SocraticGadfly: 7/22/07 - 7/29/07

July 28, 2007

How far beyond housing will the housing bubble’s credit problem spread?

Steve Pearlstein has an excellent, if somewhat depressing, column about just how bad the housing bubble could be, and how far beyond housing debt its tentacles could extend.

First, for people recently touting the Blackstone Group IPO:
The altered fortunes of the big Wall Street firms could also be measured yesterday in the humiliating 25 percent increase in the cost of insuring their own bonds against default. And investors who rushed to buy shares in Blackstone Group, the world's largest private-equity firm, when they were issued last month have watched the value of their stakes fall by 17 percent.

Second, this ride is only beginning:
It would be comforting to believe that the availability of all this money precipitated a deterioration of lending standards in only a few credit markets, such as subprime mortgages. But in an efficient global financial market in which money flows toward the best return, it is more likely that loosey-goosey lending anywhere is a symptom of loosey-goosey lending everywhere. If so, it's likely that this credit correction has only just begun.

Third, how widespread will the damage be?
In truth, nobody knows how all this will play out. Many of the newfangled financial instruments at the heart of today's credit system have never been fully tested in a market panic. And for all their claims to rationality, financial markets are still driven by the emotions of greed and fear that cause markets to overshoot on the way up as well as on the way down.

Fourth, it ain’t just housing debt that's a problem:
Banks and credit-card companies have begun to report noticeable increases in delinquencies on consumer debt.

And now, investment banks are having serious trouble raising money to finance corporate takeovers and stock buybacks. A record flow of those deals fueled a year-long stock market rally that, only a week ago, pushed the Dow Jones industrial average past 14,000. Yesterday, the Dow closed at 13,473.57, down more than 300 points.

High-profile deals left hanging by this week's turmoil include the big buyout of Chrysler by Cerberus Capital Management, KKR's purchase of British retailer Alliance Boots and Citigroup's purchase of Allison Transmission. Barry Diller was forced to trim the stock buyback through which he hoped to take Expedia private. And there were reports that the sale of Cadbury Schweppes's drink business, which was being shopped around, will be delayed for months.

If you take all the different economic-type worries that voters have listed individually in recent polling, and make them one lump sum titled “economic worries,” they’re already rivaling the situation in Iraq as a matter of concern.

Once again, as I’ve blogged before, can you say, “recession”? And, if you’re a Democrat, whether a presidential or congressional candidate, are you ready to address this?

Minimum wage hikes and the future of newspaper employment

With year one of a three-year, 70-cent-an-hour per adjustment minimum wage hike in place, I see three options for newspaper companies:

• At least partially keep pace with editorial staff wage hikes.
• Improve benefit offerings. Since all sorts of companies across industries struggle with health insurance, this means benefit improvements would include more vacation time, profit sharing, 401(k) accounts, flex time, or some combination of all the above.
• Do nothing, let more and more talented people walk, and resort even more to syndication groups, part-timers, stringers, and in the neon lights, fame-hungry “citizen journalists.”

Knowing how capitalistic the business is, my money is on option 3 being the first resort.

Corporately dirty fox pays to help guard the National Parks henhouse

The National Parks Conservation Association lists among its 2007 Salute to the Parks corporate sponsors Rio Tinto, arguably the most environmentally destructive — and labor exploitive in less developed countries — mining company in the world. What’s up with that?

Why can’t environmental groups have at least a bit more purity on an issue like this?

Dems going soft on FISA reform?

House Intelligence Committee Chairman Silvestre Reyes sounds like he’s ready to agree to a fair extent with President Bush on reforming the Foreign Intelligence Surveillance Act, a big red flag.

I agree with the ACLU: The Clinton Administration had cell phones and the Internet on its hands and was perfectly able to work with the current FISA provisions. I don’t think there’s a need for change and certainly not for wholesale ones, such as immunizing telecom companies from criminal charges for what would right now be criminal cooperation with BushCo-type demands.

Pakistan’s past, present, and maybe future? The tyrant and the criminal meet

Pakistani President Pervez Musharraf has held under-the-radar talks with former Prime Minister Benazir Bhutto about him getting her support for a third term, in exchange for a power-sharing arrangement. Talks reportedly broke down when Bhutto refused the deal unless Musharraf resigned from the military.

Let’s hope they stay broken down. Musharraf would only resign his commission, if he does, with a whole series of toadies to replace him in all top rungs of the Pakistani Army. That leaves a military just about as dependent on him but less skilled than before, while Ms. Graft returns to skim money off government contracts and such.

July 27, 2007

How Wall Street is rigged

Yesterday’s 300-point loss, followed by today’s 200-point dive, reminded me of this enough to blog about it.

The Street shuts off computerized trading programs whenever a fall gets to be too steep, by percentage of the Dow, but does it do the same when a rise soars too fast?

Of course not.

So, the Dow isn’t such an accurate economic reflection point after all.

More housing woes: It’s so bad we’re looking to Beijing for a bail-out

Housing and Urban Development Secretary Alphonso Jackson traveled to China recently begging for mortgage investments:
The U.S. (has urged) China's central bank to buy more mortgage-backed securities after a surge in defaults by risky borrowers in the world's largest economy eroded demand for such instruments.

“It’s not a matter whether they’re going to do more business in mortgage-backed securities, it’s who they’re going to business with,'” U.S. Department of Housing and Urban Development Secretary Alphonso Jackson told reporters in Beijing. He met with central bank Governor Zhou Xiaochuan and Minister of Construction Wang Guangtao.

The U.S. housing regulator is seeking to tap China’s $1.33 trillion of foreign-currency reserves after surging defaults on subprime mortgages caused the near-collapse last month of two hedge funds run by Bear Stearns Cos.

Fact is that Beijing is smarter than this and isn’t going to pound money down a rat-hole unless it’s last-ditch necessary to do so to prop up its other U.S. investments or consumer purchasing power to buy Made in China goods.

New home sales off, too

The housing market continues to look bleaker:
The Commerce Department reported Thursday that sales of new single-family homes dropped by 6.6 percent last month to a seasonally adjusted annual rate of 834,000 units. The decline was more than triple what had been expected and was the largest percentage drop since sales fell by 12.7 percent in January.

That follows word of a 3.8 percent drop-off in existing home sales in June, announced earlier this week.

CDOs and the Great Depression

Collateralized debt obligations based in fair part on subprime mortgages and in fair part on highly leveraged debt of various types strike me as being the modern equivalent of stocks being sold on just 10 percent margin in early 1929.

July 26, 2007

I'm getting published, and on a pretty important issue

Pardon me for tooting my own horn a bit, but ...

This February, I wrote an op-ed column in my newspaper about how the mentally ill often get "warehoused" in the Texas prison system. It caught the eye, online, of Chris Salazar, publisher of DOCTalk, a nationally-distributed, Texas-based physician advocacy bimonthly magazine. (The current issue's cover story is an in-depth interview with Michael DeBakey; inside stories include an interview with the director of Houston's M.D. Anderson cancer center; you can learn more about the mag here.)

So, he's running the column in his next issue, as part of a series on mental health issues. On this particular issue, the "advocacy" part includes getting parity on mental health insurance coverage and many other issues, which of either state or federal legislative action in many cases.

Contempt? Yes. Right now? No. Ditto for perjury

The House Judiciary Committee, on party-line vote yesterday, approved contempt citations on Josh Bolton and Harriett Miers, but an anonymous top Democratic official said the full House wasn’t likely to take up the matter until after the August recess.

Now, this A. None Mouse may argue this gives Bush more time to rethink his stance, and for Fielding to reach an acceptable compromise with Congress.

I’m here to tell her or him: “Ain’t gonna happen.” All you’re doing is giving Bush one more month on the calendar to stall this out until the end of his term. Look at how much time he has already gotten.

On Senate Judiciary Committee Chairman Patrick Leahy now says he is giving Attorney General Alberto Gonzales until late next week to revise his testimony.

Hell, give him ’til Christmas; it ain’t happening. There’s a proper pace for proceedings like this, yes, but given how much Gonzo testimony water has already passed under the bridge, Leahy needs to stop confusing “proper pace” and “snail’s pace.”

Web to surpass e-mail as virus source

Expert says websites make an easier target than e-mail.
There is an increase in Web threats compared with normal worms...the number of worms has increased by 22 percent since first-quarter 2005, while Web threats have increased by 540 percent.

The main effort is to convert a home computer into a bot. Security strategies include security software, regular downloads of operating system and Web browser updates, and using another browser than the “default” Internet Explorer.

Tightened lending from subprime crisis has ripple effect

For example, skittish lenders are demanding that Cerberus Capital dig up $2 billion in cash to help pay for its acquisition of Chrysler.

Other fallout? GM’s sale of Allison Transmission is on hold; so is KKR’s plan to buy electric utility TXU. Expedia’s desired stock buyback was cut by 80 percent, by number of shares, because it couldn’t raise the necessary loans.
What do investors want? Higher rates and stiffer covenants governing what a company can or can’t do with the money. In the last year or so, buyout firms have been able to sell lots of so-called covenant-lite bonds — bonds with virtually no conditions attached.

But now that investors are cooling to those deal terms, investment banks have to lend the money themselves, in what are called bridge loans, to make deals happen.

Investment banks don’t like being in that position because they are hired to find money, not to lend it. Lending money ties up capital that could be used for other deals. And that means other deals have to wait.

But they are doing it. JPMorgan’s Dimon told analysts last week that banks have committed to take $100 billion on bonds on deals and to make $200 billion in bridge loans so deals can close.

The root of the crunch isn’t corporate deals. Instead, it’s a result of the subprime mortgage mess. Banks gathered huge pools of mortgages, then sold securities backed by the loans that reflected the risk tolerance of various investors.

With many homeowners defaulting on their mortgages, big investors are worried they’ll never see their money again. They want more before financing anything that smacks of high risk: The yield on a typical midgrade bond has jumped from 6.9 percent to 8.6 percent in a month, according to the Telegraph newspaper in London.

Here’s the bottom-line question: How much will this affect economic performance in the next 9-12 months?

I think it’s going to be minimal, in and of itself. Maybe 0.2 percentage points. But, combined with other factors, that can add up. It depends on how much of an inflationary ripple this has.

Maybe John Edwards HASN’T been so good to the poor

Or, at least not to lower-middle class people

His investments include subprime-mortgage funds. His salary includes hedge-fund consulting, and remember, there’s controversy about how hedge funds should be taxed.

Plus, how many of these hedge funds, with their “global strategies,” are based on the type of free trade, without environmental or labor rights concerns, that affect a number of working-class Americans?

Not so fast on that “new home sales are up, what housing bubble” attitude

That’s because existing home sales took another plunge off a cliff in June. The 3.8 percent falloff was much steeper than the 1 percent advance prediction by Wall Street.

Texas is No. 1 — in dirty power plants

A work e-mail I received from the Environmental Integrity Project (EIP) rates the country’s 50 dirtiest power plants:
The report will show that the 12 states with the heaviest concentrations of the 50 dirtiest power plants (in terms of one key pollutant) are: Texas (five); Pennsylvania (four); Indiana (four); Alabama (three); Georgia (three); North Carolina (three); Ohio (three); West Virginia (three); Wyoming (two); Florida (two); Kentucky (two); and New Mexico (two).

Standing by for comment from Gov. Rick Perry.

July 25, 2007

Besides polluting, ozone may contribute to global warming

How so? It inhibits plants ability to intake carbon dioxide, meaning more of it remains in the atmosphere. In addition, ozone can otherwise stunt plant growth

California home mortgage defaults at record pace

And the subhead in the Los Angeles Times’ online version of the story even uses the word “recession” in describing the problem:
Foreclosures soared to 17,408 for the three months ended June 30, an increase of 799 percent from the same period last year. The current rate handily exceeds the previous foreclosure peak set in 1996, when the state was in the final throes of a six-year slump.

“The economy will bend further under the weight of the mounting housing and mortgage problems, but it will not break,” said Mark Zandi, chief economist at Moody’s

That’s what passes for optimism these days. Others are more downbeat.

“All the artificial stimulus housing gave the economy is going to go away,” said Rich Toscano, a financial advisor with Pacific Capital Associates in San Diego who runs the popular real estate website. “There will be individual pain for people who made the wrong decisions. We all may end up in a recession.”

The good news, as seen by Toscano: “I don’t envision a ‘Grapes of Wrath’ scenario where we all have to pile in the family car and look for harvesting work.” ...

Most analysts say the housing market won't stabilize until 2008 or 2009. The so-called soft landing that was much talked about last year is rarely mentioned anymore.

The rising foreclosure rate is tied to stricter lending standards and weakening home values. With housing prices flat or falling, lenders are less willing to refinance loans — especially to borrowers with shaky credit who are most likely to miss payments. ...

One reason foreclosures are rising faster than defaults is that strapped owners are having a harder time saving themselves.

As recently as a year ago, most homeowners who had slipped behind in their payments found a way to get current again. Nearly 9 out of 10 defaulting borrowers got out of trouble by selling their house or refinancing, according to DataQuick.

Fewer than 6 out of 10 are able to do so now. “People have stretched their finances to the breaking point,” said DataQuick analyst John Karevoll.

There’s already a year’s supply of houses on the market in San Bernardino and Riverside counties, up from a three-week supply at the height of the boom, said Ron Barnard, owner of Home Center Realty in Norco. Many are foreclosures that banks are trying to unload.

Will this be an “as California goes, so goes the nation,” scenario? As I’ve posted in the past about this issue, even states like Texas which look good on paper aren’t so solid.

In the sense of not liking or wanting a recession, it gives me little comfort to have my analysis confirmed by a major seven-day daily newspaper. But, in the sense of confirming that I’m not Chicken Little, it shows indeed that I’m on the right analytical track.

A question or two for Lancaster ISD School Board President Ed Kirkland

Dear Ed:

Is Superintendent Larry Lewis still worth that big salary range, into the $190K area, that you pushed for him to get a couple of years back?

Given that LISD is above the state average and Texas Education Association guidelines for percentage of district funds spent on administration salaries, will you ask Lewis to voluntarily return part of his salary as part of LISD belt-tightening efforts?

Steve Snyder

July 24, 2007

Subprime crisis moves right into prime-market loans

Countrywide Financial has prime-level mortgages at least 30 days late increase more than 250 percent:
Shares of Countrywide Financial Corp. tumbled today after the nation's biggest mortgage lender signaled that rising defaults and delinquencies are spreading beyond the troubled sub-prime market to higher-quality "prime" loans.

The Calabasas-based company reported a 33 percent drop in its second-quarter profit and slashed its outlook for the rest of the year, citing an “increasingly challenging” housing market. ...

Countrywide said payments were at least 30 days late at the end of second quarter on 4.56 percent of prime home-equity loans serviced by the company, up from 1.77 percent a year earlier.

Payments were late on 23.71 percent of sub-prime mortgage loans, up from 15.33 percent at the end of the same period in 2006, the company said.

Bill Clinton said, 15 years ago: “It’s the economy, stupid.”

I give you 1-3 odds we’re in a recession in 12 months. It will be the economy, again, as well as Iraq, on the presidential and congressional campaign trails.

I increase those odds to 1-2 by Jan. 20, 2009, especially if Bloomberg’s is right about $100/bbl oil. Whoever is elected president will have to deal with this.

Update: DuPont was among slumping stocks today, with profit projections tumbling due to a decline in housing starts, home remodeling and related business affecting demand for countertops.

Peak Oil alert: $100/bbl oil near?

So says Bloomberg:
The $100-a-barrel oil that Goldman Sachs Group Inc. said would prevail by 2009 may be only a few months away.

Jeffrey Currie, a London-based commodity analyst at the world's biggest securities firm, says $95 crude is likely this year unless OPEC unexpectedly increases production, and declining inventories are raising the chances for $100 oil. Jeff Rubin at CIBC World Markets predicts $100 a barrel as soon as next year.

I want to see how Saudi Arabia spins this once prices do start going up. Note that Currie says increased OPEC pumping would be “unexpectedly” happening.

That $100/bbl is already happening on some futures markets:
A record number of options have been sold that give the buyer the right to buy crude oil at $100. The contracts, covering 50 million barrels, only pay off should oil go above the target price. September crude futures fell 89 cents to $74.90 at 11:16 a.m. in New York today.

And, no, this isn’t just some traders trying to gin some numbers. Our own government is in some sort of agreement, without talking specific price increases:
”There are questions about whether the oil industry can keep up with demand,” U.S. Energy Secretary Samuel Bodman said last week, commenting on the Petroleum Council report.

Peak Oil guru Matthew Simmons thinks these projections are too low:
Oil prices could triple in three months to more than $200 a barrel, given the right circumstances, according to Matthew Simmons, chairman of Simmons & Co., a Houston investment bank.

“Oil is still cheap,” Simmons said. “In the 20th century, with a few exceptions, oil was almost free. The only exceptions were during 1973, 1979 and when Iraq invaded Kuwait.”

T. Boone Pickens also expects prices to zoom:
A pullout from Iraq may be the event that pushes oil to $100 a barrel, according to Boone Pickens, the Dallas hedge fund manager. Pickens predicted a year ago that $100 oil would probably occur by now. Today he is looking for $80 within six months, and he says growing chaos in Iraq would be a bad sign.

What’s this mean in gasoline prices at the pump? A year from now, the U.S. average would be $4/gal, with $5/gal gas in places like San Francisco and New York City.

House votes to end wives on campaign staffs

Voice vote approval given to a big ethics issue:
Spouses don't belong on campaign payrolls, the House says, voting to end a practice that has benefited some members of Congress for years.

Monday's action follows controversies in which lawmakers added many thousands of dollars to their family incomes by hiring relatives for campaign tasks, even if their qualifications were not always apparent.

But watchdog groups like CREW see dimmer prospects in Senate. Reading between the analytical lines, it seems likely somebody will put a “hold” on the bill.

But, in today’s blogosphere, “holds” have been quickly outed on some major pieces of legislation. This one shouldn’t be any different. So, when it gets to the Senate, let’s be alert.