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Latest quarterly earnings

2012-05-08T02:23:00.003-07:00

Most highly rated stocks stumbled during the past week, as the overall market fell back into correction mode after a brief uptrend.
InvenSense (INVN) was among the week's big losers, sliding 20% in fast trade. It has fallen out of the IBD 50 lineup.
The maker of motion-sensing devices briefly climbed back above its 10-week moving average, but then ended below that level for the fifth straight week.

Investors seemed to be disappointed by the company's latest quarterly earnings result, which came out late Thursday and only matched expectations.
Ubiquiti Networks (UBNT) also lost 20% for the week and sliced through its 10-week line as it reported earnings. The networking gear maker had been holding above its 10-week average since January.
Other IBD 50 stocks retreated in a less dramatic fashion, but still showed signs of stress.
Among those finishing the week under their 10-week lines were Apple (AAPL), MercadoLibre (MELI) and Michael Kors (KORS). MercadoLibre has lost its spot in the IBD 50 screen.
Some stocks still managed to hit new highs, helped by better-than-expected quarterly earnings.
Online auctioneer Liquidity Services (LQDT), whose clients are
government agencies and corporations, jumped 15.5% for the week.
The stock is well extended from its last proper buying range after five up weeks in a row.
SolarWinds (SWI) touched a new high as it edged up 1%. The tech stock has formed an imperfect short-stroke pattern.
Monster Beverage (MNST) also soared to a fresh peak, but finished well off that level with a weekly gain of just 2%.
The energy drinks maker jumped as much as 28% on April 30 amid news that Coca-Cola (KO) had discussed buying it out, but then gave up its huge gain after Coke issued a denial.
For the week, the IBD 50 index slid 3.5%. That was better than the Nasdaq's performance, but worse than the other indexes' declines.
The Nasdaq dropped 3.7%, the NYSE composite 2.7% and the S&P 500 2.4%, as each index endured its worst week since late last year.
IBD-style investors should watch their stocks for signs of a breakdown. Don't let a hard-won gain turn into a loss. Remember it can be smart to harvest profits when they reach 20%, as well as avoid new buys during a correction.

Healthy demand for the shares

2012-05-05T07:09:00.001-07:00

Texas Roadhouse (TXRH) broke out of its base Tuesday after a better-than-expected earnings report, and Cheesecake Factory (CAKE) also cleared a base, leading a host of restaurant stocks higher.
Texas Roadhouse gapped up, clearing a 17.93 buy point in huge volume as it broke out of a flat base.
The nine-week pattern also can be viewed as the handle to a larger cup with handle.
The stock has a 96 Composite Rating, putting it fifth among 53 companies in IBD's restaurants industry group.
The company said late Monday Q1 profit rose 15%, beating expectations. Sales rose 14%, accelerating for the second straight quarter.
The stock has an A- Accumulation-Distribution Rating, indicating healthy demand for the shares. Yet the company's quarterly profit growth hasn't topped the 25% that's common of leading stocks in six quarters, and Q2 earnings are seen rising just 5%.
Meanwhile, Cheesecake Factory hit a new high as it cleared a flat base. The buy point was 31.68, which it topped Thursday, although 32.57 can be treated as an alternative buy point.
The company announced Thursday that Q1 profit rose a better-than-expected 9% on a 4% increase in sales. The company has averaged 28% profit growth over the past three years, but earnings growth over the past three quarters averaged just 18%. Quarterly sales growth over the past three years has been mainly under 10%.
Although the two stocks are not in the top tier of industry leaders, the new breakouts suggest there's still strength in restaurant stocks. The industry group ranked No. 38 out of 197 as of Tuesday's IBD.
Meanwhile, Red Robin Gourmet Burgers (RRGB) reclaimed its 50-day line. The company is expected to report May 17 that Q1 profit rose 12%, down sharply from triple-digit gains in the two prior quarters. The stock is shaping a flat base with a 38.08 buy point.
Also Tuesday, Brinker International (EAT), the operator of Chili's restaurants, jumped to a new high, and Dunkin' Brands (DNKN), which owns Dunkin' Donuts and Baskin-Robbins ice cream parlors, is near an all-time high.

The percentage price

2012-05-03T07:20:00.000-07:00

The stock action of Questcor Pharmaceuticals (QCOR) in the past two sessions offers a clinic to IBD readers wondering how they should invest during a notoriously volatile time.
On Wednesday, Questcor moved like a bungee cord. It opened sharply up in the opening minutes, then dove as much as 9% below the prior session's close of 41.66.
The percentage price swing from the intraday high of 42.80 to its intraday low of 38 was 12.6%. The stock finished the day down nearly 3%.

Add Thursday's 7% rebound in heavy volume, and you've got a two-day trading range of as much as 16%.

If anything else, Questcor teaches investors the importance of buying correctly.
Trying to enter a stock too early — ahead of the breakout from a complete base pattern — can lead to whiplash in the form of an instant 8% loss or even more.
What caused the violent trading action? Earnings news, of course.
After the market close on Tuesday, the maker of H.P. Acthar Gel (or known as simply Acthar) reported outstanding first-quarter results. Earnings per share excluding items rocketed 205% to 61 cents a share. That marked the fifth straight quarter of EPS growth exceeding 40%.
Sales leapt 161% to $96 million. Not only was that a quarterly record, but it extended Questcor's streak of accelerating top-line growth to five quarters.
After-tax margin rose to 42.3% vs. 34.7% in the year-ago period.
Officials noted in a news release that its quarterly results can be volatile. Why? The timing of orders can be unpredictable.
On the last day of Q1, Questcor says it filled an order for 180 vials, a significant chunk of the 4,111 total vials shipped during the quarter. Questcor noted this order alone added 4 cents per share to the bottom line.

Percentage of closed bank assets

2012-05-01T03:43:00.001-07:00

It is not complicated to understand how laws are being violated by the FDIC. Karl Denninger in his post details that and why there should be no losses from bank closings (unless there is bank fraud involved). Simply stated, it is the FDIC that is causing the losses by not closing banks when their mandate says they must. Leaving them open beyond this point enables losses to continue to mount to the point that, when they are finally closed, taxpayer funds are needed to bail out depositors. Timely closings would ensure taxpayer funds would not be needed.
There are two possible reasons why the FDIC is in violation of the law. First, they are inept. Second, they are “playing politics.” While all government agencies suffer from the first (and most from the second), the FDIC has a rather simple task and Sheila Bair, at least based on TV appearances, does not appear incompetent.
It is my belief that the FDIC is playing a form of politics. Whether this is willingly or out of necessity might be debated. Thus far they have closed just over 100 banks. Losses (which should not occur) have been increasing as a percentage of closed bank assets, indicating their “oversight” is becoming worse. Speculations by some analysts of eventual total bank closings exceed 1,000.
Whatever the correct number, many eventual closings are already in loss positions and should, by law, have been closed already. So why has the FDIC not performed according to its mandates? There are several reasons:

1. Politically it would not coincide with the economic propaganda being issued by the Administration.
2. Economically, it might not be possible because they are out of funds. Eventually Congress will provide them with whatever funds are needed, but the timing for such an admission, while never good, seems especially bad given the current state of politics.
3. Physically, it is probably not possible to “seize” many more banks than the 5 or so they have been closing most weeks. Staffing levels probably do not allow many more than that.
4. It is doubtful that the FDIC actually knows much beyond the biggest problem banks. Bank regulators have adopted a “pretend and extend” policy that allows banks to “pretend” their loans are good in hopes that they can weather the economic storm. While these regulators are outside the FDIC (and just as guilty as the FDIC in dereliction of duty and law), it means that bank balance sheets represent part GAAP and part fantasy. How can anyone know which banks are in trouble if the balance sheets cannot be trusted?

There is plenty of guilt to go around beyond the FDIC. It starts from the very top, and it started before the Obama Administration. This culture of corruption appears so rampant in Washington that one wonders how we ever return to normal. By normal, I am not naive enough to say that corruption goes away; merely that it returns to less shameful and expensive levels. That is the best we can hope for.

Yeah, ok, the title is dramatic and will never happen.
Nonetheless, if we were truly a nation of laws, it would happen.
The LA Times notes regarding IndyMac depositors over the insurance limit:
The head of the Federal Deposit Insurance Corp. delivered some bad news personally to uninsured depositors who lost money last year when IndyMac Bank crashed and burned, saying an act of Congress is their only hope for recovering their funds.
“When a bank fails, we have to do what’s least-cost to our deposit insurance fund,” FDIC Chairman Sheila Bair said during a public appearance Wednesday in Los Angeles.

Sheila is correct as far as she goes, but like most government employees, it is what she didn’t say that is the problem, not what she did.

The problem lies with the willful and intentional refusal to enforce black-letter law, in this case Title 12, Chapter 16, Section 1831o which says in part:

Each appropriate Federal banking agency and the Corporation (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.

“Shall” is a specific term of art in legislation. It allows no discretion and mandates action. “May” and “Can” are two other words of course, and mean what they say – as does “shall.”

This section of the law goes on to define capitalization “buckets”, each of which represents a level above water, or above zero, of the excess of assets .vs. liabilities for depository institutions.

It also contains plenty of other “shall” directives such as:

Each appropriate Federal banking agency shall—

(A) closely monitor the condition of any undercapitalized insured depository institution;

(B) closely monitor compliance with capital restoration plans, restrictions, and requirements imposed under this section; and

(C) periodically review the plan, restrictions, and requirements applicable to any undercapitalized insured depository institution to determine whether the plan, restrictions, and requirements are achieving the purpose of this section.

and plenty more.

Everyone should go read that section of law, and note all the shall requirements in there.

These are not suggestions, they are mandates, and if they were followed each and every bank that has been closed by the FDIC would have resulted in ZERO loss to uninsured depositors.

The reason for this is simple, when you get down to it – a bank’s “capital structure” looks like this (roughly) in terms of claims against a failed institution:

Advances and loans/liens by the government (e.g. employment taxes and liabilities)

Deposit liabilities

Senior secured debt (bondholders)

Senior unsecured debt (bondholders)

Ordinary debt (bondholders)

Preferred stockholders (hybrid stock/bondholders)

Common stockholders

Excess capital (retained earnings, etc.)

As you can see in a liquidation depositors are subordinate only to statutory preference for employment and similar related claims; the entire capital structure of the firm has to be wiped out before depositors take any loss whatsoever.
If assets are properly valued at all times by government examiners and the bank is closed in accordance with the black-letter requirements of Prompt Corrective Action, then in a liquidation the depositors will never lose any money and neither will the FDIC’s Deposit Insurance Fund.
It is in fact willful and intentional blindness by government agencies, including but not limited to allowing financial institutions to lie about the value of their assets, that has resulted in these losses being sustained by ordinary Americans.
Sheila Bair and the rest of the government’s “apparatus”, including the OTS and OCC, will undoubtedly claim “sovereign immunity” from suit, even though in the instant case, that of IndyMac, the OTS’ own inspector general has disclosed that an OTS employee and persons at IndyMac conspired together to back-date deposits, thereby distorting the bank’s financial condition, and there is now a 100-bank set of history on FDIC seizures that shows the FDIC has not been and still is not following the black letter requirements of Prompt Corrective Action.
We the people must not accept this sort of malfeasance and misfeasance. These losses sustained by ordinary Americans are not the result of bad luck or even bad decisions by the banks that have failed.
Instead, these losses taken by ordinary Americans occurred as a direct result of malfeasance and misfeasance by the OTS, OCC and FDIC itself.
To be blunt, if you lost money as a consequence of being an uninsured depositor at IndyMac that loss occurred as a direct consequence of the willful blindness (or worse) of government agencies who have intentionally and wantonly refused to obey the mandates set before them under black-letter law.
You were, in essence, robbed by the government.

Strong earnings growth

2012-04-28T03:25:00.001-07:00

Since we last looked at Questcor in early March, the general market direction has shifted, the company has reported earnings, and we've enhanced the data included in the IBD 50, so today we'll see how those all tie together.

The company reported Q1 results on Tuesday, soundly beating estimates and scoring triple digit gains for both sales and earnings.
Sales growth accelerated for the 5th straight quarter, and marked a second straight quarter of triple digit increases.
While earnings growth did not accelerate, it was still very strong at 205%.
In addition to now being updated in both the Monday and Wednesday editions, the IBD 50 also now includes the average EPS growth rate over the last 3 quarters for each stock. That's because the best stocks tend to have several quarters of strong earnings growth before they launch a big run, and this new feature will help you quickly spot stocks showing that kind of performance.
After reporting its latest numbers, Questcor's average EPS growth rate over the last 3 quarters now stands at 197%.
Going forward, analysts see earnings rising 91% this year, followed by a 38% increase in 2013.
The company's return on equity is a very strong 49%.
In terms of overall fundamental and technical strength, Questcor scores the highest possible 99 Composite Rating.
Its Accumulation/Distribution Rating is a B, but that's down from the B+ it had before it reported earnings. Keep a close eye on that to see if institutional investors start to do more selling than buying.

Chart Analysis

Questcor made a big move over the last 2 years. That's something to keep in mind, since even the best stocks don't go up forever.
And although a new uptrend in the general market began on December 20 of last year (Point 1), Questcor sat out the first two months of that run, as it sold off and began forming its current base.
It found a bottom in mid-February (Point 2) and since then has been building the right side of a cup-shaped pattern.
When analyzing a base, you want to look at more than just the shape.
When analyzing a base, you want to look at more than just the shape. Also check the price and volume action for each week within the pattern.
Compare the number of UP weeks on heavy volume, with the number of DOWN weeks on heavy volume. In Questcor's case, heavy-volume down weeks outnumber the UP weeks. You'd prefer to see the opposite.
Also note that the relative strength line has been trending higher overall, but is still well below its old high (Point 3). Ideally, you'd see the RS line move into new high territory as the stock nears a potential buy point.
On Wednesday — the day after it reported earnings — Questcor pulled back on heavy volume and dipped below its 10-week line (Point 4). It managed to bounce back, but that's something you want to keep a close eye on in the coming days.
One day doesn't necessarily determine a new trend. And when a stock is testing its 10-week or 50-day moving average line, it's important to watch where the stock CLOSES for the week. Does it close above that benchmark line? Or does it close below it on heavy volume.

Recover our money

2012-04-26T03:49:00.003-07:00

“Taking the State wherever found, striking into its history at any point, one sees no way to differentiate the activities of its founders, administrators and beneficiaries from those of a professional-criminal class.”

Albert J. Nock, 1935

Our press, the glorious fourth estate, the “guardian of our freedoms,” has the visual acuity of Mr. Magoo regarding the Obama Administration. Regarding corruption, they saw no better during the Bush Administration. Finally, some in this see-no-evil, hear-no-evil press may be undergoing lasik surgery. James Lieber of the Dallas Observer seems to have had successful surgery.

No Justice: We’ve Bailed Out the Banks. When Do We Go After the Crooks Behind Our Financial Collapse?

Where did our wealth go? How do we claw it back? And when are we going to punish the culprits?
When Barack Obama donned the crusader’s mantle during the 2008 presidential campaign, his
Web-savvy campaign team created and pushed it on millions of voters. The main video showed the Ichabod Crane-like Charles Keating—the wealthy, politically connected poster child of the ’80s savings-and-loan scandal—in handcuffs.
The Obama video portrayed John McCain as Keating’s stooge and likened the S&L crash to the 2008 Wall Street meltdown, except that the current crisis is global and its bad guys are bigger and badder. Today’s corporate villains were flashed on the screen, among them AIG, Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac. The opening narrator was Bill Black, a Ph.D. criminologist and former lead lawyer at the Office of Thrift Supervision who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars.
Those watching the compelling attack ad (still online) had every reason to believe that Obama’s approach would be just as hard-edged and that felon-busting G-men would rout the crooks and recover our money.

Fast growing market

2012-04-23T01:45:00.000-07:00

Casino game maker Shuffle Master (SHFL) and women's fashions chain Francesca's Holdings (FRAN) wouldn't seem to have much in common.
But a look at their charts shows that both have found support at their 10-week moving averages and may be forming new bases.
Francesca's broke out past a 24.73 buy point in early March and climbed 37% before retreating to its key support level in low volume, a bullish sign.

The company eventually plans to operate 900 boutiques, more than triple the current figure. Earnings

growth has accelerated from 15% to 17% to 90% over the past two quarters vs. year-ago levels. Sales growth has been consistently strong, ranging from 43% to 88% over the past nine quarters.
Shuffle Master's decline to its 10-week line has also come in light volume. It appears to be forming the first half of a cup-shaped pattern.
Sales growth for the maker of roulette chip sorters and table games has been subpar for many quarters with the exception of last quarter's 28% increase. But profits have been robust recently, rising 55%, 29% and 56% over the past three quarters.
The company plans to buy Ongame Network, one of the world's biggest online poker companies, to tap that fast-growing market.
Both companies are in strong industry groups. Francesca's is in the 50-member Retail-Apparel, Shoes & Accessories group, which was ranked 12th out of 197 as of Friday. It has a Composite Rating of 97, seventh-best in the group.
Shuffle Master's Composite Rating is a best-possible 99, tops in the 37th-ranked Leisure-Gaming/Equipment group.
Shuffle Master also boasts an A+ Accumulation-Distribution Rating and a 1.8 up-down volume ratio, indicating strong demand for the stock. Francesca's has a B Accumulation-Distribution.

Most economists had forecasted

2012-04-22T07:36:00.000-07:00

Markets in Asia rallied in what could be interpreted as relief after North Korea's embarrassing rocket launch failure.
However, China announced GDP growth slowed to 8.1 percent in the first quarter, a deceleration that was sharper than what most economists had forecasted.
England's FTSE 100 is down 0.4%.
France's CAC 40 is down 0.9%.
Germany's DAX is down 0.6%.
Spain's IBEX 35 is up 1.9%.
Italy's FTSE MIB is down 1.2%.
U.S. markets are looking at a lower open with Dow futures currently down 48 points. Later this morning, we get earnings announcements from Wells Fargo and JP Morgan.

Credit rating could be slashed

2012-04-18T05:54:00.000-07:00

Citigroup is scheduled to announce its Q1 earnings Monday morning.
Wall Street is looking for EPS of $1.00 on revenue of$19.8 billion.
However, a bottom line surprise alone won't cut it this earnings season.
On Friday, JP Morgan and Wells Fargo each beat on the top and bottom lines. But both underperformed the stock market on Friday as their shares sold off.
With Citi's stock price up 27 percent this year, details will be very important.
"Going into 1Q results, we think C...may be better positioned (given upside from cap mkts, expenses and provision expense)," writes Deutsche Bank's Matt O'Connor.

Credit Suisse's Moshe Orenbuch is also optimistic. From a note to clients last week: "We expect the large banks to kick off 2012 with respectable 1Q results. We look BAC, C and JPM to benefit from improved trading in 1Q. Commentary around loan growth and demand, in addition to commentary regarding pace of capital deployment will be focal points. We are positively biased to large banks given stocks are seeing at attractive valuations given expectations for improved profitability and greater capital deployment of capital in 2012."
Morgan Stanley's Betsy Graseck is a bit more guarded. "We are Equal-weight on the risk that a slow-down in emerging markets offsets improvements in US housing," she wrote.
Analysts will also be looking for an update on Citi's plan to resubmit its capital plan to the Federal Reserve. In case you forgot, Citi is doing this because they recently "failed" the Fed's bank stress test.
Citi is also one of the many banks that Moody's recently put on credit watch. The ratings agency warned that the Citi's credit rating could be slashed by up to two notches. A downgrade of this nature could be bad news for Citi's derivatives business, writes Bank of America's Guy Mozkowski. "Though liquidity/ funding impacts appear manageable for firms in our coverage, we expect derivative counterparties will likely remain highly credit sensitive, and may substantially reduce activity with firms at risk of “Baa”-rating, including: C."

The relation between oil prices

2012-04-16T23:50:00.001-07:00

Airlines have incentive to buy new planes as opposed to flying older, less fuel-efficient planes when oil prices are between $80 - $130 per barrel, according to a new Citi report by Jason Gurksy and Jonathan Raviv.
If prices were any lower, then the airlines could just stick to their old gas guzzlers. If they were any higher, then the airlines wouldn't be able to afford the new planes.
Here are two charts that show the relation between oil prices v/s gross orders in the last 21 years and the relation between oil prices and new aircraft demand.

Economic figures in an unsustainable fashion

2012-04-13T02:44:00.000-07:00

If anyone mentions the just-released 3.5% U.S. third quarter GDP growth, just throw this chart in their face. Cash for Clunkers clearly distorted the U.S. economic figures in an unsustainable fashion.
According to the Bureau of Economic Analysis (BEA), motor vehicle output spiked a seasonally-adjusted 157.6% quarter on quarter. This is completely unprecedented. Vehicle output is clearly going off a cliff next quarter. The question will be how low can the blue line below go.
Next quarter, we won’t just be returning to business as usual for auto output. Don’t forget that Cash for Clunkers pulled future auto demand, ie. some of Q4 demand, into Q3. Thus Q4 is likely to be very weak since many people who planned to buy a car in Q4 probably took advantage of Clunkers and bought in Q3.

To put this into GDP terms, according to the BEA the spike you see below added 1.66% to the U.S. GDP growth figure reported. Thus without it, GDP growth would have been only 1.89% (3.5% – 1.66%) in Q3.
Now imagine if next quarter the blue line below goes down into negative territory as it did just two quarters ago. Next quarter, not only are we unlikely to get Q3′s boost, but motor vehicle output data could subtract from GDP as well. So watch out for the cliff…

The current crisis is global

2012-04-10T05:38:00.001-07:00

“Taking the State wherever found, striking into its history at any point, one sees no way to differentiate the activities of its founders, administrators and beneficiaries from those of a professional-criminal class.”

Albert J. Nock, 1935

No Justice: We’ve Bailed Out the Banks. When Do We Go After the Crooks Behind Our Financial Collapse?

Where did our wealth go? How do we claw it back? And when are we going to punish the culprits?
When Barack Obama donned the crusader’s mantle during the 2008 presidential campaign, his Web-savvy campaign team created and pushed it on millions of voters. The main video showed the Ichabod Crane-like Charles Keating—the wealthy, politically connected poster child of the ’80s savings-and-loan scandal—in handcuffs.
The Obama video portrayed John McCain as Keating’s stooge and likened the S&L crash to the 2008 Wall Street meltdown, except that the current crisis is global and its bad guys are bigger and badder. Today’s corporate villains were flashed on the screen, among them AIG, Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac. The opening narrator was Bill Black, a Ph.D. criminologist and former lead lawyer at the Office of Thrift Supervision who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars.
Those watching the compelling attack ad (still online) had every reason to believe that Obama’s approach would be just as hard-edged and that felon-busting G-men would rout the crooks and recover our money.
This was not to be.

Most economists initially objected to the theory

2012-04-07T22:06:00.001-07:00

The piece below by Peter Boettke summarizes what I think about current economics. The Keynesian model or paradigm is wrong and always has been. Two primary reasons it was adopted were 1) the crisis of the 1930s was misunderstood but demanded “action” of some kind and 2) it gave the politicians a license to steal power and money from the citizens. If economics were a physical science where data could refute false hypotheses, it is doubtful that the paradigm would still exist today. Because it isn’t, reason number two became paramount. Most economists initially objected to the theory, gradually agreeing with it over time. After all, it also provided lucrative rewards for them in terms of higher paying jobs in government and eventually a route to tenure after it dominated university economics departments.
The books referenced below in the fifth paragraph are excellent reads for anyone interested in the flaws and inconsistencies in the so-called General Theory. “The Critics of Keynesian Economics” book is especially insightful because it is a collection of great economists (authors include Jacob Viner, Frank Knight, Garet Garrett, Jacques Rueff, Benjamin Anderson, Frederick Hayek, Ludwig
von Mises, and others) contemporaneously passing judgment on the then “New Economics.” Most of the essays were written in the 1930s or early 1940s and accurately saw the inconsistencies in Keynesian theory and its ultimate unworkablility. The passage of time has only proved their critiques correct.
As the world suffers through another desperate period, unnecessarily imposed by crank economics, one wonders if the dullard economists of today will finally recognize where the blame lies. If this recognition were finally to come, there is no guarantee that normalcy would return. The political establishment is so entrenched and dependent upon these false ideas that it is difficult to see how the situation will change. Indeed, it is this fact that has probably enabled it to last so long in the first place.

The Legacy of Lord Keynes

Greg Mankiw argues in the NYT that John Maynard Keynes is the most important “defunct economist” to learn from for 2008. Tyler Cowen proposes to do a book club reading on his blog for Keynes’s General Theory. In the comments section Barkley Rosser predictably (irony intended) suggests that chapter 12 is the key to unlocking the mystery of our current mess. On could just as easily point to Keynes’s 1937 article summarizing his core ideas on our being “engulfed in the dark forces of time and ignorance.”

Now I am all for reading and debating economics, and so I don’t have an objection to another public forum discussing Keynes’s contribution. But I also think that the emphasis on Keynes demonstrates a collective delusion among economists. Even Milton Friedman can be quoted as emphasizing Keynes’s brilliance.

But what of Knight’s judgment that “what is new isn’t true, and what is true isn’t new”, or of Hayek’s judgment that Keynes’s idle resources argument assumes a post-scarcity world, or of Mises’s judgment that Keynesian economic policy assumes the miracle that stones can be turned into bread?

The problem with economics since 1940 has been the thorough victory of Keynes throughout the democratic western nations. We have Keynesian theory, the development of Keynesian inspired data collection, the “testing” of Keynesian theory via Keynesian data with the purpose of providing tools for Keynesian policy. This exercise survived the Monetarist and New Classical intellectual challenge, and it survived the Supply Side revolution in policy. All that remained was an oscillation between liberal and conservative Keynesianism, never a serious challenge to the paradigm of Keynesian policy manipulation of the economy.

Instead of reading Keynes one more time with feeling, I would suggest an alternative reading experience. (Or at least an additional one) Start with Henry Hazlitt, ed., The Critics of Keynesian Economics, move on to Hazlitt’s The Failure of the “New Economics”, graduate to W. H. Hutt’s The Keynesian Episode, and then read closely Buchanan and Wagner’s Democracy in Deficit and then Higgs’s Crisis and Leviathan and War, Depression, and Cold War.

Sincerely, you want to know what is going on in 2008 — it is the consequence of the bad economic ideas of Lord Keynes that have led to the victory of Keynesian policy (of either the liberal or conservative variety) since 1940. We are living through the consequences of Keynes’s ideas. The Soviet Union had to confront the legacy of Marxist-Keynesianism in the 1980s, and we are dealing with the consequences of Social Democratic-Keynesianism in the 2000s.

Hayek warned us about the “tiger by the tail” problem of inflation and Buchanan warned us about the destruction of the “old-time fiscal religion” due to Keynesianism. Yes, Marxism and Social Democracy caused serious problems as they reflected a breakdown in restraints on the power of government, but we have to also recognize the fundamental role that Keynesian ideas on economics and economic policy fed into this shift from constitutional democracy to social democracy throughout the 20th century in the West and the policy reality of conspicuous production for “growth accounting” in the Soviet Bloc nations after the Industrialization Debate in the 1920s, the Collectivization of the 1930s, and Five-Year Planning system from Stalin to Brezhnev. Keynesianism represented the pushing open of an already opened door to fiscal and monetary irresponsibility and opportunistic politicians left and right walked right through. I am sure stating this sentiment this way will qualify me as a “wing-nut” in Brad De Long’s classifications, but instead of admitting my “wing-nutness” I would rather we have a serious discussion of the consequences of Lord Keynes with respect to world-wide fiscal imbalance associated with intergenerational accounting and world-wide inflation as governments attempt to meet those obligations through monetization of debt. Somehow I doubt that will take place in our current intellectual and policy context.

So by all means join Tyler in his book club and re-read The General Theory, it is a very important book to read thoroughly and critically understand. But I would suggest that you read Keynes alongside the books I suggested above and with the Hayekian and Buchananite perspective on the legacy of Lord Keynes with respect to monetary and fiscal policy.

Keynes isn’t the intellectual solution to our current woes, his ideas are one of the primary reason we are in this mess in the first place. He was wrong in 1936, he was wrong in 1956 and 1976, and he is certainly wrong in 2008 and will be wrong in 2036. Bad economic ideas result in bad economic policy which in turn result in bad economic consequences, and that simple linear relationship is true across time and place. Until we come to grips with the implications of this, we will not understand the consequences of Lord Keynes for our economic future let alone the economic future of our grandchildren.

Foreign resource stocks might do especially well

2012-04-05T04:13:00.000-07:00

Peter Schiff adamantly recommends getting out of the dollar. His presentation, if correct, will be devastating for this country and wipe out the wealth of the middle class. All of what he says is correct, although his timing may be off. Furthermore, there is the possibility that our government might change course, although I, like Schiff, feel that unlikely. His recommendation to own “real stuff” is correct. If the stock market goes up, I doubt whether it will keep pace with inflation. The best performing stock market in the world in recent years has been Zimbabwe, but it did not keep pace with their inflation.
So, what to do? If as some believe that the dollar will decline by 50% from here over the next 10 years, then having your funds outside the dollar (in other currencies) would presumably produce a 7% average return per year. Investing in foreign stocks would provide that 7% plus the returns (or losses) obtained in foreign stock markets. Precious metals, as money substitutes, should do well. So should natural resources and other hard assets like land. Foreign resource stocks might do especially well.
None of this is meant to be investment advice. If what Schiff (and I) fear comes true, some of the above might be reasonable investments/hedges. On the other hand, all of the above comments would be 180 degrees wrong if we were to end up in deflation instead of inflation.
Schiff was very emotional, practically begging people to get out of the dollar. I suspect the economy and markets over the next year or two will justify his emotion. Whether his scenario results or not, is the more difficult issue.

Profits sank in loan servicing

2012-04-01T04:59:00.001-07:00

“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate — the return that investors are demanding to buy a property — are going up.”
U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.
Billionaire George Soros, speaking today at a lecture organized by the Central European University in Budapest, said a “bloodletting” may be coming for leveraged buyouts and commercial real estate.
“The American consumer will no longer be able to serve as the motor for the world economy,” said Soros, 79.
His comments came in the same week that Capmark Financial Group Inc. filed for Chapter 11 bankruptcy protection after originating $60 billion in commercial property loans in 2006 and 2007.
‘Extreme Caution’
Ross, the 71-year-old chairman and chief executive officer of WL Ross & Co. LLC, said in an interview on Bloomberg Radio that he would use “extreme caution” before putting money into commercial real estate, especially office space, because properties are losing tenants.
U.S. office vacancies hit a five-year high of almost 17 percent in the third quarter, while shopping center vacancies climbed to their highest since 1992, according to the property research firm Reis Inc.
“I think it’s going to take quite a while to work itself out,” Ross said.
As of Oct. 15, Ross said he had spent less than $100 million of at least $1.5 billion available to him under the Public-Private Investment Program, an investment pool of private and government money for purchasing distressed assets from financial institutions.
Ross used the funds he spent so far to purchase residential mortgage-backed securities, he said in a Bloomberg Television interview.
Corus Investment
WL Ross was among a group of firms that agreed Oct. 6 to buy $4.5 billion of Corus Bankshares Inc.’s real estate. Starwood Capital Group LLC and TPG led the group to buy the assets of the Chicago-based lender, which was seized by federal regulators Sept. 11 after its investments in construction loans for condominiums went bad.
In 2007, Ross ventured into the declining residential property market, winning an auction for the home-loan servicing unit of Melville, New York-based American Home Mortgage Investment Corp. He agreed to pay between $435 million and $500 million for the right to collect payments and maintain escrow on about $45.3 billion of home mortgages.
Making Lists
Dubbed the King of Bankruptcy by clients during his quarter century at the Rothschild investment bank, Ross entered the U.S. home mortgage business as an increasing number of borrowers quit making payments and profits sank in loan servicing.
“Our methodology is to make a great big list: What’s every thing we can think of that’s either wrong with the industry or that we just plain don’t like about it,” Ross said today.
“Then we start work on another list. If we had control of this industry, what would we do to fix each one of those problems?” he said. “Once we feel that there is a reasonable likelihood that the second chart kind of equals the first chart, that’s when we get ready to do something.”

The problem with economics

2012-03-27T02:27:00.000-07:00

The piece below by Peter Boettke summarizes what I think about current economics. The Keynesian model or paradigm is wrong and always has been. Two primary reasons it was adopted were 1) the crisis of the 1930s was misunderstood but demanded “action” of some kind and 2) it gave the politicians a license to steal power and money from the citizens. If economics were a physical science where data could refute false hypotheses, it is doubtful that the paradigm would still exist today. Because it isn’t, reason number two became paramount. Most economists initially objected to the theory, gradually agreeing with it over time. After all, it also provided lucrative rewards for them in terms of higher paying jobs in government and eventually a route to tenure after it dominated university economics departments.
The books referenced below in the fifth paragraph are excellent reads for anyone interested in the flaws and inconsistencies in the so-called General Theory. “The Critics of Keynesian Economics” book is especially insightful because it is a collection of great economists (authors include Jacob Viner, Frank Knight, Garet Garrett, Jacques Rueff, Benjamin Anderson, Frederick Hayek, Ludwig von Mises, and others) contemporaneously passing judgment on the then “New Economics.” Most of the essays were written in the 1930s or early 1940s and accurately saw the inconsistencies in
Keynesian theory and its ultimate unworkablility. The passage of time has only proved their critiques correct.
As the world suffers through another desperate period, unnecessarily imposed by crank economics, one wonders if the dullard economists of today will finally recognize where the blame lies. If this recognition were finally to come, there is no guarantee that normalcy would return. The political establishment is so entrenched and dependent upon these false ideas that it is difficult to see how the situation will change. Indeed, it is this fact that has probably enabled it to last so long in the first place.

The Legacy of Lord Keynes

Greg Mankiw argues in the NYT that John Maynard Keynes is the most important “defunct economist” to learn from for 2008. Tyler Cowen proposes to do a book club reading on his blog for Keynes’s General Theory. In the comments section Barkley Rosser predictably (irony intended) suggests that chapter 12 is the key to unlocking the mystery of our current mess. On could just as easily point to Keynes’s 1937 article summarizing his core ideas on our being “engulfed in the dark forces of time and ignorance.”

Now I am all for reading and debating economics, and so I don’t have an objection to another public forum discussing Keynes’s contribution. But I also think that the emphasis on Keynes demonstrates a collective delusion among economists. Even Milton Friedman can be quoted as emphasizing Keynes’s brilliance.

But what of Knight’s judgment that “what is new isn’t true, and what is true isn’t new”, or of Hayek’s judgment that Keynes’s idle resources argument assumes a post-scarcity world, or of Mises’s judgment that Keynesian economic policy assumes the miracle that stones can be turned into bread?

The problem with economics since 1940 has been the thorough victory of Keynes throughout the democratic western nations. We have Keynesian theory, the development of Keynesian inspired data collection, the “testing” of Keynesian theory via Keynesian data with the purpose of providing tools for Keynesian policy. This exercise survived the Monetarist and New Classical intellectual challenge, and it survived the Supply Side revolution in policy. All that remained was an oscillation between liberal and conservative Keynesianism, never a serious challenge to the paradigm of Keynesian policy manipulation of the economy.

Instead of reading Keynes one more time with feeling, I would suggest an alternative reading experience. (Or at least an additional one) Start with Henry Hazlitt, ed., The Critics of Keynesian Economics, move on to Hazlitt’s The Failure of the “New Economics”, graduate to W. H. Hutt’s The Keynesian Episode, and then read closely Buchanan and Wagner’s Democracy in Deficit and then Higgs’s Crisis and Leviathan and War, Depression, and Cold War.

Sincerely, you want to know what is going on in 2008 — it is the consequence of the bad economic ideas of Lord Keynes that have led to the victory of Keynesian policy (of either the liberal or conservative variety) since 1940. We are living through the consequences of Keynes’s ideas. The Soviet Union had to confront the legacy of Marxist-Keynesianism in the 1980s, and we are dealing with the consequences of Social Democratic-Keynesianism in the 2000s.

Hayek warned us about the “tiger by the tail” problem of inflation and Buchanan warned us about the destruction of the “old-time fiscal religion” due to Keynesianism. Yes, Marxism and Social Democracy caused serious problems as they reflected a breakdown in restraints on the power of government, but we have to also recognize the fundamental role that Keynesian ideas on economics and economic policy fed into this shift from constitutional democracy to social democracy throughout the 20th century in the West and the policy reality of conspicuous production for “growth accounting” in the Soviet Bloc nations after the Industrialization Debate in the 1920s, the Collectivization of the 1930s, and Five-Year Planning system from Stalin to Brezhnev. Keynesianism represented the pushing open of an already opened door to fiscal and monetary irresponsibility and opportunistic politicians left and right walked right through. I am sure stating this sentiment this way will qualify me as a “wing-nut” in Brad De Long’s classifications, but instead of admitting my “wing-nutness” I would rather we have a serious discussion of the consequences of Lord Keynes with respect to world-wide fiscal imbalance associated with intergenerational accounting and world-wide inflation as governments attempt to meet those obligations through monetization of debt. Somehow I doubt that will take place in our current intellectual and policy context.

So by all means join Tyler in his book club and re-read The General Theory, it is a very important book to read thoroughly and critically understand. But I would suggest that you read Keynes alongside the books I suggested above and with the Hayekian and Buchananite perspective on the legacy of Lord Keynes with respect to monetary and fiscal policy.

Keynes isn’t the intellectual solution to our current woes, his ideas are one of the primary reason we are in this mess in the first place. He was wrong in 1936, he was wrong in 1956 and 1976, and he is certainly wrong in 2008 and will be wrong in 2036. Bad economic ideas result in bad economic policy which in turn result in bad economic consequences, and that simple linear relationship is true across time and place. Until we come to grips with the implications of this, we will not understand the consequences of Lord Keynes for our economic future let alone the economic future of our grandchildren.

The government guaranteed all their debt

2012-03-23T03:15:00.002-07:00

• Oh yes — this is surely a sign that the credit crunch is behind us. Regulators closed seven more regional banks last Friday, bringing the tally for the year to 106. There have been more bank failures this year than in the past 15 years combined, and the only reason why the big boys never followed suit was because the government guaranteed all their debt and then allowed them to hide their losses by switching to mark-to-model accounting from mark-to-market. Believe us when we tell you that even the most renowned experts could not tell you what is really sitting on the balance sheets of these large U.S. banks — but there is limited downside risk because Uncle Sam has deemed them all to be ‘too big to fail’. Those who were investors in American United Bank, well, we are sorry to have to tell you that you were involved in an institution that was small enough to close down.
• We realize that this did not make it anywhere in the weekend press (outside of a microscopic piece in the IBD) but the ECRI leading economic indicator actually fell (by 0.2 of a point) for the second week in a row (and the smoothed annualized growth rate declined 1.6% —- now what is that all about?).

Foreign resource stocks might do especially well

2012-03-19T05:08:00.003-07:00

Makes meaningful economic recovery impossible

2012-03-19T05:06:00.005-07:00

It is about Citibank and is outrageous. Apparently it is going on with other credit card issuers as well.
This is the sort of thing that, in my opinion, makes meaningful economic recovery impossible.

Here’s what it says:
To continue to provide our customers with access to credit, we have had to adjust our pricing.
….
These changes include an increase in the variable APR for purchases to 29.99% and will take effect November 30, 2009.
(It then goes on to say that if you pay on time you can get 10% of your interest charges back, which lowers the effective rate by about 3%.)
I have multiple copies of this letter, all on the same theme – 30% interest rates, vastly higher than they were.
The obvious message in this letter is simple: Those who are responsible and can pay their bills will be subsidizing those who cannot – that is, you, the responsible cardholder, will pay the deadbeat’s bill!
Citibank has 92 million cards in circulation and is #4 in market share in terms of purchase volume, with 11.05% of the total.
Overall, consumers hold an average of 5.4 revolving (credit) cards. Half of all undergraduates in college have 4 or more cards.
Average card debt per household, including households that have no cards at all, is $8,329. For households with one or more cards, it is $10,679, both figures at the end of 2008.
Of the 73% of families with credit cards, 60.3% carried a balance. This means that for those with balances, the average balance is nearly $18,000.
If the previous interest rate on those cards was around 20% and is now 29%, the average family with a balance (about 44% of all households) was paying $3,600 in interest charges previously, but now will be paying $5,220, and increase of $1,620 a year or $135.00 a month.
There are approximately 116 million households in the US. As a consequence the decrease in disposable personal income attributable to this sort of interest rate change is approximately $113 billion, or a bit under 1% of GDP.
And that’s only the direct cost of the interest. What cannot be measured is the impact on consumer spending that comes from changes in consumer behavior – that is, this is only the interest component of the change in rate.
If this interest rate change prompts people to pay down just 25% of their credit card debt over two year’s time the impact on GDP simply from paying down the debt as opposed to holding it level will raise the impact to approximately 1.9% of GDP, or about $270 billion annually in foregone consumer spending.
Good luck with your “recovery” thesis folks.

Unaccountable political formulation

2012-03-19T05:01:00.000-07:00

Commentary by Chris Whalen:

“I submit that our spendthrift government, the Federal Reserve System and the TBTF banks together now comprise the paramount political tendency in America today. This tripartite “Alliance of Convenience,” let’s not call it a conspiracy, fits beautifully into the corporatist mold that seems to be America in the 21st Century – but only viewed by the elites in cities like New York and Washington. Many Americans of all political descriptions oppose this corrupt and unaccountable political formulation. I hope and expect that these differences will become even more pronounced as the election approaches next November.

The difference that separates the United States from the rest of the world is the difference which has always divided us, namely our at least theoretical devotion to individual liberty and free markets. Until we break the Alliance of Convenience between the Congress, the Fed and the large, TBTF banks and force our public officials to embrace core American values regarding transparency, insolvency and accountability, we will not in my view find a way out of the crisis. In may ways, the differences that separate the popular view and the views of our political elite have been turned on their heads compared with a century ago, but this does not mean that the debate and resulting political competition for ideas will be any less intense.”

It is terrible economics but wonderful politics

2012-03-17T00:41:00.002-07:00

Interventionism is economic intervention by the government into the free market. It typically involves subsidies or penalties to particular groups. Interventions never improve the economy. Indeed, many interventions lead to additional interventions to attempt to correct the harm done by the first action. Interventions may improve the lot of a targeted group, but does so at the expense of society. While a particular group may be said to benefit, the total economy is always made worse off.

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Others like Bastiat expressed a similar views about a hundred years before. Based on Bastiat, this wrong-headed Keynesian thinking has become known as “The Broken Window Fallacy.”
Why do governments continue to do something that doesn’t work? Because it works for politicians in terms of “vote-buying.” The beneficiaries know that they have received a gift. The harm done to the other individuals cannot be traced back to the “beneficial” program. Hence, the harm cannot be blamed on anyone. It is terrible economics but wonderful politics.
Barry Ritholtz discusses the intervention of providing Credit for First-time Homebuyers. (Similar and equally disturbing analyses were produced regarding the Cash for Clunkers program.)

$15,000 Home Buyers Credit Costs $292,000/home
I have long argued that home prices are elevated, and until they normalize, the economy will be stuck in the doldrums. I even wrote a chapter of Bailout Nation, titled “The Virtue of Foreclosure.” I make a basic economic argument that the excess credit of the 2001-07 era is unwinding, and foreclosures are part of that process.
The simple premise is that the abdication of lending standards by both bank and nonbank lenders created an enormous credit bubble. Easy money drove home prices to unsustainable and unaffordable levels. People bought homes far more expensive than they could reasonably afford. Many assumed they would be able to refinance, paying for the excess costs by cashing out the price appreciation everyone knew was sure to follow.
Of course, we know what happened next. Prices rose unsustainably, credit tightened up, and the supply of greater fools abated. So much for the real estate perpetual motion machine.
What we were left with was an oversupply of new homes, and 4-8 million people in homes they couldn’t really afford. When measure by traditional metrics like median price to median income, costs of ownership relative to renting, or Homes as a % of GDP, houses were extremely expensive.
Running 300,000 monthly foreclosures — on pace to do 3 million foreclosures this year — the prior boom process is now unwinding. Excess prices are normalizing — but they still remain somewhat elevated compared to historical ratios. Perverse though it may be, the mass Foreclosures are helping to drive prices back to normalized historic levels.
Although this process is a necessary evil, Politicians of all stripes hate it. Between the NAR and NAHB, they have ready lobby fighting market forces. The lobbyists shamelessly ignore the role their members played in blowing up the bubble, and how they encouraged irresponsible and in many cases illegal behavior. The NAR and the NAHB have yet to offer up their mea culpas for their contributions to the mess, but their roles were substantial.
All of the home mortgage modification programs and foreclosure abatements are attempts by politicos to “ease the pain.” These programs have proven themselves to be ineffective in preventing defaulting mortgages from going into foreclosure. More than 50% of all mods slip into foreclosure again, and in some instances, we see 70-80% delinquency rates.
But the real question is “Why are we trying?” Except for those instances where there has been fraud or predatory lending, we really should not intervene. The foreclosure process is restoring prices to where they should be. (Note I suggested a voluntary program last year that helped banks forestall writedowns, and allowed viable homeowners to keep their houses, but also lowered prices).
Now comes the latest attempt by politicians to intervene in the housing market: Expanding the about to expire, $8,000, first time home buyers tax credit to a $15,000 credit for everyone. This is counter productive. (Won’t that just make prices more expensive?) The lobbyists want to goose the housing market by any means possible — even if it is an expensive and unhealthy method.
A recent Brookings Institute analysis demonstrates persuasively that the $8,000 subsidy actually costs $43,000 per extra house sold; worse yet, the new $15k tax credit will ultimately cost $292,000 per home.
How does that math work? :

“[The] refundable tax credit, which was part of the February stimulus bill, gives $8,000 to first-time homebuyers (but is phased out at higher incomes). It is scheduled to expire on December 1, 2009, although the sponsor of the initial proposal, Senator Johnny Isakson, now wants to extend the credit for another year, and expand it to $15,000. This extension would be a mistake.
Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tax of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy . . .
An extension and expansion of the tax credit will cost far more than the $15 billion of the current credit, likely in excess of an additional $30 billion. And the cost per new house sale will likely be much higher going forward, as a greater proportion of the sales will be for those who would have bought anyway, without the credit. (emphasis added)
In a latter posting, Gayer does the math on the new tax credit: A one-year, $15,000 tax credit apply to all home buyers, would cost the Treasury ~$73.9 billion. Gayer estimates that beyond the people who would have purchased homes anyway, the increase in house sales would be about 253,000. Each extra home sales costs the Treasury $292,000 ($73.9 billion divided by 253,000.)
Randall Forsyth points out a lower (but still absurd) figures calculated by the NAHB:

The National Association of Home Builders, not exactly a disinterested bunch, figures the subsidy would boost house sales considerably more, by 700,000 homes. That implies each of those additional sales would cost American taxpayers only $133,000 — still “a very expensive and poorly targeted subsidy,” writes Gayer.
Its one thing to argue as to whether the government should be so brazenly intervening into the housing market, and I can understand reasonable people disagreeing. But the subsidy — whether its $133,000 or $292,000 — is absurd.

Now practically doomed to foreclosure

2012-03-16T01:45:00.000-07:00

When it come to home ownership, condo prices are the last to rise and the first to go down. Given the glut of condos and unfinished condos in the bubble areas, the following article should not be surprising.
Please consider Experts: Plummeting prices have rendered condos nearly worthless by the Arizona Republic.

New federal loan-guarantee rules imposed to fend off future government losses from plummeting condominium prices have rendered condos utterly worthless, Valley real-estate experts said.The Federal Housing Administration rules, which took effect Oct. 1, prohibit any new FHA-backed loans on condo units in projects that include more than 25 percent commercial space.

In addition, no single investor – including the developer – may own more than 10 percent of the units in a particular project. That particular restriction alone creates a catch-22 from which condo builders most likely cannot escape, said mortgage originator Jill Hoogendyk of Wallick & Volk in Glendale. Another rule that has sellers and brokers scratching their heads prohibits FHA loans in condo developments that aren’t “primarily residential,” which could be taken to mean the FHA won’t guarantee loans in future mixed-use projects.
“I’m predicting that what we’ll see is whole condominium complexes sitting empty,” Hoogendyk said.
The new rules are a reaction to substantial losses on federally insured condominium mortgages in the past year, government officials have said compared with about 4,900 units sold during the same period.
Bowers said there are Phoenix-area condominium projects in which only a handful of buyers purchased individual units. The only viable use for such projects would be renting the unsold units as apartments, which many condo building owners already have been doing.
However, most have continued trying to sell units, hoping to eventually sell out as the real-estate market recovers. Because of the new rules, local and national experts seem to agree that owner-occupants in half-empty condo buildings are now practically doomed to foreclosure.
What applies to Arizona also applies to Florida, California, Las Vegas, and anywhere else there is a glut of condos.

On top of the above rules, it is going to be difficult to buy into buildings with less than 70% occupancy. Cash buyers can close of course, but I would not recommend it.

When this false rally collapses

2012-03-16T00:45:00.000-07:00

10/09/09 Stockholm, Sweden – The biggest story generally going unreported in the mainstream media is that many financial institutions are simply failing to pay back your hard-earned tax dollars.
According to USA Today, “The U.S. taxpayers’ investments in smaller banks are increasingly at risk… 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made,” a clear sign the trend is worsening.
Among the non-payers are obvious weak giants like AIG and CIT, but the list goes on and includes many other players. It’s an especially disappointing trend given that we’re in a period of “recovery.” When this false rally collapses the number of institutions that are unable to meet TARP obligations are bound to skyrocket. Taxpayers beware.

Greater amounts of the securities it prints

2012-03-15T03:40:00.001-07:00

Bernanke‘s backdoor tricks to support the growing deficits via stealth Quantitative Easing can no longer be hidden. Things must be really getting desperate over there. They usually wait 3 or 4 days before doing what they deny they are doing. This latest example took all of 30 minutes! Is funding getting so desperate that they couldn’t have waited a day or two?
From Zero Hedge the following quote and story:
“We hope that as Bloomberg and other MSM conduits disseminate this and other relevant stories, that more and more people become familiar with the behind the scenes machinations that the Fed is doing, all in its single-minded pursuit of gobbling ever greater amounts of the securities it prints, all with the hidden agenda of destroying any residual value the US currency may have as any confidence that the dollar may be worth anything is promptly refuted by the most recent wave of dollar bills printed by the Chairman.”

Foreign investors from Treasuries

2012-03-15T03:25:00.001-07:00

Timothy Geithner, the current Treasury secretary, has tolerated the greenback’s 12 percent slide from its peak this year in March as measured by the Federal Reserve’s trade- weighted Real Major Currencies Dollar Index. While he said as recently as Oct. 3 that “it is very important to the United States that we continue to have a strong dollar,” the last time the U.S. intervened in markets to support its currency was 1995.
The weaker dollar may boost America’s exports as the economy recovers from the deepest recession since the 1930s. The risk is that it may also drive away America’s largest creditors just as the Treasury relies more than ever on foreign investors to buy the bonds financing Barack Obama’s stimulus spending. The dollar’s share of global currency reserves fell in the second quarter to 62.8 percent, the lowest level in at least a decade, the International Monetary Fund in Washington said on Sept. 30.
“Since the dollar has been weak and weakening for years, Geithner was using a code phrase, a carry-over from the Bush administration,” said David Malpass, president of research firm Encima Global in New York. “It means that the U.S. approves of a constantly weakening dollar but doesn’t want a disruptive collapse,” said Malpass, the former chief economist at Bear Stearns Cos. and deputy assistant Treasury secretary from 1986 to 1989.
Poorer Americans
The dollar’s 15 percent decline against the euro and 11 percent depreciation versus the yen since early March are increasing concern among world leaders. At the same time, Americans are getting poorer.
Per capita net wealth tumbled to $172,749 in August from a peak of $212,599 in September 2007, government figures show. A United Nations Human Development Report released Oct. 5 showed America’s quality of life dropped to No. 13 in a 2007 global ranking from No. 5 in 2000.
European Central Bank President Jean-Claude Trichet said today in Venice that a strong dollar is “important,” repeating remarks made in Brussels on Sept. 28. Toyoo Gyohten, an adviser to Japan’s new finance minister, said the same day there is “no better alternative to the dollar.” Bank Rossii First Deputy Chairman Alexei Ulyukayev said Sept. 29 that Russia will keep buying Treasuries because there’s no realistic alternative.
The dollar fell as much as 0.7 percent against the euro today, before trading at $1.4736 as of 2.35 p.m. in London, from $1.4691 yesterday.
‘Special Burdens’
“We recognize that the dollar’s important role in the system conveys special burdens and responsibilities on us and we are going to do everything necessary to make sure we sustain confidence,” Geithner told reporters after attending a meeting of counterparts and central bankers from the Group of Seven in Istanbul on Oct. 3.
The comments came after policy makers from China to Russia called for an alternative to the world’s main currency in foreign-exchange reserves.
“Major reserve-currency issuing countries should take into account and balance the implications of their monetary policies for both their own economies and the world economy with a view to upholding stability of international financial markets,” China President Hu Jintao told the Group of 20 leaders in Pittsburgh on Sept. 25, according to an English translation of his prepared remarks.
Bentsen, Rubin, Summers
When Ronald Reagan was elected president in 1980 his platform called for a “strong NATO,” “strong leadership,” “a strong peace,” and a strong currency. “A sound monetary policy will be restored — one designed to instill confidence in the American dollar abroad, as well as bring down the rate of inflation at home,” according to a 1980 brochure from Reagan’s campaign.
The preference for a strong dollar was brought back under Lloyd Bentsen, Bill Clinton’s Treasury secretary, in 1994 and the phrase was used regularly by his successors, Robert Rubin, a former Goldman, Sachs & Co. co-chairman, and Lawrence Summers, who is now the director of Obama’s National Economic Council.
Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, gained an average of 4.93 percent a year between 1996 and 1999 when Clinton was in office.
Rubin Mantra
“By not varying the statement, an issue never arose about whether a comment involved a subtle change or not in the policy toward the dollar,” former Fed Chairman Alan Greenspan told his colleagues on the Federal Open Market Committee in 2001, according to a transcript of the meeting. “It was boring, it was dull, it was repetitive, it was nonintellectual, and it worked like a charm.”
Rubin, a former senior counselor at New York-based Citigroup Inc., wasn’t immediately available to comment. A spokesman for Summers referred questions to the Treasury.
During the presidency of George W. Bush, the Dollar Index declined 20 percent.
The government has used the phrase for so long that “I don’t think it has much meaning left for the markets,” said Vassili Serebriakov, a currency strategist at Wells Fargo Bank in New York. “Once you have this policy in place I don’t think there’s any possible choice but for the Treasury to stick to what it’s been saying all this time.”
More Expensive
The decline means it’s becoming relatively more expensive to live in the U.S. The difference in per-capita income with Canada has shrunk 87 percent since October 2008.
A McDonald’s Corp. Big Mac sandwich cost $3.57 in the U.S. in 2009, unchanged from 2008, according to The Economist magazine’s Big Mac Index. That compares with a 13 percent decline in the euro region to $4.62 from $5.34, and a 19 percent drop in the U.K. to $3.69.
One benefit to a depreciating dollar is that it helped shrink America’s trade deficit to $32 billion in July from the record $67.6 billion in August 2006, data compiled by the Commerce Department show.
Exports rose 5.7 percent to $127.6 billion in July from the low this year of $120.6 billion in April, the most recent data show, led by sales of capital goods including cars, civilian aircraft and computers, as well as stronger demand for industrial supplies and consumer goods.
Theory ‘Problem’
“The Washington theory is that dollar weakness will benefit the U.S. by inflating our way out of debt and causing more exports,” Encima’s Malpass said in a Sept. 25 note to clients. “The problem with this theory is that it assumes capital stays put while the dollar devalues.”
While the dollar dropped in global currency reserves, holdings of euros rose to a record, the IMF report shows. The U.S. currency’s portion declined to 62.8 percent from 65 percent in the first quarter. The euro’s share rose to a record 27.5 percent from 25.9 percent while the pound and yen gained.
The share of reserves in dollars declined even after the Fed and the government lent, spent or guaranteed $11.6 trillion to shore up the economy and the financial system. The Fed has increased the size of its balance sheet to $2.144 trillion from $906 billion in September 2008.
Treasury officials rely on foreign investors to buy the record amount of debt needed to finance the more than $1 trillion budget deficit. The gap will grow to $1.6 trillion in fiscal 2010 before narrowing to $1.4 trillion the following year, according to the Congressional Budget Office.
Treasury Sales
The U.S. sold $1.517 trillion of notes and bonds this year, compared with $585 billion at the same point in 2008. London- based Barclays Plc forecast total 2009 issuance at $2.1 trillion, and $2.5 trillion in 2010.
Dollar bears say net purchases of long-term U.S. securities by foreign investors fell below the trade deficit by $46 billion in the first half of the year, one of the only three occasions since 1994 there was a shortfall, according to Treasury Department data.
China has slowed purchases, increasing its holdings 10 percent to $800.5 billion through July after a 52 percent rise in 2008 and 20 percent in 2007, according to the Treasury Department. Foreign ownership overall has risen 11.4 percent to $3.43 trillion, after gaining 31 percent in 2008.
Chinese Premier Wen Jiabao said in March that the Asian nation was “worried” about the safety of its investment in U.S. debt, as a weakening dollar eroded the value of its record $2.1 trillion of foreign-exchange reserves.
Dollar Index
The Dollar Index, which was as low as 75.896 today, is still above the lows in March 2008, when it fell to a record 70.698. The decline isn’t as steep as in the late 1980s, when it tumbled 48 percent to 85.33 in January 1988 from 164.72 in March 1985.
There’s no sign slower purchases of U.S. debt are leading to higher borrowing costs. The yield on the benchmark 10-year Treasury, which helps determine everything from mortgage rates to auto loan payments, has averaged 3.17 percent this year, compared with 5.6 percent since 1989.
“The dollar will fall against the euro into the year end as investors reallocate funds in search of higher yields,” said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, the most accurate forecaster of 2007. “This is only capital export though, not capital flight. There is no evidence whatsoever that the weak dollar will lead to capital flight.”
No Inflation
There is no inflation in the U.S. that would deter foreign investors from Treasuries. Consumer prices fell 1.5 percent in August from a year earlier, and have dropped for six straight months, the Labor Department in Washington said Aug. 16.
“Inflation is still declining in the U.S. so it’s wrong to say that the dollar is losing its purchasing power,” Redeker said. “The U.S. is a domestically driven economy. It has huge output gaps and these are going to keep inflation subdued for at least two years.”
G-7 finance chiefs stopped short of singling out the dollar for criticism in a statement after talks on Oct. 3, saying that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.” That’s the same language they used in April, when the Dollar Index rose to 86.871.
“It’s hardly a decisive statement by the officials but at the same time it shows that they prefer the dollar steadies in the current range and they could learn to live with it,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. “I’m sure Geithner wouldn’t mind the dollar becoming a little more competitive but he doesn’t want to threaten the dollar’s status as the reserve currency, so by definition he has to play a delicate balancing act.”