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Category: Latest Business Headlines

Reports on current events in the markets

Sandpapered

Washington Mutual reported results that can only be described as being sandpapered. We are now in a strange brew of continued Ponzi finance, combined with steadily worsening credit conditions, and squeezed financial margins. In WM’s case, nonperforming assets increased to 0.69%, from 0.52% a year ago, and 0.62% in June. 30 day plus delinquencies in credit cards popped to 5.53% from 5.23% in June, and 5.18% in March. Moreover the following item was in the footnotes: ”Without the impact of the planned sale of $403 million of higher risk accounts, managed receivables at period end and the 30+ day managed delinquency rate would have been approximately $22.32 billion and 5.99 percent“. WM also seems to be motivated to get rid of higher risk credits, although gain on sales generally on $30.24 billion in mortgages securitized was down to only $119 million. More color on credit card conditions was also reported by Capital One,  as delinquencies rose to 3.24% in the quarter, up from 2.92% in June. Charge offs rose a similar amount to 2.36% from 2.01%. Bankamerica cards “held 90 days delinquent”: March: 1.94%, June: 2.37%, Sept: 2.50%.


WM indicated that net interest margins fell to 2.53%, down from 2.65% in June, and 2.75% in March. The cost of their total interest bearing liabilities increased to 4.48% from 4.12%. Time deposit costs at 4.77% (from 4.39%) are finally approaching three month t-bill rates, as the cheap rates on older CDs roll off. WM suggested that margins should stabilize as they are “nicely” positioned to pass higher borrowing rates on to Joe Soccer Mom (JSM).  We were also offered generic clues about employment conditions in the financial sector, as WM has eliminated 9,300 jobs in the last six months. They also sent 3,800 jobs to India.  Not much was offered in the conference call about JSM’s ability to absorb the higher pass through rates, fees, and job losses that are so important to WM’s (and others) strategy. . Clues on that are coming from other sources though, as California home-loans defaults are now the highest in four and a half years. A couple key items in this article:


About 19 percent of homeowners who were in default earlier this year lost their homes to foreclosure in the third quarter. That’s up from 6 percent a year earlier, DataQuick said.  The median age of the home loans that went into default in the third quarter was 14 months. More than half the loans were originated in 2005.


Adding fuel to this sticky wicket, aggressive late cycle debt enabler Accredited Home Lending warns this morning, citing “increasing turbulence in the market for home loans to less-creditworthy buyers”.  A few obvious hints mentioned, and I await with baited breath for the details. A glance at this chart from San Diego County, is starting to look like the early parabolic lift off in housing prices up to a year ago.


septsandiego


More now routine “cows already out of the barn” butt covering commentary from the apparatchiks, in this case John Dugan. I would refer you back to the California foreclosure numbers as to who is in trouble first. Answer: 2005 originations, loans made while Mr. Dugan’s agency and others were “monitoring” the situation, and being lobbied and delayed by Pig Men. 


Dugan told members of the American Bankers Association that a recent underwriting survey showed a “significant easing” in residential mortgage lending standards.  The survey showed lenders are doing the opposite of what regulators would expect them to do in a cooling housing market: allow longer interest-only periods, more piggyback loans, higher loan-to-value ratios, and more reduced-documentation loans.  “Frankly, that concerns me.”


This $19-22 billion mutha IPO out of China, ought to suck a lot of hot money out of the western Godfather racket tonight. Proceeds will largely be used to line the pockets of Chinese, not western plutocrats. Perhaps marks the peak of the financial sphere mania and Bubble? On the general topic of developing a Chinese Pig Man to compete with, and pull their own capital back from the West, Australian Treasurer Costello all but calls for it .


Peter Costello has called on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an orderly adjustment. He said underdeveloped financial markets were to blame for the emerging economies of East Asia sending 94 per cent of outward portfolio investment to “ageing” countries outside the region.

Alice in Wonderland Asian Lip Gloss

Several reports are coming out of Asia, that point to the problems the Wizards there are dealing with. The first one from China is sounding like a broken record, and describes another crackdown on local and provincial officials that won’t play ball. To me, this illustrates that the central government in China is in many respects broken. China has become a nation of economic mafiosos, governed by local elitist Godfathers and their political hacks.  Oh sure, once in awhile Beijing lays a hand on someone, as for instance they aren’t willing to give up Shanghai without a fight, but by and large they are on the defensive. In fact, my suspicion is that these so called crackdowns are largely a facade. On another front, China is moving to take advantage of the break in oil prices to start filling their strategic reserve.


The second report out of Japan reports that several governors expressed concern in their August minutes about the impact of the Yen carry trade. The news report again illustrates, the complete lack of directness in communications out of these Asian countries. They rarely commit themselves, or instead operate as if subtle suggestion will have an effect on the Riskloves that are raiding their currency.  Then when the subtle warning is made, they do an offset when a key official makes a Humpty Dumpty remark like this one. Of course the carry trade Boyz then immediately pile into more Ponzi trades with this kind of perceived green light


It is not true that we’ve recently started a survey specifically on the carry trade,” said Tokiko Shimizu, the head of the bank’s foreign exchange operation division. “The BOJ is monitoring movements of financial markets daily and we are interested in the carry trade too.”


alice


Readers know that of all the housing data noise, I am currently most focused on housing permits. Simply put if permits aren’t taken or aren’t being followed up on, then construction employment will fall fast. Given that construction and financial employment is a major factor in Bubble locales, the fall on effect will be an even greater acceleration of delinquencies and foreclosures than the trend already underway.  Today we see more evidence that the game is up. In my view even this 1.6 million unit pace is still far above what the market can absorb. Obviously, the continued availability of Ponzi finance is distorting market decision making, and encouraging continued “because the money is available” aggressive and unnecessary activity in many sectors.


Permits for future groundbreaking, an indicator of builder confidence, fell 6.3 percent to an annual pace of 1.619 million units, the lowest rate since October 2001, from a 1.727 million rate in August. Economists had expected the Commerce Department to report September permits at a 1.702 million pace. They were down 27.7 percent from the same time a year ago.


I even find this permit report suspect. It just doesn’t hold water, especially given that many builders continue to report 40% cancellation rates. Even outfits like NVR who have been spared this indignity because of higher deposits, or special diligence, or operating in more exclusive high end Bully markets, are falling under the retribution sword as customers bail on them..


New orders in the third quarter decreased 18 percent to 2,378 units from 2,897 units last year. Meanwhile, the cancellation rate jumped to 27 percent from 15 percent last year and 13 percent in the second quarter of 2006.


And a little Bubble mentality humor from Minyanville.


nahb2


nahb1


What I’m about to say, may seem wild eyed, but this “stock” market has an almost unprecedented pinned looked, as if there is an historic manipulation going on in the futures pits, or with some type of Robotrader derivative trading. Free, non manipulated markets just don’t act this way. I really don’t think it’s the Fed although they are negligent. It could be a Pig Man operation, they’ve captured the market, at least for now. Maybe some modern day Jay Gould and his henchman Fisk in the garb of electronic trading? Market and banking oversight today has morphed back to 1869 defacto standards for sure.

Another theory, is there might even be a rogue trader or group of rogues, who have been allowed in this unregulated environment to accumulate some massive leveraged equity futures or option position, and in the short term literally hijack or at minimum strongly influence the market? Don’t think so, well it’s happened before. A slightly different twist, is that a thousand Riskloves and crazies are all trading the same black box program at the same time. If that one is valid, someone will trip them, just as sure as the sun goes down at night. When you look at measures such as TRIN, it just doesn’t look like real money is driving this, but more like synthetic trading of some type.

Some Ponzi Unit Takeaways

I’m looking for financial institutions coming clean on non-performing loans. Some early takeaways:


National City set aside $73 million for bad loans, up 30 percent. Net charge-offs rose 41 percent to $117 million, including $10 million of “fraud-related mortgage loan losses,” while nonperforming assets rose 16 percent to $689 million, in part because of real estate foreclosures.


Fortunately, for this particular Pig Man, they’ve been collecting higher “fees” to “offset” this. Does this mean if you can’t make your payments, the bank just ignores loan performance, but reports more robust numbers because they charge through the kazoo for your late payment? What kind of a circular Ponzi scam business is that? Do they provide loans for the late fees too?


Third-quarter profit rose 15 percent, as higher fees and improved mortgage results offset an increase in bad loans.


Wachovia showed an increase on foreclosures from $99 million to $181 million, and an increase in accruing loans past 90 days from 624 million to 666 million, yet their reserve for unfunded lending committments fell from $165 million to $159 million.


Next we have Downey Financial adding a provision for credit losses of $9.6 million in the third quarter of 2006. Non performing assets were up $27 million to $67 million in the quarter, and delinquencies have increased 79.9% since year end to $101.16 billion, yet only $26.4 million in loss provisions were made.  These Boyz appear well behind the disclosure curve?


NON-PERFORMING ASSETS
Non-performing assets increased during the quarter by $27 million to $67 million and represented 0.39% of total assets, compared with 0.21% at year-end 2005.


Next we have Corus, all but admitting that the reason they didn’t have more problems, was because their more flakey Ponzi unit customers seemed to have Ponzi backers willing to throw good money after bad. I’d say there is an epidemic of this behavior out there:


The slowdown in the housing market is also impacting Corus in terms of credit quality of loans already on our books. We have seen various projects that are experiencing slower sales of condominium units and/or lower prices than the developer or we would like. While construction projects are clearly not immune to the forces of the slowdown, conversion projects presently seem to be displaying more obvious signs of weakness. So far, we can report that we have only one condominium conversion loan which is nonaccrual and one additional loan listed as a Potential Problem Loan. However, we have had numerous other loans that have experienced meaningful problems, but in these cases, the borrowers or their financial backers have stepped up to the plate and invested additional dollars, signed financial guarantees or taken other actions that have strengthened the loan from our perspective.


In this piece small banks worry that the Ponzi finance spiggot may get turned off. And John Dugan, chairman of the Comptroller of the Currency, provides color on the industry, namely that 35 percent of the banks it oversees exceed the new 300 percent real estate exposure guideline. Stifel Nicholaus downgraded subprimers NEW and LEND today, estimating that 20-50% of borrowers would not qualify under the new underwriting standards that NEW adopted last week. 


Is that what Hyman Minsky wrote about here? If it walks like a Ponzi unit, talks like a Ponzi unit, and looks like a Ponzi unit, it probably is a Ponzi unit. Am I the only one who feels like Alice?


“Ponzi? finance units must increase its outstanding debt in order to meet its financial obligations.?


Minsky

alice

Where and Who has the Rotting Fish?

Looking at the early fallout from the New Jersey Bust is this excellent piece of journalism. Key takeaways,


When Kara Homes filed for bankruptcy this month, Amboy National Bank of Old Bridge was listed as the largest creditor with $58.2 million in loans. When local real estate mogul Solomon Dwek’s $400 million empire was frozen by a judge following charges of bank fraud, Amboy was again the largest creditor ? for $49.7 million.


Next the article looked at New Jersey banks exceeding the new Federal guidelines, and found 47 percent of the 95 national- and state-chartered banks are already over the proposed guideline (no more than three times capital in commercial real estate loans). In effect, this means there is a regulatory tightening underway.


Banks in 10 other states have an even greater investment in commercial real estate, the Press’ analysis showed. In Arizona and Washington, more than seven of every 10 banks have more than three times their capital wrapped up in commercial real estate loans.


For the record, two quotes;


– Are we alarmed or very concerned? The short answer is no,” said Steve Fritts, an associate director at the Federal Deposit Insurance Corp.


– It’s a disaster waiting to happen out there,” said Gerard Cassidy, bank analyst for RBC Capital Markets.


Also initial signs that credit conditions are tightening for mortgage purveyors seeking to raise capital. This site also tracks credit swap premiums. Lower levels as seen of late in the A and BBB tranches suggest higher “insurance premiums” necessary for hedging against default.


swaps


Banks begin reporting third quarter results this week, and will see how they treat or ignore rising delinquencies and negative surprises. We also continue see a pattern of some black box transactions going awry, as Credit Suisse actually owns up to some losses. A reminder of what bank loan loss reverses now look like.


BankLoanLossReserves


Finally, a reader, Lee Adler of the Wall Street Examiner points out that there is a footnote in the recent Fed H8 data, that suggests the big surge in real estate and HELOC lending I reported on may be an outlier, caused by the merger of a non-bank player into a reporting bank player. This of course makes the conclusion of my Saturday blog more cloudy, although intuitively I feel the surge in retail sales is fueled by new debt, as we still have the MBAA refi index data showing a boomlet.

Koyaanisqatsi-Life Out of Balance

Following on the heals September’s Koyaanisqatsi retail report, comes this week’s Fed’s H8 data. This gives us direct evidence on how the consumer did it. As mentioned in yesterday’s blog, there was a $20.8 billion yoy increase in retail sales, or 0.6% excluding gasoline. At first glance I was prepared to dismiss this as just another bogus report. This is especially true given the clear and hard to dispute slippage since late spring in state sales tax collections. But the new H8 data to me suggests that September consumer activity was a very real Hail Mary, and perhaps a last Hurrah.


statetax


Bottom line: there has been an absolute orgy of new consumer borrowing over the last three weeks.  Almost unfathomable behavior, given the actual declines routinely seen in housing prices of late. Guess the Ministry of Truth convinced folks that because they had saved $2.3 billion on gasoline, that they should go on a major binge? Interestingly, the consumer reaction has been so strangely lopsided, that even a complete stooge and sycophant like George “One Trick Pony”  Bush felt compelled to exercise some rare cautionary comments on this Koyaanisqatsi environment.

Even the higher interest expense and sure to leave a hangover home equity lines of credit (HELOCs) are being revived. In three weeks Joe Soccer Mom added $17.3 billion new debt to the whopping $2.3 billion saved on gasoline. Do the math, and you pretty much have your $20.8 billion retail increase figure for Sept.

But that wasn’t all. Although real estate borrowing in the Fed data also picks up commercial borrowing, we also got confirmation from the MBAA refi index that a borrowing boomlet took place in the house as ATM realm. Conclusion, even with declining house equity, consumers mustered at minimum, equity extraction along the lines seen in the last several years. At least some will have more Ponzi finance to make house payments at least for awhile. Will they also have enough to go wild for XMAS? With rates back up some, watching the refi index going forward should give us clues. 

HELOC:
Sept. 13: 447.0
Oct. 4: 464.3

That’s 67% annualized!

Real Estate:

Sept. 13: 3,104.7
Oct. 4: 3,158.8

29.5% annualized!

Bank credit:

Sept. 13: 8.003.4
Oct. 4: 8.065.4

13.35% annualized, Houston we have a problem! So much for the rate cut theory, and explains why five Fed governors brought out the hose in their comments of late.


mew