Camels, faulty bailouts and scary price increases

My favorite quote of the week:

"The consumer is an overloaded camel and the air is full of straws."

Consumer confidence: third-lowest reading in the 56-year history of the survey

Don't need to tell you how the markets reacted this week. A 4-digit Dow isn't as far away as you might think.

But we are overdue for a bounce - although the VIX shows no "fear" in the markets. Regardless, it looks like a multi-week bounce may start at some point this week.

GM stock at a 53-year low.

Want the head's up on Tuesday's announcement on June auto sales? Not good.

According to J.D. Power's forecast, generally accepted as among the most accurate in the auto industry, General Motors Corp. will see a 26.2% decline, Ford Motor Co. a 31.4% drop and Chrysler LLC a 30.1% fall.

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Uh-oh - the world is catching on:

Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".

"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.

http://tinyurl.com/3tjerw

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For the large former Fortis contingent in the house:

"American 'meltdown' reason for money injection Fortis. 28th of June, 9:10
BRUSSELS/AMSTERDAM - Fortis expects a complete collapse of the US financial markets within a few days to weeks. That explains, according to Fortis, the series of interventions of last Thursday to retrieve € 8 billion. "We have been saved just in time. The situation in the US is much worse than we thought", says Fortis chairman Maurice Lippens. Fortis expects bankruptcies amongst 6000 American banks which have a small coverage currently. But also Citigroup, General Motors, there is starting a complete meltdown in the US"

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I didn't mention it last month, but Dow Chemical raised prices 20% across the board. They make “thousands of products ranging from plastic wraps to car parts and insecticides.” Now a month later, they do another 25%! 50% price increase in a little over a month!! This affects pretty much everything in Target - why is nobody concerned about this...yet? This surely won’t help the CPI...
http://tinyurl.com/5mnmwk

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Mike Morgan - read him while he still posts publicly...
http://tinyurl.com/64ply3

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$300 Billion Housing bailout bill passes 83-9.

“The resounding vote reflected a keen interest in both parties in claiming election-year credit for helping homeowners amid tough economic times.”

Welcome to paying for irresponsible people/lenders to continue their ways. People’d probably care more if a line-item showed up on their taxes showing you the charge, instead it will be hidden in there with all the other increases for years to come. Be ready.

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We aren’t thinking about winter yet, but it’s definitely not too early for people to prepare for this – maybe some of our Maine-ites can comment...

Apparently, the sky IS falling!

That’s the word not from Chicken Little, but from former Maine Governor Angus King, who says he doesn’t use the term “catastrophe” lightly.

“This is a human catastrophe coming at us in the state of Maine in terms of energy supply and costs,” King said last week at a daylong seminar on harnessing tidal energy and offshore wind to confront runaway energy costs, costs he sees as a direct threat to Maine being habitable.

“This winter, the cost of fuel oil is going to more than double,” he said. “What’s being quoted now is $4.96 — $5 a gallon. That’s $1,000 to fill up your tank in the basement one time, and most people are going to have to fill up their tank six times.

“How is somebody who is making $350 or $400 a week going to pay to fill up the tank to keep warm? How are they going to pay to fill up the truck to get to work? This is, I think, the most serious crisis to ever face the state of Maine.”

“Eighty percent of homes in Maine are heated with oil,” he said. “The national average is 9 percent. If you do the math, 87 percent of the total energy bill of the average Maine person is dependent on oil or natural gas, and that is a particularly serious problem.”
King notes that oil prices have more than tripled in the last 10 years. Only six months ago, he said, the price of oil was $75 a barrel. Last week it was $114.

It’s not $114 any more...
http://tinyurl.com/4uu5cr


Just as bad expected in Montana:

Natural gas is used to heat more than 250,000 Montana homes. During winter months, a household with natural gas heat may use 15 to 20 dekatherms. At current prices, that means a $300 monthly bill.

http://tinyurl.com/6qfovm

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In case you haven't seen the pictures of Iowa - unreal
http://tinyurl.com/3oy5qh

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Here we go – Fannie and Freddie already abusing the power we just gave them – taxpayers beware!!!

Three months after Fannie Mae and Freddie Mac won the freedom to step up home-loan purchases, the government-chartered mortgage-finance companies are doing what critics in the Federal Reserve and Congress had predicted.

Instead of using powers granted by Congress to buy jumbo loans for the first time, Freddie Mac and Fannie Mae are purchasing their own mortgage-backed securities, helping reduce losses, company filings show. The large loans, above $417,000, made up almost a third of the U.S. market last year, according to the Mortgage Bankers Association.

Since the rule change took effect in March, Fannie Mae has packaged $24 million of jumbo loans into securities, while Freddie Mac added $220 million, according to the Inside Mortgage Finance newsletter. In April, the companies spent more than $32.4 billion to buy their own instruments, regulatory filings show.

``They were granted expanded opportunity to help recovery in a troubled housing market and yet have appeared to focus on their own recovery,'' said former U.S. Representative Richard Baker, a critic of the companies who left office earlier this year to run the Managed Funds Association in Washington.

Congress had kept Fannie Mae and Freddie Mac out of the jumbo market to force them to concentrate on low- and moderate- income borrowers.

The change places taxpayers at greater risk ``without facilitating the policy goals I believe the Congress had in mind when they eased these portfolio limits,'' said Baker, 60, a Louisiana Republican.

http://tinyurl.com/6jtd8h

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“It’s never been this bad” – bad omen.
http://tinyurl.com/584v2a

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I'll sum this one up for you if you've made it this far - it's from the monolines to the banks. "Remember that $125 BILLION of insurance we have you covered for? How about we round that down to the nearest zero?" Ridiculous. Oh, by the way, I moved this up from the "less important" section because of the exposure that Merrill Lynch and Citigroup have to the monolines. Monolines go down and those two are boarderline toast.
http://tinyurl.com/6bvne7




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"Less" important, but still worth a scan:

Bank of America is doing just fine - which is exactly why they leave messages on peoples answering machines "offering to settle all 3 accounts (credit card) with me for 70 to 80 percent OFF existing balances.... I'm delinquent on all 3 and getting ready to file. YIKES and they left that on my voicemail!!!"

When the banks go, credit goes, and it all goes...
http://tinyurl.com/3p7k8t

It does seem like everything is happening at once on this planet..
http://tinyurl.com/54rkwk

Lest we forget the upcoming ARM resets - the numbers in here are scary. Oh, and don't forget how BADLY the banks need this money from people.
http://tinyurl.com/6pxwwt

And don't forget the unemployment situation. For the record, I think his unemployment estimates are way low.
http://tinyurl.com/654g6n

If the Fed doesn't have to play by the rules....
http://tinyurl.com/5jqyer

More on how the banks are the ones who actually wrote the bailout bill. Sad how this country is now run.
http://tinyurl.com/6sbdq8

Yep, these are our leaders.
http://tinyurl.com/56w9w8

Multiple states suing Countrywide, some asking their boards to remove Countrywide’s license to sell in their state. Bank of America says the deal is going through (duh, it came out this week that the taxpayers will be paying for up to $5 Billion of it!). This blemish could bring them down. Remember when I said it was a mistake to make Bank of America a Dow stock a few months back??? Have fun taking over Mozillo’s rapidly SINKING ship – and tying your anchor to the Dow Jones...

Friends of Angelo

Oil up 80% in the last year. ONE year. Care to guess how much worldwide demand increased over that time? .9% - not even one percent. Aren't bubbles fun. Nice job Ben.

Remember the run wheat had last year? (and what it's doing to food prices now) Now we are getting a repeat in corn. Limit up, limit up, limit up. Aren't bubbles fun. Nice job Ben.

PPI up 1.4% last month. Don’t annualize that number, it’s not pretty. You think the consumer has it bad now? Wait until those prices get passed through to them. This gets uglier by the day.

FedEx has bad guidance – shocker. They are a bell-wheather, when things aren't getting shipped...

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Seriously, this situation is f'ed up. This is as big a cluster f knock on the system as you can find. The chairman of the banking committee - are you kidding me?! This WSJ editorial sheds more light on the picture. Nice system we got here. Disgusting.
http://tinyurl.com/3p2jel

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I was gonna tell you which numbers to read, but just read all 12. Florida is to the rest of the states what subprime was to all mortgages - just the beginning.
http://tinyurl.com/5amhxu

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Here's the deal gang. Ben recently said it was time to fight inflation. If his next move is to cut rates again, that will PROVE how bad things are behind the scenes. He did the bail-out-the-buddies game, and now interest rates are moving up on their own. If he tries to buck that trend with the amount of damage he has done to his $800B balance sheet already - well there is your $200 oil. Aren't bubbles fun. Nice job Ben.

On that note - From the Telegraph: Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve
http://tinyurl.com/3jovcj

As if that wasn't enough - RBS should be big enough to be worthy of your attention: "Crash Alert".
http://tinyurl.com/5qckkp

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What goes up, must come.....

From an NY Times article:

Only a year ago, Wall Street reveled in an era of superlatives: record deals, record profit, record pay. But a mere 12 months later, nearly half of the profits that major banks reaped during that age of riches have vanished.

The numbers are staggering. Between early 2004 and mid-2007, a period of unprecedented wealth on Wall Street, seven of the nation’s largest financial companies earned a combined $254 billion in profits.

But since last July, those same banks — Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley — have written down the value of the assets they hold by $107.2 billion, gutting their earnings and share prices.

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Back to the whole "Friends of Angelo" fiasco from above - Is it any wonder CONgress votes the way it does? Flat out illegal. The poster-boy and first person that should end up in jail when all this is done is Angelo Mozillo. Bribery by any other name...
http://tinyurl.com/5e755g


Arresting the jerks is the right choice – but no, we continue to let them make the rules of our country instead.

Standing Rules of the Senate - RULE XXXV - GIFTS

1. (a)(1) No Member, officer, or employee of the Senate shall knowingly accept a gift except as provided in this rule.

(b)(1) For the purpose of this rule, the term "gift" means any gratuity, favor, discount, entertainment, hospitality, loan, forbearance, or other item having monetary value.

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As for the housing bailout that Dodd (Friend of Angelo) and friends are trying like all get-up to push through, this is what the SC rep had to say:

Sen. Jim DeMint, R-S.C., signaled he might try to block the
measure, saying, through a spokesman:

"The housing bill has a
multibillion-dollar taxpayer bailout for a company that reportedly
gave preferential loans to members of Congress. This is exactly the
type of thing Americans are sick of."

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Probably should move this right to the top, but I don't expect we can stop it due to the massive corruptness of this country.
http://tinyurl.com/6exjbq

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Just click on the chart (although there is a short explanation below it) – that is a disturbing trend the Fed is setting up.
http://tinyurl.com/5umcfo

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There aren’t enough "Bunny Ranch" stories in the Replay (formerly known as the Update)...
http://tinyurl.com/6f7xh7

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When the media gets blamed for being too gloomy, they should read this. I’ll believe the media is being too gloomy (and it’s time to go long) when I see Erin Burnett all-out balling on the air.
http://tinyurl.com/6nlg28

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Investors Business Daily goes for the Democratic jugular as well – strong words in this one.
http://tinyurl.com/46gcmg





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Non Required:

Hope this is an aberration and not some sort of beginning of a trend in this country.
Two garden hoses and six outhouses for 350+ people.
http://tinyurl.com/62ded4


Gas hoarding in their apartment turns out badly...
http://tinyurl.com/594ewk


Why housing is nowhere near bottom. Rates are starting their upward climb. Mortgage rates are higher than they were before the rate cuts began – good job Ben, AS IF you didn’t see this coming when you bailed out your buddies. Jack a$$.
http://tinyurl.com/59o78n


What this chart tells me is that those on the left side have a long way to go...
http://tinyurl.com/5jmflq


More power? That’ll turn out well...
http://tinyurl.com/693so6


These were the "smartest guys in the room" over the past few years – constantly being praised for having hedged away all fuel costs. That appears to be done. Imagine how bad it must be for the not-as-smart guys...

Southwest Airlines Co., the biggest discount carrier, must keep increasing fares "gradually and continuously" as jet-fuel prices surge, Chief Executive Officer Gary Kelly said.

The U.S. airline industry is struggling with a "terrible" operating environment as fuel stays near $4 a gallon, Kelly said today at a Merrill Lynch & Co. conference in New York.

"We're going to have to move fares along gradually and continuously to be able to overcome these dramatically high fuel costs," Kelly said.

An 82 percent surge in jet fuel in the past year is forcing Dallas-based Southwest to juggle its low-fare business model with the need to charge more to recoup its costs. Kelly said that after taking no first-quarter price increases, Southwest has adopted three this quarter.

On the heels of that Continental cuts 15 cities and lays off 3000 more people. Don’t for a second believe the unemployment numbers.


From Todd. Long one, but the lack of accountability is nicely summed up by:

"Today, the Bakers owe $30,000 on credit cards and $105,000 on a home worth only $63,000. They blame themselves but also say lenders share responsibility for 'making it so easy' to borrow."

Regardless, the money is gone, the credit is being removed from the system, and that’s the oxygen this system runs on.
http://tinyurl.com/59ff2u



Actual LEH NPA’s since there was a bad link in the last Replay
http://tinyurl.com/5p86eq

The oil rampage continues

Retail sales up almost $4B this month! Don’t pay attention to the $48B in "stimulus checks" that were sent out though, or where that money ended up...

Unemployment biggest rise in over 20 years from 5 to 5.5% - in ONE month. This will ramp.

Oil has biggest one-day gain ever by jumping $5.50.

Oil has biggest one-day gain ever by jumping over $10 (the next flippin’ day!!!). Morgan Stanley analyst says $150 by 4th of July. These predictions are usually 12-18 months out – not 3 weeks.

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A picture that tells the story pretty well
http://tinyurl.com/5flymk

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Peoples equity in their homes dropped to 46.2% - the lowest level ever. That had never even went under 50% until a couple months ago, it’s dropping quick. Foreclosures come in at their highest rate ever as well.

Every article is quick to point out that oversupply is the problem (and that stopping foreclosures is then the answer) – how about QUIT BUILDING houses without buyers. That’s what builders do. You should be writing your reps (congress.org) reminding them that a tax break for builders adds to this problem.

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The monolines get downgraded. This is most certainly not priced in - this will cause serious problems! Meredith Whitney (the one analyst you can trust) expects another $40B in just bank write-downs due to this.

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Interest rates are spiking before Ben’s eyes. Here is the mortgage rates for the past 6 months. How those rate cuts working now. Imagine what happens now that he is going to have to raise rates??? EXACTLY what happens when you have to bail out Wall Street for being stupid. The fun is just beginning for Joe 6-pack. Ten year rates up to 4.2% - not gonna be pretty...
http://tinyurl.com/65hy6h

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Go look at my statements about who the next Investment Bank to go would be the day after Bear Stearns went down. These aren’t penny-stocks that are going away either…

Just look at the trend in their ratio of Non-Performing Assets (NPA) to Equity over the last couple years…
http://tinyurl.com/65hy6h

Erick provides the definition of NPA’s:

"A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset which is not producing income."

And they are buying back shares with all that "spare" money to try to stop the bleeding and make themselves look worthy of investment (foreign or otherwise). Problem is, you can’t buy back your own shares in the last 30 minutes of trading. Look at their chart at that time the last week...

Of course now they say they are raising another $6B in capital – best put:

"Lehman is raising capital it said it didn't need to replace losses it said it didn't have."

UPDATE: Stock now trading near $22 – why would the deal will go through at $28 now? Could see that Bear Stearns repeat quicker than you think unless something drastic happens very soon. Don’t you hate when “one-time isolated” events happen 3 months apart...

UPDATE part 2: Deal went through. Word on the street is they are being shopped somewhere in the teens....

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A Fed governor resigns (thankfully, he lived for bailouts and rate-cuts), another former one rips the system, the Mpls Fed president prepares the markets for rate increases. That one’s funny, as rates are increasing already. It’s becoming more and more clear that the Fed actually tries to give the illusion of control, but the market sets the rates, the Fed just follows. Never knew that before.

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Epic. That will describe the number of voters come November. Drove past the Excel before the Obama visit last night and the line was 3 deep for 20 blocks (1.6 miles). I talked to people near where I was going – they had about 15 blocks to go still – they had already been there for an hour and a half. My prediction is between now and November this race will turn into a landslide for Obama. (Then our taxes will go through the roof, ouch)

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A clip I found interesting because of the numbers in the section I highlighted:

Banks know that they are too big for the government to allow them to fail. The moral hazard that is created will be reflected in their continuing to take on high degrees of debt and financial leverage and invest in risky assets with no concern for the consequences. And much of the activity in the derivatives market is nothing more than mere speculation. When Bear Stearns was saved from bankruptcy it had $120 billion of debt outstanding, but for some crazy reason there were $2.8 trillion of credit derivative contracts written guaranteeing that small amount of Bear Stearns debt. If Bear had gone bankrupt and these counterparties had to actually pay, it would have caused massive bankruptcies of hedge funds and other financial institutions, not to mention the fact that Bear itself was also a counterparty to tens of trillions of derivative contracts and their prime brokerage business financed trillions more of derivative positions at their hedge fund clients.

Credit Default Swaps are a mess. There are now $45 Trillion of them. A nine-fold increase in THREE years. Triple the size of the US GDP. Yep, that’ll end well...

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California out of money by August? 8th largest world economy.
http://tinyurl.com/5tws6g

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Turns out it’s not even easy being less rich. Yep, it’s just subprime – everyone else is fine. Read this to forever extract that thought from your mind.
http://tinyurl.com/6s4l45

Oh, and as a refresher of what the resident “genius” Bernanke said last year:

"We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

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Think this will have repercussions across the economy?

General Motors Corp. on Tuesday reported a 27.5% drop in May U.S. light vehicle sales to 268,892 cars and trucks from 371,056 a year ago. Cars fell 13.8% while trucks plunged 36.9%.

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My favorite description of the balancing act between interest rates and the equity markets:

"Bernanke has a choice - he can allow the interest rate curve to ramp which will kill what's left of housing, or he can crash equities to drive the 10-year rate back down.

But he can't have it both ways, and that, for him, sucks.

He's trying to "manage" the process. That's kinda like trying to juggle plates - it looks really cool until a wasp flies up your pants and stings your wiener, at which point it all comes crashing down around you."

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Well First Federal's (FED) run from the $30’s is about to make it into single digits – let me know if you are looking for advice on an exit point for those who played the ba-bye game a few months back.

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Just paid $68 to fill up my tank. That was fun. Guess it could be worse if I didn’t get 24mpg though.

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Not sure how he gets this info before it hits the presses – but here is the May California foreclosure data and it’s UGLY.
http://tinyurl.com/4n3v9e

"California broke a major foreclosure record in May with $10.4 BILLION in loans going back to lender’s balance sheets. This was a near 9% increase month-over-month. Last month $9.237 Billion went back to the bank. See my April CA Foreclosure Report. It is obvious that the foreclosure crisis is continuing to worsen. If the banks are lucky and sell the homes for 60% of the new appraised value or BPO, this represents another $6 Billion+ in losses for the nations largest banks in one state for one month!"

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Want to hedge against the price of your house???
http://tinyurl.com/6gyo7u

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Again, what happened to all the rate cuts? This will soon blow in Ben’s face. Jumbo rates already blowing through their 5-year highs in this chart.
http://tinyurl.com/3dyztj

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When they say how great “pending home sales” are looking every month – this tells you why to not even bother listening.
http://tinyurl.com/6lfhur

2/3rds of the sales...ouch.


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Non-required:

Year over year chart of Case Shiller house prices
http://tinyurl.com/69mrz2


New home months of supply. Don't be alarmed, the blue section on the right is only a "probable" recession - they are still trying to figure out if we are in one. This chart wouldn't help them at all...
http://tinyurl.com/67awlc


Happy 1st birthday to the WaMu pool of loans. 31% is 60-day delinquent or worse. 23% foreclosed or bank-owned. 93% of it was rated AAA.
http://tinyurl.com/5kecyw


Just because it’s so funny to hear him completely rag on the idiocy that is our Fed (I don’t even bother to read the article, just his comments tell me enough).
http://tinyurl.com/3kgxgd


The sham that is government statistics. The GDP deflator.
http://tinyurl.com/5egpow


Over a million homes in foreclosure for the first time ever.
http://tinyurl.com/6hwchw


Another $20B comes off the banks non-borrowed reserves (column 3). You can still see the +43B that we were at every month before this started. How ugly is this?
http://tinyurl.com/2fykqe


The 5.5% unemployment really is 9.7% per the government numbers in this chart – which are of course still flawed...
http://tinyurl.com/6zou24


I think Mish is going easy on some of the predictions here – namely unemployment. Regardless, Paulson and Bernanke are publicly proving to be the buffoons we predicted long ago.
http://tinyurl.com/65zkw3


States fiscal years don't start until July 1 - they are still funneling money into the system until then. Funny how many different things are eating up the entire stimulus check - it did nothing.
http://tinyurl.com/5lsamu


What's scarier - the banks having to bring 5 TRILLION dollars back on to their balance sheets - or the fact that they were allowed to do something that INCREDIBLY stupid in the first place?
http://tinyurl.com/4xgqj3


Nobody has described the true situation of housing better than Mike Morgan (esp. Florida) - paints a VERY grim picture here based on that.
http://tinyurl.com/6oe7uj


Maybe wishful thinking on my part, but after reading this quote from John Hussman, and then seeing the article in the link below - might they do the right thing???

"As a side note, with all of that said, Senator Richard Shelby made an important observation last week that the Federal Reserve's intervention in the Bear Stearns' wipeout dangerously crossed the line from monetary policy to fiscal policy. I couldn't agree more. The Fed's actions in that case were outside of its mandate precisely because by taking Bear's assets into its own portfolio, the Fed effectively provided public funds to a private corporation without recourse if the collateral goes bad. Only Congress has that power. It was literally an illegal act, but it was also done so quickly that it was presented as an irreversible fait accompli. My impression is that there is less of a “Fed backstop” for other financial companies than investors believe, because the Fed is essentially on notice from Congress that the Bear deal went over the line."

http://tinyurl.com/6f4f93
Removing that "backstop" would force the hand of the IB's big time. I still say JPM and GS are "safe", the rest could go away (MS, MER, LEH...)


Another quote worth reading:
The downturn has sapped the morale of industry survivors, who often resort to gallows humor to describe the mood. "You want to know how morale is?" said a high-yield investor. "How should I know? Everone I could have asked is gone."


Just as gloomy as Mike Morgan, but not as recodnized of an "authority". 12 to 22 years until housing bottom...
http://tinyurl.com/5ab35z


Zilliow banned in AZ - oh no, information is evil.

"Relying on the experts is how many Realtors thrive, so tools that aim to level the disparity of knowledge are seen as bad; in this case, illegal."

Piss off.
http://tinyurl.com/6ow2aa