KeNo's Housing and Economic Portal: Sunday August 30 Housing and Economic stories

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RBS uber-bear issues fresh alert on global stock markets - (www.telegraph.co.uk) Three-month slide could hit record lows, Royal Bank of Scotland chief credit strategist Bob Janjuah predicts. Britain's Uber-bear is growling again. After predicting a torrid "relief rally" over the early summer, Bob Janjuah at Royal Bank of Scotland is advising clients to take profits in global equity and commodity markets and prepare for another storm as winter nears. "We are now in the middle of a parabolic spike up," he said in his latest confidential note to clients. "I expect this risk rally to continue into – and maybe through – a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets." The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a "surge higher" in these gauges can justify current asset prices. Results that are merely "less bad" will not suffice. He expects global stock markets to test their March lows, and probably worse. The slide could last three months. "A move to new lows is highly likely," he said. Mr Janjuah, RBS's chief credit strategist, has a loyal following in the City. He was one of the very few analysts to speak out early about the dangerous excesses of the credit bubble. He then made waves in the summer of 2008 by issuing a global crash alert, giving warning that a "very nasty period is soon to be upon us" as – indeed it was. Lehman Brothers and AIG imploded weeks later. This time he expects the S&P 500 index of US equities to reach the "mid 500s", almost halving from current levels near 1000. Such a fall would take London's FTSE 100 to around 2,500. The iTraxx Crossover index measuring spreads on low-grade European debt will double to 1250. Mr Janjuah advises investors to seek safety in 10-year German bonds in late August or early September. While media headlines have played up the short-term bounce of corporate earnings, Mr Janjuah said this is a statistical illusion. Profits were in reality down 20pc in the second quarter from the year before. They cannot rise much as the West slowly purges debt and adjusts to record over-capacity. "Investors are again being sucked back into the game where 'markets make opinions', where 'excess liquidity' is the driving investment rationale. "The last two Augusts proved to be pivotal turning points: August 2007 being the proverbial 'head-fake' when everyone wanted to believe that policy-makers had seen off the credit disaster at the pass, and August 2008 being the calm before the utter collapse of Sept/Oct/Nov… 3rd time lucky anyone?" The elephant in the room is the spiralling public debt as private losses are shifted on to the taxpayer, especially in Britain and America. "Ask yourself this: who bails out Government after they have bailed out everyone?" Mr Janjuah said governments might put off the day of reckoning into the middle of next year if they resort to another shot of stimulus, but that would store yet further problems. "If what I fear plays out then I will have to concede that the lunatics who ran the asylum pretty much into the ground last year are back in control." Over at Morgan Stanley, equity guru Teun Draaisma thinks we are through the worst. "We were on course for a Great Depression in February, but Armageddon was avoided. Governments did not repeat the policy errors of the 1930s." "We have seen the lows of this crisis. This is a genuine rebound rally, and it has been short by historical standards so far," he said. Mr Draaisma, who called the top of the bull market almost to the day in mid-2007, has crunched the worldwide data on 19 major stock market crashes over the last century. They show that the typical rebound rally (as opposed to bear trap rallies, when markets later plunge to new lows) lasts 17 months and stocks rise 71pc. The 1993 rally in the US was 170pc over 13 months. Finland's rally in 1994 was 295pc. Hong Kong rallied 159pc in 2000. This rebound is only five months old. The key indexes have risen 49pc in the US and 42pc in Europe. Mr Draaisma advises clients to stay in the stocks for now, but stick to telecom companies, utilities, and oil. Yet he too expects a nasty correction once this rally falters. The usual trigger at this stage of the cycle is when central bankers start to make hawkish noises, typically a couple of months before the first turn of the screw (normally a rate rise, but in this case an end to "quantitative easing". "As long as policy-makers are talking about how fragile the recovery is, equities are unlikely to go down much." This moment can be hard to judge. There has already been rumbling from some governors at the US Federal Reserve and from the European Central Bank's Jean-Claude Trichet. Markets are pricing in rates rises by early next year. The pattern after major financial bust-ups is that the rebound rally gives way to another fall of 25pc or so, lasting a year, followed by five years of hard slog as stocks bounce up and down in a trading range, going nowhere. Mr Draaisma suggests taking a close look at the chart of Japan's Nikkei index from 1991 to 1999. Gains were zero. We are in uncharted waters, however. Monetary and fiscal stimulus has been unprecedented. Russell Napier at Hong Kong brokers CLSA says a powerful bull market is already taking shape as the American giant reawakens. Perma-bears will be left behind. He said: "It is dangerous to be in cash." When the finest minds in the business disagree so starkly, the rest of us can only shake our heads in confusion.

More than half of Sacramento-area mortages under water - (www.sacbee.com) Santa Ana-based First American CoreLogic just minutes ago released a grim look at the mortgage crisis, reporting that 32.2 percent of all U.S. mortgages were tied to homes worth less than the amount of their loans. In California, it says, 42 percent of mortgages are in that condition often referred to as "under water." The report says 2.9 million California mortgages are in a state of negative equity and 3.1 million more are nearing it as the housing crisis persists and the economy worsens. Nationally, 15.2 million mortgages tied to $3.4 trillion worth of residential property are in a negative equity position, and consequently in some danger of foreclosure, says First American. The firm didn't immediately have a Sacramento-area breakdown, but in the past has said that more than one-third of the region's mortgages were in that condition. We have an email into the firm to try and get the regional picture. "Negative equity continues to be the dominant driver of the mortgage market because it leads to foreclosures in the event a borrower experiences some kind of economic shock such as a job loss, illness or other adverse situation. Given that negative equity did not increase this quarter and home prices declines are moderating or flattening, we may be at the peak of the negative equity cycle. However, until negative equity recedes and unemployment declines, mortgage risk will continue to be very elevated," said Mark Fleming, chief economist for First American CoreLogic.

Commercial real estate suffering - (www.modbee.com) Even as the housing market starts to show signs of recovery, fortunes for commercial real estate are looking increasingly grim, and that could spell trouble for the fragile U.S. banking sector. The weak economy and rising unemployment have forced businesses to cut back on rental space, resulting in declining revenue for many landlords. Tighter underwriting standards and falling real estate values have made it much harder for them to refinance, too. The rate at which property owners are defaulting on loans is climbing at an unparalleled pace. Many banks are stuck with malls, hotels and office buildings they've repossessed and can't sell. Scores of banks have been closed this year, many of them, including Horizon Bank in Pine City, Minn., and Omni National in Atlanta, because of sour commercial loans. "The bottom line: Defaults are exploding," said Richard Parkus, an analyst with Deutsche Bank. "It's terrible. It's going to be worse than in the early '90s." The delinquency rate on commercial property loans pooled together into investments, estimated at $750 billion, hit nearly 3 percent in the second quarter, nearly tripling from where it was at the end of last year, according to Reis Inc. "We haven't seen the end of these delinquencies and defaults," said Edward Leamer, a senior economist at UCLA. The commercial real estate market in the Northern San Joaquin Valley is struggling, too. Area experts say a large number of Stanislaus County office buildings are empty and likely to stay that way for a while because the ranks of office workers have shrunk. The residential housing market crash contributed to a dramatic decline in office workers. Space once filled with mortgage brokers, title insurance officers, real estate agents, developers, engineers, architects and planners is empty or occupied by smaller staffs. From the bankruptcies of large retailers such as Gottschalks and Mervyn's to closures of mom-and-pop restaurants and shops, scores of business failures have created vacancies of all sizes in every city. Even the most desirable commercial areas have empty buildings and storefronts. As the real estate market declined and prompted more office vacancies, the fallout from the downturn spread to other businesses and the unemployment rate soared to levels not recorded in more than a decade. The housing market has shown signs of stabilizing, but unemployment continues to plague the region's economy. In all, there is about $3.5 trillion worth of commercial real estate loans held by banks, or tied up in commercial mortgage-backed securities or held by other institutions.

Foreclosures hitting hard in Kona, Hawaii - (www.honoluluadvertiser.com) The Big Island represents two ends of the spectrum in the ongoing flurry of foreclosures.While Kona leads the state in homeowners who decide to cut the strings to their property, Hilo is near the bottom of the scale. That's because many of the homes in foreclosure are investment properties and second homes, said Jackie Parkinson, executive director of the Hawaii Island Board of Realtors. 'That's what's hitting Kona so hard," Parkinson said. "People are just walking away." Kailua, Kona had 78 foreclosure filings in July, which represents one home out of every 200, according to the Mainland-based research firm RealtyTrac. Waikoloa had 23 filings — or one out of 125 homes — and the Waimea-North Kohala area had 16 filings, which represents one out of 286 homes. Not to say East Hawai'i is without difficulties. Puna and Ocean View have significant foreclosure rates, mostly investment homes, Parkinson said. Puna and portions of Ka'u east of Pahala had 21 foreclosure filings in July, which represents one filing for every 264 homes. Besides investments and second homes, other dwellings that are in trouble are primary homes that the owners bought or refinanced in the past couple of years, Parkinson said. That's where the Big Island's 11.5 percent unemployment rate may be coming most into play, as residents struggle to make their house payments, buy gas and put food on the table. Hilo had 34 foreclosure filings in July — one out of every 613 homes.

City budget could doom iconic Petaluma Veterans Day parade: Story shows all he subsidies going to various groups – (www.pressdemocrat.com) Petaluma’s shrinking budget could soon claim another victim — the city’s annual parade honoring military veterans. City officials say they can no longer afford police overtime and other expenses connected to the Nov. 11 event and have asked a veterans group to pick up the tab. But officials at American Legion Post No. 28 say they can’t cover it, either, in part because the city has stopped its subsidies to the organization. Steve Kemmerle, post commander, said unless a private donor comes forward with $12,500, the Veterans Day parade likely will be canceled. “If we can’t pay the city we can’t have a parade,” said Kemmerle, a Vietnam-era veteran. “It’s that simple.” The change comes as cities all over Sonoma County slash budgets to make up for dwindling tax revenue. In the fiscal year that began July 1, Petaluma laid off 10 employees and eliminated services to balance a $36 million general fund budget that was about 10 percent smaller than last year’s spending plan. With its reserves gone, the city will need to be reimbursed for any additional expenses, including police and Public Works employee support at the parades, City Manager John Brown said. According to a city memo, the cost for six officers, a sergeant and other police services to handle the parade that draws up to 7,000 people would be nearly $5,000. Barricade and sign installation plus other security would be an additional $7,500. Brown suggested the vets adopt a shorter parade route to reduce costs or start fund-raising. “This is money we really don’t have,” Brown said. “We have to ask people to offset these costs.” Other cities in Sonoma County seek reimbursement for similarly sized parades. Santa Rosa sends a bill to organizers of the Rose Parade and Sebastopol passes along costs to Apple Blossom officials. However, the cities also provide the groups with annual subsidies that cover the events. Petaluma doesn’t give the American Legion any money. The group has in the past received a small share of hotel occupancy taxes. This year, the city expects to divide about $180,000 in hotel taxes between organizers of the Butter & Eggs Day parade, hosts of a popular 1950s cruise event and the visitors center, City Councilman David Glass said. With a smaller pot available this year, the city allocated the money where it would get the best return, Glass said. “They are part of the fabric of this community and are part of what generates revenue,” Glass said. “It doesn’t mean they are more worthy of support. I have to look at this in a cold-hearted way.” Veterans said they were getting short shrift. Rich Granger, commander of the Veterans of Foreign Wars in Petaluma, said many of his 250 members risked their lives for the country and “shouldn’t have to pay for a parade to themselves.” “It’s a sad state of affairs we’re in when the veterans can be chopped,” said Granger, a Vietnam veteran. “It cuts deep.” Kemmerle, whose group has run the parade since 1989, said the American Legion shouldn’t be asked to draw down its small bank account to pay the city. Many of its 280 members are World War II veterans who are too old for fund-raising. “People are dying,” Kemmerle said. “We’re getting smaller.” If the city insists on being reimbursed, the parade featuring 900 participants and airplane flyovers could come to an end. “Patriotism isn’t what it used to be,” he said.

Reader's Digest Plans for Prearranged Chapter 11 - (www.cnbc.com) Another private equity deal that has gone bad, with the company leveraged to the hilt with debt. Reader's Digest Association, publisher of the widely-read Reader's Digest magazine, said Monday it would likely file for Chapter 11 bankruptcy for its U.S. businesses to cut its debt load. The media company, known worldwide for its family-friendly namesake magazine, been trying to slash costs and boost growth since it was taken private in 2007 by an investor group led by Ripplewood Holdings. The bankruptcy would take the form of a so-called pre-arranged filing, Reader's Digest said in a statement. A pre-arranged filing comes after a company has already reached deals with its lenders to cut its debt. The Chapter 11 filing will apply only to the company's U.S. businesses. Its operations in Canada, Latin America, Europe, Africa, Asia and Australia-New Zealand will not be affected. "Restructuring our debt will enable us to have the financial flexibility to move ahead with our growth and transformational initiatives," said President and Chief Executive Officer Mary Berner, in a statement. Reader's Digest calls itself the the world's largest paid-circulation magazine in the world. The Pleasantville, N.Y., media company said the bankruptcy would help facilitate an agreement with lenders to exchange a portion of its $1.6 billion in senior secured debt for equity, and transfer company ownership to the lender group.