The Beneficiaries of the Downturn

There’s money to be made from poverty. That may sound uncharitable, especially at this time of year. But the fact is, when people lose their jobs, buy cheaper goods and default on their loans, someone has to do the dirty work — and those companies can get well paid for doing it.

So we at breakingviews.com developed the Poor Getting Poorer Index — a basket of 22 equal-weighted stocks that includes the retailers, white-label manufacturers, repossession agencies, dollar stores, pawnshops and other public companies poised to capitalize on rising poverty. This year the index would have generated a positive return of about 9 percent, easily outperforming the 40 percent decline of the Standard & Poor’s 500-stock index.

In 2005, Citigroup equity strategists coined the term “plutonomy” to describe economies powered by a relatively small number of rich people. They also devised their own basket of luxury stocks like Bulgari, Porsche and Sotheby’s. Now, with unemployment rising and wages weakening, the downward pressure on the American consumer seems a better bet than the ascent of the gilded class.

So where is gold to be dug from the widening mire? Let’s start with retailers. After all, notwithstanding the economic situation, shopping is an American pastime. Yet splurges at the fancier department stores that anchor malls are being replaced by carefully choreographed outings to discounters.

Among them, Dollar Tree and Family Dollar place great emphasis on how far a single greenback can go. Though Dollar Tree has already had a 60 percent gain in its shares, the stock trades at a relative low that is 15 times its 2010 fiscal year earnings estimates. Family Dollar fetches just 14 times next year’s earnings.

Not all discounters have performed as well, however. Big Lots, which sells leftover inventory at cut-rate prices, is down 8 percent this year and recently reduced its earnings guidance. But trading at around eight times earnings, it’s advertised as a bargain.

Similarly, shares of BJ’s Wholesale Club have been flat this year, but its focus on those farther down the socioeconomic chain could give it an edge over rivals.

Of course, in retail it would be foolish to ignore Wal-Mart, whose motto is, after all, “Save Money. Live Better.” The retailer’s market share gives it an unrivaled heft in cutting back suppliers’ prices. H. Lee Scott Jr., the departing Wal-Mart chief executive, recently said that demand for food storage items and frozen goods was rising, a sign that Americans are choosing to stay home rather than eat out.

That trend may benefit fast-food restaurants like Burger King, Jack in the Box and McDonald’s. Similarly, generic brands made by Ralcorp and Campbell’s canned soups are more likely to crop up on thriftier shopping lists.

Of course, even in a bad economy, people need to have fun. Expensive movie tickets can be replaced with a $14 monthly Netflix subscription that provides two CDs at a time with no monthly limit. And though leisure travel will take a hit, discount carriers like JetBlue will attract those willing to take 3 a.m. flights from obscure airports.

For the unemployed, retraining will be the buzzword of 2009. And there’s a good chance that federal money will be channeled their way. That could help publicly traded online educators like Apollo Group, Strayer Education and DeVry. As a result of high projected growth rates, all three have price-to-earnings ratios above 20 times consensus forecasts, representing hefty premiums to the overall market.

All of the aforementioned members of the breakingviews index are mainly the beneficiaries of consumers’ trading down. But there are others that prey on poverty and thrive on desperation. None are household names, at least not yet.

Rent-a-Center and Aaron Rents lease appliances and furniture to the down and out. America’s Car Mart specializes in selling cars to buyers with poor credit. EZCorp runs a chain of pawnshops and Cash Store offers payday advances. And once consumers do default, there is money to be made as well. Portfolio Recovery Associates collects and manages portfolios of defaulted consumer receivables. So even on the lowest rung of the American economic ladder, enterprising companies find ways to profit.
http://www.nytimes.com/2008/12/29/business/29views.html?_r=1&ref=business

We may see a 20% rally from here into possibly March'ish

The 50 Day (simple) Moving Average was taken out in Tuesday's FOMC rally.

DJI Daily Candle 2008



Compared to the 1929-1932 Bear we are at the point of the "arrow".

Dow Jones Industrial Average January 1929 -- December 1933



After the first bottom following the 1929 crash, the Dow retraced 52.3% of the loss and reached the 200-day moving average over a period of five months. The arrow shows our equivalent position, now that we have penetrated the 50-day moving average.

So far this time we have retraced 19% to 8985.42, reached on December 5. Tuesday's close at 8924.14 is 18.1% above the low and it is 25% below the 200-day moving average.

However, the 200 day moving average is coming down by roughly 2 points a day, so it will be somewhere in the vicinity of 11000 by mid-April, which is five months after the low.

So, if we copy the 1929 crash, we'll intersect the 200-day average approximately 45% above the low.

January 2007 - Present

Nationalization R US

A Message from Fred Thompson on our Economy: Great Video!

The Cost of the Bailout

Lets face it folks, we need to start discussing the impact of defaulting on our national debt.

Long Term New Home Sales Chart

Self Explanatory

Visual Road Aid to the Financial Crisis

If you want a synopsis of all the government hearings we've had lately then...

watch this summary, it has been reduced into an easy ~2 minute video to watch.

The Silver Lining: Wild Swings Equal Bottoming Out Process?

From a bearish well respected analyst/economist.

From Merrill's David Rosenberg:-------------------Most volatile month in the 80-year history of the S&P 500From 2003 to 2007, there was not one session which saw a 4% move in the market; there were 9 in October alone. Perhaps this sort of volatility is typical of a bottoming process – we had 8 of these in September 1932, when indeed the market was in a bottoming formation. Be that as it may, we are willing to wait it out and see how the testing process evolves (see more below). The last week of October was, amazingly, the best in 34 years for the S&P 500 – up 10.5%, the best since the week ending October 11th, 1974 (the market had bottomed the week before on October 3rd). Yet, that great week did not stop the whole month of October from seeing the S&P 500 dive 16.9%, in the worst month since Oct/87 (though that was practically a one-day event). The Dow fell 14.7% last month and all 30 stocks were down, but in the final week, it was up 11.3% and all but one of the 30 stocks finished higher.Only 7 out of the S&P 100 were down this week, but only 9 were up for the month (see page B3 of the Saturday NYT). The Russell 2000 also plunged but finished the week with a resounding 14.1% gain. This is unbelievable. Oil prices were down a record 33% in the month; and gold was off 18% for its worst month in 28 years; copper and aluminum suffered their worst losses in 20 years. High-yield bonds endured their worst month ever too – negative returns of 15.5% in the USA and 22.7% in Europe, so the carnage was hardly confined to equities. The only real winner we can see was the 2-year Treasury note, which generated a 1.1% return in October – the fifth straight month of positive returns (now what other asset class can boast that result?).

The CDS World Depends on Italy and Spain - Who Knew?

borrowed from seekingalpha blogspot

Consumer Short Term Financing/Discretionary Spending Getting a Punch in the Face

Nov. 5 (Bloomberg) -- Credit card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, as investors shunned the debt amid the global credit freeze.
A weakening job market and a looming recession are making it harder for consumers to make monthly payments, eroding confidence among investors about the safety of credit-card-backed bonds. It's the first month since April 1993 that there have been no sales, according to Wachovia Corp. data. Issuers sold $17.1 billion of the debt in October 2007, the data show.
``Nobody is eager to put money to work given the uncertainty in the market,'' said James Grady, a managing director at Deutsche Bank AG's asset management unit. ``When you think it can't get worse, it continues to get worse. There is not a demand'' for these bonds.
Top-rated credit card-backed securities maturing in three years traded at a gap, or spread, of 475 basis points over the London interbank offered rate during the week ended Oct. 30, JPMorgan Chase & Co. data show, 25 basis points higher than the previous week. The debt was trading at 50 basis points more than Libor in January.
The higher cost to sell the bonds makes it more expensive for banks and credit card companies to fund loans to customers. New York-based American Express Co. paid 160 basis points more than Libor at a Sept. 11 sale of the securities compared with 30 basis points over the benchmark at a similar sale in October 2007, Bloomberg data show.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aajOmDkW3xeE&refer=home

S&P 500 Crash Chart Comparisons

Something to consider: Especially in a Bear market

The DJIA Top 11 Biggest % Gains of all time:

1. March 15, 1933 … 15.34%
2. Oct. 6, 1931 ….. 14.87%
3. Oct. 30, 1929 …. 12.34%
4. Sept. 21, 1932 … 11.36%
5. Oct. 13, 2008 …. 11.08% !!!!
6. Oct. 28, 2008 …. 10.88% !!!!
7. Oct. 21, 1987 …. 10.15%
8. Aug. 3, 1932 …. 9.52%
9. Feb. 11, 1932 …. 9.47%
10.Nov. 14, 1929 …. 9.36%
11.Dec. 18, 1931 …. 9.35%

Just sayin' , bear rallies can be especially violent

Time to dip the toes into international stocks?

Stock markets around the world have fallen very far from their recent highs, most of which were reached late in 2007. Here's list compiled by the LA Times:

Iceland -88.7%
Russia -73.9%
Ireland -73.4%
Peru -73.2%
Vietnam -70.5%
China -69.8%
Poland -62.6%
Hong Kong -60.1%
Brazil -57.2%
Egypt -56.9%
Italy -55.2%
South Korea -54.5%
Turkey -58.5%
India -58.3%
Singapore -58.2%
Japan -58.1%
Mexico -48.3%
Germany -47.0%
Spain -46.4%
U.S.-S&P 500 -44.0%
Australia -43.3%
Great Britain -42.3%

Rumor Mill: Legendary Oil Barron T Boone Pickens' Hedge Fund Collapsed

You probably heard a few years ago that T. Boone Pickens, who chairs the hedge fund BP Capital Management, gave Oklahoma State a $165 million donation to be used all for helping the school's athletic program. And the largest portion of it was going to be used to beef up the school's football stadium and football facilities. Well, there was one problem with Boone's donation. He left the donation in the hedge fund, which initially seemed to be a good idea as oil prices soared in a post Katrina economic climate, swelling the initial gift to over $300 million. That was before things began to turn in 2007, as international demand for oil failed to meet projections, causing the fund to come to a sudden standstill, and then dropping on mistakes made by fund managers, who were managed by Pickens.Anyway, Pickens resisted pleas by some OSU Regents to bank a good deal of the balance out of the fund when it exceeded $300 million, which was only 14 months ago. Instead Pickens decided on borrowing almost $200 million needed to expand and renovate Boone Pickens Stadium on the Stillwater campus, despite the fact that the donation was dropping in value.Now, here's the bad news. Yesterday all indications were that OSU Regents had been told last Friday afternoon that a large portion of the Pickens donation in the BP Capital hedge fund was virtually wiped out by margin calls on the funds investments in the third quarter. Well, that's not actually the case. It seems that ALL of the money is gone. Officials were told that actually, the entire $ 165 million donation, and the earnings, which once inflated the gift to over $300 million, had recently been eliminated by margin calls due to drastically falling oil prices.As of Monday OSU's gift had flat-lined completely and was declared 'gone.'And just so you know, the school has already made a lot of those improvements to the football field . That's because the school borrowed almost all funds used in the stadium expansion plans using the $300 million balance in BP Capital as collateral.Yikes. So, um, Oklahoma State is now in debt of close to $300 million dollars. I have no idea how in God's name they're going to get out of this. State schools don't exactly have an extra $300 million sitting around. Has a college ever actually declared bankruptcy? I'm not sure, but we're probably about to find out.

UPDATE: ESPN News: Pickens to Replace Lost Donation?

AUSTIN, Texas -- Texas oil tycoon and Oklahoma State University alum T. Boone Pickens said he plans to announce another major financial gift to his alma mater.
Speaking to an ABC sideline reporter Saturday during OSU's football game against Texas in Austin, Pickens said he planned to announce details of the gift on Monday.
Pickens announced a record-setting gift of $165 million to OSU two years ago for athletic programs and then invested it in his BP Capital hedge fund.
But the fund dropped so low amid the national economic downturn that university officials won't say how much is left and the fancy athletic village it was supposed to pay for has been put on hold.
"The program is on schedule. We'll do just exactly what we said we would do," Pickens told ABC in the interview. "On Monday, I'll make another announcement, a major gift to the university."
Pickens said the money from his donation was in a fund with 300 other partners. That fund has sustained sizeable losses.
"We won't come out short. We will come out with more money than we went in with," Pickens told ABC.
Copyright 2008 by The Associated Press

http://sports.espn.go.com/ncf/news/story?id=3663639

Entertaining S&P Pit Trading Audio

On Oct. 10th a large buyer emerged into the market and bought about $1 billion worth of S&P contracts in a timeframe of a few minutes forcing a huge rally in the entire market. Normally rallies are not the result of one giant buyer and if it is a big buyer they are discreet using different brokers and smaller bids. Traders all over are trying to figure out who it was, was it the US government's "plunge protection team"? Was it a large Middle Eastern or Asian sovereign wealth fund? Thats about the only two real possibilities that I've heard. Anyhow, see link below for the entertaining trading tape audio.

http://www.tradertape.com/index.php?option=com_achtube&task=view&id=521&mosmsg=Thanks+for+your+vote%21

The World's Shipping Barometer: The Baltic Dry Index

The Baltic Dry Index or BDI for short is an index that tracks the level of worldwide bulk shipping rates. As you can see it shows the bull market we've had in the world economy (especially the BRIC countries Brazil, Russia, India, China) we've had for years and shows it's recent collapse due to the financial crisis. It also correlates with the commodities price spike and commodities recent utter collapse (i.e. oil). The BDI is a great meter for showing the growth or decline of the world economy and proves that the decoupling theory, where world economies would become immune to the West, is not based in sound thinking. The old theory that if the US sneezes the world catches the flu is still intact.

First of all, the credit crisis, combined with deleveraging, combined with commodity price collapse, job losses, combined with rapidly slowing economies, and consumption decline signifies one thing, Deflation with a capital D. Deflation was at the heart of the Great Depression and is why Bernanke is intent on showering the world with dollars even if he risks rapid inflation in the future. Typically in deflation CASH or near cash equivalents is king because dollars become more valuable than the things they purchase and allows you to then step in with those dollars and buy things on the cheap (i.e. homes, cars, furniture, etc). I think it may have been Buffet or someone close that gave great advice last year saying don't lose your job and hang on to your cash.

chart giving a historical perspective

Phillip Brewer's Take On Things

By Phillip Brewer

How much money is there in the economy to borrow? Well, if you don't have foreigners lending you large amounts of money, and you don't have central banks creating large amounts of money, then the amount of money available to be borrowed each year is roughly equal to the amount of money saved.

Take a gander at that graph. The green line is personal savings. The Bureau of Economic Analysis calculates that. It's just income minus spending--the obvious way of figuring saving. The red line is debt. The Federal Reserve calculates that value. The value on the graph is the change from the previous year--that is, it shows each year's new debt, just like the green line shows each year's saving. Both values are adjusted for inflation--the graph is in billions of (year 2000) dollars.

Everything looks fine from the 1950s right up until the late 1990s. New borrowing goes up during expansions and drops during recessions. (Sometimes it even drops below zero in a recession--people are paying off old debt faster than they're taking on new debt.) Saving rises a bit during the early 1980s, when interest rates reached generational highs, then declines pretty steadily as interest rates fell.

Then, starting in about 1998, borrowing just goes through the roof.

How did that happen? It was largely due to two things:
China and rich oil-producing countries were making huge profits from our purchases, leaving them with lots of dollars. One thing they did with those dollars was lend them to us.
Banks lobbied for and got permission to lend much more money for each dollar deposited. Instead of lending out around $10 for each dollar deposited, they could lend out $30 or $40. And, using houses as collateral, they did just that.

Of course, none of this is news. People could have (and did) produce the same graph last year or the year before or the year before that--and when they did, they saw the same thing we see. So, why is it now that things have come to pieces? Starting back in about 2005, the American consumer reached the point that they could no longer service ever-increasing amounts of debt. That led to the housing bubble popping. The result is what you can see in the last datapoint on the graph--less new borrowing in 2007.

All the news just lately has been about how the banks have been unwilling to lend. Just as important, I think, is that consumers are unable to borrow--the ones who would be willing to take on more debt simply wouldn't be able to make the payments.

The real, long-term solution is going to have to be to get borrowing back under saving. That, though, would mean a huge decline in spending. Just the little drop in new borrowing that you can see on the graph is sending us into a recession. The central bank and the Treasury are terrified about what letting borrowing drop all the way down to our current level of saving would mean. So, since the consumer is all borrowed up, they're trying to have government borrowing replace consumer borrowing.

Because of their fear, the Treasury hasn't done one obvious thing that's necessary to get the economy back on sound footing--it hasn't made it more attractive for savers to save. They're afraid that more saving would mean less spending, resulting in an even worse recession. And yet, longer term, it's that saving that will support future borrowing.

In the meantime, we've dodged one bullet. Those folks who looked at versions of this graph from past years and got worried mostly figured that the crisis would come when China and the rich oil-producing nations either decided that they weren't comfortable loaning us so much money, or simply decided to spend more of the money on domestic consumption. Instead, the crisis has had the perverse effect of bringing dollars flying back to the US all the faster--brought by people who figure that US Treasury securities are the safest way to hold dollars.

That means that the Treasury has been able to borrow the hundreds of billions of dollars used for the bailout so far. But that's not the same thing as making sure that there's domestic savings to support domestic borrowing. Quite the reverse.

Credit Default Swaps: What are they and why are they destroying us?

Credit Default Swaps, or CDS for short, are a type of derivative. Derivatives are financial instruments used to gain leverage over an underlying asset for a relatively smaller investment. Derivatives like futures, options and swaps were developed to allow investors to hedge risks in financial markets - in effect buy insurance against market movements - but have quickly become a means of investment in their own right. The “insurance” that CDS covers is the bonds that are traded for corporations.

In Warren Buffet’s 2003 annual report for shareholders Buffet made a loud and damning assessment of derivatives in general writing; that such highly complex financial instruments are time bombs and ‘financial weapons of mass destruction’ that could harm not only their buyers and sellers, but the whole economic system. It is widely rumored that CDS are largely responsible for bringing down AIG and Lehman, two companies whose balance sheets equal up to 15% of the entire US GDP for a year.

Let me try to explain in laymen’s terms why these derivative ‘insurance’ contracts are contributing to the destabilization of the entire world economy:

First off, let me explain the enormity of the issue. The CDS market’s estimated value is roughly $65 Trillion. Lets put this into perspective, this means that the CDS market is valued at over 4 times the entire US Gross Domestic Product (roughly $14 Trillion) and is EQUAL to the entire world’s GDP (roughly $65 Trillion). This means that the value of the CDS market is equal to about $9,285 for every man, woman, and child on planet earth.

Second, we will delve into why Buffet called them a ticking time bomb. I think just about every person understands the role of homeowners insurance so since CDS are really just an insurance vehicle (but for bonds) I will use homeowners insurance as my example. Lets say you bought a new $100,000 single family home. When you get insurance on it (as required by the lender) the insurance guy says “let me tell you what I can do, I will give you an insurance policy that will give you a $5,000,000 payoff if the home is damaged significantly if in exchange you pay me one large lump sum of $25,000”. In effect you have an insurance contract that leverages the value of the home many times over in case of significant damage. You say well since I’ll be living in the home for a long while it sounds like a great deal, so you take it. Now multiply this example millions of times, and then imagine a giant hurricane that completely destroys every home in Florida. Now, the insurance company that sold that insurance policy and all ready used that money for operations, stock dividends, and other issues has to come up with a HUGE amount of money to pay off this absurdly large promise on a grand scale for the entire home owning population of Florida. Obviously, the insurance company (in the CDS case it’s usually banks or large insurers like AIG) doesn’t have the money to pay out or even borrow the funds (especially in today’s credit climate) to pay off the obligation. And there we have it, immediate insolvency, default on an obligation and panic further spreading into the system. We are at zero hour now; hopefully somebody can make something happen so we can sleep easier at night, amen.

US Government/Treasury to Sell More Debt to Address Shortages

Oct. 8 (Bloomberg) -- The U.S. Treasury said it will sell more debt to meet demand for government securities and alleviate ``protracted shortages,'' said Karthik Ramanathan, the department's head of debt management.

The market disruptions are primarily affecting two-year notes through 30-year bonds, Ramanathan said in a statement released in Washington. The Treasury said it would sell $40 billion in reopenings of 10-year notes today and tomorrow, in four separate auctions of $10 billion each.

The four securities have maturity dates of Feb. 15, 2015; May 15, 2015; Aug. 15, 2015; and Feb. 15, 2018.

``To address upcoming borrowing needs and further enhance liquidity in the Treasury market, Treasury will reopen multiple securities which have created severe dislocations in the market, causing acute, protracted shortages,'' he said.

Treasury markets have been struggling with elevated numbers of transactions that don't settle properly, called failed trades or fails, in part because U.S. government securities have been in such high demand.

Ramanathan said the Treasury will monitor fails and encourage market participants to find ways to solve the problem.

``Private-sector participants should take additional steps from a monitoring and supervisory perspective to ensure that settlement fails do not reach levels that impact financing markets,'' he said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXwwEfiJE.CU&refer=home

World Wide Interest Rate Cut Announced Today: Stocks Not Impressed

All indices have been bouncing around this morning in extraordinarily volatile action. The indices are currently down about 2%.

Oct. 8 (Bloomberg) -- The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.

The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point.

``We are now looking at the first page of the global- depression playbook,'' said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. ``The only solution is to cut rates as close to zero as you dare,'' pump money into the banking system ``hand over fist'' and increase government spending, he said.

continued at:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKj1Uvn3ofpo&refer=home

Big News Today: Fed Will Back-Stop Commercial Paper,Currently a $1.6 Trillion Market

A quick primer on commercial paper

1. Commercial paper is a money-market security issued by large banks and corporations. It is generally not used to finance long-term investments but rather to purchase inventory or to manage working capital.

2. Commercial paper essentially can be compared as an alternative to lines of credit with a bank.

3. Most commercial paper is issued by financial companies but as of the late 90's over 25% was issued by nonfinancial firms such as manufacturers, public utilities, industrial concerns and service industries.

The big news: Fed to Purchase U.S. Commercial Paper to Ease Crunch

Oct. 7 (Bloomberg) -- The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations.

The Treasury will make a deposit with the Fed's New York district bank to help set up the new fund. The central bank will also lend to the program at policy makers' target rate for overnight loans between banks. The Fed Board invoked emergency powers to set up the unit, the central bank said in a statement released in Washington.

Today's action follows a slide in the commercial-paper market to a three-year low of $1.6 trillion last week as investors fled even companies with few links to the subprime mortgage crisis. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market's disruption.

The Fed's efforts are aimed at ``stemming the bank-run-like panic,'' said Mark Gertler, a New York University economist and research co-author with Bernanke. ``The immediate threat to the real economy is that large corporations are having difficulty obtaining funds via the commercial paper market.''

Fed officials in a conference call with reporters didn't say how much commercial paper, which hundreds of companies use to finance payrolls and meet other cash needs, it plans to purchase. The central bank's special purpose vehicle will be big enough to backstop the entire market, one official said on condition of anonymity.

Size of Sales

Issuers will be able to sell commercial paper to the Fed up to the average amount they had outstanding in August, an official said.

Policy makers began considering buying commercial paper several weeks ago as the market began to seize up, with borrowers increasingly only able to raise funds on a short timeframe, even just overnight, officials said. The Fed's unit will buy three-month commercial paper, which should help issuers extend the maturity of their borrowing, an official said.

Fed officials anticipate that yields will come down significantly as a result of their initiative.

Yields on top-rated overnight U.S. commercial paper dropped 0.74 percentage point today to 2.94 percent, according to data compiled by Bloomberg. Borrowing for seven days increased 1.25 percentage points to 4 percent.

Treasury Deposit

The Treasury's deposit with the Fed's special purpose vehicle will be substantial, officials said. The funds won't come from the $700 billion rescue plan authorized by Congress last week.

Stocks initially climbed and Treasuries sank after the Fed's announcement, while shares later turned lower. The Standard & Poor's 500 Stock Index was down 0.1 percent at 1,055.38 at 10:23 a.m. in New York. Yields on benchmark 10-year notes climbed to 3.51 percent from 3.45 percent late yesterday.

Today's announcement came hours before Fed Chairman Ben S. Bernanke speaks on the economic outlook at 1:15 p.m. in Washington. He and Treasury Secretary Henry Paulson held discussions yesterday as stock markets slid and money market rates climbed as the crisis deepened.

The Fed's new unit will buy three-month dollar-denominated commercial paper at a spread over the three-month overnight- indexed swap rate, which is a measure of traders' expectations for the Fed's benchmark rate.

Fed officials on the conference call indicated that they would like the facility to be a backstop, which would suggest the special vehicle's rate would be set at a slight penalty to normal market rates. They declined to answer a specific question as to whether the rate would be set above current rates, or below, which would constitute a subsidy for borrowers.

Fed to Consult

``The Federal Reserve will consult with market participants regarding appropriate spreads that are consistent with the facility serving as a funding backstop under more normal market conditions,'' the Fed said.

Commercial paper purchased by the vehicle must be rated at least A1/P1/F1, the Fed said. Issuers will pay the unit an upfront fee based on the commercial paper initially sold to the vehicle. The vehicle will cease buying commercial paper on April 30, 2009, unless the Board of Governors agrees to extend it.

The Fed will cap the amount of commercial paper each company may sell to the central bank.

The Fed yesterday said it will double its cash auctions to banks to as much as $900 billion, and telegraphed today's announcement by saying it was looking for other ways to alleviate liquidity strains.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a2Oo4vDj6PK0&refer=home

Some Good News: Chinese News Reporting China to Buy Up To $200 Bn of US Treasuries

Chinese news sources are reporting that China will buy up to $200 Bn in US treasuries, this should give a decent shot in the arm to the US treasury's balance sheet. HMMMmmm I wonder if it has anything to do with the loophole in the bailout regarding foreign banks being allowed to dump toxic assets onto us via the $700 Bn bailout plan? Did I predict this? see my Oct. 3rd post on the bailout plan problem below:
http://marketssense.blogspot.com/2008/10/big-problem-with-bailout-bill.html

A.I.G. Uses $61 Billion of Fed Loan

The American International Group said on Friday that it had already drawn down $61 billion of the $85 billion emergency bridge loan it received from the Federal Reserve two weeks ago, an announcement that startled credit ratings agencies.

The emergency loan was supposed to buy the company time to sell its troubled assets in an orderly manner. But the sell-off has not yet begun, and now the insurer faces the additional pressure of trying to sell the businesses at a time when potential buyers are having trouble borrowing money.

http://www.nytimes.com/2008/10/04/business/04insure.html?_r=2&ref=business&oref=slogin&oref=slogin

Big Problem With The Bailout Bill

The Bailout Bill also dubbed by some as the "No Banker Left Behind Act" has a startling provision in it. A loophole that allows foreign banks to dump their toxic assets on US banks which would in turn be bought up by the US gov. The powers that be said they would actually kill this bill if that loophole is closed. Why oh why would we, should we, and can we bail out failed condos in Shanghai? Is this some sort of bribery to assure foreign central banks keep funding our national debt? That is the only conclusion I can come up with. To think that we are going to use taxpayer money to bailout not only Wall Street but the rest of the world and eventually hand this ever growing giant IOU to our children is despicable. Why should my daughter be paying off failed condo developments in Shanghai years from now? The American.gov and our people will eventually have to stop passing the buck.

How the Wachovia "bank run" went down

Inside Wachovia, executives started noticing customers withdrawing money on Friday morning, following the failure of Washington Mutual on Thursday. “The so-called silent run on the bank – it's real,” Carlos Evans, Wachovia's wholesale banking executive, said in an interview. “When Congress failed to pass the ($700 billion bailout) proposal, when WaMu collapsed, you could see the money flowing. My computer screen was lighting up.”
Starting Friday morning, Evans said, businesses and institutions with large accounts started withdrawing money to lower their balances to below the federally insured $100,000 limit. They weren't closing accounts, he said, adding “they were very apologetic in saying they love the service they get from Wachovia and they weren't leaving Wachovia. They were just moving their money until things settled down.”
Money flowed out of Wachovia throughout the weekend, said Evans who heard anecdotes and received memos and BlackBerry messages from bank employees in the field.
“What happened last week, and it literally happened that fast …You could go from being OK, hurt, weakened, there's no question the company was weakened… but you go from being weakened to in trouble in a matter of days,” he said. “I don't think people understand how quickly events unfolded.”
The FDIC and the OCC declined to comment on whether the bank experienced a run on deposits. However, FDIC spokesman David Barr said it wouldn't be surprising. “When a bank in the news is rumored to be in trouble that does prompt a lot of depositors to take a second look at their deposits,” he said.
Wachovia had $448 billion in deposits at the end of June. Spokeswoman Christy Phillips-Brown said the bank updates the number only as part of quarterly earnings reports but added: “Depositors should have full confidence in Wachovia.” In announcing the Citi transaction Monday, FDIC chairwoman Sheila Bair said Wachovia customers had “full protection of all of their deposits.”

source: http://www.charlotteobserver.com/business/story/226799.html

When Will The Housing Market Bottom?

The purpose of this post is to contemplate a potential end to the housing price collapse/credit crunch mess, I will be delving into it's causes in later posts.

The bad news first: The US coasts and their insane home prices. The main driver of the credit crunch is the housing price collapse and the subsequent foreclosures and bad loans that go with. To find when the housing price collapse and hopefully the credit crunch that came with will bottom/end should be near the time that housing prices become AFFORDABLE again.

Lets talk about affordability. I will use West Palm Beach, FL as a gauge of the coastal housing crisis. In July 2006 a median priced home in WPB was $392,000. The median income for a family in WPB was $52,000 per year. That means the average family had to pay almost 8 times their income for a median priced home in the city . Historically, families can comfortably afford on a long term basis only a 3 to 1 ratio of home price/to household income. This means that the median home price in WPB has to come down to about $155,000 to reach the long term average for housing affordability. As of 10/2/08 the median home price has come down to $323, 000. This means that West Palm Beach has a further 50%+!!! to come down to historical price affordability, making the peak to trough a ~65% decline. Given the fact that home prices raced ahead of the historic mean to the upside the home price collapse should fall below the historic mean of home prices. Prices that over shoot the mean on the upside typically do so on the downside as well. I would guesstimate that the median home price in WPB will fall to around $140,000 before this is all over which is a retracement to 100 on the Schiller housing index based below. At this rate I guesstimate, depending on how fast the velocity on the down side comes, that we will see home prices bottom around 2012 for West Palm Beach, FL.

Bottom line, it's going to be ugly and painful for homeowners. The wild card even in stable markets is JOBS. When layoffs are done en mass i.e. Detroit then look out below.

The good news: The Heartland did not participate (as much) in housing's irrational exuberance and the folly of believing in a never ending gravy train. For this example I will be using Dallas, TX. The median home price in Dallas, TX in July 2006 was around $150,000 as of today it is $170,000. The median annual income for Dallas households is about $60,000. Is your mind all ready comparing WPB's numbers to Dallas? I bet so. Given a 3 to 1 household median home price/to median household income you will find that the average Dallas resident can afford a $180,000 home comfortably. This means that Dallas home prices are, on average, roughly priced %5 below the affordability line. I think that the huge housing bust in Texas in the 80's, the tight belt mindset of the average Texan, and cheap endless land help Texas stay affordable.

This is great news for homeowners in Dallas. Since many large corporations are located and have been relocating to Dallas for it's lower costs and well educated populace the job market should stay healthier than the coasts. The Burnett Shale will also contribute to DFW's economic growth.

According to Zillow.com my home town Coppell has actually had rising home prices throughout all this credit mess, YEEHAW. I predict that DFW's home prices will slowly rise over the next few years as Americans search for affordability. Of course, the wild cards are the credit tap being totally shut off and job losses.

For a historical perspective on national home prices see below:

The bailout may help to reinflate the housing bubble via loose lending but all this will do is delay the inevitable. Home prices have to come back to their historical affordability sooner or later. I fear the bailout is like stepping in on the Beanie Babies price crash, everyone knew those beanie babies weren't worth what people were paying, it's a matter of time until intrinsic value comes back.

I pray that home prices on a national come back to affordability without too much pain for hard working Americans. Hopefully, we will collectively learn from this mess...

Why the panic? The Lender's Fear Meter

Credit markets are frozen and now going into deep freeze mode if something doesn't change quickly. A deep freeze in credit markets would not only be lethal to individuals trying to finance purchases like cars and homes but the problem also effects many large and small businesses who need cashflow to buy things like equipment, pay payrolls, finance receivables, etc.

One of the best ways to gauge credit problems in the market is the TED Spread which is a credit spread. The TED Spread is calculated as the difference between the 3 month T Bill interest rate and the 3 month LIBOR.

LIBOR is a daily rate based on average interest rates that major banks lend (unsecured) to each other.

The dollar-denominated overnight LIBOR soared to 6.88% on 9/30/08, from 2.56%, its highest level since records began 24 years ago. The LIBOR rate is tied to many revolving credit lines including credit cards, home equity loans, and adjustable mortgages. This will further the pain in the housing market via adjustable rate mortgages adjusting at higher rates and credit in general costing more for individuals and businesses to tap credit lines. Banks are also unwilling to lend to each other because they don't trust what other banks will do with the money that they lend, they think other banks might be insolvent and unable to repay loans.

In short, the easiest way to think of the TED Spread is to use it as a lender's "Trust Meter". When the meter is at low numbers trust flows throughout the banking system, banks make loans to each other and to customers such as businesses and individuals and the economy hums along. When the TED spikes the opposite happens. Right now the TED spread stands at 3.61!!!! This is higher than the 1987 stock market tankage, the height of the 1st gulf war and the coinciding housing issues around '91, and the giant LTCM hedge fund collapse.


sources:

http://www.bloomberg.com/apps/quote?ticker=.TEDSP%3AIND

Welcome

Welcome to my blog/column on money, economics, markets, investments, and random other musings. I plan to focus mainly on Macro-Economic issues and issues that effect the markets both on a national and local level. Please stop by often!

Erik C. Gamblin