Friday, February 27, 2009

Was the Beijing building boom a mirage?

I've watched from afar in amazement as China has built it's economy and infrastructure. In 1990 when I wrote that China was the next great economic power to emerge and that China, not Japan was the greatest threat to American economic dominance, even I never envisioned the China that sits before us today (btw - I got B- on that paper because my professor thought the idea of capitalism emerging in China was a silly concept). Via the LA Times....

"By Rodman's calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, more than all the office space in Manhattan. And that doesn't include huge projects developed by the government. He says 100 million square feet of office space is vacant -- a 14-year supply if it filled up at the same rate as in the best years, 2004 through '06, when about 7 million square feet a year was leased."

Two huge items in that paragraph -
1) China built more office space since 2006 than all the office space that exists in Manhattan

2) They have a 14 year supply of commercial real estate at the peak demand rates of 2004-06.

China's economy is clearly slowing and if the market has 100 million square feet of surplus inventory today, you can imagine what the market will look like in 2010 or 2011.

I often kid that everything made in China is meant to be disposable. A TV used to last 30 years, now lasts 2. However, I never thought I'd see the day of disposable stadiums....

"The National Stadium, known as the Bird's Nest, has only one event scheduled for this year: a performance of the opera "Turandot" on Aug. 8, the one-year anniversary of the Olympic opening ceremony.

The venue, which costs $9 million a year to maintain, is expected to be turned into a shopping mall in several years, its owners announced last month.

A baseball stadium that opened last spring with an exhibition game between the Dodgers and the San Diego Padres, is being demolished. Its owner says it also will use the land for a shopping mall."

Sounds like a good time to short the mall industry in Beijing. Seriously, you built a stadium for an exhibition game and then tear it down?

Ultimately, this real estate issue may have some consequences.....

"Before that happens, the situation could get worse. Most of the real estate has been financed by Chinese banks, which have avoided writing down the loans. Eventually, they will be forced to, and that probably will have a ripple effect throughout the economy."

Hmmm, banks writing down loans and that could have a ripple effect on throughout the economy......where have I heard of that happening before?

Can Twitter make money?

FT asks whether Twitter can ever make money - here....

Clearly Twitter is heading down the road to profitability via ads served to users similar to the ads on Facebook. I'll grumble when they do it, but I'll probably keep tweeting...

It took me awhile to be won over by the world of microblogging, but I now see the power of twitter. If you follow the right people, smart people, & connected people, your twitter account can become like a real-time news crawl updating with relevant data non-stop.

A smart step would be for Twitter to identify power users (maybe via a digg-style popularity tool) and employ a Twitter editorial board of top posters.

My fear is that Twitter may be overtaken by the mlm scammers. There appear to be quite a few of them on board already.

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Like a gambler in Vegas down to his last $5, we're doubling down on Citi...

So far we've kicked about $45 billion into Citibank and we're on the hook for another $300 billion in loan guarantees. The total value of Citibank is about $13 billion and falling. Like I posted last night we can reshuffle the pieces but the equity is practically worthless in these banks. Saving them at this point is well....pointless.

Unfortunately, Sec Geithner and Larry Summers are too proud to admit a mistake and after today's announcement there is no way we'll nationalize Citibank. So we'll keep trying to "save" Citibank with more money from you and me. GM and Chrysler have to really be steaming in Detroit.

Keep sending in those taxes, we're going to need to give it to Citibank.

" Citigroup and the Treasury Department announced a deal early Friday that will give the federal government control over up to 36% of the bank's common stock.

Citigroup shares tumbled 46% in premarket trading".

The "value" of our "investment in Citigroup might be wiped out by noon at this rate.


Thursday, February 26, 2009

Banks, Water, and Writing, Oh my....

I think that Paul Krugman goes off the reservation from time to time, but on the issue of the banking crisis I think we're on the same page. I don't think this is a criticism of the Administration, but rather the teams that are in place at Treasury and at the Fed. I don't have the original post but here is what Nobel Prize winner Mr. Krugman had to say about the latest "plan: to emerge.

"I’m trying to be sympathetic to the various plans, or rumors of plans, for bank aid; but I keep not being able to understand either what the plans are, or why they’re supposed to work. And I don’t think it’s me.

So the latest is that we’re going to convert preferred stock held by the government to common stock, maybe. Here’s my stylized picture of the situation:

What Treasury now seems to be proposing is converting some of the green equity to blue equity — converting preferred to common. It’s true that preferred stock has some debt-like qualities — there are required dividend payments, etc.. But does anyone think that the reason banks are crippled is that they are tied down by their obligations to preferred stockholders, as opposed to having too much plain vanilla debt?

I just don’t get it. And my sinking feeling that the administration plan is to rearrange the deck chairs and hope the iceberg melts just keeps getting stronger."

I agree - swapping preferred stock (green) for common stock (blue) is kind of irrelevant if the debt (red) exceeds assets (black). Or maybe Mr. Krugman is just ticked that NY Times is a $4 stock and he didn't get picked for a role in the Administration :)

I think I've mentioned before that one of the great long-term industrial opportunities lies in the production of safe, affordable fresh water. It is an issue for industrialized nations for agricultural needs and it is going to be an issue in central Asia with 2.8 billion people looking to the Himalaya's for more water.

Well, this is little more than a singular data point on that trend line, but it is interesting.....

California to Stop Water Deliveries to Farms

California authorities report that most state and federal reservoirs are at their lowest levels since 1992. Therefore, the U.S. Bureau of Reclamation, which operates a massive network of dams, canals and pumps that moves water between Northern and Southern California, is stopping water deliveries to state farms for a three-week period beginning March 1st for the first time in 18 years.

It's unclear what this means for production of produce, but expect to see more and more of those little signs popping up at the grocery store that say "Due to water restrictions in California. Tomatoes will be $17.99 per lb until further notice"

This is way off-topic but I there's an interesting piece over at the BBC on the death of handwriting.

"Christmas cards, shopping lists and what else? The occasions in which we write by hand are fewer and fewer, says Neil Hallows. So is the ancient art form of handwriting dying out?
A century from now, our handwriting may only be legible to experts.

For some, that is already the case. But writer Kitty Burns Florey says the art of handwriting is declining so fast that ordinary, joined-up script may become as hard to read as a medieval manuscript.

"When your great-great-grandchildren find that letter of yours in the attic, they'll have to take it to a specialist, an old guy at the library who would decipher the strange symbols for them," says Ms Florey, author of the newly-published Script and Scribble: The Rise and Fall of Handwriting."

Every time I sit down to scribble a note to a friend or a teacher I'm reminded of the slow deterioration of my own handwriting skills. Since we're re-inventing everything else we do how about a proactive approach to handwriting. Teach kids the basic printing skills, but let's give up the hope that they'll ever have great ability to write in script. The extra 2hrs/week spent writing could be applied to actual keyboarding skills (instead of what passes for keyboarding - point/click via mouse).

Okay, I'm off my soapbox for now.

Freak the Geek out. Withdraw all your money and hide it.

Wednesday, February 25, 2009

Is predictability returning?

Well, I think it's a little early to say companies are seeing any increase in the visibility of their operations, but I thought it was interesting that both Nissan and Intel today noted that demand seems to have found a new level that allows for additional predictability. As a result, Nissan is restarting some production and Intel said the tech market is becoming increasingly predictable.

Now, the skeptic in me says yes Intel, it is more predictable. You can now predict that your sales will fall 5%/month for the foreseeable future. An optimist my take a different view of the quote.

On the subject of prediction - an interesting little UK company called received another round of financing today ($13.5mil).

If you have 20 minutes to kill, it's an interesting waste of time to take their visual DNA test. Members that take the test can join a social network with other similar personalities, etc. I could see this firm selling their idea to Facebook or Twitter (or more likely, one of these firms should spend 30 minutes coming up with a similar idea).


Traffic update again - Closing in on 2,000 visits this week thanks to Twitter, Facebook and Newzjunky. By far the most visits this year! Keep spreading the word....

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Bailout Comedy.....


Japanese exports fall 46%

With all of the buzz around the President's speech and Fed Chairman Bernanke's testimony this story out of Japan kind of fell between the cracks. Asia is really teetering and frankly many of the countries in the Asia Pacific rim have probably slipped into a deep, deep recession if not a depression. It will take many months of data to confirm this shift, but the magnitude of the moves are unprecedented.

"During the last three months of 2008, Japan’s economy shrank a dramatic 12.7 percent from the year-earlier period, and the trade data for January, which was released Wednesday, underpinned economists’ views that the start of 2009 is looking even worse.

Exports plunged 46 percent from a year earlier and imports dropped 32 percent, echoing similarly sharp declines reported recently by China and Taiwan."

The political and economic impact of Asia slipping this far, this fast will only show up over time.

Finally, in another example that no one on Wall Street can tell the truth...

Banker Support Group was faked.

This article initially garnered a lot of buzz because it seemed so unbelievable. Girlfriends of bankers forming a support group because they're boyfriends were out of work or suffering through lower bonuses. Unfortunately, the whole thing turned out to be another Wall Street lie:)

Tuesday, February 24, 2009

Losers have a day in the sun!

I think I mentioned earlier today that many of the weakest stocks, GM/Alcoa, etc had an explosive day today. Many were up 10-25% on no news.
The best theory that I can come up with is that some smart technical analysts warned of a potential sharp bear market rally in the near-term. If this were the case, many shorts would rather lock in their gains than watch them get eroded by a huge (albeit short-term) rally. The chart above shows that the 50 worst performing stocks in the S&P 500 this year were up 13% today. In the best of times, that's a great year, not the sort of return you'd expect in a day!
I think I've said it before, but it bears repeating - healthy markets do not suffer violent swings (up or down) like this. The markets are clearly confused and being driven by the gamblers.

Assessment appeals are soaring...

Well, here's one booming business for you - a property tax attorney specializing in tax appeals. As I've said before, NJ is not a perfect comp for Upstate NY, but I think their real estate tax issues offer some insights into future issues for NNY.

"The burden is on homeowners to use data to show their home value, as of October 2008, is too high based on other sales. That could be hard in a year when sales were few and far between, providing little evidence for homeowners to make their case.

“We’re anticipating a substantial number of tax appeals,” said Louis Izenberg, an appraiser who represents towns and large property owners. “Having said that, at the end of the day, the New Jersey Tax Court relies upon evidence, and for the first time I can recall, we really don’t have an abundance of data.”

"Some of the strongest candidates for reductions are homeowners whose towns last did property assessment updates around the height of the housing boom, and owners of high-end properties, experts say."

Since many local towns (Clayton and Alexandria Bay come to mind) reassessed in 2006/2007 it seems like they might be in for some appeals. However, the biggest challenges will be finding comparable sales data. With so few sales occurring in the last 4 mths it is going to be difficult to find data to support an appeal.

“We have currently about 2,500 appeals pending, and we’re ready to file about 1,000, and I’m going to see another 1,000 after that,” said Livingston property tax attorney Lee Holtzman. “They’re coming out of the woodwork here. Everyone’s complaining.”

Wow, 4,500 appeals!! At an average bill rate of $150/hr these attorneys are going to be buying up distressed properties in the Hamptons next year.


The no news rally returns...

I don't have a good rationale for today's rally outside of the normal rumors, maybe a dead cat bounce or talk that nationalization is off the tables for the time being. If I hear something concrete I'll put it up later.

This is why these markets are so dangerous for non-gamblers (back in the good old days these people would have been called "investors"). We broke back above support lines today and if we hold this could be the beginning of a strong bear market rally. I'll reiterate that we're eventually going lower, but rarely do markets move in straight lines.

If you're looking for the bailout calculator check the post below.

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What's your share of the bailout costs?

I think the numbers used in this calculator are flawed so......garbage in/garbage out. Still it's fun to play around with the data to see how much your taxes may change in the future.


Housing tumbles again but the markets are holding up...

Some of the retailers weren't as bad as expected (I don't know how, but Home Depot cut it's sales forecast by $2 billion !!! and it was viewed as a positive??) so the markets have been holding up. The gamblers --- I mean traders --- will be whipping the markets around on any little bit of news or rumor. Bernake is talking about a recovery in 2010 but frankly he hasn't been right on one single issue since taking over at the Fed. As more of President Obama's speech leaks out expect the market to react swiftly to that news.

Housing sales and prices plummeted across the country in December according to the Case/Shiller S&P home index. Surprise, surprise. What I do find interesting is this notion that home prices are back where they were in 2003. Really, well, I sold my house in NJ in 2003 and I know that comparable homes listed in my neighborhood are still listed for 50-60% above the prices of 2003. I'd love to find some waterfront properties in Clayton under $200k (there were at least 10 properties like that in 2003).

My point is that while some markets have retreated quickly, in the Northeast we may still have further to fall.

I'll also make one of my famous 50 year predictions - The resurgence of the Rust Belt from Chicago to Syracuse might be driven by access to clean water. Yes, the weather is beautiful in California, Arizona and Nevada, but I suspect that they will face critical water shortages in that region in the coming decades. Yes, it's miserable in the Northeast and Midwest for 9 mths/year, but we have plentiful and relatively clean freshwater. If I'm still around in 2059, let me know how that prediction worked out.

On a related subject consider the status of housing in Chicago -"But given the states of the housing and credit markets, almost 99 percent of homes lost to foreclosure in 2008 went back to lenders—a total value of $1.9 billion in Chicago, according to data provided by the Woodstock Institute, a Chicago-based think tank.

Banks don't want to be landlords, so the properties usually sit vacant until they sell. And very few are selling. Census data show that from 2000 to 2007, the number of vacancies in Chicago jumped 82 percent to a record 165,679 housing units."

166,000 vacant units - that's a huge amount of excess supply.

Monday, February 23, 2009

Tons to cover...

But my wife's in NJ this week and my oldest just fell asleep, so bear with me while I try to run down the highlights.

The markets traded lightly throughout the day, but the "Sunday Surprise" (a new Washington tradition to goose the markets with a "plan" on Sunday night) fizzled before the markets opened. I think it's clear that the markets are not happy with a semi/partial/kind of/sort of nationalization. The markets need clarity - force Citi into bankruptcy or nationalize them. In a weird twist, despite the weakness in the markets today, the financial stocks actually acted well. However, I remain convinced that buying most of these stocks is akin to gambling. In 6 mths they are a double or $0.

On a separate note, my opinion is consistent on the issue of bankruptcy. If it's good for GM/Chrysler it's good enough for Citibank. Unfortunately, for GM they don't have any highly placed friends inside the beltway.

The technical levels that everyone was watching were 7,500 on the Dow, 752 on the SPX and 1310 on the NASDAQ. We've taken out two of these technical supports - the next stops technically are around 6,500 on the Dow and 700 on the S&P. We're now back near the prices last seen in 1997.

Like the cousin in the Dominican Republic that eventually blows your cover, AIG is the thorn in our side that won't go away. The joke of the day circulating on trading desks is that AIG is waiting to hear what the banks want, what the car companies want and then they'll just ask for the rest.

AIG should have been put out of its misery in September (disclaimer - I worked for AIG back in the early 90's when we were viewed as being masters of creative financing) but because no one can figure out what they owe or who they owe it to - the word was "They'll crash the financial system". Now AIG is facing another $60billion loss next Monday and is apparently ready to come back to the taxpayer with their hat in hand. Any thoughts on what we should put in their hat?

Microsoft, Intel, GE, Alcoa.
Alcoa - Back below prices last seen in 1987 - 22 yrs ago.
GE - Back below prices last seen in 1994 - 15 yrs ago.
Intel - Back below prices last seen in 1996 - 13 yrs ago.
Microsoft - Back below prices last seen in 1998 - 11 years ago.

I don't really have any comment other than to say, wow. GE and Alcoa are victims of the credit crisis and global slowdown. Intel and Microsoft are just victims of falling tides sinking all ships.

Miles of Idle Trains in the Midwest.
I've touched on this a couple of times, but the 30% reduction in railway cars in use speaks to the sharp fall in goods being shipped around the country. Some of this decline is due to falling diesel prices, but I think it's clear that the economy isn't rebounding until we see some of this railway capacity comeback online.

I don't offer specific investment advice, but when everyone on talk radio is hawking gold and someone goes on TV predicting gold is going to $3,500 an ounce - it's time to be suspect. This feels like gold might be the new oil of 2009. I think the natural price of gold could be $600/oz right now. We're near $1,000 today. This doesn't mean the market for cold can't remain irrational for awhile and if the stock market continues to melt, expect more people to chase the only thing that's working which is gold right now.

Tiger video
Finally......Tiger's Back. Nike's got a great new ad out welcoming Tiger back. I haven't seen it on TV yet, but it's on youtube. Welcome back!


Sunday, February 22, 2009

What went wrong and preparing for the worst case

I heard some really positive feedback on the video at Crisis of Credit so I thought I'd post the link again. It's a little overly simplified, but it provides a decent overview of what went wrong. It's a pretty clear picture that shows everyone was party to the collapse (Greenspan, investors, banks, mortgage companies, brokers, real estate agents, consumers, etc). It's an 11 min video so please watch it a home or when your off the clock :)

TRAFFIC UPDATE: Thanks to all the new readers!!! I'm averaging almost a 1,000 unique visits a week and many more readers via the RSS subscriber. Consider signing up with your email via the RSS feed on the right or just bookmark and comeback daily for your local money/market updates.

Also, look for details on a new contest coming this week to help drive traffic and keep you warm.....(that's called a tease in the biz).

The Wall Street Journal put out a to do list if you think you're job may be in jeopardy. It's a worthwhile read.......I take issue with a couple of the ideas.

1) Double that emergency fund. One way to do this is by making minimum payments on your credit cards. That runs counter to the usual advice, but for those worried about losing a job, these aren't usual times. Take the remaining money you would use to pay off the whole bill and stash it in a money-market or high-interest savings account, suggests June Walbert, a financial planner with USAA, which mainly serves military members and their families.

* This is insane - pay your minimum so your balances explode so you can store more money in a bank earning 3%? No -- cut expenses sharply and shoot to pay off any debt while you can.

2) Consider downsizing your living quarters. For example, after business began to slow at Saxon Anderson's teeth-whitening kiosk at a Los Angeles area mall, the 26-year-old downgraded from a nice single apartment to a house with five roommates.

* This is consider sacrilegious in America where we feel that every person deserves their own 3,400 sq ft. The trend of multigenerational households will return.

3) Since it's easier to get credit while you're employed, look into opening another credit card or a home-equity line of credit as a precaution in case money becomes hard to access if you are unemployed. But use this credit only as a last resort.

* Again why solve your money issues with debt? Sell your junk on ebay, take a part-time job, etc. Debt is the easy way out, but it dulls the pain for a very short period.

4) File for unemployment benefits immediately, says Linda Robertson, a senior financial planner with Financial Finesse. A severance package from your employer could delay your eligibility, but "so many of the unemployment offices are overwhelmed right now and are behind," she says.

5) Call your landlord or lender if your layoff results in immediate financial instability. Ask about deferred-payment plans for rent or find out if your lender offers programs to restructure any loans, says Ms. Robertson. If you're financially stable, you may still want to alert your landlord or lender to your employment situation in case you have trouble making future payments.

6) Look into all your health-insurance options. The government made some modifications to the federal COBRA law, which allows people to extend their previous coverage, but know that this isn't always the most affordable plan. Young and healthy? A high-deductible plan might still be more affordable.

7) Develop a bare-bones budget -- and stick to it -- so your severance or emergency funds will last as long as possible.

* This is hard for some people because they view so many luxuries as essentials. Cell phone, TV, Internet = luxuries. There was another article over the weekend that said many people are ditching high cost cell phone plans for pay as you go plans.

8) Prioritize your debts.

*Obviously secured debts (mortgage/cars) are critical, but debts are debts. Their all due eventually.

Washington resists the Nationalization groundswell

As I've said, they current crop in Washington seems to be glued to their twitter accounts to see how their plans are received by the markets. I'm optimistic that President Obama will eventually get us pointed in the right direction but with a team of advisers from Goldman and Citibank it's hard to get objective advice. The current thinking coming from such great minds as N. Roubini (btw - if this guy was so smart he'd be running money making billions - instead he's an NYU professor, nuff said) is that we need to do a Swedish style of nationalization. Take them over, clean them up, break them up and sell them back to the private sector in a few years.

This is an overly simplistic view, but it is the current thinking. Well, via bloomberg tonight we here that "The government may end up holding as much as 40 percent of Citigroup’s common stock, the newspaper said, citing people familiar with the situation it didn’t identify."

Wow, this is a bad decision. We could own 100% of Citibank and if trends continue it's going to be worth zero. This is a classic example of throwing good money after bad.

Here's my plan - let these banks fail or succeed on their own. Let's take the billions we're going to throw away on Citibank and start a National Credit Union owned by the taxpayers. If you're taxpayer you'll get a card and become a member of the National Credit Union. We can't blame the banks for not lending if we are the bank (maybe this would convince some that the problem isn't just loan supply it's also loan demand).


Friday, February 20, 2009

The crisis of credit

It's an overly-simplistic view of what went wrong, but if your still confused about what went wrong with our financial system watch
The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.'>this video.

There are additional issues related to commercial real estate, the shift to a service economy, etc, but this is a pretty comprehensive overview.

BTW - DID YOU SEE THE MARKET? Oh boy, we almost really broke down. The intraday low on the S&P 500 was 755. If we'd cracked 752 it would be all over - the market might have gapped down another 3-5% (amazing that just as the market was on the verge - news from Washington saved the day. I think someone needs to pull the Bloomberg terminals from the White House).

MSM misses the point

All of the papers and national media are focusing on the Dow's drop yesterday. Clearly it is the easiest number to focus on, but it's 30 stocks and unfortunately it includes duds like Alcoa, Citigroup, Bank of America and GE.

The more important number is 752 on the S&P 500. We closed at 779 yesterday and look to open around 764. We're getting close to the edge and while I still expect a vicious bear market rally at some point this year, the odds of going much lower have increased markedly in the past few weeks.

However, options are expiring this week and that often leads to irrational market moves.


Thursday, February 19, 2009

Wall Street comes around on credit cards...

I've been sounding the alarm on the time bomb that is facing banks - credit cards. It seems like Wall Street is finally coming around to this line of thinking.

Credit-card defaults may rise beyond 10 percent this year, breaking records and wiping out more than half of annual profit for lenders including Bank of America Corp. and JPMorgan Chase & Co., analysts said.

Loan failures are about to surpass a previous high of 7.53 percent as people losing jobs amid the U.S. recession can’t repay debt, according to Fitch Ratings. The defaults may peak at 10 percent to 11 percent of loans by yearend under a stress scenario, Goldman Sachs Group Inc. analyst Brian Foran said yesterday in an e-mail, reducing 2009 earnings for issuers including an almost 40 percent cut for American Express Co.

Charge-offs may reach the “mid-teens” in a worst-case scenario, Moody’s Investors Service analysts led by William Black said in a Feb. 4 note. Issuers would have to bolster their securities to prevent them from hitting early payment-triggers and lower-rated securities could be downgraded, Moody’s said.

Sustained defaults at 10 percent could force a major issuer to seek a rescue or sell its credit-card division, said David Robertson, president of the Nilson Report, the Carpinteria, California-based trade newsletter.

So there it is. "Could force a major issuer to seek a rescue" - they're laying the groundwork for Bailout #3. In my opinion, this is just another reason to let the failing banks fail, but Sec. Geithner is too tied to the legacy banks to let that happen.


Cutting through the clutter: Will the housing bailout work?

BTW - I'm on twitter now at Grindstone_Fin - I'm not sure I'm ever going to understand their business model of what the appeal of twitter is, but it seems to be what all the kids are doing....

Onto the news of the day....

I'll start with the premise that home prices are still too high to support. It's like putting a bowling ball on your kid's toothpick bridge - it might hold for awhile, but eventually the laws of physics will win out.

If you look at regions of the US where the housing market is showing some signs of life, it includes Florida and California where prices have plummeted 50% and foreclosures are up. People will step up and buy houses when the prices are right. Unfortunately, in most parts of the country (including most of NNY) prices remain inflated and the market can not find balance with artificial price supports.

Who will the new $75 billion plan help?

1) If your mortgage debt is 80%-105% of your home's value you may be eligible to refinance. A refinance could help cut your payment 5-10%.

My observations -
a) If you have no home equity or up to 5% negative equity you really can't afford your home. No money down mortgages were part of the problem that created the housing bubble. If you're home is only worth the debt owed - you and the bank should suffer the consequences.

b) Who is going to make the determination of loan to value? I think most home debtors think their home is still worth X while the bank might think the home is worth 50% of X. This is the great debate that will determine how many people will participate within this program.

2) The bill creates incentives for lenders to modify the terms of subprime and other loans. Participating lenders will reduce payments to no more than 38% of borrower's income, with the government matching further reductions down to 31%.

I think I've addressed this before - If you can't afford 38% of your pre-tax income going to service your debt, changing that threshold to 31% is not likely to make a material difference. After-tax, the bulk of your income is still going to be servicing debt (plus your real estate taxes are climbing).

Again, this plan seems designed to hold up prices that were never real to begin with. Consider for example, the price of an F1 Ferrari Coupe - MSRP $312k. Well, if you have to pay 20-40% down and finance the balance over 5 years, that limits the market and keeps prices in a natural balance. However, if Countrywide Ferrari Finance suddenly says they will finance up to 120% of the value with an interest only loan over 15 years and balloon payment at the end, guess what happens?

DEMAND SOARS and people that used to buy Hyundai's are lining up to buy Ferrari's. The going price jumps from $312k to $1.1 million because of demand and cheap financing. If the market changes and the price suddenly falls to $850k should we intervene to prevent millions of Americans from losing their Ferrari's? Of course not. They made a flawed financial decision based on poor judgement and loose lending terms.

Now insert a 4 bdrm ranch in Phoenix for Ferrari's in the paragraph above. Hopefully, it's clear why this bailout can't work. The Ferrari is still only worth $312k - propping it up at $850k is only delaying the inevitable.


Tuesday, February 17, 2009

Taxes, taxes everywhere....

Well, not so much anymore. Here's the triple whammy facing states -

* Sales tax - Sales tax revenues are obviously directly tied to sales. They are the most basic consumption tax - buy a $500 grill vs. a $100 grill and you pay more tax. Buy a $1,000 flat screen and you owe $82.50 in tax, etc, etc. Well, some really connected sales tax experts are indicating that sales tax revenues are not just down, they are off the charts. States have already taken several stabs at cutting their budgets to catch up with falling revenues. I just don't think anyone is being honest with themselves as to how rapid sales tax revenues might be declining.

"Throughout the country, states are reporting historic weakness. One Midwestern state reported two months of double-digit declines, which just three months ago would have been "unthinkable." A small southern state reports that never before has an entire year fall below the prior year; they are currently down 5.7% for the year, and have to go back 35 years to find similar monthly weakness. Calling the holiday season one "large discretionary item," our contact in a large Midatlantic state reports that that item "imploded like never before" in his forty years of data. "Holiday receipts will make you say: OMG," he promised, even if you're too old to talk that way."

* Property Tax - I think we've covered this in various posts, but here's the deal - property taxes are a local issue, but as homeownership declines in the US and an increasing amount of commercial real estate comes off the tax roles, local governments are going to need help. They're going to turn to the states for help. I also pity the fools that reassessed every property in the US in the last couple of years - get ready for massive assessment appeals and tax rate increases.

* Auto Sales - I don't think this stuns anyone - auto sales have also fallen off a cliff. However, I'm not sure everyone connects the dots between an 8% sales tax rate and what a 40% decline in $35,000 cars means for the states.

"January's 9.5 million rate (for autos plus light trucks) is one of the lowest in history, but its earlier rivals were at times when the U.S. population was considerably lower than it is today.
January's rate translates into 31.1 units per 1,000 people, which is 3.5 standard deviations below the mean, and well below November 1970's 36.1, a dismal performance created not by economic weakness, but by a two-month strike at GM. It's also worse than the lowest levels of the 1973-75 and 1981-82 recessions (40.8 and 38.3 respectively). It comes after a 17-year period when there was basically no auto recession. But the contraction has hit suddenly and hard: sales were 50.3 per 1,000 in February 2008."

Source: SafeHaven

In a related story:

As commissioner David Stern warned at All-Star Weekend, the NBA is bracing to have the salary cap (and luxury-tax threshold) go down this summer for the first time ever. The picture might be even gloomier in 2010.

With season-ticket renewals expected to plunge because of the weakness of the economy, some league executives expect the cap to fall significantly, which could have serious ramifications for a number of teams.


Monday, February 16, 2009

Let's watch 800 on the S&P 500

The devastating decline in Japanese GDP coupled with the renewed auto viability concerns sent shockwaves around the global markets.

The market watchers are seem very nervous at these levels. The traders and chart readers have been working the 800 - 880 range in the S&P 500, but the general consensus is that if we break through 800, we're going right back down to our 2008 lows.

I will say however, that the markets are always looking for the next bit of breaking bailout news so watch out for sharp reversals if the housing bailout or auto bailout or bank bailouts get any traction.

I mention this home sale not for the dramatic decline in home price (which is dramatic) or because it's my old home town in NJ, but because of the potential impact on real estate taxes and tax rates.

Here's the story:
A monster 6,000 sq ft mansion with 6 bedrooms and 5 bathrooms in a nice part of the best commuter town in New Jersey with top rated schools is listed for $2.25 million and sold 359 days later for $1.2 million (46% below asking price).

The absolute killer - the recent township assessment from 2007 (!!!) puts the property at $2,200,000. So now the assessor is going to get flooded by neighbors appealing their assessment. Maybe, they'll just reassess the whole town down 40-50% from 2007, but the town's budget probably won't change, so will the town have the guts to double the tax rate to keep tax revenues the same? It will be interesting to see how this plays out.

Separately, that's my new starting point on bids for real estate - I'll give you 40% of your assessed value in cash:)


They're baaaaack....

It wasn't a surprise that GM came back to Washington this week to update Congress on their progress. What may be a surprise, is that they are already putting out notice that while they are happy with this $4 billion payment they are going to need more.

"In revamped viability plans taking into account tougher business conditions than expected, GM and its smaller rival Chrysler will make clear they need more government support than the $17.4bn approved in December."

With the economy bleeding 600,000 jobs a month and after passing an $800 billion stimulus to create 4 million jobs, there is no way Washington is going to let a million auto related jobs fade away without some good grandstanding. There will still be pain (particularly at the dealer level or for individual brands), but it might be mitigated by further help from Washington. Again, the US auto industry - US automakers and foreign - was built on an assumption that Americans would buy 15 to 16 million vehicles annually. That number has fallen to a current estimate of 9 - 9.5 million. Good luck trying to adjust your business model to absorb a 45% decline in sales.

On a related note:
Nissan Motor announced plans to reduce working days at its 3 Japanese plants and it may cut wages for some Japanese workers by 20% on production holidays. They are also considering a work-sharing program.

Tax Cut Stimulus Details

Here are the stimulus tax cut details as I know them right now....

* Millions of workers can expect to see about $13 extra in their weekly paychecks, starting around June, from a new $400 tax credit to be doled out through the rest of the year. Dual income households would get up to $800. In 2010, the credit would be about $7.70 a week, if it is spread over the entire year.

This is insignificant to most people ($13/week?) but in aggregate it is VERY expensive.

* The $1,000 child tax credit would be extended to more low-income families that don't make enough money to pay income taxes, and poor families with three or more children will get an expanded Earned Income Tax Credit.

This will clearly help some struggling low-income households, but the politics of this are tricky.

* Middle-income and wealthy taxpayers will be spared from paying the Alternative Minimum Tax, which was designed 40 years ago to make sure wealthy taxpayers pay at least some tax, but was never indexed for inflation. Congress fixes it each year, usually in the fall.

This isn't a major shift - Congress just pulled forward their planned patch for the Alt Min tax.

* First-time homebuyers who purchase their homes before Dec. 1 would be eligible for an $8,000 tax credit, and people who buy new cars before the end of the year can write off the sales taxes.

There are a lot of caveats to receiving these credits or deductions (you have to buy a purple house on an odd number street on a Thursday in a county which starts with the letter Y, etc).

* Homeowners who add energy-efficient windows, furnaces and air conditioners can get a tax credit to cover 30 percent of the costs, up to a total of $1,500.

This remains a good idea - but it's a challenge to define energy efficient windows and furnaces.

* College students — or their parents — are eligible for tax credits of up to $2,500 to help pay tuition and related expenses in 2009 and 2010.

I hate these overly simplified ideas. It creates an artificial floor for college costs. If people are struggling to pay for college, then colleges need to cut their price or fail. Rather than waste money supporting the antiquated college system in the US that is producing first round draft picks in beer pong and quarters, but very few that can name 50% of the periodic table of elements, how about reinventing the college system. I think we need to create regional technical institutes that will train people in specific skills - science, engineering, accounting, etc.

* Finally, those receiving unemployment benefits this year wouldn't pay any federal income taxes on the first $2,400 they receive.

So, while the spin masters on both sides of the political aisle will talk about all of the huge tax cuts in this bill and how they will help you, I think it's pretty clear that while the cuts are huge in aggregate, they're impact on you will be relatively small.

Sunday, February 15, 2009

Weekend Update....

Well, the stimulus was passed. Up next bank bailout 2, home bailouts and another bailout for the autos!!!

Regarding the pending home plan the details are sketchy right now but here's what we heard today - "the plan would reduce Americans' payments on troubled mortgages, people familiar with the discussions said late last week, possibly through a cut in the interest rate, the costs of which would be shared by the government and mortgage servicers. Government officials would make the reduction available to people who are at risk of defaulting.

A loan-modification program at government-backed Fannie Mae and Freddie Mac currently calls for holding monthly housing-related payments to 38% of pretax income. The new formula is likely to be as low as about 31%, according to some people."

I hate to appear like grumpy five year old that says no to everything, but in a nutshell here are my issues with this plan:

* It aims to put a FLOOR underneath home prices. This flies in the face of the US economic model. Did anyone suggest that we put a CAP on home prices when they were jumping 20% a year?

* Let's do a little math. Assume you're leveraged to your eyeballs in an overpriced ranch in Arizona. You're husband loses his job as mortgage broker and your household income is down 50% in the last couple of years. Your take pre-tax pay is $5,000/month and you have a $2,000/month mortgage (40% of pre-tax pay). The government feels your pain so instead of suggesting that you try to work out a short sale and move into a 1 bedroom apartment that you can actually afford, we're going to help you get your mortgage down to $1,500 a month (30% of pre-tax pay). Unfortunately, since we're dealing with pre-tax money, your new super-duper mortgage still represent almost 50% of your AFTER-TAX salary.

Just a quick note on housing since it's going to be a hot news topic this week. Talk radio is full of people reciting the talking points on how the Community Reinvestment Act caused the housing collapse. This is pure drivel. Look where all the foreclosures are centered - Arizona, CA, Florida, Nevada, etc. I don't do politics here (too many good people have that covered), but if you're interested there's a good rundown on the CRA myths at The Big Picture.

Japan's economy shrank 12.7% in the 4th qtr! Wow. That's a simply stunning number. The great consumer contraction seems to be having a particularly harsh impact on Japanese exports of everything from cars to televisions. I actually think there are two things at play here

1) The aspiration purchasers are moving downstream - For the same reason that some people are moving from Starbucks to McDonalds, those people that are still spending are moving downmarket from Sony's to Vizios.

2) The global consumer retrenchment. This is hitting all consumer export nations equally.

I was very disappointed in one component of the stimulus legislation that remained intact. Any bailout bank or financial services firm is going to be prohibited from hiring people on H1-B visas. H1-B visas have been an hot-button political issue for years and now the protectionists in Congress seemed to have gotten their way.

This is terrible idea because a) it keeps some of the best and brightest in their fields out of the US, b) it reduces our competitiveness by forcing the US to hire not the best person for the job, but the best US citizen, and C) it is ridiculously easy to work around this plan.

Let's say Citibank had planned to hire 200 employees living and working in the US under the H1-B visa program. Now, since Citibank has taken bailout funds, they can no longer hire these people. These people will likely stay in India, Vietnam, China, etc and become independent contractors for Citibank. They still work for Citibank, but now their purchasing power is feeding the Chinese or Indian economies rather than our own. It's called cutting off our nose to spite our face.....


Friday, February 13, 2009

Black Thursday

If you're not directly tied to the legal industry, yesterday probably felt like any other day. However, to many lawyers across the Northeast, yesterday will forever be remembered as Black Thursday. Unofficial tallies show that between 800 and maybe over 1,000 attorneys and staff were laid off at various law firms from Boston to DC.

It's unclear what prompted this move and how so many unrelated firms could coordinate a move to occur on the same day. At a time when so many in the US are suffering, I don't think anyone is going to have a pity party for some laid off lawyers, but I'll note again that like Wall Street, lawyers generate huge tax revenues for NYC and NY State. Moves like this have long-lasting budgetary impacts.

I don't feel like I've been able to accurately articulate my opposition to the bad bank proposal. So I thought I'd take another shot. With the Resolution Trust Corp of the 80's you had bad loans supported by assets that were sold at auction. It was a painful process but it had a cleansing effect. Unfortunately, the latest plan seems to be taxpayer financing for hedge funds to purchase worthless paper in an effort to support outdated valuations. Maybe something will hit the wires today that will change my mind.


Thursday, February 12, 2009

Washington plans to announce plans to form a plan and markets soar!!!

Well maybe soar isn't the right word, but the markets did bounce at the 3pm magic hour when news leaked of a new housing "plan".

"Like earlier efforts from the Federal Deposit Insurance Corp. and housing industry groups, the new plan will make use of interest-rate reductions, loan extensions and so-called principal forbearance, in which part of a mortgage’s principal is deferred to the end of the loan’s term."

Really? That's our grand plan save the housing market? Lower rates (further), EXTEND loans (what's next 60yr mortgages?) and deferring principal (more balloon payments?).

Color me skeptical. Full disclosure: I did buy some calls today on the expectation of a little bounce - I'll sell into any strength tomorrow.

Amidst all the doom and gloom, I read a really interesting piece today on the solar industry over at Barron's. There appears to be substantial overcapacity in polisilicon industry. This oversupply could eventually lead to meaningfully lower prices for solar generating capacity.

"The silver lining here is that in the long run, much lower prices for polysilicon are the most direct way to bring down solar electricity production costs low enough to compete with conventional utility scale power generation. With poly in the $40-$60/kg range, he says, module prices would drop to the $1.70-$2/watt range, and utility scale projects could produce power for 11 cents/watt. At that rate, he says, solar would be “reasonably competitive” with combined cycle natural gas facilities and wind turbines. “A significant market would open and drive a wave of growth for the industry,” he says. “In the long-term, a collapse in polysilicon would be extremely positive for the industry,” but only after a “difficult adjustment period with falling prices and negative growth.”

Boy, there is a lot of wisdom in that thought - near-term pain and suffering for long-term growth. I'd like to see some of this logic applied in Washington.


Did Retail Sales Jump 1%?

Well, yes, but as I've said before the devil's in the details. Technically, retail sales were estimated to have bumped up 1% from December's sales to $344 billion (plus or minus .5%). However, sales for January were still down 9.7% from January of 2008.

The major media outlets keep running the "SURPRISING JUMP IN RETAIL SALES" story. Please. Overall, there was an estimated $3.7 billion jump in retail sales in January from December. Much of the jump was due to increased sales at gas stations (gas prices bumped up about 10 cents in January and continue to climb, despite falling oil prices), grocery sales and electronics sales. The gas station and grocery sales are most likely explained by higher prices. Anyone that's been grocery shopping recently can tell you that prices are still climbing despite weakness in the economy.

However, there was some surprising strength in electronics stores and non-store retailers (online stores). Perhaps the push to switch to digital TV faked some consumers into upgrading their TV in January ?? I'll look to find an answer to that later this week.

Again I think it's important to look at the trend, not the month to month moves. The individual moves are mostly white noise - look at the year over year trends or a series of consecutive months (if we see a real pick up in sales that is not driven by price increases for example) before drawing any conclusions about the "strength" of the economy.

The Ethanol Bust

As oil prices have plummeted from $145 to just $35 in six months and with that collapse the burgeoning ethanol industry in the US is collapsing as well. I'll be the first to admit that I only have a limited knowledge about corn ethanol so I'll let the farmers and politicians battle over it's ultimate value. However, it's been pretty clear in every study that I've seen that corn ethanol is a very inefficient product as it takes nearly as much energy input to produce a unit of ethanol output.

However, last year everyone was on the ethanol bandwagon - particularly before the Iowa primaries (hmmm, what would people in Iowa have to gain from increased use of corn?).

"VeraSun Energy, one of the nation’s largest ethanol producers, has suspended production at 12 of its 16 plants and is planning to sell production facilities. In recent days Renew Energy, Cascade Grain Products and Northeast Biofuels have filed for bankruptcy protection. Pacific Ethanol said it would suspend operations at its Madera, Calif. plant.

Bob Dinneen, president of the Renewable Fuels Association, a trade group, estimated that of the country’s 150 ethanol companies and 180 plants, 10 or more companies have shut down 24 plants over the last three months. That has idled about 2 billion gallons out of 12.5 billion gallons of annual production capacity. Mr. Dinneen estimated that a dozen more companies were in distress."

Biofuels can and should be a part of our long-term energy solutions but I'd rather see it focus on switch grass and/or sugar cane.

Maybe I'm just bitter because I got a notice from my auto manufacturer that "it has been determined that ethanol fuels with low moisture content will CORRODE the internal surface of the fuel rails. Over time, the corrosion will create a pinhole resulting in fuel leakage." Great.

Wednesday, February 11, 2009

Historical perspective

The unemployment data has been massaged over the past week a number of people have put together decent charts showing that while unemployment has dipped, this decline is not unprecedented.

(Hat tip to Scott for passing along this chart).

I'll address the severity of the current decline in moment, but I think it's fair to say that things today are at least as bad as 81 or 74. Will we bounce or breakdown? That's the $789 billion question.

I think it's fair to question Steve Ballmer's business acumen (Microsoft hasn't exactly been setting the world on fire with him as CEO), but I don't think you can question his reach into the economy.

Today he made the following comments that should get some attention:

"Microsoft Chief Executive Steve Ballmer sketched a dire portrait of the world economy on Friday, likening it to market conditions in 1837, 1873, and 1929, each of which involved bank failures, high unemployment, and a depression.

"This is a once-in-a-lifetime economic crisis," Ballmer told a retreat of House Democrats in Williamsburg, Va. "There is a lot of history around that, and frankly if you stop and think about it, 1837, 1873, 1929, 2008, it's almost exactly a whole lifetime between each of the major economic difficulties that we face."

Ballmer said that economic growth in the last 25 years was fueled by innovation, globalization, and debt--and that the current levels of debt were unsustainable. "In 1929, for example, just before the stock market crash, the private debt-to-GDP ratio was 160 percent," he said. "Last year, private sector debt as a percentage of the GDP: 300 percent, far more leverage."

ECON 101 - It's called supply AND demand for a reason.

"Mortgage applications in the U.S. slid last week to their lowest level since November, led by plummeting demand for refinancing amid tighter credit and a worsening economic outlook.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan decreased 24.5 percent to 600.6 in the week ended Feb. 6, from 795.4 in the prior week. The group’s refinancing measure plunged 30.3 percent and the purchase index fell 9.8 percent to its lowest level since December 2000.

“Demand for refinancing has waned after surging in December,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York.

No matter what type of stimulus or bailout emerges, you can not force wary buyers to buy. Without a rebound in demand and growing supply, the housing market will remain unstable.

Charlie Munger has been Warren Buffett's investment partner for much of their successful run with Berkshire Hathaway. He authored a well constructed op-ed in the Washington Post today (it apparently helps to own 20% of a newspaper when you want to write an op-ed) - it's worth a read, but here are the key thoughts.....

"A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes. "

"Sensible reform cannot avoid causing significant pain, which is worth enduring to gain extra safety and more exemplary conduct. And only when there is strong public revulsion, such as exists today, can legislators minimize the influence of powerful special interests enough to bring about needed revisions in law."

"The modern form of this duty would demand at least some increase in conventional taxes or the imposition of some new consumption taxes. In so doing, the needed and cheering economic message, "We will do what it takes," would get a corollary: "and without unacceptably devaluing our money." Surely the more complex message is more responsible, considering that, first, our practices of running twin deficits depend on drawing from reserves of trust that are not infinite and, second, the message of the corollary would not be widely believed unless it was accompanied by some new taxes."

Here, here......

Finally, just a quick note on a global firm with local ties - Alcoa.

S&P downgraded their credit rating to BBB- from BBB+ with a negative outlook. "The downgrade reflects our belief that the company's credit metrics will deteriorate significantly during 2009 and, given uncertainties regarding the length and depth of the ongoing economic downturn". Unfortunately, for Alcoa they are a relatively small player in the global aluminum industry and size will be a virtue as companies seek to weather this downturn.


Tuesday, February 10, 2009

Was that Sell The News or Sell Timmie?

Tim (Timmie) Geithner didn't win over many critics with his "we've got a plan to build a plan to launch a plan" speech. However, I think the near-400 point drop was more likely due to some combination of the following:

1) Sell the news again - We've seen every major news event where the expectations were high met with a market sell-off. I think expectations were high for this plan and the financials had a huge run in recent weeks. The Dow is back down to it's lowest levels of 2009 (Did anyone notice that crazy closing price - 7,888.88?).

2) Rumors - There were some crazy, crazy rumors about what was to be included in the plan which I won't repeat. When none of those rumors panned out, I think some people decided to sell first and ask questions later.

3) They held the line on Mark-to-Market - There was a rally last week on talk that the plan would include scrapping mark-to-market accounting. I think I've covered my concerns with that idea, but this was a big, bold decision and I'm glad to see the powers that be make a correct but unpopular decision.

We'll see how the market digests the balance of the news this week, but the corporate news remains bleak tonight (Applied Materials - "businesses are suffering their most severe fall off they have ever experienced", Sirius possibly filing for bankruptcy?, Walmart layoffs at headquarters?).

China is really starting to be more vocal in an effort to ensure the value of the US securities they hold.

Tonight this article at Bloomberg said:

"China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.
The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,”.

Premier Wen Jiabao said last month his government’s strategy for investing would focus on safeguarding the value of China’s $1.95 trillion foreign reserves.

“In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe,” said He in Beijing. “That would be one of the prerequisites for more purchases.”

Well, that's kind of a chicken and egg scenario. The US can try to support the exchange rate all we want, but if China stops buying $'s our exchange rate will fall.

Crazy days.

Well at least two markets aren't in recession...

These two items passed across my desk today as "deals". If these are deals, then there clearly is no recession in high-end TVs and high-end fishing lures.

1) A 103" Flat Screen TV (open box) for the low, low price of $42,996.

Click here to snap it up fast. There's only one left in stock! Who in the world needs a 103" TV?

2) A hard swimbait for just $49.95. Click here to buy a lure that cost more than my average fishing reel.

$50 will buy a lot of high end salmon or sushi. This lure needs to catch, measure and clean the fish for $50.


Here are the highlights as I understand them...

Summary: My concern with the rumors I was hearing was that Sec. Geithner's plan was too tied to saving the banks not the banking system. The plan as I see it today is basically a supersized version of TARP 1. It should help save the incompetent financial firms that helped to create the financial crisis of 2008 (for a time). I think we'll be in the same position in the summer of 09 looking to save the banks again thanks to collapsing credit card portfolios and commercial real estate values.

Here are the big picture highlights:

* Create a joint Treasury and Federal Reserve program (cost of $250 billion to $500 billion) to encourage investors to acquire soured mortgage-related assets from banks. This is the dreaded bad bank that we heard so much about.

Banks lent money against homes that were never worth 1/3rd of what was lent. Borrowers have been crushed as they lose their jobs and the value of their homes have returned to historical norms. Not all of these loans are worthless, but it's like taking out a giant loan to buy stock in If the stock of falls and you can't service your loan, should the bank write off the loan or get bailed out. The government's response is to bail you and the bank out. I am of the opinion that you and the bank made a bad business decision and should both suffer the consequences. My opinion is falling on deaf ears.

* Expand to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans.

Huh??? Unfreeze the credit markets? Again? These markets are unfrozen - this myth that the markets are frozen persists. PEOPLE ARE CHOOSING NOT TO BORROW BECAUSE THEY DON'T EXPECT TO HAVE A JOB NEXT WEEK. Lowering rates, or expanding guarantees won't change any of this. The problem is no longer the supply of money, it's the demand for money. US consumers are finally pulling back on their spending and policymakers have no recipe for solving this problem short of priming the spending pump again.....

* Review the capital levels of all banks, including projections of future losses.

This is important, but no one short of a few bloggers and a couple of professors were willing to be honest about the losses facing the US last year. Do you think these same bankers that have been remarkably clueless so far are going to be able to gauge credit card losses? Commercial real estate losses? Additional mortgage defaults? No way.

* Finally, a separate $50 billion initiative to enable millions of homeowners facing imminent foreclosure to renegotiate the terms of their mortgages.

It sounds good on the surface, but home ownership isn't a right. It's earned through prudent personal financial management. If you reached to buy a house that you couldn't afford. Sorry. It's hard read stories about the collapse of communities like those in Florida but there is a price to pay for incompetence. However, while this plan sounds impressive it might only help 150,000 to 200,000 homeowners. Considering 20 million (and growing) US homeowners are underwater (owe more than their house is worth), this is little more than window dressing.

By the way, I'm ready to claim my portion of a bailout. Here's my modest proposal - If you have a 50% or greater equity position in your home (ie, your mortgage - if you have one - is less than 1/2 of the current market value of your home), you get a tax holiday in 2009. No Federal or State taxes will be collected from you b/c you were not part of the problem.

This would never, ever, happen, but it would be fair to give the prudent a break, because we're going to need it when China calls up in July of 09 and says they're pulling back from the US Treasury Buffet because their stuffed with US dollars.

Sorry to be so harsh, but Sec. Geithner struck out on this one. He's doing a PR tour to support the story today, maybe some of the details will change my mind.


China's auto sales overtake US auto sales in Jan.

This isn't exactly breaking news - with a population of 1.3 billion people, it is inevitable that the Chinese car market will exceed the US market in total volume. However, the steep decline in auto volumes in the US and the slower drop in the Chinese market meant that the change atop the leader board happened sooner than many thought it would.

China's monthly auto sales overtake US for 1st time in January, helped by shrinking US market
China's monthly vehicle sales surpassed those in the United States for the first time in January, moving this country closer to becoming the world's biggest auto market, data released Tuesday showed.

With its growing middle class and vast potential as a consumer market, China is vital for General Motors, Volkswagen and Toyota as they count on demand here to offset weakness in the U.S. and elsewhere.

But China's ascent in the global auto market has been hastened by the plunge in U.S. auto sales, which tumbled 37 percent in January to a 26-year low of 656,976 units.

Chinese vehicle sales also have cooled, but hardly as dramatically. In January, 735,000 vehicles were sold, down 14.4 percent from a monthly record 860,000 last January, the China Association of Automobile Manufacturers said.

Mike DiGiovanni, General Motors Corp.'s executive director of global market and industry analysis, said last week he expected Chinese auto sales could hit 10.7 million units in 2009, more than his estimate of 9.8 million unit sales in the U.S. this year. Autodata forecasts 2009 U.S. sales at 9.57 million."

My only caveat to this data is that the source is the China Assoc of Auto Manufacturers. I sometimes take issue with data issued by domestically so I think there is a fair chance that this number was massaged a bit as well.


I'm working through what we know of Sec. Geithner's plan and should have an update later today.

Monday, February 09, 2009

Save some cash and create your own stimulus plan

A random collection of ideas to save some cash in these tight times:

Entertainment - Show Time Warner to the Door: I'm taking my own advice here. It's hard to go cold turkey but consider dropping to a basic plan. Hulu, and are all providing decent amounts of free content if you're desperate to see the latest episode of "So You Wanna Be Smarter Than a Dancing American 5th Grader?

Watch movies at home: Become a Netflix fanboy. When was the last time you enjoyed spending $40 at the movies. Consider adding the Roku Netflix Player and you can stream video to you laptop or tv.

Phone Service - I've used Packet8 and Viatalk (but Vonage is the same idea) for VOIP service. $15-$25/mth for a reliable landline is very reasonable. MagicJack is all over the TV and I've had the service for over a year. The quality of the calls from MagicJack is below average but if you want a cheap phone - it's hard to beat $20/year.

Exercise - I've spent up to $150/mth in the past to be part of the "right" gym. A good pair of shoes = running all you want for free. If you need to spend some money - I'm a huge fan of the Beachbody DVDs featuring Tony Horton (P90x kicks butt!).

Any other tips from readers??????

Should Amazon's Kindle 2 be part of the stimulus?

First, I'm not a believer in the Kindle. I'm biased, because I still like to pick up a book. I've tried both the Kindle and the Sony Reader and I just don't like them. However, I'll admit that I'm old school and I'll never be with it on some items. The combination of hearing stimulus news and the launch of the Kindle 2 made me think - shouldn't we bring a kindle to the kids?

Right now there are roughly 52-53 million school age kids in the US. Back out kids under 8 and you probably have about 46 million kids in the US using textbooks -- some of which are clearly ancient. The cost of new text books is a huge burden for local schools. Here's the solution - tell Google, Microsoft, IBM, Sony & Amazon that they have 5 months to create a prototype for US schools. A Kindle-style device for textbooks. The US government will buy one for every child and pay $100 each. It's a $4.6 billion contract for the hardware alone. So far, it is estimated that Amazon has sold 500,000 Kindles. I think they'd jump at the chance to sell 46 million units by September 09 (and Google already has a curious Google Books program underway).

Then we'll go to the textbook suppliers and tell them they have 4 months to create electronic versions of their books. We'll negotiate a national contract to buy a single math book for 3rd grade (I recommend the Singapore Math books - their grade 1 is more challenging than our grade 4 math), a single history book for 5th grade, etc, etc. You can create a national standard of education while upgrading every textbook in America. These books will get downloaded to your child's e-textbook on Labor Day 2009 and your child will have a much lighter backpack next year.

Total cost probably $10 billion in year 1. It's serious money, but it's a real investment that I could support.

Unfortunately, this probably makes far too much sense to actually happen. But if anyone has an in w/Sen Schumer or Rep. McHugh or your Senator or Congressman -- send it along. Hey, you never know......

How to lose 90% in a year and keep your job

Bill Ackman has been a very successful hedge fund manager in past years. His active use of options and pushing management for aggressive changes have proved profitable for investors over the years (I think you can argue that his activism doesn't necessary improve the companies he targets, but rather just generates short-term gains).

However, his latest bet on Target has been painful to watch. Since establishing the fund a little over a year ago, this fund is down 89.5%. Ouch. Options can be great when you're on the right side of the trade, but they can wipe you out when you're on the wrong side.

Barry Riholtz at the Big Picture has an interesting view of the new US economy as we move forward. I added some of my observations:

* Asset Deflation: Equity portfolios are on average down about 40%; Dividends are being slashed, stock repurchases canceled. Nationally, home prices are down 20-25%;

Asset deflation is real and reflating asset prices with another bubble of some sort is not the answer.

• Consumer Spending: Down significantly, after the US had its worst Xmas in 40 years. Savings rate has turned positive; Conspicuous Consumption replaced with Conspicuous Conservation.

I don't necessarily agree. US consumers view spending as a recreational sport. Any little upward blip will lead consumers back to the feed trough.

• Retail Stores: Have been hard hit; Many chains are filing bankruptcy (Circuit City, Linens ‘n Things Sharper Image, Steve & Barry’s Tweeter, Mervyn’s); The survivors (Starbucks, Macy’s, Sears, Office Depot) are closing stores — some, as many as 10-20% or more of exiting stores. Retail shopping will emerge from the recession with a much smaller footprint than before;

Despite my belief that consumers will keep trying to spend their way out any downturn, I do agree that we have far too many retailers. I remain stunned when I drive down Arsenal Street in Watertown and realize that some of the new commercial space that's been finished for months remains empty. Consider the number of anchor retailers that could go bankrupt or close stores this year (Bon-Ton, Rite Aid, Target, Home Depot, Old Navy, etc) and Watertown could be awash in available commercial real estate soon.

• Employment: 3.6 million jobs lost already, with anywhere from 1 to 4 million more to go; Real Unemployment hit a record this past month;

• Autos: US auto sales have plunged; Annual Sales are down 37%, from a 15 million annual run rate to barely over 10 million.Its not just Detroit, either. Toyota, Honda, BMW, Lexus are all suffering;

If you build your business expecting X and then the industry shrinks to 60% of X, you need to shrink your business quickly or fail.

• University Endowments: The intellectual engine of America’s brain trust has just taken an enormous hit to the frontal lobe: Harvard, Yale, Stanford, others are down -25% plus over the past 6 months alone. The big endowments fund Professorships, grants, student scholarships, pure research. The loss will be deeply felt over ensuing decades.

This is particularly troubling to me. Universities need be an engine of growth for the US to remain a global leader for years to come. However, I sense that universities are doing just the opposite, cutting staff and investment allocations in an effort to conserve their current balances. They are operating to save their jobs rather than improve the prospects for their universities.

I think many of the changes you see in the US 2020 are do to the dramatic demographic shifts that we are experiencing. The boomers are aging, the boomers parents are still hanging on, Gen X is only having enough kids to keep our population static and Gen Y can't get off Facebook long enough to look for job:)


Investing goes wiki....

Wikinvest has been around for a couple of years but a frontpage story at the NYTimes will clearly boost their profile. The concept is one that sounds good on paper as a business plan - compile financial information and let the public at large edit the information to create a wikipedia for the investing public.

However, as a former SEC officer noted "People have to understand that whenever you use a wiki, you get what you pay for.”

Despite their best efforts, it won't be long before this site is dominated by penny-stock scam artists and Nigerian princes in need of cash to get their money out of a Swiss bank. Once upon a time Yahoo message boards actually offered some interesting insight, but when they become overrun by the spam artists, the websites are practically worthless today.


Sunday, February 08, 2009

The Spender of Last Resort.....

"The age of the U.S. and world economy being driven by the U.S. consumer may be in the past. We need to become more of a nation of producers rather than a nation of consumers.”
- Nigel Gault, chief U.S. economist for IHS Global Insight

This is the gist of my complaint with the stimulus plans and bank bailouts. The current issues facing our economy are simply the manifestation of 25 years of excess consumerism. Our country is an addict and easy credit was our drug of choice. The remedy for this addiction isn't more credit and more consumerism. Unfortunately, this seems to be our game plan right now. I think we've entered a phase of the Great Regression where we feel that the spending spree has to continue. The consumer isn't coming back so the Government has become the Spender of Last Resort. I wish if we were going to spend a trillion dollars we'd have a little bit more confidence in the plan than saying "we hope this will work".

The great needs facing our global economy for the next 100 years are clean energy, clean transportation, fresh water, healthcare and technology. As opposed to spending additional billions (or trillions) on trying to save a failed system of banks and chain stores, I think we'd see a far better return by investing in these industries and encouraging more magnet schools that attract the best and brightest (remind me to come back to the subject of magnet schools at some point).

Well, now that we've got the stimulus passed, it's onto the next big bailout for the banks. My two great concerns with the rumors I was hearing were that Sec. Geithner was still too tied to "saving the banks" and that big money managers were going to get a piece of the action.

Unfortunately, they both seem to be true....

"Wall Street helped produce the global financial and economic crisis. Now, as the Obama Administration prepares to unveil a revised bailout plan for the banking system, policy makers hope Wall Street can be part of the solution.

Administration officials said the plan to be announced Tuesday was likely to depend in part on the willingness of private investors other than banks — like hedge funds, private equity funds and perhaps even insurance companies — to purchase the toxic assets that wiped out the capital of many banks.

The officials say they are counting on the profit motive to now create a market for those assets. The government would guarantee a floor value, officials say, as a way to overcome investors’ reluctance to buy them.

Details of the new plan, still being worked out over the weekend, are sketchy. And they are likely to remain so even after Treasury Secretary Timothy Geithner announces the plan on Tuesday. But the aim is to reduce the need for immediate federal financing and relieve fears that taxpayers would be paying excessive prices if the government took over risky securities the banks created when credit and home prices were booming a few years ago."

It's a nice idea, but some big money managers have already heard about this plan and have been front-running this idea. They started buying lots of toxic paper about two weeks ago, just as they ramped up their efforts to convince the government of what a great idea this would be. After the plan is announced, these assets that they bought two weeks ago are going to become much more valuable overnight and they'll likely sell some of those assets to the US government at they higher price. Nice work if you can get it.

Also, this plan remains committed to saving the banks. Mr. Geithner works for us and his obligation is to protect the US taxpayers first, but he's still determined to save the NY Banks at a cost to you and me. I hope I'm wrong on this issue, but so far Mr. Geithner seems to be in over his head.