Saturday May 23 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Ford Shares Plunge, While GM Hits 76-Year Low - (www.cnbc.com) Investors dumped shares of both Ford Motor and General Motors on Tuesday, with GM hitting its lowest level since the Great Depression. Ford Motor dropped almost 9 percent a day after disclosing a public offering of 300 million shares of common stock that will help it fund its health care trust for retired autoworkers and their families. Meanwhile, shares of General Motors plunged nearly 20 percent to a 76-year low a day after a group of GM executives disclosed they had sold shares in the struggling automaker. Ford , the only major U.S. automaker that has not accepted government aid, said late Monday it will use the proceeds of the offering for "general corporate purposes" including funding its Voluntary Employee Beneficiary Association, or VEBA, with cash instead of stock. Dearborn, Mich.-based Ford owes $6.3 billion to its VEBA by the end of this year. In March, United Auto Workers members approved a new contract that, besides freezing wages and cutting benefits, allows Ford to use stock to make payments to the retiree health care trust. The public offering of common stock is a first for the 105-year-old Ford, which went public when the Ford Foundation liquidated its shares of the company in 1956. Since then, the number of shares has multiplied with employee stock options, stock splits and preferred stock offerings. Shares of Ford have enjoyed a strong rally in recent months, with some investors saying it is well-positioned to recover once the vehicle market improves. The company has also been picking up market share amid deeper problems at its crosstown competitors, Chrysler and General Motors. Chrysler filed for bankruptcy protection earlier this month, while GM is working to restructure out of court but may also face bankruptcy. The companies have received billions in government loans, which Ford has not asked for.

GM Executives Dump Stock - (www.cnbc.com) It's kind of like watching a car crash. You know it's sad. You know it's awful. But you can't stop looking at it. I'm not trying to be trivial about the plunge in GM shares this week. While it should not come as a surprise to anyone, it is still tough to see shares of the automaker slide to their lowest price since April of 1933. No wonder six GM executives have cashed out of their GM holdings. The six executives: Bob Lutz, Vice Chairman; Thomas Stephens, Vice Chairman; Ralph Szygenda, CIO; Troy Clarke, President; Gary Cowger, Group Vice-President; Carl-Peter Forster, GM Europe; I can't blame any of them for cashing out before GM shares drop any further. Whatever gains they made from their holdings are a small percentage of what their investment once represented.

Many GM, Chrysler Dealerships Are Facing Disaster - (www.cnbc.com) For months we've all heard the warnings. If GM and Chrysler go bankrupt it will trigger a host of other bankruptcies from suppliers to dealers. So far, Chrysler has not dragged the supplier base down and I think the Treasury Department's supplier support program should keep most of "at-risk" companies from sliding into Chapter 11. The same cannot be said for dealerships. This week, Chrysler and GM will notify about 3,400 dealerships they are being dropped. For some dealers it will mean closing distribution points while keeping another store or stores that sell Chevy, GMC, Chrysler, Jeep, etc. Those guys will survive being dropped. Their bottom line will take a hit, but they should have the resources to weather this storm. On top of that, their remaining dealer points should strengthen with less competition cannibalizing profits. The dealers who are worried, and for good reason, are those who will be completely dropped by GM and Chrysler. That in itself will mean a loss of revenue, access to captive financing, and marketing support that could push those dealers to the brink of bankruptcy. What could push many over the edge is the inability to service their debt payments. For them, this economic storm will turn into disaster if they can't pay loans they've taken out for their dealerships. This is the part of the dealer story that hasn't received much attention. Those close to the industry estimate up to 20 percent of the dealers are over-leveraged. They've borrowed heavily over the years to expand their businesses.

Enjoy the rally while it lasts - but expect to take a sucker punch - (www.telegraph.co.uk) Our delicious spring rally is nearing the limits. The 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money. Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July. Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker. James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel, suspecting that we really are on the cusp of new boom. That is a tell-tale sign. "Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again," he said. Genuine bottoms tend to be "quiet affairs", carved slowly in a fog of investor gloom. Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc. Teun Draaisma, Morgan Stanley's stock guru, expects another shake-out. "We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We're not convinced the banking system has been fully fixed," he said. Mr Draaisma said US housing busts typically last nearly about 42 months. We are just 26 months into this one. The overhang of unsold properties on the US market is still near a record 11 months. He expects the new bull market to kick off later this year – perhaps in October – anticipating real recovery in 2010. Keep an eye on the upward creep in yields on the 10-year US Treasury, the benchmark price of world credit. This alone threatens to short-circuit the rally. The yield reached 3.3pc last week, up over 1pc since January and above the level in March when the US Federal Reserve first launched its buying blitz to pull rates down. Bond vigilantes are taunting the Bank of England in much the same way, driving the 10-year gilt yield to 3.73pc.

Economic downturn deepens in Baltics - (www.ft.com) Latvia’s economy shrunk by 18 per cent year on year in the first quarter – and by a staggering 28.7 per cent compared to the previous quarter – showing how the worst recession in the European Union is continuing to deepen. The once booming Baltic states of Latvia, Lithuania and Estonia have gone into reverse gear over the past year after foreign banks stopped funding an unsustainable consumer and real estate boom. Lithuania’s economy contracted by 12.6 per cent in the first quarter and Estonia is expected to announce on Wednesday that its gross domestic product plunged by between 14 per cent and 16 per cent. The Baltic states’ fall in output now looks likely to be worse than even during their rocky transition from the Soviet planned economy in the early 1990s. The decline has been worsened by the Baltic governments’ refusal to devalue their fixed exchange rates, forcing them to depress domestic demand to prevent a balance of payments crisis. At the end of last year Latvia – once the fastest growing economy in the EU – was forced to agree a €7.5bn IMF stabilisation plan to defend its currency peg; Lithuania is widely expected to follow it in the next few months. However, Latvia is struggling to keep its budget deficit to the level of 5 per cent of GDP agreed with the IMF because of the severity of the downturn, and doubts are growing that it will be able to stabilise its economy without devaluing its currency. All three Baltic countries are now being forced to make round after round of expenditure cuts as tax revenues collapse, depressing their economies even further and sparking political protests. Demonstrations in January helped to bring down Latvia’s unpopular government after one round of IMF-approved budget cuts. The new government now plans to make another austerity package next month to cut public spending by 40 per cent but even this will only bring the budget deficit down to 7 per cent of GDP. The IMF has halted disbursement of €200m in loans to Latvia until it sees more progress in cutting public spending, a move that also blocks euro1bn in EU assistance due to be paid out next month. The IMF is widely expected to agree to the higher deficit target and to disburse the second loan tranche. Otherwise it risks the collapse of the stabilisation plan, which could spark a chain reaction of devaluations throughout the Baltic states and beyond.

Behind the Bank Equity Blitz - (www.businessweek.com) Do bank stress tests and the latest round of capital-raising mean it's finally safe to invest in financial stocks? The last week has been a Rorschach test for investors. Bearish investors question the assumptions and results of government-conducted stress tests, which required top U.S. banks to raise billions in new capital. Bullish investors cite realistic hopes that this round of capital-raising could signal an end to the financial crisis. At first the bulls seemed to win the day, with financial stocks helping to lead the market higher last week. Then, on May 11, bank stocks gave up some of their gains. So is it really, finally, safe to invest in financial stocks? There's no doubt that something has changed. In just a few days, institutions from U.S. Bancorp (USB) and Wells Fargo (WFC) to Keycorp (KEY) and Capital One Financial (COF) have been able to raise billions—not from the government but from private investors. A long crisis of investor confidence appears to have ended, at least temporarily, from a combination of stress test results, a stabilizing financial and economic situation, and the passage of time. "It's showing investors are regaining some confidence in the banks," says Mark Batty, an equity analyst at PNC Capital Advisors (PNC). "That's a positive for the system overall." Still, bank stocks retreated on May 11 after a strong rally in the past two months that saw many financial equities double in price. Batty thinks an oversupply of new shares on the market may be to blame. Indeed, banks are offering equity shares not just because they were required to do so (by the results of government stress tests), but because they want to.

NYC subway, bus fares to go up on June 28 - (finance.yahoo.com) Mark your calendars: The price of a single bus or subway ride in New York City goes up by a quarter on June 28 to $2.25. Fares for the Long Island Rail Road and Metro-North Railroad will increase by about 10 percent on June 17. And tolls on the Metropolitan Transportation Authority bridges and tunnels will rise on July 12. The MTA board authorized the fare and toll hikes Monday after the state Legislature passed a rescue package last week that included higher fees and a payroll tax for employers in New York City and seven surrounding counties.

Negative Repo Rates Revive ‘Specials’ Trading, Barclays Says - (www.bloomberg.com) The emergence of sub-zero rates in the $7 trillion-a-day market to borrow and lend government debt since a new penalty system began has revived trading in the most sought-after Treasuries, according to Barclays Capital Inc. U.S. securities in scarce supply were traditionally traded in the repurchase market at so-called special rates, below the general charge that’s typically close to the federal funds rate. After the Federal Reserve cut its target rate to a range of zero to 0.25 percent in December, there was little room for specials. A new penalty on failed trades changed that by generating negative-rate trading, Barclays said. “Before the fails fee, when an issue became scarce, dealers would simply back away from the market and fail to make delivery, as repo rates couldn’t go below zero percent,” said Joseph Abate, a money-market strategist in New York at Barclays, in an interview. The firm is one of the 16 primary dealers that trade with the Fed. “Zero was not a market-clearing rate.” A negative repo rate means investors who lend cash in exchange for obtaining Treasuries as collateral pay interest instead of receiving it on the money they loan. It is currently a more appealing option that paying the 3 percent failed-trade penalty. In a repurchase agreement, one party provides securities as collateral to another in exchange for cash. When a security is not delivered as promised, the uncompleted trade is called a fail.

Schwarzenegger Tells Lawmakers Deficit May Swell to $21 Billion - (www.bloomberg.com) California’s budget deficit has grown so severe that Governor Arnold Schwarzenegger said he may be forced to release 40,000 prisoners or lay off 51,000 teachers if voters next week reject three budget balancing measures. The state’s projected deficit will swell to $15 billion between now and June 2010, Schwarzenegger told lawmakers late yesterday. Half the gap falls in the current fiscal year that ends in seven weeks. If voters reject plans to sell bonds backed by lottery profits and siphon tax receipts from tobacco and high earners already dedicated to special programs then the deficit would expand by another $6 billion. The ballooning deficit comes three months after lawmakers passed a package of spending cuts and tax increases to fill a record $42 billion shortfall and end a cash shortage that prompted officials to prepare to issue IOUs for the first time since the Great Depression. In the intervening months, tax revenue declined further along with the state’s economy. “The severe economic downturn that California, like the rest of the nation, has been facing has worsened substantially,” Schwarzenegger said in a letter to lawmakers. “These changes in the state’s economic and revenue pictures have caused a significant new budget problem to emerge.”

Far From Over - (www.nytimes.com) It’s a measure of just how terrible the economy has become that a loss of more than a half-million jobs in just one month can be widely seen as a good sign. The house is still burning down, but not quite as fast. I can understand why people are relieved that we no longer seem to be hurtling toward a depression, but beyond that I see very little to be happy about. The economy is in shambles. Nearly 540,000 jobs were lost in April, a horrifying number. The unemployment rate rose to 8.9 percent. Even the most optimistic observers expect the job losses to continue, although, hopefully, at a slower pace. The unemployment rate is expected to keep on climbing, like some monster from the movies, toward double digits. We are stuck in what is — or will soon be — the worst economic downturn since the 1930s. Newspapers and the U.S. auto industry are on life support. The employment picture for even the most well-educated Americans — men and women with four-year college degrees or higher — is the worst on record. If there is something about this economy to be cheerful about — something real — I wish someone would let me know. Poverty and homelessness are increasing and, as Lawrence Mishel, the president of the Economic Policy Institute, said during an interview this week, “There are a whole lot of people who are going to be economically desperate for many years.” Joblessness is like a cancer in the society. The last thing in the world that you want is for it to metastasize. And that’s what’s happening now. Don’t tell me about the stock market. Don’t tell me about the banks and their perpetual flimflammery. Tell me whether poor and middle-income families can find work. If they can’t, the country’s in trouble. One reason the employment losses slowed somewhat in April was that the government added 72,000 jobs, most of them temporary hires as part of the preparation for the 2010 Census. The private sector dumped 611,000 jobs. Moreover, the Labor Department revised the job losses for March upward, from 663,000 to 699,000, and for February, from 651,000 to 681,000. Some 5.7 million jobs have been lost since the start of the recession in December 2007.

Banks Brace for Credit Card Write-Offs - (www.nytimes.com) It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead. The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs. Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.” In the meantime, he said, “I’m just doing what I can.” Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust. The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called an adverse economic situation.




OTHER STORIES:

Krugman fears lost decade for US due to half-steps - (www.reuters.com)
Banks Won Concessions on Tests - (online.wsj.com)
Snipping Credit Lines for Small Businesses - (www.businessweek.com)
Still Feeling Stressed - (www.nytimes.com)
California could be broke by July, state official warns - (www.latimes.com)

Gold Rises in London as Weaker Dollar, Higher Oil Spur Demand - (www.bloomberg.com)
U.S. Treasuries Decline as Data Show Recession May Be Easing - (www.bloomberg.com)
Crude Trades Above $60 on Speculation Recovery May Spur Demand - (www.bloomberg.com)
Copper, Pound Increase; Europe Stocks, U.S. Futures Pare Gains - (www.bloomberg.com)
U.S. Stock-Index Futures Rise as Citigroup Gains, Oil Hits $60 - (www.bloomberg.com)
Bank Stock Sales Add Billions in New Capital - (www.washingtonpost.com)

Indian Output Declines by Most in 16 Years Amid Slump - (www.bloomberg.com)
China’s Investment Surges 30.5%; Exports Decline - (www.bloomberg.com)
EU Bank Regulators to Conduct Confidential Stress Tests of Risk - (www.bloomberg.com)
China April Iron Ore Imports Rise 33% to Record Level - (www.bloomberg.com)
Mexico Debt Rating Outlook Cut to Negative by S&P - (www.bloomberg.com)
Russia Stockpiles the Gems, Awaiting the Return of Demand - (www.nytimes.com)
Trade Deficit in U.S. Widens for First Time in Eight Months - (www.bloomberg.com)

Despite Stimulus Funds, States to Cut More Jobs - (www.washingtonpost.com)
Economists Downgrade U.S. Recovery Outlook, Survey Indicates - (www.bloomberg.com)

Prices Fall To Match A New Frugality - (www.washingtonpost.com)
Citigroup: TARP loans near $45 billion mark - (news.yahoo.com/s/ap)
Bank of America Said to Sell $7.3 Billion CCB Stake - (www.bloomberg.com)
Dollar Rally Will End, Rogers Says; May Short Stocks - (www.bloomberg.com)
Swine Flu Is as Severe as 1957 Pandemic, Study Shows - (www.bloomberg.com)