Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

At the end of October (see Fed Implode-o-Meter October 31), it looked like the Fed had spent about $3.8 trillion in the year to date. Not even three weeks later, that figure is now up to $4.28 trillion. According to CNBC, “To put it in perspective that’s . . . more than what was spent on WW II.” Funny choice of comparison; the Iraq war, the longest-running conflict in the history of the US, has also cost more and the final tab won’t be in for years. Anyway . . .

So, where’s all the money going? Here’s a list (hat tip to CNBC) of what has been made public:

The Telegraph UK quotes Paul Volcker, former chairman of the US Federal Reserve and short-list candidate for Treasury Secretary, as saying, “. . . it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months. I don’t think anybody thinks we’re going to get through this recession in a hurry. The economic slump has begun to metastasize after a shocking collapse in output over the past two months . . . normal monetary policy is not able to get money flowing. The trouble is that even with all this [government] protection, the market is not moving.” Further, he said “What this crisis reveals is a broken financial system like no other in my lifetime,” he told a conference at Lombard Street Research in London. Mr. Volker is 81 years old. Normal monetary policy can’t restart economic activity because credit is contracting at a faster pace than new money is coming into the system. Fractional reserve lending can’t work unless banks lend.

Through all of this, the Fed is still taking as collateral illiquid, mark-to-model assets, presumably at notional value, from the banks. In return, the banks receive brand-new treasuries that, in principle, could be lent out. At this point, most, or probably all, of the Fed’s general collateral is comprised of toxic waste. Currently, the Fed does not even have enough reserves to cover dollars in circulation.
Good thing we’re only talking about Monopoly money. If it were real money we’d be in big trouble.

There are a number of grass-roots efforts trying to put an end to the Fed’s out-of-control borrowing. One of them, End the Fed.us is having a meet-up on November 22 in 39 cities. Mish of Global Economic Trend Analysis is putting together another email, fax, and phone-call campaign to stop further auto company bailouts. Chances are slim that the brakes will be put on before the end of the year.

However, with a new administration coming in, 2009 could be another story.

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Filed under: General Motors (GM), Politics, Financial Crisis

General Motors Co. (NYSE: GM) Chief Executive Rick Wagoner, the longest serving head of an automaker, is personally lobbying members of Congress to back a federal bailout of the struggling automaker, which wants to merge with its much weaker rival Chrysler LLC.

Bloomberg News, which broke the story, reported that Wagoner’s “involvement includes attending meetings, such as one with Treasury Department officials last week in Washington.” You can bet that Michigan’s powerful senior member of Congress, John Dingell, is attending many of the same meetings as Wagoner. GM no doubt is employing an army of lobbyists — both Republicans and Democrats — to press its case. The company, which for now may be the largest, has little choice.

GM and Chrysler would need between $10 billion and $12 billion to integrate their operations, according to a Citigroup note cited by Bloomberg. Combining the two fading industrial behemoths would be a logistical nightmare. Imagine trying to combine disparate systems for everything from personnel to purchasing to accounting. Let’s not forget the byzantine IT systems at both companies as well.

Economically, it’s hard to justify bailing out GM. Decades of incompetent management at the Big Three resulted in the industry drowning in billions of debt. The problem with telling the industry “no” is political. Dingell is a 1,000-pound gorilla in Congress. The auto industry continues to have considerable clout in Washington as well. Their argument is simple: if Wall Street fatcats can get a federal bailout, why not us?

The problem with rescuing Wall Street is that lots of struggling industries are going to pass the hat in Congress. What about the airlines? The retail sector? Pharmaceuticals? When does it end?

Can GM CEO Rick Wagoner’s lobbying help land federal bailout? originally appeared on BloggingStocks on Tue, 28 Oct 2008 13:12:00 EST. Please see our terms for use of feeds.

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The selling pressure on Fannie Mae and Freddie Mac has been heavy this week after a Barron’s article published on the weekend made the case that both government sponsored entities would require a full fledged bailout.  This was made clear even prior to the Housing and Economic Recovery Act of 2008 being signed into law.  […]
Related Posts:
■Real Homes of Genius: Two For One in Compton. Southern California Housing Bubble Hangover.
■Real Homes of Genius: Today we Salute you Paramount. 768 Square Feet for $324,900. Buy, Withdraw, Sell, Foreclose. The Cycle of Life.
■World Premier! Real Homes of Genius Video.
■Real Homes of Genius: Today we Salute you Compton. $90,000 in Los Angeles County?
■How Many People Overpaid for Their Home in Los Angeles County? Trying to get a Raw Number of Households Underwater.

The selling pressure on Fannie Mae and Freddie Mac has been heavy this week after a Barron’s article published on the weekend made the case that both government sponsored entities would require a full fledged bailout.  This was made clear even prior to the Housing and Economic Recovery Act of 2008 being signed into law.  The challenge now becomes if they do go out and sell more stock that current shares will be diluted to a point where the shares become worthless.  Both Fannie Mae and Freddie Mac are testing multi-decade lows.

Sometimes people forget what these two companies stand for.  Part of their mission is of creating liquidity on the secondary mortgage market.  Yet with a struggling housing market these large institutions have to contend with a faltering portfolio that is seeing more and more losses.  Now it is very likely that current shareholders would be wiped out in the event of a bailout.  The question becomes why would foreign investors purchase bonds or preferred shares in the company if the likelihood of failure is around the corner.  Certainly they will be made whole but not at premium rates.  The well is drying up quickly.

There are a few emerging trends in the housing market.  It is rather clear that housing still remains in a precarious situation.  We are nearing the end of the summer selling season and the boost that was expected unfortunately did not materialize.  Record inventory is still on the market and questionable mortgages such as pay option ARMs still loom on the balance sheets of many lenders.  One of the trends that is emerging is people engaging in housing swaps.  That is, people exchanging homes normally without a broker or agent.  In many cases, it is a barter trade.  Another trend is towards frugality.  Now some would argue that this isn’t a trend more than the economic situation forcing the hand of many to face the grim reality.  Yet there should be little doubt that prudence is making a comeback.  Also, we will examine the hidden housing numbers embedded in the Southern California housing market.  Are we really approaching some sort of market bottom?

Housing Swaps

I happened to stumble upon housing swaps on Craigslist.  For those two of you who haven’t heard of Craigslist, this is one of the most visited sites on the internet with some 20,000,000 visits per month in the United States alone.  You can consider this a dynamic classified section where you can find pets, look for employment, trade cars, get rid of unwanted furniture, and now swap your home with someone else.  Now I’ve used housing swaps when traveling for a temporary living arrangement.  For example, you need a place to stay and you find someone in your desired location who is looking to travel as well, and you come to an agreed upon trade.  Now this I used during college and was amazed at how many people are out there and the ability of technology to shrink the world.

That isn’t the new trend.  But what I am noticing is postings from people looking to permanently swap their place with others.  That is something that is new.  There were the unique postings in the past but now everyday you can find a person looking to trade their home with your home.  Here is an example:

The person above is looking to exchange their Chicago home with a home out here in Burbank either temporarily or permanently.  Now why would someone do a housing swap as opposed to selling their home?  There are actually many good reasons.  First, you may be an area with depressed sales and can’t sell your home.  For many corporate careers, if you are in a junior position you may need to go where the company sends you.  This may translate into you relocating but if you own your home and cannot sell, then you are stuck.  What if you absolutely love your career?  Then most would do anything they can to find a way to move to their new location.

Another reason people would do a housing swap instead of selling is they may be in a negative equity position.  Say you bought a home for $350,000 and the home is now “worth” $250,000.  A large number of people do not (or don’t want to) come to the table with $100,000 simply to sell their home.  There is a large portion of the population that can manage the housing payment but is simply stuck in this position of limbo.  They would like to sell their home but cannot.  There only other option is to ruthlessly default and some are going down this path as well.

Finally, this may workout for people who are on the margins.  If you have say a 4 or 5 percent equity position in your home, it may cost you $10,000 or $30,000 simply to sell your place.  Why not contact someone and save yourself that amount?  You can hire a real estate attorney for a few hours, get the paperwork drawn up and finish the deal.  This may work for cases like the person that needs to relocate and doesn’t really care if they get a profit on their home.  They are simply looking to sell the home.

It’ll be interesting to see if more and more of these cases pop up on Craigslist.

Frugality

There is a definitive emerging trend in frugality.  There is a fountain of wealth with Google.  You can use Google Maps and have access to technology that only a few years ago was accessible by the highest level government officials.  You also have the luxury of searching for information from a variety of sources.  One of the features I enjoy from Google is their Google Trends search feature.  In this, you can see the amount of search queries for any phrase or word.  Since Google dominates the search world, this is an excellent view of what people are searching for at any given time.  Take a look at this search phrase:

As you can see from the above chart, not many people are searching for “real estate investing” anymore which shouldn’t come as a surprise.  Ironically, in times where people should be more financially educated they tend to steer away from this.  They ramp up their investments at the worst time, near a peak, and face rapid problems.  Is it any wonder that California has now seen a drop of 38 percent in one-year for a median priced home?

This trend can also be seen perfectly by comparing two stocks for the year.  That of Family Dollar Stores and Best Buy:

For the year Family Dollar Stores are up 24 percent while Best Buy is down 15 percent.  So what does this mean?  What it means is that people are focusing on things they “need” and avoiding things they “want.”  It is interesting to note that consumer and producer inflation is running at decade highs.  Now why is this?  Clearly housing prices collapsing and credit tightening is wealth destruction so you would think that we would be seeing possibly deflation.  The problem however is items that people need such as food, fuel, and healthcare are not growing exponentially.  These remain fixed while the U.S. Dollar declines and purchases less and less of these items.  In addition, many Wal-Mart goods are produced in China which is facing its own inflation.  The workforce is slowly getting more educated and is demanding slightly higher wages which find their way into the price of the goods that people consume.

With budgets getting tight “want” stores like Best Buy are facing the brunt of the economic contraction.  We saw this with Mervyn’s filing for Chapter 11 bankruptcy in July.  Another clear example is looking at a low cost food source such as McDonald’s and comparing it to P.F. Chang’s China Bistro:

Over the past year McDonald’s is up 29 percent while P.F. Chang’s is down 27 percent.  Frugality is becoming a way of life because money is tight and this is being reflected in the spending behavior of Americans.

Census Selling

Much to the chagrin of many the housing market won’t see a bottom at least in California until 2011.  There is some positive aspects to this including more affordable housing for many.  It will also lighten the debt load for households in the future.  It may also give people the incentive to purchase homes in areas they plan on staying in and investing their time in creating a better community.

Foreclosures are still at historical highs.  Given the recent housing report for Southern California and the modest jump in sales, I think it is important to look at the actual sales and how they played out in various regions.  Let us first get a population count for the 6 major counties:

Population Count For County:

Los Angeles:               9,948,081

Orange:                       3,002,048

Riverside:                    2,026,803

San Bernardino:          1,999,332

Ventura:                      799,720

San Diego:                  2,941,454

Total Southern California:   20,717,438

So that gives us the entire population count for Southern California.  The total population of California is 36,457,549 so Southern California makes up 56 percent of this amount.  Now let us look at last months sales data:

Now I made the case in a previous article that the minor bump in sales was in large part by the fire sale of homes in the Inland Empire.  Let us now break down the numbers to get an actual proportion:

Riverside + San Bernardino Total July Sales =  6,637 / (20,329 total SoCal Sold)

So these two counties made up 32.6 percent of all sales for Southern California.  Now we should look at what percent these counties make up for the Southern California population:

Riverside + San Bernardino Population = 4,026,135 / (SoCal total 20,717,438)

Total population percentage for these two counties is 19.4 percent.  So essentially these two counties are selling at twice the percent of their population representation.  I was listening on the radio to someone explain the median price drop and cautioning that sales are getting skewed because “expensive” homes aren’t selling and only foreclosures and lower priced homes are selling.  This in fact is true.  The only thing I would caution these folks about is that distress sales are now the bulk of the market even though miraculously in some of the data, foreclosures don’t pop up in multiple listing services.

These new trends are simply a way people are coping with the economic conditions.  It is very unlikely we will be seeing a second half recovery especially for housing.

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Emerging Economic Trends: Housing Swaps, Frugality, and Selling Homes in Lower Priced Areas.

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Related Posts:
■Real Homes of Genius: Two For One in Compton. Southern California Housing Bubble Hangover.
■Real Homes of Genius: Today we Salute you Paramount. 768 Square Feet for $324,900. Buy, Withdraw, Sell, Foreclose. The Cycle of Life.
■World Premier! Real Homes of Genius Video.
■Real Homes of Genius: Today we Salute you Compton. $90,000 in Los Angeles County?
■How Many People Overpaid for Their Home in Los Angeles County? Trying to get a Raw Number of Households Underwater.

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Filed under: General Electric (GE), Berkshire Hathaway (BRK.A), Goldman Sachs Group (GS)

Berkshire Hathaway Inc. (NYSE: BRK.A) stock has fallen 26% this year to a low not seen since February 2007. That does not sound great, but compared to the S&P’s 42% drop so far in 2008, Buffett looks relatively good.

Buffett has been in the news quite a bit lately. His biography tops the business book best seller list and he’s been flogger-in-chief for the administration’s $810 billion bailout plan — since it was signed into law, the NYSE index has lost $3.8 trillion of its market capitalization. He’s also been trying the cheer-lead America into buying stocks.

But I am wondering whether all this cheer-leading was part of the deal that allowed him to get 10% interest payments and warrants to buy The Goldman Sachs Group (NYSE: GS) and General Electric Company (NYSE: GE) a few weeks ago — their stocks are well below the $115 and $22.25 a share exercise prices on those warrants. Along with his painful loss of wealth, Buffett’s reputation has taken somewhat of a tumble as a result of his getting out in front of what now looks like a bad bailout approach.

Continue reading Warren Buffett is not perfect

Warren Buffett is not perfect originally appeared on BloggingStocks on Tue, 28 Oct 2008 11:56:00 EST. Please see our terms for use of feeds.

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Filed under: Deals, General Motors (GM), Recession

With talks swirling about low-interest taxpayer funded loans for General Motors (NYSE: GM), there’s a lot of discussion about whether the automaker is too big to fail.

Center for Automotive Research David Cole estimates that a GM bankruptcy could cost America two million jobs. With that in mind, some defenders of the industry have pushed for billions in loans for the industry, arguing that the costs of keeping the guy in a coma on life support are outweighed by the catastrophic fallout that would result from the company’s failure.

They may be right about that, but here’s the issue: any bailout could be structured in a manner that transfers the ownership of the company to the federal government. Does that sound socialist? Perhaps — but so is billions in low-interest loans for a private company.

The problem is that General Motors stock is trading at an artificially high price on hopes that the company will receive a bailout — a bailout for GM that leaves the company’s equity intact amounts to a handout to Wall Street speculators. That’s wrong.

GM workers’ jobs can be saved without saving the holders of the company’s common stock. If a bailout should happen, that’s the way it should happen.

Would a General Motors bankruptcy really be a disaster? originally appeared on BloggingStocks on Tue, 28 Oct 2008 10:55:00 EST. Please see our terms for use of feeds.

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Filed under: Citigroup Inc. (C), Morgan Stanley (MS), Financial Crisis

Big investors who make money by selling stock short have enjoyed a money-making paradise. The Wall Street Journal provided a valuable public service by investigating how they made money shorting Morgan Stanley (NYSE: MS), helping its stock plunge in mid-September.

Conceptually, what shorts did was very simple — they shorted the stock then they bought thinly-traded Credit Default Swaps (CDSs) on the bonds of the stock they wanted to short. (The Journal quotes Erik Sirri, a Babson Finance professor now working at the SEC whose office is next to mine, on the ease of manipulating CDS premiums.) This forces up the premiums and scares investors. The short sellers, in many cases, also withdraw their considerable funds from the targets’ prime brokerage accounts; when asked why, they say that the firm in question is going bankrupt.

Needless to say, these rumors get spread around trading desks. Whether or not they’re true, many investors are inclined to withdraw their money first and ask questions later. (The bankruptcy of Lehman Brothers highlighted the dangers of waiting too long to get out — in the form of frozen hedge fund accounts.) As the stock goes down, the CDS premiums rise further, which spooks more investors and creates a vicious downward cycle for the stock — and a short seller’s paradise.

Continue reading Short seller’s paradise: Panic means big profits

Short seller’s paradise: Panic means big profits originally appeared on BloggingStocks on Tue, 25 Nov 2008 14:55:00 EST. Please see our terms for use of feeds.

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A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

“People have begun to feel like a Christian Scientist with appendicitis.” — Tom Lehrer

It is difficult to believe but earlier this year people were still debating whether or not we were in a recession. The debate broke down along the lines of, “We haven’t met the technical definition of a recession” vs. “If it smells, like a duck, quacks like a duck and looks like a duck then it’s a duck.”

One of the reasons for the debate was because there are so many different definitions of a recession.

The standard definition used by idiots and journalists (like me!) is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

Idiots and economists (like them!) don’t like this because it leaves out the unemployment rate and consumer confidence as indicators. “By using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.” Sadly, that’s not going to be an issue this time around.

National Bureau of Economic Research (NBER) says a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales.” A recession runs from when business activity has reached its peak and starts to fall until business activity has bottomed out. When business activity picks up again is called an expansionary period. I like this definition because it would let us say that a depression is the period from the end of the recession until the start of the expansionary period. If there’s no gap between the two then there’s no depression.

Like so many other things that we take for granted today, the “recession” idea was invented as a response to the Great Depression. Before then any economic downturn was called a depression. Then the tsunami hit and economists realized they needed to differentiate between it and something that’s just a big wave.

So there really is no technical definition for a depression. One guide that’s been offered is that a depression is any economic downturn where real GDP declines by more than 10 percent.  While useful this does create some difficulties for the academic types who mess with nomenclature. Consider the US GDP from 1930 to 1933:

• 1930 -8.6%
• 1931 -6.4%
• 1932 -13%
• 1933 -1.3%

So we were in a recession for all but one of those years? Personally, I would have called that duck as I saw it. Are we in a depression now? You can answer that for yourself by applying this complex economic formula I learned from a t-shirt: “Why am I in this handbasket and where is it going?”

PS: Now that the extension of unemployment benefits has passed the Senate expect to see a sharp increase in the unemployment rate — which only counts people who are collecting unemployment insurance. You are no longer officially counted as unemployed if you are not collecting insurance. A lot of people who used up their benefits but aren’t employed will now re-appear magically on the roles. They will just as magically disappear in seven weeks when their benefits are used up and the rate will go down again. However, those people won’t be any more employed.

PPS: The talking heads are now nattering about deflation. Allow me to say, you read it here first.

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