Boom2Bust.com

Why Ethanol Sucks

“So ethanol is bad for taxpayers, bad for consumers, bad for the environment, and bad for the world poor. Does anyone benefit from ethanol?”

Wall Street Journal Online Video Link

Source:

“Ethanol: Silly Senator, Corn Is for Food!”
reason.tv
Wall Street Journal Online, August 14, 2008

Windfall Profits Tax? Where’s The Windfall?

Driving back and forth between Chicago and Burlington, Wisconsin, last week, I listened to the news on the radio quite a bit. There was a lot of chatter about Exxon Mobil reporting its highest quarterly profit ever ($11.7 billion) on Thursday. Not surprisingly, politicians were quick to criticize the announcement. The New York Times’ Clifford Krauss wrote Friday:

Democrats in Congress were quick to criticize Exxon’s profit, hoping that the resentment felt by many drivers over high gasoline and diesel prices could help them in an election year.

“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said Senator Charles E. Schumer, Democrat of New York.

Does anyone still pay attention to this guy? IndyMac. Lest we forget!

Anyway, one politician decided to take on the issue of oil company profits directly. On Friday, Senator Barack Obama (D-IL) announced a new proposal where oil companies enjoying record profits would face a “windfall profits” tax, where the cash would be passed on to consumers in the form of a rebate.

Hmm. A “windfall-profits” tax. I seem to recall that a windfall-profits tax was previously imposed on oil companies back in 1980, but was eliminated in 1988 after oil exploration and gasoline prices both fell. I’ve also heard that the tax raised only $79 billion, well below its proponents’ estimates. As a matter of fact, oil industry economists blamed the tax for contributing to a decline in exploration and drilling, helping set the stage for the energy crisis we currently face.

A reduction in oil exploration and drilling. Great. That’s exactly what our country needs right now. Which leads me to ask, which rocket scientist came up with this idea?

Earlier today, ABC News’ Jake Tapper asked the Obama campaign about the specifics behind the tax proposal. From their exchange:

TAPPER: What is a “windfall profit”?
OBAMA CAMPAIGN: Senator Obama believes that while oil companies and shareholders need incentives to run well managed businesses that invest in efficiency and innovation, a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Therefore, a well designed mechanism can impose a fee on a small share of these windfall profits without affecting incentives for oil companies and without affecting the price of oil. Indeed, as the Congressional Research Service recently concluded: “[T]o the extent that a surtax on the corporate income of crude oil producers on their upstream operations could approximate such a [pure corporate profits] tax, this would not raise crude oil prices and would not increase petroleum imports in the short run. While the current corporate income tax is not a pure corporate profits tax, a surtax for oil companies would arguably be an administratively simple and economically effective way to capture estimated oil windfalls in the short run.” [Emphasis added, “The Crude Oil Windfall Profits Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service, 3/9/06, p. 32.]
TAPPER: Should such a tax only be applied to oil/gas industries?
OBAMA CAMPAIGN: Yes.

Okay. Enough of this foolishness.

…a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Geez, is that the best they can come up with? In which parallel universe is any business or industry NOT affected by external factors such as supply-and-demand fluctuations, disruptions, and distortions? As such, is it fair to impose additional taxes on a business or industry just because these factors (which had “nothing to do with their management skill or investment decisions”) played out the way they did?

Yet, the most disturbing aspect of this ill-contrived proposal is the fact that profit margins in the oil and gas industry aren’t exactly at windfall levels. The evidence? From the July 27 issue of Parade Magazine (based on U.S. Department of Energy data):

Although Exxon Mobil netted $40 billion in 2007, the average profit margin for oil companies is just 7.6%, compared with 9.2% for most manufacturers.

Adding to growing speculation that the proposal is purely for political pandering, the Wall Street Journal wrote yesterday:

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come…

The Journal summed it up best when it stated:

…a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

It’s what politicians do in Venezuela, not in a free country.

Sources:

“Exxon’s Second-Quarter Earnings Set a Record”
Clifford Krauss
New York Times, August 1, 2008

“Obama’s Proposed ‘Windfall Profits Tax’”
Jake Tapper
ABC News, August 5, 2008

“With Gas at $4 a Gallon… Who Is Getting Your Money?”
Parade Magazine, July 27, 2008

“What Is a ‘Windfall’ Profit?”
Review & Outlook
Wall Street Journal, August 4, 2008

When The Rich Suffer, So Do You

Take note all you player-haters. When the rich suffer— so do you. At least that’s the argument put forth in an Associated Press piece yesterday. AP’s Mark Jewell wrote:

It may have taken longer and it may not be as acute, but there are early hints that the economic slump is crimping the lifestyles of the wealthy.

They are investing more conservatively, spending less on luxury goods and are being more thrifty with their credit cards. Many are asking their personal shoppers and private-jet travel providers to seek the best deals rather than over-the-top extravagances.

That news may produce a shrug from many people who have lost their jobs or homes in this economy. The problem is that when the wealthy get stingy, it trickles down to the rest of us.

Jewell went on to explain how a pullback in spending by rich Americans tends to affect Main Street. He wrote:

The 10 percent of households with the highest incomes account for nearly a quarter of all spending, according to data compiled by research firm Moody’s Economy.com from a 2006 federal survey…

Other government data show households in the top one-fifth of the U.S. population ranked by income earn about half of all total personal income before taxes — an imbalance that gives the wealthy immense economic clout, said Sara Johnson, an economist at the research firm Global Insight.

“Consumer spending makes up 70 percent of gross domestic product, and when one group accounts for a very substantial share of consumer spending, they also account for a large share of the economic activity that creates jobs,” Johnson said.

The outlook for spending by wealthy Americans doesn’t look too good. Jewell noted:

Unity Marketing, a Stevens, Pa.-based firm whose clients include retailers in the more than $322 billion U.S. luxury goods market, said its latest poll of affluent people nationwide found a 20 percent decline in spending on luxury goods in this year’s second quarter, and the lowest luxury consumer confidence level in the nearly five years the survey has been conducted.

Just over half of the 1,024 respondents earning an average income of $204,800 predicted they would spend less on luxury in the coming 12 months than they did a year ago.

Sometimes, it just doesn’t pay to hate the players. Really.

Source:

“Rich begin feeling the pain in down economy”
Mark Jewell
Associated Press, August 3, 2008

Consumer Blues

Who HASN’T noticed escalating prices these days? Judging from recent purchases, from flowers for my girlfriend to car washes to movie tickets, it’s pretty apparent to me, at least, that the cost of living is on the rise. According to Reuters’ Herbert Lash and Richard Leong this morning:

Consumer prices jumped at the sharpest rate in more than a quarter century during June, and consumers coping with soaring costs received their smallest income gain in a year, the government said on Monday.

The Commerce Department said personal incomes edged up 0.1 percent after rising 1.8 percent in May. June’s rise was the smallest since April 2007, when income was flat.

On a year-over-year basis, prices rose 4.1 percent in June, up from 3.5 percent in May, for the biggest annual gain since May 1991.

An inflation gauge tied to consumer spending jumped 0.8 percent in June, its steepest gain since a 1 percent rise more than 27 years ago, in February 1981.

Source: bobmccarty.com

Source:

“June inflation jumps, incomes barely rise”
Herbert Lash, Richard Leong
Reuters, August 4, 2008

Signs Of The Time, Part 17

We must be nearing the end. Earlier tonight, I was watching a local news station here in Chicago when they did a segment on the new Black Canary Barbie Doll that is scheduled to be released in September. And just why is a grown man talking about Barbie dolls? Well, take a look for yourself…

Definitely not the same Barbie the girls were playing with when I was young. According to BarbieCollector.com:

DC Comics super heroine Black Canary is known for her martial-arts skills and her “Canary Cry” — a high powered, sonic scream with the ability to shatter objects and incapacitate villains. Barbie doll captures this super heroine’s essence, wearing her signature black “leather” bodysuit and jacket, patterned tights, and black boots with “golden” details. Long honey blond hair with bangs and black gloves with “golden” details complete the look.

Tights? Try fishnets. The station’s affiliate in Southern California interviewed a few people about Barbie’s new look. The words “tramp,” “Goth,” and “S&M” came to mind. One woman mentioned that the toy company was trying to get the young “handlers” of Barbie to grow up too soon.

What’s next for the product line? Transvestite Barbie?

Dr. Frank-N-Furter
“Rocky Horror Picture Show” (1975)

Holy Cow! Not Another Economic Forecast Devoid Of Evidence

This morning, I read a piece by Marshall Eckblad of the Dow Jones Newswires on the CNN Money website. Bank of America Corp. Chief Executive Ken Lewis shared his outlook on the U.S. economy and housing market earlier today, after which Eckblad wrote:

Chief Executive Ken Lewis said Monday that the U.S. economy would see “sluggishness” through the rest of 2008 but eventually would stabilize this year and then begin its recovery in the early part of next year. Lewis made the comments during a conference call with analysts to explain the bank’s second-quarter earnings results…

Lewis said one component of those optimistic forecasts is his projection that the peak of the housing crisis is growing closer. “We see housing price depreciation being mostly over this year, maybe going into next year,” Lewis said.

Sound familiar? It should. Consider the following from Mr. Lewis:

In an interview with Bloomberg on Tuesday, Bank of America’s Chief Executive Officer Kenneth Lewis said the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to say that the housing market will begin to improve in the next month or two, forestalling a recession, according to Bloomberg. Lewis believes that job growth will lift home prices and reinvigorate construction by early 2008.

I wrote this over a year ago on June 21, 2007.

The Wall Street Journal’s Mark Gongloff pointed out yesterday that some individuals keep calling for a turnaround in the economy, housing market, what have you, only to be proven wrong time and time again. Gongloff said:

Like Chicago Cubs fans always looking to the next season, there are analysts who have been calling for a turnaround for months despite evidence to the contrary, yelling their hearts out for what so far has been a losing cause.

According to their theory, this has all been a fever dream, a midcycle slowdown like the one the economy suffered in 1998, when stocks briefly swooned, but the technology bubble quickly went right back to inflating. This is the same crowd who dismissed the collapse of the housing market because it’s just a small part of gross domestic product and who said the subprime mortgage meltdown would be no big deal.

And now, $400 billion in losses and one bear market later, they’re still calling for the rosy outcome…

Maybe these individuals should pay closer attention to the evidence. Or use better evidence. Take FOXBusiness.com’s Brian Sullivan for example. This morning, he wrote “Still Looking for the Recession” morning and said:

I went to Atlantic City this weekend for my birthday and stayed at the new Water Club by Borgata…

Whoa! You lost me at Water Club by Borgata. Atlantic City’s first cosmopolitan hotel, which bills itself as “the ultimate resort destination,” charges $479 a room on Fridays and $529 on Saturdays during the summer.

Two problems with this piece of “evidence.” One, the place is new. A good number of East Coasters, like their counterparts along the Pacific, have a reputation for being trend-followers. Let me guess, the place was probably packed, right?

Two. If you can afford room rates like these, it would probably require a great deal more economic pain to cancel your stay, as opposed to what Joe Six-Pack and Suzy Soccer Mom could tolerate. I don’t think we’re at that point (yet).

From the reports I’ve been getting, wealthy Americans have been doing okay when it comes to spending and buying homes. As a matter of fact, I for one believe the purchase of high-end properties by the rich is what’s been skewing median prices upwards in some areas across the country. It’s not that the housing market is getting any better— it’s just that the rich are buying (what they see as) bargain-priced properties.

One more thing. $1,008 a weekend for a hotel room? As long-time announcer Harry Caray of the Chicago Cubs used to say, “Holy Cow!”

Sources:

“2nd UPDATE: Bank of America CEO Sees Economy Rebound In 2009”
Marshall Eckblad
CNN Money, July 21, 2008

“The Economy: How Bad Can It Get?”
Mark Gongloff
Wall Street Jorunal, July 20, 2008

“Still Looking for the Recession”
Brian Sullivan
FOXBusiness, July 21, 2008

The Pollyannas Have Their Day (And Say)

“Don’t believe the mainstream media. now is the time to buy. we buy when others sell and sell one others want to buy. even with whats happening in the real estate market, right now is the time to buy real estate too. do it right and cash in big.”

-Comment left on Yahoo! Finance website

Despite a logjam of bad economic news lately, it seems the “Pollyannas” (referring to an overly-optimistic character from a children’s story of the same name) are running rampant on Wall Street and elsewhere. Emboldened by a Dow Jones Industrial Average that has risen 484.12 points since Wednesday’s opening, “don’t worry, be happy” is their war cry. Consider the following headlines and snippets from mainstream media outlets the past couple of days:

“Buy Now, Don’t Regret Later”
Yahoo! Finance, July 16

But perhaps we do have to be bold more often, and maybe even a little foolhardy when our gut tells us that this is important, or when we come across something alluring in our adventures. If something enchanting catches our eye — whether it’s a Ukrainian samovar or just a hat on your way to work — maybe it’s best to get caught up in the euphoria of the moment.

“This Real Estate Rout May Be Short-Lived”
SmartMoney, July 15

Noted market experts such as Pimco bond-fund manager Bill Gross and economist Mark Zandi of Moody’s Economy.com predict the meltdown in housing will continue for many months, with home prices declining by 10% or more from today’s depressed levels… Yet, such pessimism appears overdone, based on much recent data. Sales of existing homes are showing tentative signs of increasing, while the plunge in prices likely is nearing an end.

“Mean Street: Pollyannas of the World Unite! It Is Time to Buy”
Wall Street Journal’s Deal Journal, July 15

All this bad news can only mean one thing: It is time to buy.

Pollyannas of the World Unite! You have nothing to lose but your chains of media-induced panic.

Of course, there is no getting around the seriousness of the situation, given runaway oil prices and the sorry state of the nation’s financial sector. But take a few minutes and peer through the fog of Breaking News flashes scrolling across CNBC every 30 seconds.

Consider these big flashes: A major restructuring at General Motors. Is this news? GM has been lumbering from one restructuring to another for the past three decades.

George Soros and Jim Rogers predict an end of the world as we know it…yet again. Can anyone recall when either was bullish about the U.S. economy?

Wall Street analysts fall over themselves to downgrade financial stocks. Remember the Goldman Sachs reversal of its bullish call on financials a few weeks back? It is pure herd behavior. Good luck finding analysts who like a financial stock at any price.

A bearish Wall Street is swept by powerful ill-winds. But remember the line from the movie Pollyanna, “When you look for the bad in mankind expecting to find it, you surely will.”

And truer words describing the mindset of a bear market have rarely been spoken.

By the way, does anyone know what becomes of overly-optimistic Pollyanna in the children’s story? She gets crippled in an accident.

Sorry to blow the ending for you…

“I’ve never replied to nonsense like this before but I could’t resist there is no way that this minor blip even compares by the numbers I would bet in ten years we won’t even remember the “housing bubble” I think that the time back in 2001 to 03 was worse, give me a break. f@#% the critics. The U.S. economy is still the greatest on Earth. Think about it.”

-Comment left on Yahoo! Finance website

Sources:

“Buy Now, Don’t Regret Later”
George Anders
Yahoo! Finance, July 16, 2008

“This Real Estate Rout May Be Short-Lived”
Jonathan R. Laing
SmartMoney, July 15

“Mean Street: Pollyannas of the World Unite! It Is Time to Buy”
Evan Newmark
Wall Street Journal, July 15, 2008

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

Vacancies Up At Strip Malls, Regional Malls

Because of this blog and other projects I am working on— I don’t get out much these days. But when I do manage to escape the cage, I’ve noticed more and more empty storefronts in business districts, strip malls, and regional malls around the Chicagoland area. It’s not like I specifically look for them either. Even my father noticed it as we drove back from breakfast this morning. “Look at all those empty stores,” he remarked, as we drove through the downtown area of one of the western suburbs.

So I wasn’t too surprised when I came across a piece by Illaina Jonas of Reuters UK, which said the second quarter was the worst quarter for strip malls in 28 years due to store closings and cutbacks. Using data provided by real estate research firm Reis, Jonas wrote this past Monday:

Strip malls, which are usually anchored by grocery or drug stores, saw average vacancies spike 0.5 percentage points to 8.2 percent, a level unseen since 1995, according to the report released on Monday…

For the first time since 1980, more space became available to rent at strip malls than was rented out – about 3.2 million square feet more. Part of the available space came in the form of 5.7 million square feet of new development that came on the market during the quarter.

Looking For A New Hangout?
Jay & Silent Bob From “Clerks 2” (2006)

Jonas talked about the sources of the strip mall woes. She wrote:

A growing list of retailers shuttered stores ahead of lease expirations or chose not to renew leases, and as newly completed space hit the market without signed tenants…

Consumers are constrained by increases in food and energy costs, as well as the cost of servicing debt run up during the housing boom. In addition to cutting back on clothing, jewelry and nonessentials, they have turned to lower-price grocers such as Wal-Mart at the expense of the upper end usually found at strip malls, such as Whole Foods Market Inc., Reis said.

It’s not just the strip malls that are hurting. The Reuters reporter noted:

Vacancies at regional malls rose 0.4 percentage points to 6.3 percent, the highest level since the first quarter of 2002, according to the preliminary results.

The result of growing vacancies, Jonas said, was downward pressure on rents charged by landlords.

Not a good time to be a mall tycoon…

Source:

“US retail property 2nd-qtr worst in 30 yrs - Report”
Ilaina Jonas
Reuters (UK), July 7, 2008

Playing The Markets? Caution Is The Name Of The Game

Caution is not cowardly. Carelessness is not courage.

-Unknown

Here’s one for the traders and investors out there. I came across the following list of reasons yesterday from Bennet Sedacca (with Professor Rob Roy) of the financial website Minyanville.com as to why caution is a must in the markets these days:

1. Stocks are firmly in a downtrend.
2. Corporate spreads are rapidly widening.
3. Everyone I know is saying “All is well, buy America.”
4. European equities are taking out the lows of the year.
5. The capital-raising window is closed.
6. Earnings estimates are too high.
7. While much of the move in financials is done, it should spread to other industries.
8. If the “best of breed” are missing their numbers, what happens to the real dogs?
9. We are entering the worst part of the Presidential cycle.
10. We are at war. On multiple fronts.
11. The consumer is tapped out.
12. Corporate buybacks are gone.
13. Net equity issuance is very high.
14. Oil above $100 is very bearish.
15. The savings rate is 0.
16. The U.S. is actually one of the best performing markets in the world this year.
18. Level III assets continue to grow.
19. “Credit rot” is spreading from sub-prime to prime.
20. The dollar is sinking to new lows.
21. The Federal Reserve’s balance sheet is impaired.
22. Mutual fund equity cash remains low.
23. Individual investors are now taking money from their retirement accounts to survive.
24. The market is technically on the verge of breaking down.
25. We’ve broken the 200-week moving average in the Dow Jones for the first time since 2003.

Sedacca and Roy explained each reason in detail, and offered this advice:

Risks remain high and, as always, being cautious will only lose you opportunity - not capital.

Source:

“25 Reasons To Remain Cautious”
Bennet Sedacca, Professor Rob Roy
Minyanville.com, July 1, 2008

Talk Of Another Stimulus Package

Although only one-half of the tax “rebate” checks have been paid out, there is already talk of another “stimulus” package being required to jump-start the U.S. economy. Reuters’ Emily Kaiser wrote this afternoon:

Even as U.S. consumers raced to spend their tax rebate checks, economists and analysts at a Reuters summit this week said the effect on the economy may be so short-lived that another cash infusion will be needed.

Kaiser talked to economists Martin Feldstein and Roger Kubarych, and wrote:

Martin Feldstein, a Harvard University economics professor and head of the influential National Bureau of Economic Research in Cambridge, Massachusetts, said textbook economic theory holds that one-time tax rebates don’t work, but recent experience shows otherwise.

“For a lot of people, seeing the cash sends them right out to the store to spend it,” he said. “If the economy is weak a year from now, and this (first stimulus) seems to have worked, I think they ought to do it again.”

Kaiser also spoke to Roger Kubarych, the chief U.S. economist at The Unicredit Group, who said:

We’ve got quite a lot of fiscal kick for the second half but it has got a lot of work to do. I think that it allows maybe 2 percent, 2.5, 3 percent growth in the third quarter but by the end of the year it will be slack. And the next president will reconsider and maybe do another rebate program next year. The economy is not really strong enough without some fiscal kick, and the Fed is pretty much spent.

Despite such benefits, Kaiser warned, “Nothing is free, and the current package, worth $168 billion over two years, will add to an already daunting federal deficit.” In fact, the U.S. Treasury Department reported yesterday that the May deficit was more than double what it was in May 2007. According to the Associated Press on Wednesday, $48 billion in “stimulus” payments contributed to last month’s $165.9 billion deficit, the highest imbalance ever for May.

“She Wants My… Stimulus PACKAGE”
Warning: Somewhat Offensive Material
YouTube Video Link

Sources:

“Economy may need second dose of stimulus”
Emily Kaiser
Reuters, June 12, 2008

“Stimulus payments result in record May deficit”
Martin Crutsinger
Associated Press, June 11, 2008

Top Credit Analysts Say Housing Decline Could Amount To $4 Trillion In Lost Capital

So far, credit crunch talk has revolved mainly around losses in the billions of dollars. No more. Reuters’ Walden Siew wrote today:

No one knows when the credit crisis will end.

But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That’s the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Siew interviewed Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc. The analyst informed him that:

• Wall Street write-downs and losses totaling at least $325 billion to date may ultimately mean $3.9 trillion in tighter credit conditions
• U.S. home prices may keep on falling until 2010, declining as much as 30% from their 2006 peak
• Further drops in subprime mortgage debt markets are expected
• High-yield corporate bond default rates, now at 0.75% from 0.34% at the beginning of 2008, may climb to 2.25% later this year and jump to 6.5% in 2009

Glenn Costello, a Fitch Ratings managing director, also said that there will be more defaults and delinquencies for U.S. home mortgages, with the highest default rates coming from mortgages originating in the last few years. The senior analyst warned:

There are a lot more mortgage defaults to come. We see an ongoing high level of default.

Source:

“Home price drop means $4 trillion in lost capital”
Walden Siew
Reuters, June 11, 2008

All Good Housing News, All The Time

It amazes me how much adults can revert back to acting like children. Confronted with a harsh economic reality, I see more and more people refusing to acknowledge what is actually going on around them. On a day when the New York Times ran a story that said almost one in eleven mortgages in the United States were past due or in foreclosure at the end of March, I came across the following piece from Mary Umberger, the Chicago Tribune’s real estate columnist. Umberger wrote:

Looking for something encouraging about the housing market? How about a Web site devoted to areas where something—anything—is stirring?

The site is HappyREnews.com, run by IMS Inc., a Canadian provider of real estate data in North America. It claims to be a response to the typically bleak data consumers routinely hear from people like me. The site reports data only on communities whose housing markets show statistical improvement.

I just couldn’t resist posting a comment for the article on the Tribune’s website. My comment?:

HappyREnews.com? This is not a new concept. I believe the original one was called Pravda.

“Wendy’s Commercial- Soviet Fashion Show”
YouTube Video Link

Sources:

“About 1 in 11 Mortgageholders Face Loan Problems”
Vikas Bajaj, Michael M. Grynbaum
New York Times, June 6, 2008

“The .com pursuit of happiness”
Mary Umberger
Chicago Tribune, June 6, 2008

Back To The Trenches

After an extended Memorial Day Weekend, it’s good to be blogging again. And guess what? Boom2Bust.com turned one this past weekend!

Altered Images, “Happy Birthday” (1981)
YouTube Video Link

Unfortunately, you won’t find my very first post from that 2007 holiday weekend, as my girlfriend left a comment that I later tried to remove, but instead ended up deleting the entire post. Thanks honey…

Regrettably, being so immersed in my financial research and other projects, it’s sometimes impossible to disconnect myself completely from the work at hand. With that in mind, here are some pertinent observations “from the ground” this past weekend:

Friday- To beat the holiday traffic from Chicago, I decided to leave for Wisconsin (a favorite vacation destination of Northern Illinois residents) a little after rush hour ended. In recent years, this wouldn’t have made too much of a difference, as the area roadways got pretty busy in the days leading up to the weekend. This year, however, traffic was DEAD. Even with all the construction and lane closures. Think this might have something to do with a slowing economy and high gas prices?

Speaking of gas prices, after arriving in Burlington, Wisconsin, I watched the Chicago news while putting together a new gas grill. A TV reporter was broadcasting live from a gas station in downtown Chicago. Even though it was a holiday weekend, there was no one at the pumps. However, they did interview other drivers in the area. While everyone complained about the high price of gas, one individual in particular stood out. Angrily, this motorist claimed that the whole situation was due to rampant price gouging. If it were only than simple, I thought to myself.

Seeing that I didn’t have enough dishwashing liquid to perform a leak test on the new gas grill, I stopped by the local Menards, a home improvement retailer similar to Home Depot and Lowe’s. I’ll be honest, I haven’t been to this particular store that many times, but it sure seemed DEAD for a Friday before Memorial Day Weekend.

Saturday- With too much going on back in the Windy City, I hit the highways once again that morning. Even though I was driving in the opposite direction of holiday traffic, it still looked light in the opposite lanes. The lane closures were still in effect too. Where is everybody, I thought? Well, I was hoping they’d stay off the roads at least until I got back to my pad in the city. Thankfully, I got my wish.

Sunday- I dropped in at the local Barnes & Noble bookstore with my girlfriend. As it was located in the middle of a major mall, this place is usually hopping. Not today. As soon as we stepped inside the store, my girlfriend pointed out the small number of patrons inside. As a matter of fact, while browsing the bargain books section near the registers, I happened to overhear two store clerks talking to each other. One clerk remarked how the bookstore was so quiet today. The other one suggested that most people were probably at home working on their gardens, or at home improvement stores buying supplies. See Friday entry…

Monday- Spent my afternoon at a wake. No financial or economic observations here, although I did have an interesting experience. While downstairs in the guest lounge having some snacks and a coffee, I was looking at a nice-looking grandfather clock at the top of the stairs. About a minute after I started observing this timepiece, the glass cabinet door of the clock mysteriously came ajar and opened wide (with no human help, thank you). Surprised, and not the least bit curious, I put down my coffee, walked to the top of the stairs, and observed the clock. I noticed that the door opened and shut very easily— but I still wondered why it opened when it did.

Creepy. Which could also describe this past Memorial Day Weekend…