Are Banks Running Out of Money?
by Anthony Cherniawski, The Practical Investor, LLC | March 28, 2008
PrintThe constricting credit market is taking its toll on all forms of businesses, both large and small. Gadget maker Sharper Image declared bankruptcy this month as well as Peloton Partners, LLC which collapsed after their banks demanded repayment of the loans they took out to purchase mortgage securities. In a recent report, Goldman Sachs Group Inc. suggests that the credit supply may be shrinking by as much as $2 trillion. This is equivalent to 7% of all government, corporate and household debt.
A survey conducted by the Federal Reserve in January found that one-third of domestic banks had toughened lending standards for small-business loans in the past three months. A record 80 percent made commercial-property loans harder to obtain, and a majority tightened terms on mortgages to people with good credit. The survey covered 56 domestic and 23 foreign lenders.
The tightening is apparent to Peter Djuric, a mortgage broker in Chicago who has 28 customers waiting for approvals on loans. Applications are taking a month or more for lenders to process, compared with an average of 10 days last year, he said.
``They're looking for reasons not to do loans.''
Taxpayers will take the hit on the Bear Stearns bailout
The Bush Administration keeps insisting that it isn’t using taxpayer money in any institutional rescues, but the Treasury may have difficulty recovering the more than $30 billion in assets that it received in return for the Bear Stearns bailout. In addition, Treasury's push to have Fannie Mae and Freddie Mac buy more mortgage bonds reduces the capital the government-chartered companies hold in reserve at a time when foreclosures and defaults are surging. This puts taxpayers at risk for an even larger bailout when these institutions fail. J P Morgan Chase will liquidate the Bear Stearns assets over a 10-year period with JPM absorbing the first $billion in losses. The U.S. Treasury (and, ultimately, the taxpayers) will be liable for the remainder of the losses. The average recovery of a failed company is 40 cents on the dollar, suggesting that the taxpayers will ante up about $17 billion over the next ten years.
National City puts up a “for sale” sign.
Investment bankers are trying to find a buyer for Cleveland- based National City after losses triggered by the worst housing slump in a quarter of a century, Dow Jones reported March 13, citing people familiar with the matter. The bank, which once ranked among the nation's biggest subprime home lenders, sold $400 million of bonds in January as part of its plan to raise capital after posting a $333 million fourth-quarter loss.
A drop in Durable Goods Orders turns market south.
March
26 (Bloomberg)
-- U.S. stocks fell for the first time in four days on a worsening
outlook for bank profits, an unexpected drop in durable goods orders
and concern that financing for buyouts will collapse.
The storm flags have been raised since analysts had already discounted the consumer, but projected that industry would take up the slack. The precipitous drop in durable goods orders has taken the wind out of their sails.
Treasuries snap their winning streak.
March
27 (Bloomberg)
-- Treasury notes fell, snapping a two-day rally, as the government
said personal spending was stronger last quarter than previously
estimated, and before an $18 billion auction of five-year notes, the
biggest since 2003.
The final report on the Gross Domestic Product for the 4th quarter of 2007 was unchanged from prior estimates. It showed an annualized growth of 2.4% in the fourth quarter, compared to 4.9% in the third quarter. Corporate profits, on the other hand are rapidly decelerating, down $52.9 billion, compared to a decrease of $20.5 billion in the third quarter.
Cashing in on the high price of gold.
Last
week’s 100+
points slide has not deterred the gold bugs. They believe that
this event is just another “blip on the screen.” But a 12.5%
decline in just a matter of days is not to be taken lightly. Many
fundamentalists have not taken into account that the trend may now be
broken. Yes, gold has been one of the leading
investments for the last year, but trends don’t continue
forever. Technically, the uptrend is done. Let’s see what’s next
for gold.
The Nikkei caught in durable goods crossfire.
Japan’s
Nikkei index fell last night as manufacturers raised concerns about
the slowing economy in the U.S. “Worsening performance among
exporters' is trickling down even to companies that depend on domestic
sales,” said Koshi
Kumagai, Tokyo-based head of investment management at BNP Paribas
Asset Management, which manages about $438 billion in assets. “I
expect more companies to cut their earnings estimates.”
China Shares not finished declining.
Shanghai:
China’s benchmark stock
index tumbled 5.4 percent Thursday to its lowest level in 11 months,
dragged down by dramatic declines in PetroChina and other large cap
stocks.
Thursday's declines follow a smaller drop on Wednesday. Investors remain cautious about large lots of shares coming into the market as lockup periods expire in coming weeks. Analysts say the slide can only be stopped if policy makers in Beijing signal publicly that they are discouraging massive sales by big shareholders.
White House, Treasury support strong Dollar.
NEW YORK, March 26 (Reuters)
- The dollar fell for a second straight session on Wednesday after an
unexpected drop in durable goods orders heightened worries about the
health of the U.S. economy and backed expectations of further interest
rate cuts.
The belief by economists is that the European Central Bank will keep interest rates steady, while her in the U.S., the weaker economy suggests that interest rates will continue to decline. All things equal, this is not good for the dollar.
Housing continues to decline…is that news?
In the sharpest
price drops recorded since two economists developed their popular
method to track housing prices in the 1980s, local home prices
declined a steep 16.8 percent from a year earlier and 21 percent from
the peak in November 2005, according to the Standard & Poor's/Case-Shiller
home price index.
Over 30% of all home sales in California are foreclosures, up from only 6% a year ago. This is having an effect on home prices that won’t diminish for some time to come.
Is the Midwest getting preferential treatment?
The
Energy Information Administration’s This
Week In Petroleum tells us that the normal seasonal patterns for
gasoline and diesel fuel are being turned on their heads. Gasoline,
which normally sells at a premium to diesel fuel, is enjoying
inventories well above average, while the price of diesel has had a
floor put under it due to the high demand for home heating fuel. It
looks like that trend will continue for some time. Meanwhile, the high
price of oil is the main contributing factor to the price of both
fuels.
Cold weather alone wouldn’t cause this spike.
The
Natural Gas
Weekly Update reports, “The net withdrawal from working gas
storage of 36 Bcf is about 10 percent less than the 5-year average
withdrawal of 40 Bcf but significantly exceeds last year’s net
withdrawal of 11 Bcf for the same report week.” Natural gas
inventories are still above their 5-year average, but lower than a
year ago. Warmer weather will normalized the inventory numbers and the
overall pattern will become clearer as the weather warms.
Greenspan’s Legacy
Nassim Taleb finds himself in the eye of a storm as he has had an uncanny way of pointing out flaws in Wall Street’s worst-case scenarios. Simply put, they ignore the really rare and devastating events that seem to be happening more often than one can account for. Why? Because the merging of mega-institutions resulted in the concentration of mega-risks.
“The Lebanese-born Taleb, a balding man who labels himself a philosopher of randomness, has an eerie knack for timing things right. His most recent book, ``The Black Swan: The Impact of the Highly Improbable'' (Random House), came out in May 2007, just months before the subprime fiasco rocked global markets and led banks to announce at least $208 billion worth of writedowns. The book's message offered something of a preview of the crisis: that we're all blind to rare events and routinely fool ourselves into believing we can predict risks and rewards.”
Copyright © 2008 Anthony Cherniawski
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contact information
Anthony Cherniawski | President and CIO, The Practical Investor,
LLC.
State Registered Investment Advisor | Mason, MI USA | Email | Website
The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
