The Democrats’ “Reform Plan,” Outlawing CDOs, Countrywide’s Bomb, the Auto Industry’s Dark Forecast, and More!

by Addison Wiggin & Ian Mathias

  • Ready for higher taxes? Democrats dust off “reform plan”
  • Congress moves to outlaw subprime CDOs… Talk about too little, too late
  • Countrywide drops the bomb… Earnings twice as bad as predicted
  • Durable goods “unexpectedly” drop… The dark forecast for 2008 auto sales
  • New home sales rebound… But it’s not the whole story

Congressional leaders read opinion polls, saw they had the lowest approval ratings of any in history and came to this conclusion: We must raise taxes!

Cut spending, you say?! Huh?

A moribund plan, proposed yesterday by Rep. Charles Rangel, “would dramatically raise taxes in ways that, in my judgment, would hinder U.S.’s ability to compete in the global economy,” said Treasury Secretary Hank Paulson. Paulson was perhaps the kindest voice of dissent.

As if declining wages, house prices and an impending recession weren’t enough…

Congressman Barney Frank also co-sponsored a bill that would penalize financial institutions that securitize subprime-backed mortgages. Frank’s bill would hold firms liable for selling mortgage-backed securities and allow hurt borrowers to sue to recover their losses.

Yeah, more taxes and more regulation… that’ll help. Good thinking. They should pass a few tariffs on Chinese goods while they’re at it and give the whole package a simple name everyone will love: The Clueless Congressman’s Guide to Wrecking Your Economy in 3 Easy Steps.

Comments on this legislation from a reader below.

Big surprise… The dollar furthered its record lows overnight. The euro traded to a new high within the $1.43 handle, now just a few pips from $1.44. The British pound dug deeper into $2.05, and the yen stayed the same, at 114.

The dollar index came to rest at 77.2, just shy of the all-time low set on Monday.

Gold soared to new 28-year highs overnight. The metal’s steady rise this week left it at $775 this morning, its latest high.

Crude oil went through the roof late yesterday and overnight. The world’s energy closed at a record high of 90.46 in the States, and overnight futures climbed as high as $92.22.

“We have no price band or price target,” said OPEC Secretary-General Abdalla Salem El-Badri. “If it persists for a longer period, then we start worrying. But at this time, we don’t know what’s going to happen next month.” Isn’t that confidence-inspiring?

“OPEC will ponder what it can do to alleviate the situation, but with certainty, [the problem] will have nothing to do with production,” added Algerian Energy Minister Chakib Khelil. Venezuelan oil officials echoed Algeria’s hesitation to increase production. Oil broke through its record high minutes later.

Countrywide revealed a loss of $1.2 billion dollars in the third quarter this morning, far larger than Wall Street expectations. The latest earnings statement revealed losses of $2.85 per share, more than double that of the forecast $1.28 loss. The third quarter of 2007 marks the company’s first loss in 25 years.

“We view the third quarter of 2007 as an earnings trough, and anticipate that the company will be profitable in the fourth quarter and in 2008,” said a statement from President David Sambol. “Over the longer term, we believe that prospects for the U.S. housing and mortgage markets, as well as for Countrywide, remain very attractive.”

As many as two million subprime borrowers will lose their homes by the end of 2009, at a cost of $71 billion, a congressional report estimated yesterday.

“State by state, the economic costs from the subprime debacle are shockingly high,” said Sen. Charles Schumer, the man behind the report. “From New York to California, we are headed for billions in lost wealth, property values and tax revenues.” Schumer’s report went on to estimate a 20% drop in housing prices in the next three years. California, Florida, Ohio, New York and Texas are projected to get it the hardest.

New home sales increased 4.8% in September to an adjusted annual rate of 770,000. September sales actually beat estimates, yet despite this “rebound,” the sales rate is still the second lowest in more than 10 years.

What Countrywide called an “attractive” market this morning…heh.

Sixty-five percent of Americans say a recession is likely next year, said a poll released by Bloomberg
Fifty-one percent said the economy is doing “poorly.”

U.S. markets were pretty boring yesterday. The Dow and S&P 500 lost less than 0.1%. The Nasdaq shaved off more of its big gains from earlier in the month with a 0.8% loss.

Microsoft reported a surprising 23% rise in profits after the bell yesterday, beating analyst expectations by a ton. Bill Gates and company cited booming sales of the Vista operating system and video game Halo 3. The stock inflated over 10% higher in after-hours trading, bringing Microsoft shares to their highest level since 2001.

“The growth is impressive — like a receding hairline suddenly reversing itself,” opines former Strategic Investment
editor Dan Denning. “But what’s interesting is where the growth has come from — and where it will have to come from in the future if Microsoft is to keep expanding… It’s all about video games these days.”

Chinese investors sold off in a fury early Thursday morning. The Shanghai index fell 4.8% after Chinese officials reported a marginal cooling of economic growth, from 11.9% in the second quarter to 11.5% in the third.

Geez, Chinese people… Keep it together! The Dow would hit 16,000 if our government said growth was around 11.5%. The Shanghai Composite Index has since stabilized…it gained about half a percent overnight.

Benchmark indexes in other nations kept their wits about them. Hong Kong finished up 1.8%. Australia and Japan registered a little over 1% gains.

On the heels of August’s 5.3% drop, orders for “durable” manufactured goods declined 1.7% in September. Analysts had expected an increase of 1.5%. Motor vehicles and parts orders fell a noticeable 2.9%.

“The amount of distress in the housing market is…hurting sales of new vehicles,” said Mike Jackson, CEO of the nation’s biggest chain of car dealerships. “It’s going to continue for at least a year from now.”

Jackson, whose 257 AutoNation dealerships span 16 states, claims sales have fallen 11% in California and Florida, his two largest markets.

“At best, [auto sales are] going to be at the same level as 2007″ next year, said Nissan’s CEO Carlos Ghosn yesterday. In an interview with The Detroit News, Ghosn predicted 15.5-16 million light vehicle sales for 2008, as much as half a million less than this year. Ghosn was considered pessimistic by his peers earlier this year when he predicted a steep slowdown in auto sales for 2007… his “gloomy” call for 16 million cars looks like it’ll be dead on.

And the “cure” for this auto sales ailment? A November rate cut “is likely, and it is badly needed to ease the economic distress,” said Jackson. Right. The dollar be damned…

“Of course there are many factors that caused the current state of the housing and mortgage market,” writes a reader who is the president of a national mortgage company, “but I believe there is far too much focus on subprime mortgages. They have been deemed a problem of not only the financial markets (which they are), but also the housing market and (soon, I’m sure) the economy in general. Subprime foreclosures, for the most part, are a symptom of the housing market and economy, not vice versa.

“If demand for housing was still strong, there would be far fewer foreclosures. The low subprime foreclosure rates in the years preceding the bust demonstrates this, as subprime mortgages had been used for years. Yes, underwriting had become more lax as companies struggled for market share. Lenders felt continued appreciation would mitigate their losses, and greedy, overextended property owners were counting on appreciation giving them the option of selling and cashing out into the hot market before ever reaching foreclosure.

“Two of the biggest factors of the current state of the housing market are that our central bank kept rates down so low for so long and a weak economy in which high-paying jobs have disappeared. These factors artificially inflated home values and the strength of the economy, and when rates rose, workers could no longer afford the inflated prices and appreciation stopped and then fell.

“Sellers could no longer sell their properties for what they owed or refinance their way out of ‘living beyond their means,’ because the majority were financed at 100% or very close, and very few borrowers had any reserves. There was no longer any incentive for property owners to pay their mortgages, because they had no more equity and it was now cheaper to rent (I don’t mean to be preaching to the choir).

“Instead, all the media and legislation can focus on is the symptom — subprime and ‘bad’ brokers. That’s what is disturbing, trying to cure a symptom instead of the illness.”

“I think your Czech-born reader’s input was entirely spot on — we need to drink more beer!”

The 5
Responds: Cheers.

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast


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