Never mind GDP, latest household wealth data shows real U.S. recession
Forecloses surge to record highs… fine print and industry insiders say worst may be yet to come
Another terrible jobs report… worst unemployment spike in more than 20 years
Oil has biggest trading day in history… what news pushed crude to near-record highs
The one sentence that crushed the dollar rally
Plus, the “how to buy” and “how to store” gold dispute is settled
Forget the National Bureau of Economic Research and their textbook definitions… how’s this for a recessionary indicator: Household net worth in the U.S. fell by $1.7 trillion in the first quarter.
That’s the biggest drop since 2002, the end of the last American recession. According to a Federal Reserve report released yesterday, total household worth declined 3% last quarter, to $56 trillion.
The sudden bear market and continued decline in home prices were the primary culprits. In fact, home equity fell to 46% by the end of last quarter, the lowest amount since the Fed started keeping track in 1951.
During the recession from 2000-2002, American net worth dropped 6.2%. In other words — if the current crisis is of any comparison to the tech bust — we’re about halfway through.
U.S. foreclosures surged to a record high in the first quarter, said the Mortgage Bankers Association late yesterday. 2.4% of all American home loans were in some form of foreclosure during the period… an all time high. Perhaps even worse, mortgage payment delinquencies surged to a rate of 6.3%, also an all-time high.
That’s about 1 in 11 American mortgages past due or in foreclosure… incredible.
In the last quarter of 2007, 5.8% of were behind on payments, and the first quarter’s record foreclosures were the result. As home prices continue to fall… and more foreclosed homes hit the market… and more rates reset… we can’t help but forecast this trend to worsen.
Hell… even Ed McMahon can’t afford to stay in his house. The Tonight Show sidekick and Star Search host is $644,000 in arrears on a $4.8 million loan for his Beverly Hills crib. According to public records released this week, McMahon’s mortgage is officially in default. Reuters tell us the place has been for sale for two years with no takers… bummer.
McMahon should have handed Carnac his mortgage papers
"Can the [housing] market go down another 10% or 20%? Sure," grumbled Robert Toll, CEO of Toll Bros. The head of the nation’s biggest homebuilder had reason to be grumpy this week… Toll Bros. just reported its third straight losing quarter. Revenue has fallen 30% from this time last year. Toll went on to say the housing market was in a “depression” and that recovery could be up to three years away.
“I believe the industry will continue to face rising pressures,” echoed D.R. Horton CEO Don Tomnitz, “for certainly the next 12-18 months. 2010 will be the earliest we get a more solid homebuilding environment."
Adding to the feeling of a common-sense recession, U.S. unemployment jumped to 5.5% in May. Today’s jobs report from the Labor Department was horrid… the U.S. economy lost 49,000 jobs during the month. Unemployment rose by its biggest monthly margin since 1986.
March and April jobs numbers were also revised down. The May loss marks the fifth straight monthly decline in U.S. jobs. The U.S. stock market is getting killed this morning as a result. The Dow is down over 200 points as we write to you this morning.
However, we offer the same disclaimer we always do these first Fridays of the month: The Labor Department’s jobs report is notoriously inaccurate. It’s riddled with huge margins of error and suspect methodology. But it’s all we’ve got… so take it for what it’s worth.
In the finance world, Standard & Poor’s cut the credit ratings of bond insurers MBIA and Ambac. We warned you yesterday of Moody’s impending cut… guess S&P felt like they had to beat ’em to it.
Since Fitch has already downgraded the pair as well, we wait for Moody’s to deal the deathblow.
“The consequences of future MBIA and Ambac downgrades are not good,” Dan Amoss tells us. “All the structured finance securities insured by MBIA and Ambac would also be downgraded. There are billions of dollars worth of these securities still sitting on the balance sheets of the investment banks. Under Basel II, this would raise the investment banks’ capital requirements significantly, which will pressure them to raise even more dilutive capital (from parties in the Middle East and Asia that will not be so generous next time).”
MBIA and Ambac guarantee over $1 trillion in securities.
But strangely, the credit downgrading of MBIA and Ambac seems to have already been baked into the market. Check out yesterday’s trading action:
You can see when S&P dropped the bomb. But after the knee-jerk sell-off, “investors” quickly brought shares back to Wednesday’s levels. Some of those traders, in fact, were MBIA and Ambac chairmen. They collectively bought about a million bucks worth of their companies yesterday.
But despite it all, traders were in a buying mood yesterday. Shares of Wal-Mart hit four-year highs as the latest sales figures prove that the mega retailer is all but immune to the consumer buying downturn. Ditto for Costco stock. Verizon Wireless said it would buy Alltel for $28 billion… a rare super-sized deal under the current credit conditions.
In all, the Dow, S&P 500 and Nasdaq had their best day in at least a month, each rallying a little less than 2%. While retailers and the Verizon deal added to the buying fever, energy stocks were the real drivers of yesterday’s rally. Here’s why:
Crude oil shot up nearly $10 since we last wrote to you. In fact, it rose $5.50 in yesterday’s American session alone. That’s the biggest one-day gain in the history of U.S. oil trading.
The light sweet stuff is back at $134 this morning, a breath from an all-time high. Unlike recent trading activity, where questions of supply and demand clashed with geopolitical strife and whispers from OPEC, oil is skyrocketing today on little more than the bad jobs report on the ol’ greenback.
“We could decide to move our rates a small amount in our next meeting,” said European Central Bank President Jean-Claude Trichet, hinting at a rate hike. “I don’t say it’s certain. I say it’s possible.”
That was all it took. Dollar rally — over. Ben Bernanke should take note… that’s how a central banker props up a currency. Almost all of Bernanke’s work this week to strengthen the dollar was flushed down the drain.
Factor in the lousy jobs report and the dollar index is at 72.7 and falling. The euro popped 2 full cents, to just shy of $1.56. The pound and yen held steady at $1.95 and 106, respectively.
By the way, for all the Fed’s talk of inflation sensitivity lately, their printing press has been rolling 24/7. The Federal Reserve auctioned off another $75 billion in short-term loans to struggling banks this week. In their 13th TAF , the Fed received bids for $95 billion in loans… a sure sign that banks are either still desperate for cheap loans, or eagerly taking advantage of the Fed’s low rates. To date, some $550 billion in loans has been dolled out via this auction.
And yesterday, Bernanke and company took on another $27 billion in toxic mortgage- and asset-backed securities in exchange for U.S. Treasuries. That’s the 10th time the Fed has conducted a TSLF — the new program in which investment banks can trade illiquid securities for American IOUs.
Continental Airlines announced a big job cut and capacity reduction yesterday. Racing toward Byron King’s “Silent Spring," the airline said it is slashing 3,000 jobs and reducing capacity by 11%. Sixty-seven planes in the Continental fleet will also be retired.
"The airline industry is in a crisis,” said CEO Larry Kellner. “Its business model doesn’t work with the current price of fuel and the existing level of capacity in the marketplace… We need to make changes in response." We’ll give Kellner some credit, not only for “tellin’ it like it is,” but for also voluntarily forgoing his pay for the rest of the year.
The U.S. consumer is feeling the pain of the airline industry emergency. Take a look at these fares:
According to bestfares.com, tickets for July flights are universally up from last year, the majority between 100-300% more expensive than July 2007.
Even Southwest, the last great bargain in air travel, has been forced to cave in. The budget airline has quietly abandoned its policy of charging no more than $299 for a one-way ticket. Some fares on the “cheap” airline now cost over $400 each way.
Gas prices have finally stopped hitting record highs. After striking 28 all-time highs in the last 29 days, the price of retail gasoline backed off a bit today. The national average trimmed a few tenths of a cent, to $3.98.
And as the dollar fell yesterday, gold enjoyed a small rally. The precious metal rose $20 from its low, to about $885 this morning. You might recall earlier this week we had a friendly debate on the best method of buying and storing gold. Turns out we were all wrong… the way to be is under the bed, in the form of a funky chalice:
John Webber is an everyman’s Englishman. He kept this under his bed in a shoe box for the past 70 years, along with other “odds and ends.” His granddad gave it to him the in the 1930s and Webber wrote it off as another scrap metal trinket his grandfather was known to collect. He started packing for a move recently and dusted off the beaten old cup for a closer look. It felt heavy for its size, so he had it appraised… it’s 22 karat gold and about 2,500 years old… as in, older than Christ. It sold at auction yesterday for nearly $100,000.
“My family and I are on a ‘cash basis’ only,” writes a reader. “No more credit card debt is being created… I would sell Visa and MasterCard [stock]. I am buying gold through my broker (GLD and DGP) because I agree that the future does not bode well for fiat currency. I agree with Trichet on this and wonder what our central bankers are smoking.”
The 5: “Sell Visa, buy agricultural commodities,” responds Eric Fry. “This pair trade seeks to capitalize upon two important facts:
1) Debt-financed consumption is not an essential bodily function.
2) Eating is.
“We’d rather invest in grain than plastic, especially during the economic slowdown that might soon begin.”
Eric gives a full case for his pair trade in this morning’s Rude Awakening… check it out here.
Enjoy your weekend,
The 5 Min. Forecast
P.S. “The Chief” is out again today working on the book… since he won’t be reading this, I don’t mind saying it: He may have gone a bit crazy. I hear he’s offering you six grand to cancel all your AF subscriptions. Sounds pretty insane to this editor, but you can read it here…