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Toyota, Honda US Slump Ends Gains Dating to Mid-90s - Bloomberg
Obama's plan holds promise for Michigan - Detroit Free Press
Gazprom Dispute Entangles Europe - New York Times
Bid to Revoke Madoff’s Bail Cites His Gifts - New York Times
Tech Stocks Seize Day Across Asia - Forbes
![Freakonomics[Revised and Expanded]](/images/21xRHBWYYML.jpg "Freakonomics[Revised and Expanded]")
“The money markets have completely broken down, with no trading taking place at all. There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.'’
-Christoph Rieger, a fixed- income strategist, Dresdner Kleinwort.
Courtesy: Bloomberg
Hasn’t our Government done enough to amplify the current credit crisis? I just read on Marketwatch.com that market increased the bets on a rate cut tomorrow when Federal Reserve board members meet. This will be the stupidest thing to do in this ever-sensitive market environment. I strongly believe that this is not a prudent way to resolve the current situation. Politicians and Govt officials alike are really good in putting band-aids (short term solutions) to issues. This is more than likely not going to work in the longer term. Japan was a case in point. In the midst of a post-real estate bubble burst in Japan in the mid 80s, Japan cut the rates aggressively which they thought at that time will pull the economy back from the doldrums. And we learned from the history that was a huge mistake. Japan has been in Deflationary mode in the last decade or so.
Interest-rate futures have jumped as the market showed signs it expects the Federal Reserve to reduce its benchmark rate at its meeting to 1.75% from 2%.
If we want a full recovery, Fed or Treasury should avoid intervening the markets on a daily basis. Let the market figure it out. It will take time but eventually things will return to norm. We have accumulated ton of toxic debts in the last few years. It can’t be cleared out over night. Fed’s actions will only guarantee to make the markets more volatile, reduces further confidence in managing this global crisis and in our free market capitalism.
Currently, Dow and S&P futures are indicating a much lower opening tomorrow. If Fed cuts the rates before the bell, buckle-up we are in for another wild ride.
Bloomberg.com (c) Futures Data
New York, Sunday 14, 2008
Lehman is once again in the spotlight. But something tells me that this maybe this the last time it will be on anyone’s radar. In the recent weeks, there has been a number of rumors, speculations and mis-statements that Lehman will be absorbed in parts or in whole by some major financial institution. Since the credit crunch began in 2007 fall, Lehman and other Financial majors have been actively pursuing for additional capital to survive the credit crisis. Since the fallout of Bear Sterns, Fed and Treasury have taken an active role in preventing major financial meltdowns. On the one hand Government involvement has stabilized the market in the short term, on the other hand it creates a longer term issue.Lehman has approached several Financial institutions (both Domestic and Foreign) in the recent weeks for cash infusion. But none of them showed any interest after reviewing Lehman’s balance sheet. Lehman is one of the worst exposed among the Investment banks to the whole real estate market. Lehman pre-announced its third-quarter earnings last Thursday. Despite Lehman’s promise to purge its balance sheet of more than $30bn in weak real estate assets, most analysts remained skeptical of its rescue plan.
Since its founding in 1850, Lehman has successfully survived many of the historic events such as Civil War, WW1, Depression Era, WW2. It has slowly and agressively expanded into other banking segments such as Fixed Income Sales, Trading and Research, Investment Banking, Private Investment Management, Asset Management and Private Equity.
While it has always been a consistent risk taker in the past, it has only been in the recent past that it took excessive risk without considering the consequences. Most employees at Lehman will agree that Dick Fuld was responsible for this whole mess. He refused to see the gravity of the problem and continue to stay in denial mode.
This weekend, many of the major financial insitutions are meeting with Fed and Treasury Dept to figure out a way to provide lifeline to Lehman. Recently Bank of America Corp and Britain’s Barclay’s Plc have been mentioned as possible suitors. Goldman Sachs Group Inc., which also was being talked about as a potential buyer, is not interested, according to an industry official who ask not to be named.
On Thursday, the cost of credit insurance for Lehman debt rose as high as 805 basis points - meaning investors would be willing to pay $805,000 a year to insure $10m of debt for five years - before easing later on.
Meanwhile mortgage related problems continue to haunt other major Investment Banks and Insurance majors such as American Insurance Group (AIG), Merrill Lynch and Washington Mutual. It seems like both Fed and Treasury Dept have too many fires to put off and they wish this was all just a pretty bad dream.
May the force be strong with Federal Reserve and Treasury Dept!
Presidential/VP candidates reaction to Freddie, Fannie bail-out
Biden: Protect taxpayers in mortgage rescue
Obama calls for changes in Mortgage Giants
This is a bail-out of creditors - China, Japan, Russia and PIMCO at the expense of Shareholders and U.S taxpayers
By now, most of you must have heard the breaking news in the Financial sector. 
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and CEO of Fannie Mae (FNM) and Freddie Mac (FRE) held some some high level meetings yesterday to discuss the U.S bailout of the two mortgage giants.
U.S government cannot let Fannie and Freddie fail because foreigners own $36 billion of that outstanding debt. If these mortgage giants fail and the foreigners start pulling the money out of the system, this house of cards will come crashing. So, the charade goes on. Freddie and Fannie are the most corrupted, mismanaged and badly run organization in the country (10 times worse than Enron).
After all, it is sad that taxpayers are the one who has to bite the bullet and pay for this expensive bill. But wait, Federal Reserve can just crank up the printing presses and roll out those juicy new dollar bills. Problem solved. That is until it finally implodes. At some point, those foreigners will be pulling out their money as they would not be that dumb to stick around till the very end. The way our govt run our system is beyond comprehension.
Bill Gross bond guru from Pimco holds a major chunk of these distressed debts. in his note to his clients he said “The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now, or it can be paid later. The tab will be less if paid up front, than if swept under a rug …”. Gross plea is heard well by Fed and Treasury. This is the same person who sold short on the very same asset securities last year and made money. Now he wants U.S govt to come bail him out? Interesting.
Strangely, ut Financial sector reacted positively after the market hours (except of course Freddie and Fannie stocks) in the hopes that this bailout will save rest of the Financial industry. Freddie and Fannie stockholders equity will be wiped out if this plan goes through tomorrow.
My bet is that Financial stocks will initial react positively and then will come crashing back to earth. This is a repeat of Bear Sterns saga which will only end ugly.
Sources:
http://www.fool.com/investing/dividends-income/2008/09/05/bill-gross-to-treasury-please-help.aspx
I predicted the possibility of this at the beginning of the year. U.S economy is highly leveraged and it has been for a while. With increasing inflationary pressures combined with Fed/Treasury reckless opening of the credit window to everyone and their mom will further fuel this credit mess. We are going towards a Stagflationary economic environment. This is nothing new to us. We were in this environment back in the mid 80s during Reagan administration. This means higher interest rates (10%+) and slower growth. For those of you who think this is not a possibility, please come back to earth and look around you.
I also suggest if you have bank accounts with a small local/regional bank with bad balance sheets, move your money out of immediately to a safer bank (with better financials). We are expecting at least 600 banks to go belly under within a year. FDIC (yes the insurance company) itself might collapse.
Some highlights from last week
1) One in every 464 U.S. households — 272,171 U.S. properties — received a foreclosure filing, got a default notice, was warned of a pending auction or were foreclosed on during the month of July.
2) Fannie Mae and Freddie Mac will go bankrupt and govt will have to bail out. These two are the worst run quasi govt organizations in the planet. I can’t even believe why the U.S govt is printing money to help these freaks from going under. We as tax payers are lending money to finance them to keep them afloat. But the repercussions are going to be immense. Fannie’s leverage ratio is 78:1.
3) U.S Government Credit Rating - will be downgraded from AAA to AA+ (first time in history i believe?)
4) Following IndyMac infamous collapse 2 weeks ago, FDIC expects 100s of banks to go belly under within the next year. Remember Savings and Loan crisis? FDIC itself might go out of business.
5) Inflation will skyrocket forcing Fed to raise rates. We are seeing 10% or over. Ofcourse being the election season, Fed will play nice to support politicians.
6) De-coupling - whatever happened to argument that the BRIC nations are decoupled from U.S economy? Not true. In this highly integrated world markets, everyone is in same hole.
India down - 25%
China down - whopping 54%
7) Wall Street Job losses increase to 100,000. Forget about the bonus for this year end.
8) Turn-around - when will the housing turn around? Not until 2010.
WASHINGTON (Reuters) - The U.S. Treasury Department and Federal Reserve on Sunday announced sweeping measures to lend money and buy stocks if necessary in embattled mortgage lenders Fannie Mae and Freddie Mac.
http://www.reuters.com/article/newsOne/idUSN1332789320080713
First Bear, next IndyMac and now Freddie and Fannie.
Watch USD imploding tomorrow. Short term botton is in. I expect market (especially Financials) to rally tomorrow mostly because of shorts covering.
Three points mentioned by Barry Ritholtz on BigPicture blog makes complete sense
1. Excess housing inventory is currently at or near historic levels.
2. The Housing Affordability Index is still very elevated. (The index measures median household income relative to the income needed to purchase a median-priced house). While it is off of its recent highs, it is still above its historic mean by significant amounts.
3. The House Price to Rental Ratio. As the chart shows, we are not remotely close to normalized levels yet.
U.S. home ownership rates from 1900 through the current year (Courtesy:WSJ)
You think U.S housing is overvalued. Look at the U.K housing price. It is set to collapse anytime. I like the relative comparison of U.S, U.K and Spain housing prices in this video.
Click on this link to watch the video from Financial Times.
Also, check out the blogs here
Alastair Stewart doesn’t mean to be alarming or anything. We guess. And the advice dispatched to clients of the Dresdner Kleinwort analyst on Friday is based entirely on anecdotal evidence. But Stewart is “seriously convinced that things are deteriorating faster than even we expected and that land values are in free fall.”
http://www.housepricecrash.co.uk/
http://ftalphaville.ft.com/blog/2008/04/04/12080/uk-housing-sell-everything/
I like this chart posted on Housepricecrash blog
WASHINGTON — Senate Democrats and Republicans reached a tentative deal Wednesday afternoon on a package of legislation to help homeowners facing foreclosure, the majority leader, Senator Harry Reid of Nevada, said.
Senate aides said the final deal would set the cap on mortgages insured by the Federal Housing Administration at $550,000 in the most expensive real estate markets. The economic stimulus package approved by Congress in February temporarily raised the limit to $729,750 in the most expensive markets, from $362,790. But lawmakers had been in stalemate over where to set the cap over the long term.
http://www.nytimes.com/2008/04/02/washington/02cnd-cong.html?ref=us
This is my own prediction. Manhattan Real estate market is going to flounder this year. Thanks to layoffs in the Financial sector, over-build up and extreme overvaluation of the condo market. When real wages and asset prices are not in sync, one or the other needs to catch-up with reality. In this case, real estate prices have to come in sync with the real wages/employment numbers.
March 31 (Bloomberg) — New York City’s residential real estate market is showing the first signs of fallout as U.S. banks and securities firms cut the most jobs in seven years.
Manhattan apartment sales fell in January and February from a year earlier and new properties came to the market at the fastest pace since at least 2000, according to data from New York-based real estate appraiser Miller Samuel Inc. Transactions slid 6.4 percent to 3,250, while the number of condominiums, co- operatives and townhouses for sale at the end of last month climbed to 6,225, 15 percent more than at the start of the year.
“It’s very much of a concern because while the share of jobs being lost is relatively small, the income effect is large,'’ said Marisa Di Natale, senior economist at Moody’s Economy.com, based in West Chester, Pennsylvania. “Wall Street bonuses and salaries in particular have been propping up the Manhattan real estate market.'’
http://www.bloomberg.com/apps/news?pid=20601103&sid=ahgWx1z6LFxE
This is bad for New York real estate market. This will bring a flood of new condos and co-ops into the inventory.
Check out this article posted on Bloomberg site -> Financial Layoff impact on NY Real Estate market
“This crisis is much worse than 2001 and we don’t know how long it’s going to last,'’ said Jo Bennett, a partner at executive search firm Battalia Winston International in New York. Job cuts “could be more than 100,000 in a few years.'’
Interesting chart. Looks like housing prices will have to trace back to its former base (120 points)
From Fortune magazine March edition
Key Points from Paul Krugman’s comments on the mortgage meltdown & Housing Crisis
I like this snapshot from Inside Mortgage Finance & WSJ
WASHINGTON, Mar 6th, 2008 — Defaults on home mortgages touched another all-time high at the end of the last year as foreclosures surged on adjustable-rate mortgages, an industry group reported on Thursday.
The latest data is expected to put further pressure on policy makers and the mortgage industry to move faster to contain losses and help more homeowners. In recent days, regulators and lawmakers have begun suggesting that the federal government might need to take a more interventionist role in the mortgage business.
