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US Economy: A Downward Spiral?
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Samsara
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Posted on 07-28-08 8:48
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Got this from a Financial Blogger I subscribe to. Some pretty good analysis and recommendations for those wanting to play Banking stocks and the US Dollar. Grim news in general...Could Washington Mutual be next?? Man, when will this mess end!
BTW, check out his recommendations as some of his insights are exactly what I've been feeling for the past few weeks.
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YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET |
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Unthinkable Truth; Undeniable Reality by Martin D. Weiss, Ph.D.
Dear Subscriber,
The truth may be unthinkable, but the reality is undeniable:
Much of our nation's financial structure is collapsing, and our government's only response is phony money, bogus bailouts and a litany of false promises.
Ben Bernanke, Henry Paulson, the FDIC and the U.S. Congress say they can do it all.
They say they can save bankrupt brokers like Bear Stearns ... take over recently failed banks like IndyMac Bank and First National of Nevada ... prop up insolvent mortgage giants like Fannie Mae and Freddie Mac ... refinance millions of defaulting mortgages ... dish out hundreds of billions in tax rebates ... and still have enough cash in the kitty to cover the next round of financial collapses.
They say their unbridled money printing won't devalue the U.S. dollar.
They say their unlimited pledge to guarantee junk mortgage bonds won't sabotage the credit of the U.S. Treasury.
They say their blank checks to private companies won't rip off U.S. taxpayers.
They'd have you believe they can outlaw the cycle of boom and bust ... repeal the law of supply and demand ... even freeze the march of time.
In the real world, of course, no government in history has ever been able to do anything of the kind, and they know it.
In the real world, their "solution" is part of the problem, and they know that too.
They know that wealth is generated from work — not from the paper money they're printing. They understand the hazards of indulging the most daring debtors and rescuing the most reckless risk-takers.
They know darn well the fatal flaws of the course they've chosen. But they proceed to pursue it anyhow.
Why? Because, behind the façade of their feel-good happy talk and beneath the thin veneer of their Pollyanna optimism, nearly every single one of our leaders — including Bernanke and Paulson, Democrats and Republicans — is really a gloom-and-doom pessimist in disguise.
They are pessimists inasmuch as they have little faith in America's ability to confront hard times. They greatly underestimate our ability to cope and adapt. They think we can't handle the truth.
I disagree. In the Great Depression, our parents and grandparents faced the unthinkable truth and created a stronger country as a result. They confronted the truth again during World War II and helped create a better world in its aftermath.
I believe we can do that too. We have the resources. We have the knowledge. And we have the added benefit of hindsight. But before we move forward, we must admit five irrefutable facts:
Irrefutable fact #1: Ours is a debt-addicted society,and weeding out the bad debts is the first step toward true recovery.
Irrefutable fact #2: By far the biggest pile-up of debts is in mortgages — $14.7 trillion, according to the Federal Reserve's latest Flow of Funds report (see PDF page 64, Table L.4, line 9).
Irrefutable fact #3: Among those mortgages, a quarter to a third could go bad: Their terms are high risk for both borrower and lender. Their collateral is shaky. Most should never have been created in the first place.
Irrefutable fact #4: When bad debts go into default, there is no free lunch. Somebody has to pay the price. The only question is: Who?
Irrefutable fact #5: The overwhelming bulk of the bad mortgages were created to help Americans move into homes that were priced far above their means. But the only way to correct this problem is to let natural market forces drive home prices back down to much lower levels.
Do most of our leaders have the wisdom and moral fiber to confess to these truths? Not yet. But in the not-too-distant future, they will have no other choice.
Reason: America's housing marketplace is bigger than any government; its power, greater than any law. It is the single largest asset class in the world. It packs the most powerful forces of supply and demand ever assembled in history.
And right now, it's tearing down some of our nation's largest banks. Two examples ...
Washington Mutual In a Death Spiral?
Washington Mutual, America's largest savings and loan, is unfortunately, also one of the nation's largest subprime lenders.
A direct consequence: It appears to be in a death spiral, losing $3.3 billion in the second quarter ... admitting to losses of as much as $19 billion this year ... and probably on its way to losses of an estimated $26 billion.
That estimated loss is over four times its total market value as of Friday's close ... twelve times its yearly earnings in the best of times.
Can it get a new capital infusion to stave off failure?
Perhaps. But on April 8, Washington Mutual already got an injection of $7 billion from private equity firm TPG Capital. And now, less than five months later, an amount equivalent to TPG's entire investment has been more than wiped out with the plunge in Washington Mutual's shares — to a meager $3.82 on Friday.
What's worse, the TPG deal restricts Washington Mutual's ability to raise new, desperately needed capital going forward. And further impairing its ability to raise capital, Moody's announced that it is reviewing the thrift for a downgrade to junk status.
Here's the big problem: As of the latest reckoning, Washington Mutual has $214.6 billion in residential mortgages on its books. And among those, more than three-quarters are in non-traditional categories — option ARMs, subprime loans, home equity loans and multi-family mortgages. Less than one-quarter is of the traditional, single-family prime variety.
Just in option ARMs alone, Washington Mutual has $52.9 billion, one of the biggest such portfolios in the industry. Moreover, 62.5% of its option ARMs are in two of the hardest hit states — Florida and California.
Nonperforming assets are growing by an average of 36% each quarter. If they continue to grow at that rate, they could reach a whopping 6.7% of total assets by year-end.
Investors are pulling out. Rumors are swirling that creditors may be doing the same. Bankruptcy looms.
Wachovia Also Suffering Huge Losses
Wachovia, the nation's fourth largest bank with nearly $800 billion in assets, is also in danger. Its staggering $8.9 billion loss reported last week may be just the tip of the iceberg.
Its big blunder: The acquisition of subprime lender Golden West Financial for $24 billion at the very peak of the real estate market in 2006.
The net result for the bank: It's now stuck with option ARMs valued at $122 billion concentrated in California, the state with one of the worst mortgage default rates.
Net result for shareholders: Over $55 billion of their wealth has been wiped out since the acquisition — more than double the total purchase price of Golden West.
The big problem going forward: Wachovia has $231 billion in residential real estate loans on the books. But only 22% of these are classified as "traditional mortgages." Most of the rest are higher risk.
My Recommendations
Recommendation #1. If you haven't done so already, check the safety of your bank.
Yes, your deposits are insured by the FDIC up to $100,000. But there are still risks and inconveniences of getting stuck in a failed bank or thrift.
For example, if your principal is $100,000, your accrued interest could be at risk. And if your account is a business checking account with large uncashed checks outstanding, even though your book balance may be under the $100,000 limit, your actual bank balance may be over the limit. So those funds may also be at risk.
Even with your insured deposits, after a messy failure, there could be a significant delay in regaining access to your money. You will get your $100,000. But don't expect it to happen overnight. To get a free safety rating on your institution, follow these steps:
Step 1. Go to TheStreet.com's Banks & Thrifts Screener.
Step 2. Look for the green box to enter your information. Under "Bank Name," type in only the first word of your institution's name.
Step 3. To the right of your bank or thrift's name, make note of its rating: A is excellent, B is good, C is fair, D is weak and E is very weak.
Step 4. Use these general guidelines:
- If your bank or thrift is rated B+ or better, we believe it's secure.
- If its rating is between B- and C-, check it a few times per year to make sure it hasn't fallen below C-.
- If it's D+ or lower, seriously consider switching to a safer institution, of which there are many to choose from.
Recommendation #2. Also consider moving most of your savings and checking to a Treasury-only money market fund. Treasury-only money funds are not insured by the FDIC. But I think that's a moot point because the investments they buy enjoy the direct guarantee of the United States Treasury, with no $100,000 limitation.
Examples:
Recommendation #3. If you haven't done so already, dump any bank shares that you may own, whether at a profit or a loss. The recent Fed- and SEC-inspired rally was a gift — a last chance to get out at somewhat better prices.
Recommendation #4. Your investments, your business or your income may still be vulnerable to collapsing mortgages and other debts. For protective hedges, check Our Comprehensive List of Inverse ETFs and consult with your advisor or money manager to select the ones that best match your needs.
Good luck and God bless!
Martin
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Last edited: 28-Jul-08 08:50 AM
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pyaradeshbasiharu
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Posted on 07-28-08 11:05
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It's Been a brilliant post, Thanks to Samsara and the rest of the people...
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Samsara
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Posted on 07-29-08 8:51
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For all who are worried about their bank deposits, etc. being lost in the current turmoil, read the below I got today. She has put in some good points to watch out for and protect your life's savings (for many this may be true). Always a good hedge to know all the below beforehand just in case a financial panic arises...It'd feel good to have done your homework a lot earlier if and when the collapse does happen (at this rate, nothing is uncertian anymore).
Beltran, a 6.2% mortgage about a yr ago would mean tht your FICO score was prolly in the mid-high 600s to low 700s (or if higher then you were not putting up atleast 20% as a down payment) right? If this is the case, and you feel that you CAN make the monthly required payments on the condo and your job is stable, then whatever mortgage you get right now, TAKE IT as the new laws being drafted for home-ownership and mortgages are going to be the strictest we've ever seen for a while. There is no way the Fed would ever want to repeat a similar meltdown ever again. Also be very wary of the "no mortgage fees" clauses...You'd still have to pay a whole lotta other misc fees and taxes (yeah taxes...thats the most killing part) when closing. However, the good thing is that they can all be written off on your year-end tax-return (even the interest paid ont he mortgae can be written off, which means about half the monthly mortgage payment). And yeah, go to your bank where u have your checking/savings account and get them to do your mortgage as they would be able to provide you with more help and more incentives than any other bank would. Also, read this sometime in the beginning of this yr that when you are loking to purchase a property in the current market, offering 20% below the asking is a wise move.
BTW, mukundo, thanks for the great words in the earlier post, but it was appalling that you'd taken it word for word form that website and not even cited your source (pls do that from the next time if you're just gonna copy someone else's post from another webboard and post it here).
Loote, a depression may be in the works, but unlike the one back in the 1930s which was prolonged by the Fed and the govt's inability to act upon it (as the laws of Classical economics was the stance taken by the Fed then as its "invisible hand" were thought to make all business cycles come back to it previous state in the long run). Definitely, we would see a lot more depressions but these would all be mini depressions which would not last for 8-10 yrs like the one back in the 30s did (all thanks to that certain someone called Keynes). Classical economics' "long run" efficient markets have all been a joke since..."In the long run, we're all dead." BTW, just yesterday read that Obama wants another round of stimulus checks to be sent out to all taxpayers. that would surely provide some much-needed short-run relief.
All this doomsday talks have begun giving me a bleak outlook of everything that once was the US of A. Is this the end of the dominance or is it just another bump in the road adter which the US comes out stronger and more efficient than ever like they did after the Great Dep? Only time will tell...But I'd defn want to see a silver lining come through soon though.
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YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET |
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Is Your "Keep-Safe" Money Really Protected from Credit-Market Chaos? by Sharon A. Daniels
Dear Subscriber,
The ongoing credit-crunch continues to shake-up financial markets in unexpected and frightening ways. It's hard to keep up with the fast-growing list of financial sector casualties. Just take a look at the fallout so far this year ...
Bear Stearns: This, century-old, brokerage firm was on the verge of collapse in March when the Federal Reserve arranged a last-minute fire sale to JP Morgan to prevent bankruptcy.
IndyMac Bank: One of America's largest mortgage lenders DID collapse just weeks ago, stranding some 10,000 depositors WITHOUT FDIC coverage. This could prove to be the most expensive bank failure in U.S. history costing taxpayers between $4 and $8 billion!1
Fannie Mae and Freddie Mac: Fannie and Freddie are Government Sponsored Enterprises, so you'd think they'd be run conservatively, right? Wrong! Fannie Mae is fighting to stay in business on life-support from the U.S. Treasury. Meanwhile, Freddie Mac is already insolvent under fair value accounting rules!2
Landmines are going off left and right in the financial sector, leaving unprepared investors in one of the most precarious situations since at least the last bear market and perhaps since the Great Depression.
In this devastating climate you should understand that it's not the return ON your money you should be concerned about ... it's the return OF your money that's most important.
If you have money with an ailing Wall Street investment bank, or a shaky commercial bank, then it is high-time you ask some tough questions about the security of your keep-safe money. Questions like: "What's really in your money market fund?" And, "Just how safe is my money in this bank CD? Will I be fully covered if it fails?"
If the answers to any of these questions are: "I'm not really sure," then you should take immediate steps to help safe-guard your wealth.
Don't assume that your bank CD or money market fund is safe just because it has been in the past. Bear Stearns was safe for nearly 100 years; Fannie Mae and IndyMac were considered safe too ... until now. Things are seriously different today.
The ongoing credit-crunch is taking a heavy toll on financial institutions once considered too big to fail ... let's take a more detailed look at the casualties so far, and talk about a few simple steps you can take right now to make certain your keep-safe money is really secure.
Expect More Bank Failures as Loan Losses Double
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Depositors line-up outside an IndyMac branch worried about the return of their money ... |
The high-profile failures listed above may be just the tip of the iceberg — the first of many financial firms to go bust — sending severe after-shocks through financial markets.
In fact, the Federal Deposit Insurance Corporation (FDIC) says 90 lending institutions are on its "problem list" of banks that could fail.
Could your bank be on the list? Of course, the FDIC won't reveal these names, for fear of triggering panic. However, the Chairman of the FDIC is on record warning of "additional bank failures as lenders grapple with losses from the collapse of the U.S. housing market."3
How Much Worse Could the Current Banking-Crisis Get?
Some historical perspective might help answer that question.
The U.S. Savings and Loan Crisis of the 1980s and early 1990s gives us perhaps the best example to go by. The S&L Crisis has been labeled as "the greatest collapse of U.S. financial institutions since the 1930s."4
From 1986 to 1995, more than 1,000 savings and loans with $519 billion in combined assets failed and were either closed or reorganized by Federal regulators. The S&L debacle resulted in a loss of about $153 billion when all was said and done, which overwhelmed the FSLIC deposit insurance funds available at that time.
Ultimately, U.S. taxpayers footed the bill for 81% of S&L cleanup costs — nearly $124 billion! The number of federally insured thrift institutions in the U.S. was cut-in-half during this period alone!5
Fast-forward to the present. We are now faced with a new financial and banking sector crisis that will almost certainly eclipse the S&L debacle by orders of magnitude. Over the weekend, U.S. banking regulators closed two more banks due to insufficient capital. So far, only seven banks, including IndyMac, have failed this year, but there will be many more to come — you can practically count on it.
The FDIC has its list of 90 "problem" banks, but isn't about to alert the depositors in these institutions for fear of triggering a run on these banks. But, what if there are many more insolvent lenders flying under the radar? After all, IndyMac wasn't even on the list!6 One banking analyst warns in a recent report that as many as 150 banks could fail over the next 12 to 18 months — "Everybody is drawing up lists, trying to figure out who the next bank is."7
The truth is, bank failures are a lagging indicator. You may not even realize your bank is in trouble until — as in the case of IndyMac — there's a desperate run-on-the-bank. But by the time panicked depositors line up outside your local branch, it's already too late.
American Banks Have $2.6 Trillion in UNINSURED Deposits ... Is Your Bank Account Fully Protected?
Consider this: global banks and brokers have so far suffered losses or asset write-offs of more than $400 billion — and still counting.8 These staggering losses already amount to almost three-times the size of the entire S&L debacle!
Meredith Whitney, an Oppenheimer & Co. securities analyst, recently said that banks are just halfway through writing off the value of assets.9 She predicts U.S. banks will report the biggest losses in more than two decades, exceeding the last banking-bust in 1990 by "a significant margin."10
How You Can Help Protect Your Keep-Safe Money in this Credit-Crunch Environment
Here are four pro-active steps you can take right away to help safeguard your wealth ...
First: Don't Overreach for Yield. Remember, in a true credit-crisis like this, for your absolute "keep-safe" dollars, it's the return OF your money that's most important, not the return ON your money. Unrealistically high yields may actually be a sign of trouble meant to entice your deposits into a shaky institution.
It's better to be safe, than sorry. Even if this means accepting a lower yield to protect and access your money — whenever you need it.
Second: Watch for Red Flags. Just a week before it collapsed, IndyMac Bank was offering interest rates of 4.35% on one-year- CDs. That's way out of line with the national average CD rate of just 3%.11 Banks that are desperate to attract new deposits may offer these unusually high teaser-rates — but don't bite. It could be a warning flag that something isn't right.
Remember, if it sounds too good to be true ... it probably is!
Third: Know Your Limits. FDIC deposit insurance is limited to just $100,000 per depositor, per insured bank (always read the fine print!) — or up to $250,000 per owner for certain retirement accounts.12 A surprising number of depositors exceed these limits. In the case of IndyMac, about 10,000 people with a total of nearly $1 billion in deposits WERE NOT protected by deposit insurance when the bank went belly-up — these folks may get only 50-cents back on each dollar they deposited. Make sure your FDIC-insured accounts are sized within the limitations and titled correctly. You can read more about deposit coverage by visiting the FDIC website.
FDIC data indicates that as much as $2.6 trillion in deposits are UNINSURED nationwide!13 If you are one of these depositors, you must take action now.
Fourth: Know What You're Getting Into: Bank CDs are, of course, insured by the FDIC, but ONLY up to the limits prescribed by law (see above). But in a low interest rate environment, many investors switch to money market mutual funds in search of fractionally higher yields. Remember, money market funds DO NOT carry deposit insurance, and these funds have no legal obligation to insure you don't lose money.14
Money market funds can load up on short-term debt instruments of questionable quality, rather than sticking with virtually risk-free government securities. In fact, lurking inside many money markets you'll find short-term corporate debt — like commercial paper, and worse- collateralized debt obligations (CDOs) — some of the same debt that is behind the bursting of the credit bubble.
Since the credit-crunch began nearly a year ago, money market fund managers and investors found out the hard way that commercial paper, CDOs, and other toxic-paper is no place for your keep-safe money.
Several money market funds managed by Bank of America, Credit Suisse and Wachovia, among others — suffered over $700 million in losses from investing in "junk paper" — short-term debt issued by Wall Street — which may carry substantially more risk than government securities.15
To keep your money out of harm's-way — you should avoid these higher-risk money market funds at all costs.
My view: This is NO time to be reaching for unrealistically high yields by investing in securities of questionable quality. And, with more bank failures likely, many are thinking-twice about their FDIC coverage. Fortunately, there are alternatives.
Also, Give Serious Consideration to Alternative Investment Options
With more bank failures possible, in my opinion, one of the most secure ways to invest your keep-safe money is in United States Treasury securities, which are a direct obligation — and backed by the full-faith and credit — of the U.S. Government. There is NO LIMIT on the Government's back up of its obligations — regardless of how much you have invested.
U.S. Treasuries are considered a virtually risk-free investment, especially in times of credit market panic. Indeed, most financial industry experts, with the exception perhaps of bankers who are trying to attract deposits, would agree that direct guarantees of the U.S. Treasury are actually stronger than the guarantee of the Federal Deposit Insurance Corporation. Being backed by the full faith and credit of the U.S. Government has no limit, as does the FDIC.
The reason is pretty obvious: over a thousand bank and S&L failures over the last 30 years have caused inconvenience, disruptions and in some cases, outright losses for individuals and businesses. In contrast, there has never been a default on U.S. Treasury securities ... even when fiscal budget disputes have temporarily shut down government operations.
Besides, it is the U.S. Government that ultimately backs the FDIC. So why not go directly to the source — investing in government-backed U.S. Treasury securities. In my view, investing in Treasuries is a great alternative to CDs and money market funds.
All things considered, U.S. Treasury securities offer investors one of the best safe-haven investments in uncertain times. That's why nearly 18 years ago, Weiss Capital Management, a Registered Investment Adviser, launched a special strategy that invests primarily in these securities.
The Weiss Managed Treasury Program is one conservative investment option that's worth serious consideration. This professionally managed investment program aims to preserve your capital while seeking higher levels of current income than you'll find in most money market funds or bank CDs.
Today's headlines remind us that, even with investments once considered "ultra-safe" it is still possible to lose money, and this is also true for the Weiss Managed Treasury Program, as with any other investment.
However, the Weiss Managed Treasury Program is specifically designed to reduce your risk by featuring a conservative strategy that invests in U. S. Treasury securities, and a money market fund (the Weiss Treasury Only Money Market Fund16) that also invests mainly in U.S. Treasuries.
If you're looking for a higher level of current income than some money market funds or bank CDs provide, not to mention the safety and security inherent in U.S. Government obligations, then you may want to take a closer look at the Weiss Managed Treasury Program.
I consider U.S. Treasuries one of the highest-quality investments in troubled times, and that's the central focus of this managed strategy. If you have been searching for a solution that offers you an extra layer of professional investment guidance in today's credit-market chaos — send for your Weiss Managed Treasury Kit today by calling 800.814.3034. Or to get started right away, click here.
Sincerely,
Sharon A. Daniels, President Weiss Capital Management, Inc. An affiliate of Weiss Research, Inc. | |
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Samsara
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Posted on 07-30-08 9:11
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The run that crude has had since the beginning of this year has been phenomenal. For all those on SB asking me about gas prices the other day, here is a good reading for you. Though Lehman Analysts predict that crude would be below $100 per barrel by the end of the year, the general market consensus is $200. Surely, someone is gonna win BIG while the losing party is gonna lose the shirt on their back for sure. A scenario akin to Soros' FX trade where he was short GBP in 1992 when everyone in the market was long the GBP (He was a laughing stock, the butt of all jokes around Wall Street)...And guess what, he made a Billion $ off that solitary trade called the "Mother of all trades".
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YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET |
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Get Ready for the Next Leg Up in Oil
by Sean Brodrick
Dear Subscriber,
Oil has pulled back
from its highs, and now analysts are lining up to say the top is in.
I've been saying all along that volatility is the name of the game in
oil this year. Let me tell you now that I think oil could go lower in
the short term — maybe to $110 a barrel, $100 if we're really lucky.
Then, hold on to your socks, because we're probably seeing the set-up
for oil's next HUGE rally.
Why do I think crude
oil may have some more work to do on the downside? Nothing goes up in a
straight line, and crude's run has been phenomenal — it was trading at
just $78 a barrel a year ago. A short-term pullback is a normal and
necessary part of any bull market, and crude is no different.
Short-term drivers that could push crude oil to $120 or even $110 a barrel include ...
- Easing tensions with Iran.
- U.S.
consumers driving less — 3.7% less than this time last year, according
to the Department of Energy. That doesn't sound like a lot, but it's a
savings of 9.6 billion miles and hundreds of millions of gallons of
gasoline.
- Expectations that Chinese demand will slack off now that preparations for the Olympics are finished.
- Fears that the financial crisis will translate into more pain for the U.S. economy and consumers.
Still, these are all
short-term forces. For example, people are driving less because prices
at the pump went up so far, so fast, that it came as a shock. Let
prices go down a bit, let people get used to new "higher lows," and
we'll probably see demand pick up again.
Now, let me tell you about some of the LONG-TERM forces in play that should drive oil to $150, $200 a barrel and beyond ...
Thirsty Tigers: The
U.S. may be the world's leader in energy thirst (over 20 million
barrels of oil a day) but China is coming on strong. According to the
Energy Information Administration (EIA), China consumed 7.6 million
barrels of petroleum each day of 2007. That's up 860,000 barrels/day in
just two years.
What's more,
Rigzone.com reports that China's oil imports in the first half of 2008
imply an increase of 480,000 barrels a day over the same period a year
earlier.
Drive Me Crazy:
What is China doing with all that oil? Fueling cars. In China, car
sales rose by 20% in the first quarter of this year to 1.85 million
vehicles. And while SUV sales are tanking in the U.S., the number of
SUVs sold in China rose 43% in May compared with the previous year.
Indeed, China's demand for gas is much of the reason for the run-up in
global oil prices.
China alone accounts
for about 40% of the world's recent increase in demand for oil. Fifteen
years ago, there were almost no private cars in the country. China now
has 15.2 million private cars. Still, less than 4% of the country's 1.3
billion people have already bought a car. That's the same percentage of
car ownership the U.S. had in 1915!
| China, India, and other emerging markets will continue snapping up cars — and oil — like crazy. |
Emerging Markets in the Driver's Seat:
China isn't alone. Demand is also soaring in India (up about 7% year
over year), where the locals are lining up to buy the world's cheapest
car, the $2,500 Tata Nano. India's government will spend $42.5 billion
this year on oil subsidies — twice what it spent last year. And that's
AFTER subsidies were scaled back in June.
And oil demand is
also booming in Russia, across Asia, and the Middle East. In 2008
China, India, Russia and the Middle East for the first time will
consume more crude oil than the U.S., burning 20.67 million barrels a
day, an increase of 4.4% over year earlier levels, according to the
IEA. U.S. demand will contract 2% to 20.38 million barrels daily.
Won't Less Demand from Developed Countries
Offset This Emerging Market Thirst?
No. Even though the
U.S. Europe and Japan saw their combined demand drop by 760,000 barrels
a day, according to the EIA, that's not enough.
China Syndrome: Oil demand is rip-roaring, and will overtake the U.S. | |
If China's present
growth rate of oil demand continues at its current pace (6% to 7% per
year) China will use 20 million barrels a day by 2020. That's about as
much as the U.S. uses today.
And by 2030, China would be up to 40 million barrels a day — TWICE what America is using now.
Meanwhile, Supplies Are Strictly Limited!
EIA data shows the
amount of petroleum products shipped by the world's top oil exporters —
15 countries which account for 45% of all production — fell 2.5% in
2007, despite a 57% increase in prices. This trend is continuing this
year, as petroleum exporters use more and more of their own oil.
For example, last
year, the region's six largest petroleum exporters — Saudi Arabia,
United Arab Emirates, Iran, Kuwait, Iraq and Qatar — curbed their
shipments by 544,000 barrels a day. At the same time, their domestic
demand increased by 318,000 barrels a day, leading to a loss in net
exports of 862,000 barrels a day.
Well, we'll just get
oil from outside of OPEC, right? Sorry, but the International Energy
Agency says that production in non-OPEC countries is set to peak within
the next two years. Fatih Birol, chief economist of the IEA, pointed a
finger especially at the North Sea, where production is falling at 7.5%
per year, and at Mexico, which is experiencing double-digit percentage
declines in oil production.
All this is
squeezing global spare capacity mercilessly. The global supply cushion
is officially listed as 2 million barrels a day; in reality it's
probably less. It wouldn't take much of an emergency to take away all
that spare capacity and then some.
Indeed, we saw crude
firm on Monday on news of more attacks on pipelines in Nigeria and the
news that the United Arab Emirates will cut its production by at least
100,000 barrels per day for up to 40 days starting in October. You have
to wonder what's going to happen next.
Then there's ...
Mexico: Been Down So Long,
Don't Know Which Way Is Up
Petroleos
Mexicanos, the state-owned energy company, said Mexico's oil output
fell 11% in June from a year earlier. The decline at its flagship
Cantarell field is even worse — down 35% year over year!
Mexico is pumping new fields to compensate for the drop at Cantarell, but can't bring on enough oil quickly enough.
Remember, Mexico is
the third-largest supplier of crude to the U.S. It exported 1.415
million barrels in June, down 19% from the previous year, and the
lowest level in a dozen years. This is already affecting a name you're
probably familiar with — refiner Valero Energy. Mexico told Valero it
would cut supplies to one of the company's Gulf Coast refineries by up
to 15%.
What About the Good 'Ol U.S. of A?
Four decades ago,
the U.S. was the biggest oil producer in the world. But America's crude
oil output peaked in 1970, at 9.6 million barrels a day, which was
enough to cover most of the country's needs back then.
Now, U.S. crude
production stands at 5.1 million barrels a day. On the demand side,
America consumes one of every four gallons of oil in the world but has
barely 3% of the world's proven reserves of conventional oil.
End result: The
United States now imports nearly 60% of its crude, twice the ratio of
imports before the 1973—74 Arab oil embargo, as we thirst for the fuel
to drive 220 million cars.
Our demand is going
down for now. But the real drivers of global demand are in the emerging
markets. So even if we cut back on our oil usage, oil prices will
probably continue to zig-zag inexorably higher.
In the short term,
the only answer is conservation. "Drill, Drill, Drill" isn't realistic
because all the oil rigs are rented out for the next three to five
years. Heck, we may have even less — the contracts for sea-based rigs
are being snapped up by national oil companies from Brazil to Saudi
Arabia, and Chinese oil companies make shopping trips for land-based
rigs in North America. They break 'em down and ship 'em back home for
their own urgent energy exploration program.
Longer-term, as I told you last week, I think we'll use a regular "energy buffet" of wind, solar, nuclear and more.
But Peak Oil is
coming — or already here — and as the world's remaining giant oil
fields follow Mexico's Cantarell into decline, you will be amazed by
just how high oil prices can go.
So Take Steps to Protect Yourself and Profit!
There are two great energy funds that have gotten cheaper as oil has pulled back. I don't think they will be down for long.
The United States
Oil Fund ETF (USO) tracks the price of oil pretty closely by holding
crude futures contracts. I consider it a good place to be to ride the
next leg up in oil.
I also like the
iShares Dow Jones US Oil & Gas Exploration & Production Index
Fund (IEO), which is stuffed with good stocks including Occidental
Petroleum, Devon Energy, Apache Corp, EOG Resources and more. Those are
the kind of stocks that will make the most of the big oil bull market.
After all, these stocks make money hand over fist when oil is at $100 a
barrel — they'll make an absolute killing when oil goes to $150 ...
$175 and higher.
Yours for trading profits,
Sean |
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u_day
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Posted on 07-30-08 1:41
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Actual oil demand curve.
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mohanB
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Posted on 07-30-08 3:25
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Does that mean people have to switch from Washington Mutual? (It has D rating in bank thrift)
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singing bowl
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Posted on 07-31-08 8:42
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Samsara, missed yr posting this morning!!!!
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Samsara
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Posted on 07-31-08 10:31
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With all talks about crude hitting $200 by years' end, a $6/gallon at the pump is no longer a distant reality. Definitely, with this in mind, the backbone of the American Economy, the consumers have every incentive to start looking for alternative sources to fuel their needs...In the short run, this would be extremely unsuccesful. The long run outlook does look favorable though. Read the below I got last week (today the article was boring, so I decided not to post something that is stale news and the market has regurgitated already) and see the alternatives that would work and also the ones that have been hyped but in reality are unfeasible. Also, the recommendations on the Alternative Energy indexes is something that I feel should be a part of every Nepali's investment/IRA and 401K account going forth today. u_day, good chart there but IMO, the chart you provided is something that would work only in the US, IF AND ONLY IF, viable alternative sources are found or the wind energy that everyone predicts that would save the US is up and running by then. A similar scenrio arose in the Oil Shock of the 70s (and the US stagfaltion) where the Congress proclaimed its goal of seeking alternative sources of energy that would make the US less dependent on the newly formed cartel called OPEC, but in no time, crude fell back again and the research into these alternatives were long forgotten. However, PanAm (the biggest ariline carrier in the world, the flagship of US Capitalism, the ones whose headquarters is the present day Met Life building in Manhattan) paid the price on this dearly and they limped into oblivion by the 80s. BTW, the chart you provided will not work for the world demand as the production of alternative sources will be expensive in the beginning and as we have economies of scale (which would take a few decades atleast), only then will they end up being cheaper than current oil prices. And LDCs in no way can afford to invest the billions required in the short run. mohanb, yeah, do that ASAP. I hate being the one to monger some sort of a financial panic here but if it were my money I would defn look elsewhere. Better safe than sorry, dude. singing_bowl, here it is. Hope you'll enjoy your daily dose (don't get too addicted to the medication though)
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YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET |
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Alternative Energies That Work
by Sean Brodrick
Dear Subscriber,
Many Americans are
disgusted by the fact that, faced with an energy crisis, the government
seems to produce nothing but hot air. I think the government is
paralyzed because there's no one clear solution.
Instead, there are a
multitude of options — more drilling, nuclear power, hydrogen cars,
solar power ... you name it. Every alternative has a lobby in
Washington to press its case, but there's no one to tell our elected
officials which is the best route to take.
I field these
questions all the time, from friends and co-workers who ask me if this
or that particular energy solution is the next big thing. So let me
give you my appraisal of three alternative energy solutions that work
and three that DON'T — along with some choice investments you can make
to power your own bottom line.
Let's start with ...
Energy Solutions That Don't Work
You probably already
know that corn-based ethanol isn't the right solution, for the simple
reason that nearly as much energy is used making corn-based ethanol as
you get out of it. So I won't waste a lot of time except to point out
that the U.S. Department of Agriculture STILL anticipates corn ethanol
production of 9.3 billion gallons for the crop marketing year
2007/2008. That will use more than one-fourth of our corn crop (and
drive your food prices through the roof). Now, here are three more
solutions you may think will work ... that probably won't.
Bad Idea #1 — Oil from Algae
Not all algae are
created equal. Some are just pond scum, and some algae, properly
cultivated, can produce biodiesel — that is, diesel you can grow right
in your own back yard (or converted swimming pool).
|
Biodiesel from algae is still a ways off from large-scale viability. |
So what's the problem? Scale.
While it is true
that algae can produce more biodiesel per acre per year than many land
crops, it takes either lots of ponds or land covered in clear plastic
algae-growing tubes, which have to be made from the oil you're trying
to grow.
So algae-based
biodiesel will become a viable solution when the technology improves or
we convert Lake Michigan to a biodiesel refinery.
Bad Idea #2 — Hydrogen Cars
What many people
don't understand is that hydrogen isn't a fuel, it's a storage medium.
So, whatever energy you store in a hydrogen-powered car has to be
generated some other way (coal, natural gas, nuclear, etc.).
And then there's the
danger factor. A tank of compressed hydrogen can explode with an
earth-shattering "KA-BOOM" if hit hard enough. So you end up with
highly pressurized, reinforced storage vessels which are three to four
times the size of conventional fuel tanks.
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Then there's the cost — the price of a hydrogen car easily runs over $150,000. Sure, costs will come down, but not that much.
Why does this idea
have so much traction? Because both Washington and Wall Street love
expensive boondoggles, making hydrogen fuel cells into black holes for
your tax dollars.
Bad Idea #3 — Shale Oil
There is a big
difference between oil shale and shale natural gas, and it is confusing
the heck out of people. Let me make it simple: Shale natural gas works.
Shale oil doesn't — not yet anyway.
Oil shale is a rock
that contains an organic compound called kerogen. Left on its own,
kerogen might turn into oil in 100 million years. Oil shale is
different from shale natural gas in a lot of ways. For one thing, shale
gas is economically feasible, but shale oil hasn't proved profitable
(yet).
To harvest the
kerogen, the rock is dug up and heated to 700 degrees Fahrenheit. On
average, you have to process about two tons of rock to get one barrel
of synthetic oil. The rock expands during the heating process, so you
can't put it back in the hole you took it out of (or at least, not all
of it). And the kerogen-harvesting process makes the rock carcinogenic,
so you have to be careful how you store it.
Newer technology
removes the kerogen without digging up all the rock, but that process
still has bugs that are being ironed out.
Finally, three barrels of water are needed to make one barrel of synthetic crude from oil shale.
The Bureau of Land
Management estimates the shale formation in western Colorado, where a
lot of activity is focused, could yield as much as 1.8 trillion barrels
of oil. However, that part of Colorado is dry country. It will also
probably take a lot of energy to crack the oil out of the rock, though
nuclear power could provide that energy.
Royal Dutch Shell is
trying to prove naysayers wrong — it is investing a lot of money in oil
shale. Petrobras, one of the world's best-run and most forward thinking
oil companies, is also experimenting with oil shale. So maybe it will
work eventually. But right now, the technology isn't there yet.
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In fact, the problem with many solutions that sound good on paper is that the technology just doesn't work yet. But ...
Here Are Three Energy
Solutions That Work Right Now
These three sources of energy can work — today — to power our homes and rev up our cars.
Solution #1: Wind Power
Critics will point
out that the wind seems to stop blowing when you want electricity most
— on hot summer days. And that is a problem. However, a study last year
by Stanford University shows that wind power from interconnected farms
can be used as reliable base load electric power.
|
Wind power, especially when used on a large scale, is a great alternative source of energy. |
As one might expect, not all locations make sense for wind farms.
But legendary oilman
T. Boone Pickens says the United States should take advantage of the
so-called "wind corridor," stretching from the Canadian border to West
Texas. Energy from wind turbines built there could supply 20% or more
of the nation's power by 2030, according to a new report from the
Department of Energy.
U.S. electrical demand is expected to grow another 39% through 2030, so wind would help fill the gap.
And although wind is
expensive, costs per unit should come down with a larger scale
operation. Besides, with the cost of coal and natural gas rising, wind
is already becoming more competitive.
Solution #2: Solar Power
Unlike wind, we tend
to get the most solar power when most electricity is needed — during
hot summer months. And the technology is working now.
There are two
general forms of solar power. The first is PV or photovoltaic, which
converts energy from photons directly into electricity. The second is
thermal, which uses the sun's heat, concentrated to heat liquids to
transfer that heat, boil water and turn a turbine.
A rooftop
photovoltaic system is fairly expensive — about $35,000 to $40,000,
though the cost can be reduced through tax incentives and rebates. In
sunny Florida, where I live, the system would probably pay for itself
in 15 years or less — a lot less if electricity rates go through the
roof, as Florida Power & Light is now threatening.
Solar thermal is
also expensive, though cheaper than PV-based solar power. The Mojave
Desert in the southwest is home to the largest solar thermal system in
the United States. This Solar Energy Generation System (SEGS) has a
total capacity of 354 megawatts.
New technology
allows for better, cheaper storage of solar energy even when the sun
isn't shining. Of course, wind and solar aren't widely used to power
cars ... but that can change.
Solution #3: More and Better Electric Cars
There is technology
available today to plug an electric car into your home power grid. In
short, it turns a fleet of electric cars into a network of mobile
generators that can draw energy from the power grid and send electricity back to the grid during periods of peak demand. It's called a vehicle-to-grid system, or V2G.
Only 20% of cars are
in use at any time, so the rest could work as plug-in batteries and
load buffers for the electric grid. By combining new electric cars with
wind and solar power we'd have a 1-2-3 integrated solution to the
energy crisis.
America's existing
electric grid could support 180 million electric cars, and a concerted
effort to upgrade the grid could let it support 200 million.
There are other
advantages, too. With the same amount of electricity, you can drive an
electric car three times farther than a hydrogen car. On 100 kilowatts
of electricity you can drive an electric car 75 miles while a hydrogen
fuel cell car of similar size can do only about 16 miles.
Are there obstacles? Yes! First of all, many electric cars can't keep up with the speeds on America's highways.
The easy solution to
that is to lower the speed limits for all cars (55 or 60 mph) and allow
electric cars to go at even lower speeds (45 mph or so) on major
highways.
As Ronald Reagan
said, when confronted by government-mandated 55-mph speed limits,
"Speaking just personally, I think it's not a bad thing if we all slow
down just a bit and enjoy the scenery a little more."
The second problem
is that manufacturers simply can't make electric cars fast enough. U.S.
consumers buy between 15 million and 17 million new cars per year.
Meanwhile, Toyota only makes 20,000 of its Prius hybrid models a month,
and GM is planning on building just 60,000 of its new Volt electric
cars in 2010.
The new
battery-powered Think City, which will enter the U.S. market at the end
of 2009, will be able to travel up to 110 miles on a single charge,
with a top speed of about 65 mph, and be priced below $25,000. Yet the
manufacturer plans to sell only 10,000 units at most in the U.S. during
its debut year.
But that's where the
government can help, too. World War II saw U.S. auto makers go from
making cars to tanks in a matter of months. With can-do spirit,
government money and a big ol' pair of scissors cutting through red
tape, Detroit could become the electric car capital of the world.
Look, there is no
"silver bullet" solution. It's a bunch of bullets strung together for
just one possible solution. And I haven't covered other workable
alternative energy solutions including nuclear power, electrified rail
or cars powered by compressed natural gas.
Moreover, the best thing we can do is use less energy — conservation. The cheapest oil is oil you don't use.
Still, I want you to
know that there are workable solutions right now. And not only can they
help our country, but they can reward investors, too ...
How You Can Profit in Alternative Energy
There are a bunch of
great funds in the alternative energy space. Here are two that focus on
two of the solutions I talked about today — wind and solar.
The Claymore/Mac Global Solar Energy Index ETF (TAN) holds a basket of 25 stocks in the solar space, and it is a fund with a global portfolio, as its name implies.
The PowerShares Global Wind Energy ETF (PWND) is a basket of 32 companies, also worldwide, that are focusing on wind energy.
Yours for trading profits,
Sean |
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jhyalincha
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Posted on 07-31-08 12:20
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great thread..all I want to add is this...regardless of what is happening in the market, add up all the investable securities you have, isolate the pieces based on your short term and long term needs, make sure the short term has the most secure parking spot (see postings above for solutions) and 'invest' the rest within your risk tolerance in a well diversified portfolio (and tax efficient too, if it is non qualified securities, and you are in a high tax bracket). You can always set aside a small piece for high risk/reward positions and arbitrage opportunities (plz check eminitraders thread for assistance here), but only if you can afford to lose them and still carry on with your normal life financially.
Good discussion though..lets keep threads like this going.
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latoboy
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Posted on 07-31-08 3:56
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jyalinja , u sound like u know something about Equities. what do u think about market direction in near term ? i am have 80% of my portfolio in short term trades.. some within same day.. some i close within hours of opening. todays greenspan comments brought down market.. really bad timing with that.. as i had gone long on spy calls just earlier. im hoping markets will gap up big within next week.
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newface_sajha
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Posted on 07-31-08 7:28
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Folks,
Solution #3: More and Better Electric Cars looks ok but it has so many downfalls. Anyway, we gotta wait and see the better alternative source for gasoline.For short term, i think, we HAVE TO worry about the big hike in gas price. I've found some interesting things which certainly helps us to consume lesser gas. Here we go,
1. Turn off the AC five minutes before you reach your destination and don't keep it working until the last second.
2. Park your car in the shade if you can, so you won't have to keep the AC working as hard when you go somewhere. When you park your car in the shade, you also reduce the amount of fuel that evaporates.
3. Avoid fast braking.
4. If you have a cruise control and there isn't a whole lot of traffic, you probably should use it (it will keep the speed constant and hence doesn't need to accelerate).
5. Reduce weight. Try to take unused heavy things out of your trunk. (F=ma).
6. Make sure your Fuel Cap is o.k. In the US every year 147 million Gallons of Fuel are lost due to evaporation.
thanks.
Last edited: 31-Jul-08 07:29 PM
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Samsara
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Posted on 08-01-08 10:56
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Talks about the Fed and what it has been doing recently that may have serious repercussions...From the bailouts to the strangle-hold on the short sellers and the "evil" speculators (us traders). I was outrightly supportive of the Fed's move when it saved Bear Strearns but now the scenario has gotten outta hand. Every bank involved in the consumer housing sector looks like its in the birnk of doom and am wondering how long can the Fed keep bailing these dead horses out?? A point in time will have to come that the Fed will have to just sit on its hands ala the Thai Federal bank when they could not afford to artifically inflate the Bhat from crashing in 1996 after buying $23.4 Billion of their currency contracts in the open market...The Bhat crashed to half its value within a 2 month period. Also, whats this about banning short-sellers and the "evil" speculators from trading in commodities (gas, wheat, corn, soybeans, pork-bellies, etc.)? Aren't these speculators the ones who bring about stability and weed out the inefficient firms from the market-place?? Damn, looks like these cats at the Fed have taken Keynesian economics a step too far than Keynes could've ever imagined...even Friedman must be tossing in his grave seeing how his monetary theories are being implemented for the "worst" of all causes: A day's rally in Wall Street. Sadly, thats just the sign of the times to come!!
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YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET |
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When is enough, enough?
by Mike Larson
Dear Subscriber,
When is enough, enough? How much is too much?
Those are the questions I've been pondering lately as I survey the housing and mortgage market landscape.
It seems like every week we get another borrower bailout initiative.
Or another multi-billion dollar package of legislation.
Or another whiz-bang Federal Reserve program that keeps U.S. banks and brokers on the dole for a few more months.
Or more recently, a
blatantly transparent attempt by the Securities and Exchange Commission
to squeeze short-sellers and drive stock prices higher ... but only for
a select group of 19 financial companies.
Are we a free market society? Is this a capitalist economy? I thought so.
But with each extra
step to prevent the failure of a lender who made too many stupid
decisions ... with every effort to keep borrowers who overextended
themselves on home mortgages ... and with every move to prevent what
NEEDS to happen to restore health in the housing market — namely,
falling home prices — I wonder that much more.
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And I'm afraid the
long-term consequences of all these bailouts will be severe. So today,
I want to examine how we got here — and talk about where we're going ...
The Fed Shifts into Hyperdrive ...
The credit crisis
started striking in earnest last summer. The Fed's initial response was
to cut interest rates, hesitantly at first, then much more
aggressively. The idea was two-fold:
#1.
Drive funding costs lower in order to bail out lenders by fattening
their net interest margins (the difference between what they pay to
borrow money and what they make on loans) ...
AND
#2.
Bail out borrowers with adjustable rate mortgages or home equity lines
of credit by lowering the cost of paying their loans back.
|
The Federal Reserve has cut interest rates, and thrown billions and billions at the markets ... |
But the Fed didn't
just deliver 325 basis points of interest rate cuts. It has also rolled
out liquidity program after liquidity program for commercial banks and
(later) investment banks.
The Fed's efforts on
that front began in December 2007 with the Term Auction Facility, or
TAF. The TAF allows depository institutions to swap securities for Fed
loans.
Originally, the TAF
auctions were going to offer $20 billion a pop, with 28-day maturities
on the loans. But the Fed soon raised the auction sizes to $30 billion
... then $50 billion ... then $75 billion. The Fed also said TAF
auctions would last "at least" six months.
Then this week,
things changed again. The Fed said it will now offer 84-day loans on
top of 28-day ones. And it released an auction schedule that implies
TAF auctions through November at least. In other words, the "temporary"
bailout program is now going to last for who knows how long.
And even the TAF wasn't enough for bailout-hungry lenders!
The Fed was forced
to roll out the TSLF — or Term Securities Lending Facility — in March.
The TSLF lets primary dealers bring all kinds of less-than-pristine
securities to the Fed and swap them for top-notch Treasuries.
Fannie and Freddie
debt? Residential mortgage backed securities? Commercial mortgage
backed securities? Bundles of car loans, student loans, and credit card
balances?
"No problem. We'll take it all," said the Fed. The total amount of U.S. debt up for grabs: $200 billion.
Did that do it?
Nope. The brokers started facing more funding problems. So the Fed put
them on the dole as well, introducing the Primary Dealer Credit
Facility, or PDCF. This allowed other dealers, as opposed to just
depository institutions, to borrow at the Fed's discount window. Like
the TAF, it was originally slated to be in place for six months.
But surprise,
surprise: Our financial institutions apparently aren't in good enough
shape to actually operate without tens of billions of dollars of Fed
assistance month in and month out.
So rather than cut them off and let them stand on their own two feet and merits, like American businesses USED to have to do, the Fed just announced that it will extend the PDCF and TSLF programs through January 30, 2009.
Anyone want to lay odds that "deadline" will stick? Didn't think so.
Treasury, Congress Get into the Game, Too ...
At the same time, the Treasury Department and Bush administration started rolling out various programs to help borrowers.
The FHASecure
program was designed to make it easier for borrowers who had fallen
behind on their ARMs to refinance into FHA-insured mortgages.
|
Meanwhile, Congress and the Treasury Department have introduced a slew of aid programs! |
Then there was the
HOPE NOW coalition, a government-industry joint effort to encourage
more loan modifications. That's when lenders extend loan maturities,
reduce interest rates for a period of time, or otherwise try to stave
off foreclosure by changing the terms of borrower's mortgages.
Meanwhile, tax laws were modified so that forgiven debt was no longer considered income. Let me explain ...
Say you bought a
$200,000 house with no money down, and its value fell. You might
negotiate a short sale with the lender that would allow you to sell the
house for $180,000. You would use the proceeds to pay off that part of
the mortgage balance, while the lender forgives the remaining $20,000.
Previously, that
$20,000 would have been considered income, and you would have paid
taxes on it. That ended when Bush signed the Mortgage Forgiveness Debt
Relief Act of 2007 into law in December.
And now the
President just signed the massive Housing and Economic Recovery Act of
2008 into law this week. This bill has a little bit of everything:
- It
authorizes the FHA to insure up to $300 billion in new mortgages.
Lenders are required to write down the principal of outstanding loans
to 90% of the current value of the underlying properties. Then
borrowers can refinance out of their private loans and into new
FHA-backed mortgages.
- The
bill also permanently raises the size of home mortgages that Fannie
Mae, Freddie Mac, and the FHA can back or buy — to as much as $625,000
in higher cost areas.
- Localities
will get $3.9 billion to buy, renovate, and resell foreclosed
properties. State housing authorities will be granted permission to
sell another $11 billion in tax-free bonds to fund mortgage refinance
programs.
- And
first-time home buyers who purchase between April 9, 2008 and July 1,
2009 will get a $7,500 tax credit (though in reality, the benefit is
essentially an interest free loan that you have to pay back over 15
years).
But the most
important — and potentially, the costliest — provisions pertain to
Fannie Mae and Freddie Mac. The two so-called "Government Sponsored
Enterprises" now have access to an unlimited line of credit
from the Treasury (Previously, it was $2.25 billion each). The
government has also pledged to buy equity from the two GSEs, should
they need help raising money.
Officially, these
moves don't bring Fannie Mae's and Freddie Mac's $5.2 TRILLION in
direct and contingent mortgage liabilities onto Uncle Sam's balance
sheet. But by making the implicit backing of the companies explicit, the government might as well have taken that step.
And of course, the
mortgage and housing industries were ALREADY receiving billions of
dollars worth of subsidies and tax favoritism.
Since 1997, married
couples have been able to exclude as much as $500,000 in capital gains
from the sale of their primary residences from the tax man. Stocks and
other assets get no such treatment.
Borrowers can also
deduct the interest on up to $1 million in first mortgages and up to
$100,000 on home equity loans. That means you can borrow $5,000 against
your house to cruise the Mediterranean and then catch a tax break for
it!
Here's the real question that needs to be asked ...
What's the Price of All These Bailouts?
My fingers are
almost blistering from recounting the various direct and indirect ways
the Fed, Congress, and the Bush administration have tried to bail out
lenders, borrowers, builders, and everyone else who helped inflate
and/or profited handsomely from the housing bubble.
There's just one
problem. Bailing out anyone and everyone isn't free! The cost of the
Fannie Mae and Freddie Mac support program alone could total as much as
$100 billion, according to the Congressional Budget Office. All the
other provisions in the latest housing bill will likely end up costing
billions more.
Meanwhile, the Fed's
actions are increasingly weakening its OWN balance sheet. Total Federal
Reserve credit is about $883 billion, up from $850 billion a year ago.
The vast majority (about 92%) of the Fed's money was in rock-solid U.S.
Treasuries a year ago. Now only 54% is. That's a consequence of lending
tens of billions of dollars to institutions via the TAF ... of assuming
$29 billion in lousy paper as part of the Bear Stearns bailout ... and
more.
And the cost of all the old
tax breaks on housing and mortgages (things like the mortgage interest
deduction)? Well, that will come to about $148 billion in 2008,
according to a Washington Post piece from Robert Samuelson. He writes:
"The real lessons of
the housing crisis have gotten lost. It's routinely portrayed as the
financial system run amok; the housing market became a casino. The
remedy, we're told, is to enact rules that prevent a repetition. All
this is partly true. But it ignores a larger truth: Our infatuation
with homeownership, embedded in dozens of government policies, has
turned housing — once a justifiable symbol of the American dream — into
something of a national nightmare.
"As a society, we're
overinvesting in real estate. We build too many McMansions. They use
too much energy, and their carrying costs, including mortgage payments,
absorb too much of Americans' incomes. We think everyone should become
a homeowner, when many families can't or shouldn't. The result is to
encourage lending to weak borrowers who are likely to default. The avid
pursuit of a few more percentage points on the homeownership rate (it
rose from 64 percent of households in 1994 to 69 percent in 2005) has
condoned enormously damaging policies."
It's not like we
have all this money lying around to pay for all of these programs,
either. New projections show the budget deficit should come in at about
$389 billion in 2008. And next year, it's poised to explode — to a record $482 billion. The previous estimate was for a 2009 deficit of just $409 billion.
What does that mean?
We'll have to sell Treasuries by the truckload to fund all the red ink!
You, I, and our kids and grandkids are going to have to pay that bill.
None of this even
TOUCHES upon the moral hazard question — whether all these bailouts
will just reinforce the idea that lenders and borrowers are free to
recklessly speculate, knowing that if they get in trouble as a result,
Uncle Sam will bail them out (using our money).
Finally, has anyone
stopped to think about whether mobilizing the full faith and credit of
the U.S. to prevent or slow the decline of home prices is a laudable
goal?
From where I sit, falling home prices aren't the problem. They are the SOLUTION!
As prices fall, homes will become more affordable for NEW buyers.
They'll be able to
purchase houses with traditional 30-year fixed loans — not all the
newfangled crap the industry foisted on people between 2003 and 2006.
They won't have to take out loans with payments that swallow 40% or 50% of their monthly income.
They'll be able to
enter SUSTAINABLE homeownership, not just get into a house for the sake
of getting into a house — and then lose it a year or two later.
Even investors will
be enticed back into the market if lenders are allowed to foreclose and
fire sale more property. Heck, that's already happening in some select
markets here in Florida, in California, and a few other of the places
where prices have fallen the hardest and fastest.
The combination of
owner and investor buying, in turn, will reduce inventory levels and
get supply back in line with demand ... IF we let prices go where they need to go.
It's certainly food for thought as the bailout brigade keeps riding out from the stables of Washington, D.C.
Until next time,
Mike |
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jhyalincha
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Posted on 08-01-08 1:47
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short term trades are what they are-- short term. Please go to the thread "making money with emini" for a lot of good info on the short term trading and forecasts. Of course, none of the strategies are fool proof, but they have some pretty good strategies and tools there.
I am hoping (just like everyone else, of course) that we are about to turn the corner. will it happen tomorrow? highly unlikely. Will it happen by the end of the 3rd quarter? possibly. Will it be back on track in 2009? most likely.
so there you go, another case for smart long term investing again. You can also go to Omaha and discuss this with Warren Buffett over cheeseburgers and cherry coke--he seems to be slowly unloading his cash back into the market.
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Samsara
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Posted on 08-02-08 10:17
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The US Dollar?? The Great American Green-Back? God help its free-fall. Though Thursday's Q2 GDP #'s was nearly 50% less than the forecast, like clockwork, we did see a knee-jerk reaction in the market where the dollar was initially sold off like no tomorrow but within hours it had come back to where it started the days from...What does this mean? This means 2 things: Either the dollar now has a strong upward momentum and traders are bidding its relative value up OR either the world economy is facing the ripple effect of the US' impending recession and they aren't doing too well either.
Why would anyone want to bid the USD up? Only thing that comes to mind in the present doomsday scenario we face in the US in terms of economic data and grim financial reports, is of traders covering their shorts on the EUR. Any dips and they're getting out of their short positions and stacking up on the long side (as a further rally may be due here). No other reason for a strong USD is plausible anymore.
But, we have to understand that the fundamentals are NOT what drives the FX market. Even if it did, the USD should now have been oversold to its nadirs (Why da F is it still where it is?). Everything in the US is reminiscent of a savings account holder at Indymac Bank trying to get her money out of the bank even if the Fed tries to calm the situation saying the bank would be back in business and there is no need to panic thanks to FDIC insured accounts. The shark-feeding frenzy has begun and the US Dollar has no real Fundamental reasons why it should ever rebound from its slumber. I shall give MY reasons below:
Firstly, Europe and the rest of the world has NOT faced a subprime crisis which has made only the US suffer a recession of a mini Great Depression proportions. Secondly, Europe still looks attractive on holding onto its foreign reserves and attract more of it from abroad thanks to its economic data that is a lot better than the US and the interest rate there is 4.25% (compare that with the US' 2%). That itself should answer why the EUR would defn not go any lower than its current levels. Thirdly, the Iran scenario has not been doing the US economy any good. Anytime that country is on the news, start shorting the USD and reap the profits made within the end of day...This has become a strategy of sorts for most trading vets now. The USD's free-fall began ever since the talks of the Iraq war started in 2003. In July 2002, the USD was 0.88cents per EUR, by June 2008, the USD was $1.60cents per EUR (nearly a 100% free-fall). This in trading terms applying a widely used leverage of 100 (which is the norm) could've meant that for every $1,000 you went long on the USD back in July 2002, your returns would've been $92,000 (minus commissions and holding charges that would amoung to a couple of thousands). Your loss would've been your initial investment only. No wonder we saw all this move into the FX sector by the novice traders who were badly burnt because of bad advice. Fourthly, the US' Balance of Payments (the major force as per economists behind currency devalution/appreciation) is at its historic lowests. We're basically borrowing money from our trading partners to use our basic necessities here now. Isn't that ironic? The US who once saved these Asian dead horses are now being assisted into a wheel-chair by these very dead-beats after its nasty fall. Fifth, the Fed's arrogance in continually printing new money has been getting out of hand. By last year, Congressman Ron Paul warned Ben Bernanke of the deadly effects of the dollar which was in abundant supply and now being produced indiscriminatorily to finance everything from the War in Iraw and Afghanistan to International Aid. He estimated that nearly 1.6 trillion USD was printed at whim last year and this would definitely bring about a weaker USD thanks to the increased supply (also raising hell and inflation along with it). Finally, all the economic data releases of the US have been dismal to no avail: Weaker than expected reports in all sectors: Unemployment's been bad, New Housing Starts has been a fiasco, GDP went down the rocks, CPI numbers have been worse than expected, stocks crashing thanks to the financial mess here...Every sentiment here is bleak. But the good thing for the USD is that the World Economy too is not performing in the same stellar mode that it used it. Nearly all developed countries' major trading partner is the US and a recession here could hurt their Exports and directly affect its employment and manufacturing sector deeply...These nations are the last ones who want to see a weaker USD come about. But this to me is exactly what the Fed has in mind even though they come about on TV with a different stance to pacify the markets from shorting the USD to oblivion by subliminal threats of an intervention like the Bank of Japan does all the time.
Though the author below does have high hopes for a USD rebounding, as per my personal convictions, I do not see that happening anytime soon. Sorry mister, I only agree with your Dollar Frown theories.
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YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET |
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Two Lessons from this Week's Dollar Action by Jack Crooks
Dear Subscriber,
You can never actually know for sure what's going to happen on any given day, in any given market. And it's thinking you do know that can get you into real trouble.
Instead, you should think about the markets in terms of probabilities. I believe that is the real key to successful trading.
Here's how legendary trader Richard Wyckoff put it ...
"Listen to What the Market Is Saying About Others Instead of What Others Are Saying About the Market"
In other words, you need to be open to information the market is sending you.
In short, we have forecasts, time-frames, and reasons, but if the market tells us those things are wrong — we should act. Let me give you a great example from this past Thursday:
- U.S. second-quarter GDP growth undershot expectations ...
- Weekly jobless claims overshot expectations ...
- And capital started stampeding out of the dollar.
In a game of expectations, it seemed as though traders were ready to erase the dollar's latest rally and send it dramatically back to test all-time lows.
Turns out, it only took a few hours for the all-out dollar stampede to make a sharp U-turn.
In fact, the U.S. dollar index actually finished the session relatively flat from where it stood when the fireworks started.
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In my opinion, this demonstrates two important points about the U.S. dollar right now:
- Currency traders are no longer convinced that the U.S. economy will worsen dramatically, and ...
- Currency traders are worried that Europe is on the verge of losing its relative advantage.
Critical to Thursday's whipsaw action was the anticipation of Friday's U.S. jobs report. We know now that jobs declined less than forecast even while unemployment jumped more than forecast in July.
The immediate reaction following the better-than-expected news was mostly positive for the greenback.
What about the dollar's longer-term prospects? I think we should look past the day-to-day action for that answer ...
This Year, the Dollar Is Down — So Is It a "Smile" or a "Frown?"
At the beginning of the year, I told you about a concept called the Dollar Smile. That idea offered up three potential scenarios for the greenback. Briefly:
1) The U.S. dollar appreciates on risk. In other words, the buck could ignore its weak fundamentals and rally on a flight to quality. This assumes foreign currencies and investments lose their appeal in the event of a global financial crisis. So far we have not seen this scenario play out.
2) The U.S. dollar appreciates on surprise growth. Clearly, this hasn't happened. Any positive surprises regarding the U.S. economy were few and far between. I ruled out this scenario in January, and I think it's safe to rule it out again. At least for the rest of this year.
3) The U.S. dollar falls as the U.S. economy muddles along. For the most part, this is exactly what has happened since January when I published the Dollar Smile concept here in Money and Markets. Each new month the economy revealed greater disappointment. And the U.S. dollar index has fallen as much as 7.8% since then.
Considering the way the dollar has been behaving over the last several weeks, I thought it would be good to go back and think about where we are with the dollar smile. In doing so I decided the environment is far different from the environment back in January.
With that in mind, I developed something a tad bit different from the dollar smile; something I think does a better job of offering up potential scenarios for the buck. Let's call it "the dollar frown."
Have a look at the following graphic. On top you'll find the Dollar Smile. It's a visual representation of how the dollar behaves based on the three scenarios I just described. On the bottom is the Dollar Frown. It's a representation of the three scenarios I'm about to lay out for you.
Scenario #1 — The U.S. dollar falls on risk. Again, if we look back to analyze the dollar's performance since January, we'll actually find that the buck has done poorly during major bouts of risk aversion. It's no secret the U.S. stock market is having a stinky year. And it's no secret the dollar is following that lead.
Just recently we experienced what I call the triple whammy — a flight out of U.S. stocks, U.S. bonds and the U.S. dollar. This points to the possibility that investors are growing increasingly concerned about a potential collapse of the U.S. financial system. This type of risk bodes ill for the buck because capital would flee ALL U.S. assets.
Scenario #2 — The U.S. dollar rises as the U.S. economy becomes relatively less bad. For much of the last couple years, the U.S. has been the laughingstock among major global economies. And for longer than that the buck has been sinking lower and lower and lower versus the major currencies.
But now analysts, economists and investors are beginning to notice a weakening trend seeping into many developed nations. The secret is already out on the United Kingdom. They're following the path of the U.S.
The commodity dollar countries — Canada, Australia, New Zealand — have all had their scares, too.
And European countries are now on the economic watch list for fear they're at risk of major collapse. And it doesn't look like they'll be getting off that list any time soon.
Bottom line: If the U.S. muddles along while Europe et al start to crater, the dollar can rally as its disadvantage narrows.
Scenario #3 — The U.S. dollar falls on doom and gloom. Of course, it doesn't matter so much what's happening in Europe or anywhere else if it pales in comparison to what's happening in the U.S. This scenario is similar to scenario #1, but to me it implies a LENGTHIER dollar decline.
Which scenario is most likely right now? I'm leaning toward scenario #2, especially in light of what I saw happen this past Thursday.
Best wishes,
Jack
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Last edited: 02-Aug-08 12:16 PM
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Guchha
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Posted on 08-02-08 10:24
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Samsara,
Thanks very much for starting great thread, it is indeed very useful, specially time like this.
I am getting home loan, 30 yrs fixed on 7% interest with only 10 % down payment, no points.
Do you think this is good offer? Shall i pay point to lower the interest rate ?
Please drop your thought guys.
Thanks.
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Samsara
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Posted on 08-02-08 11:27
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Guchha, I'm glad you came here. You're getting a 7% loan that too with 10% down? Is your credit really that bad because at this rate I assume your FICO must be around the 500s? If not,then damn, thats a massive rip-off my friend.
Listen, if your FICO is above 650 and you're putting 10% down on a mortgage and you can document your income, there is no reason why you shouldn't be receiving atleast a sub 5.8% on your mortgage. Damn, a 7% mortgage means that the broker will prolly make about $1,800 - $2,500 for every one hundred thousand borrowed...If the property you're looking to purchase is in NYC, imagine how much the broker is looking to make off just one deal. Thats crazy money you'd be paying outta your loan, son.
All I can advise is that you go to your bank that houses your checking and savings (not the mortgage brokers and their small garage shop operations we see all around) and get them to do the loan. Man, shop around as a 7% mortgage rate is something only suckers should be paying. Use lendingtree.com as well and have brokers compete and let them know what rates and most importantly the closing costs (Good Faith Estimates) that you would be charged on this. A lil homework today could end up saving 10s of thousands in the long run, dude.
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Guchha
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Posted on 08-02-08 12:35
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Samsara,
Thanks. BTW, My fico score is 775 and income is documented, combined gross income is 140K. I will contact my bank today as per your advise. I am in California.
Guys, please advise if you know any reliable morgtage broker.
Thanks Samsara.
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Samsara
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Posted on 08-04-08 8:46
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With bailouts of corps looming all around since the Bear Stearns fiasco...We now have Fannie and Freddie being saved the flogging even though they soiled their pants (and they were adults!!). And what about GM? Damn, GM, the flagship and pride of American technology and the auto industry is now gonna be the next dead horse. They chould've stuck to making cars only instead of getting into the high-risk/high-gain consumer credit industry. These I-Banking novices got burnt to their last chaddis. Its been a long-long time since I've heard of any other corp losing $172 Million per day last quarter to a total of $15.5 Billion!! And for GM, that has been the trend. They've dead-beats now. Either the Fed saves them or it'll be time to believe that this corp is a perfect candidate to be shorted until no tomorrrow!
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The Last Government Rescue by Martin D. Weiss, Ph.D.
Dear Subscriber,
With America's economy sinking rapidly into recession, with much of America's financial system teetering on the brink, and with a presidential election just three months from today, our leaders in Washington are under siege.
What are they saying behind closed doors? What worst-case scenarios are they contemplating? What contingency measures are they debating?
I have no pretense of being privy to the answers. Nor can anyone forecast what they will do in the press of events. But we do have abundant research and data to serve as a basis for guessing. Add a healthy dose of imagination, and I can begin to draft a script, below.
Just bear in mind that what follows is fiction — a scenario that I trust will give you greater insight into the dire reality of our times, along with a better understanding of what's likely to come.
The Last Government Rescue (Draft Script for a Fictional Scene)
A regularly scheduled meeting between Treasury Secretary Paulson and Fed Chairman Bernanke is hastily expanded to include the CEOs of Fannie Mae and General Motors, plus former Fed Chairmen Alan Greenspan and Paul Volcker.
The Treasury Secretary seeks unanimous vows of confidentiality and opens the discussion with an air of confidence. His immediate agenda: To get everyone on the same page to make consistent public pronouncements in support of the government's rescue efforts for the economy.
Treasury Secretary Henry Paulson: Gentlemen, I know we have problems, and that's why we're here today. But let's begin by counting our blessings: The stimulus plan has supported the economy during this difficult period, and it couldn't have been timelier. American families spent, American companies invested, and the country as a whole benefited from strong export growth.
Yes, I know the 1.9% growth in GDP in the second quarter disappointed some people. But a lot of that was due to a decline in inventories, which is healthy. The economy is not contracting; it's growing. Employment is still historically very high. Inflation is still historically low.
Moreover, this is the message I would hope to see everyone put out. In normal times, I wouldn't presume to tell you what to say or how to say it. But in this unsettling climate — in this atmosphere of frazzled nerves on Wall Street — the last thing we need is dissenting voices from the administration, from former government officials or even from industry. To restore confidence — to prevent panic — we must present a united front, a single voice that resonates with the public, that's credible, that can inspire, that can motivate investors to invest and banks to lend.
Fed Chairman Ben Bernanke: I agree. We have to tell the truth. But there should be no rush to tell the whole truth. Always count your blessings, and do so publicly.
Former Fed Chairman Alan Greenspan: Blessings? This is a disaster and it's getting worse. The United States is living through a once-in-a-century crisis tied to the plunge in home prices, and those prices are nowhere near a bottom.
Paulson: I know housing continues to be at the heart of our economic challenges and remains our most significant downside risk. I know home prices are likely to decline further on a national basis. I know foreclosures are going to be increasing. And I didn't say we should deny these realities in public. I myself have recently admitted to all of them — in speeches, in front of dozens of TV cameras.
Bernanke: My sense is that if we don't acknowledge at least some of the most obvious issues, we look foolish.
Paulson: Agreed. But you and I also agree that we don't have to be so blunt as to cause panic in the markets. Look. I'm not asking anyone here today to ignore the issues. What I'm asking is that we do everything we can to stress the positive. Focus on the big steps we've taken — like the stimulus package and the housing legislation. Talk about the brevity of the current correction and the longevity of the coming recovery.
Give people hope, damn it! Don't run around talking about the housing market as a bottomless pit ... or about the huge risks the Fed is taking by inserting itself into broker balance sheets ... or about Fannie Mae being insolvent.
Greenspan: The last of those three statements was not mine. But it's true. Fannie Mae is insolvent. And what you're advocating — that we sugarcoat the realities even more than we normally do — is a huge mistake in its own right. The sooner people face the music, the sooner they'll deal with it and the quicker we'll get this thing behind us. The longer we cover it up and pussyfoot around, the worse it's going to be in the long run.
I said it once, and I'll say it again: Gentlemen, face it. This is a disaster and it's getting worse. Home prices, which we said would stabilize, are doing nothing of the kind. Detroit, which we said would be turning the corner, is falling off a cliff. The credit crunch, which we said was ending, looks like it's just beginning a new, broader phase. Inflation, which we said was moderate, is doubling. The federal deficit monkey, which we said was tamed, is going wild again.
That's what folks out there are talking about. That's what's in their face every day on the nightly news. Heck, the only "good" thing I hear anyone talking about nowadays is the fact that a barrel of oil costs "only" $125, which, I need not remind you, is double what it was last year.
Paulson: So that's what you want to tell the American people? That "this is a disaster and it's getting worse"?
Greenspan: No, but how can we address the dangers we face if our primary agenda is to disguise the true gravity of those dangers? First, we risk losing all credibility — looking like horse's asses. Second, we risk a situation in which we ourselves start believing our own B.S. But most fundamentally, we risk losing the opportunity to cure the cancer before it spreads to critical organs of our economic body.
Fannie Mae CEO: I can no longer dispute the comment that we're insolvent.
Paulson: Please give us a heads up on that.
Fannie Mae: This week, we are going to announce still another round of downgrades in our forecasts for credit losses.
We've already warned investors that credit-related losses, such as payouts on loans we guarantee, were going to rise for the rest of the year. But this market is crumbling far faster than anyone dreamed possible. Even the Jeremiahs and Cassandras at Fannie Mae — and believe me, there are more of them coming out of the closet every day — even they underestimated how fast the home market could come unglued. Even they underestimated the degree to which that pattern would persist through the present and into the future.
Look at the numbers that just came out. You've got home prices falling far faster than expected. You've got more people defaulting on their mortgages at a faster pace than expected. And you've got foreclosures spreading faster than anything we've ever seen in the history of this country. It's a revolution. It's sweeping the country like wildfire. And it's being led by people willing to abandon their homes without the least remorse.
Paulson: Bottom line?
Fannie Mae: Bottom line, the forecast we made back in May — and Freddie Mac's forecasts as well — are way off target.
Paulson: Is that why Standard & Poor's just raised its loss estimates on your risky loans? Is that why Wall Street is saying you may not have enough capital to offset those losses?
Fannie Mae: Yes. We did ratchet up our expectation for 2008 credit loss ratio to at least double our historical range. But now we know it's going to be a lot worse.
Paulson: OK. I understand. But whatever you do, don't admit to the idea that you're insolvent. Stick to our story! Your primary regulator, OFHEO, says you have adequate capital. I've testified before Congress that you have adequate capital. You've said you have adequate capital. We can't let the market bust our bubble.
Fannie Mae: Bust our bubble? The bubble has already burst, and look who's getting stuck with most of the foreclosed properties: Fannie Mae.
Let me give you a concrete example: We have 5,000 real estate brokers all over the country handling our foreclosure sales. And in Flint, Michigan, we have one broker trying to sell one particular home for a price that will shock you.
Paulson: About thirty or forty thousand dollars?
Fannie Mae: No. He first tried to sell it for $6,900. But he had no takers. So then he cut the price to $5,000. Still no buyers! And this is a three-bedroom home in a residential neighborhood we're talking about. Not a two-door Chevy on a used car lot!
Bernanke: How widespread is this?
Fannie Mae: Just in the first quarter, we got saddled with twice the number of homes through foreclosure than we could sell. We're trying to get rid of them quickly. But we keep falling further and further behind.
Bernanke: How much do you and Freddie Mac have in foreclosed homes on your books?
Fannie Mae: As of March 31, $6.9 billion worth. Right now, much more.
Bernanke: That's a lot, but in proportion to the $5 trillion-plus in mortgages that you and Freddie own or guarantee, it doesn't sound like that much to me.
Fannie Mae: Maybe not. But try this arithmetic exercise: Throw together all the foreclosed homes owned by every single one of the nation's 8,500 commercial banks and thrifts. How much do you think that adds up to? I'll tell you. It adds up to a figure of $8.56 billion.
See that? 8,500 banks and thrifts have $8.56 billion in foreclosed homes. But between Fannie and Freddie — just two companies — we're stuck with almost as much $6.9 billion. In fact, if you look at all money tied up in foreclosed homes in the U.S., about $4 of every $10 is our burden.
Bernanke: What are you doing about it?
Fannie Mae: Until now, our stated goal has been to always try to get the highest possible price, even if that meant hanging on to the properties longer. But that's about to change. Now, we're going to have to start pricing our properties a lot more aggressively. And consider this: Once we send the directive to our 5,000 brokers across the country — to start dumping — there's no way we can keep that directive under wraps. The Street will know. Everyone will see what's really going on.
Paulson: Could it be that you are overstating the price declines and the losses that they could cause? Take that house in Michigan, for example. It must have been a dump to begin with. Do you know how much it sold for originally?
Fannie Mae: It's a dump all right. It needs a new roof. It needs new carpeting. The plumbing has been ripped out. But just three years ago, in 2005, it was not a dump. Three years ago, it sold for $110,000. So even assuming we can find a buyer for the $5,000, its price has fallen by over 95%.
Naturally, most of our foreclosed homes for sale haven't fallen that far, that fast. But this gives you an anecdotal illustration of what we're up against. And it gives you a sneak preview of the much deeper home price declines that are possible in the future.
Paulson: But how widespread is this, really?
Fannie Mae: What definition are we using for "widespread"? If I told you that among the supposedly "AAA" rated subprime mortgage securities issued in 2006, the default rate is now about 85%, would that qualify as "widespread"?
Paulson: Eighty-five percent?
Fannie Mae: Yes, 85%! And I'm not referring to a small, little subset of our portfolio. We've got about $70 billion in subprime and Alt-A securities in our portfolio. Freddie Mac is even more at risk, with nearly $150 billion. And that's not even our primary concern. Our primary concern is the surging foreclosure rate in "prime,"supposedly "high-quality," "safe" mortgages, which represent the bulk of the paper we hold or guarantee.
Paulson: What is your official posture on that aspect?
Fannie Mae: We used to say all this was "contained." Now we're trying to put out the message that it's "temporary." But we can't keep up that fiction much longer.
Paulson: Why not?
Fannie Mae: One reason is that, until recently, at least the rating agencies were playing along with us on this, postponing downgrades, keeping the fantasy alive. But now they're downgrading this paper step by step. They're forcing Fannie Mae — and all of us here around this table — to face reality. They're telling us that, until we face reality, this is going to be an endless soap opera.
Paulson: I know all about that. But what makes you say you're insolvent?
Fannie Mae: I was afraid you'd come back to that. Because, I must say, that's the big, immediate downside of facing reality. When we face reality, we're going to have to increase our reserves by such a huge amount, it will finally be abundantly obvious, even to our dearest friends at OFHEO, that we are not adequately capitalized after all — that we are, indeed, insolvent, bankrupt.
Now I ask you: How much longer can we hide this from the public? From ourselves? A few weeks? Days?
Paulson: I don't get it. I just don't get it. I'm not talking just about Fannie Mae. I mean the entire economy. The Fed cut interest rates all the way down to 2%. But that didn't do the trick. We rushed through the stimulus package, and that helped a bit, but barely enough to keep things going for another quarter. Now what do we do? Now what do we say to the American people?
General Motors CEO: I'll tell you what you do. You do whatever it takes to keep Fannie Mae and Freddie Mac capitalized, even if that means making them wards of the United States government. You do whatever it takes to keep banks like Washington Mutual, Wachovia — and certainly mega-giants like Citigroup and HSBC — capitalized.
And while you're before Congress, or the president, or the McCain or Obama people — and while you're making the case that the GSEs and the big banks are vital to America's financial security — you must also make the case that our nation's great auto manufacturers are equally vital to America's security.
You talk about home prices plunging. But have you seen the collapse in used SUV prices? At the end of a two-year lease, one of our most popular SUVs was supposed to be worth $22,000. But as it turns out, the best price we can get for it in the used car market is less than $11,000.
You talk of a housing collapse. But please don't ignore the auto industry collapse. You talk about a mortgage collapse. But God help us all if you ignore the collapse in auto credit! And don't forget the collapse in auto leasing that's coming with the collapse in used car prices.
Most people are clueless about what's really going on, even analysts on Wall Street. For example, we've just reported a $15.5 billion loss for the second quarter ... and that doesn't even begin to reflect the big write-offs from the auto leasing debacle.
The $15.5 billion loss equates to a loss of $27.33 per share. But you want to know the loss most people on Wall Street were expecting? Less than $3 per share!
So, yeah, sure, we did a good job of "putting out a positive message." And, yeah, we fooled them all right. But what good did it do us? All it did was give us an excuse to delay much-needed action.
Paulson: What kind of additional action were you contemplating?
General Motors: For starters, telling it like it is — telling you, telling Congress and telling the American people that unless you give us the same access to capital and funding as you're giving Fannie Mae and Freddie Mac ...
Paulson: ... But the reports I saw last month said you had plenty of cash — enough to last at least a year, maybe two.
General Motors: That was our messaging, yes. And we tried to convince folks that "we knew what was coming in the latest horrendous sales results," that "we knew what we needed to do to respond and react." But now it looks like we really did not know. Now it looks like we'll run out of cash a lot sooner. So like I was starting to say, unless we get federal help, General Motors is history. Ford is history. Chrysler is history.
Paulson: And you still believe that where GM goes, so goes the United States?
General Motors: Yes, I do.
Former Fed Chairman Paul Volcker: I've been listening to all this with increasing unease. Gentlemen, do you not see where this discussion is headed? It's headed toward nationalization of the GSEs, nationalization of Detroit's Big Three, nationalization of major banks.
Earlier, it was said that this thing is spreading like a cancer. What was really meant by that phrase? Well, I can't answer for the person who first spoke it, but I can give you my own interpretation of its meaning:
The truly dangerous cancer that's spreading is the cancer of mistrust. First, mistrust in subprime mortgages. Then, mistrust in higher quality mortgages. Now, mistrust in Fannie Mae and Freddie Mac.
If it were mistrust based on unfounded rumor, we could ignore it. But if it's mistrust based on hard data that's been distorted, quarantined or simply lied about ... then that's another matter entirely.
Let me fast-forward to the final, fatal stage of this cancer, the stage we must avoid at all costs. Let me take you to the day, however unlikely that day is, when it could spread to the U.S. government itself, when investors all over the world can no longer trust the debt of the United States Treasury Department.
Gentlemen, I know what I'm talking about. I looked the precursor of that mistrust in the eyes nearly three decades ago, in my first year as Fed chairman. And in those days, we did not have collapsing mortgage markets or collapsing auto markets or insolvent GSEs. All we had was plain-vanilla, double-digit inflation, without all these extra alarm bells and whistles. In that sense, the mistrust back then was less complex — and more manageable — than it is today.
But it was powerful nonetheless — so powerful, in fact, that it nearly shut down the entire market for U.S. government bonds.
Greenspan: I meet a lot of people who don't remember that time, or don't quite grasp its significance. Please help make sure everyone in this meeting does.
Volcker: It was 1980. We were meeting at Camp David. Present were President Carter, myself, the Treasury Secretary, plus CEOs from Merrill Lynch, Salomon Brothers and other primary government security dealers.
In some ways, this meeting today reminds me of that meeting then — the same sense of siege, the same philosophical disagreements. But there was one aspect we all agreed upon: The spreading investor mistrust in U.S. government bonds.
That mistrust was so intense and so widespread, we could not sell U.S. government bonds. Treasury bills were still fine. But not bonds. No one wanted long-term bonds and the entire market for them was as close to a total shutdown as it's ever been in the history of our country.
Greenspan: Go into the crux of the crisis.
Volcker: The crux of the crisis was that the fear of inflation was so intense, and government bond prices were going down so swiftly, there were virtually no more buyers of government bonds. Worse, primary government security dealers had lost so much money from falling bond prices that they were afraid to buy them at auction, hold them in inventory and resell them.
Yet that's precisely what we needed from them. It's through those dealers that the U.S. government sells nearly all of its bonds. It's through them that we raise nearly all of the money we need to refund maturing bonds and fund the government's day-to-day operations.
Our network of government security dealers is much like GM's network of auto dealers. The dealers buy the merchandise at auction, mark it up, put it on their lots and then hope to resell it.
Now, imagine what would happen if GM's dealer network were to shut down! How would GM be able to sell its cars? That's the same kind of situation the U.S. government was facing for its bonds in those dark days of early 1980. Except for a couple of the biggest dealers, like Salomon Brothers and Merrill Lynch, nearly all the government security dealers were shutting down their government bond operations.
Salomon would call Merrill to sell what's considered a small lot of, say, $100 million in 20-year Treasury bonds. At the same time, someone else at Merrill would call Salomon to place a similar trade. It was like two kids trying to trade the same marbles. There were no buyers. Virtually all the other dealers had packed up and gone home.
The point is, in that environment, we could not sell U.S. bonds.
Three-month Treasury bills? No problem. People trusted us for three months. But 20- or 30-year Treasury bonds? No! The market for Treasury bonds had dried up. And without it, the U.S. government simply could not continue to fund its own operations, couldn't meet payroll. Hard to believe, but true: We faced a shutdown of the U.S. government.
Our only answer was to kill the monster that had fomented all the mistrust — inflation. But to do that, we had to jack up interest rates. We had to cut off credit to millions of Americans. And in the process, we knew we were going to squash the economy.
Carter was up for re-election. So you can imagine his initial resistance to the Draconian steps we were proposing. But he had no choice. To bring the point home, he was asked: "Which do you prefer: The chance of losing the election in November? Or the certainty of the presidential paycheck bouncing right now in February?"
Paulson: Can we bring this back to the present?
Volcker: Absolutely. Let's bring this back to the present by asking this question: Is this the direction you want to take the country? If anyone in this room is willing to take that risk, say so now or forever hold your peace.
Because that's the inevitable fork in the road ahead — the end of the fast lane you're now on. I'm referring to the fast lane of open-ended government bailouts. The fast lane of "consistent messaging" to cover up the true cause — and the true consequences — of these bailouts.
Henry, never forget: Millions of investors, mostly overseas, have put their faith in U.S. government securities. They've loaned you their money because they trusted you, the U.S. Treasury Department. If you turn around now and pour their money down the bottomless pits we talked about today — Fannie and Freddie, GM and Ford, major banks — what do you think their reaction will be?
What makes you believe that they'll respond any differently than they did in 1980, when they disappeared from the U.S. government security market or, worse, dumped their bonds in fear?
What makes you believe you can stop the cancer of mistrust from spreading to 1500 Pennsylvania Avenue — to the U.S. Treasury Department itself?
When and if that day arrives, I know we will make the right choices. I am absolutely sure we will never let U.S. Treasury bonds become the next victims of the subprime crisis.
But if we know this now — if we CAN look ahead now and see that's the ultimate choice we will confront someday ... why not make the right choice now, while our economy is still standing, while our country still has the resources to make the needed sacrifices?
Face it, gentlemen: The last government rescue must not be to save the government itself. We must first save ourselves.
Good luck and God bless!
Martin |
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Samsara
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Posted on 08-05-08 8:38
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Looks like the discussions here have come to a standstill...Alls good. Just means that not many people care about their financial matters OR many people here are still thinking that they would remian unaffected by today's plight in the global markets OR the most obvious reason, not many have the financial knowledge to play with and make money outta today's markets which are more sophisticated than ever.
Whatever be the case, here's an important read for those wanting to beef up their global portfolio (hey, you could even do this for you IRAs and brokerage accts). Emerging Markets is where the short-run profits seem to be these days. However, hope you all read about my soccer-mom syndrome earlier (or was it in another thread). Be ye warned :)
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YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET |
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Chinese Food Stocks Look Attractive! by Tony Sagami
Dear Subscriber,
As a teenager, I couldn't wait to get off the family vegetable farm. While the rest of my friends were joyriding around town, swimming, and otherwise having tons of fun, I was always working.
But attitudes sure do change over time. Now I live in Montana to recapture that rural lifestyle that I hated so much as a teenager.
That's why I laced up my hiking boots and headed to Glacier National Park for one more hike before I jet off to Beijing in six days. I just can't get enough of the outdoors.
I guess you can take the boy off the farm but you can't take the farm out of the boy.
My love of the outdoors and my farming roots have helped me in the investment world, too. And they'll be especially useful for this upcoming China trip. I say that because I am going to visit several of the key agricultural companies in China ...
These Companies Happen to Be Making a Fortune From the Booming Business of Food!
Why am I so interested in agricultural companies? First of all, food is an essential commodity for life. And since the world's population is forecast to be three times bigger by 2010 than it was in 1950, the demand for food is exploding.
Just as important, a greater proportion of that growing population is becoming affluent enough to eat well.
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Thanks to growing incomes, the demand for better diets and more protein is just beginning. I believe that you've only seen the early stages of an agricultural boom, and that it will be one of the most profitable sectors you can invest in.
At the same time, the growing consumption of corn, sugar, and wheat to produce ethanol is essentially taking food out of hungry mouths. President Bush, in his last State of the Union address, proposed increasing the production of alternative fuels fivefold to 35 billion gallons by 2017.
And as is often the case for many of today's new hot investment trends, you need look no further than China to find some of the best investment opportunities.
Four Reasons to Jump on The Chinese Food Bandwagon ...
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While China is known for rice farming, there are plenty of other attractive agriculture investment areas ... |
#1. China has changed from being a net exporter to being a net importer of major agricultural crops. With 1.3 billion hungry mouths to feed, China can't produce enough food to meet its own demand, let alone other country's needs.
#2. Chinese agricultural companies are protected by the government and foreign competition is heavily regulated. There are two Great Walls in China; the physical Great Wall and the governmental "great wall" that protects Chinese companies against foreign competitors. Chinese agricultural companies enjoy a state-sanctioned monopoly.
#3. Recent droughts and extreme water pollution have negatively impacted China's food supply. Rapid industrialization has severely polluted China's water supply and made the current drought even more painful.
#4. As more Chinese move from the rural interior to more affluent coastal cities, consumption of all food commodities have exploded. And this will only continue as more Chinese move into urban settings!
If you're interested in the Chinese agricultural companies, there is no shortage of investment options, many of which are traded on U.S. exchanges. Here is a partial list of companies that have piqued my interest:
American Dairy is the largest dairy company in China.
AgFeed Corp sells premixed food for livestock, particularly hogs.
Agria Corp produces corn seed and sheep breeding products.
Chaoda Modern Agriculture is China's largest vegetable and fruit grower.
China Green Agriculture makes humic acid, a liquid fertilizer.
China Mengniu Dairy is another Chinese dairy producer.
China Organic Agriculture is one of the largest producers of organic rice in the world.
Global Bio-Chem Technology deals in corn starch, corn sweeteners, and corn feed.
Origin Agritech makes bioengineered rice, corn, canola, and cotton seeds.
New Oriental Energy & Chemical manufactures urea, a chemical used for fertilizer.
Sinofert is a major Chinese fertilizer distributor.
There are also dozens of American companies that are doing a substantial — and growing — amount of business in China. Some of the familiar names are Mosiac, Potash, Archer-Daniels-Midland, Bunge, and Monsanto.
Now, don't rush out and buy any of these stocks. I haven't even had the chance to conduct my customary in-person due diligence and research on these companies yet.
Sure, I've done the nerdy financial homework on these companies, and I've found some spectacular bargains on paper. But I need to visit these companies in person before I will make any recommendations to my Asia Stock Alert subscribers.
I've learned the hard way that just because a company looks good on paper doesn't make it a winning investment. Kicking the tires in person has been my key to finding home run stocks.
Best of all, I'll get to dig around in some dirt, and get back to my farming roots this trip. My dad will be very proud of me!
Best wishes,
Tony |
Last edited: 05-Aug-08 08:39 AM
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latoboy
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Posted on 08-05-08 9:29
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in regards to your soccer mom comments i will say my picks. I have been long on on general US Market. and short commodities like Gold, Silver, Natural Gas.
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latoboy
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Posted on 08-05-08 9:40
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samsara pls stop giving advice such as "emerging mkts is place to be for short term profits" some people might take u seriously and go out and buy all kinds of emerging market equities... we dont want people to go all out and start buying BRIC etfs or stocks. u only have to look at FXI , EWZ to see how badly they are performing recently. this is not a place to make short term profits.
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