KeNo's Housing and Economic Portal: Tuesday December 8 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Don't say we didn't warn you this time -- a new crash is dead ahead - (www.marketwatch.com) Here is what's happening: History is repeating itself. Wall Street's soul-sickness is setting up a new meltdown. Dead ahead. Be prepared. Economy is back on track: Stronger retail sales and other indicators suggest the U.S. economy is back on track for moderate growth with low inflation. My track record speaks for itself. Back on March 20, 2000, my column headline read: "Next crash? Sorry, you'll never hear it coming." Bull's eye: The dot-com bubble popped at 11,722. The economy collapsed. A 30-month recession. Markets lost $8 trillion. Today the market is still below that 2000 peak. Factor in inflation and Wall Street's "too-greedy-too-fail" banks have lost about 30% of your retirement nest eggs in this decade. Incompetent? Clueless? No, Wall Street is a bunch of crooks without consciences. Since 2000, my columns have covered many warnings of major debt accumulation, market meltdowns, and the psychological failings of Wall Street's greedy, myopic brains. Last June we summarized 20 predictions made between 2000 and 2007 warning of a subprime meltdown coming. Oddly, no one seemed to be listening to all the warnings from leading minds like Buffett, Grantham, Gross, Faber, Shilling, Roubini, Fed governors, and many more. Was that a repeat of 2000 with no one listening? Suddenly it hit me: It's just the opposite: Everyone is listening and everybody knew a crash was coming -- but we were in a trance, including Washington's bosses. Bernanke, Bush, Paulson, Greenspan all heard it. So did Wall Street, and Main Street. Unfortunately America's collective brain was addicted to the adrenaline rush of gambling in a risky bull. The euphoria is intoxicating. We were caught up in a game of musical chairs, squeezing out every last dollar of return, blind to the catastrophe ahead until caught by surprise. Unfortunately, Wall Street lacked a moral compass and stole trillions from American taxpayers. Today, the only lesson Wall Street has learned is "greed is good." Now the beginning of the end has become a moral tragedy that is setting the stage for an implosion of Wall Street, capitalism and our economy circa 2012. Everyone's still listening, still in a trance Yes, another meltdown is coming; it's inevitable. This time, I've decided to do more periodic updates -- a watch list of alerts, warnings and predictions. Just like the updates done for over a decade, except this time we're more aware that few in power will listen, not Wall Street, not Washington, not Corporate America. But you must. Recently a bright idea came to me: a new way to present these predictions. My wife was working all day at a hospital in Templeton, Calif., so I parked myself in the Café Vio in nearby Paso Robles, with two huge briefcases of research files on bubbles, debt, derivatives, behavioral economics and lots more. While trying to make sense of the materials, the headlines themselves started telling a fascinating story. Here's an edited montage of their staccato warnings. Read fast and "feel" the message:

Bailout program could be extended - (www.washingtonpost.com) The Obama administration is poised to extend the life of the highly unpopular $700 billion financial bailout and, to display a commitment to fiscal responsibility, is planning to use much of the leftover funds to reduce the national debt, government sources said. Administration officials are grappling with how best to announce the extension of the Troubled Assets Relief Program at a time when the economy is struggling and the unemployment rate is at its highest point in 26 years. The officials are hoping that by putting roughly $200 billion toward paying down the $12 trillion national debt, they could mitigate the political fallout, the sources said. No final decision about the fate of the bailout has been made, and officials are keenly aware that their preferred course contains risks. Officials worry that lawmakers, seeking to fund their own projects, may try to tap any large sum of unused money set aside for debt reduction, the sources said, speaking on condition of anonymity because the internal deliberations were private. Congressional Democrats are already eyeing the unexpended bailout cash as a source of funding for new efforts to combat soaring unemployment. Rep. John B. Larson (D-Conn.), chairman of the House Democratic Caucus, said lawmakers could send an important message about their priorities by taking money from the financial bailout program and redirecting it to pay for road and bridge projects and other measures meant to create jobs. "We want to look at how Wall Street can refund Main Street," Larson said. He added that he and a number of other senior House Democrats are also considering a new tax on financial transactions. Meanwhile, some lawmakers warn that the administration must do even more to cut the deficit. Sen. John Thune (R-S.D.) introduced a bill this week that would end the bailout program. He said he aims to keep it from turning into what he called "a political slush fund." Billions available: About $139 billion in original TARP funds remain unallocated and available to the Treasury Department. Banks have returned about $71 billion the government gave them and paid another $10 billion in interest and dividends to the Treasury. Under the law enacted last year, Treasury Secretary Timothy F. Geithner need only notify Congress if he wants to extend the program until October, the two-year anniversary of the bailout bill.

Bond Yields Turn Against Cash-Rich Life Insurers - (online.wsj.com) Life insurers have poured tens of billions of dollars into the corporate-bond market this year, whittling down stockpiles of cash they built up during the financial crisis last year. Now, with many bond prices up by double-digit percentages, insurers are finding it harder to put money to work, according to data and interviews with insurance executives and analysts. Though insurers continue to buy bonds, the rally does "make it challenging in terms of getting yield," Steven Kandarian, chief investment officer at MetLife Inc., told analysts in an Oct. 30 earnings call. Life insurers have long been one of the nation's biggest bond buyers, currently holding about $1.78 trillion in corporate debt, or 16% of the total outstanding, according to industry group American Council of Life Insurers. Their frustrations in finding investment opportunities signal how far and fast the bond market has recovered from the dark days when markets were frozen and insurers were diverting almost all incoming premiums and investment income into cash accounts. Buying by insurance companies likely was one of the reasons behind the market rally, so any slowdown in their purchases could stall market momentum, especially since companies are taking advantage of the healthy market by issuing record amounts of debt. Some insurers worry that yields—which move in the opposite direction of price—have dropped so sharply that buyers could get burned if interest rates edge higher. So far this year through Tuesday, the BofA Merrill Lynch US Corporate Index of investment-grade bonds is up about 20%. The gap between the index's yield and that of Treasurys has narrowed to 2.2 percentage points from 6.6 points late last year, and the effective yield now stands at 4.7%, down from 7.8% at Dec. 31. Meanwhile, in the government-agency residential-mortgage-bond area, once a haven for life insurers, executives say competition from the Federal Reserve for Fannie Mae and Freddie Mac home-mortgage bonds has made those bonds expensive. The issue came up in a Nov. 5 earnings call for Protective Life Corp., based in Birmingham, Ala. Several analysts pressed for details about the deployment of what Chief Executive John Johns called "a considerable amount of excess liquidity in our investment portfolio, in excess of $1 billion."

FHA, Prime Mortgage Defaults at Record Highs on U.S. Job Losses - (www.bloomberg.com) Foreclosures on prime mortgages and home loans insured by the Federal Housing Administration rose to three-decade highs in the third quarter, driven by the biggest job losses since the Great Depression. One out of every six FHA mortgages was late by at least one payment and 3.32 percent were in foreclosure, the highest for both since at least 1979, the Mortgage Bankers Association said today. The delinquency rate for prime fixed-rate mortgages, considered home loans with the least risk, rose to 5.8 percent and the foreclosure inventory rose to 1.95 percent, the highest since at least 1972. Homeowners are falling behind on their mortgages as the U.S. has lost more than 7 million jobs since December 2007, driving the unemployment rate to 10.2 percent in October, the highest since 1983. Declining home prices in most markets also are preventing many owners from selling their properties, said Jay Brinkmann, the Washington-based trade group’s chief economist. “If you don’t have a job, you can’t pay a mortgage,” Brinkmann said in an interview. “You don’t pay a mortgage with economic output, you pay a mortgage with a paycheck.” The share of all types of mortgages with one or more payments overdue climbed to a record seasonally adjusted 9.64 percent in the third quarter. The foreclosure inventory increased to 4.47 percent from 4.3 percent. Both were the highest in 37 years of data.

Fear of Double Dip in Housing - (online.wsj.com) The U.S. housing market is sputtering again, adding to doubts about the vigor of the economic recovery. Just a few months after housing showed signs of leveling off, bad weather and uncertainty over the extension of a home-buyer tax credit sent new-home starts in October tumbling 10.6% from the previous month. They fell to the lowest level since April, the Commerce Department said Wednesday. Starts of single-family houses fell 6.8%. Industry consultant John Burns talks to reporter Nick Timiraos about where the market is headed and the significance of low mortgage rates, the home buyer tax credit and the FHA, which he calls the "new subprime." Earlier this month, Congress expanded the tax credit and extended it through April, so building should improve. Still, the latest data portend poorly for the economy overall, and for fourth-quarter growth. On Wednesday Pulte Homes Inc., the nation's largest home builder, warned investors of a grim outlook. "As we look out to 2010, we are expecting difficult conditions to continue," said chief executive Richard Dugas. Meanwhile, more Americans who bought homes during the boom are falling into mortgage limbo. About 3.4% of U.S. households -- or about 1.9 million homeowners -- are 120 days or more overdue on their payments, but not yet in foreclosure, according to LPS Applied Analytics, a research firm in Denver. That is up from 1.5% a year earlier. Many of these people are likely to lose their homes over the next few years. That means more bank-owned homes will hit a market already suffering from oversupply. The housing-supply picture is tricky to read. The number of homes listed for sale was 3.63 million in September, down 15% from a year earlier, according to the National Association of Realtors. That is enough to last about eight months at the current rate of sales. Anything above about six months is considered a buyer's market, in which prices may come under downward pressure. But those numbers don't reflect the millions of homes expected to go through foreclosure over the next few years, adding to supply. Amherst Securities Group in September estimated seven million homes are headed for foreclosure in the next few years -- more than a year's home sales at the current rate.

Goldman Sachs CEO Blankfein trying to portray his firm as a paragon of virtue. - (money.cnn.com) The public relations gurus who are advising Goldman Sachs Chief Executive Officer Lloyd Blankfein might want to give him some new advice. Shut up! Blankfein made a startling confession Tuesday. He apologized for Goldman's role in the financial crisis, saying that the bank "participated in things that were clearly wrong and have reason to regret." But it's tough to take Blankfein at his word. This mea culpa came a little more than a week after he made an embarrassing comment in an interview with the SundayTimes, saying that he was just "doing God's work." Interesting. I don't believe there are any references to credit default swaps in the Bible, Torah, Koran or any other religious text. While Blankfein might have made the "God's work" comment in jest, it still goes to show that he needs to tread carefully if he really wants to prove to taxpayers that Goldman is not really the blood-sucking parasite that many are now making it out to be. Goldman is facing a populist backlash because it was one of the original nine firms to receive bailout funds last fall. But it is now all of a sudden generating gigantic profits again and putting away large wads of cash for employees in its bonus pool. Goldman has earned $8.4 billion in the first nine months of 2009. The company has already set aside $16.7 billion for compensation expenses, putting it on track to have a bonus pool of about $21 billion at year's end. So it's no wonder that Blankfein has turned the spin cycle on over the past few months to try and send the message that Goldman Sachs is the Wall Street equivalent of Google, i.e. it won't do evil. On Tuesday, Goldman announced that it, along with investing legend Warren Buffett, is launching a $500 million program geared toward helping small businesses. That's certainly admirable even though it's fair to cynically point out that Buffett's Berkshire Hathaway investment firm is Goldman's largest shareholder. So I don't think I am going out on a limb to guess that the idea for this largesse probably had its roots in Omaha as opposed to the corner offices on Broad Street. And if Blankfein is really sorry about the mistakes Goldman made, here's a thought: Instead of contributing a meager $500 million to help get small businesses back on track, maybe he could kick in $14 billion instead.