Vigilant Investor

We’ve been quite busy the past few days, so here’s a quick summary with links of articles with more details.

The Fed and the world’s central banks are now well aware they’ve got a global credit crisis on their hands that is far nastier than they expected.  So to work they go!

In the U.S. we are seeing what the authorities have in mind with their $700 billion package, which is the first of many to come — never mind the assurances that this is all it’ll take.  It looks like we’ll be seeing a great deal of nationalization in banking.  Paulson, no doubt, appears ready to use the full authority granted him as U.S. Treasury Secretary.   We worry about the blank check Congress has just obligated taxpayers and dollar holders to.  As we noted in a post a few days ago, the Monetary Base suggests the flood of freshly minted cash is to be hitting our shores soon.

• Fed, ECB, Central Banks Cut Rates in Coordinated Move
• White House considers ownership stakes in banks
• Fed eyes plan to fund short-term business loans
• Fed Considers Plan to Buy Companies’ Unsecured Debt
• More Treasury Bonds on Way to Ease Crisis
• Paulson Says U.S. to Use All `Authorities’ in Crisis

In the U.K. things have gone from bad to worse.   Socialization has even less of a stigma in Europe, so as in the U.K. you’ve got all sorts of intervention falling in line to bail out the banking system.  Meanwhile, Iceland is in such bad shape, it appears the small nation could be hit with insolvency fairly soon.

• Darling unveils bank rescue
• U.K. Banks Get Unprecedented Government Bailout; Stocks Fall
• In Flailing Iceland, Disbelief and Regret
• Icelandic Regulator Takes Control of Kaupthing Bank
• Barclays, RBS in Talks on U.K. Government Funding
• Russia Lends Iceland 4 Billion Euros to Save Banks
• Belgium, Luxembourg scramble to sell Fortis

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A list of articles worth perusing to grasp the depth of our problems:

• Fed takes boldest action since the Depression to rescue US mortgage industry
• Fears That Bear Stearns’s Downfall May Spread
• Another Source of Quick Cash Dries Up
• Jim Rogers Says Fed Support of Bear Stearns `Outrageous’: Video
• U.S. 3-month bill yield seen lowest in 50 years
• Gold hits $1,010 on flight from paper currencies
• Foreign investors veto Fed rescue
• Wall Street asks who will follow Bear Stearns
• Bear Stearns takeover sparks fresh financials rout
• Dollar Doomsayers Draw Signs From Bernanke Rate Cuts
• Fed Takes New Steps to Ease Crisis:Cuts Lending Rate to Financial Institutions to 3.25 Percent
• Wall Street waits for the next domino to fall
• Luxuries are cheap, necessities are expensive
• Debt Reckoning: U.S. Receives a Margin Call
• U.S. Fed Cuts Discount Rate, Says Securities Firms May Borrow
• Houses are left behind to pay car, credit bills
• CDS sector weighs Bear Stearns backlash

NEW YORK — Wall Street was expected to plunge at the opening of trading Tuesday, extending its huge losses from last week and taking more cues from heavy selling that has spread throughout the world. Indicators showed the Dow Jones industrial average was set to fall by more than 500 points when trading begins.Fears of a recession in the United States that could pull down the global economy as well have infected markets around the world, and those declines further unnerved U.S. investors who were unable to trade Monday, when Wall Street was closed for Martin Luther King Jr. Day. Meanwhile, U.S. bond prices soared as investors fled the stock market, and the price of oil skidded as investors dumped futures in the belief that a recession would slash demand for energy.

It looks like the markets are finally taking the credit crisis and recessionary risks seriously. It was as if a switch was flicked at the turn of the year, from “will there be a recession?”, to “Yikes! A recession! How long and how deep?”

Our answer? Deep. Long. And very liquid.
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Where to begin? Tune in to tomorrow’s discussion on the dollar and systematic risk. In the meantime, here are some more sobering headlines:

• The latest Chinese export may be inflation
• $100 Oil Price May Be Months Away, Say CIBC, Goldman
• Cost of debt insurance hits highs
• States Aim to Stem Tide Of Home Foreclosures With Funds for Refinancing
• Wells Fargo ends sub-prime loan
• Miami condo glut pushes state’s economy to brink of recession

Here are a handful of articles on the pulse of what’s transpiring in the U.S. & global economies. Stay Vigilant!

• Many investors feel like running away from homes
• Nations’ home sales outlook is grim as declines steepens for sales, prices
• Realtors lower forecast for 2007 U.S. home sales
• Drop in U.S. Home Sales, Prices Likely to Accelerate
• The waves of debt feeding today’s buyout deluge will eventually recede. Now’s the time to figure out what will make that happen.
• Operational risk at the core of the ‘subprime meltdown’ in the USA
• U.A.E. May Be Next to End Dollar Peg, Forwards Show
• UBS Hedge Fund Loss Ensnares UBS, Echoes LTCM
• U.S. Productivity Slowed, Costs Up More Than Forecast
• Years of Global Growth Raise Inflation Worries
• Rise In Labor Costs, Drop In Productivity Add To Price Fears
• Fitch highlights negative consequences of credit boom & hedge funds
• The Sure Bet Turns Bad
• Most homeowners unhappy with adjustable-rate mortgage

Insight: A stretched credit cycle, a more savage downturn. (Financial Times)

High finance has never been more sophisticated. Bankers have never been more clever. Yet in the US subprime lending boom, banks fell over themselves to advance 100 per cent loan-to-value mortgages to out-of-pocket deadbeats. According to industry folklore, even an insolvent arsonist was given accommodation.

Lending standards to private equity are collapsing just as risks rise and returns are being competed away. “Cov-lite” loans are the order of the day, meaning that restrictions on a borrower’s interest cover and balance sheet leverage cease to apply.

The alchemists of finance (Economist)

AT LEAST since 1823, when Byron’s Don Juan described “Jew Rothschild, and his fellow Christian Baring” as the “true Lords of Europe”, investment bankers have inspired awe, envy and, rightly or wrongly, a measure of disdain. Exactly 100 years ago the undisputed patriarch of the modern industry, J. Pierpont Morgan, stemmed the Panic of 1907, a financial crisis caused by unregulated trusts (the hedge funds of their day). Acting, in effect, as lender of last resort from his Wall Street office, he was briefly feted before Americans realised the danger of having such power vested in one man. Cartoonists then mercilessly mocked him. After his death in 1913 the Federal Reserve was set up.

How S&P put the triple A into CPDO (Financial Times)

Last summer a team of financial whizzkids at ABN Amro, the investment bank, developed a new debt product that has since taken the markets by storm. Using complex mathematics, the designers had wanted to create an instrument that would pay the same high interest rate as a “junk” bond but be as free from risk as a bank deposit.

The effect of collateralised debt should not be underplayed (Financial Times)

Once upon a time, it was presumed that the actions of central bankers controlled behaviour in the risky lending world. For if central banks jacked up rates, the argument went, the cost of borrowing would rise – making it harder for highly leveraged groups, such as buy-out funds, to snap up deals.

Now, however, this argument is looking a touch quaint. In the last couple of years, Western central banks have indeed been raising rates. Meanwhile, investors have had to contend with minor matters such as surging oil prices, Middle East turmoil, and now subprime woes. Yet, the credit party has continued, seemingly oblivious – triggering a buy-out frenzy.

So could anything else take the punchbowl away?

Stocks Can’t Fall? Check Out REITs’ Retreat (The Street.com)

In late 2006, Sam Zell made history by selling his prized Equity Office Properties to The Blackstone Group. Investors saw this transaction as confirmation of value. By contrast, I viewed the sale by the “smartest man in the room” as a cautionary sign.

LBOs Attack Finance Company Bondholders; SLM Unravels (Bloomberg)

Bondholders were ambushed by last month’s $25 billion takeover of SLM Corp., the student loan company known as Sallie Mae. They had assumed that companies whose profits depend on investment-grade credit ratings couldn’t afford to pile on debt.

No, it is not pretty. But it appears the rest of the media is slowly catching on…

• Bank of America’s Lewis Calls for Lending `Sanity’ (Says credit bubble about to break!)
• U.S. Home Prices to Drop in 2007 on Loan Standards
• Fed Keeps Rate at 5.25%; Says Inflation is `Predominant’ Risk
• Don’t Fool Yourself: It’s a Cheap-Money Economy
• Home prices expected to fall further
• Home Prices Fall in Rich New York Suburbs Once Immune to Slump
• Supply of Homes Continues to Grow
• Toll Brothers Homebuilding Revenue Falls 19% on Cancellations
• U.K. Consumer Spending Power Wanes in Face of Inflation [WSJ]
• Consumers May Be Getting Tired [WSJ]

It’s been a while since we’ve done a Weekend Reads. Enjoy!

• Wal-Mart May Suffer as Mortgage Woes Hit Customers
• Growing Alt-A problems could threaten some mortgage-backed securities
• M&T, Buffett Holding, Says Alt-A Loans Hurt Profits
• Japan Feb housing starts down 9.9 pct yr-on-yr, worse than forecast
• Adjustable rate mortgages part of foreclosure crisis
• Late payments rise on some consumer loans
• US motor lenders fear risk turmoil
• Fed sees subprime market woes for one to two years” target=”_blank
• Greenspan blamed for subprime crisis
• Unstable, Unbalanced, Uncoordinated, and Unsustainable
• Fed’s Moskow warns subprime mortgages could crimp economy
• Subprime warnings ignored despite earlier credit card troubles
• Bernanke Keeps `Inflation Bias,’ Sees Growth Risks
• Subprime Defaults May Spread to Auto Bonds, S&P Say
• The Economist: America’s Housing Market Cracks in the façade (Featuring a Casey Serin Update)
• Euro Money Supply Growth at Fastest since Euro Launch
• U.S. gasoline prices rise to $2.61/gallon
• Drivers Shrug as Gasoline Prices Soar
• Merrill’s Subprime Risk High
• Credit Suisse sues subprime lenders
• Mortgage crisis hits million-dollar homes

Boy, the headlines are flying.. Let us help you connect the dots to dveloping problems!

Merrill sounds alarm on global liquidity

Merrill Lynch has warned of a global credit crunch as central banks in Europe and Asia tighten monetary policy, advising clients to shun risk and switch to safer assets over the forthcoming months.

Merrill Loaded for Bear in Mortgage Market That Humiliated HSBC

Merrill already has bankrolled two home lenders that subsequently failed and purchased a third, First Franklin Financial Corp., for $1.3 billion, just before HSBC Holdings Plc disclosed that its bad-loan provisions increased 20 percent because of the unraveling U.S. subprime market.

Sacramento: The pressure’s on sellers to lower their prices

Here’s an alarming fact about Sacramento’s housing market: About one of every five existing homes on the market is a “short sale.” That means the home is worth less than the value of the mortgage, and the lender is willing to accept less than full repayment of the loan to avoid foreclosure, says Tracey Saizan, president of the Sacramento Association of Realtors.

Zero-down lenders folding: High-risk loans go bad; subprime firms go under

Brian and Selah Davenport were two days away from closing on a townhouse in Parker when their mortgage broker called on Valentine’s Day. Their lender, Las Vegas-based Silver State Financial Services, one of the country’s bigger subprime lenders, had ceased operations. That forced the couple, who were looking for a zero- down loan, to scramble to find another lender and save the purchase.

After Subprime: Lax Lending Lurks Elsewhere

Investors who dabbled in subprime mortgages have learned that risk is a four-letter word. The lesson might need to be applied elsewhere before too long. The shakeout in the subprime-mortgage industry — which caters to high-risk borrowers — claimed more victims last week. ResMAE Mortgage, a Brea, Calif., lender, said it was filing for bankruptcy protection and selling assets. Accredited Home Lenders Holding reported a fourth-quarter loss of $37.8 million, in part because it was forced to buy back nonperforming loans it had sold

Investors in mortgage-backed securities fail to react to market plunge

It’s amazing how long it can take investors to see that the wheels are coming off a prized investment vehicle. Denial, after all, is a powerful thing. But when an imperiled favorite happens to be a pool of asset-backed securities — especially those involving home mortgages — denial can be compounded by outright blindness to the real risks of that investment.

• Risks Still Cloud U.S. Economic Outlook
• Central Banks Face Rising Pressure From Politicians

As we’ve discussed during prior live streaming shows, we are now doing a short, 15-minute daily live update every day at market close, 4:15 p.m. ET. Tune in or subscribe to the podcast recording by clicking the Talkshoe ID below.

Live — Vigilant Investor now!

Doug Wakefield from Best Minds Inc. and Vigilant Investor’s Johannes Ernharth discuss why paying attention to the economy is more important than it has been in a long time when it comes to your financial future. For a long time it seemed like those who talked about problems in the economy translating into problems in your pocket book were always wrong, or at best, too early. But since 2000 and the bubble burst in technology stocks and then the S&P and Dow, times have changed. Stocks have not regained their 2000 highs, and after a recession dip in 2001, the economy is again slowing and facing a deflating housing bubble. Should you be paying attention, or should you stick with auto pilot, buy and hold asset allocation that worked so well from 1982 to 2000?

Tune in right now live (9:00 pm Eastern), or check out the podcast that is always available on talkshoe.com or through iTunes.
Also, feel free to call in to talkshoe for your questions. For more information, click the talkshoe link below!

• Federal Reserve official: Inflation may take several years to moderate
• High-Cost Loans on The Rise: Consumer Debt Seen Increasing
• IMF warns of ‘severe global slowdown’
• Realtors slash home sales forecast
• Labor Costs Shake a Pillar of Fed Policy
• Are home investors in for a Bubble Bath?
• Behind That Sense of Job Insecurity
• Dissenting Fed official says inflation a risk
• ARMs account for smallest share of loans in 3 years
• The myth of central banks and inflation
• Why Looming Stagflation (and Other Indicators) Reminds Me of 1973
• Oil slides toward $66 on BP, ample US stocks
• U.S. rate jitters hit stocks as yen soars
• Dollar Up, Gold Down in Europe

A few linked headlines and snippets from around the net today:
CPAs Pessimistic about Economy

“More than half of certified public accountants polled by the American Institute of Certified Public Accountants, many of them CFOs or controllers, are pessimistic about the state of the U.S. economy. The opinions of 54 percent of accountants polled ranged from neutral to very pessimistic. That’s up from 41 percent expressing similar sentiments in December 2005, the last time the AICPA conducted this kind of survey.”

Housing Appreciation Rate Lowest Since 1999

“In the latest evidence of a cooling housing market, U.S. home prices rose in the second quarter by the slowest rate in more than six years, according to a government report released yesterday. Still, home prices were 10 percent higher in the three months ended June 30, compared with the corresponding period last year. The quarterly appreciation rate of 1.17 percent, however, was the slowest since the fourth quarter of 1999, according to the analysis by the Office of Federal Housing Enterprise Oversight.”

Home equity borrowers on the edge

“Last week, Moody’s Investors Service reported that the delinquency rate in the home equity loan market rose 11 percent for the quarter ended in April from the same period a year earlier. “This is the 11th consecutive month that the home equity delinquency growth rate has risen,” Moody’s Ben Garber said. To give you an idea how quickly the market turned, the delinquency growth rate was falling at a 27 percent annualized rate in the quarter ended May 2005. In the space of 11 months, we’ve rotated from vast improvement to sharp deterioration.”

Enjoy our expanded edition of The Weekend Reads, including subsections.

Economy & Markets

• Bank of Italy slashes dollar holdings in favour of UK pound
• U.S. Economy Cools As Consumers Pull Back
• European Money Supply Growth Slows in June After High
• US dollar slumps ahead of Fed pause
• Analysts suggest protection plans against inflation
• Bank of England Raises Interest Rates
• Federal Reserve’s William Poole Says He’s Still Split on Rate Hike
• Rate debate splits market
• Wary employers add fewer jobs in July
• Fed Should Pause, Avoid Risk of Hurting Economy: Gene Sperling
• And the Fed’s next move will be
• Stock investors want Fed to pause
• Joblessness Rises Amid Uncertainty
• U.S. Economy Cools As Consumers Pull Back
• Dollar Drops After U.S. Adds Fewer Jobs Than Forecast in July

Housing Bubble

• In the heat of summer real estate market running out of steam
• Mortgage Default Notices Soar 67%
• Data Shows More California Homeowners Feeling The Squeeze
• California Default Notices Up 67 Percent
• More Seattle homeowners facing foreclosure: Up 30%

Energy & Gas Prices

• Gas Price Rise Alters Spending Habits
• Gas prices creep higher with no relief in sight
• Gasoline prices top $3 per gallon
• Toyota cashing in on gas prices
• Oil prices continue to fall as concern over tropical storm recedes
• Gas prices prompt state inquiry

Commentary to Ponder

• Fleckenstein: Don’t worry about the Fed getting tough
• Kasriel: Weekly Jobless Claims Confirm Softening Labor Market
• Schiff: The Pause That Will Not Refresh
• Unemployment surging! Inflation out of control!
• Mauldin: A Thousand Barrels a Second
• Who’s Got the Power?

• Low-rate loan use defying warnings
• Investors jittery ahead of local inflation figures
• Inflation’s Sources Hard to Domesticate
• 40% don’t think employers are paying market rates
• June housing starts fall more than expected
• Gold May Rise on Speculation Fed to Struggle Curbing Inflation
• College Costs Are Damaging Future of Americans
• Israel troops cross border
• U.S. Plan Seeks to Wedge Syria From Iran
• Fed May Have Boosted Rates In Part to Satisfy Expectations
• High fuel prices give U.S. double trouble
• Rates on 30-year mortgages are highest since 2002
• Debt forces one in four to fall behind on monthly bills