Category: Finance

Finding a Solution, and Applying it to Narrowly

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In looking at the role of speculation on oil prices, a Senate committee is looking at increasing margin requirements:

“I think there’s an orgy of speculation that we ought to be deciding to do something about,” said Sen. Byron Dorgan, D-North Dakota.

He and others raised the idea of changing the margin or amount investors must pay up front in order to engage in oil speculation. It would be a hugely significant change in financial markets. Dorgan said stock speculation requires a 50% margin, but commodities like oil demand a much lower threshold, just 5% or 7%.

If you look at the credit crunch generally, the real problem is excessive leverage. Margins should be raised to the 75% range, where they were for stocks before the Fed cut them around 1980, and they should be applied to all investments.

Countrywide Shareholder Lawsuit May Proceed

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Gee, what makes you think that the people running the lender were more interested in lining their own pockets than running a business competently?*

Directors and officers of Countrywide Financial, the beleaguered mortgage lender, must answer shareholder accusations of insider trading and an overall failure to monitor lending practices that led to the company’s collapse, a federal judge in California has ruled.

Rejecting the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

Plaintiffs also identified “numerous red flags” that would have warned directors of increasingly risky loans made by Countrywide, according to the judge, who rejected a motion to dismiss the suit. “It defies reason, given the entirety of the allegations,” Judge Pfaelzer wrote, “that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action.”

Hope that these folks are left completely destitute. They should spend the rest of their lives in homeless shelters and gutters.

*The interesting thing about this is how many people are shocked by this. Capitalism 101 is that people act for their own benefit, but somehow the senior executives are exempt from all this?

Economics Update

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I guess for those of us in the US, the big 3 are employment, energy prices, and real estate. So, going in that order, we have:
nitial jobless claims rising to 371,000 last week, though as I always state, this is a noisy number, and you need a few weeks, or better yet months to extract real meaning, but, quoting the article, “The trend in claims is still upwards and we expect new highs over the next few months.”

Matt Trivisonno has the withholding tax numbers, you know the social security taxes that employers take out of wages below about $104K, and they are way down too.

Here are the pretty pictures:


Trending Down on a daily basis


And on a quarterly basis


And on a yearly basis.

As to why these numbers fell? Because no one is making anything in the US in April. Industrial production fell -0.7% in the US. The consensus estimate was -0.3% down, and March output was ajusted to +0.2%, down from +0.3%. Not good.

In energy, Crude fell below $122/bbl, which is good, but Gas hit a new record, $3.776 a gallon, the 8th record in 8 days.

In real estate, we have the inevitable article calling the light at the end of the tunnel, when it is more likely an oncoming train, in Orlando, Florids, one of the worst hit areas. Inventory fell slightly, and sales are up a bit (0.2%), and the rate of decline of existing home sales is a bit better.

Me, I’ll go with National Association of Home Builders/Wells Fargo monthly index, which fell again. The home builders are in the business.

I would also note that even with the Fed rate cuts, mortgage rates fall seem to be pretty stubborn about staying above the 6.0% line, so there won’t be any help for the market there.

Europe, on the other hand, appears to be doing fairly well, with GDP increasing 0.7% across the Euro Zone in the first quarter, led by a sizzling, for the developed world anyway, 1.5% increase for Germany.

This makes it far less likely that the ECB will cut rates. Actually it makes it more likely that the ECB will raise rates, and as a result, the US dollar is down today.

Economics Update

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The CPI rose less than expected 0.2%, though there was a huge delta in food, about 0.9%, 2.5% and 11% annually rates.

Look at my earlier posts on this issue, and you’ll see that the real inflation is far closer to 11% than it is 2.5%.

This has, for reasons unclear to me, led to the UD dollar strengthening in overseas markets.

Year over year foreclosures in the US are up 65%, and between the banks discounting these properties, and the builders discounting new homes, we have a way to go to bottom.

In investing, the dispute between Clear Channel, which had a deal to sell itself to a private equity firm, and the banks, who were trying to get out because they had no expectation of being able to resell the debt, has been settled. The buyout is now at 36$/share, as opposed to the earlier $39.20/share, so both sides took a haircut to get the deal done.

Still this indicates that the credit markets are still frozen.

Finally, we are back to the monoliner insurers. with MBIA and Ambac’s losses making the ratings agencies nevous.

If the ratings process was an honest one, they would have lost their AAA status over 6 months ago.

Crucial Interest Rate Metric to be Reworked

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As I’ve mentioned earlier, there are concerns that one of the crucial interest rate indices, the LIBOR, is not accurate because the member banks are not accurately reporting interest rates.

It now appears that the , “benchmark interest rate for at least $347 trillion of derivatives and 6 million U.S. mortgages” will be modified to address these concerns. (Yes, that “t” after the $347 is correct)

The British Bankers’ Association, which is responsible for reporting the rates, has, “report based on discussions with member banks to its independent Foreign Exchange and Money Market Committee.”

There are estimates that the reported rate could be as much as 30 basis points too low, or about 10%.

Economics Update

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Well, the financial news is reporting that consumer spending are up, but as Barry Ritholtz notes, “Retail Sales were rather unimpressive: Gasoline, Groceries, Food & Beverage were up, while pretty much everything else was flat to down. (see picture)

Also note that the real numbers are actually a reduction when adjusted for inflation.

In the “same as it ever was” department, we have crude oil and gasoline hitting a new record again, $126.98/bbl.

In real estate, The median single-family home price dropped 7.7% Q1, annualized, that is around a 30% drop, but you will see articles calling a bottom soon.

In banking, we have Bank of America saying that credit costs are up.

Translated from bank-speak, it means that they are having more late payments, defaults, and foreclosures.

On the good news side, Ben Bernanke is promising more free money through the Federal Reserve’s “sh%$pile for dollars” auctions.

Citi Plans to Dump Almost Half a Trillion in Assets

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Their new (started last December) CEO has announced a restructuring, with the standard quote about getting back to “core” businesses.

Ultimately, Citigroup said it would get rid of roughly $500 billion in so-called legacy assets that currently make up about 22% of the company. Given the current market conditions, the company said it expected to wind down those assets to less than $100 billion over the next two to three years.

This is more than a refocus, this is going to be a significant amount of losses in order to raise capital and to get out of losing business.

Of all the really big banks, Citi is the one that I am least confident in.

SEC to Require Additional Bank Disclosure

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The SEC is proposing regulations that would requireinvestment banks to make more detailed disclosures about their liquidity and capital positions.

The head of the SEC, Christopher Cox, is also calling for legislation to create a specific authority to supervise investment banks. (the current disclosure program is voluntary).

Hopefully, this is the harbinger of more, and more aggressive, regulation of the financial services industry.

Why House Prices Still Have a Long Way to Fall

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Rolfe Winkler of Option ARMageddon makes a very simple point, that housing affordability is based on monthly payments, not on house price, and since house prices are falling with historically low mortgage rates, we can reasonably expect further price drops as mortgage rates return to their historical numbers.

With real inflation nearing double digits, and there being an eventual limit to just how long foreigners are willing to supply us cheap money, mortgages have to return to something nearer to their historic rates of around 9%, possibly with some overshoot.

BTW, here is how interest at a given rate influences house price:

By my maths, it looks like we might see an inflation adjusted drop of around 50% from peak, which means that people who bought a house at peak might be under water for more than 10 years barring significant inflation.

Economics Update

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We have another sign of recession, imports falling sharply in March, which indicates a decrease in consumer demand.

It also appears that the decisions by the Bank of England and ECB to target inflation may be putting an end to the brief dollar rally.

In energy, we have Oil settings new record, $126.20/bbl, and gas hitting a new record, $3.671/gal.

It should be noted that much of our trade deficit is oil, but the number dropped even with increasing oil prices. Things are slowing down a lot.

I would note that there are signs that the credit crunch is no spreading to insurance, with AIG posting a 1st quarter loss of $7.8 billion, and making plans to issue more stock to raise needed capital.

If the insurance industry goes balls up in any significant way, it’s going to be effecting a lot more people.

Finally, we have housing inventories continuing to rise, 3.5% in April, and 6% year over year.

Economics Update

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Tanta of Calculated risk notes that continuing unemployment claims are now above 3 million. Note that, unlike the weekly new claim figures, this one tends to show trends much better.

You may recall that recently the weekly data is showing a decline, the fact that the numbers are still rising means that people are spending more time on unemployment.

Because of inflation concerns, both the Bank of England and ECB leave rates steady have decided not to follow the Fed’s example and cut rates. Which has left the ECB rate at a 6 year high.

Normally, this would suggest a weaker dollar, but the dollar is doing pretty well against the Euro. No clue as to what is going on here.

Finally, another day, another record high in oil, $123.53/bbl at closing.

Fannie Mae is Doomed

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Here’s a little tidbit buried in a Washington Post story on Fannie’s recent losses:

To help homeowners caught in the market crisis, Fannie Mae said it would take the unusual step of allowing borrowers whose homes are worth less than their mortgages to refinance up to 120 percent of the property value. That option would be offered to homeowners whose loans are owned by Fannie Mae and who remain up to date on their mortgage payments.

They have just condemned themselves to death.

They will be lending on houses already underwater, and the increase in walkaways as a result will have them needing a government bailout.

Economics Update

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The numbers are out for March pending home sales, and they are very grim, with the pending home sales index falling to it’s lowest level since its founding in 2001, a 1% one month and 20% year over year drop. Of course the NAR is seeing a turnaround in the next few months, like they always do.

We are also seeing increasing signs of inflation, with Federal Reserve Bank of Kansas City President Thomas Hoenig suggesting that inflation pressures may lead to rate hikes soon, and Toyota to raising prices on their cars, largely as a result of the falling dollar.

On the plus side, however, productivity increased by 2.2% in the first quarter, more than the 1.5% predicted, which should moderate inflation some.

On a more general, “we in a recession” note, retail imports fell 4.8% in March, yet another indicator of a slowdown, that the retailers are cutting back.

Oil hit another record today too.