A Sacramento mortgage lender's vision

A global conference on the economic crisis started today in Washington. World leaders could agree on little except to continue efforts to "spend their way out of recession". Statistics published within the last 24 hours showed deterioration in economies around the world. The 15-nation euro area fell into its first recession in 15 years; retail sales in the U.S. fell by the most on record in October; and Chinese industrial production gained last month at the slowest pace in seven years.

Oil Slides to $56/barrel, devastating 3rd world countries such as Ecuador, who today announced they were considering defaulting on some of their Government debt.

Oil is off peak more than 50% from just 3 months ago. This can be attributed mainly to speculators, who buy and sell futures contracts promising to purchase set amounts of barrels sometime in the future. Since the economy is showing weakness, it's expected the demand will fall. Yet the ironic thing is its not the actual demand slowing that is causing this fall in oil price, it's speculators expecting the demand to slow and closing out their positions.  In this way, the price of oil usually has little relevance to it's actual value as a commodity.

In other headlines: October Retail sales and prices of goods imported to the U.S. dropped by the most on record. This triggered a run on retail based US companies such as Sears. Federal Reserve Chairman Ben S. Bernanke said central bankers worldwide are prepared to take additional actions as needed to unfreeze credit markets. There does seem to be minor improvements in the cash flow and liquidity of our private and government banks. In this bloc article I noted the disturbing spike in the LIBOR benchmark rate...the 1 month LIBOR has now fallen to 1.48% from 4.47% a month ago. This is great news...but the commercial paper market seems to be in seizure still, and the bond yield curves are still out of whack, and for good reason.

The good news is these factors are combining to make housing prices quite attractive to the people that can qualify.

The program applies to loans held by Fannie Mae/Freddie Mac only. Slated to go into effect December 15th, and administered by the Federal Housing Finance Agency, this is the latest life preserver being thrown at the mortgage titanic.  Public perception of this latest action is negative, with some voicing the opinion of "too little, too late".

Matter of fact the original Economic Stimulus package (which raised both FHA and conventional loan limits) that passed last year hardly went as intended. The idea was to get lenders to write loans in the higher amounts and free up the markets. What instead happened is lenders do write these larger loans but impose much higher credit score, down payment, and debt-to-income restrictions on them, with the result that they go to almost nobody that needed them. A similar story played out with the FHA Secure program, which offered help to people behind on their mortgage payments. But the caveat was, to be eligible, you could miss not more than 3 payments, they had to be consecutive, could not have missed any other credit payments, and you had to have a minimum credit score.  In other words it is extremely unlikely that anyone who actually needs it qualifies. 

Another brilliant execution is the Hope for Homeowners program, which to this date no lender will fund, meaning no broker or bank can offer it to the consumer. The few people getting help under the program are working directly with the servicers of their loans.  Meanwhile, unscrupulous, unregulated loan modification companies are charging exorbitant fees to desperate consumers.  The situation is bleak...experts agree a concerted, unanimous, effort needs to be made by the ENTIRE Government and ALL banks and servicers.

Compounding the problem is the actions of US Secretary of the Treasury Henry Paulson. Not only is the Troubled Asset Relief Program funds going places other than promised, but Paulson continues to refuse to disclose Treasury actions. This goes against his promise to do so and continues to spark outrage. Paulson said today that the second half of the 700 billion (slated to purchase mortgage backed securities) will now be instead sent to lenders in the credit card, auto and student loan industries.  An example would be the 25 Billion dollar rescue plan proposed by House Financial Services Committee Chairman Barney Frank today. Can this get anymore insane? Let's review:

1. The bailout plan gets passed under extreme pressure and emergency, just like the Patriot act and the Iraqi war.
2. Command of the funds is given to a 32 year veteran of Wall Street, who served as CEO of Goldman Sachs just a couple years ago, who has a net worth of $700,000,000.00.
3. Transparency, disclosure and oversight is promised to Congress. It is not delivered, just like the Iraqi war.
4. The application of the funds and authority is nothing like as promised, just as before.

What is wrong with this picture?

In an astounding move, the Federal Reserve today appointed American Express as its de facto bank holding company. This is strange because AMEX only operates a very small bank, American Express Centurion Bank, as well as a savings and loan, American Express Bank. Originally designed to assist banking institutions only, the Fed has been throwing it's borrowing windows open to a variety of industries; to date Securities, Brokerages, Insurance and now Credit Cards. It is open to speculation what the outcome of this might be.

This comes on the heels of public outrage at failure by the Fed to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.  A lawsuit filed by Bloomberg News last week speaks for the fact that Americans have no idea where their money is going or what securities the banks are pledging in return.

Other news that won't let you sleep at night: A very deep connection between Obama and Google has been revealed. From massive campaign contributions to Google CEO Eric Schmidt flanking President-elect Barrack Obama during his first post-election press conference, this is bad news indeed for what little competition Google does have(currently Google has 60-70% market share).

As it turns out, China is taking a beating along with everyone else. it seems an end to the phenomenal bull run the Chinese markets have been on has come, with their announcement of their own "Stimulus Package" last week. Interestingly enough a nation with huge trade imbalances in its favor and enormous export production needs a solid market to sell those goods to. This is bad for many reasons. First, Chinese buyers are the largest purchaser of US treasury bonds, a funding source we desperately need. Second, as the world's 4th largest economy, China is a huge market for commodities and our goods and Third, it underscores the point that we are now one global economy. There is no isolationism now, if one domino falls, we all fall.

General Motors is now openly seeking emergency Government assistance, saying "[it] may not have enough cash to keep operating this year and will fall ``significantly short'' of the amount needed by the end of June unless the auto market improves or it raises more capital".

Land America and Fidelity National title announced a merger today to the tune of 128 million. This deal would consolidate a combined market share of 46% of all nationwide transactions. The real estate industry greets this with a collective sigh...title and escrow orders on REO (bank owned) transactions have been slow, mistake prone and badly affected by poor customer service. One wonders if the inevitable layoffs resulting from this merger will help the situation.

Berkshire Hathaway, Warren Buffet's investment vehicle posted a 4th straight consecutive decline...this time a 77% decline in profits.  I mentioned earlier that Buffet has been running around making all sorts of investments...28 billion this year so far. If you consider his impressive track record this is no surprise at all...Buffet seems to thrive in down markets.Can we expect anything less from the guy who owned land when he was 11, made millionaire in his 20's and bought the Washington Post in his 30's, the paper he delivered as a child.

In other news, Barrack Obama showed some restraint by not jumping fully into the economy issue, and instead vowed to push an economic stimulus package through Congress  "immediately after'' taking office in January if lawmakers and the Bush administration can't agree on one before then. This comes on the dismal news that U.S. unemployment rate for October rose to the highest level since 1994 as companies slashed payrolls...to 6.5% from 6.1% (September). It seems that Obama has inherited quite the red headed stepchild. We need a FDR style leader to get us out of this jam- Obama has shown his charisma and political savvy, but can he lead? The jury is out....

According to this New York Times article, "In country after country, elation at Obama's victory was palpable, the hunger for a change of American leadership as strong outside the U.S. as in it. "

I for one was not aware of how closely the rest of the world was following this. World leaders everywhere lent their support. A German press article quoted someone as saying that [americans] "were electing a president, but also the new world leader". (Cannot find the source of this, sorry.) Perhaps America forgets sometimes what massive effect it has around the global. Certainly the subprime fallout has been a obvious example.

In California news, it looks like Proposition 7, a mandate to increase Alternative energy sources for utilities is passing, on the heels of the apparent defeat of Prop 11, which would provide funding for alternative fuels implementation and research. This is a mixed blessing for industries like Solar Power. Controversial Prop 8 is looking like it will pass, to the amazement of political analysts.

Enough Politics! U.S. Stocks Post Biggest Post-Election Drop on Economic Concern  as the bond market races to the bottom. As of the close in the Tbills markets, yields are down across the board. Why? "[...] concern the economy will worsen even as President-elect Barack Obama moves to spur growth". Yes, the economy continues to come up with dismal numbers...this week has seen worse than expected manufacturing index reports, redbook retail sales, factory orders and mortgage applications among other things. When the market comes to a consensus, it will usually react depending upon how far the reported information differs from the consensus...and lately things have been significantly off.

Some good news: It appears that the credit crunch, at least in larger banks, is easing. Short term rates plunge and big banks rely less on the Federal Reserve for commercial paper. This is good, because the Fed is intended to be a "lender of last resort". The fact that most of the commercial paper was coming from the Fed meant that the banking system was frozen, dang near completely locked up. Now that banks are starting to lend to each other again, we hope to see that trickle down into the much needed municipal and consumer arenas.

Unless of course the foreclosure boom continues to rear its ugly head. These dataquick numbers for Q3 indicate that the decrease in CA foreclosure filings was due to a foreclosure procedure change. Had this change not be implemented sooner(making it more difficult for lenders to file), foreclosure filings would have continued to increase at the rate they did in Q1 and Q2.

In closing, we offer this graph by Credit Suisse

Normally this blog is about money matters...today we're turning political again in honor of election week.

This excellent CNN article: How the economy stole the election is a time machine look back 2 years, when the housing market was hitting record highs and everything was moving smoothly. Trek forward to the here and now, and the number one issue cited by voters is the economy and what to do about it.

CNN politics reports that the race between Obama and McCain is close, but with a definitive edge to Obama. It is still up in the air who will win.

Bond Market

Treasuries gain on economy woes- manufacturing index falls...outlook gloomy. As indicated by the market, traders expect the efforts of the Treasury to mitigate the recession to fail.

I've often written about the treasury supply issue caused by the 700bn bailout, and how this is affecting the market for those bonds. This interesting analysis of a report by Barclay's Capital, finds that the declining issuance in the mortgage backed securities and municipal bonds (among others) should help offset the ballooning Tbills.  This is a textbook example of a self correcting economy shades of Adam Smith and his "invisible hand" theories.

As predicted by the Chicago Board of Trade fed funds futures, the Fed funds rate was cut to 1% this morning. The central bank's new loan programs have expanded assets on its balance sheet by 104 percent during the past year to $1.804 trillion, or 12.6 percent of GDP. Incedentally, the futures reflect a 100% chance of another qaurter point cut by December. Federal open market committe language in was very terse and vauge. In reality, the Fed may end up facing a Bank of Japan in the early 90's style deflationary scenario. In this time period BoJ cut rates to near zero during severe economic depression; and held them that way for quite some time. 

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"The Conference Board's confidence index tumbled to 38, lower than forecast and the worst reading since monthly records began in 1967, the New York-based research group said today." Full article here

The data is based on polls and surveys. Elsewhere, the US department of Labor reported that the economy as a whole has lost 760,000 jobs this year, continuing a streak for 9 consecutive months.

Overall the damage to the economy has been severe. In recent months, the liquidity crisis spread from mortgages into the car business, seeing auto loan giant HSBC exit the business and the Big Three auto manufacturers step up price breaks and incentives sharply as their stocks fell and vulture style merger and bailout rumors surfaced.  Reportedly, it takes a 700+ fico score to obtain an auto loan these days. An estimated 700 car dealerships will close this year if the reported trends continue.

Treasury bonds have been taking a heavy beating over the last week. Overnight mortgage rates spiked in response. This condition is being caused by the $700 billion bailout- I mean, did you think the money was going to magically appear? No, it's all financed on T-bills, and this massive borrowing is causing a large supply problem in the Govie bond market. As a side note, the money isn't really being used to buy bad securities (as originally sold), but instead is going as a cash infusion directly into banks. I don't normally go this direction, but you should watch this video of Ron Paul shooting massive holes into the Bailout. He called it the "Destruction of the Dollar" and a "contest between inflation and deflation". Think what you like about Ron Paul's domestic policy, but his stance on the economy is brilliant.

In other political news, the power issue between Obama and Mccain continues to be the economy. Obama continues to be perceived as stronger on this issue while Mccain continues to try and shake the "old boy, old money" image. For a little commentary try this ABC news article.

In a bit of a shocker, Alan Greenspan, the longtime Federal Reserve Chairman and predecessor of Ben Bernanke, opened his mouth yet again, to say that he was wrong. Interesting thing to note is that after he stepped down in January 2006, right when the subprime issue started to raise it's ugly head, he would periodically make public statements that would scare the living daylights out of the market; once the DIJA plunged several hundred points.  Under large amounts of pressure, he finally took a more private approach.

Anyway, today he said that ``Yes, I found a flaw,'' Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. ``That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.''

There are schools of thought that lay the blame for the cheap money causing irresponsible subprime lending directly at Greenspan's door, as a result of his financial policies from 1999-2006. Greenspan even released a report in 2004 as Fed Chairman, with such gems as "Indeed, the surge in mortgage refinancing likely improved rather than worsened the financial condition of the average homeowner." mixed in with the boilerplate. The document shows a remarkably detached analysis of the exponential growth of credit during the time period with almost no cautionary language. Course, hindsight is 20/20, and in all fairness he did manage our finances well for over 18 years at the Fed, but that was then, and this is now. 

Bernanke publicly advocated additional economic stimulus today in a message to the House Budget Committee. A plan is currently on the table for an additional 150 billion to shore up federal unemployment, among other things.  Like other programs of the kind, it is meeting opposition.

In other news, the futures are predicting a 100% chance of another rate cut at the fed's next meeting at the end of October.  This time however, other global banking centers are expected to cut as well.

A little bit of statistical analysis...

September 3rd, 1929: The dow reaches an all time high of 381.17.

July 8, 1932: In the depths of the Great Depression, it finishes its slide at 41.22, erasing 36 years of gains. This is a 9.247:1 reduction from the high close, or a 924% decline.

October 9, 2007: The dow reaches another all time high of 14,100. Today, October 20th, 2008: As of 155PM EST, the dow is at 9063.21. This is only a 55% reduction off peak.

However, the Dow took about 4 years to make that great slide. Let's look at September 15th, 1930, exactly 1 year and 12 days after the all time high in 1929, near exactly the amount of time we are now away from the 2007 peak. A reliable source gives the close price on that day at 236.62. Applied against the 1929 high, this figure is only a 61% decline off peak.

Throwing out for the moment the difference in time, culture, politics and inflation...these raw numbers show a correlation, of our present market decline, to the infamous stock market crash which preceded the Great Depression.

***A few qaulifications: 1. I do not have a degree in economics. 2. The above idea is based purely on simple math of market close ratios, and discards all other factors. 3. Speaking of other factors, that would include information, credit, law etc. 4. it is intended to be only a starting point, for observation on the energy and momentum of human psychology in market operations; which is timeless in my opinion, and a very important factor in economic analysis.***