Geoff writes:
ECRI - deny deny deny that you are coming to the party, then arrive late. Whatever.
Geoff | 02.01.08 - 4:29 pm | #

Tim writes:
My shorts are getting blown out.
Tim | 02.01.08 - 4:29 pm | #

Yal writes:
Rumors: MBI will be broken into 2 enetities. One for Munis which will survive and the other for the CDO and sub-prime which will BK.
Yal | 02.01.08 - 4:31 pm | #

Tim writes:
BK?
Tim | 02.01.08 - 4:32 pm | #

MLM writes:
My shorts are getting blown out.

You should probably see a doctor about that.
MLM | Homepage | 02.01.08 - 4:34 pm | #

dunham writes:
Tim - Seriously.

I guess I'm lucky that the employment # was a negative, PCE is down, jobless claims are up and GOOG/AAPL/AMZN all missed earnings/guidance.

The short squeeze could have been a lot worse if the economy was actually on a firm footing.
dunham | 02.01.08 - 4:35 pm | #

In the trenches writes:
Yal -
That would be a smart move. Where did you hear it?
In the trenches | 02.01.08 - 4:35 pm | #

Elvis writes:
"[T]he window of opportunity to avert a U.S. recession is about to slam shut."

This must have been a late 2006 quote.
Elvis | 02.01.08 - 4:37 pm | #

KnotRP writes:
We should soon see an increase in CRE toliet flusher jobs, so we have that going for us, right?
KnotRP | 02.01.08 - 4:40 pm | #

Anonymous writes:
Moody's Investors Service cut credit ratings of XL Capital Ltd.'s insurance subsidiaries, partly because of the company's connection with fifth-largest bond insurer Security Capital Assurance Ltd., whose credit rating is on watch for downgrade.

Moody's downgraded ratings of XL's insurance units, including XL Insurance (Bermuda) Ltd. and XL Re Ltd., one notch to A1 from Aa3. It also cut XL Capital's senior debt rating Baa1 from A3. The outlook on the ratings is now stable.
Anonymous | 02.01.08 - 4:41 pm | #

ac writes:
It's "Hug a Housing Bear Friday".

Seriously, show some sympathy folks.
ac | 02.01.08 - 4:42 pm | #

Mike Howard writes:
Looking at the NRI chart, it's clear that this is a lagging indicator, either remaining steady or even rising through the first part of the recession then falling dramatically as the recession is declared over.

Anyone relying on the CRE numbers to demonstrate that we're not about to see a recession ought to take that into account.
Mike Howard | 02.01.08 - 4:42 pm | #

ac writes:
"[T]he window of opportunity to avert a U.S. recession is about to slam shut."

Why the hell would you want to do that? So Wall Street can maintain the power to go on systematically destroying consumer wealth?
ac | 02.01.08 - 4:43 pm | #

OkieLawyer writes:
Tim:

BK = bankruptcy
OkieLawyer | Homepage | 02.01.08 - 4:45 pm | #

ratefink writes:
I think we are about to see the difference between a recession where people have been saving for a rainy day, and one where they have been borrowing to keep an unsupportable lifestyle going. People have not been anywhere near as prepared for a slowdown now as they have been in previous recessions. The consequences are likely to be dire.
ratefink | 02.01.08 - 4:49 pm | #

Trainwreck writes:
SAN FRANCISCO (MarketWatch) -- A group of eight banks including Citigroup Inc., Wachovia Corp. and some of Europe's largest lenders, have formed a group that will try to rescue bond insurer Ambac Financial, CNBC reported on Friday.

Citibroup bailing out Ambac....HAHAHAHA!
Trainwreck | 02.01.08 - 4:50 pm | #

Reggie writes:
Many CRE investors and developers are in deep trouble cash flow and liquidity wise. There is a lot of IO debt coming due in the next three years, and they can't refinance.

In addition, those who overpaid for dirt and conversion properties now cannot get the construction loans that will support the assumptions that they made when they purchased the property. Basically, they are sitting on overpriced shells, dirt, or conversion properties that no can afford to convert.

This will come home to roost quite quickly. The smaller guys will impact the regionals, but the larges ones will as well. GGP, the company that I left the long list of analysis links for in the previous CRE post, actually uses $20 billion or so of non-recourse, property specific loans for its residential mixed use and retail properties. The COO made clear that defaulting on non-recourse loans remain an attractive option. Now, although the present value of the potential interest penalty is costly, it get's their rear out of the fire. 6% of their properties in their $29 billion portfolio have an LTV in excess of 100%, cap rates under 4% and negative or sparse cash flows.

See http://boombustblog.com/content/...nt/view/144/34/

Vornado and Simon are not far behind, but do have a superior quality portfolio. GGP will be forced to firesale properties or allow foreclosure, or a combination of the two. Their fashion show property debt was due up last month.
Reggie | Homepage | 02.01.08 - 4:50 pm | #

Neal writes:
The rescue of the insurers by the insured is a zero-sum game unless you can invite a patsy to the party...Ben, oh, Ben, what are you doing this weekend?

Split insurer into two entities? How does that work? Who would accept that? The municipal bond business is heading to a rough patch now with the downturn-so they need as much reserve as possible. The CDO market is crap, so why would those parties allow the money part of the business (municipals for now) walk away with reserves that they would need first.
Neal | 02.01.08 - 5:06 pm | #

anotherajh writes:
Yal writes:
Rumors: MBI will be broken into 2 enetities. One for Munis which will survive and the other for the CDO and sub-prime which will BK.

If I owned CDO's insured by MBI, I'd be screaming-mad at this idea. Could they really do this? It seems amazing to imagine an insurance company saying "well, our insurance only applies if you don't make a claim."
anotherajh | 02.01.08 - 5:07 pm | #

MAB writes:
Spot on Reggie!

I looked at dozens of commercial properties in the NY/NJ/PA area over the past 3 years. Cap rates were always low single digits. Brokers were pitching the "price appreciation" and "increasing rents" as justification.

Everybody overpaid at a market top! Just plain foolishness.
MAB | 02.01.08 - 5:08 pm | #

rich writes:
I don't know if cash-rich companies are going to "go on a shopping spree" because they can only get 2% in the money market. But what difference does it make?

Microsoft lost $35 billion of market cap today. Yahoo gained $35 billion. It was a wash.

Nothing really happens good or bad when one company buys another. It doesn't stimulate demand for stocks. It doesn't increase earnings. Mainly, it just creates job cuts as they consolidate and streamline.

One of the big myths that has busted is that there is a permanent bid under the market because of acquisitions. Most companies need all the cash they can get now, and they'll be able to buy other companies (proven survivors) cheaper later.
rich | 02.01.08 - 5:09 pm | #

rich writes:
Another day, another monoline rescue smokescreen.
rich | 02.01.08 - 5:10 pm | #

wawawa writes:
SAN FRANCISCO (MarketWatch) -- A group of eight banks including Citigroup Inc., Wachovia Corp. and some of Europe's largest lenders, have formed a group that will try to rescue bond insurer Ambac Financial, CNBC reported on Friday.

Citi-group was semi-rescued by middle east money a couple of month ago, now they want to rescue Ambac ?!
wawawa | 02.01.08 - 5:17 pm | #

energyecon writes:
rich,

from the previous thread discussion on the Wilshire 5000 earnings link you provided - backing the financials contribution out of 2Q2007 and 4Q2007 still results in a 38% decline - ouch!
energyecon | 02.01.08 - 5:20 pm | #

MAB writes:
Rich, energyecon,

U.S. corporate profits were at historic highs as a percentage of GDP in 2006 and 2007.

Also, % of profits from financials are probably understated. Take GE & GM for instance. Both have huge finance arms. Remember, too, that during the dot com boom, much of the vendor financing profits of firms like Nortel and Lucent were ficticious.

I won't even mention financial derivatives.
MAB | 02.01.08 - 5:35 pm | #

wally writes:
"Rumors: MBI will be broken into 2 enetities."

Splendid idea! But why not break them into 12,000 entities and default on all the policies that are losers and keep the profits on all the rest? And health insurers could just break into, maybe, 2 or 3 million entities.
wally | 02.01.08 - 5:35 pm | #

FT Woods writes:
Cash and Cash Equivalents "...if there are record amounts of Cash and Cash Equivalents...then how much of it is in the form of [asset-backed commercial paper]?"
FT Woods | 02.01.08 - 5:36 pm | #

HARM writes:
"[T]he window of opportunity to avert a U.S. recession is about to slam shut." [said Lakshman Achuthan, managing director at ECRI]

Could Mr. Achuthan please explain how the government is capable of single-handedly repealing the business cycle and dealing with massive overcapacity + bad debt overhang in residential RE?

Thank God recessions have been officially outlawed --I never liked those things anyway.
HARM | Homepage | 02.01.08 - 5:36 pm | #

MLM writes:
ac -

It might cheer you up to go take a look at the bounce tech stocks had in April and May of 2001.

Housing fundamentals, as rich points out still really stink.
MLM | Homepage | 02.01.08 - 5:40 pm | #

rich writes:
energyecon,

My point is that earnings seem to be trending further downward for non-financials. So, two quarters from now, to get TTM earnings, you will likely be replacing the healthy earnings from Q1 and Q2 2007 with even lower earnings (than now) from Q1 and Q2 2008. So, you are likely to see TTM earnings at that time that may be 60-70% lower than quoted a year ago.

Unless stocks fall by a lot from here, this would cause P/E ratios to adjust much higher. So, while it may be possible to still find individual stocks that are attractive on a valuable basis, all major U.S. indexes will appear very over-valued by historic TTM standards at the end of Q2.

You can't assume an earnings bottom until its verified, and you can't assume earnings will just barrel up off the bottom, like they did in 2003, especially if inflation and overcapacity are high and consumer demand is weak (cost squeeze).

I guess my main point is -- ignore the BS and focus on what really matters to stock valuations, earnings.

It's interesting that bulls couldn't talk enough about earnings a year ago. Now, they can't even see them.
rich | 02.01.08 - 5:41 pm | #

Kicker writes:
The CDO market is crap, so why would those parties allow the money part of the business (municipals for now) walk away with reserves that they would need first.

I'm guessing that the parts are worth more than the whole...

Create a new subsidiary strictly for munis with a brand-spanking-new AAA rating. Sell the subsidiary to the banks for and the parent goes into run-off.

Don't know what that does for the ratings on the steaming pile of horse-huey that is left with the parent. It's possible that the infusion of cash from the sale will be enough to keep the AAA ratings and avoid the downgrade/markdown/firesale issues (for a while)

Of course, it may be that it's a write-off and they are just trying to contain the scope of the downgrades.
Kicker | 02.01.08 - 5:46 pm | #

EL writes:
to reggie:

probably going to see further consolidation in the mall and regional shopping center industry. not sure if westfield's international position keeps them stronger than the rest of the bunch -if so, they'll buy whatever they can get. and with PCE falling, those dividends the REITs pay are going to come under pressure.
EL | Homepage | 02.01.08 - 5:48 pm | #

Alo writes:
OK can any of you explain how Ambac can be "rescued" by these banks? No really, how is this going to work?
Alo | 02.01.08 - 5:54 pm | #

barely writes:
["The window of opportunity to avert a U.S. recession is about to slam shut." said Lakshman Achuthan, managing director at ECRI]

LOL! Talk about behind the curve. Sebastian will call it next, as we're well into the 2nd qtr of the recession.

Equities looking at the other side of the recesion, pricing in a short pullback in the bull market and charging blindly ahead. Amazing.
barely | 02.01.08 - 5:56 pm | #

Joe writes:
No, there won't be a recession in neither '08 now '09. When will you finally learn ;-)

Seriously, the monetary policy changes plus government stimulus together with empty warehouses of manufactured goods will prevent this plunge from becoming a recession. It's a mid-cycle downturn and we'll still average 2+% GDP growth this year.

This is nonwithstanding further muted RE activity.

O-Joe
Joe | 02.01.08 - 6:09 pm | #

Optimistic Joe writes:
LOL! Talk about behind the curve. Sebastian will call it next, as we're well into the 2nd qtr of the recession.
barely

We've just had 0.6% quarterly GDP growth, which is usually revised up. So the statment is plain wrong.

O-Joe
Optimistic Joe | 02.01.08 - 6:11 pm | #

Robyn writes:
I know some insurance companies have spun off parts of their business that they didn't like. That's how we wound up with Allstate Floridian and State Farm Floridian. So it's not impossible. It will probably just be a full employment act for a lot of corporate lawyers for a while - and depend a lot on the fine print in the insurance contracts.

FWIW - our Simon properties here in the Jacksonville FL area are really good. Its newest shopping center is a smash hit.

The banks can save the monolines simply by borrowing money to pay off claims. Remember - banks have access to sources of capital that insurance companies don't have - like the discount window. I think that many of the brokerage firms (maybe all) that I heard mentioned today as part of a possible bailout also own banks (like UBS bank). Robyn
Robyn | 02.01.08 - 6:28 pm | #

Zac writes:
Yeah and all the rate reductions will prove to be too late to do much good. BB wanted to take a pollyannaish view of things most of last year, and wait to see, and of course, as almost always he waited too long.
Zac | 02.01.08 - 6:35 pm | #

Robyn writes:
P.S. I am not sure why the monoline insurers are so important - but enough important players think they're important - in a systemic sense - so that makes it probable that they will not be allowed to fail. Enron and Worldcom did not present systemic financial problems - nor do the thousands of people like Mrs. Sanchez - so they were and will be allowed to fail. Systemic financial problems are a whole 'nother story. They didn't call it the Greenspan put (and now the Bernanke put) for nothing. Robyn
Robyn | 02.01.08 - 6:37 pm | #

MAB writes:
The focus on the monolines underscores the ponzi nature of our financial system.

Consider, banks are contemplating proping up the monlines to the tune of billions in order to avert 100s of billions in write downs. This type of return on investment is just not possible outside of a fiat/ponzi finance system. The under-lying housing assets do not change regardless of what the banks do. Only the score card.
MAB | 02.01.08 - 6:47 pm | #

David Pearson writes:
Barely,

The behavior of the markets may be crazy, but its not unusual.

It takes me back to the spring of '06. Every public homebuilder was reporting disappointing orders, and it was clear the housing correction was underway. Meanwhile, after each earnings report, the stocks would skyrocket. The idea was that the markets were "seeing through the trough" that was supposed to occur, "sometime in 3q" partly as a result of "the Fed riding to the rescue".

We all know how that one turned out.

The markets assign narratives to stock moves. In this case its quite possible the rally in "early cyclicals" was caused by quant fund liquidation (of which we'll hear more about shortly). That's a bit esoteric though, so a better narrative is, "the end of the recession will occur in 3q, so buy stocks now."
David Pearson | 02.01.08 - 6:49 pm | #

Keep It Simple, I'm Stupid writes:
Put me in the camp of not understanding how such a bailout would work. The banks want to avoid having to mark down securities in their portfolios if the insurers get downgraded, because this would force them to carry extra reserves against the downgraded bonds. In order to prevent that, they are going to take money out of their reserves and, in some fashion, give it to the insurers. This will force them to find additional reserves to carry against all the other stuff in their portfolio?

What am I not getting? Or, am I getting it, and this is just Young Super SIV?
Keep It Simple, I'm Stupid | Homepage | 02.01.08 - 6:58 pm | #

idoc writes:
barely

i agree with David. i've been loading up on HB's and SRS and banks. take a look at MOM's great site for NACM. i think we're going to blow soon.

http://maxedoutmama.blogspot.com/
idoc | 02.01.08 - 7:02 pm | #

barely writes:
MAB - "Consider, banks are contemplating proping up the monlines to the tune of billions in order to avert 100s of billions in write downs"

Really remarkable, when you think about the idea itself. What relevance is AAA insurance, when you are in effect insuring your own instruments. It's not like they know the value today let alone in 2 months so it's a black hole. The whole concept is totally insane. Might as well just say you're self insured and be done with it.

It's absurd.
barely | 02.01.08 - 7:04 pm | #

barely writes:
idoc - I have been doing the same thing but it's fighting the tape and I'm running out of rope. The deep pockets driving this thing have more staying power than me. The sharks are doing their best to put enough lipstick on it so that joe 401k jumps back in and they get to sweep it off the table. It borders on criminal.
barely | 02.01.08 - 7:07 pm | #

idoc writes:
i understand your frustration. my returns have been whittled down seriously as well. but read MOM's report and especially read the actual NACM link and the underlying comments. also read Denningers site and listen to the technical:

http://market-ticker.denninger.net/

it should cheer u up (in a short sellers sense). i think next week we'll get some action.
idoc | 02.01.08 - 7:13 pm | #

Robyn writes:
Some random thoughts about earlier threads today.

"Actually - St. Joe is selling the kind of land that you people who think the world is ending might want to buy ;):

'They call that land? Or is it just a place to park your houseboat? If so we got that for free up here. dryfly' "

Dryfly - that land wouldn't be great for a houseboat - although a doublewide would be fine ;). A lot of it is in the high (at least 50 feet above sea level - high for Florida!) and dry part of the northern tier of the Florida panhandle. In the absolute middle of nowhere. I found it interesting looking at that land today. Maybe if I thought the end of the world was a bit closer - I'd buy some. Put up a family compound of doublewides (we can afford the land - but have no survival skills - we also have family members who don't have the money - but they have survival skills - perfect match).

Sebastian - I have to agree with you about different parts of the country. Even the poster who mentioned living in Boston doesn't get it IMO. There are many metro areas (including Boston) where the housing prices have been - and still are - even after "corrections" - simply crazy. We moved from Miami in 1995 because it was getting much too crowded - recovery from Hurricane Andrew was slow - and the housing costs in NE Florida were less than half of those in Miami. And we're not in the middle of nowhere. I can get medical care at Mayo Clinic 10 minutes away - or buy a Louis Vuitton handbag at a mall 15 minutes away.

Our housing prices weren't stable during the "boom". But we didn't go up as much the real boom areas - and we won't go down as much either. Just about every Florida county that has more than 10 people in it is on that Countrywide list posted previously. But we are a category 3 - which is the best listing for any Florida county that was mentioned.

BTW - as I have asked you before - could you give us a clue where you live? State and general nature of the area (rural - town - small city - metro area - etc.)? I live in the metro Jacksonville FL area (population a little over a million).

AC - I feel your pain. No fun to lose money in the markets (although everyone who has actually been in the markets has done it before). Just curious - did you have an approach for closing out your shorts - a system? If not - next time around - don't leave home without one. I don't trade short term (unless I get whipsawed) - and I don't take short positions - but I have been getting buy signals on financial sectors the last week or so (could be a bear trap - who knows?). And I think any reasonable short system would have told me to close out my short positions before I got buy signals. Anyway - good luck and good trading. Robyn
Robyn | 02.01.08 - 7:26 pm | #

Owen B. writes:
Comments from ECRI with slightly more detail on their view... http://www.usnews.com/blogs/mone...imulus- now.html
Owen B. | 02.01.08 - 7:29 pm | #

Sivaram Velauthapillai writes:
(disclosure: I'm long Ambac)

Kicker: "I'm guessing that the parts are worth more than the whole..."

NAh... the whole split-off argument is mainly put forth by people who don't understand anything about how these insurance companies operate. Some people assume that you can magically parcel off the "good stuff" away from the "bad stuff". This idea is dumb given that no one even knows what is good (even muni bonds can be bad since they have lower margins eg. look at Ambac's Las Vegas Monorail deal that is making news).

Furthermore, shareholders will be totally against splitting the company. If something like that happeneed it would be because the government forced it or something. Otherwise it makes no sense.

I can see the monolines unloading a big chunk of their muni bond business but it probably won't be quite what most here picture it (i.e. seperating the good from the bad; instead it will be similar to reinsuring some big chunk and giving up profits)...

---------

KICKER: "Don't know what that does for the ratings on the steaming pile of horse-huey that is left with the parent. It's possible that the infusion of cash from the sale will be enough to keep the AAA ratings and avoid the downgrade/markdown/firesale issues (for a while)"

If the municipal bonds are unloaded and the remaining entity goes into run-off, then ratings don't matter. The bond insurer doesn't care about ratings if it is not writing new business. All it cares about is making payments on its claims. Even the policyholders who bought insurance really can't say much. They bought policies not to protect ratings but to pay losses. However, as the run-off entity's rating declines, the policyholders may have to write off some losses (especially if ratings drop below A-). But the amount will likely be be over a period of time.
Sivaram Velauthapillai | Homepage | 02.01.08 - 7:38 pm | #

dr strangemoney writes:
OK can any of you explain how Ambac can be "rescued" by these banks? No really, how is this going to work?

They are going to change the name to Super Ambac.
dr strangemoney | Homepage | 02.01.08 - 7:47 pm | #

rc writes:
Sadly, no government agency is going to enforce the insurance companies to come clean. Only a surge in defaults will speed up the process, and it is coming!


http://www.usnews.com/articles/o...ng-a- panic.html
rc | 02.01.08 - 7:53 pm | #

rich writes:
Most people are focused on one side of the monoline's problems, the financial side. But they may have problems just as big on the legal side.

What are the SEC and FBI looking into with the investigation of investment banks and monolines ? It's probably not something small or technical, and they've probably managed to turn some inside witnesses to go public with it.

It could be illegal payments or kickbacks made to the monolines to slap their guarantees on the CDOs and asset-backed. You shouldn't discount the possibility of a criminal racketeering suit, and of course there will be civil filed against monolines for years (or as long as they last).

One big legal problems the monolines have is the clout of the entities they jeopardized with their venture into subprime land. Huge investors and big state govt. entities that have paid them hundreds of millions of dollars for public bond protection. There's a strong public interest to protect, and I'll bet several states go after monolines with civil or criminal cases, alleging violation of state insurance standards or lack of fiduciary responsibility, at the least.

The performance of MBIA's CEO this week makes more sense in terms of legal defense (jury pool spin) than finance, when you think about it.

In any case, the news about a joint SEC/FBI investigation doesn't exactly bode well for the bail-out soap opera directors, does it?
rich | 02.01.08 - 8:07 pm | #

Kicker writes:
If the municipal bonds are unloaded and the remaining entity goes into run-off, then ratings don't matter.

But, they matter to the banks and pension funds that will now need to either mark-to-market or sell the down-rated securities.
Kicker | 02.01.08 - 8:13 pm | #

ron writes:
OT

Bussinesweek has a pretty decent write up on housing and RE for MSM.

http://finance.yahoo.com/real-es...ousing- Meltdown
ron | Homepage | 02.01.08 - 8:23 pm | #

idoc writes:
i would like to ask where is the justified outrage at the TAF which is allowing dead men to keep walking by offloading crap loans off to the Feds balance sheet? when, not if, many smaller banks fail we, the taxpayer, get to pay these things off. this is whats keeping the system propped at this point.
idoc | 02.01.08 - 8:25 pm | #

risk capital writes:
rich-

GM has been the target of a "formal" investigation for "years", feel like explaining where that "went"?
risk capital | 02.01.08 - 8:27 pm | #

ugh writes:
Don't forget the fortune 500 bonds tainted with subprime (like Bristol-Meyers) that are backed by the monolines.

Are these "good" bonds like munis or "bad" bonds like CDO junk?

Who gets these F500 bonds if the monolines are split up? Hmmm?

How are these F500 bonds valued unless they're offered on the market?
ugh | 02.01.08 - 8:30 pm | #

Jas Jain writes:
--
On the subject of recession...

$3-4Tr. Of Americans’ Phony Wealth Evaporated In the First Three Months of the Recession

First a definitive piece of “news” – the recession in the US began in November of 2007. I have multiple confirmations on this and I will be vindicated by NBER in due course.

The phony wealth in question is due to Asset Inflation, from inflation of the Scam Market and the housing prices. The drop in the Scam Market value during Nov’07-Jan’08 is slightly north of $2Tr and drop in home values is north of $1Tr. as per my best estimate.

This drop of phony wealth during the 3-month period represents more than 20% of the annual GDP, or more like drop of 90% of the GDP annual rate. This has not happened since the Great Depression.

Jas
Jas Jain | 02.01.08 - 8:30 pm | #

4822 writes:
"You shouldn't discount the possibility of a criminal racketeering suit, and of course there will be civil filed against monolines for years (or as long as they last)."

like the rocket scientists that crashed two billions dollar spacecraft into mars a few years ago, the conclusion will be reached that "they are the best at what they do" and the solution will be a new list of policies and rules.
4822 | 02.01.08 - 8:33 pm | #

bZb writes:
Looks like Krugman might be a regular visitor:-)

YHTMAAAIYP
That’s “you have too many acronyms and abbreviations in your paper” — a caution that used to be thrown at people writing about international trade policy, which is full of QRs, ADDs, the MFA, the GATT, etc.. (Not to mention Section 201 versus Section 301, but that’s another matter.)

Anyway, reading this from Calculated Risk brings it all back. You see, CRE may be headed down, and so may PCE, because the apparent strength of MEW is mainly because of HELOCs, and those won’t last much longer … which may be why ECRI is talking recession.

Well, that’s all clear now!

http://krugman.blogs.nytimes.com.../01/yhtmaaaiyp/
bZb | 02.01.08 - 8:40 pm | #

In the trenches writes:
O-Joe -
How many mid-cycle downturns have we had in our history as a nation? 2 of our last 4 Q's have been under 1% - when has that EVER happened before? I'll tell you when in the past 50 years - ONCE - 1979 - and we all know what happened in 1980 - we had a recession that effectively lasted for 3 years. This is not a mid-cycle correction - we dont have those this severe - we have slowing growth that eventually leads to a recession. There are serious cutbacks to capital budgets, expenses and head counts being formulated for 2008. I'm living it and talk to many others who are as well. Boards are putting down similar mandates across US industry - it would be imprudent not to. So get ready, because its going to get worse and corporations will be a big part of the next leg down - and I suspect the consumer will cut back even further. Reminds me of 1990 and 2001 - but with more urgency at the beginning of the year and the consumer in much rougher shape. As I talk to other business owners, customers, vendors and managers I hear the same things - people are preparing for the worst. Usually when that happens in the corporate world the worst emerges. The employment picture will get much worse in the next 6-12 months from everything I'm hearing and seeing. Also, I haven't seen credit contract this severely and quickly since 1990 - it's showing no signs of reviving - it's just getting worse. Credit is the lifelblood of expansion for the corporate world.
You dont need to believe me or agree with me, but I'm just calling it as I see it. I'd prefer everything to be great, but I cant afford to oversee assets simply on hope. I get paid to anticipate and prepare. I was far more bullish in 2002-2006 than the rest of the world so I am far from a pessimist - but I am a realist because my job requires that I be one.
Good luck O-Joe. Dude, I think your recession started in December 2007 but we wont know for sure until the NBER tells us in a couple years....
In the trenches | 02.01.08 - 8:49 pm | #

Zigurrat writes:
How could they do it?

OK....look. CDS's on MBI cost a down payment of $850,000 + $500,000 per year premium for $10 million.

So the bank each buys 100 CDS's for $135 million and puts the CDS in an entity backing up MBI's statutory insurers.

With 8 banks, this would give mbi $8 billion in support for $135 million per bank or around a billion for the first year.

The CDS's would be on the mbi corporate paper, but the entity with the CDS's would support the underlying insurance companies.

At this point things would be so convoluted that no one could figure out what's going on.

This was supposed to be a joke.
Zigurrat | 02.01.08 - 9:00 pm | #

barely writes:
rich, "What are the SEC and FBI looking into with the investigation of investment banks and monolines ?"

Don't hold your breath. The PPT is more powerful than any legal authorities. They will crush any attempt to expose these outfits *before they actually fail*, like a bug. After they collapse all the authorities will be turned loose, when there's nothing to lose. Maybe a head mounted on a pole, after there's nothing else left.
barely | 02.01.08 - 9:02 pm | #

Zigurrat writes:
As far as the idea of splitting the company into two pieces, this is some precedent. For example, the Home Insurance sold the renewal rights to new business and put the remainder into a runoff entity.

When ACE bought CIGNA's property casualty, they put the runoff which was mostly environmental and asbestos into a new company called Brandywine.

Neither of these worked out too well, but the idea was to make more assets available to the bad business.

Another more successful example of the same type of approach was to put the Lloyds runoff into Equitas. This seems to have actually worked.

Manville and USG (non insurers) went BK and set up trusts for asbestos plaintifs and used sale of stock in the new company excluding asbestos liabilities to fund the trusts for the plaintiffs.

None of these approaches helps the owners of insured structured finance stuff, since they go into the residual entity. It would help a little, since there may be more total capital if the viable portion of the business can attract some capital. But basically, it won't work.
Zigurrat | 02.01.08 - 9:10 pm | #

owl writes:
In the trenches, I agree. I know a lot of business owners and I hear the same. As a matter of fact some are now ex-owners because they have closed their businesses. The only thing that has me doubt that this market has a long way to go downward is the intervention by the government into the private sector. I would not be surprised for them to buy back a large portion of the bad loans and become the "lender" thru some made up program. I would not be surprised for them to bail out the almost BK'd monolines. The way they are desperately trying to "fix" this mess, nothing, no matter how irresponsible, is beyond them. Time will tell.
owl | 02.01.08 - 9:11 pm | #

Anonymous writes:
what the heck do you invest in knowing consumer consumption is going to decline?
Anonymous | 02.01.08 - 9:20 pm | #

Peconic Bay writes:
I have been trying to understand why any party would want to invest in the monoline insurers. From everything you read in the press, it sounds like they are insolvent. There was some speculation on CNBC that New York Insurance Commissioner Eric Dinallo could force a restructuring in bankruptcy that would in essence strip off the muni bond insurance business from the structured finance piece, wiping out shareholders. The number posited by Bill Ackman is 12 billions dollars, which swamps MBIA's capital base.

Even if some entity would invest enough to adequately capitalize these businesses, the dilution would kill exisitng shareowners. Abac abandoned it plan to raise equity because the dilution was overwhelming. So, either way these business look like they are insolvent to me.

Can anyone provide an alternative perspective that shows how value can be restored?
Peconic Bay | 02.01.08 - 9:21 pm | #

12th Percentile writes:
I use Yahoo Finance for various things. Their headlines have been a a tad optimistic in nature.

I was suprised to see this one tonight.

Housing Meltdown: 25% Decline Ahead?
- BusinessWeek Online
Some experts say that home prices could sink by an additional 25% before bottoming out, returning values to 2000 levels...


And I said to myself, did i make a mistake by buying SRS at $100 today? And I responded to myself, "patience, dear boy, patience...we need not rush in to prosperity as money is for fools and cranks...but we'll take it from them nonetheless"
12th Percentile | 02.01.08 - 9:23 pm | #

Sic semper writes:
Theory: Krugman is Sebastian
Sic semper | 02.01.08 - 9:27 pm | #

Zigurrat writes:
"Most people are focused on one side of the monoline's problems, the financial side. But they may have problems just as big on the legal side. "

If they are trying to save them, letting the legal dogs run will not help. I think the states have to figure out pretty quickly if they want to save the existing entities or extract fines and try to collect some D&O.

It's not just the bond insurers. CT is suing Merrill to take back some CDO's. Merrill agreed but CT's AG hasn't let up yet. They are talking fraud.

If people start pushing problem CDO's back to the banks, they are doomed. You have the fed wrecking the dollar to keep the banks solvent and the AG's trying to figure out what to do, but still working on auto pilot with the idea of extracting money from large financials.

Suing deep pockets is ingrained in the dna of the AG's starting with the tobacco settlements, and followed up by the various Spitzer led stuff. The deep pockets can't afford it.
Zigurrat | 02.01.08 - 9:28 pm | #

dc1000 writes:
there is so much to say on this.

first, it doesnt seem THAT surprising that these monolines are having problems and that people are just catching on to the idea that really, the buck stops here.

we seem to have found the final stretches of the leverage fiasco.

in cahoots with the monolines or somehow involved, the last dollar generated by the fraudlent mortgage app assisted by the worst underwriting ever exacerbated by the worst price decline ever, nationally - we
finally see that this is the last drop of leverage possible from the 110% 3 trust no income no asset investment prop buyer with a sub 600 FICO -

i'm feeling that

so what now

where from here?

o joe and sebastian are always wrong in their attempts to be bullish

but yet some how i'm drawn to jas jain who is basically saying that we've underestimated even this dour crowds most negative predictions.

i think its possible so some sort of mini depression.

might we even conclude this all with a new globo or amero currency? yes i concede that

prayers rest on some wacky new technology like the jet engine, telephone, the number 0, writing or the god damn internet.

until then we wait. we muddle around and fuck up and borrow too much or spend too much or save too much. and it might take decades.

but thus far have we not always in time gotten that

NEXT LEG UP

so

the moral of my story is

dont forget no matter how bad it gets, the next leg is coming and those that plan for its turn best have a great advantage
dc1000 | 02.01.08 - 9:28 pm | #

mock turtle writes:
bZb

you got it right

krugman knows which blogs rock

CR and Tanta are awesome

krugmans laugh about acronyms on the blog is a great compliment to, and PR for, CR and Tanta which they richly deserve.
mock turtle | 02.01.08 - 9:32 pm | #

Robyn writes:
Just remember Zigurrat - Lawsuits - AGs - whatever - Altria is still up from about 20 at the top of the market in 2000 to 70+ now - while the SP500 has gone nowhere.

It is frequently stupid to trust one's gut feelings (bullish or bearish) about the market. That's why I like TA. It tells me what the markets are actually doing - and I listen. Robyn
Robyn | 02.01.08 - 9:46 pm | #

rich writes:
>like the rocket scientists that crashed two billions dollar spacecraft into mars a few years ago, the conclusion will be reached that "they are the best at what they do" and the solution will be a new list of policies and rules.

Maybe, if the crime is white collar and esoteric. But it may not be. It may be your basic street-hood shakedown type of robbery. I'm not raising the rocket science situation. I'm talking about basic organized crime, which somehow is more what it smells like, at least the way the SEC and FBI reports came out.

Also, just get off it that "the PPT won't let the monolines go down." The PPT is a federal task force, and there are many different fiefdoms and ego-driven prosecutorial cultures potentially bearing down on the investment banks and monolines. Some of them may have more ammo and open legitimacy than the PPT. And it's an election year and what we now know as the PPT may not last it out.

I don't know anything about an investigation of GM. All this smells different, less like white collar crime, more like street crime. And it also smells like some powerful people with subpoenas are pretty POed.
rich | 02.01.08 - 9:58 pm | #

rich writes:
Also, some of those powerful people with subpoenas work in Democratic states for Democratic governments.
rich | 02.01.08 - 10:00 pm | #

David Pearson writes:
Its interesting that the ECRI is just now predicting a recession. Their index is a leading indicator, so that means a recession should BEGIN several months from now. If so, it contradicts the emerging consensus that the recession will be OVER by 3q.
David Pearson | 02.01.08 - 10:02 pm | #

Zigurrat writes:
With tobacco, the AG's were picking on one of the most profitable businesses in America.

It worked out great for the lawyers, pretty well for the tobacco companies, the states are addicted to the money, but I'm not sure that smokers got much of a break. A pathetically small portion of the billions is used to combat smoking, although I'm not sure how they would do it.

The states now have a huge interest in keeping the tobacco companies solvent. In Illinois, someone won a class action which would have required a huge appeal bond. Altria mentioned that they might have to file chapter 11 because they couldn't come up with that much cash immediately, which would delay payments to the states. The got some sort of immediate judicial relief on the bond and then got the class action dropped.

It all worked because the tobacco companies are selling a highly addictive drug. If the bond insurers were selling recreational drugs instead of insurance for 40bp they might have a chance.
Zigurrat | 02.01.08 - 10:04 pm | #

sk writes:
OT: and looking for confirmation.

In Colorado, a colleague of my wife told her that her neighbor who's a realtor was doing badly because of the housing recession but is now doing ok because:

"He's being paid to knock on doors of people who are facing foreclosures due to resets - and he offers them a Wells Fargo 50 year mortgage as their reset deal".

This didn't sound much like the teaser-freezer deal or anything I'd heard of on the blogs and a search on Google for "Colorado Well Fargo 50 year mortgage Foreclosure deal" turns up nothing.

Anybody else heard of such things ?

-K
sk | Homepage | 02.01.08 - 10:09 pm | #

Zigurrat writes:
12th Percentile...

i saw it also. I think it means that the msm has a pretty good idea about what's going on. That means we are past denial and maybe some areas are in the middle innings of this fiasco.

The game may be called because of the mercy rule.
Zigurrat | 02.01.08 - 10:14 pm | #

Sivaram Velauthapillai writes:
Peconic Bay: "I have been trying to understand why any party would want to invest in the monoline insurers. ...Can anyone provide an alternative perspective that shows how value can be restored?
Peconic Bay"

The reason I, as well as some others who invested in the monolines in the last few months, still feel bullish is because of the following:

The thing is... contrary to what Ackman and others have been claiming for years, the monolines are not insolvent. In fact, they are unlikely to be at least for a few years. What has been happening so far is that THEORETICAL losses (as indicated by mark-to-market valuations) have been large. But no one knows if these will turn out to be real losses or not.

People like Ackman, as well as clueless people like Jim Cramer, like to rely on these marks (often in highly illiquid securities (some of the CDOs don't even trade)) and think these marks will turn out to be real losses. But we just don't know. This is also why the rating agencies don't cut the ratings to, say, CCC; and also why the insurance regulator hasn't seized control of the company from the holding company.

Even with the huge loss Ambac and MBIA reported, their stock price is trading around 50% below the book value. For example, Ambac's book value is around $20 and adjusted book value (this includes value of unearned premiums,etc) is slightly higher, versus the current stock price of around $10. If these marks (to market) reverse, or if subprime default rates stabilize, the stock price is still way below book value.

The reason I decided to take a position (just a few weeks ago--unfortunately before the recent plunge in price) is because I feel that there is IRRATIONAL PESSIMISM regarding the monolines. I am tryin to develop a contrarian investing style and felt the monolines were attractive. When CDS on the monoline bonds are trading sky high, and when monoline-insured bonds trade below non-insured bonds (totally irrational), you know that the market fears anything to do with bond insurance.

The difficulty with these situations is that you have to pick the RIGHT company. I honestly don't think this is the end of the industry (the entrance of Buffett pretty much ensures that he feels this is a viable industry). Even structured products, which everone thinks will dissapear, will likely not end here. I really don't see asset-backed securities and the need for insuring them dissapearing. I mean, there are millions of dollars of credit card debt, student loans, auto loans, etc being issued daily and that is not going to dissapear (it might slow down during economic weakness but it will still be there).

What has hurt me so far is the major mistake made by Ambac management in not raising capital. I was investing with the assupmtion that they will raise around $1.5 billion but they messed that up and killed the stock price.

I've been wrong big time so far (down something like 50%) and I have no idea if my thinking is right, but we'll know by the end of this year. It will all come down to whether the subprime default rates and losses will increase or stabilize. I never took a position thinking this but a bet on the monolines is a bet on the housing bust being mild.
Sivaram Velauthapillai | Homepage | 02.01.08 - 10:24 pm | #

energyecon writes:
rich,

There is also the point that unlike the GM formal investigation, in this fiasco some very well heeled folks have taken a nasty hit - the contributor class for these elected minions of order - somebody's head will be served up on a platter.

Now whether it will be the most deserving is another conversation...
energyecon | 02.01.08 - 10:33 pm | #

Robyn writes:
Zigurrat - I don't think you've contradicted anything I said. Which is basically - watch and listen to the markets - and let them tell you where they're inclined to go.

BTW - I think you may be thinking of a Florida tobacco case - although there may be one in Illinois too. And the law school at the University of Florida is now the Fred Levin (a tobacco lawyer) Law School. Not a bad use of settlement proceeds.
Robyn | 02.01.08 - 10:35 pm | #

Sivaram Velauthapillai writes:
Zigurrat writes: "With tobacco, the AG's were picking on one of the most profitable businesses in America."

I kind of disagree Zigurrat. Investing in monolines is VERY SIMILAR to investing in tobacco many years ago. The market was pricing tobacco stocks as if they were going to go bankrupt.

The monolines are also highly profitable businesses (now we know why: they mispriced their insurance). For example, Ambac had the highest profit margin in the S&P 500 last year. It's just that they are not as big as the tobacco companies.

The difference, of course, is that a bet on the tobacco companies is a bet on litigation coming out in your favour. In contrast, a bet on the monolines is a bet on the housing bust being mild or "typical".

In fact, maybe I'm biased, but I think a bet on a monoline is safer than a bet on a tobacco company (back then). When it came to the tobacco industry, the government was literally going to take away your only business (although many were trying to diversify by moving into food products and stuff eg. Phillip Morris with its Kraft ownership). In contrast, a bet on the monoline is purely a bet on economic fundamentals (basically subprime default rate and loss recovery).
Sivaram Velauthapillai | Homepage | 02.01.08 - 10:37 pm | #

Owen B. writes:
Found a more detailed ECRI article on another blog here http://kirklindstrom.blogspot.co...-window- of.html

Copied the article text below, but the above link also shows a chart of their weekly index.

A WINDOW OF OPPORTUNITY: A Special Report

By ECONOMIC CYCLE RESEARCH INSTITUTE
Founded by Geoffrey H. Moore
January 25, 2008

The U.S. economy is now in a clear window of vulnerability, given the plunge in ECRI’s Weekly Leading Index (WLI) since last spring. Yet there is a brief window of opportunity within that window of vulnerability to avert a recession. That is why ECRI has not yet forecast a recession.

WLI growth accelerated to a three-year high last June, anticipating the quickening in GDP growth to a four-year high in the third quarter of 2007. The economy’s resilience surprised most economists, given the earlier Fed rate hikes and oil price spikes – a combination that had helped trigger earlier recessions. But the strength in the WLI underscored the economy’s buoyancy, correctly ruling out a recession.

WLI growth then turned down sharply, and, by year-end, had plunged to its worst reading since the 2001 recession. This indicated an economy seriously vulnerable to recessionary shocks.

As a result, a self-reinforcing downturn has already begun. If allowed to continue, it will amount to the vicious cycle known as a business cycle recession. During such vicious cycles, pullbacks in spending lead to production cutbacks, which lead to employee layoffs and declines in income, which in turn feed back to lower spending and production and so on. Still, this does not mean a recession is already baked in the cake.

Imagine a large Roman column that has just started to topple. At that moment, a modest push back near the top would be enough to right it again. But if its fall gains momentum, it would be virtually impossible to stop it from crashing down. Today, the column that is the expansion has just begun to tip.

At this juncture, prompt stimulus to boost consumer spending can avert a recession. But time is truly of the essence – the stimulus is needed in a matter of weeks, not months.

In averting recessions, the timing of policy is often the key. In September 2000, for example, we warned: “Never in this expansion have the leading indicators been so close to forecasting a recession. Luckily, underlying inflationary pressures have already turned down.”

But it was not until three months later that the Federal Reserve shifted from a tightening bias directly to an easing bias before beginning an aggressive rate cut cycle a few weeks later, in early January 2001. It was not enough to avoid a recession.

In the lead up to the 2001 recession, misplaced inflation concerns inhibited Fed rate cuts for much too long. In the current cycle, once again, inflation concerns held the Fed back from large rate cuts until recently. Yet in both cases, ECRI’s Future Inflation Gauge, a forward-looking measure of underlying inflation pressures, has been in an unambiguous cyclical downswing, giving the green light to rate cuts months before they materialized.

Yet all is not lost. How can that be, given the weakness of the WLI?

Self-Fulfilling or Self-Negating?

If we have a recession this year, it will be the best advertised in history. Recently, several Wall Street houses joined the 70% of Americans who have been expecting a recession for the last few months. A number of other prominent economists boosted their estimates of the probability of a recession above 50%.

Yet such probability estimates imply that a recession is a matter of chance, whereas it is still a matter of choice. This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet.

If we have a recession this year, it would turn out to be the most widely anticipated recession in history. Clearly, the pessimism of consumers and business managers could cause them to cut spending, creating a self- fulfilling recession prophecy. But there is another side to the story.

The biggest negative impetus in any recession comes from the manufacturing sector, driven mostly by the inventory cycle. Unaware of an approaching recession, businesses typically produce goods in anticipation of rising demand. When, to their surprise, demand for their products starts falling, inventories mount rapidly, forcing sharp production and job cutbacks, thus reducing income and spending power. The spending cuts force further production cutbacks to work off the excess inventory.

This time, prolonged pessimism about the economy, along with a surprise acceleration in growth through last summer, has resulted in a sharp drop in business inventories, taking the inventory/sales ratio to a record low. Thus, there is very little inventory left to whittle down in response to slackening demand.

{CHART}

Therefore, the inventory cycle downturn responsible for most of the downward impetus in a recession is likely to be less powerful this time. Also, if timely stimulus results in a quick burst of consumer spending, it will force manufacturers to boost production instead of reducing inventories. That is why prompt stimulus could be unusually potent in this cycle.

Global pessimism about the U.S. economy has resulted in a major decline in the dollar, making U.S. exports much more competitive. Therefore, U.S. export growth will strengthen further, boosting production. In fact, the latest industrial production data overshot consensus expectations because of the strength of exports.

The unusual decline in inventories and the boost to exports in this cycle have been the paradoxical results of widespread pessimism. Especially if stimulus is prompt enough, this may result in a self-negating prophecy of a recession.

The Need for Speed

At ECRI, we do not take positions on the content of policy. What we are emphatically pointing out today is the extreme importance of the timing of stimulus.

At turning points, a few months’ lag in policy action can be immensely costly. If it spells the difference between a recession and a soft landing, a couple of months’ delay can end up costing a couple of million jobs and couple of hundred extra basis points in rate cuts – and still not have the same effect. What a stitch in time can accomplish early in a down cycle cannot be achieved, even with far more aggressive action, a few months down the road. At best, forceful but delayed action can mitigate the severity of a recession.

The danger is that fiscal policy makers, who can still shore up the “stone column” of the economy that has begun to tip, may waste time designing a safety net to catch the falling column, instead of trying to stabilize it quickly in order to avert a recession. But the outcome is not pre-ordained, and the WLI will promptly let us know whether policy action, in conjunction with the forces pushing toward a self-negating recession, can successfully abort the self-reinforcing downturn.
Owen B. | 02.01.08 - 10:39 pm | #

Robyn writes:
Sivaram - In terms of mild versus not mild in housing. I live in a community with about 1100 houses with a median price of maybe $700k-$1 million. As of today - there are only 4-5 houses with any kinds of problems (and even if the mortgage companies are slow to do anything - our HOA files liens immediately if a property is 30 days late in paying assessments). I don't think most places in the US are like Stockton CA. Robyn
Robyn | 02.01.08 - 10:44 pm | #

justin writes:
"The monolines are also highly profitable businesses (now we know why: they mispriced their insurance). "

Doh. Anyone can be "very profitable" by grabbing market share thru insuring stuff too cheaply then not accounting correctly for the future commitments by using a broken risk model. Current marks are a reasonable approximation of expected impairments, and predict monoline bankruptcy. "Book value" is meaningless because there is a irreparable hole in the book. To buy stock in the monolines is just betting for a miraculous recovery in the housing market. You probably get a better return spending your money on buying condos in florida and CA if you believe that strongly that the housing stock over-hang does not really exist.
justin | 02.01.08 - 10:48 pm | #

Robyn writes:
P.S. Perhaps the WSJ and the NYT exaggerate - but every time I read an article about distressed homeowners in places like Stockton - it's about a hairdresser married to a gardener who make $50k a year and bought a $500k+ house. My neighbors aren't hairdressers or gardeners. Do any of you live in higher priced neighborhoods and have neighbors like that? Robyn
Robyn | 02.01.08 - 10:54 pm | #

David Pearson writes:
To the folks at ECRI, every business cycle is an inventory cycle. Please. Consumers need to raise their savings rate and repair their balance sheets (lower their debt service ratios). This will cause a prolonged decline in demand, and businesses will respond with more than just a two-quarter inventory reduction: they will lay off excess labor, especially in the service -- not manufacturing -- sector. Its things like hospitality, entertainment, retail and financial services that have excess "production".

Welcome to the "strip mall" recession.
David Pearson | 02.01.08 - 10:56 pm | #

Sivaram Velauthapillai writes:
Robyn writes: "Sivaram - In terms of mild versus not mild in housing. I live in a community with about 1100 houses with a median price of maybe $700k-$1 million. As of today - there are only 4-5 houses with any kinds of problems (and even if the mortgage companies are slow to do anything - our HOA files liens immediately if a property is 30 days late in paying assessments). I don't think most places in the US are like Stockton CA. Robyn"


Yeah... I don't think the situation will be as bad some bears imagine. It will be poor no doubt, but with the FedRes rate cuts, the downside shouldn't be too bad.

Having said that, the monolines have a tougher time than your neighbourhood because all the problems are with SUBPRIME mortgages (your neighbourhood sounds like upper-middle class). Things are pretty bad in subprime land but we shall see how things unfold. The rating agencies are supposed to be using Great Depression-type numbers for their AAA ratings so, as long as we don't end up in a massive deflationary depression, I'm thinking the default rates should be manageable...

In case anyone missed, the two best performing sectors in January were financials and consumer discretionary. Industries such as homebuilders are up significantly, with some companies up 50%. This was in a horrible month where nearly everything (except maybe gold) posted big negative numbers.
Sivaram Velauthapillai | Homepage | 02.01.08 - 11:19 pm | #

Owen B. writes:
"To the folks at ECRI, every business cycle is an inventory cycle."

Perhaps, but they may also be more sophisticated than that having researched cycles for many decades.
Owen B. | 02.01.08 - 11:20 pm | #

feesherman writes:
It's as simple as this.

You cannot have California as the 7th largest GDP in the world (CA dept of finance, fwiw) and have massive real estate problems and NOT have it impact the national economy.

So yeah, your neighbors may not be subprime. Nor are mine. But it is coming.

This is going to be a slow band-aid rip, from west-coast to east-coast, in that order.

feesherman
feesherman | 02.01.08 - 11:44 pm | #

Anonymous writes:
Robyn must live in the only community in Florida with no problems. In Miami, Ft Lauderdale, Orlando, Tampa, Coral Springs/Ft Meyers, things are dead dead dead and foreclosures are very high. See Countrywide's hurricane type categories chart posted a couple of days ago.
Anonymous | 02.01.08 - 11:49 pm | #

sdtfs writes:
Robyn must live in the only community in Florida with no problems.

Well, her community of 1100 is worth about a billion dollars, that's not exactly average either.
sdtfs | 02.02.08 - 12:11 am | #

Denzel writes:
Just in case anyone forgot, when the Fed made an emergency rate cut in January 2001, the Naz rallied 17%...in one day.

The S&P is at about the same point now as it was then, 7 years ago, after that rate cut. During May of that year, the S&P was up around 11%. And we know it was year and a half later before the bottom was in...but the market was range bound until the Iraq war started. The sharpest rallies occur within a bear market, like we've had this past week or so.

Does anyone really think the homebuilders or lenders are really going to have a better year in '08 than last year? As far as bubbles go...just pull up a chart of EMC, INTC, MSFT, SUNW (and these are the financially sound companies) to see what happens to a good stock in a bubble and after it bursts. They'll oscillate for awhile, but eventually return to the mean.
Denzel | 02.02.08 - 12:14 am | #

Nev writes:
It ain't certain until the NBER big wigs take Ms. R for dating....
Nev | 02.02.08 - 1:45 am | #

six feet funder writes:
We need a new rating for these guys, AAA-insolvent.
six feet funder | 02.02.08 - 2:58 am | #

Ramoy writes:
Robyn writes:
P.S. Perhaps the WSJ and the NYT exaggerate - but every time I read an article about distressed homeowners in places like Stockton - it's about a hairdresser married to a gardener who make $50k a year and bought a $500k+ house. My neighbors aren't hairdressers or gardeners. Do any of you live in higher priced neighborhoods and have neighbors like that? Robyn
-------------------

the gardener and hairdresser have 2 young kids and one is autistic.

It was tight but they had to buy before prices got to the point where they would be unable to afford even the most modest of homes. Luckily their lender was flexible.
Ramoy | 02.02.08 - 3:16 am | #

Jas Jain writes:
--
David Pearson: "Its interesting that the ECRI is just now predicting a recession. Their index is a leading indicator, so that means a recession should BEGIN several months from now."

Only dopes trust Lakshman Achuthan of ECRI. One needs to read his comments for the past 8 months to confirm that he is a propagandist and a bubble-meister. He claims that ECRI will forecast recession 6-8 months in advance using the WLI, which is going to prove to be lie. I know that there are some ECRI fans here but they are lazy as usual.

Dopes get constantly led, or misled, by propagandists. There have been very few honest economists who have access to the media. One of them is David Rosenberg. Most economists in America, with access to media, are in propaganda business. Beware!

Jas
Jas Jain | 02.02.08 - 6:28 am | #

Owen B. writes:
"He claims that ECRI will forecast recession 6-8 months in advance using the WLI,"

Is this hearsay, or can you back that up?
Owen B. | 02.02.08 - 7:53 am | #

Owen B. writes:
"He claims that ECRI will forecast recession 6-8 months in advance using the WLI,"

Did you read the Jan 25 piece that was posted earlier?
Owen B. | 02.02.08 - 7:55 am | #

Jas Jain writes:
--
More on ECRI...

“But Achuthan still holds out hope that a stimulus package from Washington could save the day.”

So, now his forecast for a recession is based on what politicians do and not on economic data? Do you see why I call him a propagandist? If you read his statements for the past year you will conclude that he is a rogue economist/forecaster. Amazingly, he has cult followers among Scam Lovers.

Jas
-x-x-x-x-x-x-x-x-x-x-x-

http://www.businesscycle.com/new...ews/press/1428/


Recession Watcher's Rx: Stimulus Now!

U.S. News & World Report

1-February-2008

(U.S. News & World Report) - Lakshman Achuthan, who predicts recessions over at the Economic Cycle Research Institute, is gearing up for his latest call.

His weekly gauge of future U.S. economic growth sank, and the ECRI's annualized growth rate forecast plummeted back to a six-year low last seen in early January. In short, economic growth that managed to continue through the end of 2007 may be experiencing its last gasps.

"The window of opportunity to avert a U.S. recession is about to slam shut. This isn't good," he says.

Achuthan's opinion is worth a listen, as it comes with one of the better track records around. His group successfully predicted the last two U.S. recessions and managed to avoid a good chunk of false starts over the past couple of years, which is why his heightened concerns are another bit of bad news in a week when a host of reports showed weakness on everything from jobs to consumer spending.

But Achuthan still holds out hope that a stimulus package from Washington could save the day.

He reminds us that recessions rarely happen without the factory sector throwing in the towel. Today's report from the Institute of Supply Management showed some surprising resilience in the sector that could continue if—and only if—consumer demand doesn't fall off a cliff. The only way that will happen, he says, is if they get that extra infusion of government cash in the form of the $150 billion stimulus package making its way through Congress. And they need it now.

"That may give us this moment to sneak something in before the window slams shut," he says. "You could do something later this year, and it'll have nothing to do with averting a recession. You have to be doing something today. Or yesterday."
Jas Jain | 02.02.08 - 9:08 am | #

Jas Jain writes:
--
Owen B,

I was on a forum where Lakshman would post. He has claimed several times that ECRI can forecast recession 6-8 before they begin using WLI.

If I get time to search his quote I will post later.

Jas
Jas Jain | 02.02.08 - 9:13 am | #

Jas Jain writes:
--
Owen B,

I was on a forum where Lakshman would post. He has claimed several times that ECRI can forecast recession 6-8 before they begin using WLI. If I get time to search his quote I will post later.

“Did you read the Jan 25 piece that was posted earlier?”

I read everything that relates to ECRI forecasts before it gets posted here. So, yes, I read the piece posted on January 25th. What is your point?

Jas
Jas Jain | 02.02.08 - 9:57 am | #

Mike in AZ writes:
Does anyone know why the average level of NRI went from about 3.75% of GDP between 1960 and 1990, then dropped to about a 3% average? Could this mean CRE is still (relatively) underdeveloped, and will remain strong?
Mike in AZ | 02.02.08 - 11:47 am | #

Zigurrat writes:
Robyn: I wasn't disagreeing with you, just elaborating on the rather unusual aspects of tobacco litigation. Here is a link on the Illinois settlement: http://www.jointogether.org/news...ims- ruling.html

The AG's were ganging up on Illinois so their states would get timely payment of their settlement money. It was a unique and surprising, which goes to your point re emotion.

Siv: As far as bond insurers being as profitable as cigarette companies, get real. MO makes $12 billion a year. The bond insurers are gnats in comparison. The marginal cost of making a pack of cigarettes a quarter.

Also, the bond insurers don't use cash accounting. The fact they will have cash for a long time doesn't mean they are solvent until the last penny is paid out. They use accrual accounting and are insolvent when their estimates of ultimate losses, which must be signed off on by their auditors and be considered plausible by the state insurance departments, impair their capital.

Basically, except for the derivative portions of their business they mark to model. Over time, all estimates converge, but if the estimated payments exceede reserves plus whatever portion of capital is greater then statutorily mandated capital, they are impaired. It goes downhill from there until the capital is wiped out.

You now have a situation where two areas of government - the state insurance departments and the fed, et all want to pump them up. You have other areas that want to sue them, because that's what they do. New York is unique because Spitzer knows the playbook backward and forward and has tried to switch teams. He initially backed Cuomo's investigation, but they are at cross purposes. At least he is smart enough to know which side his bread is buttered on, but it may be too late. There is no way to prevent civil litigation, but it is a long, drawn out process.
Zigurrat | 02.02.08 - 11:51 am | #