Freefall Friday

The forecast is for another 7 plus inches tonight here in Massachusetts. Fun stuff indeed. I will be a little short on time tonight due to a later work day, and I have to have time to rock blog of course! I am giving a shout out to reader Watchtower who correctly guessed the film reference made last night in the LOL cat caption. Nobody has picked up on the "Major Award" reference as yet.

Freefall Friday
Stocks were down all day and closed at the days lows. The reason most cited was "economic worries" or some such silly thing. Watching the markets over the last 2 weeks without blogging on them has given me some time to try and see some form of a pattern that has been in place for about 2 months now. The cycle of the markets right now is basically:

1. Some bank, lender, hedge fund, investment firm reports a horrific number with staggering losses.
2. The markets sell off hard
3. The FED sends out some face to say basically "the FED is ready to cut rates"
4. The markets rally on the rate cut news
5. Oddly, gold and the dollar do not rally on the rate cut news
6. Things are choppy for a bit
7. Gold rallies big and the dollar tanks without news to spark the move
8. Economic data shows credit issues remain
9. Markets look for signs of an end to the credit issues even after there is not one good piece of news
10. Another company reports more poor numbers and we repeat at number 1

Simplistic I know, but that cycle is on about a month and a half time frame and has been VERY consistent. If you are the sort that can do quick trading, timing the top and bottom is pretty easy (even for me!) and there lies a good trading opportunity.

My take on the whole thing? The market seems to want to rally very much. The problem is that for any real move to happen there needs to be a span with no indisputable information that the credit issues still are real and are still here. Obviously that cannot happen. There lies the problem. At some point all the players are going to have to acknowledge that there are serious impairments to the system and they must be dealt with. This fact is in NO WAY reflected in equity prices at this time. When the FED rate is at 1% in August and a major bank comes clean and faces bankruptcy, things will get very interesting indeed.

Scary Thought

You may have heard the statement lately that something along the lines of 93-95% of all mortgages are paid on time and that only 5-7% are delinquent. I am not debating the numbers and they really do not matter anyway. The point is, say even as high as 10% of all mortgages defaulted, how exactly would that be able to crash an entire financial system? Still thinking? I would submit two things:

1. Insane amounts of leverage exist and in fact are the basis for our financial economy (read FIAT money system of ever expanding debt/credit)
2. There is no hard asset base to back any of this phantom money

I know that will not come as news for many readers here, but it could be that simple. I wonder when, if ever, some realization of how fantasy land our whole deal is will happen. Remember it is in the best interests of the rich and political to make sure that NEVER happens. I have a poll up tonight on the whole mortgage mess so please vote.

Enough somber musings! It is Friday night, and I recommend a beer and to get hyped up with a bit of rock and roll.

One of the saddest band collapses ever has to be the demise of Guns N Roses. That band had it all! One of my favorite songs is "You Could be Mine". Unbelievable drums, edgy vocals and great guitar work:

One of the all time great iron Maiden tunes, "Wasted Years":

A little Van Halen with the masterful Eddie Van Halen in "Panama":

The true master of the guitar Randy Rhoads with his guitar solo from the live album "Tribute", again the single greatest album of all time:

Have a good night.

Coming Apart at The Seams

Yet another snow storm on the docket for tomorrow night here is merry Massachusetts. Another 4-8 inches of white wonderful is going to fall yet again. I seriously think I am going to go outside during the height of the storm and throw up all over the pristine snowflakes! Childish, I know but I am at the breaking point here! Come on Spring.

Earnings Reports Should be Relegated to the Dustbin of History
One of my long term problems with the way companies report "earnings" is the various ways they are reported. Would you like before or after tax profit? Earnings per share or earnings per share minus some buybacks? Earnings before losses or earnings after one time losses? the list goes on and on. Take SprintNextel (ticker: S) today. What do you make out of the following report:
Sprint Swings to $29.5B Loss in 4Q on Nextel Deal Write-Down, Ends Dividends, Shares Dive
Sprint Nextel, based in Overland Park, Kan., said it lost $29.5 billion, or $10.36 per share, during the quarter ending Dec. 31. By comparison, the company earned $261 million, or 9 cents per share, during the same period a year ago.
The company said last month it would likely have to write off most of the remaining $30.7 billion in non-cash goodwill value from the acquisition of Nextel and a number of affiliates. Sprint Nextel has struggled since the purchase, plagued by technical problems, unfocused marketing and a difficulty in merging the two companies' work forces into a cohesive whole.
The hurdles have caused the company to fall far behind rivals AT&T and Verizon Wireless in attracting and retaining customers.
Not including the write-down and other one-time charges, the company said it would have earned 21 cents per share, which was higher than the 18 cents per share expected by analysts surveyed by Thomson Financial, based on the same criteria.

It is all right there. Sprint would have made 21 cents per share, BEATING the street by 3 cents, if only they did not write down the 29.5 BILLION dollars that they did. By the way, the market cap of Sprint is at 23 Billion right now. Not including a write down in excess of their market cap, Sprint had a great quarter. Any questions?

Enough with the baloney already. The "Excluding One Time Charges" line is the best as quarter after quarter, year after year those one timers are always there. Last month I made a ridiculous amount of money myself if you exclude one time charges like cable, phone, car, rent, food, taxes, gas, and electricity bills. If only those one timers would stop coming every month I would be rich in no time!

Coming Apart at The Seams
I think that looking back both Ben BernanSpan and Hanky Panky Paulson will look back at the past couple of days and be regretful that they did not keep their mouths shut. I am not sure what is worse, the crap these guys speak or that they get away with it unchallenged time and time again. I guess when faced by the awesome mental power of the US congress, you cannot expect much in the way of tough questions or follow up.

Take BernanSpans comments today. When asked about the dreaded "Stagflation" scenario, Benny Baby responded thus "I don't anticipate stagflation". Well there you go. The FED head that so clearly saw the subprime debacle, the credit crunch, the monoline insurance issues, and the foreclosure tsunami now does not ANTICIPATE stagflation. I find the use of the word "anticipate" very interesting. From Wikitionary, the definitions of anticipate are:

1. to act before (someone), especially to prevent an action
2. to take up or introduce (something) prematurely
3. to know of (something) before it manifests

I would suppose number 3 fits best with his comments here. So BernanSpan does not know that we are in stagflation, and does not believe that is where we are going? OK. Refusing to see something is not the same as not actually seeing it. His track record for predictions aside, where was the follow up question of "if indeed we enter into stagflation, what can/will the FED do about it?" I would love to know his answer to that one.

Not to be outdone, Hanky Paulson was out talking tough trash today. From the man that brought us the Super SIV Plan (that failed), the various mortgage rate freeze plans (Help/Hope Now and such), and lobbied hard to remove any restrictions from the GSE's, we get this handy dandy headline that is the early leader for hipocritical statement of the year, ready for it?:

Paulson Rejects Government Bailouts

I swear I am not making that up! It was on Yahoo Finance, Marketwatch, Bloomberg, etc. Paulson rejects bailouts huh? You cannot make this stuff up anymore.

We are at a point now where it seems almost every figure of power is running around like mad trying to bailout everything and everyone, soothe concerns, and maintain general sentiment. the effort being expended is considerable. It seems to this writer that things are beginning to come apart at the seams. The dollar took another header today. Weak Dell, Sprint, Fannie, and Freddie "earnings numbers were as ugly as can be. The FED head and the Treasury secretary out in public saying dumb things, while not new, has become an almost daily occurrence.

It has been suggested in various forums that right before a serious dislocation, or history changing event occurs, there is usually a flurry of activity across multiple fronts that taken as an aggregate look like a controlled panic. The last 3 months to me resemble such a time. I am not sure this all qualifies without question, but it bears observation. I will not give an anticipation in either direction, I just am trying to make you the reader aware of the possibility. Scary but fun!

Fun Stuff

Bonus points to the reader that can identify both the film and scene this LOL cat caption is referencing:

Enter the ICHC online Poker Cats Contest!

First comment that gets it correct will get a shout out on the main blog, now isn't that a "Major Award"? (step two: solve the "major award" movie reference for mega bonus points!) Perhaps if people like this we can have a Monthly contest with a paid subscription to the Calculated Risk's awesome newsletter (value $60) as a prize.

Have a good night.

The FED and the Government are Focused on the Economy; It is OK to be Scared

Hello all loyal readers as well as anyone that stops by. This is my first full post in a while. I have not lived in a real house for over 12 years and the first thing that stands out to me is that EVERYTHING takes twice as long to do. This thing is upstairs, that thing is downstairs, shovel this walkway, clean this room, etc. A medium apartment is surely the easiest lifestyle there is! Oh well, this is the situation for the time being while the wife and I ponder our long term needs.

Monoline Insurance - Still a Charade

When I left blogging, the monoline insures were in a world of hurt. ABK and MBI seemed in dire straits. Over the last 2 weeks we have seen threats of downgrades, plans to split the business into two parts, and now finally a reaffirmation of the AAA ratings the companies desperately need to function. Quite a round trip. The always excellent Mish over at his site had the best summary of the debacle that is the game being played with his post here:

http://globaleconomicanalysis.blogspot.com/2008/02/mbia-maintains-highest-rating-pfizer.htmlom/2008/02/mbia-maintains-highest-rating-pfizer.html

Mr. Shedlock compares the balance sheets of MBI and Pfizer Pharmaceutical. Pfizer debt was downgraded to a lower level than AAA recently, but after reviewing the numbers, it looks pretty silly! Check them out below:

PFIZER

MBIA

So Pfizer debt is rated Aa1, while MBI has the golden AAA rating. If these two companies owed YOU money, who would you want to collect from? Lunacy at its finest.

The FED and the Government are Focused on the Economy; It is OK to be Scared

Regular readers know I am a headline and mass media article junkie. I always get a good laugh from the often contradictory, insane, or just silly writing done on the economic issues. Yahoo finance had a dandy up today:

AP

Stocks Finish Mixed in Choppy Session

Wednesday February 27, 6:28 pm ET By Joe Bel Bruno, AP Business Writer
Investors Pare Gains After Regulator Lifts Caps on Fannie, Freddie, Bernanke Comments Please

NEW YORK (AP) -- Wall Street finished mixed in another seesaw session Wednesday after regulators allowed Fannie Mae and Freddie Mac to buy more mortgages and Federal Reserve Chairman Ben Bernanke said the central bank will remain vigilant about the weakened economy.

Bernanke indicated the Fed is more concerned about the sagging economy then the immediate risks of inflation. In testimony on Capitol Hill, he told lawmakers the Fed will "act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."

The remarks came as the dollar plunged to a record low against the 15-nation euro. That sent already inflated oil and gold prices further into record high territory, and raised the prospect of accelerating inflation.

Meanwhile, Fannie Mae and Freddie Mac -- the biggest sources of financing for U.S. home loans -- helped give the market some ballast after the government removed restrictions on the size of their portfolios. That offered a chance for an easing of the extremely tight mortgage market that has been battered by the subprime loan crisis.

"The government is trying to do their part," said Todd Leone, managing director of equity trading at Cowen & Co. "Together, this helps put a little more faith in the economy."

Harry Clark, president of Clark Capital Management in Philadelphia, said a slowdown in the economy that avoids recession could create a moderate drop in demand and help ease pressure from rising prices.
"If the economy goes down the drain with rising prices, that's stagflation," he said. "Rising prices aren't a big deal if everyone is employed and the economy is growing."

There is so much dumbness in this story it is hard to even start!

The writer seems to think he has found a new idea by reporting that BernanSpan is more concerned with slowing growth than with inflation. WOW! What a concept! Welcome to reality son, glad to see you. In his testimony today, BernanSpan used that clever line about "immediate" effects of inflation. Does he mean the immediate and short lived pressure from gas prices over $3 dollars? I mean that has not been going on very long. Food, health crae, etc over the past 3 years is not an immediate problem either. As far as the FED being "on the ball" with more rate cuts to support growth, all the cuts so far have not done a whole lot.

Early leaders for retarded statements for 2008 are found a little further down in the article. In no particular order:

"The government is trying to do their part," said Todd Leone, managing director of equity trading at Cowen & Co. "Together, this helps put a little more faith in the economy."

So the government needs a stimulus plan, several housing bailout programs, expansion of Fannie and Freddie two major money losing government entities, and massive FED rate cuts, and the result of this will be more faith in the economy? Seems a bit strange. If a patient needs an oxygen mask, weekly dialysis, a liver transplant, and a triple heart bypass I may not have MORE faith in the health of that patient, but I am a pessimist by nature.

"If the economy goes down the drain with rising prices, that's stagflation," says Harry Clark, president of Clark Capital Management in Philadelphia "Rising prices aren't a big deal if everyone is employed and the economy is growing."

Love It! Ever escalating prices are awesome if everyone in the country is employed! Too great! I offer it without commentary.

GOLD and SILVER on the Rampage

I am breaking my own trading rules by not unloading my positions in two stocks. I love the macro story for both Gold and Silver, so I have been lax to let my stocks go. I am sitting on over a 100% gain right now. The big debate is about Deflation vs. Inflation (or even hyperinflation) and as I have said before, I need more data and time before I can weigh in on that one definitively. Right now I am thinking that Gold and Silver will continue a strong run until the FED rate is at 1% this summer (July-August) and it is FINALLY apparent to even the permabulls that serious problems are here to stay. At that point things could get dicey. Weigh in in the comments section with your ideas, I know many readers here follow gold and silver.

Glad to be back!

Have a good night.

Winter Wonderland

I know my grand return was scheduled for this evening, but I just spent 2.5 hours in a car driving through a stupid snow storm that was not supposed to start until late tonight. I love the winter so very much! Weathermen are even better. Name another profession where you can be wrong over 70% of the time and still keep your job. I know, the head of the NAR is another one where that criteria applies!

Hopefully I will have a post up tomorrow. I want to get back to my old routine. I really do not like moving.

Have a good night.

Back Online

I have returned from the netherworld of no Internet access. I have my system set up and functioning now. I am a bit short on time tonight, but full length blogging will resume tomorrow! I know, you all can hardly wait! I have a new poll question up that relates to my absence.

I have a tech question that maybe someone that reads here can help me with. I had to install a wireless connection to network two computers at the house. The connection signal is always shown as "very low" as far as signal strength. My question is, is there a way to boost the signal from the modem? The bad thing is the mdem sending the signal is upstairs and diagonal from where my computer is, so there is a distance issue. Is there a product I can buy to relay the signal or increase the power? Any help is appreciated.

Until tomorrow, have a good night.

Checking In

Hello all!

The move went very well. We basically threw out everything anyway, so there was not much to move. Easier to buy new furniture and the like. The internet issue will be resolved on Monday February 25th as I have to have a couple of high speed lines installed and that was the first appointment available.

Lots of financial information out there, so use the must read blogroll and I hope to be back at it full time next week. Until then, take care all!

Have a good few nights!

Pent Up Home Loan Demand - It Is Out There

Here we are, my last post for possibly a week or more. It is amazing how much I look forward to writing about the topics that interest me. I especially like all the great feedback I get from both the regular readers (AnonG, Kevin, Jay, Watchtower) as well as the random folks that stop by. As of writing this blog has had 9,600 visits, and 14,500 page views since its inception in September 2007. Countries from all over the world have seen this blog including Singapore, China, Germany, India, Australia, Iceland, and many others. I find it very rewarding indeed to be an outlet that is somewhat useful (I hope) in the current economic debate.

While I may not be able to post, I will be monitoring the comments sections. I would like to ask all the readers here what kind of content improvements they may like to see when blogging resumes. Any and all ideas are welcome. Naked lady pictures are not an option, this is a family blog!

Warren Buffet Basically Says Past 4 Years of Loans Were "Dumb"
I am not one of those people that thinks Warren Buffet walks on water and that everything he does must be correct. I do offer that the man has been wildly successful in all kinds of markets, and further he has never had to go out with hat in hand beggin for handouts like the banks are right now. That said, he really hit the ball out of the park with his comments made in a NY times article:
Buffett Sees ‘Poetic Justice’ in Banks’ Woes
"Mr. Buffett, the head of Berkshire Hathaway and one of the world’s wealthiest people, appeared to see irony in the fallout hitting many of the banks who marketed complex investments that have now crashed.
“It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end,” Mr. Buffett said during a question and answer session at a business event in Toronto.
Mr. Buffett also played down worries about a credit crunch by saying that recent interest rate cuts mean low-cost funds are readily available.
Instead, he said, the turmoil that has rocked the nation’s economy in recent months has imbued the markets with a healthy degree of caution, while the rate-cutting response from central bankers has ensured that cheap money remains available for borrowing.
“I wouldn’t quite call it a credit crunch. Funds are available,” Mr. Buffett said. “Money is available, and it’s really quite cheap because of the lowering of rates that has taken place.”
He added: “What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.”
Exactly! There are no "liquidity issues" in the market right now. There is a problem with getting credit extended into absurd ventures. The merger mania packed with super premiums all paid for with debt is having a problem. Obviously home loans for unemployed illegal immigrants for million dollar homes on the coasts is having an issue right now. Insurers with over 300 billion dollars in liabilities that have about 20 billion dollars in real cash are facing a headwind. But real borrowers across the entire spectrum should have little problem with liquidity access. I think the moniker "DUMB MONEY" may become the catch phrase for the credit mania of the past 5 years when we look back at this time.

Pent Up Home Loan Demand - It Is Out There
You could almost hear the wild screams of joy and the high fives all around from the real estate complex today now that the GSE's (FNM, FRE) will be allowed to fund mortgages into the $750k range. The so called "Jumbo Market" will now be invaded by the government backed entities. Forget for a moment how bad an idea this is. Instead I want to focus on the "dumb money" theory as it relates to this arena.

The problem facing the housing market right now is that under any reasonable lending criteria, almost nobody can qualify for a home loan due to prices that are ridiculous. It is that simple. Indeed there is a severe "credit crunch" in play for the no document, stated income, overleveraged prospective buyer. The NAR would have you believe that the GSE's will magically fund all these mortgages in California and other high priced areas with the same kind of lax procedures that the private banks used to cause the boom. It is not going to happen.

When I hear about the "pent up" demand for housing, I believe that there is indeed such a thing. The problem is that the kind of demand that is out there is not the kind of demand you want to lend to. I will showcase some easily funded loans of the past few years that are now dead on arrival at any lending institution still with open doors:

• John the Speculator - Armed with a real estate success book and no cash, John purchases multiple homes in hot markets and flips them inside of 3 months. He has no problems getting loans for all these "primary residences" in Las Vegas and Phoenix, even though his listed address is South Dakota. John has now seen the tide turn, and is unable to sell his homes. He cannot carry the costs and needs both serial refinances for cash and more suckers to unload his inventory on. John has A TON of DEMAND for home loan cash, but he is now SOL.
• Joan the Part Time Postal Worker - Joan is a bit older, in her 40's and only works part time at the post office, grossing a whopping $25,000 a year. Sick and tired of seeing her friends make a killing on home sales, she decides she wants in. Her coworker just last year that makes the same amount of money was able to buy a $500k home for no money down, no income verification, and no questions asked for his Option Arm. And he was only paying the minimum $400 a month for the home. What a deal! Joan applies and is very angry that she was denied a loan. She goes out on the internet and applies at over 15 loan centers for her mortgage, but is denied everywhere. Joan REALLY WANTS to make this idea fly, she has pent up demand as well. Too late to the party, she will now be saved the disaster of making her big investment move.

That is two examples of what has been going on. Unless the government can mandate a return to silly lending standards (and I am sure Dodd, Schumer, and Frank have ideas to that end) the mortgage meltdown will go on for a while. The problem is not a credit crunch per say, the problem is that there is a severe shortage of quality buyers that want to play. Lop off another 30% from the prices of homes right now, and even yours truly may be interested in playing.

All right! It is indeed Friday and I have a special themed rock blogging session.

In an attempt to make sure I am not forgotten, I will choose songs with that sentiment as the theme of the song.

Simple Minds with the perfectly titled "Dont You Forget About Me":

Hairband Poison with "I Won't Forget You":

While I am not leaving on a plane, here is John Denver with "Leaving on A Jet Plane":

In case any readers here are struck by severe depression while I am away, take solace in Jewel's extremely sad song "Foolish Games". Jewel is excellent.

Have a good night and a good week!

Time to Spit, or get Off the Pot

Tonight may be the last full post for some time frame. As previously mentioned, my move date is Saturday! I am pretty excited about leaving the old apartment. I will have at least a short post up tomorrow, but then I may be away for a bit. Too bad, as things are really coming fast and furious. Thanks to all that stop by regularly. Feel free to check out the fairly large amount of content that I have put down since I started writing.

"Economic Stimulus Plan" or "Economic Rescue Plan"?
So it seems the Senate finally came to terms on a bill for some free money. The republicans which warned the democrats not to try and exceed the hefty $140 Billion Dollar price tag laid out by the house quickly compromised on a new $161 Billion Dollar plan which really shows what a fiscal conservative ought to look like! Too funny. The Yahoo Finance wrap up story had a great slip of the pen in the beginning paragraph as well:
AP
Senate Passes Stimulus Plan
Thursday February 7, 5:25 pm ET By Andrew Taylor and Julie Hirschfeld Davis, Associated Press Writers
Senate Approves Economic Aid Plan With Rebates for Older People, Disabled Veterans
WASHINGTON (AP) -- The Senate passed an economic rescue plan Thursday that would speed $600 to $1,200 in rebates to most taxpayers and $300 checks to low-income people, including disabled veterans and the elderly.
The Senate plan would rush rebates -- $600 for individuals, $1,200 for couples -- to most taxpayers and cut business taxes in hopes of reviving the economy. Individuals making up to $75,000 a year and couples earning up to $150,000 would get rebates.
People who paid no income taxes but earned at least $3,000 -- including through Social Security or veterans' disability benefits -- would get a $300 rebate.
Democrats decided on Thursday against insisting on their package. Instead, they agreed to speed the bipartisan measure, costing about $167 billion, to Bush.
"It's our responsibility to pass the strongest bill that we can, and so I think it's tremendous what we'll be able to accomplish," said Majority Leader Harry Reid, D-Nev. "We had to finish this quickly."
So the free cash will be in the mail soon. Check out the sweet deal for the folks making $3000, a $300 dollar check, 10% of their earnings, even though they paid no taxes. It seems living in the USA pays a 10% dividend this year! Not too bad.

I love Mr. Reid's comment "I think it's tremendous what we'll be able to accomplish". The congress gave out money! What an amazing thing to be able to do. Next up for this truly special collection of Senator's will be learning to wipe their own bums! That might take a while though, so do not expect miracles.

The blatant disregard for the US currency and the fiscal health of the country on display by this give away is sick. The problem is that the foreign buyers of our debt do not seem to care one iota. If there will not be any consequence for this kind of thing, why not send out $10,000? Why not $100,000? This ties into the main theme of the night below.

Time to Spit, or get Off the Pot
On Calculated Risk there was an opinion piece from the New York Times referenced that really got me feeling like we may finally be coming to a head with all this debt stuff. You can read the profound piece of craven puke here:
http://www.nytimes.com/2008/02/06/opinion/06milstein.html?_r=2&scp=7&sq=february+06+2008&st=nyt&oref=slogin&oref=slogin

I will use some snippets with commentary to highlight the key notes:
Give the Banks Some Credit
By HOWARD P. MILSTEIN
Published: February 6, 2008
"The losses that have been incurred as a result of the excesses in subprime mortgage lending will take years to work their way through the worldwide financial system, as dozens of banks act to replenish their lost capital by issuing more common stock in the public markets and trading other equity securities to sovereign wealth funds. Until the banks rebuild their capital, they will not have the wherewithal to lend money and support economic growth. If banks of all sizes could regain their capital immediately and easily, it would be a tremendous benefit to the American economy."
The title of the piece already implied trouble. Mr. Milstein starts off with the one of the most silly ideas out there, the mortgage problem is contained to subprime lending. But I would let that slide by itself. At the end of this paragraph we get his unifying theorem on fixing the situation, and it is straight out of fantasy land: If the banks that lent out all this money that can never, ever be paid back just GET ALL OF IT BACK IMMEDIATELY, there will be no more problems. NO CHIT! What a genius. This guy makes a MENSA card member look like some kind of circus clown. Mr. Milstein should be drafted by NASA to work out the long term colonization of Mars with his IQ. Lets try to move on:

"The federal government could make this happen by entering into an arrangement with American banks that hold subprime mortgages, in which homeowners typically pay a low interest rate for two or three years then face much higher payments. Here’s how it would work: The government would guarantee the principal of the mortgages for 15 years. And in exchange the banks would agree to leave their “teaser” interest rates on those loans in effect for the entire 15 years.
This would instantly give the lending banks new capital. As these mortgages would be guaranteed by the Treasury, they would suddenly be assessed, on bank balance sheets, at their original value — and a significant amount of the banks’ lost capital would be restored. Plus, the banks would receive, from most of the homeowners with subprime mortgages, up to 15 years of teaser-rate payments.
By solving the bank capital crisis immediately, this strategy would ensure that fewer families would lose their homes, that fewer neighborhoods would deteriorate because of abandoned housing and that, as a consequence, there would be less downward pressure on local real estate prices and property tax revenues."
It's so easy! All we need is the US government to gurantee home prices and loan repayments for 15 years. That would free up all kinds of capital for the banks. Wonderful, just brilliant. Leave aside for a moment why in the world anyone would ever take out a mortgae that wasn't a pegged teaser rate sort while everyone else had one. Focus instead on the easily floated, and accepted by Mr. Milstein at least, idea that the US Treasury could buy all this stuff. Also consider the hazards facing the banks when the corrupt government that we have gets its hands on basically ALL OF THE PRIVATE BANK CAPITAL. Milstein sums up:

"I propose this idea not because it would benefit our bank — we own none of this troubled debt and, in recent years, have had insignificant losses from real estate lending — but only out of concern for the health of the global financial system. This plan is a way to use our nation’s strength, and not current tax dollars, to keep people in their homes and give banks the ability to resume lending. It requires only that we believe in the future of the American economy and the value of American homes 15 years from now. I do, and this is a belief our government should share.
Howard P. Milstein is the chairman and chief executive of New York Private Bank and Trust, which owns a significant share of stock in The New York Times Company.

First off, if you have assets at New York Private Bank and Trust this fool has the great idea to give ALL OF YOUR MONEY to the government for safe keeping. Stop laughing. Of course his bank has ZERO exposure to any of this, so he is a concerened observer. We really get the idea I want to focus on with his line " to use our nation’s strength, and not current tax dollars". In this I think Mr. Milstein really has a grand idea.

For the US to operate, it must sell off monster amounts of debt around the world with the promise to pay it back. The Stimulus (rescue?) Plan and this kind of massive Treasury purchase of worthless assets is a blatant dare to play the "Too Big To Fail" card. In this, I believe we have reached a Spit or get Off the Pot Moment for two segments of people.

• Foreign Buyers of US Debt - Look guys, I know the USA has been great and all of that. I know you think over time you are going to see some of your money back. But just for a moment take a look at the numbers. Can't get a handle around them? How much is this mortgage fiasco going to cost? If the US is going to bailout the banks over this, you know they are going to try something else, maybe even bigger! Where do you draw the line at too much debt? $ 5 quadrillion dollars? More? Less? I recommend you start to figure on a number because all these types of bailout plans will not be one time deals. Spit or get off the pot foreign debt buyers; either you want to at least act like there is a reality or not. Your choice.
• US Taxpayer - I know, you are tired of hearing that you get it in the neck. This time you need to pay attention. A plan like this takes your money away and entrusts it to the US Treasury to manage. It rewards the same fools that got rich loaning out money that was never coming back and fools that gamed the system to buy things they could never afford. It is Spit or get off the pot time; either throw out of office ANY OFFICIAL (republican, democrat, independant, your cousin) that supports this action or get comfortable with a society run by the government on all levels of your life. Decide.

I wanted to present this in a better way, but I am about out of time. If you are enraged and angry about this kind of junk idea, link my post around the web. Try to get people talking. I think the real inflection point is coming, and it may get decided without as much as 20% of the public even aware that it happened.

Have a good night.

Federal Reserve Concerned About Inflation; No Seriously!

Total crap day today. Solid rain, cold rain, from morning until night. It really sucks when it is dark when you get up, dark all day, and dark when you get home. Some snow tonight as well! Tons of fun.

Cisco Earnings - Deja Vu All Over Again?
After the bell Cisco Systems (CSCO) reported earnings. As I have said before, with all the financial trickery involved in a company earnings statement, I usually will pay zero attention to them. What makes this event of interest is a certain feeling of Deja Vu I have felt since the report and conference call came out.

CSCO reported earnings in line with estimates. So far so good. It was the forecast looking forward given by CEO John Chambers that gave the market pause, as he estimated sales growth for fiscal 3rd quarter at 10% instead of 15%. Now I do not know enough about the business that CSCO is in to make any commentary about what this may or may not mean for the broader economy. I bring this up because I was very attentive to the events of the Dot Com implosion of the year 2000. I have said here before that the moment of loss of all momentum happened in 2000 when CSCO CEO Chambers came out after a good report and gave a lowered expectation of growth going forward. Not negative growth. Not even monster contraction. Just a hint that things would be a bit lower than previously thought.

After his comments, the relentless selling that took over 2 years to finally subside occurred. You know the history. I had a profound feeling of dread when I heard and read the news about this. While certainly the problems facing the US economy are far different from the 2000 bust, it still seemed a little creepy to see the same scenario occur again. Again, this may be nothing, but I like to share my experiences.

Federal Reserve Concerned About Inflation; No Seriously!
Today the market had a reaonable day percolating until about 1:30pm when the following headlines started hitting the wires, from Yahoo Finance:
AP
Stocks Extend Tuesday's Drop
Wednesday February 6, 5:29 pm ET By Madlen Read, AP Business Writer
Wall Street Gives Up Early Gains After Fed Official Says Inflation Remains a Worry
NEW YORK (AP) -- Wall Street pulled back for the third straight day Wednesday as investors still uneasy about the economy sold off after a Federal Reserve official suggested rising inflation could prevent the central bank from making further interest rate cuts.
Although the economic slowdown is a big concern, "we must not lose sight of the other part of the Fed's dual mandate -- which is price stability," Federal Reserve Bank of Philadelphia President Charles Plosser said, according to Dow Jones Newswires. The economy has been weakening but costs remain high, leading some economists to believe that the United States is headed for a troubling predicament known as stagflation.
Plosser's comments were not surprising, particularly since he is known for being more apt to argue against a rate cut than other Fed members. Nonetheless, the speech -- along with a dismal sales report from Macy's -- cut short a rebound from Tuesday's plunge that gave the Dow Jones industrials their biggest percentage drop since Feb. 27,2007.
This kind of a speech would be funny if it was not so terribly sad. What could possibly be the motivation for Mr. Plosser to make such a retarded comment?
In light of the easy money era we are still in, here are some of the things that the FED has turned a blind eye to on the inflation front:

• Oil and gasoline at record highs
• Food costs now becoming stupid
• Dollar devaluation to all time lows
• Commodities and materials sky high in costs
• Health care still rising in cost at double digit rates

There is more, but I digress. This FED head is surely joking if he expects to be taken at all seriously here. The FED is concerened with price stability allright, namely stocks and home prices staying right where they are without futher deterioration!

I really cannot come up with a plausible explaination for why Mr. Plosser made the comments he did. The markets sure bought it though, with a quick reversal to the downside. Are any market participants really, I mean really, thinking the FED is not on a one way ride to 0-1% FED rates? If they are thinking that, they are truly beyond any help.

The only thing I can think of is Plosser makes this speech, the dollar gets a little lift, and then when the FED cuts well before the March meeting by 50-75bps they have a cushion for the dollar to fall again. That is really all I can come up with. If you have an idea, leave it in the comments section!

Great Observation

There is a piece in the London Telegraph newspaper online making the rounds, and it is a nasty good read. Entire article here: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/06/ccjeff106.xml

My favorite snippet;

"Gordon Brown keeps telling us that, under his stewardship, this country has enjoyed its longest-ever period of economic growth. Were a business to make a similar boast, you might expect it to have cash in the bank."

And there you go. The entire problem facing the US and UK economies right now. Consumer spending is great if it is done with disposable and increasing incomes. It is not good at all if it comes from ransacking home equity, new lines of credit, and ever escalating debt burdens. If things have been so wonderful, how come everyone is broke? Excellent question. As a homework assignment across the nation tomorrow everyone should spend a minimum of 5 minutes considering that very question. Put another way consider this:

If you and your significant other both work full time jobs, how much cold hard cash can you put your hands on in 2 hours notice? Not HELOC's, not credit card cashouts, not 401k cash outs, not anything to come from a home equity extraction? If the number is less than $10,000 you have a major problem. It's that simple. I know many people with a newer home, 2 new cars, plasma TV's, all the extras that if ONE of the couple misses ONE paycheck the entire game is over. I am sure you know the type as well. That is not getting ahead. That is not the American dream. That my friends is a prison. And it is not worth it.

Have a good night.

Look at the Mess We Made!; Now Clean It Up or The Smell Will Kill Us All

Ice storm was in full effect for the morning drive into work. My Infiniti G35x has automatic 4 wheel drive when road conditions are poor, and that system was working it this morning! Always fun. Now it is going to be icy rain for the next 24 hours and then turn to snow. It fits perfectly with the dour, and dark mood following the Superbowl. At least the Daytona 500 is about 12 days away! Oh well, just a month and things should turn up from here weather wise.

ISM Index Sinks Stocks
By now you have read that the ISM index printed a nasty number this morning. What was not reported on too much was the fact that the report came out a full hour early due to a possible "breach of information". What the heck does that mean? Did Ben BernanSpan try and get an early peek at the data? Has some major hedge fund been able to hack the database that collects this information to use as a trading edge? I do not know, but if I was invloved with this system at all I would sure as hell try to figure out what went wrong. My new poll question asks who may be responsible for the "breach of information" debacle.

Back to the report, from Yahoo Finance:
AP
Stocks Plunge on Service Sector Weakness
Tuesday February 5, 5:36 pm ET By Madlen Read, AP Business Writer
Stocks Tumble As Weak Service-Sector Report Stirs Concerns About Economy's Health
NEW YORK (AP) -- Wall Street plunged Tuesday, driving the Dow Jones industrials down 370 points after investors saw an unexpected contraction in the service sector as evidence the economy is sinking into recession. It was the Dow's biggest percentage drop in almost a year.
The volatility that pummeled stocks in January returned with the news that the service sector shrank last month for the first time since March 2003. The report from the Institute for Supply Management wiped out the nascent optimism about the economy that had sent stocks surging higher last week.
"The report drives a nail into the coffin from investors' minds that we're in a recession," said Todd Salamone, director of trading at Schaeffer's Investment Research. "That doesn't mean stock prices in the months ahead will be lower. But when you see headline numbers like this, there tends to be a reactionary sell."
The ISM said its index of service sector activity, which accounts for about two-thirds of the economy, dropped below 50, a level that indicates contraction. The market had expected another month of growth, and the disappointment contributed to Tuesday's $500 billion loss in the Dow Jones Wilshire 5000 Composite Index, an index that measures the movement in 5,000 U.S. stocks.
According to JPMorgan equities analyst Thomas J. Lee, the three worst readings on record in the ISM's service sector index are associated with stocks rising in the ensuing three months -- on average, by 6 percent.
I was a bit taken aback by the market reaction to this data point. The ISM is a pretty choppy number, and the article itself says there was a contraction number printed in 2003 which did not mean a recession. Perhaps it is because the bullish sort have steadfastly denied that anything from the housing and banking issues would spread to the "real economy" they were a bit upset with the number.

You have to love the people Yahoo talks to though. If the lower than expected ISM really means there is going to be (or is right now) a recession, you MUST be in stocks ahead of the recovery! It is always the right time to buy stocks (and houses right?) so rush out today and get great companies at a huge discount! The desperation from the stock folks is becoming more evident.

My take; I will need to see another months ISM come in below 50, maybe even 45 to believe this is a trend and not just noise. Again, financial moves are slow and ponderous. Do not be surprised to see lots of talk about another emergency FED (only 300bps left!) rate cut based on this number start in earnest tomorrow, with a rally right behind it. Too boring I know.


Look at the Mess We Made!; Now Clean It Up or The Smell Will Kill Us All
I love the online financial world. So many opinions and so many different views on things. I came across an article written by Wall Street Examiner today that was really good. I recommend reading the whole piece here: http://wallstreetexaminer.com/blogs/cutting/?p=148
The Examiner takes a recent Bloomberg article which covered the G7 meeting in Tokyo, and it is chock full of juicy tidbits on what the big central bankers are planning for the future. In light of the housing bubble crashing, massive bank losses, and problems with monoline insurance here is a short list of some ideas the geniuses have put together:

• Offering government-backed loans to U.S. homeowners with adjustable-rate mortgages, whether prime or subprime (I thought it was contained to subprime?)
• Advocates a tax credit for people who buy homes this year that would triple the current benefits mortgage holders receive. (Priming the pump?)
• Stephen King, chief economist at HSBC Holdings Plc in London and a former U.K. Treasury adviser, says the crisis may get so severe that governments will be forced to bail out homeowners who fall behind on loan payments and to buy up worthless assets that are hurting banks. (Its soooo simple don't you see?)
• Bernard Connolly, global strategist at American International Group’s Banque AIG unit in London, even predicts authorities will eventually have to buy up stocks to prevent a crash. (Again, soooo simple!)

So there you have it. Homes are so overpriced that nobody can buy them. Solution? Put everyone into a 50 or 60 year loan they can afford and let them be debt slaves. Still not good enough? People will walk away anyway? No promlemo! The governments and central banks can simply BUY all the distressed property held by the banks and presto! No problems. Stock market getting ugly? Step right up and have the central banks BUY stocks to stop a crash! Where were these guys during the Depression? F#ing brilliant!

Sorry for the vicious sarcasm, but this stuff is really over the edge. And annoying. And silly. And everything I have come to expect by people in high positions.

I can sum up the game being played right now with a simple analogy. Here goes:

The banks and lending institutions were force fed a huge diet of fat and lard (read as easy money via 1% interest rates) by the FED. They happily gobbled it all up, and went back for second and third helpings. They even invented new and creative ways to prepare the fatty foods to consume even more. They pretended that they could do this forever without any problems.

Eventually the intake was too great and the system had to be relieved (read as housing prices finally exhausted themselves)and relieved quickly. The banks then proceeded to take a huge dump right in the middle of the living room on the brand new carpet. The explosive diarhea was so voluminous that all the rooms of the home (read as the economy) are in danger of being stunk up by the mess.

Now the big banks and the central banks want to force the citezenry to clean up the mess under the guise that if the mess is left out, the smell will kill us all! First they soil the carpet, and now they want someone else to clean up the mess just like tha little babies that they are. No admision of guilt. No responsibility taken for the accident. Just great banks that are in trouble and need to be bailed out at any and all costs.

Sorry banks. If I had my way I would rub your noses in it just like an animal to teach it not to do these kind of things. Alas, I will not have my way. There is going to be major bailouts of all shapes and sizes coming down the line over the next year. They will all have a common vein that misses the core issue: Home prices and yes even stock prices are wildly overpriced (even now). By backstopping any asset class loss the government is setting a precedent which will be repeated time and time again. If there is no downside, only a fool will not join in! Can any of these ridiculous ideas ever get off the ground? I dunno, but they will try!

Monoline Insurance Downgrade - More Bluster Without Action

Calculated Risk (you do stop there evry day right?) has a snippet up tonight about Fitch allegedly threatening to cut the insurers ratings regardless of capital position:

http://calculatedrisk.blogspot.com/2008/02/fitch-may-cut-monoline-insurers-ratings.html

I say a big "Yeah Right" to that one. Why change anything now? The lunacy of retaining the AAA rating has been thoroughly exposed, so why Fitch deems it necessary to even make such a statement is lost to me.

Again, bear with me as the Blogger spell checker has ceased to function. Hopefully they will resolve the issue soon.

Have a good night.

Debating the Ethics of Foreclosure

I spent all weekend packing and moving stuff. There is not much left in the apartment as of now, it is very empty. One week to go until the big move. Hopefully blogging will not be interrupted for too long!

Observations from the Superbowl:
A tip of the hat to the New York Giants. They never quit and the pressure they were able to generate was stifling. Great job and a hard fought win.
As for the Patriots, the game was a debacle from start to finish. I figured after a terrible first half, they would make the simple adjustment of using the 5 wide receiver set that they have USED ALL SEASON and spread out the Giants to lessen the pass rush. Instead the Pats stayed in a basic set and were unable to do anything at all offensively. The offensive coordinator should be fired. The magic that the Patriots have enjoyed is now gone, and I fully expect this loss to finish the superbowl runs that they have had. Very disapointing.

Anecdotal Observations
Over the weekend and today I had the opportunity to observe some housing related companies up close. General observations are always subject to many variables, but I offer what I saw for what it is worth:
Home Depot - We bought a new fridge to replace the 1970's appliance at the house we are moving into. The Home Depot store was absolutely empty. I have been in this particular store many times and it is always packed. The sales associate was very nice and knowledgeable, and after some prodding said that yes, things have been very slow for about 6 months.
U-Haul - I scheduled a moving truck rental for this Saturday using the online feature that U-Haul offers. About 30 seconds after I submitted the request, I had a phone call from the U-Haul location I am renting from to confirm my order and try to sell me boxes and packing materials. 30 seconds? Either they are on top of things or they were not very busy at all.

Taken together these two events may or may not mean anything. I imagine them to be signs of a slowdown that has been going on for a little while now.

Debating the Ethics of Foreclosure
Readers of this blog are well aware of the record (and still climbing) foreclosure numbers that have become a real issue. In both the mainstream media and the financial blogosphere I have begun to notice a debate brewing about the ethics of foreclosure. As the housing mess continues to worsen I think this debate will escalate.

It has been reported that major banks and lending institutions are perplexed by the new paradigm of mortgage default. In the past people would pay their mortgage first, and let things like car loans and credit card bills go unpaid. The problem now is that people upside down on a mega mortgage, faced with even more price declines, is opting to just pack it in and leave the home to foreclosure. I think the banks need to come to terms with this reality. The type of borrower that is going to default is far more prevalent than the powers that be think. Mortgages were viewed as a tool to get in on the home price gravy train. Now that the ride is over, there may simply be no incentive for paying a mortgage when there is no upside for the borrower.

As with all speculative booms, the promise of higher prices is what drives the mania. When the promise is no longer real, there is an abrupt end to the boom. Congress can pass whatever bills they want to try and save "homeowners" but the underlying issue of what motivated the buyer in the first place cannot be fixed.

Have a good night.

Friday Odds and Ends

Crazy weather today! Large ice pellets were falling and I could catch them in my hand. Not quite hail, but strings of small ice crystals clumped together. Something new always comes around. Next week is still predicted to be fairly nice, so I am hopeful. It is also Superbowl weekend! Game time is almost upon us!

Personel Notes
First off, the spell checker function is not working on blogger for some reason, so bear with me!

For obvious reasons I try to keep my personal affairs out of the blog. I have to share the current situation as it will have an impact on my writing here. All this week the wife and I will be finishing packing for a move. We will be moving next weekend. What is our plan? Not too sure at this point. We are moving into the spacious home of my wife's mother for the time being. We may purchase her house in the coming months (complicated) or we may wait out the housing bust for a while, maybe 6 more months, before we buy a home. While I in no way think housing is even close to bottoming, life has the ability to force your hand.

This situation represents what is my major resentment for the housing bubble. For 4 years I have had to wait while the financial foolishness went from fever pitch to crash and burn. It is because of foolish people that had no business with access to capital that homes became a losing proposition. Add to that the silly lending criteria and leverage of the banks, and you get to a place where I had to wait to buy something. We are still waiting, but I simply do not have the upwards of 2 years to wait until this mess is resolved. Luckily, the bust seems to be moving very quick here in Massachusetts and we will be able to buy a home that should serve our needs for some time without breaking a sweat about the price.

What does this mean? Short term it may take a week or so to get additional broadband lines installed for my computer, so blogging will be light or nonexistent for a bit. I know somehow the readers will find the strength and courage to go on! Long term you can look forward to getting an up close and detailed look at what one market looks like as the wife and I trek out to lowball offer any home that fits our needs! That will be fun! I appreciate your understanding, and please do not forget this blog.

Friday Odds and Ends
Lots of info out there today, but I am somewhat pressed for time. Bullet points include:

• Microsoft paying up the wazoo for Yahoo: A 62% premium for Yahoo, which is an afterthought compared to Google? I dunno, but this seems a bit out of the realm of good ideas.
• BAC purchase of CFC facing Issues?: Lots of stuff coming out about a major shareholder of CFC wanting to see some action taken with respect to the BAC move to take over CFC. Back-door stock deals and price manipulation? Say it isnt so! I am sure the major fund does not want any real action taken, just a better payoff.
• Jobs Data Not so Hot: The final tally for 2007 was not as great as we were led to believe, well not the readers here anyway! Mish has great coverage of the funny numbers, so I refer to him.
• Simulacra and Simulations : Jean Baudrillard's work referenced yesterday is now on my coffee table and ready for reading. I think it will be an interesting endeavor!
• Stimulus Bill getting Ugly: As if the bill were not too big already, the democrats want to add on even more freebies. Why the republicans are all of a sudden opposed to more free money after the last 7 years escapes me, but some bickering may cause problems going forward for the free cash.

Thats a good list, I will try to get caught up tomorrow. Busy weekend planned!

Of course it is still friday night, and that means music! Rock blogging will now commence.

Journey with "Separate Ways". Steve Perry is a master vocalist:

I had this one on in one of my first few blogs, but I love Motorhead's "Ace of Spades". The BASS GUITAR riff at the start is nasty good:

Anthrax and Public Enemy collaborated on a song called "Bring the Noise" which is a weird tune but it is catchy:

before Ice-T was a TV regular, he was a rapper and he also had a heavy metal band. Body Count with "There Goes the Neighborhood ":

So it is not all heavy duty, here is some Queen with "Who Wants to Live Forever" from the Highlander films soundtrack:

Have a good night.