The Housing Bottom, Lehman Crisis, Fannie and Freddie, The Best Countries, Chinese Stocks, and More!

by Addison Wiggin & Ian Mathias

  • American housing still crashing… two new data points show no bottom in sight
  • Three U.S. economic crises the Fannie and Freddie rescue won’t resolve
  • Another government bailout? Lehman Bros. ready to fail… will Uncle Sam pay the check?
  • The best countries to do business, and a curious list of up-and-comers
  • Chinese investors pull the plug… China suffers massive decline in trading volume

  One in every 416 U.S. households was in some form of foreclosure in August, a record high. That’s over 300,000 properties warned of default, a pending auction or foreclosure. Year over year, foreclosure filings are up 27%, said RealtyTrac today. August filings were 11% higher than the previous record, in May.

The housing bottom? Still nowhere in sight.

  So it’s no surprise… there are 3.9 million unsold existing family homes on the market. That’s easily the most since at least 1982, when the National Association of Realtors started keeping track. According to the latest from the group, there is a 11.1-month supply of homes on the market, two and a half times the number from this time in 2005.

  “The mortgage-backed securities that that Fed has been buying are only as good as the mortgages that back them,” Eric Fry reminds us. “And many of those mortgages are no good at all. That’s because the credit crisis that is sweeping the country has become a mortgage-default crisis. Or maybe it’s the other way around. But whatever the precise cause, twice as many California homeowners are defaulting on their mortgages this year compared to last year. And default rates are climbing across the rest of the country, as well.

“Meanwhile, home prices continue tumbling and the inventory of homes for sales continues rising. This toxic cocktail is (almost) certain to produce another wave of mass defaults and foreclosures.

“Our reasoning is as simple as it is frightening: Since most of the folks who cannot afford to keep their homes cannot sell them, either… they will hand their keys to bankers.
“The nation’s ailing housing market and soaring foreclosure rate is not merely a problem for the U.S. government — now the largest mortgage holder in the country — these woes are also a problem for hundreds of private banks that are struggling to survive. Many of these private banks will NOT survive.” We agree. For more on this matter, including a list of banks likely to fail, read this issue of Rude Awakening. More on one of those institutions in a minute.

  ”What will be the real effects of the Fannie Mae and Freddie Mac rescue?” asks our colleague David Galland of Casey Research. In his latest writing, David outlined three things the GSE seizure certainly won’t do:

“The rescue won’t resuscitate the housing market. As much as prices have declined, they still haven’t come down enough to make houses affordable. (They seemed affordable for a while only because of the artificially low interest rates the Federal Reserve engineered during the housing boom through its inflationary policies.) Don’t expect the rescued Fannie and Freddie to revive the housing market; the government’s rescue package requires them to shrink their operations.

“The rescue won’t end the credit crisis that is pulling the economy into recession. Fannie and Freddie are perhaps the biggest, but certainly not the only, institutions that overcommitted to risky mortgages. Banks, insurance companies and pension funds are holding billions in the same kind of dangerous stuff. And they still must get through another two years of interest ‘resets’ on subprime mortgages created during the housing boom. As those resets occur, there will be more defaults on mortgages that borrowers can no longer afford — or no longer want because the loan balance exceeds the value of the house.

“The rescue helps keep bad decision makers in place. Managers of banks and other financial institutions that invested heavily in Fannie and Freddie paper get let off the hook. They get another chance to make more bad decisions about how to deploy trillions of dollars of capital. And the politicians who passed the laws that encouraged Fannie Mae and Freddie Mac to take all those wild risks? They’re up for re-election.”

  Producer prices fell 0.9% in August, says the Labor Department. The latest government inflation report was a bit of a mixed bag. The recent drop in energy and commodity prices allowed the headline inflation reading to fall quite a bit in August. But the Fed’s core PPI reading — inflation stripped of food and energy prices — rose 0.2%, to a 17-year high.

For the year, producer prices are up 9.6%, just a hair below a 27-year high.

  Even though inflation is still rising, the sudden drop in energy costs has given consumer sentiment a kick in the pants. The Reuters/University of Michigan consumer confidence survey popped up 15% in August, to a score of 73. That’s way, way above the consensus forecast of a 1-point rise, to 64. Respondents lowered their 12-month inflation outlook substantially, from 4.8% to 3.6%.

  Only in I.O.U.S.A…. according to a survey, 21% of people earning $100,000 a year or more say they live paycheck to paycheck. 10% of the same respondents say they save nothing — $0 — each month.

  Oil is creeping back up today. It’s inched nearly $2, to $102. Hurricane Ike is causing quite a scare on the Gulf Coast, as we mentioned yesterday .  We’ll let you know the extent of the damage on Monday.

Also in play in the oil trade today is the ol’ greenback:

  The dollar has fallen substantially. The dollar index shed nearly a full point after the PPI reading combined forces with another lousy U.S. retail sales report. (Sales fell 0.3%, more than expected.) Thus, the dollar index reads 79.2. The euro shot up nearly 3 cents, to $1.41. The pound fared even better, up 4 pennies, to $1.78. The yen is about the same, at 107.

  The “binge and purge” trading we described Wednesday continued in U.S. markets yesterday. Wall Street kicked off the day with a big retreat. The S&P 500 opened down 1.7%, but instead of abandoning trading altogether, investors restarted the commodities trade with a particular focus on transporters and refiners. Most major indexes ended up over 1.3%.

  Gold has stopped the bleeding this morning. The spot price is hovering at yesterday’s level, around $755 an ounce.

  In the stock market today, it’s all Lehman Brothers, all the time. As you know by now, Lehman is “circling the bowl.” Shares are under $4. Bonds are yielding 20%. CEO Dick Fuld is openly shopping around for someone — anyone — to buy the firm before it goes bankrupt. (For what it’s worth, Bank of America is currently the most forecasted suitor.) Like Bear Stearns before it, Lehman’s seemingly imminent failure poses a big systemic risk to the whole stock market, other financials, in particular.

We’re sure Lehman is working with the Treasury and/or the Fed. But this time, a government bailout is far from certain. “People briefed on the matter” told Bloomberg that the Fed and Treasury will assist the sale or teardown of Lehman, but aren’t likely to offer any cash.

Since we’re in the business of making forecasts, and since the government seems to be in the business of bailing out financials over the weekend, we offer you this: The Lehman Brothers you know today probably won’t be the same business on Monday.

  Keep an eye on Washington Mutual, too. The bank announced it has added $4.5 billion in loan loss provisions for this quarter. Of those provisions, $3.4 billion will be set aside for residential mortgage-related losses.

WaMu’s been touting all the “well capitalized” rhetoric all week, but investors aren’t buying it. Shares of WM opened down 4%, to $2.72, today. That’s an 18-year low and 96% below its price this time last year. Moody’s and S&P have both downgraded WaMu debt to “junk” ratings. Four different investment bank analysts cut their ratings on WM today, too. Ouch.

Like Lehman… boatloads of systemic risk in this one. Washington Mutual is the biggest savings and loan in the U.S.

  “Balance sheets of many of these financial institutions are still terribly impaired and there are more problems to come,” superstar investor Jim Rogers told Bloomberg this week. “We had the worst credit bubble in the history of the world. You don’t clean that out in a year or two or three.”

Rogers went on to tell Bloomie that even though he has cashed in on his short sale of Citigroup, he is still betting against U.S. financials. If you seek advice in doing the same, we recommend you check out Strategic Short Report.

  Maybe Jim Rogers is right about this, too… Singapore is the best place in the world to “do business.” According to the World Bank’s annual study, Singapore takes the crown as the most business-friendly nation. New Zealand, U.S.A., Hong Kong and Denmark round out the podium, in that order. If, for some reason, it’s the world’s worst business conditions you seek, the World Bank suggests you punch your ticket for Congo.

But perhaps most interesting, to us anyway, were the major up-and-comers. Here are the biggest improvements from last year… thanks to the Wall Street Journal for the table:

  China’s industrial production grew at the slowest pace in six years during August.   Yesterday, we mentioned signs of the housing slowdown there. Today, the Chinese statistics bureau says industrials are experiencing a similar decline. But before you get too “sold” on the Chinese downturn, we note that industrial production there is still growing at an annual rate of 12.8%. Olympic-related shutdowns surely skewed August’s data. We look forward to seeing how the same measure fares over the next few months.

  The Japanese economy contracted sharply last quarter, the Nipponese government reports today. GDP there shrank at an annualized rate of 3% from April to June, the worst quarter in seven years. Just about everyone and their mother is betting on Japanese GDP to contract again this quarter, thus sending the economy into recession.

  China and Japan’s recent downturns have left a huge void in the global equities market. Global equity trading volume fell 37% last month, year over year. According to a Citigroup study, the value of globally traded stocks fell to $5.8 trillion in August, the lowest monthly volume since December 2006 and the first overall decline since Citi starting keeping track in 2002.

The Shanghai Stock Exchange suffered the most — a 78% crash in trading volume compared with a year ago. The U.S. was down 29%.

  Our inbox of reader mail is empty today… the way the news has been this week, we don’t blame you for taking a three-day weekend.

Enjoy it,

Ian Mathias
The 5 Min Forecast

P.S. We hate to ask, but can you spot us $10?


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