Filed under: Forecasts, Indices, S and P 500, Recession

Nouriel Roubini, the once obscure New York University economics professor who two years ago predicted the current global financial crisis and recession, said those who are turning bullish on the U.S. stock market need to reassess the data.

Roubini told Bloomberg News he was “still quite bearish on U.S. and global equities.” Despite losing much of their value already, Roubini thinks they could still lose another 15-20% before any recovery beginning towards the end of 2009.

Caveat emptor: let the (stock) buyer beware

The S&P 500 has fallen more than 40% in 2008, and with a forward P/E of about 12, one could make the case that stocks are at least approaching cheap levels, based on the post-World War II P/E average of about 17. Economist Richard Felson is not of that camp.

“Cheap compared to what? Compared to bull market high P/Es of 25 or 26, yes, but that assumes a) a return to GDP growth levels experienced before the recession hit; and b) that stocks won’t drop to lower levels. You can’t assume either, so Roubini’s downside forecast may represent ‘discretion being the better part of valor’,” Felson said. “This is a risky time to own stocks or increase positions. Stocks could become much cheaper, particularly if the recession lasts into Q3 2009.”

Continue reading NYU’s ‘Dr. Doom’ Roubini: Stocks may fall another 20% during recession

NYU’s ‘Dr. Doom’ Roubini: Stocks may fall another 20% during recession originally appeared on BloggingStocks on Mon, 22 Dec 2008 18:33:00 EST. Please see our terms for use of feeds.

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Filed under: After the bell, Earnings reports, General Motors (GM), Toyota Motor Corp. (TM), Market matters, Palm Inc (PALM), Oil

Today’s weakness could be blamed on overseas weakness, or it could be blamed on the auto industry — GM and Toyota especially. But the general feeling after watching equities on the first day of a Christmas-shortened week was that sellers were merely taking out extra cash so they could buy better presents. The roll-over in oil from last week’s sub-$35 took us north of $42.00 for February NYMEX crude, but that quickly came back under $40 again.

Below are today’s unofficial closing bell levels:
DJIA: 8,519.69 -59.42 -0.69%
NASDAQ: 1,532.35 -31.97 -2.04%
S&P 500: 871.63 -16.25 -1.83%
Top Analyst Upgrades
Top Analyst Downgrades

Dollar Tree Inc. (NASDAQ: DLTR) was cut to Sell by Goldman Sachs, but even worse, it was added to the CONVICTION SELL LIST. After shares ran so high this year, they were down over 4% at $41.80 right before the close.

Continue reading Closing Bell: Stocks end lower; DLTR, GM, TM, PALM

Closing Bell: Stocks end lower; DLTR, GM, TM, PALM originally appeared on BloggingStocks on Mon, 22 Dec 2008 16:14:00 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 satirical look at marketing and business.

Latest news has it that the Treasury Dept. is thinking really hard about maybe using some of the $700 billion from the Troubled Assets Relief Program (TARP) to do something about home foreclosures.

Neel Kashkari, who has to administer the Troubled Assets Relief Program, told Senators, “We continue to aggressively examine strategies to mitigate foreclosures and maximize loan modifications.” It is well worth noting that Kashkari offered no actual details as to what this might mean.

This doesn’t seem to indicate any change in Henry Paulson’s willingness to consider an FDIC plan to help homeowners. “Under the FDIC proposal, the government would seek to encourage lenders to modify loans by offering to share the cost of any defaults. The FDIC has said its proposal could prevent about 1.5 million foreclosures.” Paulson has said that use of TARP money for this would be a misuse of the funds. This is odd given his willingness to spend the money on just about anything except homeowners.

LATE UPDATE: NYT reports Ben Bernanke sketched out a range of options, including buying delinquent mortgages in bulk and refinancing them into government-backed programs, writing down the value of a loan’s principal amount in “cases of badly underwater mortgages,” to reflect the decay in real estate values, and bolstering a program run by the Federal Deposit Insurance Corporation that seeks to lower homeowners’ monthly payments on delinquent mortgages.

Fortunately FDIC chair Sheila Bair does seem to be the only major player in all this concerned with only helping homeowners. And she wants to know how we will get out of all this, too. On Tuesday Bair said that if the government doesn’t devise a way out of its massive financial rescue plan it runs the risk of  becoming a crutch for banks and other institutions over the long term.

“We really need to think through the exit strategy because (government guarantees) could become a crutch,” she said. Weaker financial institutions “need to be allowed to fail,” Bair added.

Bair certainly does seem to be leaning towards some sort of plan built around the Bank of North Dakota model. What’s that, you ask?

Maybe it’s time to try something new. Maybe it’s time for state governments–with federal help–to start some new banks with clean balance sheets that can begin lending on the day they open their doors. There is precedent for this.

There is the Bank of North Dakota. The BND was established by the state of North Dakota, which owns it, in 1919. The reason for its existence is that the farmers and small businessmen of the state were confounded by the same impossibility to secure loans back then that has frozen the nation in place in 2008. The banks were not lending, so the state started a bank which did lend and does to this day. It is making student loans and other kinds of loans that are unavailable elsewhere. The bank is the depository institution for the State of North Dakota’s funds and it also accepts deposits from ordinary people and businesses. Since it is a socialistic institution, not intended to make a profit, it does not have a motive to misbehave, as our private enterprise banks have done.

Any state can start its own bank using the funds it has deposited in private banks. That comes to many billions, and withdrawing so much money at one time could be all that is needed to send any number of banks into death throes. So the switchover would have to be carried out gradually with the federal government, which is so free and easy with its cash, supplying the startup money. (Nepotism alert: author of the above is Nick von Hoffman, my father.)

The BND is a non-profit with very limited services and is not FDIC insured, so it isn’t really a competitor to the commercial banks. It is worth noting that the BND has never in 90 years lost money.

In the spirit of bipartisanship — and common sense — why didn’t Bair get a Cabinet post?

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Source [blownmortgage]

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Filed under: International markets, Newsletters, Commodities, Agriculture, Stocks to Buy, Potash Corp. of Saskatchewan (POT)

“Investing in agriculture-related companies has been one of our main themes for the past year, and we still favor it,” say resource experts Roger Conrad and Yiannis Mostrous.

The co-editors of Vital Resource Investor note, “We’re adding a new stock to the portfolio that should benefit from the increasingly higher global demand for fertilizer: Potash Corp. (NYSE: POT).

“Potash is the world’s largest and lowest-cost publicly traded potash producer, the fastest-growing segment in the fertilizer business. Its potash reserves are sufficient for more than 100 years of production.

“The company controls about 70% of the world’s excess capacity. Potash Corp is also the world’s third-largest phosphate producer and fourth-largest nitrogen producer. Current phosphate reserves should last more than 50 years.

Continue reading Potash (POT): Planting profits for global growth

Potash (POT): Planting profits for global growth originally appeared on BloggingStocks on Tue, 28 Oct 2008 13:52:00 EST. Please see our terms for use of feeds.

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Filed under: International markets, Newsletters, Commodities, Agriculture, Stocks to Buy, Potash Corp. of Saskatchewan (POT)

“Investing in agriculture-related companies has been one of our main themes for the past year, and we still favor it,” say resource experts Roger Conrad and Yiannis Mostrous.

The co-editors of Vital Resource Investor note, “We’re adding a new stock to the portfolio that should benefit from the increasingly higher global demand for fertilizer: Potash Corp. (NYSE: POT).

“Potash is the world’s largest and lowest-cost publicly traded potash producer, the fastest-growing segment in the fertilizer business. Its potash reserves are sufficient for more than 100 years of production.

“The company controls about 70% of the world’s excess capacity. Potash Corp is also the world’s third-largest phosphate producer and fourth-largest nitrogen producer. Current phosphate reserves should last more than 50 years.

Continue reading Potash (POT): Planting profits for global growth

Potash (POT): Planting profits for global growth originally appeared on BloggingStocks on Tue, 28 Oct 2008 13:52:00 EST. Please see our terms for use of feeds.

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Option ARMs are arguably the most toxic mortgage product on the market.  I remember having this discussion with people many years ago.  Without fail, you would get someone throwing out the hypothetical unicorns in the sky case, “well what if you are a doctor with a side business and don’t want to document your income?  […]
Related Posts:
■Option ARMs for Dummies: Why 4.5 Percent Mortgages Rates will do Absolutely Nothing for these Toxic Assets.
■When will my home cost me an ARM and a leg?
■The Housing Wave of the Future: Two Main Mortgage Tsunamis.
■Stage Two of the Mortgage Collapse: $500 Billion in Pay Option ARMs Meet the Piper in 2008 with 60 Percent Being in California.
■California Housing Prices: 3 Different Measures Showing Different Prices. Calibrating Housing Prices for California.

Option ARMs are arguably the most toxic mortgage product on the market.  I remember having this discussion with people many years ago.  Without fail, you would get someone throwing out the hypothetical unicorns in the sky case, “well what if you are a doctor with a side business and don’t want to document your income?  This product makes sense.”  Yet that is the exception and not the rule as we are now painfully learning.  I’m sure some of these people were sincere but the vast majority were simply delusional and licking their gluttonous chops for a fat commission.  Never were they looking out for the client.  To ease their conscience they tell themselves, “well at least I warned the client about the risks of the mortgage.”

These loans were setup for that unicorn pie in the sky scenario of the wealthy business owner who simply does not want to document income but instead, became the primary product for many brokers in states like California and Florida for those who needed that extra pinch of leverage to buy that over priced home.  Back in June of 2008 I wrote a detailed articled called:

Stage Two of the Mortgage Collapse: $500 Billion in Pay Option ARMs Meet the Piper in 2008 with 60 Percent Being in California.

In it I talk about the dangers of the option ARM mortgages.  I don’t think the article could have been clearer.  Many of you saw the CBS 60 Minutes piece this weekend.  I know because I have gotten a lot of e-mails regarding the piece:

*Click to read/watch segment

It is a good piece although late to the game.  Yet I give CBS credit because I have yet to see ABC or NBC have any substantive piece regarding this matter.  Last night I was wondering why there was a surge in traffic to the site around 6:00PM Pacific Standard Time and when I looked at the logs, I saw Google search queries of option ARM, Alt-A, and NINJA mortgages.  Ironically the query was pulling up articles some older than two years old while the CBS piece made it seem that this option ARM thing was new.  Seeing the traffic, I think many people are going to be caught off guard just like the initial stages of the subprime debacle.  These are the articles that were pulled up:

When will my home cost me an ARM and a leg? - October 12^th, 2006

“As you can see, 2006 and 2007 will be peak years in terms of subprime and jumbo loans. Given that many of these loans have prepayment penalties many folks will not be able to refinance given the limitation inherent in the loans. The reason we have not seen the impact of the current ARM resets is that the real estate market has been hot. So hot in fact that even with a prepayment penalty many were able to cash out or even sell homes before facing the piper. This circular system keeps working until appreciation stops. Not only that, rates are much higher than they were in 2004. Keep in mind that most ARMs and interest only loans are pegged to short-term rates such as the LIBOR. Basically they go in tandem with the feds short-term rates.”

Ponzi Financing - The House that Credit Built. - October 24^th, 2006

“This was the start of the Securities and Exchange Company (sound familiar?). The ironic thing was that Ponzi was losing money daily. The thing that kept him going? Debt. Basically he was paying out his investors with money that was coming in. In fact, so many people bought into the hype that widows were mortgaging their homes to get a piece of the action. When someone from Barron’s decided to examine Ponzi more closely, they realized that the company was completely unsustainable. They realized that 160 million postal coupons would need to be in circulation when only 27,000 were estimated to be in use. By August 13 Ponzi was under arrest. Even at this time, so many people had blind faith in Ponzi that they cried and held anger toward the officers who arrested him. They bought into the dream Ponzi was selling even though economically it had no basis in fundamentals.”

“”The following chart shows the percentage of Bay Area loans that were interest only or Option ARMs (know as negative amortization).”**

Year Interest Only Option Arm
2005 42.6% 29.1%
2004 43.7% 9.6%
2003 20.3% 0.8%
2002 12.0% 1.7%
2001 2.9% 1.6%”

Press Zero for Reset: Are we out of the Subprime Mess? - September 25^th, 2007

“The solution to this, even though people do not want to hear this, is a market correction. This means that local income levels and the new tighter credit standards will dictate future housing prices. In some areas this means 10 percent drops while in others this can reach 50 percent or higher. Will this happen? The data is already pointing toward this. Even if property drops 30 percent over 5 years, combined with inflation adjustments this is close to a 50 percent drop. Some areas in Los Angeles are already seeing 20 percent adjustments year-over-year.”

Stage Two of the Mortgage Collapse: $500 Billion in Pay Option ARMs Meet the Piper in 2008 with 60 Percent Being in California. - June 14^th, 2008

“Many of these owners are going to be highly tempted to moonwalk away from their mortgages. Does Bank of American really want to assume this option ARM time bomb? They are scheduled to close their deal with Countrywide sometime in the third quarter yet I simply do not see how they avoid astronomical losses on the current mortgage portfolios and REO properties. Unless California suddenly goes into another bubble and prices start going up, we are in for a tough few years and the current California multi-billion dollar budget short fall isn’t pretty either. Keep in mind the California budget which has now been revised to a $17 billion short fall is going to force us to make some hard decisions. Either raise taxes to plug budget gaps or cut spending (aka jobs) and only increase the unemployment numbers and thus depress the economy further.

No matter how you slice it, California housing is going lower and pay Option ARMs will be the next crisis that will send the credit markets stumbling. You can bank on that.”

I bring these articles back to the forefront because nothing really has changed at its core.  The option ARM fiasco is going to be big especially for states like California and Florida.  Given that California is 12% of the nationwide GDP, this will impact the entire country to a certain degree.  In addition, you can see that this isn’t new.  Back in 2006 we saw problems.  In fact, I wrote an article back in 2006 about the wonderful Charles Ponzi which now has a modern day huckster who seems to have managed to outperform him by billions of dollars in Bernard Madoff.  Charles Ponzi operated in the Roaring 20s right before the Great Depression and here we have another character right in the midst of our own collapse.

I want to bring the option ARM issue up again because this will be a big (if not bigger) story than the subprime debacle.  In addition, we already know prime mortgages are now going bad but you haven’t seen anything until you see an option ARM recast in California.  I have.  A few people that I have talked to who were unfortunate enough to be placed in option ARMs are already geared up to stop making payments once their rates recast on their underwater homes.  They are not alone.

Let us now take a look at multiple charts produced regarding this major issue:

 60 Minutes used a similar chart to the first one.  What you’ll first notice is the subprime wave is essentially done.  That is why it was such a frustrating thing to hear people say that this economic collapse was a subprime problem.  No.  Subprime was merely the canary in the coal mine.  It went down first.  The amount of subprime loans made compared to the $50 trillion in global wealth that has disappeared actually looks like peanuts now.  I remember when I would write an article stating the stunning $35 billion a month in resets and thought to myself what an incredible number it was.  Now, $35 billion is a capital injection into a crony capitalist bank on a weekend after eating a Mr. Goodbar or posting a private Facebook message to your buddy saying, “the deal iz done!”

What is more important with the chart above is now you see a second wave coming.  The Alt-A and option ARM wave.  The problem is many of these loans are securitized outside of Fannie Mae and Freddie Mac.  Short of the government becoming a default toxic mortgage dealer, these loans will recast starting in heavy numbers in early 2009.  California has over 50% of the pay option ARM market.  Take a look at the median prices in our sidebar and you’ll get an idea how that is going to play out.

These charts show how the recasting of loans will actually hurt borrowers on a montly level.  Not only will their payment jump, but it will jump significantly.  2009 will see the first flurry of recasts with many payments jumping up approximately 40%.  In 2010 payments are jumping up closer to 50%.  2011 and 2012 see payments jump up in some cases by 80%!  My gut tells me upwards of 80% of all underwater pay option ARMs in California will default.  Bookmark it like the other articles linked above.  And why wouldn’t they default?  Prices are not going to jump up.  If IndyMac is any sign of loan modification success, we already know over 50% re-defaulted within 6 months.  And IndyMac was an option ARM specialist!  The market is only getting worse here in California and Florida, the 2 primary option ARM states.

The problem is that these toxic mortgages became mainstream and a large part of the market.  They were essentially ticking time bombs betting that real estate would appreciate at levels it could never maintain.  2, 3, and even 5 year teaser rates.  Well, look at the above chart.  2004, 2005, and 2006 were the biggest years.  Like clockwork they are exploding.  The only problem is that they are turning sour when the market is already battered.  Sadly, option ARMs provide very few options to those now stuck with them.

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Option ARM: No one saw it Coming According to the Mainstream Media. The Alt-A and Pay Option ARM Tsunami Quickly Approaches. Charting the Option ARM and Alt-A Wave.

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Related Posts:
■Option ARMs for Dummies: Why 4.5 Percent Mortgages Rates will do Absolutely Nothing for these Toxic Assets.
■When will my home cost me an ARM and a leg?
■The Housing Wave of the Future: Two Main Mortgage Tsunamis.
■Stage Two of the Mortgage Collapse: $500 Billion in Pay Option ARMs Meet the Piper in 2008 with 60 Percent Being in California.
■California Housing Prices: 3 Different Measures Showing Different Prices. Calibrating Housing Prices for California.

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Is it possible that a law enacted to ensure banks serve the needs of the communities the are located in might be at the root of the current financial crisis? The idea that any one thing, be it an agency, a law, an event or a person, bears total responsibility for the situation is patently false. It is, however, important to understand what role each played in getting us here. Preferably before taking drastic measures to repair what may never have been broken or worse, break one of the few things still working.

When the Community Reinvestment Act (CRA) was enacted in 1977 it was intended to curtail a practice called red-lining in which banks and other depository institutions were reluctant or refused to make loans based the borrowers address. It didn’t matter if the borrower was could repay the loan, nor did it matter whether the loan was a mortgage, home-improvement loan or small-business loan. If the borrower resided or intended the loan to be used in an area the lender did not wish to lend in, such as a low or moderate income neighborhood, small town or rural area, well then the borrower faced significant challenges in getting a loan if they could get one at all. As a result, potential borrowers in these areas relied heavily on mortgage banking companies for financing.

As it was originally written, the CRA was a very general piece of legislation. So of course, scarcely a year has gone by that legislators, regulators or the financial industry have not tried tinkering with it. None of these subsequent adjustments ever required depository institutions to make loans that were unsound.

“Any loan that is made must be mindful of the sacred obligations in preserving the integrity of funds,” Robert Buchard, then executive vice president of Keycorp, a holding company based in Albany, NY told ABA Banking Journal in 1989. “These can be self-serving investments in our communities, but it isn’t a hand-out program.”

How then did we reach the point where the CRA is a potential scapegoat for the current crisis?

In part it is from the same misconception Buchard was fighting nearly two decades ago. Because CRA is associated with loans made in low- or moderate-income neighborhoods, it is easy to say the loans are high risk or that CRA forced banks to make unsound loans to borrowers incapable of repaying those loans. This perception was perhaps reinforced by loan solicitations promising homeowners cash grants or equity disbursements as part of a CRA program. These solicitations appear to be an effort to get homeowners to apply for mortgage loans using their home as collateral and are NOT part of any CRA nor does the Federal Reserve endorse programs.

“Point of fact: only about one-in-four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending (2004-2006),” said Federal Deposit Insurance Corporation Chairman Shelia Bair in a speech made at the New America Foundation conference on Wednesday. “The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules.”

Put another way, three quarters of the loans many experts say played a significant role in creating this crisis were not made under CRA. By virtue of sheer numbers, it would appear blaming CRA entirely is unfair.

This does not mean CRA is perfect with no room for improvement. That quarter of loans that were made by banks under CRA demonstrates this. It also indicates there are better candidates for reform and regulation than CRA.

Source [blownmortgage]

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