values have plummeted and lenders are reticent to part with their precious dollars, such borrowing programs are nearly impossible to find. Still, for those homeowners intrepid enough to take the plunge, tax credits offer an attractive reason to get off the green fence.
While solar power isn’t as economically efficient as traditional electricity sources, the more money that’s pumped into new technologies -- even if it’s through a combination of private and public investment -- the sooner we’re likely to reach the parity solar advocates have been promising for decades.
And the sooner that happens, the better.
It’s starting to make economic sense to go green.
Last summer, with gas prices topping $4 per gallon and commodities of all kinds becoming more expensive, renewable energy advocates thought their day in sun -- so to speak -- had finally arrived.
Investors flocked to industry leaders like First Solar (FSLR) and SunPower (SPWRA), whose stocks leapt to new highs. On July 8, 2008, renowned investor T. Boone Pickens announced an ambitious plan to wean America off its dependence on foreign oil. Later that week, crude touched an all-time high of $147.02 per barrel.
Since then, oil -- along the rest of the commodity complex -- has plunged, dashing hopes that renewable energy would soon be as cheap, if not cheaper, than traditional, dirty fossil fuels. But now, with the economy in free fall and Washington scrambling to boost productivity, renewable energy has been taken off life support.
Part of the recently passed $797 billion economic stimulus package gives incentives to homeowners to adopt energy-saving appliances, solar panels and other eco-friendly add-ons. Increased tax credits for qualifying expenditures can reduce tax bills by thousands of dollars a year. The catch (and there’s always a catch when the government is involved): Benefits only arrive if you shell out big bucks for pricey green gear.
Tax credits are applicable on new expenditures, and since solar-panel systems run in the tens of thousands of dollars, the 30% tax credit isn’t exactly like socking money away in the bank. Still, green construction firms and solar panel installation outfits like Akeena Solar (AKNS) are eager snatch up new business.
Before the credit crunch and the ensuing financial meltdown, Akeena had actually partnered with Comerica Bank (CMA) to offer low interest loans for buyers of new solar-energy systems, a portion of which could be backed by the value of the home. Since monthly loan payments were easier to stomach than plunking down cash to buy a new system, these new lending programs could have made solar available to the masses.
But now that home values have plummeted and lenders are reticent to part with their precious dollars, such borrowing programs are nearly impossible to find. Still, for those homeowners intrepid enough to take the plunge, tax credits offer an attractive reason to get off the green fence.
While solar power isn’t as economically efficient as traditional electricity sources, the more money that’s pumped into new technologies -- even if it’s through a combination of private and public investment -- the sooner we’re likely to reach the parity solar advocates have been promising for decades.
And the sooner that happens, the better.
Wednesday, March 18, 2009
Commercial Real Estate: Time to Buy?
This post first appeared on Minyanville.
Valuations, finally, are coming back to earth.
Commercial real-estate values are driven primarily by future cash flow expectations, rather than speculation on rising prices (like residential properties). Most tenants are locked into long-term leases, so evidence of the challenging business environment took longer to show up in vacancies and commercial defaults. Companies like Equity Residential (EQR), Vornado Realty Trust (VNO) and Boston Properties (BXP) could be hard hit.
Rents are now tumbling at record paces, vacancies are skyrocketing and retailers are closing up shop at an alarming rate. Sellers face a vacuum of buyers, as only the savviest of investors are in a position to take advantage of fire sale prices.
Buying in this market takes a strong stomach and patient -- very patient -- capital. A real-estate recovery, despite upbeat expectations based on 1 or 2 hopeful datapoints, is highly unlikely.
Nevertheless, the few investors out there with capital to deploy can pick through an endless stream of distressed, quasi-distressed and downright terrifying assets. It will be a wild ride, but for the few that can identify the proverbial diamond in the rough, buying now may be the best long-term decision they'll ever make.
Valuations, finally, are coming back to earth.
Commercial real-estate values are driven primarily by future cash flow expectations, rather than speculation on rising prices (like residential properties). Most tenants are locked into long-term leases, so evidence of the challenging business environment took longer to show up in vacancies and commercial defaults. Companies like Equity Residential (EQR), Vornado Realty Trust (VNO) and Boston Properties (BXP) could be hard hit.
Rents are now tumbling at record paces, vacancies are skyrocketing and retailers are closing up shop at an alarming rate. Sellers face a vacuum of buyers, as only the savviest of investors are in a position to take advantage of fire sale prices.
Buying in this market takes a strong stomach and patient -- very patient -- capital. A real-estate recovery, despite upbeat expectations based on 1 or 2 hopeful datapoints, is highly unlikely.
Nevertheless, the few investors out there with capital to deploy can pick through an endless stream of distressed, quasi-distressed and downright terrifying assets. It will be a wild ride, but for the few that can identify the proverbial diamond in the rough, buying now may be the best long-term decision they'll ever make.
GE: We Don't Believe in the Housing Crisis
This post first appeared on Minyanville.
At a time when commercial real-estate investors are scrambling to unload properties, General Electric (GE), the world’s biggest landlord, is looking at 2009 through rose-colored glasses.
Tomorrow, when the company releases details of its finance arm’s real-estate holdings, investors may get a better sense of just how exposed they are to tumbling rents and rising vacancies. According to the Wall Street Journal, GE owns about $34 billion in commercial real estate, which it believes may slip in value this year by a mere 1.5%.
Compared to a 60% decline in the Dow Jones REIT Index over the past 12 months, that forecast seems unusually optimistic.
The trick here -- like that at the heart of the mark-to-market debate -- is how GE classifies its property holdings. Since they were primarily bought with cash (and thus aren't subject to the whims of creditors), the company views its assets as long-term holdings. Cash flow, not resale price, determines the value it slaps on assets for accounting purposes.
But with the market for commercial real estate essentially frozen, tenants demanding better lease terms, and the company scrambling to raise capital, GE may find dumping properties onto an illiquid market is an unpleasant experience.
Commercial real-estate losses went a long way toward sinking Wachovia -- ultimately purchased by Wells Fargo (WFC) -- and Lehman Brothers, which ultimately collapsed under the weight of housing bets gone wrong.
GE is hoping its conservative use of leverage can save it from a similar fate.
At a time when commercial real-estate investors are scrambling to unload properties, General Electric (GE), the world’s biggest landlord, is looking at 2009 through rose-colored glasses.
Tomorrow, when the company releases details of its finance arm’s real-estate holdings, investors may get a better sense of just how exposed they are to tumbling rents and rising vacancies. According to the Wall Street Journal, GE owns about $34 billion in commercial real estate, which it believes may slip in value this year by a mere 1.5%.
Compared to a 60% decline in the Dow Jones REIT Index over the past 12 months, that forecast seems unusually optimistic.
The trick here -- like that at the heart of the mark-to-market debate -- is how GE classifies its property holdings. Since they were primarily bought with cash (and thus aren't subject to the whims of creditors), the company views its assets as long-term holdings. Cash flow, not resale price, determines the value it slaps on assets for accounting purposes.
But with the market for commercial real estate essentially frozen, tenants demanding better lease terms, and the company scrambling to raise capital, GE may find dumping properties onto an illiquid market is an unpleasant experience.
Commercial real-estate losses went a long way toward sinking Wachovia -- ultimately purchased by Wells Fargo (WFC) -- and Lehman Brothers, which ultimately collapsed under the weight of housing bets gone wrong.
GE is hoping its conservative use of leverage can save it from a similar fate.
Looking for a Job? Start a Bank
This post first appeared on Minyanville.
Now's the time to put that old cliché, “necessity is the mother of invention,” to the test, because we desperately need banks. Lots of them.
Most of the ones we have are essentially insolvent, surviving primarily on generous donations from the American taxpayer. Outraged about the AIG (AIG) debacle? How about Bank of America (BAC), which made 2 horrendous buyout decisions that nearly torpedoed the bank - Countrywide in late 2007, then Merrill Lynch just a year later. Nevertheless, B of A still received hundreds of billions in government guarantees, cash, and loans - and CEO Ken Lewis still has his job, despite running the company into the ground.
Meanwhile, banking clients are seeing credit lines chopped, fees increased, services suspended, and interest rates reduced to just a shade more than a slap in the face.
As a result of the competition just to stay alive, opportunities in the banking sector are substantial. So substantial, in fact, that both Goldman Sachs (GS) and Morgan Stanley (MS) morphed into bank holding companies late last year. The move was partly to allow the struggling firms to tap government-backed debt markets, but also to take advantage of the impending void in the country's banking system.
Far away from the ivory towers of lower Manhattan, a few intrepid bankers are seeking to profit from these troubled times by founding small community-focused lenders. And although just 78 banks opened their doors in the past 12 months, compared to 173 the year before, demand for their services is through the roof.
The public’s growing wariness of Wall Street and large, impersonal banks is a boon for local banks and credit unions, where familiar faces, not fine print, greet customers at the door. Likewise, upstart banks can begin fresh, not only with customer relations but with squeaky clean balance sheets, devoid of the toxic assets weighing down most of their more established competitors.
But opening a bank is far more difficult than just renting some cheap retail space and buying a couple ATMs. Regulators, under heavy fire for their failure to perform even the most modest oversight duties, are making it well nigh impossible to get a new bank up and running. Capital requirements in particular are tough to meet, since most potential investors reflexively seize up at the sound of the words “invest” and “banks” when uttered in the same sentence.
Further, seasoned management must be brought in, preferably with a clean resume. Try finding an experienced banker these days who won't have to explain why he or she played no part in his or her former employer's demise.
Recessions, despite their lousy reputation, foster creativity, innovation and entrepreneurship. Risk-takers can separate themselves from the herd and create real productivity in an environment where merely surviving is seen as pretty damn good.
The opportunities in banking are just a few of the many currently being made available to those willing to take the plunge. It isn't easy -- in fact, it's a neverending slog -- but these are times when fortunes can be made.
Now's the time to put that old cliché, “necessity is the mother of invention,” to the test, because we desperately need banks. Lots of them.
Most of the ones we have are essentially insolvent, surviving primarily on generous donations from the American taxpayer. Outraged about the AIG (AIG) debacle? How about Bank of America (BAC), which made 2 horrendous buyout decisions that nearly torpedoed the bank - Countrywide in late 2007, then Merrill Lynch just a year later. Nevertheless, B of A still received hundreds of billions in government guarantees, cash, and loans - and CEO Ken Lewis still has his job, despite running the company into the ground.
Meanwhile, banking clients are seeing credit lines chopped, fees increased, services suspended, and interest rates reduced to just a shade more than a slap in the face.
As a result of the competition just to stay alive, opportunities in the banking sector are substantial. So substantial, in fact, that both Goldman Sachs (GS) and Morgan Stanley (MS) morphed into bank holding companies late last year. The move was partly to allow the struggling firms to tap government-backed debt markets, but also to take advantage of the impending void in the country's banking system.
Far away from the ivory towers of lower Manhattan, a few intrepid bankers are seeking to profit from these troubled times by founding small community-focused lenders. And although just 78 banks opened their doors in the past 12 months, compared to 173 the year before, demand for their services is through the roof.
The public’s growing wariness of Wall Street and large, impersonal banks is a boon for local banks and credit unions, where familiar faces, not fine print, greet customers at the door. Likewise, upstart banks can begin fresh, not only with customer relations but with squeaky clean balance sheets, devoid of the toxic assets weighing down most of their more established competitors.
But opening a bank is far more difficult than just renting some cheap retail space and buying a couple ATMs. Regulators, under heavy fire for their failure to perform even the most modest oversight duties, are making it well nigh impossible to get a new bank up and running. Capital requirements in particular are tough to meet, since most potential investors reflexively seize up at the sound of the words “invest” and “banks” when uttered in the same sentence.
Further, seasoned management must be brought in, preferably with a clean resume. Try finding an experienced banker these days who won't have to explain why he or she played no part in his or her former employer's demise.
Recessions, despite their lousy reputation, foster creativity, innovation and entrepreneurship. Risk-takers can separate themselves from the herd and create real productivity in an environment where merely surviving is seen as pretty damn good.
The opportunities in banking are just a few of the many currently being made available to those willing to take the plunge. It isn't easy -- in fact, it's a neverending slog -- but these are times when fortunes can be made.
Thrift Takes Hold, Rich Take Cover
This post first appeared on Minyanville.
While AIG (AIG) isn’t the only company eager to send its executives to swanky retreats at lavish resorts, other firms have taken note of the decidedly negative press generated by its transgressions.
As a result, they're scaling back expenditures, canceling conferences, and generally demanding their employees adopt a lower profile in the T&E (travel and entertainment) department.
Goldman Sachs (GS) recently announced its business travelers would no longer be put up at the Ritz Carlton. BB&T (BBT), a recipient of $3.1 billion in bailout money, also shunned the Ritz, canceling a March event for top sales people.
This trend bodes ill for states like Florida, a popular vacation destination for firms looking to reward star employees. According to the Wall Street Journal, in the last quarter of 2008, Florida tourism dropped more than it has at any point since the period following September 11. Hotels are receiving cancellation requests from companies wary of showering employees with expensive trips as others lay them off in droves.
Stranger still, this new allergy to perks extends even to language. One client of Amelia Island Plantation, an upscale resort north of Jacksonville, even told the hotel it wouldn’t consider a location whose name had the word “spa” or “resort” in it. Another bold customer even asked the hotel to drop the word “Island” from its moniker. (Oddly enough, the word "plantation" didn't sound any alarms.)
Welcome to the Age of Austerity, the polar opposite of our recent love affair with bling for the sake of bling.
Already, we're hearing anecdotes of shoppers uncomfortable with carrying bags emblazoned with the logo of high-end stores like Saks (SKS) or Nordstroms (JWN). Leering onlookers, disgusted at such lavishness, are shaming the well-to-do into buying their overpriced trinkets online. 2009's version of the "walk of shame" isn't down Frat Row on a brisk Sunday morning, but down Madison Avenue during the midtown lunch rush carrying bags from Prada or Coach (COH).
Purveyors of the inessential are hoping this is just a passing fad, that fast times and big budgets will be back faster than you can say AmEx Black Card.
Others, however, are shouting paradigm shift, as credit has distinctly disappeared from the American spending arsenal. Just how long it will be unavailable is anyone's guess. But as the rich are scorned and public displays of wealth are decried, the Age of Austerity rambles on, gaining momentum.
The next thing you know, that little blue box from Tiffany (TIF) will cease to carry the near-magical power to make up for that really really stupid thing you did once you were 12 beers in.
While AIG (AIG) isn’t the only company eager to send its executives to swanky retreats at lavish resorts, other firms have taken note of the decidedly negative press generated by its transgressions.
As a result, they're scaling back expenditures, canceling conferences, and generally demanding their employees adopt a lower profile in the T&E (travel and entertainment) department.
Goldman Sachs (GS) recently announced its business travelers would no longer be put up at the Ritz Carlton. BB&T (BBT), a recipient of $3.1 billion in bailout money, also shunned the Ritz, canceling a March event for top sales people.
This trend bodes ill for states like Florida, a popular vacation destination for firms looking to reward star employees. According to the Wall Street Journal, in the last quarter of 2008, Florida tourism dropped more than it has at any point since the period following September 11. Hotels are receiving cancellation requests from companies wary of showering employees with expensive trips as others lay them off in droves.
Stranger still, this new allergy to perks extends even to language. One client of Amelia Island Plantation, an upscale resort north of Jacksonville, even told the hotel it wouldn’t consider a location whose name had the word “spa” or “resort” in it. Another bold customer even asked the hotel to drop the word “Island” from its moniker. (Oddly enough, the word "plantation" didn't sound any alarms.)
Welcome to the Age of Austerity, the polar opposite of our recent love affair with bling for the sake of bling.
Already, we're hearing anecdotes of shoppers uncomfortable with carrying bags emblazoned with the logo of high-end stores like Saks (SKS) or Nordstroms (JWN). Leering onlookers, disgusted at such lavishness, are shaming the well-to-do into buying their overpriced trinkets online. 2009's version of the "walk of shame" isn't down Frat Row on a brisk Sunday morning, but down Madison Avenue during the midtown lunch rush carrying bags from Prada or Coach (COH).
Purveyors of the inessential are hoping this is just a passing fad, that fast times and big budgets will be back faster than you can say AmEx Black Card.
Others, however, are shouting paradigm shift, as credit has distinctly disappeared from the American spending arsenal. Just how long it will be unavailable is anyone's guess. But as the rich are scorned and public displays of wealth are decried, the Age of Austerity rambles on, gaining momentum.
The next thing you know, that little blue box from Tiffany (TIF) will cease to carry the near-magical power to make up for that really really stupid thing you did once you were 12 beers in.
Biotech Startups: Nothing Ventured, Nothing Gained
This post first appeared on Minyanville.
It’s a rotten time to be raising money. And for small biotechnology companies, most of which have little or no revenue and are dependent on investor capital to stay afloat, times are tough indeed.
According to the Wall Street Journal, 120 of the 360 publicly traded biotech firms have less than 6 months of cash on hand. And while this isn’t an entirely foreign position for industry upstarts to be in, the challenging fundraising environment means many of these companies could go under.
The business of developing experimental drugs, procedures and devices has always been one of high risk and high reward. Investors, often venture capitalists, are willing to lose their entire outlay many times over for the chance of hitting it big.
During their initial years, biotech startups undertake research, complete lengthy drug trials, and navigate the labyrinthine bureaucracy that is the Federal and Drug Administration, with investors pouring in more cash all the while.
The lucky few either get swallowed up by one of the industry heavy hitters or go public.
As noted in the Journal, the biotech business as a whole had its first profitable year in 2008. As fledgling companies blow through cash, giants like Genentech (DNA), Amgen (AMGN) and Gilead Sciences (GILD) rake in mountains of profits.
The fundraising troubles these startups face are emblematic of the broader difficulties for small businesses. Despite promises of help from the Obama Administration, investors are reticent to back nascent ventures. With investor cash drying up, getting by on a shoe string is becoming increasingly challenging.
This also reflects a sift in time and risk preferences, something discussed at length by Minyanville's Kevin Depew. With a decidedly cloudy economic outlook, investors are drawn to more certain, lower risk bets. Biotech startups represent the pinnacle of investor speculation, as evidenced by their challenge to find fresh backers.
One positive, and something many in the scientific community are pointing to hopefully, is President Obama's support for stem cell research and increased funding for the National Institutes of Health. Greater government assistance, they expect, could give fledgling companies the time and resources they need to make the next big breakthrough.
It’s a rotten time to be raising money. And for small biotechnology companies, most of which have little or no revenue and are dependent on investor capital to stay afloat, times are tough indeed.
According to the Wall Street Journal, 120 of the 360 publicly traded biotech firms have less than 6 months of cash on hand. And while this isn’t an entirely foreign position for industry upstarts to be in, the challenging fundraising environment means many of these companies could go under.
The business of developing experimental drugs, procedures and devices has always been one of high risk and high reward. Investors, often venture capitalists, are willing to lose their entire outlay many times over for the chance of hitting it big.
During their initial years, biotech startups undertake research, complete lengthy drug trials, and navigate the labyrinthine bureaucracy that is the Federal and Drug Administration, with investors pouring in more cash all the while.
The lucky few either get swallowed up by one of the industry heavy hitters or go public.
As noted in the Journal, the biotech business as a whole had its first profitable year in 2008. As fledgling companies blow through cash, giants like Genentech (DNA), Amgen (AMGN) and Gilead Sciences (GILD) rake in mountains of profits.
The fundraising troubles these startups face are emblematic of the broader difficulties for small businesses. Despite promises of help from the Obama Administration, investors are reticent to back nascent ventures. With investor cash drying up, getting by on a shoe string is becoming increasingly challenging.
This also reflects a sift in time and risk preferences, something discussed at length by Minyanville's Kevin Depew. With a decidedly cloudy economic outlook, investors are drawn to more certain, lower risk bets. Biotech startups represent the pinnacle of investor speculation, as evidenced by their challenge to find fresh backers.
One positive, and something many in the scientific community are pointing to hopefully, is President Obama's support for stem cell research and increased funding for the National Institutes of Health. Greater government assistance, they expect, could give fledgling companies the time and resources they need to make the next big breakthrough.
AIG: Contractually Obligated to Spit in Face of Taxpayers
This post first appeared on Minyanville.
The AIG (AIG) rabbit-hole keeps getting deeper.
Reports of the $165 million in bonuses shelled out to executives (the ones the New York Times said were "at the very heart of AIG's worldwide conflagration") are eliciting fresh cries of outrage from the public.
Lawmakers, intent on demonstrating their aggressive stewardship of taxpayer money, are up in arms about bonus payments AIG is making to retain top executive “talent.” Barney Frank, chairman of the House Financial Committee, questioned the wisdom of the bailout, saying "clearly there was a mistake from the beginning."
AIG's chief executive Edward Liddy, for his part, argues the payments are not only a legal obligation but essential to retaining key employees -- in his words, "the best and brightest talent" -- and maximizing the value of business units it aims to unload in an effort to repay taxpayers.
The Wall Street Journal reports $450 billion has been paid to employees of the company’s Financial Products unit, the group responsible for much of the trading losses that torpedoed AIG in the first place. In addition, more than $700 million in bonuses and retention payments are being paid to another roughly 10,000 employees.
Liddy, the CEO, said he found the arrangements “distasteful,” but that they were set up before he took the job last year. In defense of the payments, he argued, “Honoring contractual commitments is at the heart of what we do in the insurance business.”
Meanwhile, the company and its government shareholders are facing increasing pressure as we learn just where our $170 billion in bailout money has gone. Trading counterparts have reaped big payments on credit default swaps gone bad: Goldman Sachs (GS) got almost $13 billion, Deutsche Bank (DB) received around $12 billion, and tens of billions more was doled out to trading clients and other banks.
As AIG executives and regulators struggle to untangle the truly nightmarish mess that was once the largest insurance company in the world, the public will demand further retribution against those it holds responsible.
No matter that some, like Liddy, weren't even there when the troubles started. Others, like Congressman Frank, Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke are being tasked with the cleanup of a mess they were very much complicit in creating.
Perhaps elected and non-elected government officials alike will acknowledge their role in this mess by refusing both salaries and lobbyist money from the financial sector until the problems are sorted out.
Hey, a guy can dream, right?
The AIG (AIG) rabbit-hole keeps getting deeper.
Reports of the $165 million in bonuses shelled out to executives (the ones the New York Times said were "at the very heart of AIG's worldwide conflagration") are eliciting fresh cries of outrage from the public.
Lawmakers, intent on demonstrating their aggressive stewardship of taxpayer money, are up in arms about bonus payments AIG is making to retain top executive “talent.” Barney Frank, chairman of the House Financial Committee, questioned the wisdom of the bailout, saying "clearly there was a mistake from the beginning."
AIG's chief executive Edward Liddy, for his part, argues the payments are not only a legal obligation but essential to retaining key employees -- in his words, "the best and brightest talent" -- and maximizing the value of business units it aims to unload in an effort to repay taxpayers.
The Wall Street Journal reports $450 billion has been paid to employees of the company’s Financial Products unit, the group responsible for much of the trading losses that torpedoed AIG in the first place. In addition, more than $700 million in bonuses and retention payments are being paid to another roughly 10,000 employees.
Liddy, the CEO, said he found the arrangements “distasteful,” but that they were set up before he took the job last year. In defense of the payments, he argued, “Honoring contractual commitments is at the heart of what we do in the insurance business.”
Meanwhile, the company and its government shareholders are facing increasing pressure as we learn just where our $170 billion in bailout money has gone. Trading counterparts have reaped big payments on credit default swaps gone bad: Goldman Sachs (GS) got almost $13 billion, Deutsche Bank (DB) received around $12 billion, and tens of billions more was doled out to trading clients and other banks.
As AIG executives and regulators struggle to untangle the truly nightmarish mess that was once the largest insurance company in the world, the public will demand further retribution against those it holds responsible.
No matter that some, like Liddy, weren't even there when the troubles started. Others, like Congressman Frank, Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke are being tasked with the cleanup of a mess they were very much complicit in creating.
Perhaps elected and non-elected government officials alike will acknowledge their role in this mess by refusing both salaries and lobbyist money from the financial sector until the problems are sorted out.
Hey, a guy can dream, right?
Keepin' It Real Estate: Foreclosure Wheel Keeps on Turning
This post first appeared on Minyanville and Cirios Real Estate.
Despite herculean efforts to stop the foreclosure juggernaut, Americans are still losing their homes at near-record pace.
According to RealtyTrac, a firm that sells default data, foreclosure filings rose in February to nearly 300,000, up 6% from the month before. This figure is the third highest for any month since the housing market turned south in 2005.
As property values fall, more borrowers are finding themselves underwater - owing more on their homes than they're worth. This, coupled with job losses, means homeowners are missing payments at an alarming pace.
Sky-high foreclosures are even more astounding when myriad loan-modification efforts and short-term foreclosure moratoriums enacted by big lenders like Fannie Mae (FNM), Freddie Mac (FRE), JPMorgan (JPM) and Bank of America (BAC) have been taken into account.
And while President Obama’s hotly debated $275 billion housing-relief package is barely a month old, its becoming clear that no cleverly worded press release or inspiring oratory can reverse the trend that’s firmly in place: Housing supply remains elevated, with buyers sitting on the sidelines awaiting better deals. Prices, as a result, will keep falling for the foreseeable future.
In fact, Rick Sharga, executive vice president at RealtyTrac, told Bloomberg he believes the country’s biggest lenders have yet to list over 700,000 bank-owned homes.
This “phantom supply,” as its known in the real-estate world, paints a bleak picture for the housing market in the near term. Even though strong sales activity in distressed markets is pushing aggregate inventory data back towards historical norms, phantom supply is patiently waiting to punish those bold enough to prematurely call a bottom.
Further, well-to-do areas, formerly immune from home price declines, are starting to follow their more bubbly counterparts over the proverbial cliff. In the San Francisco Bay Area, for example, 15 homes had sold for over $5 million by this time last year. This year: Just one.
Many of the most distressed markets are in their last gap of depreciation. And while material appreciation is simply fantasy, high-end markets will pick up where they left off and keep broad measures of property values under pressure.
But as this dynamic plays out -- and the depreciation torch is passed from the "subprime" people to those who are "prime" -- opportunities will emerge in markets that stabilize first. Just as housing prices overshot to the upside, they will likewise overshoot to the downside.
The opportunities are currently few and far between. But with each day that passes, the world of possibilities grows, if only ever so slightly.
Despite herculean efforts to stop the foreclosure juggernaut, Americans are still losing their homes at near-record pace.
According to RealtyTrac, a firm that sells default data, foreclosure filings rose in February to nearly 300,000, up 6% from the month before. This figure is the third highest for any month since the housing market turned south in 2005.
As property values fall, more borrowers are finding themselves underwater - owing more on their homes than they're worth. This, coupled with job losses, means homeowners are missing payments at an alarming pace.
Sky-high foreclosures are even more astounding when myriad loan-modification efforts and short-term foreclosure moratoriums enacted by big lenders like Fannie Mae (FNM), Freddie Mac (FRE), JPMorgan (JPM) and Bank of America (BAC) have been taken into account.
And while President Obama’s hotly debated $275 billion housing-relief package is barely a month old, its becoming clear that no cleverly worded press release or inspiring oratory can reverse the trend that’s firmly in place: Housing supply remains elevated, with buyers sitting on the sidelines awaiting better deals. Prices, as a result, will keep falling for the foreseeable future.
In fact, Rick Sharga, executive vice president at RealtyTrac, told Bloomberg he believes the country’s biggest lenders have yet to list over 700,000 bank-owned homes.
This “phantom supply,” as its known in the real-estate world, paints a bleak picture for the housing market in the near term. Even though strong sales activity in distressed markets is pushing aggregate inventory data back towards historical norms, phantom supply is patiently waiting to punish those bold enough to prematurely call a bottom.
Further, well-to-do areas, formerly immune from home price declines, are starting to follow their more bubbly counterparts over the proverbial cliff. In the San Francisco Bay Area, for example, 15 homes had sold for over $5 million by this time last year. This year: Just one.
Many of the most distressed markets are in their last gap of depreciation. And while material appreciation is simply fantasy, high-end markets will pick up where they left off and keep broad measures of property values under pressure.
But as this dynamic plays out -- and the depreciation torch is passed from the "subprime" people to those who are "prime" -- opportunities will emerge in markets that stabilize first. Just as housing prices overshot to the upside, they will likewise overshoot to the downside.
The opportunities are currently few and far between. But with each day that passes, the world of possibilities grows, if only ever so slightly.
Local Governments Bail Themselves Out
This post first appeared on Minyanville.
Reeling from rising unemployment and the shuttering of local businesses, municipalities are enacting mini-stimulus packages of their own. According to the Wall Street Journal, some are taking the traditional approach: Tax breaks and public works. Others are getting creative, rewarding shopping sprees with gift cards, giving no-interest loans to small businesses, and offering discounted office space for entrepreneurs.
New York City, where much of our current economic malaise originated, even earmarked $15 million of its $43 billion budget to help out-of-work investment bankers start their own companies.
Meanwhile, states like Ohio and Iowa are floating bond issuances to raise funds to put their citizens to work. Governors expect to generate tens of thousands of new jobs from bridge building, road improvements and other public-works projects that President Barack Obama’s $797 billion stimulus package aims to cover. But rather than wait for the funds, or deal with strings inevitably attached to federal money, states are acting now.
This trend isn’t likely to subside any time soon.
With the federal government running a massive deficit -- the Treasury Department spent almost $200 billion more than it took in this February -- states, counties and cities are reluctant to rely on aid from Washington. And with mind-boggling sums being siphoned off by the growing list of firms suckling at the government teat, AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), and Bank of America (BAC) the worst offenders, it’s no surprise local governments aren’t confident they’ll get theirs any time soon.
Further, as taxes rise to cover massive spending on tap for the next few years, those who had little to do with the housing bubble, Wall Street's collapse, or the credit crisis may begin to wonder why they're being asked to pick up the tab.
It’s only a matter of time before local lawmakers begin to ask the serious question: Do we really want to go down with this ship?
Reeling from rising unemployment and the shuttering of local businesses, municipalities are enacting mini-stimulus packages of their own. According to the Wall Street Journal, some are taking the traditional approach: Tax breaks and public works. Others are getting creative, rewarding shopping sprees with gift cards, giving no-interest loans to small businesses, and offering discounted office space for entrepreneurs.
New York City, where much of our current economic malaise originated, even earmarked $15 million of its $43 billion budget to help out-of-work investment bankers start their own companies.
Meanwhile, states like Ohio and Iowa are floating bond issuances to raise funds to put their citizens to work. Governors expect to generate tens of thousands of new jobs from bridge building, road improvements and other public-works projects that President Barack Obama’s $797 billion stimulus package aims to cover. But rather than wait for the funds, or deal with strings inevitably attached to federal money, states are acting now.
This trend isn’t likely to subside any time soon.
With the federal government running a massive deficit -- the Treasury Department spent almost $200 billion more than it took in this February -- states, counties and cities are reluctant to rely on aid from Washington. And with mind-boggling sums being siphoned off by the growing list of firms suckling at the government teat, AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), and Bank of America (BAC) the worst offenders, it’s no surprise local governments aren’t confident they’ll get theirs any time soon.
Further, as taxes rise to cover massive spending on tap for the next few years, those who had little to do with the housing bubble, Wall Street's collapse, or the credit crisis may begin to wonder why they're being asked to pick up the tab.
It’s only a matter of time before local lawmakers begin to ask the serious question: Do we really want to go down with this ship?
Americans Stop Living in the Past, Say No to Self-Storage
This post first appeared on Minyanville.
When times were good, self-storage firms made brisk business out of junk repositories.
Now, with consumers eager to cut monthly expenses, paying to keep useless bric-a-brac just doesn't seem like that brilliant an idea. The Wall Street Journal reports that self-storage companies, many of which are organized as real-estate investment trusts, or REITs, are seeing customers flee en masse.
As KeyBanc analyst Jordan Sadler told the Journal, “Consumers are having to choose between a mortgage payment, a car payment and a self-storage payment. It’s an easy one to get rid of.”
When the economy began to sour, storage firms were actually highlighted as a potential pocket of strength. After a strong performance during most of 2008, the sector followed the broader equity markets down the proverbial rabbit hole last fall. Public Storage (PSA), the largest storage company in the country, fell from over $100 per share in September 2008 to below $50 last week.
U-Store It Trust (YSI), Sovran Storage (SSS) and Extra Space Storage (EXR), the other 3 publicly traded storage companies, fared slightly worse. Margins are dwindling as tenants vacate, defaults rise, and the industry is forced to increase advertising to replace its shrinking client base.
Investors also fear that the big storage companies may have a hard time rolling over their debt when it comes due, since, as REITs, they're heavily dependent on borrowing against real-estate assets.
In recent years, as new electronics and furniture piled up in the homes of American consumers, demand for storage facilities jumped. After all, we had to make room for the latest models of those "essentials" we just couldn't live without. Real-estate developers, snapping up land with cheap debt, found erecting and filling up storage units a simple, profitable business.
Old photos, antique sewing machines and other reminders of years long past don’t notice freeway noise; they don't require curb appeal. As long as the sites were accessible, location didn’t really matter. Land was cheap, and revenue -- the average lease currently sits at over $80 per month -- more than made up for the minimal upkeep and paltry debt service.
But now that budgets are stretched, customers are parting with the past in favor of the future. Indeed, in many cases, the future be damned - making it to next month is good enough.
When times were good, self-storage firms made brisk business out of junk repositories.
Now, with consumers eager to cut monthly expenses, paying to keep useless bric-a-brac just doesn't seem like that brilliant an idea. The Wall Street Journal reports that self-storage companies, many of which are organized as real-estate investment trusts, or REITs, are seeing customers flee en masse.
As KeyBanc analyst Jordan Sadler told the Journal, “Consumers are having to choose between a mortgage payment, a car payment and a self-storage payment. It’s an easy one to get rid of.”
When the economy began to sour, storage firms were actually highlighted as a potential pocket of strength. After a strong performance during most of 2008, the sector followed the broader equity markets down the proverbial rabbit hole last fall. Public Storage (PSA), the largest storage company in the country, fell from over $100 per share in September 2008 to below $50 last week.
U-Store It Trust (YSI), Sovran Storage (SSS) and Extra Space Storage (EXR), the other 3 publicly traded storage companies, fared slightly worse. Margins are dwindling as tenants vacate, defaults rise, and the industry is forced to increase advertising to replace its shrinking client base.
Investors also fear that the big storage companies may have a hard time rolling over their debt when it comes due, since, as REITs, they're heavily dependent on borrowing against real-estate assets.
In recent years, as new electronics and furniture piled up in the homes of American consumers, demand for storage facilities jumped. After all, we had to make room for the latest models of those "essentials" we just couldn't live without. Real-estate developers, snapping up land with cheap debt, found erecting and filling up storage units a simple, profitable business.
Old photos, antique sewing machines and other reminders of years long past don’t notice freeway noise; they don't require curb appeal. As long as the sites were accessible, location didn’t really matter. Land was cheap, and revenue -- the average lease currently sits at over $80 per month -- more than made up for the minimal upkeep and paltry debt service.
But now that budgets are stretched, customers are parting with the past in favor of the future. Indeed, in many cases, the future be damned - making it to next month is good enough.
US to G20: Spend, Spend, Spend
This post first appeared on Minyanville.
The move sparked a sharp 20% rally in the S&P 500. The index has since tumbled more than 30% to lows not seen since the 1990s.
If markets are jittery once again, it’s not without justification: In just under a month, global leaders will once again put their heads together, this time to hash out the best way to solve the deepening economic malaise. Hopes are high lawmakers will dream up new (and better) ways to get the world's largest economies back on track.
On April 2, in London, the US is expected to encourage its counterparts at the Group of 20 Summit to increase government-spending efforts to revitalize flagging economies. According to the Wall Street Journal, President Obama and Treasury Secretary Tim Geithner are expected to butt heads with European officials, who would prefer to shift the focus onto crafting stricter financial regulations.
The European Union, many believe, is facing an even worse economic outlook than the US. But those across the pond could need fewer new spending initiatives, since they have further-reaching social programs already in place. In addition, the European Central Bank, or ECB, is far more hawkish (read: concerned) about inflation than is our Federal Reserve.
Digging ourselves out of this mess with more borrowing could spark renewed inflation.
The ECB took longer to lower interest rates last year despite deteriorating economic conditions, citing worries about rising prices. In contrast, Fed Chairman Ben Bernanke aggressively reduced borrowing costs in the hope that companies would borrow to jumpstart new growth. Frozen credit markets didn’t cooperate, plunging the financial system into widespread disarray.
Of the countries that make up the G20, only Saudi Arabia, Spain and Australia plan to spend more propping up their economy than the US, according to data compiled by the International Monetary Fund. Of course, that doesn’t include the hundreds of billions already wasted - um, injected into the likes of Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).
Also left out of these figures are the trillions of dollars the Fed has pumped into the financial system to keep credit flowing -- however reluctantly -- throughout the economy.
The upcoming meeting marks President Obama's first chance to woo world leaders on the global stage. And while his social programs may gain favor among certain European lawmakers, his country's role in creating this mess certainly won't.
The rest of the world increasingly feels its being forced to clean up a problem that was largely American-made.
The move sparked a sharp 20% rally in the S&P 500. The index has since tumbled more than 30% to lows not seen since the 1990s.
If markets are jittery once again, it’s not without justification: In just under a month, global leaders will once again put their heads together, this time to hash out the best way to solve the deepening economic malaise. Hopes are high lawmakers will dream up new (and better) ways to get the world's largest economies back on track.
On April 2, in London, the US is expected to encourage its counterparts at the Group of 20 Summit to increase government-spending efforts to revitalize flagging economies. According to the Wall Street Journal, President Obama and Treasury Secretary Tim Geithner are expected to butt heads with European officials, who would prefer to shift the focus onto crafting stricter financial regulations.
The European Union, many believe, is facing an even worse economic outlook than the US. But those across the pond could need fewer new spending initiatives, since they have further-reaching social programs already in place. In addition, the European Central Bank, or ECB, is far more hawkish (read: concerned) about inflation than is our Federal Reserve.
Digging ourselves out of this mess with more borrowing could spark renewed inflation.
The ECB took longer to lower interest rates last year despite deteriorating economic conditions, citing worries about rising prices. In contrast, Fed Chairman Ben Bernanke aggressively reduced borrowing costs in the hope that companies would borrow to jumpstart new growth. Frozen credit markets didn’t cooperate, plunging the financial system into widespread disarray.
Of the countries that make up the G20, only Saudi Arabia, Spain and Australia plan to spend more propping up their economy than the US, according to data compiled by the International Monetary Fund. Of course, that doesn’t include the hundreds of billions already wasted - um, injected into the likes of Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).
Also left out of these figures are the trillions of dollars the Fed has pumped into the financial system to keep credit flowing -- however reluctantly -- throughout the economy.
The upcoming meeting marks President Obama's first chance to woo world leaders on the global stage. And while his social programs may gain favor among certain European lawmakers, his country's role in creating this mess certainly won't.
The rest of the world increasingly feels its being forced to clean up a problem that was largely American-made.
Moody's List of Riskiest Companies Forgets to Include Moody's
This post first appeared on Minyanville.
Make-up calls belong in basketball, not finance.
In an attempt to render itself useful, Moody’s Investors Services (MCO) is issuing a list dubbed “The Bottom Rung,” cataloguing the riskiest 15% of all companies it tracks. The effort, which the company claims is an attempt to get ahead of the looming mountain of corporate defaults, has already ruffled a few feathers.
According to the Wall Street Journal, Eastman Kodak (EK), which appeared on the list, issued a harsh rebuttal last night, saying “Any speculation, however informed, suggesting that Kodak is less than financially sound is irresponsible.”
Among the list of allegedly shaky companies: Familiar names like Ford (F), General Motors (GM) and Chrysler made the cut, along with airlines AMR Corp (AMR) and US Airways (LCC). Retailers, restaurants and even a few energy firms also appeared in this corporate hall of shame, in addition to chipmaker Advanced Micro Devices (AMD) and chemical manufacturer Georgia Gulf Corp (GGC).
Moody’s, along with fellow ratings agencies Standard and Poor’s (MHP) and Fitch Ratings Services, played a major role in the recent financial market meltdown. Conflicts of interest with debt issuers, faulty models and lax internal controls all led to credit ratings that were unreliable at best, deceptive at worst.
Unfortunately for Moody’s, gone are the days when investors valued haphazard assessments of credit risk. The Bottom Rung, while generating ample work for Moody’s customer-complaints department, isn’t likely to reclaim any of the company’s lost glory.
When a firm that specializes in assessing whether borrowers will repay their debts fails to see the biggest wave of defaults in a generation, it’s safe to say that company isn’t very good at its job.
Minyanville's Jeff Macke said it best last week:
In an environment in which DC is creating and changing the laws of corporate governance on a daily basis, it’s simply lunacy to allow 3 groups complicit in the creation of the underlying problem to go on their merry ways while members of the House endlessly lambast bankers for being bankers. Take the gun away from the 5 year old; suspend the ratings authority of Moody’s, S&P and Fitch.
Monday, March 9, 2009
Consumers Still Not Consuming
This post first appeared on Minyanville.
As lawmakers busily laud their own efforts to unlock credit markets and jumpstart lending, consumers yawn. They just don’t want to spend.
And it’s not just those out of work who are paring back expenditures. According to the Wall Street Journal, even the dwindling ranks of the employed are getting thrifty. Computer users are enduring slow machines rather than buying new ones, clothes-shopping trips are being delayed, and coupon clipping is once again the vogue.
Discounters like Wal-Mart (WMT) are benefitting from bargain hunters looking to save a couple bucks, while AutoZone’s (AZO) stock sprinted to a 52-week high last week, as drivers opt to do it themselves.
Politicians, rushing to restore the “prosperity” we so recently enjoyed, are confident this is just a passing fad, and that we’ll soon return to our spend-happy ways. Indeed, the viability of President Obama’s new $3.4 trillion budget is predicated on the US economy's skipping along at a 3.4% growth rate next year - and expanding even faster in 2011.
This optimism -- idealistic at best, delusional at worst -- ignores the extent to which Americans are embracing a new, sustainable way of making ends meet: Spending less.
Meanwhile, the Federal Reserve, busy waving its magic wand over reeling credit markets, is similarly out of touch with reality.
As noted by our friends at BTIG, new federal lending initiatives aimed at funneling money to credit-starved consumers are undersubscribed. In his speech last Friday, New York Fed President Bill Dudley pointed to weak demand as evidence that financial markets were in better condition than many believed, and that investors could be willing to start taking risk again.
Not likely.
As I noted a few weeks back, consumers are roundly rejecting the idea that more debt is a good thing. Even small community banks that have money to hand out can’t find any takers. (Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C) are quietly thanking their lucky stars, since they’re out of cash anyway.)
The ongoing foreclosure crisis, rising bankruptcy filings and tumbling equity values, though they do cause meaningful hardships for millions of Americans, do have a silver lining: The realization that unbridled consumerism does ultimately come at a cost. This is fostering a renewed understanding of the importance of fiscal responsibility.
Most media outlets report this in terms of increased savings, which is almost universally viewed as bad in the short run, if good long-term.
But saving now is good. Period. The notion that spending what you don’t have is somehow the patriotic thing to do is absurd. The only way out of this mess is through saving, not spending.
That is, of course, if one's time horizon extends beyond the 2, 4 or 6-year election cycle.
As lawmakers busily laud their own efforts to unlock credit markets and jumpstart lending, consumers yawn. They just don’t want to spend.
And it’s not just those out of work who are paring back expenditures. According to the Wall Street Journal, even the dwindling ranks of the employed are getting thrifty. Computer users are enduring slow machines rather than buying new ones, clothes-shopping trips are being delayed, and coupon clipping is once again the vogue.
Discounters like Wal-Mart (WMT) are benefitting from bargain hunters looking to save a couple bucks, while AutoZone’s (AZO) stock sprinted to a 52-week high last week, as drivers opt to do it themselves.
Politicians, rushing to restore the “prosperity” we so recently enjoyed, are confident this is just a passing fad, and that we’ll soon return to our spend-happy ways. Indeed, the viability of President Obama’s new $3.4 trillion budget is predicated on the US economy's skipping along at a 3.4% growth rate next year - and expanding even faster in 2011.
This optimism -- idealistic at best, delusional at worst -- ignores the extent to which Americans are embracing a new, sustainable way of making ends meet: Spending less.
Meanwhile, the Federal Reserve, busy waving its magic wand over reeling credit markets, is similarly out of touch with reality.
As noted by our friends at BTIG, new federal lending initiatives aimed at funneling money to credit-starved consumers are undersubscribed. In his speech last Friday, New York Fed President Bill Dudley pointed to weak demand as evidence that financial markets were in better condition than many believed, and that investors could be willing to start taking risk again.
Not likely.
As I noted a few weeks back, consumers are roundly rejecting the idea that more debt is a good thing. Even small community banks that have money to hand out can’t find any takers. (Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C) are quietly thanking their lucky stars, since they’re out of cash anyway.)
The ongoing foreclosure crisis, rising bankruptcy filings and tumbling equity values, though they do cause meaningful hardships for millions of Americans, do have a silver lining: The realization that unbridled consumerism does ultimately come at a cost. This is fostering a renewed understanding of the importance of fiscal responsibility.
Most media outlets report this in terms of increased savings, which is almost universally viewed as bad in the short run, if good long-term.
But saving now is good. Period. The notion that spending what you don’t have is somehow the patriotic thing to do is absurd. The only way out of this mess is through saving, not spending.
That is, of course, if one's time horizon extends beyond the 2, 4 or 6-year election cycle.
Saturday, March 7, 2009
Foreclosure By Design
This post first appeared on Minyanville and Cirios Real Estate.
Specialists in handling distressed debt amassed tens of billions of dollars to buy up bad loans at steep discounts. The offending institutions who had bought the stuff in the first place would be forced to own up to their mistakes, take their lumps and move on. Meanwhile, those deft enough to clean up the problems would reap their just deserts.
Alas, it was not to be.
Sometime around the middle of 2006, some regulator woke from a decade-long slumber and decided to hazard a look at the balance sheets of America’s largest financial institutions. To his horror, just about every bank in the country would be insolvent, given the going prices for delinquent mortgage debt.
He raced off to tell his boss, who alerted his superior, and so on up the chain until then-Treasury Secretary Hank Paulson got wind of the coming tsunami of losses. Paulson barely flinched, for Wall Street’s top brass was well aware their collective predicament. After all, it was the likes of his former charge, Goldman Sachs (GS), who designed and sold the toxic assets in the first place.
The choice then was simple: Step back and let markets sort out the mess, risking the lives of storied firms like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM) - or latch onto the absurd notion that these institutions were “too big to fail,” and begin a process whereby the American taxpayer's hard-earned nest egg would be used to forestall the inevitable day of reckoning.
We now know how that sad story ends.
Two pieces today, one run by Bloomberg charting the failure of myriad modification programs to address the problem of negative equity, and one in the New York Times documenting the exploits of former Countrywide executives buying distressed debt from the FDIC on the cheap, evidence the abject failure of government efforts to stem the rising tide of foreclosures.
Private investors, the ones best suited to forgiving principal or lowering interest rates to keep a family in their home, were handcuffed by political bumblings. But these programs, by preventing true price discovery in the housing market, have likely achieved their goals of their designers.
Our banking system has buckled, but not broken. The eventually recovery, however, has been pushed well down the line and the cost shoved onto future generations. Those responsible have by in large retained their posts at the institutions deemed “too big to fail,” save a couple token scapegoats tossed to the media wolves.
Meanwhile, the responsible few who did not speculate on their home, did not use credit as a vehicle for illegitimate economic growth and never thought they’d be asked to pick up the tab for those that did, have now been asked to shoulder the burden.
It should come as no surprise that housing prices keep falling -- indeed they must in order for true stabilization to occur. But the slow bleed, the persistent drag on the fundamentals of our economy, is doing more damage under the hood than our wise leaders would care to admit.
Still, they insist the more economic control centralized in Washington, the better. After all, the ones that drove us off this cliff certainly should know how to break the fall.
Specialists in handling distressed debt amassed tens of billions of dollars to buy up bad loans at steep discounts. The offending institutions who had bought the stuff in the first place would be forced to own up to their mistakes, take their lumps and move on. Meanwhile, those deft enough to clean up the problems would reap their just deserts.
Alas, it was not to be.
Sometime around the middle of 2006, some regulator woke from a decade-long slumber and decided to hazard a look at the balance sheets of America’s largest financial institutions. To his horror, just about every bank in the country would be insolvent, given the going prices for delinquent mortgage debt.
He raced off to tell his boss, who alerted his superior, and so on up the chain until then-Treasury Secretary Hank Paulson got wind of the coming tsunami of losses. Paulson barely flinched, for Wall Street’s top brass was well aware their collective predicament. After all, it was the likes of his former charge, Goldman Sachs (GS), who designed and sold the toxic assets in the first place.
The choice then was simple: Step back and let markets sort out the mess, risking the lives of storied firms like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM) - or latch onto the absurd notion that these institutions were “too big to fail,” and begin a process whereby the American taxpayer's hard-earned nest egg would be used to forestall the inevitable day of reckoning.
We now know how that sad story ends.
Two pieces today, one run by Bloomberg charting the failure of myriad modification programs to address the problem of negative equity, and one in the New York Times documenting the exploits of former Countrywide executives buying distressed debt from the FDIC on the cheap, evidence the abject failure of government efforts to stem the rising tide of foreclosures.
Private investors, the ones best suited to forgiving principal or lowering interest rates to keep a family in their home, were handcuffed by political bumblings. But these programs, by preventing true price discovery in the housing market, have likely achieved their goals of their designers.
Our banking system has buckled, but not broken. The eventually recovery, however, has been pushed well down the line and the cost shoved onto future generations. Those responsible have by in large retained their posts at the institutions deemed “too big to fail,” save a couple token scapegoats tossed to the media wolves.
Meanwhile, the responsible few who did not speculate on their home, did not use credit as a vehicle for illegitimate economic growth and never thought they’d be asked to pick up the tab for those that did, have now been asked to shoulder the burden.
It should come as no surprise that housing prices keep falling -- indeed they must in order for true stabilization to occur. But the slow bleed, the persistent drag on the fundamentals of our economy, is doing more damage under the hood than our wise leaders would care to admit.
Still, they insist the more economic control centralized in Washington, the better. After all, the ones that drove us off this cliff certainly should know how to break the fall.
Keepin' It Real Estate: How to Play the Housing Rebound
This post first appeared on Minyanville and Cirios Real Estate.
There isn’t an economic forecaster or media pundit alive who isn’t angling to be the first to (correctly) call the bottom in housing. Many have tried; they all have failed.
But what happens when one’s right?
At some point in the future, broad home price indicators will cease to slide, then stabilize and even begin to move back up. When, and in what shape that trajectory will be, of course remains a mystery. As I've written in the past, the eventual recovery in housing will be a prolonged, localized event. The rising tide will not lift all boats, as the fundamentals of the old cliché “location, location, location” will be truer than ever.
And although predicting the date of this event is a fool’s errand, savvy home buyers will be ready to jump in ahead of those who remain in their shells long after the best bargains are behind them.
Here are 5 simple things you, the future home buyer can do now, without putting your nest egg at risk, to be ready for the coming opportunities in real estate:
1. Have patience.
There will be false bottoms, dead-cat bounces and treacherous pitfalls on the path to a recovery in real estate. Be patient. Don’t believe the hype - a couple months of strong sales numbers don’t foretell and imminent rebound in prices. Let the beginnings of a trend develop before you begin your home search in earnest. Future appreciation will come slowly, as tightened mortgage guidelines and fear of the collapse we’re now experiencing will not be soon forgotten.
2. Find a market, do your homework.
Had your eye on that classic Victorian around the corner from your kids’ future grade school, and hoping the elderly couple living there knock off just in time for you to swoop in at the estate sale? Expand your search.
Pick a couple of areas you could be happy in - look in multiple cities even. By focusing too narrowly on a single street, or even a single neighborhood, you could be missing out on what could be a fantastic opportunity on the other side of town. Don’t compromise, but play with your list of priorities to give yourself the most “exposure” to localized markets that may become increasingly attractive.
Tour the schools, scope the neighbors - hang around on Halloween to see who gets egged. RealtyTrac.com is a great resource for watching foreclosure activity all over the country and in your backyard. Their free site provides a great overview of cities and neighborhoods, but you have to pay for the house-by-house detail. Unfamiliar with an area? Use RealtyTrac to eyeball major neighborhood dividers (railroad tracks, highways, main roads, etc.) and examine foreclosure activity on either side.
3. Find a broker and start a housing “tracker”.
Real estate brokers can be a valuable tool in your home search - use them.
An aside: The commonly used term “realtor” denotes an association with the National Association of Realtors, or NAR, the lobbyists who have been predicting a bottom since the downturn began over 3 years ago. Tread carefully with anyone proudly bearing an NAR pin. Contrary to what many tell you, you don't need to be a realtor to have access to MLS. But I digress.
Today, with transactions down in all but the most distressed areas, any broker worth his (or her) salt should be out prospecting for future clients, not proclaiming the time to buy is now. Collect referrals, test drive a broker or 2 and find one you’re comfortable with. Your broker should not just understand the local market but be up to speed on the macro-level events affecting the real estate and mortgage markets. Ask him what a CDO (collateralized debt obligation) is - watch for a flinch. For better or for worse, understanding the state of Wall Street is as important these days as understanding the state of your street.
Ask your broker to help you develop a “housing tracker,” a simple tool that allows you to watch homes as they come on the market to see when and for how much they sell. Watching the life cycle of homes in a given market will give you a sense of how desperate sellers are, when asking prices drop and what concessions buyers are able to receive from sellers. As concessions begin to swing in favor of the sellers, the bottom may be nigh.
4. Start saving money.
If there’s one sure bet in the housing market, it’s that mortgage requirements will remain tight for the foreseeable future. Banks -- Citigroup (C), Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC) being the obvious examples -- are hoarding cash and reticent to lend even to the most qualified buyers. Unless a loan falls within guidelines set by Fannie Mae (FNM) and Freddie Mac (FRE), rates remain elevated and approvals elusive. This isn’t likely to change any time soon.
Save for a down payment and be able to point to liquid reserves (i.e. money in the bank) during the application process. Think about this as the lender’s cushion should you fall on hard times - and banks will need all the cushion they can get.
5. Think of your home as an investment, not just a place to raise your kids.
This may seem counter-intuitive, since speculation on housing prices played a huge role in creating the recent housing bubble. But speculating and investing are not the same thing.
A home, in addition to being a place to raise kids, is a massive financial obligation. Becoming emotionally attached to a house, rationalizing the financial realities away and hoping paychecks keep coming simply isn’t a viable home-buying strategy. As un-romantic as it may be, treat a home as you would a stock: Examine it, turn it upside down, run the numbers. Love it every day you’re there, but financial responsibility and emotional attachment don’t need to be mutually exclusive.
The time to buy may not be today -- and it may not be tomorrow -- but we’ll be closer to that day tomorrow than we are today. However, just as prices overshot to the upside, they'll likely overshoot to the downside - be ready when that day comes.
Preparation, not hoping, will be the key to taking advantage of the opportunities that will present themselves on the other side of this mess.
There isn’t an economic forecaster or media pundit alive who isn’t angling to be the first to (correctly) call the bottom in housing. Many have tried; they all have failed.
But what happens when one’s right?
At some point in the future, broad home price indicators will cease to slide, then stabilize and even begin to move back up. When, and in what shape that trajectory will be, of course remains a mystery. As I've written in the past, the eventual recovery in housing will be a prolonged, localized event. The rising tide will not lift all boats, as the fundamentals of the old cliché “location, location, location” will be truer than ever.
And although predicting the date of this event is a fool’s errand, savvy home buyers will be ready to jump in ahead of those who remain in their shells long after the best bargains are behind them.
Here are 5 simple things you, the future home buyer can do now, without putting your nest egg at risk, to be ready for the coming opportunities in real estate:
1. Have patience.
There will be false bottoms, dead-cat bounces and treacherous pitfalls on the path to a recovery in real estate. Be patient. Don’t believe the hype - a couple months of strong sales numbers don’t foretell and imminent rebound in prices. Let the beginnings of a trend develop before you begin your home search in earnest. Future appreciation will come slowly, as tightened mortgage guidelines and fear of the collapse we’re now experiencing will not be soon forgotten.
2. Find a market, do your homework.
Had your eye on that classic Victorian around the corner from your kids’ future grade school, and hoping the elderly couple living there knock off just in time for you to swoop in at the estate sale? Expand your search.
Pick a couple of areas you could be happy in - look in multiple cities even. By focusing too narrowly on a single street, or even a single neighborhood, you could be missing out on what could be a fantastic opportunity on the other side of town. Don’t compromise, but play with your list of priorities to give yourself the most “exposure” to localized markets that may become increasingly attractive.
Tour the schools, scope the neighbors - hang around on Halloween to see who gets egged. RealtyTrac.com is a great resource for watching foreclosure activity all over the country and in your backyard. Their free site provides a great overview of cities and neighborhoods, but you have to pay for the house-by-house detail. Unfamiliar with an area? Use RealtyTrac to eyeball major neighborhood dividers (railroad tracks, highways, main roads, etc.) and examine foreclosure activity on either side.
3. Find a broker and start a housing “tracker”.
Real estate brokers can be a valuable tool in your home search - use them.
An aside: The commonly used term “realtor” denotes an association with the National Association of Realtors, or NAR, the lobbyists who have been predicting a bottom since the downturn began over 3 years ago. Tread carefully with anyone proudly bearing an NAR pin. Contrary to what many tell you, you don't need to be a realtor to have access to MLS. But I digress.
Today, with transactions down in all but the most distressed areas, any broker worth his (or her) salt should be out prospecting for future clients, not proclaiming the time to buy is now. Collect referrals, test drive a broker or 2 and find one you’re comfortable with. Your broker should not just understand the local market but be up to speed on the macro-level events affecting the real estate and mortgage markets. Ask him what a CDO (collateralized debt obligation) is - watch for a flinch. For better or for worse, understanding the state of Wall Street is as important these days as understanding the state of your street.
Ask your broker to help you develop a “housing tracker,” a simple tool that allows you to watch homes as they come on the market to see when and for how much they sell. Watching the life cycle of homes in a given market will give you a sense of how desperate sellers are, when asking prices drop and what concessions buyers are able to receive from sellers. As concessions begin to swing in favor of the sellers, the bottom may be nigh.
4. Start saving money.
If there’s one sure bet in the housing market, it’s that mortgage requirements will remain tight for the foreseeable future. Banks -- Citigroup (C), Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC) being the obvious examples -- are hoarding cash and reticent to lend even to the most qualified buyers. Unless a loan falls within guidelines set by Fannie Mae (FNM) and Freddie Mac (FRE), rates remain elevated and approvals elusive. This isn’t likely to change any time soon.
Save for a down payment and be able to point to liquid reserves (i.e. money in the bank) during the application process. Think about this as the lender’s cushion should you fall on hard times - and banks will need all the cushion they can get.
5. Think of your home as an investment, not just a place to raise your kids.
This may seem counter-intuitive, since speculation on housing prices played a huge role in creating the recent housing bubble. But speculating and investing are not the same thing.
A home, in addition to being a place to raise kids, is a massive financial obligation. Becoming emotionally attached to a house, rationalizing the financial realities away and hoping paychecks keep coming simply isn’t a viable home-buying strategy. As un-romantic as it may be, treat a home as you would a stock: Examine it, turn it upside down, run the numbers. Love it every day you’re there, but financial responsibility and emotional attachment don’t need to be mutually exclusive.
The time to buy may not be today -- and it may not be tomorrow -- but we’ll be closer to that day tomorrow than we are today. However, just as prices overshot to the upside, they'll likely overshoot to the downside - be ready when that day comes.
Preparation, not hoping, will be the key to taking advantage of the opportunities that will present themselves on the other side of this mess.
When Good Credit Goes Bad
This post first appeared on Minyanville.
An impeccable credit score was once a source of pride for bill-paying, fiscally responsible Americans. Now, as card issuers slash lines, up minimum payment requirements and raise interest rates seemingly at random, a stellar credit rating is rare indeed.
Besieged by mounting losses on all types of consumer debt, banks and credit-card companies are scaling back: According to Bloomberg, 45% of all US banks reduced credit card limits for new or existing customers in 2008's fourth quarter.
Issuers are attacking the problem in various ways, but the net effect is the same: Americans are using less plastic. Citibank (C) is lowering credit limits, Capital One (COF) is charging new customers higher rates, JPMorgan Chase (JPM) is upping minimum monthly payments from 2% to 5% on certain accounts, and American Express (AXP) is awarding $300 to select clients if they close their accounts entirely.
The trouble isn’t just that formerly credit-dependent consumers are having a tougher time making ends meet. FICO scores -- the most common measure of a person’s credit-worthiness -- heavily weigh total credit utilized compared to total credit available.
So as lines are cut, outstanding balances as a percentage of total credit lines rise. This in turn dings a consumer’s credit rating, making it harder to get a new card, and in some cases causing existing creditors to jack up interest rates. The vicious cycle continues, and even borrowers with heretofore unblemished credit histories are finding their FICO scores drop for the first time ever.
The solution, as evidenced by dismal earnings reports from the country’s biggest retailers, is simple: Spend less, save more.
Even as lawmakers are making herculean efforts to revitalize the economy by injecting money into the banking system and lowering taxes, reality is moving in the opposite direction.
An anti-spending, anti-consumerist mindset is taking hold across the socioeconomic spectrum. This shift cannot be stopped by flowery talk from Washington - or by vilifying Wall Street in Congress. Spending, the hobby of choice for nearly 3 decades, is becoming the thing not to do. Saving, which had begun to seem positively un-American, is once again in vogue.
This isn't some transitory fad we'll soon forget when the good times roll once again. The current crisis will be felt in the American psyche for decades to come.
Who knows - for our generation, cutting up credit cards may be our answer to the burning of bras.
Desperately Seeking Dollars: Greenback Catches a Bid
This post first appeared on Minyanville.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
Titanic Blunder for Royal Caribbean
This post first appeared on Minyanville.
Royal Caribbean (RCL), the second largest cruise-ship operator in the world, is currently scrounging up money to purchase the Oasis of the Seas, a 5,400-passenger, 16-deck, $1.2 billion monstrosity under construction by STX Europe’s Finnish shipyards. In normal times, the company would have no trouble assembling a team of lenders to finance the purchase. But now, with credit markets frozen solid, loans are more difficult to navigate than an ocean strewn with icebergs.
According to Bloomberg, Royal Caribbean is petitioning the Finnish government for help. Already, state-owned Finnerva has agreed to guarantee 80% of the loans needed to buy the Oasis and its sister ship, Allure of the Seas. The Finnish government says its given out larger guarantees in the past, but isn’t terribly keen on this one unless circumstances are "exceptional."
Meanwhile, Royal Caribbean and rival Carnival Cruise Lines (CCL), are reeling from the economic slump and the worldwide decline in tourism. And with the likes of Citigroup (C) and Bank of America (BAC) becoming increasingly reliant on government funds for survival, extravagances like the biggest cruise ship ever built will be increasingly hard to justify.
The Finnish government's dilemma underscores a growing dilemma for countries all over the world: Prop up industries begging for federal assistance, or preserve funds and maintain the integrity of the sovereign balance sheet? Volatility in the foreign exchange markets (the yen's recent tumble, for example), is evidence that investors are becoming increasingly worried that government is getting out over its skis.
With tax revenues falling, trade grinding a halt, and social-program obligations ballooning, lawmakers are opting to take a more active role in economic governance. Many, in fact, are moving toward central economic planning.
This is an unwelcome shift, but one we're being told is necessary to stave off some unnamable economic catastrophe.
The similarities between the Titanic's moniker -- "unsinkable" -- and the belief that certain banks are too big to fail would be ironic, if it weren't so sad. Given that ill-fated vessel, we should be wary of the notion that anything is invincible - especially when the path through the icebergs is growing increasingly difficult to find.
Royal Caribbean (RCL), the second largest cruise-ship operator in the world, is currently scrounging up money to purchase the Oasis of the Seas, a 5,400-passenger, 16-deck, $1.2 billion monstrosity under construction by STX Europe’s Finnish shipyards. In normal times, the company would have no trouble assembling a team of lenders to finance the purchase. But now, with credit markets frozen solid, loans are more difficult to navigate than an ocean strewn with icebergs.
According to Bloomberg, Royal Caribbean is petitioning the Finnish government for help. Already, state-owned Finnerva has agreed to guarantee 80% of the loans needed to buy the Oasis and its sister ship, Allure of the Seas. The Finnish government says its given out larger guarantees in the past, but isn’t terribly keen on this one unless circumstances are "exceptional."
Meanwhile, Royal Caribbean and rival Carnival Cruise Lines (CCL), are reeling from the economic slump and the worldwide decline in tourism. And with the likes of Citigroup (C) and Bank of America (BAC) becoming increasingly reliant on government funds for survival, extravagances like the biggest cruise ship ever built will be increasingly hard to justify.
The Finnish government's dilemma underscores a growing dilemma for countries all over the world: Prop up industries begging for federal assistance, or preserve funds and maintain the integrity of the sovereign balance sheet? Volatility in the foreign exchange markets (the yen's recent tumble, for example), is evidence that investors are becoming increasingly worried that government is getting out over its skis.
With tax revenues falling, trade grinding a halt, and social-program obligations ballooning, lawmakers are opting to take a more active role in economic governance. Many, in fact, are moving toward central economic planning.
This is an unwelcome shift, but one we're being told is necessary to stave off some unnamable economic catastrophe.
The similarities between the Titanic's moniker -- "unsinkable" -- and the belief that certain banks are too big to fail would be ironic, if it weren't so sad. Given that ill-fated vessel, we should be wary of the notion that anything is invincible - especially when the path through the icebergs is growing increasingly difficult to find.
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