Thursday, March 27, 2008

Credit Crunch - Call It What it is: A Debt Crisis

Okay, it is going to be wet snow here tonight. As it will not accumulate, I guess i can let it go. Enough already with this stuff!

Wall Street Knows All, or So They Say
One of my favorite things about the markets and market participants is how they always come up smelling like roses. Take homebuilder Lennar (LEN) and their earnings report today. from Yahoo Finance:
"Lennar reported a loss of $88.2 million, or 56 cents per share, in the three months ended Feb. 29 compared with profit of $68.6 million, or 43 cents per share, in the year ago quarter.
The results included a 38 cent-per-share charge related to valuation adjustments and write-offs of option deposits and pre-acquisition costs. After those adjustments, Lennar's loss was 18 cents per share.
The adjusted results were better than estimates on Wall Street, where the mean estimate of analysts polled by Thomson Financial was for a loss of $1.07 per share. Some analysts include write-down estimates in their predictions, while others do not.
Sales fell 62 percent to $1.06 billion from $2.79 billion in the year-ago period. The average selling price fell 8 percent.
Deliveries of new homes were down 60 percent to 3,596 homes. New home orders were down 57 percent to 3,045, with a cancellation rate of 26 percent.

Now forget about LEN as a stock, it is dead money for 4-5 years so the movements make ZERO difference in the scheme of things. What is funny is Wall Street was "estimating" a loss on the order of $1.07 a share for LEN. Now look at these numbers for a second:
  • LEN lost 56 cents a share this quarter
  • Deliveries were down 60 PERCENT!
  • Orders were down 57 PERCENT!

So in order to have lost $1.07 a share as the minds on the street estimated, their sales and orders would have had to have been ZERO. That's right absolutely ZERO. So was this upside "surprise" really a surprise? It depends. If you believe that the street thought LEN would not have sold even 1 home last quarter than yes, this was a huge upside surprise. If not, it is just more play math and moving the goalposts. (Note: I understand write-offs can account for a huge earnings difference. I purposely left that out to highlight a common practice by the CNBC crowd. As for write-offs, with such small write downs, I would watch LEN the next few quarters, there may be a downside surprise!)

There has been a bit of conjecture along the lines that estimates and expectations are so low that anything better than expected will be huge. That would be fine if the stock markets reflected RIGHT NOW any of the dour forecasts. Looking at the markets, they are priced as if Goldilocks is alive and well, the financials have bottomed, and the economy is accelerating. All points that are incorrect. And this is the point I am trying to make (I do have one!): The stock pumpers would love to rally on anything from these levels on the excuse that things are not as bad as expected. All fine and good. The problem is that the markets are priced as if things were never that bad to begin with. As they say on Minyanville, risk is high should these contrasting realities ever reconcile.

Credit Crunch - Call It What it is: A Debt Crisis
I am a huge fan of misdirection and the use of phrasing to convey particular emotions. An excellent example is the current issues which are affectionately called "The Credit Crunch". from Wiki;
"A credit crunch is a sudden reduction in the availability of loans (or "credit") or a sudden increase in the cost of obtaining a loan from the banks."
The media, the government, and especially the financial folks would love for you to think of the current state of things as a simple lack of access to cash, ie liquidity, which is of course nothing to get too excited about. A simple "liquidity injection" or other such maneuvers would in this case solve the underlying problems. Seems both simple and harmless.

So what's all the fuss? The problem is that the problems faced by the banks and the economy are not due top a lack of available cash (credit), but a massive over accumulation of DEBT. Now take a good look at the Wiki definition for Debt;
"Debt is that which is owed; usually referencing assets owed, but the term can cover other obligations. In the case of assets, debt is a means of using future purchasing power in the present before a summation (monies) has been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy.
A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in many cases, plus interest. Historically, debt was responsible for the creation of indentured servants."

Read the definition again. Then email it to all your friends. It is a stark and clear definition of debt for what it really is.

Debt is a means of using future purchasing power in the present before the actual money has been made. Mortgage borrowers took out a massive amount of loans predicated on ever rising prices. Banks happily and heartily extended the loans. Now this has all gone to hell, and all that is left is the debt incurred. Not credit. Debt.

There is no credit crunch. There are no liquidity issues. There is only a debt crisis. The name should fit the situation. So should a headline read something like this:
Credit Crunch Hits Banks - Banks struggle to find liquidity in the current mortgage mess
Or should the headline be:
Debt Crisis Hits Banks - Money lent out not to be repaid due to mortgage mess
Which do you think is more applicable to the current situation? Vote in the new poll and let me know!

You see, credit is good, and debt is bad. Hence we have a credit problem, but not a debt problem. Compare the headlines about the debt, sorry, credit crunch with this alternate analogy:
Heroin Crunch Hits Dealers - After overdosing a record number of customers that are now dead or vegetables, dealers face hard times as things dry up.

Too much debt, and a slowly changing recognition of that fact is core of the problem. Liquidity is not the issue. Let us at least be honest.

Have a good night.


Anonymous said...


"Enough already with this stuff!"

We got 2' of the white stuff last night, I agree enough of this I got stuff I want to plant.

Another way to look at this would be a leverage crisis, assets are falling and the margin clerk is on the phone and there isn't enough money in the piggy bank to pay up. What amasses me is massive debt has cut across what seems like all age groups. I started planing my early retirement when I was in my early 40's and one of the top goals was to be debt free, the number of folks older the I am and the amount of debt that they are carrying now that assert prices are falling will keep them in slavery long after many had planned. It is going to be hard on a lot of younger folks also but they at least have the benefit of youth and time.


watchtower said...

Kevin is right, it's a leverage crisis, and from what I have gathered it really is a "crisis". Not some piss ant LTCM affair, but something that will affect us both as a country, and individually.

getyourselfconnected said...

I like the "leverage crisis" call. Cuts to the heart of the matter really.
You must understand that a man with your forethought and planning discipline is about as rare as a Hope Diamond. While I have been reasonably prudent (and lucky to boot) I do harbor some feelings of sadness for the indebted serfs of the nation. The thing is, we all can change. That is why I try (feebly) to reach folks that can make a change.
Thanks for the comments guys! I especially like tonights blog.

Anonymous said...

A friend of mine finally admitted that I was right when I predicted all of this happening a few years ago. He actually admitted it.... "yeah I see those things you were talking about coming true..."

This is not a "I TOLD YOU SO" but most (not all) did it all on their own. No research, no savings, nothing down, not even "Hey can I bounce this idea off your head for a few" and last but not least.... "Well interest rates are never going to be this low EVER AGAIN".

My wife and I are sooooooo thankful we didn't buy as we would be one of those EXACT stories you see on websites reporting on the housing problem(s) in this country.

Still no real offers in the market for me and the wife has been passed up a few times now.

Another interesting show was on the other day where a US National Guard recruiter said some of the new recruits are choosing the military because there are no opportunities. NO SHIZA SHERLOCK! All the money is being pulled out and put into the WAR ON BULLCRAP!--(Sorry I got to vent this a little)

So what's a guy to do? How long would you hold out for a job that pays well, has retirement options, full family benefits and a realistic expectation for a long term career path? Would you say a month, 4 months, 6 months, or a year before you look into other opportunities?

Now it's time to let it all play out people.This is my A/\/ARCHIST side and we will need to make things happen here (and soon) or this game will continue on until ALL OF US are slaves. And I am sorry but the wealthy top 1% will pay for this financial blunder the same as the lowest 1%.

Watchtower, Kevin and getyourselfconnected I don't often say this but I will pay for the wise to make it though this crash.

Hope that rant wasn't too far off target for your post.


getyourselfconnected said...

Not at all G. It is indeed a frustrating time on many levels. I again pass on my sincere hopes that things may change for you and the wife soon. At some point, yes one does have to think about opportunites and options they might not have considered before. I wish I could be more help. Any ideas for a Friday night topic or rock blog? At least that I can deliver.

Anonymous said...


How long would you hold out for a job that pays well, has retirement options, full family benefits and a realistic expectation for a long term career path? Would you say a month, 4 months, 6 months, or a year before you look into other opportunities?

1. As long as it took but the effort has to come from you. Think outside the box, don't get trapped inside it. Wealth comes to those who seek it.

2. Never stop looking for opportunities they are all around us but most fail to see them.

3. You can do it!


watchtower said...


As I have said before, I live in a "no man's land" compared to the bustling big cities, BUT, my wife is an office manager for a doctor's office here in "Whoville", and there are times when she cannot get "qualified" people to fill a job opening. Have you thought about getting into the healthcare field? With all the "boomers" getting older, this field might hold up a lot better than others. My wife started out working as a receptionist in a hospital when I first started dating her. They (the hospital) sent her to school (on their dime) and she worked her way up the ladder until one of the doctor's groups picked her up.
Unlike how I got my job (nepotism, I call it like it is), she worked her way up, so it can be done, even in this "good ole boy, I knew your granddaddy" part of the country that I live in.

Take care G.


You are doing a great job with the "Friday Night Rock Blog".
A week or two ago you had Billy Idol's "Eyes Without a Face" which reminded me that it had been a while since I listened to my "Idol" collection, so I booted me up a big batch onto my MP3 player for my solo mountain bike trips (plus some Journey, "Girl Can't Help It"), and it was great. That is one of the things I love about your rock blog night, it gives me fresh ideas.