Here were today’s unofficial closing bell levels:

Dow 10,733.67 +47.69 (0.45%)
S&P 500 1,166.19 +6.73 (0.58%)
Nasdaq 2,389.09 +11.08 (0.47%)

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Continue reading Closing Bell: St. Patrick’s Day Hat Tricks (GE, FUQI, SNV, HIG, BBI, PLCM, ERC, MEE)

Closing Bell: St. Patrick’s Day Hat Tricks (GE, FUQI, SNV, HIG, BBI, PLCM, ERC, MEE) originally appeared on BloggingStocks on Wed, 17 Mar 2010 16:20:00 EST. Please see our terms for use of feeds.

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The banking system has captured our government and frustration is boiling over.  Yet those in the housing and banking industry seem complacent and even self congratulatory that we “have avoided Great Depression 2.0.”  Really?  Now we’re taking advice from the same group of cronies that led the economy off the financial cliff.  And the most troubling thing is we are at the height of unemployment even though the headline rate seems to have steadied out.  California’s unemployment rate still continues to move upward hitting 12.5 percent.  Yet all is well in delusional banking world since their idea of a solution is simply not foreclosing.  What is even worse, these banking crooks are now offering fire sale deals to other banks and hedge fund investors!  I’ve contacted a few banks about short sales and in many cases, preference is being given to “all cash” investors.  Glad those bailouts are supporting the crony banking system.

One of the most troubling trends is the belief that all is well because banks aren’t foreclosing on homes or the fact that there is no second wave.  Really?  Let us look at nationwide foreclosure filings shall we?

Who needs a second wave when the first wave is still in place?  Some in the housing industry seem to be patting their back that there won’t be a second wave of foreclosures (even though it is still high) and base this on the mounting distress inventory with Alt-A and option ARMs but no actual foreclosure filing.  The wave is hitting as people stop paying their mortgage.  Take for example option ARMs.  Nearly 50 percent of all outstanding option ARMs are at least 30 days late.  In other words, the borrower isn’t paying the mortgage!  Yet in some form of twisted abracadabra housing logic, this is avoiding the wave because banks are ignoring the problem.  The wave was the distress.  Foreclosures are still on the market.  The bank balance sheet is still loaded with mortgage junk.  But just because banks are putting their hands over their eyes doesn’t mean the issue was avoided.  In fact, it is corrupt to the core and the way they acknowledge this is absolutely stunning.  The fact that we have no solid financial reform after 2 years of major crisis is incredible.  Banks simply ignoring missed payments while taking trillions demonstrates what has become of our financial system and their idea of dealing with the problem.

Take for example HAMP:

“(Huffington Post) As of the end of January there were over 116,000 permanent modifications and over 67,000 permanent modifications pending final approval,” Geithner wrote in his letter, which the panel received last week. “This group of approximately 180,000 permanent and pending permanent modifications represents about a third of the population of total modifications who have completed the trial modification and are at a point in the process where they are able to convert to permanent.”

HAMP has been an absolute failure.  Yet HAMP is symptomatic of the bigger issue.  Banks were able to raid the entire U.S. Treasury and Federal Reserve for $13 trillion in backstops and bailouts, with no questions asked but then start talking about moral hazard when it comes to HAMP:

“Kucinich was pessimistic about the ability of any program that doesn’t involve principal reductions to help floundering homeowners. “Instead, we’re going to stay on this slow path to default, foreclosure and personal bankruptcy,” Kucinich said. “And our economy is going to continue to suffer.”

He added: “It’s funny that moral hazard is a concept when it comes to Main Street but not to Wall Street,” a reference to the massive bank bailouts.

More than 2.8 million homes were lost to foreclosure last year, according to data provider RealtyTrac. The firm expects a record three million foreclosures this year.”

I’ve talked with colleagues who are Republicans and Democrats and both are absolutely appalled by what is going on with Wall Street and the housing industry.  They have transformed our economy into one giant casino and houses are now life sized Monopoly tokens that are traded on the New York Stock Exchange with no regard to local economies.  Moral hazard applies to the masses yet those rules don’t apply to the plutocracy that sits on Wall Street.  While the stock market soars from the March low by a stunning 68%, job creation is nowhere to be found:

Where are the jobs?  Last month they blamed the snow and now next month, we can expect a big boost because of Census hiring.  That is great that we have thousands working at $16 or $17 an hour with no benefits but then what?  Are we going to do the Census every month?  Most Americans realize that things aren’t as rosy as Wall Street is leading on.  And California is certainly not doing any better:

California Doing a Housing Industry on the Budget

“SACRAMENTO, Calif.—Gov. Arnold Schwarzenegger said Tuesday that he vetoed the largest piece of legislation in a package of budget bills because it did not take immediate steps to cut spending.

Democratic lawmakers said the bill would have shaved $2.1 billion from the $20 billion shortfall projected for California’s budget through June 2011. So far, the Legislature and governor have agreed to just $200 million in spending cuts.

“It’s extremely important that we immediately jump into action and make midyear cuts,” Schwarzenegger told reporters on Tuesday. “We’re spending, right now, $600 million a month more than we’re taking in. It’s irresponsible.”

This came out on Tuesday by the way.  We still have a $20 billion shortfall and are spending $600 million a month more than what is being brought in.  So what does that mean?  It means more cuts or higher taxes.  How is this good for housing?  More importantly, how is this good for the state economy?  If we look at the unadjusted unemployment rate California is up to 13.2 percent unemployment (headline).  We are seeing 23 percent underemployment.  This is something none of us have seen in the modern era.  Yet those in the banking and housing industry are claiming mission accomplished just because banks aren’t moving on foreclosures.  This is their ultimate solution.  Because that is all they have.  This suspension of belief is their idea of avoiding the second wave.  Humor them and take this out to the logical conclusion.

Many Californians are underemployed as we have highlighted.  Those that are employed, can expect tighter wages and higher taxes thus cutting into their disposable income.  So how does this create higher home prices?  Even if banks “trickle” out inventory once that inventory hits the market it confronts the economic realities people have to live by.  That is why when we show examples of short sales they are selling at deep cuts.  Home prices have to reflect local area incomes and what people can afford.  Unless we plan on bringing back toxic waste mortgage sludge like Alt-A and option ARMs, people can only buy what their income can support.

If things are so fantastic in the housing market for California, I’m sure builders are out there in mass right?

Not exactly.  Because there is a glut of housing on the market.  And more importantly, that second wave of housing is sitting on the banks balance sheet.  So they won’t be making construction loans when they realize just how much inventory is really out there.  Just look at the above chart.  Building permits and construction jobs are at the trough.  No visible turn around.  And take a look at notice of defaults and foreclosures:

The only reason the foreclosure number has fallen was because of HAMP (which as we now know is a failure meaning more short sales or foreclosures will hit the market soon because many on trial mods will not make it to permanent modification status).  Whether it is a flood or just a steady trickle, this will happen.  And these homes sell for lower prices thus pushing area prices lower.  This is the next round for mid to upper tier markets.  They have bought some time but it is running out.  Eventually there will have to be some realization of local economic factors.

I was curious to see what industries were adding jobs:

Who will be buying the homes in 2010?  More importantly, why would people be overpaying for homes?  The above chart shows no real improvement in the real economy.  In fact, all the banking industry is doing is stalling the inevitable but at the same time sucking the taxpayer dry.  With the $13 trillion in bailouts and backstops we could have had enough to pay off every single residential mortgage in the United States and taken everyone to Disneyland.  Instead, we are financing the crony banking system full throttle robbery of the American people.

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Filed under: Products and Services, Industry, Toyota Motor Corp. (TM)

It should come as a surprise to no one that there has arrived yet another auto industry recall, similar to the ones recently experienced by Toyota Motor Corp (TM). According to RTTNews, over 400,000 cars produced by Honda Motors LTD (HMC) are being recalled for braking issues.

Honda owners are complaining that the brake pedals in their cars have become soft and low-riding over time. Honda Motors has attributed the problem to the vehicle stability assist modulator, stating that an accumulation of air is causing the problem.

Continue reading Honda Catches the Toyota Brake Recall Flu

Honda Catches the Toyota Brake Recall Flu originally appeared on BloggingStocks on Wed, 17 Mar 2010 12:00:00 EST. Please see our terms for use of feeds.

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Filed under: Industry, General Electric (GE)

General Electric (GE) used to be a blue chip. Well, I suppose you could argue it still is one, but you have to admit it hasn’t acted like one for a while. Remember when the stock hit a single-digit, multi-year low last year? That was painful, especially to someone who owned a long-term position in the business. Like myself.

Besides owning a long-term position, I tried trading the company during the economic crisis. I didn’t succeed; I eventually sold the short-term position at a loss, as I mentioned in this piece. But I still hold my long-term shares. And if you haven’t been reading the financial news lately, you’ve missed all the articles about the industrial conglomerate. Looks like everyone is talking about GE, specifically about its potential to come back in the next year or so.

Continue reading Everyone’s Talking About GE

Everyone’s Talking About GE originally appeared on BloggingStocks on Wed, 17 Mar 2010 15:40:00 EST. Please see our terms for use of feeds.

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People are realizing the problems in the housing market are simply a bigger reflection of the lingering issues in the overall economy.  There have now been a few stories comparing California with the issues being experienced in troubled Greece.  JP Morgan Chase CEO Jamie Dimon echoed his concerns regarding California.  The markets seem to underestimate how profound the issues are in the California economy.  What is more troubling is California is merely a reflection of other states.  The Legislative Analyst Office projects deficits deep into 2014 and each year we experience a deficit will require higher taxes or deeper cuts.  That is why focusing on jobs is such an important barometer for the improvement of the overall economy.  Without one net added job in California people are already counting the next housing boom.  The numbers simply do not reflect this assumption.

I want to examine some of the nuts and bolts of the market because this is where the real story is.  We know that millions of foreclosures have flooded the market.  We can understand how toxic option ARMs have become to the market even years after they were originated.  But what does this mean going forward?  First, let us examine the median sale price and monthly sales of Southern California over the decade:

Source:  DataQuick

This is a fascinating look at the market.  Even during the boom we clearly see the seasonal pattern in sales.  Each fall and winter sales drop as more people take inventory off the market.  Spring and summer overall are bigger sale months because of school schedules, family commitments, and just a general acceptance that this is when more inventory enters the market.  But you’ll notice in 2006 that the trend radically shifted.  The crash hit and sales plummeted.  An interesting phenomenon occurred where the median sale price didn’t peak until the middle of 2007 well into the monthly sale crash.  So it would appear that sales would actually lead future prices.  So the jump in sales would indicate much higher prices going forward right?  Not necessarily.  Even with the jump in sales, we are nowhere close to the average sales per month over the decade.  I ran the monthly sales number for the past decade and the average monthly sale number for Southern California is:

24,604 Sales

This includes fall, winter, spring, and summer.  In January we had 15,361 sales and the last time we had 24,604 sales or higher was back in August of 2006.  Prices have come down but the bulk of the drag to the lower side has been in lower priced home sales.  Much of this has been driven by foreclosure re-sales.  But another important factor to look at is how much are families committing to their monthly mortgage payment?  With Alt-A and option ARM products families were able to stretch their budget.  Since the bulk of loans are now backed by the government lenders are now at the very least verifying income.  Let us look at the monthly mortgage payment over this time:

Source:  DataQuick

The above tells you a lot.  While the median home price in Southern California is down by 46 percent from the peak the typical monthly mortgage payment is down 52 percent from the peak.  People are committing to half the monthly payment amount and this has more to do with the health of the economy.  I know many would love to have a $1,170 monthly mortgage for a place in Southern California.  This is already happening in many areas but not in higher priced regions like Culver City or other parts of the Westside.

It helps to look at a handful of examples to highlight what is really happening.  Let us look at pre-bubble prices in areas that have corrected versus areas that still seem elevated:

Source:  DataQuick

Now this data tells us a lot because over the past decade incomes went stagnant.  The overall inflation rate for California was 25.6 percent:

So if wages don’t explain this rise in prices and inflation isn’t the reason, can it be that some areas are still in mini bubbles?  This is very likely.  And this doesn’t apply to the entire state of California.  Some areas have corrected fiercely and prices seem to be more in line with inflation and wage increases:

You’ll also notice the difference in overall sale numbers.  What on the surface may seem like an enormous crash actually looks like a correction to the inflation adjusted mean.  I find it fascinating to see many communities heading back to the 25 to 30 percent inflation rate of California and are somehow finding a bottom in this range.  But many areas are still over priced and this will need to adjust either with higher incomes coming from better job growth or further price corrections.  Part of what is forgotten when examining the shadow inventory is the fact that these are properties in heavy distress.  The L.A. Times ran a piece confirming what we have been talking about for over a year:

“(LA Times) It’s been 16 months since Eugene and Patricia Harrison last paid the mortgage on their Perris home. Eleven months since the notice got slapped on their front door, warning that it would be sold at auction.

A terse letter from a lawyer came eight months ago, telling them that their lender now owned the house. Three months later, the bank told them to pay up or get out by the end of the week.

Throughout the country, people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.

Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.”

Now this wouldn’t be such a big deal if it were a handful of mortgages.  But just look at this mind blowing chart:

Source:  LA Times

Mortgages that are 90 days late and a foreclosure hasn’t been filed are up to a record shattering 5.1 percent.  Now think about that.  How is this a sign that things are good?  So we’ve reached a point where simply staying put in your home, rent-free is a strategy being used by banks to deal with the foreclosure crisis.  The big losers are the prudent in this country.  How many Americans are paying their mortgages diligently, probably needing to take a second job if there is one to be had, just to make sure they pay their bills?  Wall Street has the luxury of making disastrous mistakes and yet they are bailed out to the tune of trillions of dollars and offer billion dollar bonuses.  Those that over extended are then put in a lottery essentially where some can stay rent free for one and even two years before an eviction depending on when banks get to it.  Others are kicked out quickly.  Some are put into HAMP.  The big issue?  No clear uniformity to what is going on.  What is wrong with renting?  Half of those living in giant Los Angeles County rent.  There is this stigma attached to renting a home and massive subsidies for homeownership.  This carefully orchestrated play is now being held up even though tens of thousands now are living rent free in over leveraged homes.  Housing seemed to work well when it was a boring, track inflation play that if you were lucky after 30 years, you had a place over your head and no mortgage.  Since when did it become a rule that every 5 to 7 years you had to “trade up” a “starter home” just so you can progress forward?  This twisted logic seemed to make sense because how else were most families going to save $100,000 to $200,000 just for a down payment on a 1,000 square foot home in a decent area?  Of course that broken trend is now unraveling.

So putting this altogether, why would anyone want to buy in this current climate?  Transparency is really not to be found.  What real reform have we gotten after these two agonizing years?  Is this reason in itself to buy?  The headline data seems to tell us things have stalled but if we look at a deeper analysis, foreclosure filings, those 90 days late and with no foreclosure pending, bankruptcies, and other in the trenches data we realize that the market really isn’t healthy.  We have yet to add one net job since the recession started.  How are home prices going to go up?  So let us assume the next big play is to simply turn ourselves into Japan and go for our second lost decade by putting banks into a permanent zombie position and ignoring problems.  Pretending someone in a home that isn’t paying their mortgage is somehow good is probably a clear example of turning our housing market into a zombie market.  Yet how is this good for prices?  The same arguments were made in Japan and prices went nowhere for over 20 years!

It is interesting that the flurry of buyers jumping into the market have tapered off in the last few months.  There was a period of two months where the tax credit and uptick in sales seemed to move a large number of people off the fence.  There was a good amount of e-mail during this time.  This has now waned significantly.  But guess what?  Prices are still near the trough.  Why?  Because incomes are stagnant.  Maximum leverage mortgages are gone.  Unless you plan on staying put for 30 years and can cover your mortgage comfortably, that future buyer is only going to be able to afford what their household income can stretch with a government backed loan.  And looking at that typical monthly mortgage payment for Southern California it isn’t jumping up quickly.  In other words, know the metrics of where you’re buying before jumping in.

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Filed under: Competitive Strategy, eBay (EBAY), China

When it comes to electronic payments, China is still in the early stages. But in light of its huge population and fast-growing economy, the potential is enormous.

So, eBay’s (EBAY) PayPal is getting aggressive in the country. For example, the company has struck a partnership deal with China UnionPay, which is the biggest electronic payments provider in China.

Continue reading PayPal Makes a Move on China

PayPal Makes a Move on China originally appeared on BloggingStocks on Wed, 17 Mar 2010 13:40:00 EST. Please see our terms for use of feeds.

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For borrowers, Federal Housing Administration changes are on the horizon. Some of the new policies are effective next month, and are all part of a plan to bolster FHA’s reserves.

Last year, FHA insured one-third of all approved mortgages. The capital-reserve ratio is no longer at the Congress-mandated 2 percent threshold. FHA Commissioner David Stevens even voiced his intention to hire a chief risk officer, a position the administration has never had since its 1934 inception.

“To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action,” Stevens said in a September press release.

In efforts to avoid a bailout, the FHA will make a series of policy changes:

• The up-front mortgage insurance premium (MIP) will increase to 2.25 percent from 1.75 percent. This change is effective starting April 5.
• To qualify for the FHA’s 3.5 percent down payment program, borrowers must have a credit score of at least 580. Those with a sub-580 score have to put down at least 10 percent.
• Seller concessions will be reduced to 3 percent from 6 percent, meaning buyers will not be able to inflate a home’s appraised value in efforts to pay off their closing costs.
• The FHA will implement an array of enforcements on FHA lenders, such as publicly reporting lender rankings and seeking legislative action that would make mortgagees for loans they give and underwrite.

“When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history,” Stevens said in a January press release.

In addition to upping the MIP, the FHA is requesting legislative action to increase the maximum annual MIP. Should such legislation pass, the FHA plans to shift some of the up-front MIP to annual MIP, allowing borrowers to pay off the increase in monthly payments.

With less than a month before the MIP jump is effective, the other policy changes have no definite start date, but the FHA plans to implement all changes by this summer.

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1. Cutting LTVs is coming to a market near you!
2. Commodities Reprieve Coming to an End
3. Housing starts fall to 17-year low

Related posts:

1. Cutting LTVs is coming to a market near you!
2. Commodities Reprieve Coming to an End
3. Housing starts fall to 17-year low

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Few subjects have created as much debate as the issue of walking away from of your home when there does not seem to be any financial sense in staying. Walking away from your home when it is worth less than the balance on your mortgage seems like the sensible thing to do for many. Research shows that when homes drop in value by over 25% owners start to think seriously about letting their homes go.

Many ask themselves, “why not let the home go in default and rent a better place for less?

It is worth noting that we are talking about people who can afford their mortgages but simply decide to let their home go as a financial strategic calculation. The difference between truly troubled homeowners that would like to keep their homes and those that are defaulting on a mortgage to save money can be separated by a very thin line. But the evidence points to a growing number of borrowers that simply do not want to live under what many are calling “house arrest”.

Some experts are pointing out that around 17% of those that defaulted in 2008, over half a million homeowners, did so because of a strategic calculation and not due to a lack of income to pay the loan.

It does seem like we are at the turning point in society’s psyche, a kind of revolution. People are not as attached to their property. Mortgage brokers are advising many to walk way, and a lot of them are listening. Something that has become common again is for homeowners to simply mail their house keys to the lender as a way of setting off a foreclosure, what is also called jingle mail.

There is nothing new to this reaction; previous recessions and crisis were also characterized by homeowners walking away from their homes. However what is different is the scale of the number of foreclosures. Four years ago, a handful of people had negative equity on their mortgage, now there are over 4.5 million homeowners whose house is worth less than 75% of the balance of their mortgage. The Real Estate is not doing any favors to the economy and is stalling again; causing experts to estimate that by June the number will climb to 5.1 million in June. That is simply a huge figure, it will mean that 1 out of every 10 homes in the United States will be going through a foreclosure.

Still many believe that this so called jingle mail revolution is the product of the media’s imagination. Something that is talked about but not actually carried out. The figures seem to say otherwise, but it is true that people generally do not want to move. They do not enjoying moving neighborhood, or their children’s school, which is what keeps so many underwater homeowners in their homes.

The eternal question is what the government should do about the whole matter. According to one estimate it would cost around $745 billion to bail out all underwater borrowers in the US. This is a little more than what it cost to bail out the banks in 2008. Most of us think it would be silly and wrong to bail out every troubled homeowner, but if the government does nothing it could cause even more homeowners to walk away, further crippling an already fragile economy.

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1. Loan Modifications, NPV Test the Key to Loan Modification Success
2. Loan Modifications Scrutinized, 1340 Loan Modifications Investigated in California
3. Loan Modifications, What Is The Situation 3 Years After The Housing Bubble Burst

Related posts:

1. Loan Modifications, NPV Test the Key to Loan Modification Success
2. Loan Modifications Scrutinized, 1340 Loan Modifications Investigated in California
3. Loan Modifications, What Is The Situation 3 Years After The Housing Bubble Burst

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Filed under: Stock Picks

Some plays just exude optimism and signs of higher earnings up ahead. Truck manufacturer Paccar Inc. (PCAR), which I first wrote about on July 6, 2009 at a price of $30.81, is one.

Paccar’s revenue should increase about 10-13% 2010, after bottoming in 2009, as economies in North America, Europe, and in emerging markets continue to recover.

Continue reading Paccar: Cleaner Trucks, Higher Profits

Paccar: Cleaner Trucks, Higher Profits originally appeared on BloggingStocks on Tue, 16 Mar 2010 14:50:00 EST. Please see our terms for use of feeds.

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