Wednesday, August 01, 2007

Not Good

Here's the economic news for the day.

First, the Bear Sterns hedge fund round-up:

Two Bear Stearns Cos. hedge funds heavily exposed to the flagging mortgage industry filed for bankruptcy protection late Tuesday, two weeks after the company told investors one was essentially worthless and the other had lost more than 90 percent of its value...The news comes amid media reports that Bear Stearns froze the assets in a third fund with exposure to the credit markets. A Bear spokesman was not immediately available to comment.

Three more hedge funds are closing as a result of the subprime mess:

Oddo & Cie, a French stockbroker and money manager, plans to close three funds totaling 1 billion euros ($1.37 billion), citing the ``unprecedented'' crisis in the U.S. asset-backed securities market.Oddo said it will wind down the funds within the ``shortest possible time frame'' because of a plunge in prices for collateralized debt obligations, notes backed by other bonds, loans and their derivatives.

The contagion is spreading to Alt-A mortgage loan pools:

NEW YORK, July 31 (Reuters) - Moody's Investors Service said on Tuesday it has refined its method for rating residential mortgage securitizations backed by Alt-A loans in response to rising delinquencies in pools of loans securitized in 2006....The rating agency's higher loss estimates are projected to range from an increase of 10 percent for stronger Alt-A mortgage loan pools to an increase of more than 100 percent for weaker pools as a result of the revisions.

Subprime and Alt-A defaults are hurting corporate earnings:

Aug. 1 (Bloomberg) -- Railroads, chemical producers and insurance companies are blaming the worst U.S. housing slump in 16 years for their earnings woes. Burlington Northern Santa Fe Corp., the second-biggest U.S. railroad, said lower shipments of housing products and lumber reduced second-quarter earnings. DuPont Co., the third-largest chemical maker, said slumping demand for kitchen and bathroom countertops was partly responsible for its profit drop. Genworth Financial Inc., the former insurance unit of General Electric Co., said earnings will be at the ``lower end'' of its forecast this year as mortgage-insurance claims increase. ``The subprime slime is oozing,'' said Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey, who correctly predicted the recession in 2001. ``As home equity evaporates, that takes out the foundation of strong consumer spending growth, which has been the mainstay of the economy.''

In the housing market, foreclosures are up significantly:

NEW YORK (Reuters) -- U.S. home foreclosure filings rose 58 percent in the first six months of the year and could surpass 2 million this year as the housing market continues to deteriorate, a report said. Foreclosure filings in the first half spiked from the same period last year to 925,986 as many overstretched borrowers have been caught between rising interest rates and falling home prices. The Federal Reserve has cited the faltering housing market as the biggest risk to economic growth. The foreclosure filings were also up more than 30 percent from the previous six-month period, at a rate of one filing for every 134 U.S. households, said RealtyTrac, an online marketplace for foreclosure properties.

Home prices continue to decline:

Home prices in 20 U.S. cities fell the most in at least six years, suggesting the housing recession has yet to touch bottom. The S&P/Case-Shiller index of home prices in 20 metropolitan areas dropped 2.8 percent in May from a year ago, led by declines in Detroit and San Diego, according to the report issued today by Standard & Poor's and MacroMarkets LLC. The drop was less than the median forecast of four economists surveyed by Bloomberg News. The declines indicate that housing will continue to hamstring the world's largest economy, economists say. A glut of unsold properties and mounting defaults are forcing builders to scale back construction and hindering consumer spending as homeowners are less able to borrow against home equity. ``Things are getting worse rather than better,'' said Sal Guatieri, senior economist at BMO Capital Markets in Toronto.

Finally, energy inflation is here to stay:

LONDON (Reuters) - Oil hit a new record high above $78 on Wednesday after a larger-than-expected drop in crude inventories in the United States. U.S. crude rose to an intraday high of $78.77 a barrel, surpassing the previous peak of $78.40 reached in July 2006. The September contract was trading up 19 cents at $78.40 by 11:20 a.m. ET.

There you go - home prices continue to tank, foreclosures are increasing, the subprime mortgage mess has spread to Alt-A and prime loan mortgage pools, oil has hit near $80 a barrel, and corporate earnings are down significantly because of the tanking housing market.

Surely the preznut is right when he says the American economy is "strong and getting stronger."

No, this really is the end of the line. Although housing prices are slumping a bit, no real drop has occurred yet. When prices really start to fall, that is when the shit will hit the fan.

The funniest thing to me is when you hear people talk about sub-prime being "well contained". Yeah, after everyone said it was so great how the risk was spread out providing stability. They have sliced up that "toxic waste" and sold it in tranches. Since then it has been sliced up and repackaged so many times, no one even knows who is holding those soon to be bad debts. More than likely, we all are. In our pension funds, in our 401ks. Everyone (well except me, I just have a flat in CZ).

So how does a debt that is spread around all over remain "well contained?" Once prices really start to drop, and foreclosures really start to kick in, people will start to see that all these leveraged acquisitions are backed by money that just isn't there. This will create what I would call feedback that will resonate throughout the entire market.

What you write about is only the first drops of rain. Just wait until the storm hits. The peak of the carnage is probably still over a year away.
The ASX tanked over the past couple of days as well.
"In recent trade, the benchmark S&P/ASX200 index was up 43 points to 5984 after earlier sinking to 5937 - down 4 points on today's trade. Earlier, the index went to as high as 6059 points."
I'm just surprised at how much investment the local market has in US prime lending.
But it does seem to be spreading:
"The world's biggest miner, BHP Billiton, was down 7 cents, or 0.2 per cent, at $35.89 after going as high as $36.86 earlier today. Rio Tinto was down $1.60, to $89.60."
I guess it will be slow moving, pt, but I think it is only a matter of time before the debt problems (Americans have 100% of GDP in credit card debt and the total amount of credit market debt is 350% of GDP) bring serious problems to the markets and the economy.

Cartledge, I saw that an Australian fund had problems too because of exposure to subprime here in the US. Bad stuff. But as long as people keep buying into scams, I guess the boys and girls running these things will still make billions.
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