Fed’s Loss is Your Gain, Has Housing Bottomed?, Obama’s Budget Forecast, Five Star Hotels and More!

by Addison Wiggin & Ian Mathias

  • Hazzah! Fed loses major lawsuit… judge orders immediate improved transparency
  • Home prices get better, but is this the bottom? Shiller, Fitch and The 5 weigh in
  • Seniors to feel deflation’s sting… Social Security benefit growth stagnates for first time
  • Chris Mayer on what the Chinese love to buy… and the way you can own it first
  • Plus, another credit crisis obituary: The five-star hotel

  It’s one of those days… so many great stories, so little time. Let’s start with the best news:

  A U.S. district judge has ordered the Fed to identify the beneficiaries of 11 different shadow loan programs. Ben Bernanke and his brood lost their lawsuit with Bloomberg yesterday, which claimed that the central bank was violating the Freedom of Information Act by not disclosing the targets of their multibillion-dollar lending programs.

Until now, the Fed has refused to name names or disclose the origins and varieties of collateral offered under its several multibillion-dollar lending programs. Doing so, theyclaim, might unsettle shareholders and depositors (and Lord knows those “little people” are of small concern to the Fed). No more, says Judge Loretta Preska of the Manhattan District Court: She ruled that the Fed “essentially speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed. Conjecture, without evidence of imminent harm, simply fails to meet the board’s burden” of proof.

Of course, there’s no telling what will really come of this ruling, but we have to think it’s a step in the right direction. We’ll let you know how it unfolds.


  This can go in the “good news” file too, sort of: The rate of U.S. home price decline definitely stopped accelerating in the second quarter. That’s the word from the June edition of the S&P/Case-Shiller home price index, which was released this morning.

National home prices registered a 14.9% decline from the second quarter of 2008 to the same time in 2009. While that’s hardly worth celebrating, it’s way better then the record 19.1% year-over-year fall in the first quarter.

As the chart shows, it ain’t as bad as it used to be. But at the same time, home prices are still at early 2003 levels. You could call this a housing rebound, but it’s more like a deceleration.

  “It’s an impressive turnaround. This is a huge, sudden upward swing,” says Robert Shiller, whose namesake is attached to this index. “I think it might mark a change in trend.

“But I didn’t say we’ve reached a bottom. It’s just suggestive of a turning point. We’ve seen other corrections like this reverse. We really don’t know the future….

“Our UMM [one of Shiller’s tradable housing market securities] is still not predicting any major increases going out five years. It’s predicting now that in five years, home prices will be 6% higher than they are now. That is not a huge recovery.”

  What’s more, the “cure rate” on ailing mortgages is plummeting. According to a Fitch study released today, between 2000-2006, an average 45% of prime mortgage holders who fell behind on a monthly payment were able to catch back up the next month.

In July, that “cure rate” was 6%. We reiterate, that was for the best, prime-level borrowers. Alt-As went from an average 30% to 4%. Subprimes shrank from 19% to 5%.

“Cure rates have really collapsed,” commented Roelof Slump, Fitch’s managing director. Yeah, that’s safe to say. Not only does this give us pause in celebrating a housing comeback, but it reinforces a trend we’ve been pounding the table about over the last month or so: This isn’t about subprime anymore.

  For further proof, check this out… some of the fine print from last week’s existing home sales data:

The NAR boasted a 7.2% leap in existing home sales for July last week, the biggest month-to-month gain since they started keeping track. But with the overwhelming majority coming from foreclosures, distressed sales and the lowest of the low end… what does it really say about the true state of U.S. housing?

  Here’s an interesting credit crisis byproduct: The 50 million current Social Security recipients probably won’t see any extra SS income until 2012. In fact, millions on the government dime might see their monthly checks shrink.

It all boils down to COLA — the government’s cost-of-living adjustment. Since consumer prices are — in theory, at least — deflating, the Social Security administration announced this weekend that they do not plan on a COLA for the next two years. Should that forecast come true, it’ll be the first time that’s happened since at least 1975, when automatic increases were first implemented.

That will probably equate to a net monthly loss for millions of beneficiaries. Medicare prescription drug premiums are on track to bump up a few bucks next year — a major cost for most retirees. And until the Obama administration jams through their health care reform, medical expenses will continue to rise, as well. Who knows… they might go even higher after Obamacare. Either way, tens of millions of seniors are about to face stagnant income and rising monthly costs… could get politically interesting.

  As we forecast yesterday, the Obama administration predicted today a cumulative $9 trillion deficit over the next 10 years. Somehow, since the most recent projection in May, that forecast has grown by $2 trillion.

In other words, by 2019, the public debt will have doubled… to 75% of the size of our entire GDP.

Also of note, the new White House projections call for a 2.8% GDP contraction in 2009, twice as lousy at they forecast this time last year… try to remember that the next time they tell you about the economy “getting back on track.”

“This is where I have to come out and talk about how bad these forecasts are!” insists Chuck Butler. “For instance, 10 years ago, these forecasters said we would be enjoying a budget surplus right now… Buzz! Wrong! Thank you for playing, there’s a nice parting gift for you at the door! Johnny? Tell them what they won! How about a nearly $2 trillion (by gov’t. accountants’ figures) budget deficit instead? That will be more than $500 billion more than these accountants forecast just a year ago!”

Heh, that might be Chuck’s way of suggesting you diversify your currency holdings… unless, of course, you trust our government will switch to a strong dollar policy in the near future. His EverBank crew just rolled out a MarketSafe BRIC CD — a principal-protected CD that gives owners exposure to BRIC nation currencies. Check it out here.

  “There is probably no group of buyers more watched and coveted than Chinese consumers,” writes Chris Mayer, underscoring the American desire to invest in Far East growth. “Over the weekend, the Financial Times had a piece that highlights things the Chinese like to buy.

“This is important because the Chinese are becoming increasingly affluent in large numbers. Total consumer spending was $1.7 trillion in 2007, compared to $12 trillion in the U.S. But that number is growing rapidly. The FT focused on the new rich. China now boasts more millionaires than the U.K. The rapid growth of this group has companies all over the world spending more money and time figuring out ways to get in their pockets.

“So what do the affluent Chinese like? Outside of ordinary things like flashy cars and booze and quirky things like ivory and dried seahorses, one thing was mentioned in the FT piece that caught my eye: The Chinese love gold.

“‘China loves gold in all its forms,’ the FT reports, ‘as a reserve currency, jewelry, an investment.’ I’ve mentioned in the past about how the Chinese central bank doubled its holdings of gold this year, but it’s more widespread than that.

“The rising middle class in China also buys a lot of gold. Since 2007, Chinese consumers have been the second largest purchasers of gold jewelry in the world, behind only India. The FT points out those gold sales were up 28% year over year in May. Total gold demand for the year was up 21%, to 400 million tonnes. There are not too many sales of any kind going up that much in this financial crisis, but there it is.

“The financial crisis and weak stock market have helped gold as people look for a place to park some money. I think gold will remain a good place to be for some time yet. And gold stocks have the stars lined up for them. Many are reporting falling cash costs, yet the price of gold is staying up here in the $900s — and is likely headed much higher. That means gold stocks are reporting good increases in cash flow, among the few sectors to do so.”

That’s precisely why Chris has recently loaded up the Mayer’s Special Situations portfolio with some high-quality gold stocks. Get their stories and tickers here.

  Gold has been keeping to a tight range this week. As we write, it’s down a few bucks from yesterday, at $950 an ounce.

  President Obama formally nominated Ben Bernanke to serve another term as the Federal Reserve chairman. Yawn… stretch… did anyone really expect otherwise?

  Last today, another credit crisis victim: The five-star hotel.

Strapped for cash, many luxury hotels are deliberately abandoning the coveted five-star rating. Starwood Hotels announced this week that it would slacken some of the standards for its cushy St. Regis and W Hotels, a decision made shortly after Hilton and InterContinental chose similar fates.

Unbeknownst to your humble editors, there’s a whole slew of stuffy things a hotel has to do in order to get this elite seal of approval… most of which seem to cost a lot of money. Here’s just a few that went outside our typical expectations, according the Mobil Travel Guide:

  • At least two types of premium quality snacks are automatically offered and distinctly presented during bar and lounge service
  • Choice of at least two complimentary newspapers is offered and distributed
  • If pool service is available, during a 90-minute period and in warm conditions, some sort of complimentary refreshment is offered (for example, mineral water, fresh fruit, water spritz)
  • During turndown service, something noteworthy and thoughtful is included in the presentation
  • Guest bathroom is equipped with a telephone

Heh… guess we’ll all have to suffer the cruel normality of mere four-star hotels for a while. We’ll try to remember to bring our cell phone into the bathroom.


Ian Mathias

The 5 Min. Forecast

P.S. Dan Amoss’ latest special report has attracted a whole lot of attention over the last 24 hours — even a bit more than we anticipated. Word got out concerning his latest financial short play, to the extent that media outlets like Bloomberg have started to hound us for more details. We’re keeping the cards close to our chest (as close as we can, anyway) until Dan can digest the earnings report and conference call that’s due out today. If you want the scoop on what he thinks will be the next big bank to falter, be sure to check out tomorrow’s 5.


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