Page 4 of 5 CREDIT BUBBLE BULLETIN Dysfunctional pricing backdrop
Commentary and market watch by Doug Noland
Bursting Bubble Economy Watch
August 15 - Bloomberg (Courtney Schlisserman): "Florida and Georgia had the
biggest job losses in July, reflecting declines in construction, tourism,
retail and transportation. The payroll count in Florida dropped by 21, 400 last
month, led by a 9, 600 decline in construction and a 4, 600 drop in leisure and
hospitality ... Employers in Georgia cut 18, 900 workers ... "
August 13 - Bloomberg (Alex Ortolani): "Auto parts machine operator Marty Shawl
was so shaken by the bankruptcy of his
former employer Delphi Corp. that he paid off credit cards, canceled an annual
trip to Canada and sold his all-terrain vehicle for $1,000 less than the $5,000
he paid for it. 'Once I got it in my mind to sell it, that was it,' said Shawl
... 'We’re economizing. I won’t be buying things like that anymore.’ Shawl said
he was looking for a simpler and less expensive lifestyle -- and there are
plenty of other ex-autoworkers making a similar transition by choice or
necessity. The auto industry workforce has shrunk to almost half its size since
2000."
August 13 - Market News International (Claudia Hirsch): "That morning shower is
getting costlier, as personal care product prices rise in tandem with
ingredient commodities, packaging and transportation costs, according to
manufacturers, retailers and consumers. A wide array of personal care items
have been sporting higher price tags in recent months, due in no small part to
lofty oil prices that inject inflation into every link of the supply chain,
from the raw materials to the trucks that deliver the finished goods to
retailers, industry participants said ... 'Since the beginning of the year,
we’ve been in hyper-inflation mode,' said Kevin Mallory, president of Formulab,
a contract manufacturer of private-label personal care products ... 'All of our
raw materials are derived from either petroleum or vegetable oils, and both of
those have gone through the roof,' said Mallory ... The result is a minimum 30%
increase in Formulab’s finished product prices so far this year, while some
product prices have doubled."
August 13 - Associated Press (Donna Borak): "Lockheed Martin Corp. says a
double-digit jump in the cost of steel and rising oil prices have helped propel
the final price tag of its latest warship for the Navy to more than double the
initial estimates. Navy officials last month told lawmakers the service’s
initial estimate of $220 million per ship had ballooned to as much as $550
million ... "
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch
August 13 - CNNMoney (Les Christie): "More homeowners than ever are selling at
a loss, propelling the real estate market deeper into crisis. In the 12 months
that ended June 30, nearly 25% of all homes sold nationwide fetched less than
sellers originally paid, according to ... Zillow.com. While the nation’s
double-digit decline in home prices has been well documented, the new report
underscores the economic force of those price declines. Homeowners are walking
away with much less in their pocket when they sell ... 'It’s stunning what’s
happening out there,' said Stan Humphries, Zillow’s vice president of data and
analytics ... 'The numbers are the worst we’ve seen and it’s not just the
magnitude of the problem but the scope - so many markets are affected.’"
August 13 - Financial Times (Sarah Mishkin): "Efforts to avert foreclosures are
being complicated by the large number of subprime borrowers who took out second
mortgages so they could afford the downpayments on their homes, industry
executives say. George W. Bush ... signed a bill last month providing $300bn to
help distressed homeowners refinance into cheaper mortgages backed by the
Federal Housing Administration. In exchange for agreeing to a loss on the
initial loan, primary lenders are guaranteed a minimum pay-out while the second
mortgage would be wiped out. Second-mortgage providers are generally in a
weaker position than primary lenders in a renegotiation because they hold what
is known as a second lien ... However, industry executives say secondary
lenders are finding ways to stall or derail mortgage renegotiations, employing
such methods as delaying the completion of necessary paperwork."
Real Estate Bust Watch
August 14 - Bloomberg (Dan Levy): "Bank repossessions almost tripled in July
and US foreclosure filings increased 55% from a year earlier as falling prices
cut homeowner equity, accelerating the housing decline, RealtyTrac Inc. said.
Bank seizures rose 184%... More than 272,000 properties, or one in 464 US
households, got a default notice, was warned of a pending auction or were
foreclosed on. Nevada, California and Florida had the highest rates. 'It’s
getting worse,' Rick Sharga, RealtyTrac’s executive vice president ... said ...
'The number of properties that have been foreclosed on by the banks and still
haven’t sold is the highest we’ve ever seen.’ Total filings rose 8% from the
previous month ... "
August 14 - Bloomberg (Kathleen M. Howley and Dan Levy): "Existing US home
sales fell to a 10-year low in the second quarter and the median price for a
single-family house dropped 7.6% as the real estate recession deepened. The
median price tumbled to $206, 500 from $223, 500 a year earlier, the
Chicago-based National Association of Realtors said ... Sales of single-family
houses and condominiums fell 16% to 4.913 million at an annualized pace."
August 14 - Bloomberg (Sharon L. Lynch): "Office vacancy rates climbed in the
second quarter as US jobless claims rose and losses and writedowns at financial
firms surpassed $252 billion in the Americas. Vacancies in central business
districts from Boston to Orange County, California, averaged 10.2% compared
with 9.7% a year earlier, according to ... Cushman & Wakefield ... "
GSE Watch
August 15 - Bloomberg (Brendan Murray and John Brinsley): "Investors in Japan
and China scaled back purchases of Fannie Mae and Freddie Mac’s debt in June, a
month before US Treasury Secretary Henry Paulson announced plans to bail out
the two mortgage financiers. Private and government investors in Japan slowed
purchases of agency debt to $770 million in June, from $4.5 billion a month
earlier ... China bought $9.6 billion in Fannie Mae and Freddie Mac debt, down
from $14.9 billion in May."
August 12 - Dow Jones (Jessica Holzer and Michael Crittenden): "Fannie Mae and
Freddie Mac are finding it increasingly difficult to bridge the conflicting
demands of their private shareholders and federal overseers. Policymakers in
Washington have leaned heavily on the mortgage giants this year to play a more
aggressive role in propping up the ailing housing market. But after both firms
reported bad second-quarter results this week, it is clear they will have
trouble becoming the saviors policymakers have envisioned. ... lawmakers
haven’t dropped their demands that Fannie and Freddie keep pumping money into
the mortgage market. House Financial Services Chairman Barney Frank ...
expressed optimism that they should be able to continue to play a large role in
bolstering the housing market. 'Sure, things are tough, but they are still the
only game in town,' Frank said ... "
Fiscal Watch
August 13 - Dow Jones (Jeff Bater): "The US government’s budget deficit nearly
tripled in July, pushed wider partly by failed financial institutions. The
Treasury Department said ... the government ran a monthly deficit of $102.77bn
in July, up 182% from $36.45bn in July 2007. Outlays were $263.26bn last month,
up 27% from July 2007’s $206.89bn. Elevating spending was a $15bn disbursement
by the Federal Deposit Insurance Corp. to cover insured deposits at failed
financial institutions ... The $263.26bn spending level was a record for the
month of July. Government receipts in July were $160.49bn, down 6% from the
$170.44 billion recorded the same month a year earlier ... Year to date, the
deficit for fiscal 2008, which ends Sept. 30, totaled $371.44bn, more than
double the 157.42bn posted in the same 10-month period a year earlier.
Year-to-date outlays were $2.47 trillion, up from the previous period’s $2.27
trillion, and revenue was $2.09 trillion, down from $2.12 trillion."
August 11 - Bloomberg (Alison Vekshin): "The failure of IndyMac Bancorp and
seven other banks this year may erase as much as 17% of a government insurance
fund and raise premiums for all banks, from Franklin National of Minneapolis to
Bank of America Corp. The closing of IndyMac in July, the third-biggest US bank
failure, may cost the fund $4 billion to $8 billion, in addition to an
estimated $1.16 billion for seven closures through Aug. 1. Premiums for deposit
insurance will likely rise, FDIC Chairman Sheila Bair said ... 'It’s going to
be a bloody, expensive mess for the banking industry,' said Bert Ely, president
of Ely & Co Inc ... "
August 12 - Bloomberg (Henry Goldman and David Mildenberg): "Wall Street’s
mortgage losses have grown so large that some firms may pay little or no taxes
for years, widening New York City and state deficits and challenging their
ability to provide services, Mayor Michael Bloomberg said. Some companies are
seeking refunds from the city on taxes they prepaid, saying losses have cut
their tax liability to zero. The banks pay tax on 110% of earnings in advance
as a 'safe harbor,' protecting against penalties for underpayment. 'I think it
will be a number of years before Wall Street starts paying taxes again,' the
mayor said ... 'They will carry forward all of those losses.’"
Speculator Watch
August 13 - Wall Street Journal (Jay Miller): "Hedge funds had a rough July as
bets on rising commodity prices and falling financial stocks failed to pan out,
according to research firm Morningstar Inc. The Morningstar 1000 Hedge Fund
Index fell 3.07%, its worst monthly performance ever. 'In July, the bet on long
commodities and short financials didn’t work as well for hedge funds,' said
Daniel Farkas, hedge fund analyst for Morningstar ... 'It’s unusual for hedge
funds to underperform stocks in down markets, but hedge funds haven’t been able
to navigate the credit crunch that started last summer,' Mr. Farkas said."
August 15 - Bloomberg (David Wilson): "Hedge funds had far bigger bets on
energy stocks at the start of the third quarter than they did three months
earlier and may now regret their investments. The chart of the day shows energy
producers
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