Friday, January 4, 2008

FICO Changes - Lipstick Application to a Pig

Strange weather for Massachusetts over the next few days. This morning at 6am it was zero degrees, then went up to 30 by 6pm. Saturday through Sunday will be in the 40's and Monday through Wednesday is into the 50's! And I thought the financial world was crazy wild. I am looking for vacation ideas for late March or early April so if you have a good suggestion, please drop a note in the comments section. Only qualification is someplace warm, and preferably with some kind of fishing available. Thanks in advance.

Job Numbers Induce Panic - What's All the Fuss?
I am sure you heard about the "horrendous" jobs report that came out today. here is the headline and a snippet from Yahoo Finance:
Stocks Sink on Jobs Data; Tech Plummets
Friday January 4, 6:12 pm ET By Tim Paradis, AP Business Writer
Wall Street Finishes Lower After Slower-Than-Expected Jobs Growth, Rising Unemployment
NEW YORK (AP) -- Wall Street fell sharply Friday after the government's much-anticipated employment report showed weaker-than-expected job growth and a rise in the unemployment rate. The Nasdaq composite index, also pummeled by a downgrade of Intel Corp., skidded more than 3.5 percent, while the Dow Jones industrials fell more than 1.5 percent.
The Labor Department's report that employers raised payrolls by only 18,000 and that the nation's unemployment rate rose to its highest level since November 2005 unnerved investors, who worried that a weakening job market will hurt consumer spending and tip the economy toward recession. The December report showed employers added the fewest jobs to their payrolls since August 2003. Economists had predicted much stronger growth and an unemployment rate of 4.8 percent. Instead, unemployment climbed to 5 percent in December from 4.7 percent in November. While 5 percent unemployment is still considered good by historical standards, the increase from November clearly made some investors nervous.
"It's a scary number, no question about it. No matter how good you wanted to feel about the economy averting a recession, there is far less conviction than even two or three days ago," said Joe Balestrino, senior portfolio manager at Federated Investors.

A rise in unemployment from 4.7% to 5% is a big deal? Stocks sank on the news. Nervous hand wringing was done all over the media. Why the big fuss? Glad you asked. It is because unemployment numbers have joined the ranks of such mythical numbers as GDP, Inflation, and any woman over 29 years old age as manufactured and false. I cannot give a hard number, but some reports I have seen put unemployment at closer to 7-8% and heading higher than the fantasy land 4.5-5% number reported. When even the cooked numbers are heading higher you know it is much worse than that. Add to this the clear reality that almost ALL jobs added over the last 4 years are weak paying service jobs and government jobs and things are not as wonderful as they might seem.

The powers in charge know this. How could a small uptick in unemployment cause the following headlines to occur so fast?:
Fed Says It Will Boost New Auction Amounts by 50 Percent to Help Banks Through Credit Squeeze - more "liquidity" needed, you don't say!
Administration Considering Tax Cuts - sorry but a $500 one time check is not going to help anybody.
The mantra that unemployment would keep any credit collapse from occurring seems to be on the docket for a real test soon. After poor retail sales, an accelerating housing bust, a probable commercial real estate slowdown, and auto sales falling off a cliff job numbers have only one way to go, DOWN. As a scientist, I always look forward to actually testing ideas rather than just spouting them out loud. 2008 should be a good test.

FICO Changes - Lipstick Application to a Pig
This story sums up the current atmosphere that exists among the banks, the FED, and Wall Street so well I could not help making it center thought for the night. First the story, from Yahoo Finance by the WSJ online which is why I am seeing it a bit late (later release for free content):
Default Lines: The New Math Of Credit Scores
by Jane J. Kim Thursday, December 20, 2007
"The company that cooks up credit scores for millions of Americans is changing its recipe -- and that could affect how easily you get credit in the future.
Fair Isaac Corp., maker of the popular FICO credit score used by most lenders, says its new scoring model will do a better job predicting the likelihood of a borrower defaulting on a loan. For one thing, the new model, dubbed FICO 08, will be more forgiving of occasional slips by consumers, but will take a harder line on repeat offenders. Fair Isaac predicts its new system will help lenders reduce default rates on their consumer credit by between 5% and 15%."

Warning lights are set off immediately. What exactly is the difference between "occasional slips" and "repeat (credit) offender"? We do not know, and the writer makes no attempt to get any information. The new system is supposedly going to help lenders reduce their default rates by 5-15%? This new system's appearance coincides nicely with the collapse of all the "mark to model" baloney that is blowing up. This is a clear attempt to try and breathe new life into models for all kinds of collateralized debt to reset the make believe default rates that were so teribly wrong to begin with.
"The roll out of the new credit-scoring system comes at a time when lenders say they are eager for more-accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.
The latest version of the FICO score will largely look and feel the same to consumers and lenders. Scores will still range from 300 to 850 -- the higher the better -- and the model will continue to look at the same factors, including consumers' level of credit indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used, to determine scores."
Overall, more consumers will see their FICO scores go up slightly than will see their scores drop," says Tom Quinn, vice president of global scoring solutions for Fair Isaac."
How convenient. At a time when most remaining mortgage lending companies are trying to sell off their worst loans to the FHA, Fannie, and Freddie a new higher FICO score may be just the ticket to meet underwriting guidelines. What happens when this new FICO model proves to be just as bad at predicting defaults? You guessed it, the US government will have already taken the loans. In case you did not know, the US government's financial debts are OUR debts. In the immortal words of Joseph Stalin "It is not who casts the vote, but those that count the votes that determine an election". The inmates continue to run the asylum in the credit markets. I have a new poll question about the new FICO scam, please vote!

Friday Funny
From a great post over at the Irvine Housing Blog, the following progression of David Lereah real estate books:

And now today:

Too Funny!

Friday Football and Rock Blogging!
It's Friday night and it is a playoff weekend. Great combination.
First of the playoff picks:
AFC - Steelers over the Jaguars 34-28 in a close game.
Chargers over the Titans 24-17 in a grinding game.
NFC - Redskins slip past the Seahawks 34-31 in a wild game.
Buccaneers beat the Giants 24-20 in a snoozer.

Rock Blogging! Either everyone likes the music I select or nobody bothers to check out the tunes judging by the comments section being so quiet. Oh well, here goes in any case.

KISS with "I Was Made for Loving You Baby":

Black Sabbath with "The Wizard". Bluesy heavy metal with a harmonica to boot! Nuthin wrong with that!

I am not sure why but I have always loved the Toto song "Rosanna":

Have a good night.


Mentalic said...

Have you read "When corporations rule the world" by David Korten? I happen to be reading it right now, and though this book was written more than 10 years back (in 1995), the points that he makes might very well be applied to existing conditions today....I suggest you give this book a shot, if you haven't already...

And again, I really like reading your I have similar thoughts about the unfolding situation....

Anonymous said...

Sounds like you are getting typical Nebraska weather. sometimes we have 50 degree swings in 24 hours. 50 here today with snow for tomorrow.

Don't know what I can add on the financial situation, looks like recession is a given although I have thought that for some time now. Things are going to get butt ugly over the next 12-18 months for those who aren't prepaired and anytthing the goverment does will probably make things worse.


Anonymous said...

Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now keep it up!