Saturday, February 13, 2010

Commercial Delinquency Rising

Commercial Mortgages have hit a new monthly high in delinquencies at 5.42% as can been seen in the chart below.

It is important to note that while we have been talking about the commercial real estate "problem" for a while now there have been no solutions that have come forth to try and fix it.

Thus, the $500 billion in loans that are set to roll over during the next three years should face some problems in that estimates show over 50% of commercial real estate to be under water by next year.

The following chart shows the breakdown of delinquency by the different commercial real estate types:

As you can see, the apartment and hotel sectors are currently seeing a rapidly rising delinquency rate.  These were the properties that saw the most flexible loan terms during the bubble years.

The apartment market, in my mind, will represent the greatest buying opporunity once we see the real collapse in property values. The reason for this is simple logic: our population continues to grow and those people will need a place to live.

You may also note that the deliquency rate is the highest in the South.  That is why I live in Charlotte, a city facing extreme short term pain that has tremendous growth potential over the next 20 years. (Much more to come on that in the future)

Office and Retail are facing challenges in that many businesses can now work from home, and many consumers can shop from home. Once oil prices begin surging again in 2012-2013 when we face the coming supply crisis, working and shopping from home will become far more appealing.

The buying opportunities in the apartment market will come when the FDIC sells the assets they acquire from failed banks into the open market.

Until then, sell your home, sell your buildings, and sell any securities that invest in any form of mortgages.

We ain't seen nothing yet.

Thursday, February 11, 2010

Niall Ferguson

Niall Ferguson discussing the eurozone and the next coming debt crisis: The USA.

Wednesday, February 10, 2010

Stephen Leeb

Stephen Leeb, author of the coming Economic Collapse, which was published in February 2007, takes some time to speak with Forbes Magazine. 

The topic moves to silver, the poor man's gold, and soon to be global darling.

Tuesday, February 9, 2010

Talks With Pops

I spoke with my father on the phone a few nights ago and we talked a little about retirement.  During the conversation he mentioned that he will have the ability to access social security in just a few years.

If my father is confused on the availability of social security, then I would imagine there are a great deal of other boomers that do not understand what is going on with the fund.

Over the past 70 years, since the social security program was created, it has run a surplus.  This means that workers are taxed a percentage of their income every month and that money is put into the social security fund for their future retirement.

When they reach that magic retirement age they will be paid X amount of dollars every month.

What most do not understand is what has happened to that fund over the past 70 years.

Let's say that the social security fund in a given year takes in $400 billion in taxes.  The program pays out $200 billion in social security payments.  This leaves a $200 billion "surplus" that is put away for future generations.

The problem is that the money is not put away for future generations.  Many people do not realize that our government then "borrows" that $200 billion and spends it.  They replace the money with an I.O.U. called a treasury bond.

It is similar to the movie Dumb and Dumber when Jim Carey hands the bad guys the suitcase full of I.O.U.'s.

The size of the "surplus" suitcase that is full of I.O.U. pieces of paper is now $10 trillion.  That is money promised to the retiring baby boomers that is no longer there.

This year things will begin to get interesting.  For the first time ever, the amount of money that is brought in with taxes is going to be LESS than the amount paid out.

For example, the government still has to pay out the $200 billion in social security benefits, but they only take in $180 billion in taxes for the program. (I am making up these numbers to make it easy to understand)

This gap is going to grow wider and wider every year as we move forward for two reasons:

1.  There is a tsunami of boomers about to retire
2.  Tax receipts are plummeting in the current recession/depression

Costs Higher/Income Lower

This difference in cost between what the program takes in and what they pay out will be added to the regular budget deficit.

For example, last year the budget deficit came in at $1.4 trillion, however that included the government TAKING money from the social security surplus to pay down the debt.

The same scenario exists for medicare except the I.O.U. empty suitcase is $65 trillion.  That is what has been promised, taxed, and then spent.  (This is the running number down at the bottom of the webpage)

The most likely scenario to emerge will include the following:

1.  The retirement age to collect social security will be raised: most likely to 69 or 70
2.  The government will create a "savings" plan where a portion of your income goes to investing in the treasury market to fund the government debt shortfall
3.  There will be rationing in the health care system

This is best case scenario.  Most likely there will be a run on the United States currency far sooner.  This will cease a vast portion of the government spending as they default on the debt.  The default could come in the form of DEVALUATION if the Fed prints money to buy the debt.

This will create the worst case scenario involving hyperinflation, civil unrest, and the loss of most of the freedom we enjoy today.

Marc Faber

Marc Faber takes some time to speak with Margaret Brennan regarding the current financial picture around the world.

Sunday, February 7, 2010

The Week In Review

I apologize for the lack of updates throughout this incredible week in the markets. I’ve been in the process of moving to a new apartment and the office has been crazy.

To make up for it, I’m going to hit you with a barrage of topics to clear through the noise in the marketplace.

I'll focus on four main themes, and I've divided them into sections:

1. Friday’s Trading Session

2. Unemployment

3. The Housing Market

4. The Sovereign Debt Crisis

So without further adieu, let’s get started.....

1. The Invisible Hand

I normally do not spend time on specific market days and try to focus more on long term trends, but Friday’s session in the stock market had a peculiar incident that cannot go unnoticed.

The stock market received a thrashing all week as investors have begun to panic about the foreign debt problems.

The sell-off continued throughout the week until late in the day on Friday when out of nowhere it made a violent move straight up as can be seen in the chart below.

The market move was made by a single buyer purchasing an incredible amount of an ETF called SPY. This ETF is a basket of stocks in the S & P 500. That one trader was JP Morgan.

Perhaps they decided at that moment to get more bullish on the stock market than any other time in history. We’ll never know why.

After this market move, traders began covering their short positions for the rest of the day heading into the weekend. If a bail out was announced for Greece this weekend, no one wanted to be short and unprotected when the market was closed. (More on that to come)

Aside from this single day move, the overall market trend has been down. Investors have begun to  worry about a “double dip” for the economy. Two main factors leading this charge are unemployment and housing.

Let's take the jobs picture first.....

2. Friday's Jobs Report

Friday’s numbers showed a monthly decline of 20,000 jobs and sharp revisions downward to previous jobs losses.

However, the actual unemployment rate fell below 10% to 9.7%. This will most likely be touted as progress from our leaders but an understanding of the numbers shows otherwise.

The reason for the total percentage drop is not an improvement in unemployment, but an enormous part of the workforce entering the discouraged category. This means they have been unemployed for so long that they have fallen off the unemployment claims list. The government counts these people as have given up looking for work and therefore are not counted as part of the labor force.

A better measure of unemployment is the Labor Force Participation Rate, which provides information about the total number of people employed as a percent of the total population. This number includes the discouraged and can be seen in the chart below:

The next chart shows where we stand compared to previous recessions with that percent job loss and the amount of time it took to recover:

And finally the U6 government unemployment number which shows the real unemployment rate including the “discouraged.” It has just hit a new high at 18%:

We are not entering recovery, but just beginning the second phase of the collapse.  Look for this to lead to the next stimulus bill and then the next stimulus bill from Washington. Unfortunately, the bills make the unemployment situation far worse with each cancerous drain from the efficient portion of the economy. An article discussing that topic further can be read here.

The continued job losses and unemployment rate will only add to what is in store for home owners.....

3. Why Home Prices Will Fall

We are on the precipice of the next long leg down in the housing market. Unfortunately this one will be far worse and even more tragic because home owners have been told and promised that the worst is over.

The government has embarked on short term stimulus boosts to try and spark artificial demand for homes. One of those is the home buyer tax credit that will end this March. When the tax credit ends it will lower the demand for housing.

This lack of demand will hurt the chances of clearing out the next oncoming wave of foreclosures, also known as the shadow inventory.

Over the past three years the “cure rate” (brought current on payments) for homes that are 90 days or more delinquent has fallen from 40% to less than one percent 1%.


There are currently 2 million homes past this stage, and there are another 2.3 million homes that are already in foreclosure or have been seized by banks. (Real Estate Owned)

This shadow inventory has been held off the market by banks. They know when they sell the homes they will take massive losses and they are just trying to keep their doors open for business.

The following chart is a fantastic visual to help you see the total inventory of homes including the shadow:

Total housing inventory is now over 8 million units, a 16 month supply, shattering all previous records.

The next major problem for the housing market is what has been termed strategic defaults. This is when people can make their home payments but walk away anyway because their mortgage is higher than what their home is worth. (Underwater)

Of the roughly 2 million foreclosures in 2009, 25% were strategic, as can be seen from the chart below:

The New York Times ran an article this week titled “No Help In Sight, More Homeowners Walk Away.” In it they described the critical level at which homeowners are most likely to “walk away.” This level was when the home’s value had fallen below 75% of the total mortgage value.

They estimated that by the third quarter of 2009 4.9 million homeowners had reached that critical level.  Look for an enormous amount of these Americans to begin to walk away this year, adding to the surging supply of homes just discussed.

The final piece to the puzzle, and by the most important, is the mortgage market. As I have discussed in great detail, the Federal Reserve last March created a 12 month program to purchase $1.3 trillion in mortgages.

This program not only became the entire market for mortgages, but it kept interest rates at an extremely low level. The following chart helps show the Fed’s purchases in relation to mortgage interest rates:

A majority of the home price indicators have already begun to top and some have already turned down.

As I have repeated over and over, the Fed’s mortgage purchase program which ends next month will have to be extended in order to keep the housing market from seeing a rapid collapse in price.

This week the Washington Post reported that Federal Reserve Bank of New York President William Dudley said this week that, “The Federal Reserve would consider reopening its program to support the mortgage market if interest rates spiked or the economy showed new weakness.”

I expect a new program to be announced in a matter of weeks.

2010 will begin act two of the housing market collapse. Option Arm re-sets will start this year and continue for the next three years. The total value of option arm loans is greater in size than subprime, and the loans are far more lethal.

4. Sovereign Debt

It is important to put what is happening in the Eurozone into perspective. The following shows the percentage make up of some of the Euro nations to the overall European GDP:

Portugal 1.8 % of GDP

Greece 2.7% of GDP

Ireland 3.1% of GDP

Italy 17% of GDP

Spain 12% of GDP

France 21% of GDP

Germany 27% of GDP

As you can see, Portugal, Greece, and Ireland make up a very small percentage of the toal European economy. In that sense, letting them default would not have a major impact on the Euro union.

However, there are other important factors to consider.

The most important is the banking system. As I am typing today, Euro's are being pulled from Greek and Spanish banks and placed in German and French banks. The thinking is that if Greece and /or Spain leave the Eurozone to once again issue drachmas and pesetas, their revamped currencies will be traded at a discount to Euros. Therefore, to avoid losing purchasing power from this possibility, Euros are moving out of banks from south to north.

Thus, as the sovereign debt crisis spins out of control, it may cause banking crises in Greece and Spain, as well as the other weak spots in the eurozone, namely, Portugal, Ireland, and Italy.

For this reason these countries will be protected. Instead they will face a devaluation of their currencies, meaning that money will be printed to cover the debts.

This was discussed this week by the world's top bond manager, Bill Gross. You can fast forward to the five minute mark for that particular discussion:

Last week I discussed how the eurozone compares to the United States, and why this crisis is an enormous buying opportunity for gold and silver.