Thursday, January 29, 2009

Random walk down Riverside Drive


Hat tip to Brian Jones and his friend Cameron that passed along this photo from South Texas. So many issues facing America are summarized in one simple photo. Thanks for passing it along.

Late news - Amazon managed to surprise a few people. It was clear that Amazon was deeply discounting prices (they beat Walmart and Target by 20-30% on many popular toys) and by offering free shipping they capture more holiday spending. This helped their total sales but hurt their profitability. Some will try to spin this as a resurgence in tech - nothing could be further from the truth. Amazon is just a mid-tier retailer that started a price war and won this round. Nothing more, nothing less.

As of right now, all I've seen is a headline, but Toyota appears to be shutting production lines at 11 of its 12 factories in Japan. A bold move that signals more difficulties ahead.

Finally, a nice simple overview of why your bank is broke from Time -

"But do the math, and you can begin to understand how really botched this bailout has been. Since October, the government has deposited $165 billion into the accounts of the nation's eight largest banks. Yet those same financial firms are now worth $418 billion less than they were four months ago, and the Congressional Budget Office estimates that the government's preferred shares are worth at least $20 billion less. In Wall Street terms, that's throwing good money after bad.

All told, the government's annualized rate of return on its investment in the nation's largest banks is -1,096%. That's well beyond Bernie Madoff territory; he topped out at a mere -100%."

Boy, I wish someone would have urged a little more caution when the first TARP bill was discussed.

Cheers!





Wednesday, January 28, 2009

In my best Oprah voice: And you get a bailout, And you get a bailout, and you get a bailout....

So, the stimulus passed the house and should easily pass the Senate barring any unforeseen bumps in the road. I think the market has digested this news now and is looking forward to the bad bank bailout.

The markets have rallied as the charts, stars and weather all combined to push forward despite terrible news across the board. I think it's possible to play this through the end of the month as funds complete their window dressing. However, the increasing pressures on the global economy are very evident.

I'm very concerned about a number of issues including:

* China's economy: As the US economy has sneezed and China caught the plague. This has a number of key ramifications for the US. 1) China is going face skyrocketing unemployment, possible social unrest and it could lead to government currency devaluation to stimulate their economy. 2) If China looks to stimulate their economy with their own funds it will leave precious little money for some other large country to borrow for their own bailouts and stimulus efforts (hint, hint: That country starts with U and ends with an S).

* The global reach of the economic difficulties is rapidly becoming apparent. There are estimates that now say we could lose up to 40 to 50 million jobs globally this year. This cycle of stimulus spending to replace these evaporating jobs will eventually create spiralling inflation, etc.

Cheers!

Put on your rally caps...

So many former mega-caps like Citibank, Bank of America, etc, were trading about a week ago like penny stocks so they've become the daytraders stock of choice.

As I said yesterday, the market is being driven by technical traders that are looking to for excuses to push the market higher. It can be expensive fighting that trend. Here are today's reasons that the sun will come out tomorrow:

* Obama's team seems to have been duped into thinking the bad bank is a good idea. The government seems determined to take the bad assets off the banks books and put them in a bank for you and my kids. Two or three huge issues jump out at me:

- How do we determine what the bad assets are - Mortgages? Commercial loans? Commercial Real Estate? Credit cards?

- Who can participate - US banks? Foreign banks with big US exposure (like HSBC)? Non-banks - IBM, GE?

If the government takes the bad assets off the banks books, then the equity holders need to get wiped out. Any bank that participates should see it's stock go to zero. I'm not sure that anyone in Washington has the guts to make this call, but it's the right call. If we're taking all of your risk, your stock is worthless.

* There's more confidence that the $800, $900, $1 Trillion stimulus will get passed. This is mostly unnecessary pork that will do little to save the economy. I think I've finally come up with the proper analogy. Our economy has avian bird flu and we're treating it with penicillin. Penicillin is a nice treatment for some sicknesses, but it's not the cure for what we have. Unfortunately, no one is thinking outside of the box, so all we're doing is rehashing the same treatments that worked in the past - tax cuts, interest rate cuts, stimulus spending, etc, etc. We're digging a hole so deep that we may never get out. I hope I'm wrong.

* Yahoo's losses were awful but not so awful (huh?). I'm done trying to guess why losing money and lowering future expectations is a good thing. I think there were enough people that were really short Yahoo expecting a complete disaster, think the stock would collapse into the single digits. That didn't happen, so those people will buy back the stock today and move onto their next target.

The markets are now off their highs we'll see how it trades today.

Cheers!

Tuesday, January 27, 2009

Retail store closings do not equal deals for consumers

I think this goes without saying, but many people still fall for the "GOING OUT OF BUSINESS" signs that will be popping up with increased frequency.

Let's take the case of Circuit City as our latest example. Circuit City is having it's liquidation handled by an outside firm that specializes in liquidations. After they announced they were closing, Circuit City closed their doors for a couple of days to prepare for the liquidation. When they reopened a number of people noticed that prices had actually gone up on a number of items.

For example:

Model/ Store Price/10% Off Price/ “True” Current CCWeb Price
Samsung/PN50A550 $1999.99 $1799.99 $1699.99
Samsung/LN46A550 $1699.99 $1529.99 $1449.99
Samsung/LN52A750 $2999.99 $2699.99 $2699.99
Sony/KDL40V4100 $1399.99 $1259.99 $1199.99
Sony/KDL52XBR6 $3499.99 $3149.99 $3299.99

Source: HD Guru

What this shows is that the store price was inflated by 10-20% on many models before they were "discounted" by 10% at the start of the liquidation. In fact, many of the liquidation prices exceeded the regular price on Circuit City's own website.

A similar analysis from the boys and girls at dealnews.com found........

"From cameras to TVs, every item we saw at the store was marked as 10% to 40% off. However, of all the items we looked at, only one (the 32" Sharp LCD) was cheaper at Circuit City than it was online. Even so, we've seen other Sharp TVs with similar specs for less.

After our initial disappointment, we wondered if smaller items, like Blu-ray movies and memory cards, were better priced. Unfortunately, they weren't. Most Blu-ray movies started at $22.99 while a 4GB SanDisk Extreme III CompactFlash Card went for $45 (that same card costs $26.05 + $7 s&h at Buy.com.)

The same applied to gaming. Activision's Guitar Hero III Legends of Rock Bundle with Guitar for Xbox 360 sold for $55.99 at Circuit City. Online we found it for $50 (at Toys "R" Us.) Open box items were similarly overpriced. We found an open box Sony Bravia 120Hz 46" 1080p LCD HDTV, model no. KDL-46XBR6, for $2,519.97. Online we found a new model for $1,899.95 with free shipping (at B&H Photo-Video.) It's worth noting that open box items purchased at Circuit City could not be returned under any circumstances. Dozens of posters throughout the store made this clear.

As expected, Circuit City's liquidation sale was atrocious. Even though the store had a Black Friday vibe, there were no sales to be found. But we were surprised to find that the stores beating Circuit City aren't just online-only stores like Amazon and Buy.com. Even Toys "R" Us and Sears undercut Circuit City. It bears repeating: Liquidation sales aren't synonymous with discounts, and consumers should remember that as more merchants file for bankruptcy."


These "liquidation sales" tend to be very good to the liquidators and very bad for your wallet. If you are thinking about going to Circuit City at least wait until March when they are really getting ready to shutdown.

Cheers!

It's the starving professor sale!!! This weekend at the Ramada - No painting over $29.99!!!

Ok, so maybe Brandeis closing their museum and selling their art collection isn't exactly the same as the STARVING ARTISTS' SALES that dot the Northeast every January.

"The move shocked local arts leaders and drew harsh criticism from Rose supporters and the Association of College and University Museums and Galleries.

Michael Rush, the Rose Art Museum director, only learned of the decision late yesterday afternoon, hours after the university's board of trustees voted unanimously to close the 48-year-old museum.

In an interview last night, he estimated the collection’s value could top $350 million. Still, the director and other museum supporters took issue with the university's decision, which came after endowment losses and a sharp slowdown in fund-raising.

"I'm in shock," said Mark Bessire, the recently named director of the Portland Museum Of Art. "This is definitely not the time to be selling paintings, anyway. The market is dropping. I'm just kind of sitting here sweating because I can't imagine Brandeis would take that step."

This is going to be a consistent theme in my opinion. Universities are going to face challenges on many fronts. They had become accustomed to outsized gains in their endowments and had not budgeted for more normalized returns (or heaven forbid.....losses - gasp!!). Thus, because the infrastructure costs are so static, many universities are going to be looking for alternative revenue sources (fees, lower standards to increase enrollment, etc).

Hey, I'll ease their pain - I'll prepay tuition today for a 2018 start date if you give me a 60% discount :)

Cheers!

Just-In-Time IT Budgeting

EMC's chairman coined a new term today that is both accurate and catchy enough to really spread. When describing the difficulty of forecasting 2009 results, Mr. Tucci said that IT budgets really don't exist right now. Every project is being approved on a one-off basis or as he calls it "Just-In-Time" IT budgeting.

The term "Just-In-Time" holds a special place in my heart as operations management was one of my majors in college. The idea of improved efficiency through shortened lead-times and smaller inventories is a prudent business practice, especially in these tough economic times.

However, while this may be a prudent approach for many companies, I think this will be especially painful for many IT companies that have never experienced such the uneven demand curve that Just-In-Time purchasing creates.

Expect to hear more about this theme in the months ahead.

Cheers!

Maybe they'll change it to the US Consumer Doubt Index

US Consumer Confidence fell to it's lowest level since the survey was established in 1967. Individual data points aren't terribly important, but it is worth watching the trend and the trend is still heading down.

"A key measure of consumer confidence fell to an all-time low in January, according to a report released Tuesday.

The Conference Board, a New York-based business research group, said that its Consumer Confidence Index fell to 37.7 in January from the revised 38.6 reading in December. The month's reading represents an all-time low going back to the index's inception in 1967. "

Having said this, the markets continue to yawn at the wealth of terrible news on the wire. Thousands of job cuts have been announced, more and more companies are withdrawing future guidance, and the markets are holding up.

I think it speaks to the power that the technicians hold in the market today. Fundamentals say the stock market should be down about 25 -30% from here, but the chart readers think it's going back up another 5% in the next couple of weeks, so it seems to be self-fulfilling.

Either that or traders are all out getting the "Blagojevich" hair cut -- I hear it's all the rage with the kids on Wall Street these days.

Monday, January 26, 2009

TO better not quit his day job



because he'll never be the star of Flip This House.





Terrell Owens apparently bought this house in NJ (near Philly) in 2004 for $3.9 million. I absolutely love the fact that the realtor described the pool as:





"Featured On Mtv Cribs".





Considering TO paid $3.9 mil and is asking $2.675 mil it's probably a relative deal. But then again you'd have to live near a bunch of Eagles fans so that might account for some of the price reduction :)

Click the link above for the full listing.

Jobs update....

It's hard to draw too many conclusions from a single press release, but the tidal wave of job cuts hitting the wire is stunning. These are just some of the job cuts announced since Friday.

Home Depot - 7,000 jobs
Sprint - 8,000 jobs
Pfizer - 8,000 jobs
Microsoft - 5,000 jobs
ING - 7,000 jobs
Harley Davidson - 1,100 jobs
Caterpillar - 20,000 jobs
Philips - 6,000 jobs
Starbucks - 1,000 jobs

Not all of these are US jobs, but there are some pretty blue chip names on that list. You can imagine that there are similar cuts going on around the country, but the Ritz Carlton Cancun still want $679/night.

Cheers!

Someone should teach a PR class at Citibank...

In the midst of the greatest financial unrest in our history and at a time when Citibank is at the center of this unrest, they can't seem to stop shooting themselves in the foot.

The beleaguered bank made headlines again today when it was revealed that they are about to take delivery on an new $50 million corporate jet.

"Citigroup decided to get its new wings two years ago, when the financial-services giant was flush with cash, but it still intends to take possession of the jet this year despite its current woes, the source said."

When coupled with their brilliant decision to buy the naming rights to the new NY Mets stadium, you have to question their ability to manage their image. I still think there is a 50/50 shot that Citi goes under before a single pitch is thrown at Citi Field. We'll see.

Cheers!

UPDATE - Score one for the blogosphere - Citi has decided not to take delivery on this new jet (don't cry too hard for them - they still have a pretty substantial corporate fleet).

Sunday, January 25, 2009

Wind farms - Did the North Country miss its "wind"ow of opportunity?

The combination of falling energy prices and the economic crisis has sent shivers through the Wind Industry.


Wind farms lying fallow in hard times: Recession, oil prices undercutting costly green energy generators

Jan. 24--To state officials and proponents of "green energy," Thursday's ceremony celebrating New England's newest wind farm was a relatively small yet symbolic step toward greater energy independence in Maine.


But with a construction price tag topping $60 million, First Wind's Stetson Mountain wind farm also highlights the fact that pollution-free energy doesn't come cheap.

Between 2006 and 2008, generation of electricity from wind in the United States more than doubled to 21,000 megawatts, according to the American Wind Energy Association. But today wind-power projects nationwide are being delayed or put on the backburner due to economic turmoil.


So will the tightening financial market combined with a return -- albeit likely a temporary one -- to inexpensive oil undercut Maine's burgeoning wind-energy industry just as it is poised to take off?


Industry representatives and economic analysts in Maine acknowledge that the recession is already having some impacts on projects in the region.

First Wind, the operator of both the Stetson Mountain and Mars Hill wind-energy facilities, has shelved plans for a wind farm on Grand Manan Island near the Maine-Canadian border as well as one in New York state."

Banking Industry Update

There's a pretty heated debate going on around Wall Street and Washington on what we should do to fix the banking industry. In simple terms, banks lend out roughly $10-$12 for every dollar deposited (the exception were the big banks that lent $30 for every dollar deposited - RED FLAG!). When loans go bad or deposits are withdrawn the banks need increased cash (capital) to stabilize their business.

This is the basic problem facing the industry. Their assets (deposits and loans) continue to shrink, so the amount of money available to lend is contracting. To fix this problem you need to either attract more deposits, stabilize their loans or inject more money into the banks.

The current approach seems to be to stabilize the banks through capital injections. However, I remain convinced that this is a flawed strategy because the assets base of the banks will continue to deteriorate. There are two huge asset classes on the verge of collapsing - commercial real estate and consumer credit cards. As both of these asset classes join the plunging residential real estate portfolios, I think we're just chasing the end of the rainbow. As the assets fall, the banks will need more and more capital just to keep their heads above water.

Wash, rinse, repeat.....

We're burdening our children's children with unbearable amounts of debt in an effort to save some banks (and consumers) that made bad choices.

I'm not sold on the "bad bank" idea either. Under this solution, the government would create a bank to buy the bad assets in an effort to stabilize the banks. While this might work, it transfers the risk from the banks to you and I. That's counter to the entire capitalist model.

My suggestion is that the government cut the apron strings. The TARP was a colossal failure and throwing more money at the banking system is not going to do anything to fix it at this point. If government wants to stimulate borrowing again they need to become competitors to the banks. I propose that we establish a new lending institution (make it an Internet only lender) that would lend directly to consumers if they meet established thresholds (20% down even for cars, high credit score, sustainable income stream, etc) . This would

* increase the flow of capital in the US economy
* allow greater control over borrowing standards
* save the US billions

The problem with this plan is that many, many banks would go out of business. I think there is a pretty strong chance of that happening anyway, so I'd like to see us a try another option and maybe save us a few hundred billion.

Cheers!

Thursday, January 22, 2009

Upstate jobs data...

Yesterday, the local news aggregator - Newzjunky - put up a chart of the December unemployment rate in St. Lawrence, Lewis and Jefferson counties. I was really struck by the jump in December's jobless rate (up 40%) until I realized that the data was raw and not seasonally adjusted.





I took the liberty of recreating a December unemployment rate for December from 1990 through 2008. This should eliminate the issue of seasonality and give us a better picture of where we stand today. I think it is interesting to note that while unemployment hovered above 10% for all of the 90's, the last 7 years were very good to Jefferson county (due in large part to Fort Drum's expansion) as unemployment in December bounced between 6 and 8%.

However, the trendline appears to have been broken in December 2008.

A couple of further notes:

* the denominator in this calculation is the Jefferson county workforce which remains at just over 44k. A gain or loss of just 4oo jobs can swing the unemployment rate a full percentage point.

* while I couldn't find population data for Jefferson county in the early 90's I suspect that our population totals were meaningfully below the current levels. Thus, while the unemployment rate was substantially higher in the 90's it is possible this data was skewed by a small denominator.

So what does this mean? Jefferson county has not historically been a boom/bust/boom region because of the stability of our industries and our large reliance on state and federal employment. However, I think there is little doubt that the last 7 years have been a time of unprecedented growth in the North Country. Unfortunately, if government budgets are suddenly under pressure, then I think there a real risk of revisiting the double digit unemployment that we saw in the mid-90's.

Cheers!

Update - Welcome to those who jumped from Newzjunky or WWNY - Bookmark the blog!

Markets are holding up reasonably well considering the wealth of bad news out there. I'll be back tonight with more thoughts on some of key news of the day.

NJ jobless woes...

It may seem strange to focus on New Jersey so often, but their economy mirrors that of NYS and their difficulties often forecast troubles for NY.

There are a number of key observations from this story that is emerging from NJ. In effect, the unemployment fund has 10 weeks of payouts left until they would be out of money if they collected no additional payroll taxes. Since, the state is still collecting payroll taxes the fund probably has about one year left (they payout $45 million a week and collect $36.5 million a week in payroll taxes).

"Our Unemployment Trust Fund went into this recession without the kind of funds it should have had," Sokolow said.

Businesses and workers pay into the fund through payroll taxes. About $1.9 billion is collected each year. The fund is currently paying out about $45 million a week in claims, with jobless claims rising and tax collections shrinking.

An automatic tax increase is triggered to businesses if the fund dips too low.

Corzine said the fund has been overwhelmed because lawmakers previously diverted billions to cover the cost of state aid to hospitals and other programs.

The fund needs an estimated $200 million to avert a tax increase of $375 million to $600 million."

The choices will be increase the payroll tax on employers (and risk forcing out of your state or cut more employees) or cut unemployment benefits. Neither option is pretty.

Wednesday, January 21, 2009

In the immortal words of LL Cool J - Don't Call It A Comeback!

What a strange day in the markets. The markets opened up strong by misunderstanding IBM's results and slowly ground down to breakeven by 11am. After about 1:30 a number of influential traders decided that there was a bottom forming in financials and the markets soared from there to the end of the day. This continues the recent trend - the markets have become an online casino with few ties to reality.

This evenings news might continue the happy times for awhile. Apple lowered their outlook but not as much as some had feared and in the perverse language of Wall Street that was good news.

Despite my continued ridicule of Citigroup it delivered a nice 30% return today. If you were on the right side of that trade take your 30%, put it in your mattress and sleep well tonight.

*********************************************************************
I can't figure out if this is good idea or kind of like selling packaged snow to Northern NYers in January.

"
"Tired of paper receipts clogging your wallet or purse? Is waiting for a new roll of paper to be added to the cash register slowing your shopping momentum?

TransactionTree recently released a breakthrough paperless receipt service, to help with these and other problems related to paper receipts. Through the system, retailers will now have the ability to offer the option of email receipts to their customers, rather than paper copies. Now, you won't have to remember where you put your receipt if you want to return an item — it's already in your inbox.

TransactionTree's email option integrates with most existing point-of-sale (POS) systems, meaning existing equipment can be used on the system. The service also enables retailers to track customer shopping trends, create additional avenues for direct marketing, as well as aid in reduction of overhead spending by eliminating receipt paper expenses. "

After thinking about it a little more, this is little more than another marketing scam trying to pass itself off as a "green" option. Walmart would love to send me electronic receipts, while pulling info that shows that I buy 3 supersize boxes of ho-ho's every Wednesday night. Guess how many emails Walmart would send me on Tuesday offering me $0.015 off any 3 boxes of ho-ho's purchased on Wednesday?

Cheers!


Yesterday, I eluded to the fact that Citigroup had lost about $250 billion in market value in the past 18 months. Well someone at JP Morgan actually went through the effort of building a chart to represent the value of various banks from their 2007 highs to their current values.

That's an ugly picture.

Tuesday, January 20, 2009

NY job outlook




This picture rocks.

On a separate, less pleasant note --

New York is No. 1 again - this time, unfortunately, in job losses.

The city is projected to shed more jobs than any other metro area in the country this year, with 181,000 people likely find themselves without a paycheck.

The grim forecast can be traced to turmoil in the finance industry, which will account for more than 50,000 of the jobs lost, according to IHS Global Insight, which researched employment trends nationwide for the U.S. Conference of Mayors.

And New Yorkers will find the ripple effect to be painful.

"Financial jobs are crucial, they are high paying, they generate income spent on law firms, restaurants and ad agencies," said Jim Diffley, managing director of at IHS Global Insight. "There will be spill-over that will be pretty broad."

We're back under 8,000....

Wow, I'm not sure that the banking crisis has intensified this week, but the equities of many banks seem to be telling us that the crisis is alive and well.

Note this simple chart of the worst performing stocks for the day....

Royal Bank of Scotland Gr... -69.31% 6.57B
State Street Corporation -59.04% 6.43B
Lloyds TSB Group plc -57.90% 10.78B
Barclays PLC -42.62% 8.71B
PNC Financial Services -41.40% 7.66B

This is obviously an over simplified view of the market, but these multi-billion dollar losses are hard to ignore. Add to this the stunning collapse of Citigroup (now $2.80 - Citi has lost about $250 billion in market value in the last 18 months) and continued troubles at Bank of America, Wells Fargo, etc., and it seems that we might be facing some serious banking issues before the end of the week.

The markets have fallen pretty quickly since we broke through technical supports last week. The next stops are probably another 5-7% down from here and then if we break those levels.......well, let's cross that bridge if we come to it. I'll just point out that the market is still trading around 20 times 2009 estimated earnings - markets typically bottom around 8-12 times earnings. So either companies need to earn more money in 2009 to justify these prices or stock prices may have to fall further to signal a bottom.

After hours, IBM announced that it would beat analyst expectations. On the surface this seems like good news and the markets have reacted positively too the news. However, as I've cautioned before IBM is not a proxy for US businesses. They are a large diversified conglomerate with global exposure and many business lines. They appear to have exceeded expectations largely through cost cutting. While it is encouraging that they can control costs, this doesn't mean that all is well in tech land (note that Intel reportedly told employees that it could possibly report a loss this quarter which would be its first in over 20 years). We'll see how the markets digest this info tomorrow.

The markets are tumbling and no one is noticing...

Due to the inauguration coverage there are no little Dow trackers on the various major news outlets. However, I think it's important to note that the banks are failing badly today. Various financial indexes are down 10% to 15% today and have broken through the previous lows set in November.

The major indexes are back to within about 8% of the November lows. I'd expect a little lift after Obama's speech, but we're slipping back to October/November levels and no one seems to be noticing.

Cheers!

Monday, January 19, 2009

Circuit City's connected to the landlords the landlords are connected to the banks, the banks are connected to the....

I've been saying for awhile that retail is falling off a cliff and the impact is going to be far reaching. We've seen small bankruptcies so far - Linens N Things, KB Toys, Mervyn's - but I think Circuit City was the one that really got everyone's attention.

Millions of square of feet of retail space just became vacant as of 3/31. In newer, properties there are going to be substantial debt obligations against those properties. How will a lessor find a new retail tenant in this environment? You're right, they're not.

That means more bankruptcies for commercial developers and more troubles for the banks and more troubles for ........ you and I -- John Q. Taxpayer.

Circuit City is the biggest retail bust so far, but it won't be the last - I'd expect that 1 to 5 of these companies might have trouble seeing 2010....

Pier 1
Bon-Ton (sorry Mom, but you can't shock Bon-Ton back to life)
Talbots
Saks
Rite Aid

Cheers.

Banking ripples around the globe

There have been substantial banking upheavals around the globe as our markets have been closed over the weekend.

The Royal Bank of Scotland lost 2/3rds of its market value on Monday after the British government took further steps to stabilize the lender. The UK markets actually climbed on this news, but asian markets read it the right way - this is bad news for everyone. It appears that the British bank bailout was pulled from the Paulson playbook:

"Banks wishing to participate in the U.K. government’s 100 billion-pound bailout, the second in three months, must agree to “have specific and quantified lending commitments that will be binding and externally audited,” according to the Treasury. The deal was one of “mutual responsibility,” Brown said yesterday.

“The absence of detail on this is blinding, it is just incredible,” said Peter Hahn, fellow in finance at London’s Cass Business School. “The detail of what the banks are and should be doing is a real mystery.”

When coupled with the problems at Citibank and Bank of America the banking industry remains in upheaval. There is growing talk that the US needs to create a government backed bank to take the bad assets off the balance sheets of the banks and stabilize the banking system. In theory, back in 1917, this might have worked, but it today's increasingly complex financial system there is simply no way to effectively determine who gets to sell their junk to the US (expect every US bank, investment bank, leasing company and foreign banks to argue that they deserve to be part of the bailout part deux). I am a believer in the mantra that if a bank is too big to fail, break them up until their small enough to fail. We can't continue to reward failure in our country.

Wednesday, January 14, 2009

Other than the -25 degree weather it feels like October

Financial unease seems to be spreading again coincidentally just before Congress decides to vote on releasing more TARP money.

Citigroup is moving forward with plans to divest its businesses to raise cash, but they might be running out of time as the stock dipped below $5. Bailout fatigue is very real in Washington and on Main St. The amount of money we've already thrown at Citigroup is staggering and with no real plan for fixing their business, I think many will view saving Citigroup as good money after bad.

Bank of America has already come back to the well looking for more help with their acquisition of Merrill Lynch. I agree with many other commentators that say enough is enough from Bank of America. They bought MBNA, Countrywide and Merrill. Those were bad decisions and I don't think the government should be in the business of bailing out companies that make poor business decisions. However, much like October of 2008, we are hearing the same refrain - if this deal falls apart the entire financial system is in peril. Well, I'm willing to risk it, because the alternative is clearly not working.

There is a bunch of company specific bad news out tonight - Apple's Steve Jobs is taking a leave of absence for health reasons (get well soon!), Motorola is cutting another 4,000 jobs, Google (yes, Google) cut 100 jobs and Nortel filed for bankruptcy.

The markets didn't hold the 850 technical level that I mentioned yesterday. So from a technical standpoint many will point to 750 as the next important threshold. I'd expect a bit of a bump around the inauguration, but if we get back to 750 on the S&P (roughly 7,600 on the Dow) the big question will be - do we bounce or fall through the those levels? Unfortunately, I think the fundamentals would say we're going to eventually break through those levels. We'll see.

Cheers!

Intraday moves...

Today's market dip has taken the indexes down below a number of technical supports (860 and 850 were supposed to be important to the chart readers) with the S&P 500 at 845. If the markets stay below 850, there is little support from here to the old November lows - that's about 750 or 15% below the current level.

We'll see how it plays out....

NY defines irony

The top two stories on the NY Times website this morning:

Banks in Need of Even More Bailout Money

and

In Michigan, Bank Lends Little of Its Bailout Funds

How can that be? How can banks be sitting on the bailout money AND still need more? Well, my guess is that the banks are scared of what is coming down the road. They see more and more commercial and corporate loans going bad and they fear that without another injection of capital they won't weather that storm.

"The bad bets made by executives at Independent Bank of Michigan are on display in spots across the state: a defunct bowling alley, a new but never occupied shopping center and the luxurious Whispering Woods Estates, which offers prime lots for never-constructed dream homes.

Now it is the federal government making the big bet here.

The Treasury Department has invested $72 million out of the $700 billion in federal bailout funds to help prop up this community bank, which traces its roots back 144 years in Michigan. It is a small chunk of the giant rescue fund being wagered by Washington to encourage banks like Independent to resume lending and jump-start the frozen economy.

But Independent, hard put to find good borrowers in a suffering economy, and fearful of making the kind of mistakes that got it into trouble in the first place, is not doing much lending these days. So far it is using all of the government’s money to shore up its own weak finances by repaying short-term loans from the Federal Reserve. “It is like if you are in an airplane and the oxygen mask comes down,” said Stefanie Kimball, the bank’s chief lending officer. “First thing you do is put your own mask on, stabilize yourself.”

I absolute love that analogy even if I think the bank's lending officer didn't realize what she was saying - if a plane is going down you put on the oxygen mask. Great, how much good does your mask do you if you hit the ground at 625mph? That's the question we have to ask ourselves - is the financial industry suffering from a cabin pressure issue or have they lost 3 of 4 engines?

Tuesday, January 13, 2009

Forrester predicts a 3% decline in IT spending and I predict

a decline in the number of people buying research services from Forrester :)

3% really? Have they talked to any C-level executives in the US? If you are decision maker at a firm and you see your sales trending down 10-20% in 2009 where would your be cutting back? I think slowing the replacement rate of technology products is probably a pretty good place to start.

As I often preach you have to look for conflicts when you hear data like this - Forrester is a research firm that sells it's research products to many ............. you guessed it Technology firms. So it's probably in their best interest to have a positive bias toward the tech industry.

"Forrester reckons that spending on software will be flat at $388bn. Sales of computer equipment - PCs, servers, storage, and such - is expected to come in at $434bn, down 4 per cent from the $450bn level set in 2008 around the globe. Spending on IT services is expected by Forrester to be the big ticket item in 2009, at $484bn."

Walmart CEO provides some interesting insights

I think there has been a fair amount of anecdotal research to support the thesis that consumers are retrenching. The concern that many businesses have is that this shift in consumer habits may become permanent.

Yesterday, Walmart's outgoing CEO made some interesting comments to that effect.

"The recession, he said, could fundamentally change the way consumers live, adding that he’s “not convinced” that people will be willing to take on additional debt for a long time. "

"I'm not necessarily convinced that just when all this liquidity and things hit, if you're going to have the same immediate desire to go back to consumption and debt," he said, referring to a potential U.S. government stimulus plan.

"There are a lot of young people who have learned what it's like when you are living on the edge and the bad times come."

New Jersey's Problems

New Jersey has it's own set of problems that make direct parallels with NYS challenging, but I think we can agree that the NJ Governor is being upfront and honest about the challenges they face. Expect similar honesty from Governor Paterson.

"The cuts will affect everything from school breakfast programs to mosquito control to equipment for the state police. The governor even is proposing a wage freeze for state workers, which union leaders are rejecting, and reducing state payments to the pension fund. More cuts may be needed considering the state's falling revenues and the deepening recession.

Unfortunately, it's property owners who will pay the price for these cuts, not only because of a reduction in services provided by the state this year, but also in increased property taxes next year when the state will have a projected $5 billion budget deficit. Depending on the state of the economy and state revenues, the budget gap could be even more. It's a simple mathematical equation: If the state cuts funds to schools and aid to cities, local property taxpayers have to make up the shortfall or schools and municipalities have to cut programs and services -- a double whammy on local communities."

I've said for some time that this is the dilemma facing NYS - cut jobs, raise taxes, and/or cut services. Funny, I didn't hear anyone running in the recent election mention that as a campaign slogan --- "I promise to eliminate 35% of state and county employees or raise your real estate taxes 24% or eliminate plowing on weekends and evenings." Now that's someone that would get my vote (however, they would probably lose the election 17,042,028 to 1).

None of the choices are going to make you popular, but these are the hard choices that have to be made.

Cheers!

The 21st Century Outlook

We are now 8 years into the new millennium and it is clear that no one nation has established itself as the global economic leader for the 21st Century. There are many contenders vying for the title, so let's take a look and offer up some odds.

1) China - This is clearly the house pick. An enormous population of industrious people, prosperity emerging around every corner and a hunger to reclaim their role as the cultural and economic center of the universe.

Pros:
* Abundant labor
* Rapid development
* Access to capital

Cons:
* Government limitations on everything from Internet access to safety standards.
* Limited innovation
* Questionable quality controls

If we look at the last few economic superpowers - the UK, the US and Japan - they all shared similar characteristics: a curious workforce, extremely hardworking, innovative, high quality standards, etc. China has very few of these characteristics in my judgement. Someone mentioned last night that China was the 2nd biggest economy in the world in 1890 and they are second biggest economy today. I think the market assumes that China is the rightful heir to the US throne, but I'm not convinced. Odds - 5:1

2) India - India has the benefit of a large, educated, English speaking workforce. They are well integrated into the global economy and are playing a major role in many aspects beyond IT and customer support. Major financial firms and major US tech companies have large commitments to India.

Pros:
* Highly skilled affordable labor (although not as cheap as it was 5 years ago).
* A deeply ingrained entrepreneurial spirit

Cons:
* Levels of bureaucracy that are difficult to comprehend
* Widespread corruption (Satyam scanal and Wipro have hurt their image)
* Many infrastructure issues that have yet to be addressed
* Oppressive poverty
* That little problem they seem to have with their nuclear neighbor

India has a chance to escape the clutches of poverty that have weighed so heavily on it for the past century, but the challenges are severe. India has come a long way in a very short time and I think it has a better chance than most, to be the economic superpower it aspires to be. Odds - 4 to 1.

3) The US - Clearly the current economic slowdown and the crushing debt load we are facing will be major hurdles, but no country can innovate, inspire and lead like the US.

Pros:
* Innovative/creative workforce.
* Strong technological background
* Remains the global economic engine

Cons:
* Crushing levels of public and private debt
* Oppressive legal and regulatory environment
* Needs infrastructure upgrades and a national energy policy
* Global confidence in the US has been shaken

I remain convinced that no foreign country can compete with the US when it comes to developing new products and services, inventing new industries and changing the world for the better. However, we face some difficult decisions and need to make some important changes soon. The bookend generations (baby boomers and Gen Y) are going to be problematic. The Boomers are going to cost a fortune in healthcare and Gen Y isn't doing enough to generate taxable income to offset the Boomer costs. If we don't right the troubling demographic trends we will not be the economic superpower of the 21st century. However, I think we are still the favorite (if just barely). Odds - 2 to 1.

4) The longshots:

There is a fairly long list of countries that could leverage their assets to make a move toward becoming an economic superpower. Oil rich countries like Iran, Saudia Arabia, Venezuala or Russia could plow money back into training and reinvent themselves (ok, that's never going to happen). Countries like the UK, Germany, France, Canada, etc will look to innovate, but the lack of a start-up culture hurts their prospects and their population bases are too small to dominate.

Asia ex-India/China. This is a real wildcard, but if I were betting on a longshot it might be on the countries of Asia outside of India and China forming an aliance similar to the EU. The Philipinnes, Indonesia, Vietnam, Thailand, Korea, Taiwan and Japan could form a strong group of states that have many of the traits of an economic superpower. It will be interesting to watch. I always like an underdog (thus my undying allegiance to a certain football team that has gone 13 years without a playoff win) so I'd probaby put my money on a 7 to 1 longshot like an Asian Union.

The good news about long range forecasts is that I'll be long gone before anyone can check to see if I was right or wrong :)

Cheers!

Monday, January 12, 2009

Well, I guess the weather could be worse.....

At least we're not in Antartica.

This video of a condition 1 storm at Antartica is unbelievable.

Tech Industry Update....

Technology has been the primary driver of growth and innovation in the US over the past 30 years. While I don't see that changing, the headwinds that face the tech industry right now are severe.

If you are tech company with a corporate customer base you are hearing the same refrain over and over - "Our budgets are getting slashed and if we renew we're looking for a better price." If you are tech company that sells to consumers, well, perhaps you can get the new iphone down to a price point where Family Dollar and Dollar General will start stocking it.

The latest ripples coming out tech land are the layoffs. I'll just note that while the scope of the layoffs are limited at this point, the companies affected are the best of breed companies. If these companies are starting the layoff cycle expect things to get worse before they get better.

Over the weekend we heard more rumors about layoffs coming from IBM, Microsoft and Oracle.
This is above and beyond the layoffs at Dell, Lenovo and Seagate announced in the last week. For a running tab of layoff announcements check out this chart at cnet.

This is a cycle that feeds upon itself, it will be interesting to track tech help wanted ads again to look for an inflection point (when companies start hiring again - you'll see an uptick in online help wanted advertising first).

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Totally off-topic - Facebook/Twitter and our Celebrity Society

This is more of a rhetorical question, but can someone explain to me the need for Facebook/Twitter, etc? I'm stunned by the amount of money being invested by venture capitalists and the amount of time being dedicated to develop tools and marketing techniques around Facebook, Twitter and the rest of the social networking world.

I've done the Facebook thing and frankly, it's seems like a pretty mindless exercise designed to fill two needs for Gen y:

1) This is an exceedingly simplistic generalization, but most young people are looking for more ways to waste time. Now, people have done this since the first temp discovered solitaire on his PC, but the constant need to waste time is now having meaningful impact on our long-term success as a nation. I'll note that this is not convined to Gen Y - Gen Xers spend too much time emailing, IMing and CCing in an effort to look busy.

2) There seems to be a need to share every move they make with the world because clearly they are an undiscovered American Dancing Idol in waiting. Gen Y is the most celebrity- obsessed generation we've witnessed, and while their audition tape for Real World 38 1/2 might have been rejected for the 17th time, they can post their musings on the healing powers of wheat bread vs. white for all of 1,752 of their "friends" to see.

For those unfamiliar with Twitter - it's a dumbed down version of Facebook where you can quickly broadcast to the world earth shattering news like --- "Just finished working out and heading back to the office" (translation - "I coming back from Krispy Kreme, do you need anyting?") or "Eating w/Jane at Nobu" (translation - "Ramen noodles, again!").

If these are the two greatest technological leaps forward in the US over the past 5 years, we are in big, big trouble.

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TWITTER Update: "Just updated my blog. Heading to add pics to Facebook". :)

Friday, January 09, 2009

Non-Farm Payroll - Down 524k.... Birth/Death +72 - LOL!

I don't think I've ever seen a consensus number be spot on, but as I've said many times this payroll number is merely an exercise in statistics and is not very representative of the actual job market at any one point in time.

I will join the chorus of other bloggers that will note again that the government projected 72,000 new jobs were magically created by new firms that were formed in December. That's just embarrassing. Who can say with a straight face that in the midst of the worst financial crisis in modern times 300,000 jobs have been created by new small businesses.

There were huge downward revisions in previous months numbers as well, but at the end of the day the market will likely yawn at this data (it should have an upward bias at the open).

Unemployment has crossed 7% and I think it's interesting to note that despite all of the hopes pinned on a new costly stimulus out of Washington, we've lost 1.9 million jobs in the last 4 months. Many of these people do not have skill sets that translate well to building roads or laying bricks.

Cheers!

Payroll Day

Ten minutes until the jobs number hits the wire....

Average forecast is for a loss of 525k jobs lost. Don't be surprised by anything +or- 75,000 jobs on either side of that number.

In fact, much of this bad news is already baked into the markets expectations. Unless there is a meaningful number outside of this range, it may be non-event (or even cause some to buy the market).

Follow-up coming....

Thursday, January 08, 2009

Remind me not to move to South Korea...

Financial Blogger Arrested in South Korea

"South Korea said on Thursday it had arrested an elusive blogger accused of undermining the country’s financial markets with his doom-mongering, ending a case that has illustrated government unease with the growing influence of online ­gossip in the world’s most-wired economy.

The case comes amid government efforts to combat negative comments on South Korea’s ailing economy in the media and from private sector economists. The export-dependent economy has been among the hardest hit in Asia by the global financial crisis."

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Wednesday, January 07, 2009

Pension Bailouts, Jobs Lost and Fraud, Oh, My.....

I've had the uncomfortable position of knowing a little too much about the underfunded pension liabilities of US corporations for far too long (one my first jobs in college was analyzing corporate pensions).

When I refer to "underfunded pension liabilities" it's just a formal way of saying that what the pension owes exceeds the value of the assets held by the pension plan. This number has fluctuated over the past few years and it is not as important to the average American anymore because so few of us are pension plan participants. However, the 2008 swing from a small surplus at the start of the year (assets exceeded obligations), to a $400 billion deficit is going to have a meaningful impact on corporations across the US (see story here). The swing to such a huge deficit is principally a result of the weak performance of the equity markets last year.

Corporations are obligated to make up for these shortfalls, usually through additional pension contributions. These are dollars that can't be invested in new technology, new plant expansion, new employees, etc., so I expect the impact from pension losses to be a weight around the neck of the US economy through the next few years.

While not all retirement plans mirror the results of corporate pension plans it is going to be worth watching the investment performance of other non-corporate retirement plans (think public employee retirement plans, federal employee retirement plans, etc). Another year like 2008 and the retirement system of the US will need a bailout.

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The markets were jittery all day after the ADP payroll data. As I've said, the ADP data has been bad as of late - but ADP has taken steps to try and be a better predictor of the BLS data that comes out on Friday. Other bloggers have noted that this is a fools game.

The BLS data is flawed, so chasing a bad forecast is clearly a bad idea. ADP (and other payroll providers) have access to information far more valuable than just the number of jobs gained or lost in a month. They can tell you accurate information on hours worked, pay increases or decreases, temporary staff added or subtracted. This is really valuable, real-time data that would help corporate decision makers and policy makers so much more than a guesstimate predicting a flawed government forecast.

But, I think ADP likes all of the free publicity their data is earning them, so don't expect a change anytime soon.

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The story of Satyam Computer Services and the fraud perpetrated by their CEO was not a major mainstream media story, but I think it is sending shockwaves throughout corporate America. In essence, Satyam was the modern day Indian success story - offering high quality software and IT support to hundreds of global companies at a fair price. The problem seems to be that the CEO was changing the financial statements when they didn't meet his liking.

This is not an indictment of all Indian IT firms, but it is going to create a good deal of skeptism among corporate users and will lead to more scrutiny of offshore resources.

On a separate note - Satyam is headquartered in Hyderabad, India, where my lovely bride happens to be right now (TopChef is on honey - Padma says "Hi"). Isn't technology great? You can give a shout-out to your wife via a blog from Clayton, NY to central India (forecast for today 85 degrees and sunny).

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A final note about the markets - I don't think that it is a coincidence that on the day that President-elect Obama's team leaks that the deficit could top $1.2 trillion next year, that China has let it slip that they might be losing interest in our dollars. This was clearly meant to be a signal that while China needs the US to perk up to support their own growth, they are concerned over the amount of stimulus being proposed and what it may mean for the value of the US currency.

This can be one of the first big domino's that could trigger an end to the low rate interest rate environment in the US. Watch this carefully.

Cheers!

Apparently, the economy matters again...

Stocks are off to a pretty weak start today after Intel slashed it's numbers and the ADP job report came out.

I've pointed out before that when companies like Intel or Texas Instruments miss numbers it should be a shock to your system. These are biggest, steadiest tech names in the world and they had lowered their revenue target by over $1 billion just 2 mths ago. So this miss is surprising.

"Fourth-quarter sales dropped 23 percent, missing a forecast that it cut by $1 billion less than two months ago. Intel’s sales decline surpasses the 20 percent drop it reported in the fourth quarter of 2001, after the technology bubble burst."

This echoes what I've heard from others - it feels worse than than 2001 out there.

The ADP job number clearly has moved the markets given the shocking number of jobs that they estimate were lost in December (nearly 700,000). This might fit with anecdotal evidence reported this week that unemployment hotlines around the country have been overloaded (NY's was reportedly down for some time). Historically, the ADP number is actually a little better than the actual jobs number to be reported on Friday. If that trend held, we'd be looking at another month of massive job losses. If our economy is losing 500k+ jobs a month, any stimulus that creates 3 million jobs would only offset 6 mths of job losses.

Cheers!

Tuesday, January 06, 2009

2009 - Part II

Continuing my outlook for '09

Housing - It's hard to imagine the housing market getting much worse in 2009. I think that housing is going to become an increasingly localized story - great pockets of weakness around financial centers like NY/Boston/NC or where overbuilding continues (Florida/CA). I think the volume of inventory will eventually sink primarily due to pulled listings rather than actual sales. However, if inventory falls and interest rates remain low you could see a shift in confidence that might perk up some housing markets sooner than most people think.

Markets - It's hard to stay married to any idea right now with regards to the markets. There is a little bit of a January effect (money is reinvested in January) going on and people are still trying to ascertain what impact the Obama stimulus package may have.

I think that there is a chance that the markets try to wind a little higher from here - all of the technicians seem to be on the same page that the Dow is going to 9,750 -10,000. However, that pesky thing called reality is probably going to come back to haunt us fairly soon. I said back in October that there was a scenario under which I could see earnings for the S&P 500 falling to $40-$50/share (the estimate was over $90/share last January). Consensus estimates are falling and I saw my first $42/estimate for S&P earnings today. At today's prices, this prices the market at over 22 times earnings. This would be expensive for stocks during a boom time - and insanely expensive during a recession.

There are scenarios where stocks could trade at 8 to 10 times earnings and this puts a low end of the trading range of 4,500 - 6,000 on the Dow Jones Industrial Average. So, in summary - I think we may rally up another 10% before falling 20-40% and finally rallying again 10%+ in Q4. Volatility rules the day.

Monday, January 05, 2009

2009 - An Outlook...

On a relatively light news day I thought it might make some sense to offer up some forecasts for the year ahead and a long-term trend analysis.

1) Oil - Oil has ticked up slightly over the past week on speculation of more OPEC cuts and unrest in the Middle East. Offsetting this trend is the clear weakness in the global economy and the impact this weakness has on oil demand. In my opinion, this is principally all just white noise. If you want to know where oil is going, figure out where the US dollar is going. My bet is that the $ is going down and that's going to lead to a resurgence in the price of oil despite weak demand. At some point in 2009 oil will be above $65/barrel and gas prices in the US will break $2.40/gallon again.

2) Financial Services - Unfortunately, I think 2009 is going to be another painful year for the commercial and investment banks in the US. While they've finally got their hands around the housing mess, the banks are likely to be hit by another stunning wave of defaults from the commercial property sector. Visit any booming retail center (Boston, Austin, Atlanta, NY, LA) and you will be stunned by the vast quantities of vacant retail space. This empty retail space can only stay empty for so long before borrowers will start defaulting. Couple the retail defaults with empty office space and excess hotel space and you've got the recipe for Financial Bailout Part Deux.

I've been stunned by the bold predictions coming out Wall Street this week that have been almost universally bullish (again when the crowd all agrees on something - it's usually a sign that they are all wrong). I think there are a couple of factors behind this bullishness -

* self-preservation: If Wall Street struggles again in 2009, many of these Wall Street Wizards will be selling the home in Aspen to pay for their cable bills in 2010. No one wants to see this, so they're probably more bullish than they would normally be in the hopes that they are right, because if their wrong, it'll be ugly for everyone.

* history: Every forecaster keeps pointing to the average recession length or the 2003 recovery as evidence that it's almost over. Much like the fact that the 1982 to 2007 bull market was unlike anything we had ever experienced, this recession is different and will eventually prove to be different.

Finally, I've said before that there is a segment of all markets that is open to US manufacturers if they would simply grab it. Even in tough economic times, when people are flooding Walmart to buy disposable TVs there is a need for quality. The quality of goods being sold to US consumers is falling at an alarming rate (my one year old LCD TV failed this week, while my 20 year-old TV still works like a charm). I call it Webernomics. Weber owns the quality grill category by making a high-end product that lasts (some will note that many of their grills are now manufactured in China and assembled in the US - I can't say how this has impacted the quality of their grills, but 5-10 years ago nothing could top a Weber for under a $1,000).

As times remain difficult around the world, I think consumers are going to shift their purchase dollars from impulse/disposable items at the Walmarts and Targets of the world toward lasting goods that will cost more, but will provide years of quality service. If I were a Private Equity firm, I'd go around an scoop up the trademarks for a bunch of old quality US products (TVs, bikes, small appliances, clothing, etc) and develop a manufacturing model that delivered the Weber experience in every category. This is a long-term trend that won't play out overnight, but I suspect someone smart will give this a shot.

Cheers!

* Note - Facebook has clearly jumped the shark as I've been using it fully in 2009. If you're a reader add me to your friends for news and witty commentary.

Sunday, January 04, 2009

Housing Bubble Revisited & Local Tax Question...

The Wall Street Journal put together a pretty comprehensive (albeit snobbish) analysis of a single "home" in Arizona that resulted in a mortgage that was packaged and sold to investors. It's worth clicking through to the slideshow to see what $103,000 bought in Arizona a couple of years ago.

"The condemnation notice stapled to the wall says: "Unfit for human occupancy."

The story of the two-bedroom, one-bath shack on West Hopi Street, is the story of this year's financial panic, told in 576 square feet. It helps explain how a series of bad decisions can add up to the worst financial crisis since the Great Depression.

Less than two years ago, Integrity Funding LLC, a local lender, gave a $103,000 mortgage to the owner, Marvene Halterman, an unemployed woman with a long list of creditors and, by her own account, a long history of drug and alcohol abuse. By the time the house went into foreclosure in August, Integrity had sold that loan to Wells Fargo & Co., which had sold it to a U.S. unit of HSBC Holdings PLC, which had packaged it with thousands of other risky mortgages and sold it in pieces to scores of investors.

Today, those investors will be lucky to get $15,000 back. That's only because the neighbors bought the house a few days ago, just to tear it down."

"For a $350 fee, an appraiser hired by Integrity, Michael T. Asher, valued the house at $132,000. Mr. Asher says although he didn't personally believe the house was worth that much, he followed standard procedures and found like-sized homes nearby that had sold in that price range in 2006.
"I can't appraise it for the future," Mr. Asher says. "I appraise it for that day."

At closing, on Feb. 26, 2007, Integrity collected $6,153 in underwriting, broker, loan-origination, document, application, processing, funding and flood-certification fees, mortgage documents show. A few days later, Integrity transferred the loan to Wells Fargo, earning $3,090 more, Mr. Rybicki says."

A) The appraiser should be embarrassed by his actions - that house was never, ever, ever worth $132k. Taking sq feet and multiplying by some random $xx/sq feet of comp homes is something my 5 year old could do. An appraisers job is to differentiate between homes and determine values based on those differences.

B) Do you get a sense of why the housing boom was so insane? This woman had no ability to repay this loan on a house that was 10 times overvalued, but somehow her lender sucked $9,000 in fees out of this loan. That's why no one cried wolf (except for a few crazy bloggers) - everyone was getting rich.

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On a separate note - I've been saying for sometime that state and local governments are going to start pushing to raise revenue as they struggle through the recession. At the absolute peak of the local housing bubble our town revalued all properties to 100% market value (by 1/1/08 it was clear the market had cracked, but the assessor didn't want to hear about current conditions). Well, the funny thing was that the revaluation to 100% market value was designed to update our tax rolls and we were assured our taxes would be little changed.

In 2008, that was the case as our taxes increased by a very small amount. However, our 2009 tax bill arrived promptly on 1/2/09 and showed a whopping 24% increase in our tax burden.

So my question is - many local communities have recently reassessed properties at 100% of market value, is everyone seeing a similar spike in taxes? Is this specific to my community? If so, I'd imagine this will become a topic of discussion as tax bills make their way to the many seasonal residents of the 1000 Islands.

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Asian markets are still riding the Happy New Year - Santa Rally. Our markets have a chance to keep going for a little while, but the experienced money will return to play this week and the outlook for the global economy has never been worse (more on this tomorrow).

Cheers!

Saturday, January 03, 2009

That New Hyundai Ad is Pretty Clever...

While watching the Colts/Chargers game, I've been struck by the number of ads for the new Hyundai assurance program. It sounds simple enough - if you hit rough times and lose your job, Hyundai will take back the car and you get to walk away.

But as Clark Howard says (btw - look for his show on Headline News - he's great) the trouble is in the mice type (the fine print).

From the Hyundai Assurance brochure -

1) You file a benefit request with Hyundai Assurance.
2) Your benefits specialist will determine the value of your vehicle based on the average of your dealer’s appraisal and the values from leading industry guides.
3) Provided you have made at least two scheduled payments on your loan or lease, you pay for the amount above the Hyundai Assurance benefit (if anything) and any car payments that were due prior to you filing for the benefit.
4) After such payment (if any) and upon benefit approval, you return the vehicle to the selling dealer.
5) You walk away without further financial obligation or negative impact to your credit!

Can you guess the big loopholes in the plan?

1) Your benefits specialist will determine the value of your vehicle - Hyundai has a notoriously bad resale value and despite improvements in their product lines they still suffer huge first year depreciation.

2) You pay the amount above the Hyundai Assurance benefit.

Let's work this on a 2008 Hyundai Sonata GLS for example. This car retails for $21k, but the invoice is $20k so let's assume you pay $20,250 for the car (assuming no $ down or trades). After 4 months you lose your job with XYZ bank and you file for a benefit under the Hyundai program. Well, unfortunately for you, the value of a used 2008 Hyundai Sonata GLS is about $13,000 wholesale (it's not clear what Hyundai uses to determine value - wholesale or retail - but I can't imagine it's retail).

Now you've made about $1,600 in payments on your car, but the Hyundai specialist has determined your benefit to be just $13,000. So, for the low, low price of $5,650 you can now turn the keys back over to your dealer. We take cashier's checks - thank you very much.

Alternatively, you might owe nothing if you made a large down payment. In that scenario, Hyundai just keeps your money and your car. Good for them, not so good for you.

Like most deals, this one sounds better than it appears to be in reality, but I appreciate their creative thinking - it's clever marketing at the very least and many, many, many people will fall for this program.

UPDATE: There is a small note in the Hyundai brochure that I missed initially. They will cover up to $7,500 of negative equity. It's not clear why you'd ever have to pay anything above the the Hyundai benefit if they are covering $7,500, but I still find it interesting that they kept the language in the agreement about a final payment.

So, I'll admit that I missed that number, but I still think this is more marketing than substance. Much like that Jeep ad last summer where you could lock in $2.99/gallon for a year. Well, with gas at $1.50/gallon that deal is a little irrelevant. I expect that this program will be little more than clever marketing at the end of the day.

Cheers!

Friday, January 02, 2009

Well, of course the markets are up - It's a New Year!

The financial media are all buzzing excitedly over the sharp rise in the markets today. There are a couple of factors that continues to play a role:

1) No one is working this week on Wall Street. Light volume indicates that all of these moves have been driven by an absence of sellers.

2) The start of a new quarter does mean that some funds have to re-invest. Coupled with the limited sellers in the market this fueled much of today's rally.

But, however, it's happened, the markets are back at a 2 month high. Is this a sign of something good just around the bend? I'm not convinced. In fact, I think that just the opposite is true. I expect business to get demonstrably worse for most companies in the coming quarters.

A number of big hedge funds (that play both long and short) are starting to reload their shorts and I expect that sometime next week the buzz kill that we've come to know as "reality" will begin to sink in.

Happy New Year!

Thursday, January 01, 2009

Welcome to the New Year...

There's a stunning amount of media coverage that seems to be focused on how turning the pages of our calendar is going to cure all of our economic ills.

Unfortunately, I think January might just be the rude awakening that we escaped in December. People knew things we're bad in December, but as we enter the new year I think companies are going to go begin implementing a number of new policies that may exacerbate the current weakness.

Case in point:

"Mark January 15 in your calendar: Rumors of layoffs at Microsoft peg that as the day the bad news will come.

The latest to report on the possibility of layoffs at the software giant is the blog Fudzilla, which puts the number of job cuts at 15,000, or nearly 17 percent of Microsoft's worldwide operations. The January 15 date is a week before Microsoft's second-quarter earnings report, scheduled for January 22."

I think Microsoft has become bloated and this is probably a prudent step, but the fact that a tech giant like Microsoft sees enough weakness in the corporate market to layoff 15,000 workers is likely to send chills throughout the economy. If you're a mid-market paper supplier in Utica how do you like your chances of flourishing in '09 when Microsoft is cutting back?

Cheers!