This post first appeared on Minyanville and Cirios Real Estate.
Looks like all those option adjustable rate mortgages (ARMs) weren’t such a good idea after all: 1% teaser rates and loans that grow, rather than shrink, over time just aren’t meant for questionable borrowers buying overpriced homes.
Newport Beach-based Downey Savings (DSL), the fifth largest originator of option ARMs, was seized by federal regulators late Friday. The scraps were sold to US Bancorp (USB) for a song, which included almost $10 billion in deposits. Pomona First Federal, another Southern California lender highly levered to the real estate market, was also taken over by Minneapolis-based US Bank.
According to Bloomberg, the 2 failures will cost the FDIC more than $2 billion to clean up. US Bank agreed to assume the first $1.6 billion in losses from the banks’ loan portfolios, but anything above that will be split with the FDIC.
Each of the 5 biggest option ARM writers have now collapsed. Countrywide was purchased by Bank of America (BAC) in July; IndyMac collapsed into the arms of the FDIC just a few weeks later; Washington Mutual was scooped up by JP Morgan (JPM) in September; October saw Wells Fargo (WFC) best Citigroup (C) for the right to buy Wachovia (WB); now Downey is gone.
It didn’t have to end this way.
Traditionally meant for savvy borrowers capable of managing multiple payment options, Washington Mutual is often cited as having invented the option ARM in the early 80s.
The loan gives a borrower a series of payment choices, the lowest of which is so tiny the loan balance increases each month instead of being paid down. ARMs also typically include a teaser rate -- sometimes as low as 1% -- which can last anywhere from1 month to 5 years.
Ideal for real estate investors, salespeople with choppy income or families hopping between 1 and 2 earners, the flexible payment options and strict underwriting guidelines made option ARMs some of the best performing loans on the market.
But that was then.
As securitization took off, interest rates fell and the housing market heated up, lenders turned these once-safe loans into jet fuel for their ballooning mortgage businesses.
Option ARMs came to epitomize the irresponsible lending that ran rampant during the boom. Lenders abused their ability to qualify borrowers at absurdly low rates, jamming them into homes they could never afford once their mortgage payments rose.
Due to their complexity, mortgage brokers and loan officers rarely bothered to make sure borrowers fully understood the loan terms. A complete explanation would have lasted hours, providing adequate cover for the fraud already so prevalent in the business.
Banks loved option ARMs because accounting rules allowed them to book the fully indexed mortgage payment as income, even if the borrower made the minimum payment each month. That meant a juicy bottom line, even if cash barely trickled in the door.
Mortgage brokers and loan officers loved option ARMs because they could earn fat commissions on loans that were easy to sell - since they never had to explain them.
And borrowers loved option ARMs because they could buy their dream homes, rationality be damned.
Option ARMs flourished in boom states like California, Florida, Arizona and Nevada since homeowners could simply sell or refinance their way out of any problems as home values kept rising. Delinquencies remained remarkably low, creating years of "historical" data upon which to base assumptions about future loan performance.
Back in New York, Bear Stearns pioneered Wall Street’s foray into Option ARMs. The mortgage gurus at Bear figured out how to turn them into highly profitable mortgage-backed securities.
After that, it was a race to the bottom. Bear, Countrywide and IndyMac literally competed for business based on who could buy the loans faster - and with less scrutiny.
When home prices stopped rising, however, it all came crashing down.
Faced with a rising loan balance, higher monthly payments as teaser periods ran out and falling property values, borrowers were stuck. Defaults rose, losses mounted and banks couldn’t unload the paper without taking significant hits. Instead, they chose to hold on and try to ride it out.
We now know how that strategy ended.
As I have written previously, in the face of unprecedented government intervention, the free market has still managed to punish the mortgage boom's worst offenders. Not every guilty party will be brought to justice, but the firms that have failed thus far were deserving of their fate.
To be sure, not every employee at the likes of Bear, Lehman, Countrywide and Downey were culpable, but when the dust settles, the weak hands will have been truly cleaned out. Banks that maintained even marginally prudent lending standards are now reaping the benefits.
This fact gives me hope - hope that despite their best efforts, bureaucrats will always lose in their battle against the free market.
Monday, November 24, 2008
Powering Down
This post first appeared on Minyanville.
With each passing day, it becomes clearer this is no ordinary economic downturn.
Data show Americans aren’t just cutting back in traditional ways: Paring non-essential purchases and getting by with fewer luxuries. Rather, there are fundamental shifts going on in the way we live.
These emerging trends evidence a shift not just in purchasing habits, but in lifestyle.
According to the Wall Street Journal, businesses and households alike are using less energy. Specifically, large utility companies like Minneapolis-based Xcel Energy (XEL), Charlotte’s Duke Energy (DUK) and American Electric Power (AEP) in Ohio are seeing steeper drops in electricity consumption than in previous downturns.
To be sure, energy demand weakens as the economy slows. Consumers buy fewer electronic gadgets, drive less and generally use less stuff that needs to be turned on.
This time, however, executives are worried fundamental behaviors are changing. Jim Rogers, CEO of Duke Energy, told the Journal consumption is falling even in places where prices are stagnant. “Something fundamental is going on.”
Xcel CEO Dick Kelly said for “the first time in 40 years [he’s] seen a decline in sales” to homes.
If the pattern persists, it could cause utilities to drastically change their business model. Typically, purveyors of power count on small, but consistent growth in energy demand. They build this assumption into their business models, which plays an integral role in expansion plans and breaking ground on new plants. Coupled with the rising cost of capital resulting from the credit crisis, this means Americans are likely to see higher energy prices in the future.
And while the data is far from conclusive, it could be an early sign that we are (begrudgingly) embracing the concept that less is, actually, more.
Minyanville’s Kevin Depew and others have been cataloguing this shift in consumer behavior, as broad deflation grips society. More than just lower prices, deflation is taking hold in all aspects of our lives. It’s a slow process, to be sure, but one that is undeniably gaining momentum as social mood darkens and the public rejects consumerism.
Despite lower gas prices, Americans are still driving less. Ever hungry for bigger offerings from McDonald's (MCD) and Burger King (BKC), restaurants are increasingly being forced to inform their customers just how bad an idea it is to eat a Triple Whopper with cheese. Someday, the lesson may actually stick.
Confucius once said a journal of a 1000 miles begins with a single step. Turning off the lights when you leave a room may be that first step. Watching less television may be the second. Maybe, just maybe, spending less time on Facebook could be that third step that sets the whole thing running down hill.
Hey, a guy can dream right?
With each passing day, it becomes clearer this is no ordinary economic downturn.
Data show Americans aren’t just cutting back in traditional ways: Paring non-essential purchases and getting by with fewer luxuries. Rather, there are fundamental shifts going on in the way we live.
These emerging trends evidence a shift not just in purchasing habits, but in lifestyle.
According to the Wall Street Journal, businesses and households alike are using less energy. Specifically, large utility companies like Minneapolis-based Xcel Energy (XEL), Charlotte’s Duke Energy (DUK) and American Electric Power (AEP) in Ohio are seeing steeper drops in electricity consumption than in previous downturns.
To be sure, energy demand weakens as the economy slows. Consumers buy fewer electronic gadgets, drive less and generally use less stuff that needs to be turned on.
This time, however, executives are worried fundamental behaviors are changing. Jim Rogers, CEO of Duke Energy, told the Journal consumption is falling even in places where prices are stagnant. “Something fundamental is going on.”
Xcel CEO Dick Kelly said for “the first time in 40 years [he’s] seen a decline in sales” to homes.
If the pattern persists, it could cause utilities to drastically change their business model. Typically, purveyors of power count on small, but consistent growth in energy demand. They build this assumption into their business models, which plays an integral role in expansion plans and breaking ground on new plants. Coupled with the rising cost of capital resulting from the credit crisis, this means Americans are likely to see higher energy prices in the future.
And while the data is far from conclusive, it could be an early sign that we are (begrudgingly) embracing the concept that less is, actually, more.
Minyanville’s Kevin Depew and others have been cataloguing this shift in consumer behavior, as broad deflation grips society. More than just lower prices, deflation is taking hold in all aspects of our lives. It’s a slow process, to be sure, but one that is undeniably gaining momentum as social mood darkens and the public rejects consumerism.
Despite lower gas prices, Americans are still driving less. Ever hungry for bigger offerings from McDonald's (MCD) and Burger King (BKC), restaurants are increasingly being forced to inform their customers just how bad an idea it is to eat a Triple Whopper with cheese. Someday, the lesson may actually stick.
Confucius once said a journal of a 1000 miles begins with a single step. Turning off the lights when you leave a room may be that first step. Watching less television may be the second. Maybe, just maybe, spending less time on Facebook could be that third step that sets the whole thing running down hill.
Hey, a guy can dream right?
Friday, November 21, 2008
More Heads Will Roll
This post first appeared on Minyanville.
The world’s bankers, besieged by the credit crisis, may soon be busting out the bellbottoms.
According to CTPartners, an executive search firm, the ranks of financial professionals are shrinking so fast we could “go back to the investment banks of the 1960s and 70s.”
Brian Sullivan, the firm’s chief CEO, told Bloomberg layoffs in the financial industry could double by the middle of next year. As many as 350,000 people may lose their jobs before it's all said and done. “This is the financial equivalent of World War II. It’s unprecedented. You’re seeing a seismic shift in the population of banking.”
With Citigroup’s (C) recent announcement of more than 50,000 job cuts, the headcounts at banks, insurance companies and other financial service firms continue to shrink.
As credit markets seized up last year, banks began to lose access to easy leverage. For years, Citi, along with former investment banks Goldman Sachs (GS) and Morgan Stanley (MS), grew massive trading operations to supplement their traditional role as transaction advisors, research firms and brokerages.
Now that those business lines are suffering massive losses, forcing banks to shutter operations and pare back risky positions. Former traders, structured finance wizards and salespeople are finding their services are no longer needed.
And job losses aren’t just being felt in the ivory towers of Wall Street.
Washington Mutual, the Seattle-based thrift that collapsed in September and was snatched up by JPMorgan (JPM), announced this morning it would lay off 1,600 workers in the San Francisco Bay Area. As part of its efforts to merge with JP Morgan, WaMu is closing operations centers in San Francisco as well as Pleasanton, about an hour to the east.
Yesterday, Bank of New York Mellon (BK) said it would fire 1,800 of its 43,000 employees. The firm blamed a need to cut costs in response to the weakness in the global economy.
As firms across industries hand out pink slips, consumers will further retrench, spurning the superfluous and buying only what they need.
This doesn’t bode well for purveyors of the unnecessary, say, for example, Coach (COH). A $800 handbag just isn’t that cool if you’re holding it in the queue at the unemployment office.
The world’s bankers, besieged by the credit crisis, may soon be busting out the bellbottoms.
According to CTPartners, an executive search firm, the ranks of financial professionals are shrinking so fast we could “go back to the investment banks of the 1960s and 70s.”
Brian Sullivan, the firm’s chief CEO, told Bloomberg layoffs in the financial industry could double by the middle of next year. As many as 350,000 people may lose their jobs before it's all said and done. “This is the financial equivalent of World War II. It’s unprecedented. You’re seeing a seismic shift in the population of banking.”
With Citigroup’s (C) recent announcement of more than 50,000 job cuts, the headcounts at banks, insurance companies and other financial service firms continue to shrink.
As credit markets seized up last year, banks began to lose access to easy leverage. For years, Citi, along with former investment banks Goldman Sachs (GS) and Morgan Stanley (MS), grew massive trading operations to supplement their traditional role as transaction advisors, research firms and brokerages.
Now that those business lines are suffering massive losses, forcing banks to shutter operations and pare back risky positions. Former traders, structured finance wizards and salespeople are finding their services are no longer needed.
And job losses aren’t just being felt in the ivory towers of Wall Street.
Washington Mutual, the Seattle-based thrift that collapsed in September and was snatched up by JPMorgan (JPM), announced this morning it would lay off 1,600 workers in the San Francisco Bay Area. As part of its efforts to merge with JP Morgan, WaMu is closing operations centers in San Francisco as well as Pleasanton, about an hour to the east.
Yesterday, Bank of New York Mellon (BK) said it would fire 1,800 of its 43,000 employees. The firm blamed a need to cut costs in response to the weakness in the global economy.
As firms across industries hand out pink slips, consumers will further retrench, spurning the superfluous and buying only what they need.
This doesn’t bode well for purveyors of the unnecessary, say, for example, Coach (COH). A $800 handbag just isn’t that cool if you’re holding it in the queue at the unemployment office.
Electric Cars: Be Careful What You Wish For
This post first appeared on Minyanville.
The rhetoric is eerily familiar: A green, viable alternative to gasoline. What's not to love?
Any purported "cure" for America’s gasoline addiction should, however, be regarded with the utmost skepticism - just think of the ethanol debacle. Ethanol helped spur rampant food-price inflation -- resulting in riots throughout the developing world -- while doing little to curb oil imports from unfriendly nations.
The promise of electric cars could similarly be remembered as a massive swindle - one that cost taxpayers billions and still failed to find a green solution to our dependence on foreign oil.
Nevertheless, California -- ever at the heart of the green revolution -- is getting an early Christmas present this year: A planned $1 billion charging network for electric cars. The Wall Street Journal reports that Better Place, a startup founded by former SAP AG executive Shai Agassi, will begin construction on a series of charging stations throughout the San Francisco Bay Area in 2010.
Most electric cars, including General Motors’ (GM) Chevy Volt, go a mere 40 miles on a single charge. Agassi hopes this new fad will take hold; to that end, his company is offering charging services and an exchange service by which fresh batteries can be swapped for drained ones.
Following the cultish success of the Toyota (TM) Prius hybrid, Chevy’s Volt and Ford’s (F) Hybrid Escape aim to capitalize on environmentally friendly commuters.
But widespread acceptance of electric cars could create more problems than it solves: Without adequate sources of green electricity, fossil fuel emissions could actually increase if plug-in Hummers catch on.
Critics argue that, as long as American power companies continue burning coal to produce the vast majority of our power, any benefit to “clean” electric cars would be wiped out by busier furnaces and dirtier smokestacks.
According to the Energy Information Association, utility companies still produce more than half their total power from coal. And although clean alternatives like wind, solar and hydroelectric are seeing sizable gains in market share, they still represent a tiny fraction of our total energy output.
Meanwhile, natural gas and nuclear power, which collectively come close to totaling coal production, are controversial clean-power alternatives.
Natural gas is notoriously tricky to store and transport, although methods for getting this clean-burning alternative to market are improving. Nuclear energy, despite its capacity for creating massive amounts of power with few environmental side effects, suffers from public-health concerns. The stuff is certainly toxic and tricky to handle, but there hasn’t been a serious nuclear accident in the US since Three Mile Island in 1979.
To be sure, breaking our addiction to foreign oil won’t happen on its own. We do not, however, have a great track record at finding permanent solutions that meet both economic and social requirements.
Gas prices are tumbling back to earth, and driving is once again becoming affordable. Americans would do well to remember the scary summer of 2008, when we were finally forced to be green - whether we liked it or not.
The rhetoric is eerily familiar: A green, viable alternative to gasoline. What's not to love?
Any purported "cure" for America’s gasoline addiction should, however, be regarded with the utmost skepticism - just think of the ethanol debacle. Ethanol helped spur rampant food-price inflation -- resulting in riots throughout the developing world -- while doing little to curb oil imports from unfriendly nations.
The promise of electric cars could similarly be remembered as a massive swindle - one that cost taxpayers billions and still failed to find a green solution to our dependence on foreign oil.
Nevertheless, California -- ever at the heart of the green revolution -- is getting an early Christmas present this year: A planned $1 billion charging network for electric cars. The Wall Street Journal reports that Better Place, a startup founded by former SAP AG executive Shai Agassi, will begin construction on a series of charging stations throughout the San Francisco Bay Area in 2010.
Most electric cars, including General Motors’ (GM) Chevy Volt, go a mere 40 miles on a single charge. Agassi hopes this new fad will take hold; to that end, his company is offering charging services and an exchange service by which fresh batteries can be swapped for drained ones.
Following the cultish success of the Toyota (TM) Prius hybrid, Chevy’s Volt and Ford’s (F) Hybrid Escape aim to capitalize on environmentally friendly commuters.
But widespread acceptance of electric cars could create more problems than it solves: Without adequate sources of green electricity, fossil fuel emissions could actually increase if plug-in Hummers catch on.
Critics argue that, as long as American power companies continue burning coal to produce the vast majority of our power, any benefit to “clean” electric cars would be wiped out by busier furnaces and dirtier smokestacks.According to the Energy Information Association, utility companies still produce more than half their total power from coal. And although clean alternatives like wind, solar and hydroelectric are seeing sizable gains in market share, they still represent a tiny fraction of our total energy output.
Meanwhile, natural gas and nuclear power, which collectively come close to totaling coal production, are controversial clean-power alternatives.
Natural gas is notoriously tricky to store and transport, although methods for getting this clean-burning alternative to market are improving. Nuclear energy, despite its capacity for creating massive amounts of power with few environmental side effects, suffers from public-health concerns. The stuff is certainly toxic and tricky to handle, but there hasn’t been a serious nuclear accident in the US since Three Mile Island in 1979.
To be sure, breaking our addiction to foreign oil won’t happen on its own. We do not, however, have a great track record at finding permanent solutions that meet both economic and social requirements.
Gas prices are tumbling back to earth, and driving is once again becoming affordable. Americans would do well to remember the scary summer of 2008, when we were finally forced to be green - whether we liked it or not.
Thursday, November 20, 2008
Keepin' It Real Estate: Homebuilders Facing Extinction
This post first appeared on Minyanville and Cirios Real Estate.
For as bad as things are in the housing market, it’s remarkable that none of the country’s big homebuilders have gone bust. The industry’s resilience is a testament to how much money the firms raked in during the boom.
Just ask guys in charge.
The Wall Street Journal reports many homebuilder CEOs socked away such obscene amounts of cash over the past 5 years that they out-earned their Wall Street counterparts. As profits soared, Toll Brothers (TOL) CEO Robert Toll and his brother Bruce together took home $773 million, while Dwight Schar, chairman of Virginia-based NVR (NVR) earned more than $625 million from stock sales.
By contrast, vilified Countrywide CEO Angelo Mozilo earned a mere $471 million during the same period.
Sitting on huge -- but dwindling -- stockpiles of cash, big builders like DR Horton (DHI), Lennar (LEN) and Ryland Homes (RYL) have thus far ridden out the bloodletting. According to JPMorgan analyst Michael Rehaut, these 3 may yet see positive cash flow in 2009.
Their smaller rivals, however, may not be so lucky.
Rehaut predicts that Pulte Home (PHM) and KB Home (KBH) could see negative cash flow next year - and some analysts believe 2009 could finally be the year that weaker hands start to fold. Credit protection for Hovnanian (HOV), Standard Pacific (SPF) and Beazer Home (BZH) is trading like the companies’ failure is a foregone conclusion.
Meanwhile, one key characteristic of market bottoms is notably absent: Consolidation.
Just as strong American banks have swallowed up the weak, no meaningful housing market bottom will be found until homebuilders begin to feast on one another.
Let’s face it: We don’t need 10 different multi-billion dollar companies churning out indistinguishable cookie-cutter "mansions" on tiny lots in cramped subdivisions miles from the nearest grocery store. We’ve got our hands full already, thank you very much.
Yesterday, the Commerce Department said October housing starts registered the lowest reading since 1959. Since just 4 of the 10 builders mentioned in this article existed 50 years ago, it looks like 6 are pretty much dispensable.
For as bad as things are in the housing market, it’s remarkable that none of the country’s big homebuilders have gone bust. The industry’s resilience is a testament to how much money the firms raked in during the boom.
Just ask guys in charge.
The Wall Street Journal reports many homebuilder CEOs socked away such obscene amounts of cash over the past 5 years that they out-earned their Wall Street counterparts. As profits soared, Toll Brothers (TOL) CEO Robert Toll and his brother Bruce together took home $773 million, while Dwight Schar, chairman of Virginia-based NVR (NVR) earned more than $625 million from stock sales.
By contrast, vilified Countrywide CEO Angelo Mozilo earned a mere $471 million during the same period.
Sitting on huge -- but dwindling -- stockpiles of cash, big builders like DR Horton (DHI), Lennar (LEN) and Ryland Homes (RYL) have thus far ridden out the bloodletting. According to JPMorgan analyst Michael Rehaut, these 3 may yet see positive cash flow in 2009.
Their smaller rivals, however, may not be so lucky.
Rehaut predicts that Pulte Home (PHM) and KB Home (KBH) could see negative cash flow next year - and some analysts believe 2009 could finally be the year that weaker hands start to fold. Credit protection for Hovnanian (HOV), Standard Pacific (SPF) and Beazer Home (BZH) is trading like the companies’ failure is a foregone conclusion.
Meanwhile, one key characteristic of market bottoms is notably absent: Consolidation.
Just as strong American banks have swallowed up the weak, no meaningful housing market bottom will be found until homebuilders begin to feast on one another.
Let’s face it: We don’t need 10 different multi-billion dollar companies churning out indistinguishable cookie-cutter "mansions" on tiny lots in cramped subdivisions miles from the nearest grocery store. We’ve got our hands full already, thank you very much.
Yesterday, the Commerce Department said October housing starts registered the lowest reading since 1959. Since just 4 of the 10 builders mentioned in this article existed 50 years ago, it looks like 6 are pretty much dispensable.
Tuesday, November 18, 2008
Insurance Companies Position Themselves for Bailout
This post first appeared on Minyanville.
Insurance companies have now joined the growing list of American firms vying for a piece of the bailout pie.
According to the Wall Street Journal, large insurance companies are snatching up small regional banks to speed up their transition to savings-and-loan holding companies, thereby qualifying them for capital infusions from Washington.
Like Goldman Sachs (GS) and Morgan Stanley (MS), who recently made similar conversions, insurance companies are looking for billions of dollars in government money to shore up their battered balance sheets.
Over the last week, Hartford Financial Services (HIG) purchased Federal Trust of Sanford, Florida; Genworth Financial (GNW) bought a thrift in Maple Grove, Minnesota; and Lincoln National (LNC) agreed to buy a tiny bank in Goodland, Indiana, which has a mere $7 million in assets. For Lincoln, a company with over $180 billion in assets, that’s just not very much money.
Insurers take in premiums from policy-holders, which they then use to buy up securities. As long as the income generated from those investments covers their payouts on claims, they turn a profit. Traditionally believed to be stogy, conservative firms, in recent years insurers dabbled in risky securities to juice profits. Using leverage, they added mortgage-backed securities to their core holdings of highly-rated corporate bonds.
The poster-child for these bad investments was, of course, AIG (AIG), which has now gobbled up almost $150 billion in taxpayer-funded bailout money.
And while AIG was the worst offender, its competitors have likewise seen the value of their investments erode in value in recent months. Last month, Met Life (MET), the largest US insurer by assets, raised capital to cover expected losses. Investors initially cheered the move, optimistic that the firm could get money at all.
In the last month, however, Met Life shares have lost almost 50% of their value.
And the bailout money is running thin. Treasury Secretary Hank Paulson has said he won’t petition Congress to release the second half of the $700 billion allocated for the bailout of the financial system. Confident the bailout is working, Paulson is urging lawmakers to hold on to the money for that proverbial rainy day.
The question, of course, is in what form the deluge will come. General Motors (GM)? General Electric (GE)? Or something else entirely?
Insurance companies have now joined the growing list of American firms vying for a piece of the bailout pie.
According to the Wall Street Journal, large insurance companies are snatching up small regional banks to speed up their transition to savings-and-loan holding companies, thereby qualifying them for capital infusions from Washington.
Like Goldman Sachs (GS) and Morgan Stanley (MS), who recently made similar conversions, insurance companies are looking for billions of dollars in government money to shore up their battered balance sheets.
Over the last week, Hartford Financial Services (HIG) purchased Federal Trust of Sanford, Florida; Genworth Financial (GNW) bought a thrift in Maple Grove, Minnesota; and Lincoln National (LNC) agreed to buy a tiny bank in Goodland, Indiana, which has a mere $7 million in assets. For Lincoln, a company with over $180 billion in assets, that’s just not very much money.
Insurers take in premiums from policy-holders, which they then use to buy up securities. As long as the income generated from those investments covers their payouts on claims, they turn a profit. Traditionally believed to be stogy, conservative firms, in recent years insurers dabbled in risky securities to juice profits. Using leverage, they added mortgage-backed securities to their core holdings of highly-rated corporate bonds.
The poster-child for these bad investments was, of course, AIG (AIG), which has now gobbled up almost $150 billion in taxpayer-funded bailout money.
And while AIG was the worst offender, its competitors have likewise seen the value of their investments erode in value in recent months. Last month, Met Life (MET), the largest US insurer by assets, raised capital to cover expected losses. Investors initially cheered the move, optimistic that the firm could get money at all.
In the last month, however, Met Life shares have lost almost 50% of their value.
And the bailout money is running thin. Treasury Secretary Hank Paulson has said he won’t petition Congress to release the second half of the $700 billion allocated for the bailout of the financial system. Confident the bailout is working, Paulson is urging lawmakers to hold on to the money for that proverbial rainy day.
The question, of course, is in what form the deluge will come. General Motors (GM)? General Electric (GE)? Or something else entirely?
Monday, November 17, 2008
Copper Prices Fall, Deflation Takes Hold
Looting abandoned homes just ain’t the fun it used to be.
Stripping foreclosed homes of their copper pipes became big business when commodity prices soared, driven by easy credit, a weak dollar and a robust global economy. Since the summer, however, the prices of base metals have fallen precipitously, with copper's decline being the most dramatic.
Analysts don’t expect the trend to reverse any time soon. Despite a massive economic stimulus package from China, the world’s largest copper purchaser, some experts believe the metal could slide as much as 40% further.
Bloomberg reports global inventories have risen twofold in the past 4 months, as auto sales have slumped, new home construction has all but ground to a halt, and fears about a worldwide economic slowdown are becoming reality. Bigger stockpiles, coupled with faltering demand has led to a collapse in commpodity prices: The S&P GSCI Index, which tracks 24 raw materials, has fallen by more than half since July.
Minyanville’s Ryan Krueger regards copper as a proxy for global productivity. Unlike gold or silver, copper is unaffected by speculation, since demand for it is purely pragmatic: It serves as the essential material for construction of all types.
Miners like Freeport MacMoran (FCX) and BHP Billiton (BHP) have been hauling the stuff out of the ground at record rates in the past few years in order to keep up with skyrocketing demand. Shares soared, reaping big profits for investors.
Since its low in 2000, Freeport rose almost 1800% to its high just a few months ago. Shares have since come back to earth: Freeport and BHP are down 81% and 66%, respectively.
According to the Wall Street Journal, miners are now racing to cut production in reaction to slumping demand. US Steel (X) will lay off 2% of its workforce, as mining companies around the world are forced to cut overhead to stay alive.
Meanwhile, construction costs are tumbling, fueling fears about central bankers’ worst nightmare: Deflation. It seems like yesterday that Federal Reserve Chairman Ben Bernanke and his ilk were scared stiff about inflation; rising prices have already sparked riots in developing countries around the world.
As Professor Kevin Depew put it last week,
"The argument against deflation and inflation is both academic and political. Present economic elites benefit from inflation and suffer terribly in deflation. Therefore, there is great incentive for the small minority -- the 2-3% of wealthy who control the vast majority of assets in this country -- to continue to press government and the Fed to maintain the present course of inflation over deflation."
Deleveraging is lowering the value of all assets, from stocks to bonds to houses to steel. Those whose wealth is tied up in these commodities are scrambling to halt the accelerating evaporation of their value.
After years of watching the rising tide lift their boats, they now find themselves foundering on the shore - which is already littered with those who never set sail in the first place.
Stripping foreclosed homes of their copper pipes became big business when commodity prices soared, driven by easy credit, a weak dollar and a robust global economy. Since the summer, however, the prices of base metals have fallen precipitously, with copper's decline being the most dramatic.
Analysts don’t expect the trend to reverse any time soon. Despite a massive economic stimulus package from China, the world’s largest copper purchaser, some experts believe the metal could slide as much as 40% further.
Bloomberg reports global inventories have risen twofold in the past 4 months, as auto sales have slumped, new home construction has all but ground to a halt, and fears about a worldwide economic slowdown are becoming reality. Bigger stockpiles, coupled with faltering demand has led to a collapse in commpodity prices: The S&P GSCI Index, which tracks 24 raw materials, has fallen by more than half since July.
Minyanville’s Ryan Krueger regards copper as a proxy for global productivity. Unlike gold or silver, copper is unaffected by speculation, since demand for it is purely pragmatic: It serves as the essential material for construction of all types.
Miners like Freeport MacMoran (FCX) and BHP Billiton (BHP) have been hauling the stuff out of the ground at record rates in the past few years in order to keep up with skyrocketing demand. Shares soared, reaping big profits for investors.
Since its low in 2000, Freeport rose almost 1800% to its high just a few months ago. Shares have since come back to earth: Freeport and BHP are down 81% and 66%, respectively.
According to the Wall Street Journal, miners are now racing to cut production in reaction to slumping demand. US Steel (X) will lay off 2% of its workforce, as mining companies around the world are forced to cut overhead to stay alive.
Meanwhile, construction costs are tumbling, fueling fears about central bankers’ worst nightmare: Deflation. It seems like yesterday that Federal Reserve Chairman Ben Bernanke and his ilk were scared stiff about inflation; rising prices have already sparked riots in developing countries around the world.
As Professor Kevin Depew put it last week,
"The argument against deflation and inflation is both academic and political. Present economic elites benefit from inflation and suffer terribly in deflation. Therefore, there is great incentive for the small minority -- the 2-3% of wealthy who control the vast majority of assets in this country -- to continue to press government and the Fed to maintain the present course of inflation over deflation."
Deleveraging is lowering the value of all assets, from stocks to bonds to houses to steel. Those whose wealth is tied up in these commodities are scrambling to halt the accelerating evaporation of their value.
After years of watching the rising tide lift their boats, they now find themselves foundering on the shore - which is already littered with those who never set sail in the first place.
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