Page 4 of 5 CREDIT BUBBLE BULLETIN The Uppers
Commentary and market watch by Doug Noland
July 30 - Bloomberg (Mike Cohen): "South African inflation accelerated to 11.6%
in June, the fastest pace in at least 10 years, adding to pressure on the
central bank to raise interest rates next month."
July 31 - Bloomberg (Jacob Greber): "Australia may be headed for a housing
recession similar to those roiling the US and UK. The cause is a combination of
rising default rates, the biggest drop in home prices in five years, the
highest borrowing costs in a decade and slowing economic growth. Prices in the
property market ... will fall 30% by 2010, according to Gerard Minack, senior
economist at Morgan Stanley ... Prices dropped in all of Australia's major
cities last month for the first time since just before the Great Depression. 'I
panicked' when the figures came in, said John Edwards, CEO of Residex Ltd, a
Sydney company that tracks property prices.'We've been doing this for 20 years
and have data that goes as far back as 1865, and it's really abnormal.'"
July 31 - Bloomberg (Jacob Greber): "Australian retail sales fell by the most
in six years, stoking speculation central bank Governor Glenn Stevens will be
forced to cut 12-year high interest rates. Sales declined 1% from May, the
biggest drop since June 2002 ... "
July 30 - Dow Jones (Shri Navaratnam): "New Zealand's string of finance sector
credit woes spilled into other areas of the economy as fund manager Guardian
Trust Co. Ltd. said it has suspended investor payments ... Guardian Trust, a
New Zealand based fund manager, said ... it was suspending new investments and
withdrawals from one of its funds ... due to liquidity difficulties."
July 29 - Bloomberg (Tracy Withers): "New Zealand home-building approvals
slumped to the lowest in almost 22 years in June ... Approvals fell 20% from
May to 1,337, the lowest since October 1986, Statistics New Zealand said ... "
Bursting Bubble Economy Watch
July 29 - Financial Times (Francesco Guerrera and Saskia Scholtes): "The US
financial crisis is spreading from subprime borrowers to wealthier consumers,
with evidence mounting that more affluent people are failing to pay their
mortgages and credit card balances. Growing concerns over the financial health
of richer borrowers are prompting banks and card issuers to tighten lending
practices in moves that could futher dampen consumer confidence and spending
more. Banks such as JPMorgan Chase and credit card groups such as American
Express have clamped down on lending to customers that have traditionally been
regarded among the safest and most profitable borrowers. 'The crisis is just
starting to spread beyond the middle class,' said Curtis Arnold, founder of
CardRatings.com. 'Even folks with good credit-ratings scores are no longer
immune from adverse actions from their card issuers.' Senior bankers say that
after the subprime debacle, the worsening outlook of 'prime' portfolios shows
the crisis is far from over and could inflict substantial losses on financial
institutions ... At American Express, which has traditionally focused on
high-spending consumers ... Kenneth Chenault, chairman and chief executive,
said the company's most affluent card-holders were feeling the pinch."
July 28 - New York Times (Peter Goodman): "Banks struggling to recover from
multibillion-dollar losses on real estate are curtailing loans to American
businesses, depriving even healthy companies of money for expansion and
hiring.Two vital forms of credit used by companies - commercial and industrial
loans from banks, and short-term 'commercial paper' not backed by collateral -
collectively dropped almost 3% over the last year, to $3.27 trillion from $3.36
trillion, according to [Fed] data. That is the largest annual decline since the
credit tightening that began with the last recession, in 2001. The scarcity of
credit has intensified the strains on the economy by withholding capital from
many companies, just as joblessness grows and consumers pull back from spending
in the face of high gas prices, plummeting home values and mounting debt ...
Drew Greenblatt, president of Marlin Steel Wire Products, figured it would be
easy to get a $300,000 bank loan to finance a new robot for his factory ... His
company, which makes parts for makers of home appliances, is growing and
profitable, he said ... But when Mr Greenblatt called the local branch of
Wachovia - the same bank that had been aggressively marketing loans to him for
years - he was distressed by the response.'The exact words were, 'We're saying
no to almost everybody,' Mr. Greenblatt recalled."
July 30 - New York Times (Michael Grynbaum): "Several national restaurant
chains were shuttered on Tuesday, possibly offering an early taste of what's in
store this year for businesses that depend on free-spending consumers whose
budgets are now being squeezed. The parent company of Bennigan's ... with about
200 sites across the country, filed for bankruptcy, a move that will put
hundreds of employees out of work and leave many landlords with empty retail
space during a painful time in the real estate market. A sister brand, Steak
& Ale, will also close ... The restaurants are the latest casualties in the
so-called casual dining sector, considered a cut above fast food. Soaring food
costs and a surfeit of locations have hurt the companies' bottom lines just as
Americans are choosing to take more meals at home . . . "
August 1 - Bloomberg (Mike Ramsey): "US auto sales tumbled 13% in July, pushing
the industry toward its worst year since 1993, as General Motors Corp, Ford
Motor Co and Toyota Motor Corp posted declines on lower demand for fuel-thirsty
trucks ... The industry's annualized selling rate for July was 12.6 million
vehicles, the lowest since April 1992, according to Autodata."
August 1 - Bloomberg (Jeff Plungis): "Leasing a car is about to get more
expensive. Chrysler LLC, the money-losing automaker owned by Cerberus Capital
Management LP, is closing its unprofitable leasing business today, and General
Motors Corp and Ford Motor Co are scrapping leases for some models."
July 29 - Boston Globe (Beth Healy): "The Massachusetts Educational Financing
Authority yesterday said it will not be able to provide student loans this fall
for the first time in its 26-year history, leaving more than 40,000 families
without an important source of tuition funds just weeks before college classes
begin. The nonprofit lending authority, which last school year provided $510
million in loans, said it has been unable to secure funding to provide private
student loans ... 'As a result of our problems and the continued dislocation of
the capital markets, we have been unable to raise funds for the coming academic
year,' said Thomas M Graf, the authority's executive director."
July 30 - New York Times: "Mervyn's and the parent company of Bennigan's both
filed for bankruptcy protection yesterday, providing more evidence that the
pace of corporate flame-outs is accelerating. Only half way through 2008,
billion-dollar bankruptcies are at their highest level in five years, according
to BankruptcyData.com ... 'We seem to be in the midst of a 'perfect storm'
leading to more bankruptcies: high levels of debt, high energy and raw
materials costs and weakness in the US economy," George Putnam III of New
Generation Research, which publishes BankruptcyData.com, said ... "
July 28 - UPI: "Los Angeles food bank operators say the troubled economy has
produced the biggest demand for their help they've ever seen. The demand is
spreading from poverty-stricken residents to those in the middle and upper
classes, they told the Los Angeles Times. 'This is probably the most people
we've ever seen use emergency food assistance," Darren Hoffman, communications
director for the Los Angeles Regional Food Bank, told the newspaper. 'We're
seeing people who were making $70,000 a year coming into a food bank for the
first time.' Food bank operators say people who have spent their retirement
savings to pay their mortgages are turning to the pantries to avoid going
hungry. Some told the Times that major job losses in the banking and
entertainment industries, coupled with the housing crisis, are hitting the San
Fernando Valley area especially hard."
July 30 - Bloomberg (Meg Tirrell): "Profits at US companies may have dropped
the most in at least a decade last quarter after credit writedowns triggered a
combined $7.43 billion loss at Merrill Lynch & Co and Lehman Brothers
Holdings Inc. Earnings of S&P 500 Index companies have tumbled 24% from a
year earlier, according to data compiled by Bloomberg on the 291 companies that
had reported quarterly results ... As recently as July 3, analysts expected a
drop of 11%. Financial industry profits ... have plummeted 87% ... The energy
group of the S&P 500 has posted a 15% gain in profits so far."
July 30 - Bloomberg (Kevin Bell and Beth Jinks): "The Starbucks index is
pointing down in Las Vegas. The Nevada city's gambling-driven growth in the
1990s proved irresistible to Starbucks Corp ... Las Vegas, which had no
Starbucks outlets before 1995, has about 155 now ... Starbucks, stung by a
slowdown in sales as strapped consumers shy away from $4 lattes, is staging the
biggest retreat in its 37-year history, closing 600 of 11,168 US company-owned
and licensed stores. Las Vegas is taking the biggest hit, losing 16 of the
once-trendy cafes, including in North Las Vegas, or 10% of its total. Los
Angeles will lose just two of about 56 and New York City 10 of more than 200."
July 30 - Bloomberg (Mike Ramsey): "Bayerische Motoren Werke AG, the world's
largest maker of luxury vehicles, is trying to reduce the 60% of its US sales
that come from leases as automakers balk at the contracts' rising costs."
Central Banker Watch
July 28 - Wall Street Journal (Sudeep Reddy): "A year after credit markets
seized up, the Federal Reserve is still struggling with the crisis and
expanding key lending programs that were designed as temporary measures to
nurse the financial system back to health. The central bank announced Wednesday
that it is extending programs through January that allow investment banks to
borrow from the Fed. The move is an effort to prevent a worsening in what the
Fed described as 'continued fragile circumstances in financial markets.'
Troubles in the financial world continue to take the Fed deeper into new
territory in its effort to prevent a larger credit crunch."
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch
July 29 - Bloomberg (Timothy R Homan): "Home prices in 20 US metropolitan areas
fell at a faster pace in May, indicating the three-year housing slump has not
stabilized, a private survey showed today. The S&P/Case-Shiller home-price
index dropped 15.8% from a year earlier ... The gauge has fallen every month
since January 2007. Stricter loan rules, rising mortgage rates and an increase
in foreclosures are making it more difficult for prospective buyers to get
financing, hurting home sales."
Real Estate Bust Watch
July 30 - Bloomberg (Sharon L. Lynch): "Home prices in the Hamptons, the summer
haven of New York financiers and socialites, fell almost 12% in the second
quarter from a year earlier as Wall Street firms cut jobs and the economy
teetered near a recession. Sales dropped 26% and the median price slid to
$970,000 in the resort towns on the East End of Long Island ... broker
Prudential Douglas Elliman Real Estate and appraiser Miller Samuel Inc said ...
'We used to think of the Hamptons as insulated and that's not the case,' said
real estate developer Arthur Rauscher ... It's not what it used to be.'"
July 30 - New York Times (Abha Bhattarai and Fred Bernstein): "A record number
of hotels are opening this year, and the timing could not be worse. High
gasoline prices and a slumping economy have put a damper on leisure and
business travel. Airlines have been cutting service and raising fares. While
new hotels open, occupancy rates are falling across much of the United States.
'We're really on the verge,' said Charles Snyder of Smith Travel Research ...
'It hasn't turned into a hotel recession just yet, but we're certainly keeping
an eye on the economy.' Until recently, the industry was in the midst of a
major boom, and it
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