News What is wrong with the US economy? Part 2

[edward]

According to Moody CEO in regards to AAA credit ratings on subprime packages: "They drank the kool aid." In essence they gave their customers the ratings they wanted, and made millions doing it.

He then turns to a topic that he calls "Rating Erosion by Persuasion." According to Mr. McDaniel, "Analysts and MDs [managing directors] are continually 'pitched' by bankers, issuers, investors" and sometimes "we 'drink the kool-aid."

http://www.usnews.com/blogs/the-hom...n-digs-into-moodys-sp-with-internal-docs.html

"It could be structured by cows and we would rate it," one analyst said.

In another internal exchange, a Standard & Poor's analyst in 2006 told a co-worker, "Let's hope we are all wealthy and retired by the time this house of cards falters."

http://ap.google.com/article/ALeqM5j6i103m1hb5IKV4nnM2yThIBvX_wD93VQ2CO1

 

[Astronuc]

Here's an interesting discussion on GE's situation.

GE under siege
http://money.cnn.com/2008/10/09/news/companies/colvin_ge.fortune/index.htm

For years GE Capital's profits powered its parent's earnings and helped finance its vast array of businesses. Now GE's biggest asset has turned into a liability that puts the future of the entire company at risk.

By Geoffrey Colvin, senior editor at large, and Katie Benner, writer
Last Updated: October 15, 2008: 10:27 AM ET

 

[Astronuc]

Death Watch in a Mill Town
High oil prices may be the final blow for a legendary paper plant
By Alex Kingsbury
Posted August 5, 2008

MILLINOCKET, MAINE—The name Millinocket comes from the Abenaki Indian expression for the "many islands," a fitting description of the region near the geographic center of th e state. It was the thousands of acres of timberland and the rivers, on which logs could be floated, that attracted the paper makers a century ago. But mention Millinocket in New England, and it's never clear if you're speaking about the town itself or its old industrial anchor, the Katahdin paper mill, once the world's largest paper producing facility. In fact, there was a time when most phone books on the East Coast came from the Millinocket mill.

The mill no longer holds that title, but its No. 11 machine still spins out more than a thousand miles of paper a day in rolls wider than a two-lane road, mostly for glossy circulars and magazines (including in the past U.S. News). That's more than enough to paper a highway from Boston to Chicago. It has been a mild summer and a relatively good one for making paper, with orders for the high-quality "supercalendared" stock flowing in. But the mill and the town are facing a hard winter. The abrupt jump in fuel oil prices has made paper production dauntingly expensive, perhaps too expensive to keep the mill going, while the soaring cost of home heating oil has made living here equally challenging for anxious millworkers and other residents.

Sitting in a conference room in the mill's ivy-covered, brick administrative building, located at one end of the town's main street, mill manager Serge Sorokin outlines the problem on a whiteboard. "This is what oil prices means for Millinocket," he says, writing with a red felt marker. "We use about 400,000 barrels of fuel oil per year, and 18 months ago, we bought it at around $40 per barrel." He writes the numbers on the board. "Now, the price per barrel is $110." Sorokin, who studied paper engineering at the State University of New York College of Environmental Science and Forestry, does the arithmetic and underlines the corporate bottom line: The annual cost of making paper went up here by $28 million.

. . . .

http://www.usnews.com/articles/news/national/2008/08/05/death-watch-in-a-mill-town.html

Oil is down about $70/gal.

 

[turbo]

Old news here, Astronuc, and it's problematic because the price of oil can go up and down in very short time-frames, while re-investment in a mill such as this needs to yield both a long-term payout, and short-term profitability sufficient to make payroll, cover insurances, utilities, etc. We're losing more mills, too, but few are so crucial to the survival of the town in which they are located. Millinocket is in a very remote location. The mill was sited there because of water power and access to wood, and the town grew up around the mill. Aside from tourism, fishing, snowmobiling, etc, there is nothing that would draw people to this area, so businesses are dropping like flies and property values are in the cellar. If you want to own a second residence in a very pretty part of Maine (on the southern edge of Baxter State Park), you can buy one VERY cheaply.

 

[mgb_phys]

and having to pay for re-tooling, re-engineering, etc doesn't seem to appeal to Japanese car makers

I think it's having to pay for pensions and health insurance for the workforce that's a bigger worry.

They only thing a Japanese maker would get is a suitably rugged sounding American name and a network of underperforming dealers.
The alternative is to either convince american buyers that your truck is better, even with a Japanese name on the hood = toyota. Or simply invent an american name for your brand and promote it like crazy without saying who owns it = Lexus.

 

[turbo]

GM and the other big boys negotiated contracts with the trade unions when they had the US auto market by the tail, and when US protectionism allowed them to stay fat and happy and keep their competition at a disadvantage. Now, their short-sightedness is coming back to bite them.

GM can't cut contracted benefits, so their salaried workers will feel the pinch. They will no longer get matching 401K contributions, educational reimbursements and other benefits. Voluntary retirements are hitting GM's targets, either, so pink slips will fly.

http://news.yahoo.com/s/ap/20081023/ap_on_bi_ge/automakers;_ylt=Aq_uU43A9ytG0A_jolo6p06s0NUE

 

[Astronuc]

October 24, 2008 - Global equities markets got hammered this morning!
Wall Street futures down 5 pct, echo global rout

ATX    ATX                1,742.81 6:06AM ET    -181.87 ( -9.45%) 
BFX    BEL-20             1,855.49 6:21AM ET    -127.65 ( -6.44%) 
FCHI   CAC 40             3,038.23 6:21AM ET    -272.64 ( -8.23%) 
GDAXI  DAX                4,112.31 6:06AM ET    -407.39 ( -9.01%) 
AEX    AEX General          237.19 6:21AM ET     -20.66 ( -8.01%) 
OSEAX  OSE All Share        270.80 6:06AM ET     -23.72 ( -8.05%) 
MIBTEL MIBTel            15,120.00 6:21AM ET  -1,073.00 ( -6.63%) 
IXX    ISE National-100      77.76 Sep 22          0.00  (0.00%) 
SMSI   Madrid General       873.31 6:20AM ET     -71.62 ( -7.58%) 
OMXSPI Stockholm General    182.28 6:21AM ET     -16.50 ( -8.30%) 
SSMI   Swiss Market       5,518.42 6:21AM ET    -375.31 ( -6.37%) 
FTSE   FTSE 100           3,790.20 6:06AM ET    -297.63 ( -7.28%) 


AORD   All Ordinaries     3,831.60 1:10AM ET    -107.70 ( -2.73%) 
SSEC   Shanghai Composite 1,839.62 3:00AM ET     -35.94 ( -1.92%)
HSI    Hang Seng         12,618.38 5:27AM ET  -1,142.11 ( -8.30%)  
BSESN  BSE 30             8,701.07 6:00AM ET  -1,070.63 (-10.96%) 
JKSE   Jakarta Composite  1,244.86 6:24AM ET     -92.34 ( -6.91%)  
KLSE   KLSE Composite N/A                           0.00 (0.00%)
N225   Nikkei 225         7,649.08 3:00AM ET    -811.90 ( -9.60%) 
NZ50   NZSE 50            2,778.55 12:31AM ET    -28.79 ( -1.03%)  
STI    Straits Times      1,600.28 5:10AM ET    -145.39 ( -8.33%) 
KS11   Seoul Composite      938.75 5:03AM ET    -110.96 (-10.57%) 
TWII   Taiwan Weighted    4,579.62 1:46AM ET    -150.89 ( -3.19%)

--------------------------------------------------------------------
Oil powerhouse Venezuela struggles to keep lights on
http://www.reuters.com/article/newsOne/idUSTRE49M0BW20081023

SAN FELIX, Venezuela (Reuters) - Despite having some of the world's largest energy reserves, Venezuela is increasingly struggling to maintain basic electrical service, a growing challenge for leftist President Hugo Chavez.

The OPEC nation has suffered three nationwide blackouts this year, and chronic power shortages have sparked protests from the western Andean highlands to San Felix, a city of mostly poor industrial workers in the sweltering south.

Shoddy electrical service is now one of Venezuelans' top concerns, according to a recent poll, and may be a factor in elections next month for governors and mayors in which Chavez allies are expected to lose key posts, in part on complaints of poor services.

The problem suggests that Chavez, with his ambitious international alliances and promises to end capitalism, risks alienating supporters by failing to focus on basic issues like electricity, trash collection and law enforcement.

Stock futures freeze as tumble worsens
http://news.yahoo.com/s/nm/20081024/bs_nm/us_markets_stocks

LONDON (Reuters) – Stock index futures tumbled so sharply in European trade on Friday, they had to be frozen at several points in the morning.

By 6:27 a.m. EDT December Dow Jones futures were down 6.2 percent, Standard & Poor's 500 futures were off 6.6 percent and Nasdaq 100 futures were down 6.6 percent.

All three contracts lost the maximum amount permissible before the start of futures trading in the United States.

"We are in a panic mode, I don't know how else to describe it and when you're in panic mode, all rational thought goes out of the window," said City Index chief market strategist Tom Hougaard.

"We've just got to let this thing rage. I think we'll see the Dow below 8,000 today."

According to Reuters data, December S&P futures hit a low of 855.20, while Dow Jones futures touched a low of 8,224 -- the lowest levels at which both contracts could trade in a session.

Jeremy Hughes, a spokesman for the Chicago Mercantile Exchange in London, said both contracts were "limit down."

"The limit is calculated at roughly 5 percent down. At that point it can't go any further down but it is still accessible and can go up again," he said.

"When the U.S. futures open in Chicago, the contract becomes available again, so (it could go) further down another 5 percent down, so 10 percent in total," he added.

Ukraine in for tough times amid global crisis
http://news.yahoo.com/s/ap/20081024/ap_on_re_eu/eu_ukraine_tough_times

KIEV, Ukraine – Construction cranes have stopped swinging and thousands of steel workers face layoffs as Ukraine braces for a severe economic downturn.

Lacking the large foreign currency reserves of China and Russia, more integrated into the world economy than some smaller countries, Ukraine is being hit harder than other former Soviet states by the global financial crisis.

"Ukraine has been exposed as the most vulnerable," said Jan Randolph, an emerging markets analyst at Global Insight.

On Thursday, the Ukrainian currency plunged against the dollar to a historic low amid a run on banks and a frantic rush to convert savings into U.S. currency. Ukraine's hryvna plummeted to 6.01 hryvna per U.S dollar in trading at Ukraine's currency exchange.

Jittery customers lined up to buy dollars at exchange offices across the capital, some of which ran out of cash. The country was already short on foreign currency as demand for steel, its main export commodity, plunged. The Ukrainian currency has lost more than 20 percent since September.

Four years of robust economic growth left Kiev clogged with shiny imported automobiles and dotted with upscale fashion outlets. Real estate prices exceeded those of Rome for a time and the stock market gained an astonishing 130 percent in 2007.

But today, experts agree, Ukraine is in for tough times.

Falling demand for steel was widening the external trade deficit to a hefty $12.5 billion so far this year, compared to $5.9 billion last year. After excessive reliance on foreign credit to feed its vast consumer boom, which sent Ukrainians rushing to buy mobile phones, cars and apartments on credit, the economy was hit hard when panicked foreign investors abandoned emerging markets and European banks slashed lending, crippled by their own liquidity crunch. Inflation soared to 31 percent in May, year over year, and cooled to 16 percent in September.

The government spent $2.9 billion buying hryvnas to support the currency this month alone, bringing its reserves down to $34.2 billion, according to the central bank. One global rating agency after another has downgraded Ukraine's creditworthiness.

Today Ukraine is pinning its hopes on a loan of up to $14 billion from the International Monetary Fund. But unlike Hungary, which has also turned to the IMF for money, Ukraine does not benefit from European Union aid.
. . . .
Ukraine exports steel and cast iron to the Middle East, Europe and former Soviet Union countries, where they are used in housing construction, machine and ship building. But production by the country's metal industry, which represents 6 percent of the GDP and accounts for 40 percent of the country's exports, was down by 30 percent.

Steel magnate Serhyi Taruta, chairman of the Industrial Union of Donbas, told the newspaper Kommerstant Ukraine that his company plans to lay off as many as 20,000 people.
. . . .

UK economy officially on the brink of recession
http://news.yahoo.com/s/ap/20081024/ap_on_bi_ge/eu_britain_economy

LONDON – Britain's economy shrank between July and September, official figures showed Friday — confirming that the country is on the brink of recession and sending the pound into a dive against the U.S. dollar.

Britain's economic output declined by 0.5 percent last quarter, according to the Office for National Statistics.

It was the first time since 1992 that Britain's economy has contracted, and the fall was greater than analysts' prediction of a 0.2 percent drop.

The figures put Britain halfway into a technical recession — defined as two or more consecutive quarters of negative economic growth.

. . . .

The economic contraction was led by steep declines in the hotel and restaurant and manufacturing industries, the statistics office said.

The manufacturing sector, which has been hit hard by a decline in consumer spending, is already in its own recession according to the figures. Industry growth shrank by 1 percent in the third quarter following a decline of 0.9 percent in the second quarter.
. . . .

 

[mgb_phys]

Strange how recession is the new terror, the UK economy has been growing by 1-2% a year for 16 years since the last recession andnow looks to fall by 0.5% for a couple of quarters - that still leaves you 20% ahead.

There is an excellent graph on the BBC showing each years GDP change through the last few recession and then the cumulative growth over the same time.

 

[Art]

It can be argued that the only real need for growth is to alleviate poverty without needing to redistribute the wealth of the rich, but seeing as how most of the extra wealth created goes to the rich anyway the real benefits of growth for the greater part of the population of most western countries have been limited.

 

[Astronuc]

The UK has been over-leveraged for a couple of years. I noticed that last year when I was there. They are in much the same boat as the US.

This afternoon, I was listening to an interview with a person from a German Church. They had been receiving declining donations from the congregation while their operating costs where steadily increasing, so they decided to invest some money in the equities market to get a source of increased income. They invested in Lehman Brothers - and they lost their income and investment. So the collapse of the US financial industry has had a global reach.

 

[edward]

Half of Chinese toy factories have closed. That casts a heavy shadow on the global situation, especially the USA.

"Last year was the most difficult time in decades for the Chinese toy industry," said the vice-chairman of the China Toy Association, Liang Mei.

A total of 3,631 toy exporters, or 52.7% of the industry's businesses, shut down in 2008, according to figures from the Chinese General Administration of Customs reported by the official Xinhua news agency.

http://news.bbc.co.uk/2/hi/asia-pacific/7670351.stm

In other areas of production Chinese companies are moving their factories to Laos, Cambodia, and Vietnam. The reason is claimed to be excess government regulation and cheaper labor elsewhere.

Where have I heard that before? Has Walmart pushed the ever lower prices a bit too far??

http://www.clipser.com/watch_video/124913

 

[Astronuc]

5 Reasons the Market Could Fall Further
http://www.usnews.com/articles/busi.../5-reasons-the-market-could-fall-further.html
Credit's still weak, and so is the global economy
By Kirk Shinkle
Posted October 24, 2008

The beatings are likely to continue on Wall Street after one of the most frightening trading days in a long, bearish season.

Today's shudder started with early-morning fright when premarket trading was halted on the New York Stock Exchange following a drop of 550 points—6.5 percent—in Dow futures. Stocks opened down about 450 but staged a modest comeback after what analysts were calling "Black Friday" in equity markets around the globe.

Stocks are still bouncing around their lows for the year—a dangerous place to be until markets get some confirmation that it really is a bottom. Unfortunately, the coming days don't appear to offer much in the way of hope for a quick recovery, even given what has become one of the worst trading months in decades.

The problem is this: Equity traders are still largely blinded by problems in the credit markets even as weakness in the economy and corporate America continues to creep into an already chaotic scene. That's nothing new. However, the longer heightened levels of uncertainty continue, the greater the damage. When the smoke clears, traders could be disappointed even further.
. . . .

 

[jal]

Warning of approaching disasters were made and were ignored.
-------
http://johncbogle.com/wordpress/wp-content/uploads/2007/10/risk_mgmt.pdf
Black Monday and Black Swans
Remarks by John C. Bogle
Founder and former chief executive, The Vanguard Group
before the Risk Management Association
Boca Raton, Florida
October 11, 2007
When investors—individual and institutional alike—engage in far more trading—inevitably with one another—than is necessary for market efficiency and ample liquidity, they become, collectively, their own worst enemies.
While the owners of business enjoy the dividend yields and earnings growth that our capitalistic system creates, those who play in the financial markets capture those investment gains only after the costs of financial intermediation are deducted. Thus, while investing in American business is a winner’s game, beating the stock market—for all of us as a group—is a zero-sum game before those costs are deducted. After intermediation costs are deducted, beating the market becomes, by definition, a loser’s game.
We’re merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune. We’re also adding even more costs by creating ever more complex financial derivatives in which huge and unfathomable risks have been built into our financial system.
The Soaring Costs of our Financial System
Turning first to the costs of our system, they have soared to staggering proportions. Led by Wall
Street bankers and brokers and mutual funds, followed by hedge funds and pension fund managers, plus advisor fees and all the other costs incurred by financial market participants have risen from an estimated $2.5 billion as recently as 1988 to something like $528 billion this year, or some 20 times over. (Chart 9)
But don’t forget that these costs recur year after year. If the present level holds for the next decade (I’m guessing that it will grow), total intermediation costs would come to a staggering $5 trillion.
Then think about these cumulative costs relative to the $16 trillion value of the U.S. stock market and the $12 trillion value of our bond market. Those costs would represent an astonishing 18 percent of that value.
Does this explosion in intermediation costs create an opportunity for money managers?
You better believe it does! Does it create a problem for investors? You better recognize that too. For as long as our financial system delivers to our investors in the aggregate whatever returns our stock and bond markets are generous enough to deliver, but only after the costs of financial intermediation are deducted, these enormous costs seriously undermine the odds in favor of success for our citizens who are accumulating savings for retirement. Alas, as we all know, the investor feeds at the bottom of the costly food chain of investing.
-----
jal

 

[Astronuc]

After intermediation costs are deducted, beating the market becomes, by definition, a loser’s game.

That's a big part of the problem.

 

[Art]

Perhaps it is time the US and other world gov'ts took even more ownership of the finance industry.

The bail out, deposit guarantees and huge injections of money to improve liquidity seem to have stopped the collapse of the banking industry but given the tiny reductions in the LIbor rate it seems the banks aren't keeping to their side of the deal with credit remaining as tight as ever. The spread difference between 3 month T-bills and the 3 month Libor rate should be around 0.2% but currently stands at 3.5% which in plain language means borrowers are being ripped off as interest reductions by the central banks are not being passed on.

It would seem the banks are soaking up the extra cash to improve their balance sheets whilst eyeing their fellow bankers looking for signs of renewed weakness ready to pounce. In some cases in the UK at least incredibly the banks are actually putting the cheap money the gov't injected into the system on deposit with the central bank and earning interest on it!

It seems to me it is impossible for the current batch of finance executives and managers to change the predatory way they think and the way they have operated for the past 20+ years as evidenced by the huge bonuses they are still paying themselves at even this critical time and so if the banks will not voluntarily perform their vital role in oiling the gears of the economy then the gov'ts should put their own people in charge of them who will.

 

[fuzzyfelt]

Perhaps, but the governments already now have stakes, and also perhaps there has been a change from the developed market credit crisis to emerging markets currency meltdown, all with the downturn in the background.

 

[turbo]

What galls me is that the Fed keeps dropping rates to stimulate borrowing and lending, while those of us who have saved all our lives are taking it in the neck. Money-market accounts and savings accounts pay nothing these days.

 

[Astronuc]

Low government interest rates are part of the problem also. The lenders benefitted from low interest rates by larger point spreads - they borrowed low and load at high interest rates. For the most part, consumers did not benefit.


They the other thing - under Bush, the economy produced sub-prime jobs. That and too many sub-prime loans lead to an over-leveraged economy - in addition to fiscal irresponsibility.

 

[Astronuc]

Hammer time!

World markets slump [again]; Nikkei at 26-year low
http://biz.yahoo.com/ap/081027/world_markets.html

LONDON (AP) -- World stock markets slumped again Monday with the Nikkei index in Japan closing at its lowest in 26 years as the financial crisis drove up the yen, piling the pressure on the country's exporters.

Tokyo's Nikkei 225 index closed down 6.4 percent to 7,162.90 -- the lowest since October 1982. Hong Kong's Hang Seng Index tumbled 12.7 percent to 11,015.84, its lowest close in more than four years and biggest daily decline since 1991.

European markets followed Asia lower, with benchmarks in Britain, Germany and France trading down more than 4 percent in early trading. The FTSE 100 index was 190.31 points, or 4.9 percent, lower at 3,693.05, while Germany's DAX was down 182.81 points, or 4.3 percent, at 4,112.86. France's CAC-40 was the worst performing European index, down 184.65 points, or 5.8 percent, at 3,009.14.

"Worries about the impact of the surging yen on Japanese export earnings have hit the Nikkei hard," said Julian Jessop, chief international economist at Capital Economics.

"This in turn has led to sharp falls in European markets even when, as on Friday, the U.S. had closed higher the day before," he added.

Dow futures were down 268 points, or 3.2 percent, at 7,994. Standard & Poor's 500 futures were down about 4 percent.

Major Stock Indices (in local currency)
Asian Markets

AORD   All Ordinaries       3,768.30 1:11AM ET     -63.30 (-1.65%) 
SSEC   Shanghai Composite   1,723.35 3:00AM ET    -116.27 (-6.32%)  
HSI    Hang Seng           11,015.84 5:59AM ET  -1,602.54 (-12.70%)  
BSESN  BSE 30               8,509.56 5:59AM ET    -191.51 (-2.20%)  
JKSE   Jakarta Composite    1,166.41 6:33AM ET     -78.46 (-6.30%) 
KLSE   KLSE Composite N/A                            0.00 (0.00%)  
N225   Nikkei 225           7,162.90 3:00AM ET    -486.18 (-6.36%)  
NZ50   NZSE 50              2,778.55 Oct 24        -28.79 (-1.03%) 
STI    Straits Times        1,600.28 Oct 24          0.00 (0.00%)  
KS11   Seoul Composite        946.45 5:03AM ET      +7.70 (+0.82%)  
TWII   Taiwan Weighted      4,366.87 1:46AM ET    -212.75 (-4.65%)

European Markets

ATX    ATX                  1,700.32 6:59AM ET    -156.51 (-8.43%)  
BFX    BEL-20               1,824.52 7:16AM ET     -93.56 (-4.88%)
FCHI   CAC 40               3,005.89 7:16AM ET    -187.90 (-5.88%) 
GDAXI  DAX                  4,105.93 7:02AM ET    -189.74 (-4.42%)  
AEX    AEX General            234.35 7:16AM ET     -11.57 (-4.70%)  
OSEAX  OSE All Share          250.75 7:01AM ET     -17.63 (-6.57%)  
MIBTEL MIBTel              14,653.00 7:16AM ET    -737.00 (-4.79%)  

SMSI   Madrid General         843.54 7:15AM ET     -50.91 (-5.69%) 
OMXSPI Stockholm General      176.17 7:16AM ET     -10.52 (-5.64%)  
SSMI   Swiss Market         5,423.12 7:16AM ET    -251.97 (-4.44%)  
FTSE   FTSE 100             3,699.04 7:01AM ET    -184.32 (-4.75%)

This will certainly be one of those periods highlighted in the history books.

 

[jal]

"Worries about the impact of the surging yen on Japanese export earnings have hit the Nikkei hard," said Julian Jessop, chief international economist at Capital Economics.

Has anyone figured out that now the japanese can go and buy out any asset at basement prices?

 

[mgb_phys]

Has anyone figured out that now the japanese can go and buy out any asset at basement prices?

Not exactly - the US$ is going up.
Any asset they wanted they bought last time (in the 80s) most profitable US companies are either in defence or can claim to have enough links to national security that you can block foreign takeovers (eg ports). somehow I can't see Toyota buying GM to gain their experience of building cars.
The euro is looking very cheap though - might be time to buy a european car company or mobile phone maker.

 

[mheslep]

I believe the markets now undervalue the underlying earnings beyond any reason: The US stock market capitalization is now $7-9 trillion in an economy that produces $14 trillion yearly. Even in the worst recession scenario on the table GDP is NOT going to change much. The stock markets may decline further, but at this point it is panic selling not earnings based.

 

[Astronuc]

This morning I heard that there was a lot of downward pressure because of margin calls, i.e. all those folks who had borrowed to buy stock with the expectation of appreciation had to sell stock to pay back the borrowed money/stock.

 

[edward]

This morning I heard that there was a lot of downward pressure because of margin calls, i.e. all those folks who had borrowed to buy stock with the expectation of appreciation had to sell stock to pay back the borrowed money/stock.

I have been thinking about that. Speculators can now borrow money provided by the government to play the market, Something is wrong with this picture.

 

[fuzzyfelt]

Really weird stuff, like Volkswagon being the 2nd biggest company in the world for a little while today.

 

[mgb_phys]

Really weird stuff, like Volkswagon being the 2nd biggest company in the world for a little while today.

And Porsche are still trying to buy them!

So you are rolling in cash because yuppies have been buying your sports cars and even the worlds ugliest SUV (although cthulu knows why) - you suspect that things aren't going to last for ever so you look at buying one of the biggest producers of small cars.
Somebody in the Porsche family obviously inherited some brains.

 

[fuzzyfelt]

I believe the markets now undervalue the underlying earnings beyond any reason: The US stock market capitalization is now $7-9 trillion in an economy that produces $14 trillion yearly. Even in the worst recession scenario on the table GDP is NOT going to change much. The stock markets may decline further, but at this point it is panic selling not earnings based.

I think this could be confusing micro (like the evaluation of companies) with macro (like countries) economics. National account numbers are historical figures (which, roughly, in the event of a recession the GDP growth rate declines over 6 months or more, and in a depression GDP growth itself declines for that period). Companies, otoh, are valued on their future earnings, for say a year in advance, involving variables, some knowable, that include EBITDA, like price to earning ratio, dividend yield, free cash flow multiple... With the speed of this crisis Analysts, in most cases, haven't yet revised their projections.

 

[B. Elliott]

And Porsche are still trying to buy them!

So you are rolling in cash because yuppies have been buying your sports cars and even the worlds ugliest SUV (although cthulu knows why) - you suspect that things aren't going to last for ever so you look at buying one of the biggest producers of small cars.
Somebody in the Porsche family obviously inherited some brains.

Porsche has slowly been buying more and more of Volkswagen over the years. It's primarily been due to prevent foreign companies from taking over. Preservation of tradition and heritage is paramount to Porsche.

 

[jal]

What is wrong with the US economy?
http://www.bloomberg.com/apps/news?pid=20601109&sid=aVann0.cv9Tw&refer=home
Broken Securities Industry Still Has $20 Billion to Pay Bonuses

The following table compares compensation and estimated bonuses for the first nine months of 2008 with the first nine months of last year. Bonus estimates are 60 percent of total compensation. Bonus awards are typically determined at the end of the year, with payments made in December or January.

( The table does not cut and paste properly go read it)
---------
Their wages came out of the money that came from the investors.
Therefore, don't ask why there is a "market correction".
You could ask, "Without the bail out, where would the money come from for those bonus?"

 

[fuzzyfelt]

Wow, VOW was the biggest company in the world for a little while today.

(Agreed the Porsche SUV is really ugly )

 

[mheslep]

So a friend working at Freddie Mac told me recently that Secretary Paulson had dropped by and gave a large forum talk to the employees of the now government owned firm. Apparently he told them keep their heads up, and "just keep doing what you've been doing". Ok, I assumed that meant keep buying mortgages, but certainly the days of low down payments and risky loans are over, right? Then I see this in the latest The Economist:

...Surprisingly, mortgage-lending conditions may be improving. Under pressure from the federal government, Fannie Mae and Freddie Mac, the now-nationalised mortgage agencies, and the Federal Housing Administration, the programme for low-income buyers, are stepping up their activity. A buyer can now obtain an FHA loan with as little as 3.5% down on a house costing up to $625,000—which would include most of the homes in the country. Ms Zelman reckons the FHA accounted for 22% of mortgage originations in the third quarter, up from 5% in all of 2007.

Incredible. Inmates are running the asylum. Anybody giving out less than 20% down loans ought to be in a padded room.

 

[Greg Bernhardt]

Incredible. Inmates are running the asylum. Anybody giving out less than 20% down loans ought to be in a padded room.

yup, if you can't put down 20% you simply can't afford it. Stick to renting. Why people think they can borrow $600k when they only have $20k in the bank is beyond me.

 

[Astronuc]

White House to banks: Start lending now
http://news.yahoo.com/s/ap/20081028/ap_on_bi_ge/financial_meltdown

WASHINGTON – An impatient White House served notice Tuesday on banks and other financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans.

"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said.

Though there are limits on how much Washington can pressure banks, she noted that banks are regulated by the federal government.

"They will be watching very closely, and they're working with the banks," she said.

Anthony Ryan, Treasury's acting undersecretary for domestic finance, made the same point in a speech in New York before financial executives.

"As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy," Ryan told the annual meeting of the Securities Industry and Financial Markets Association. "It is in a strengthened institution's best financial interest to increase lending once it has received government funding."

Washington is getting impatient.

It will certainly be interesting to see who takes Paulson's place. I understand, he doesn't plan to stay in the next administration.

 

[mgb_phys]

WASHINGTON – An impatient White House served notice Tuesday on banks and other financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans.

In further news they gave $5 to a 5 year old and told them not to spend it all on sweets.

 

[Astronuc]

In further news they gave $5 to a 5 year old and told them not to spend it all on sweets.

The US government can't afford such lavish spending. Five bucks indeed! What is this nation coming to?!

 

[Astronuc]

Folks with money snatched up stocks on the US markets sending the Dow 30 up nearly 900 pts. A good day.

Meanwhile

Medical Debt Sending Many Over Financial Brink
http://news.yahoo.com/s/hsn/20081028/hl_hsn/medicaldebtsendingmanyoverfinancialbrink

TUESDAY, Oct. 28 (HealthDay News) --Since 1999, Keith and Deborah Krinsky of Magalia, Calif., have seen their health insurance deductible soar from $1,000 to $10,000.

And their health-care costs have put them in a financial hole.

A combination of Keith's chronic asthma and potential heart problems, Deborah's connective tissue disorder and fallen arches, and their kids' various scrapes and stumbles led them to amass a pile of credit card debt and forced them to refinance the mortgage on their house -- which they now are having trouble paying.

Keith, once a plant manager for a trucking company in Chico, took a $30,000 pay cut to get a job with better health benefits. Deborah, who doesn't work because of her disability, said they are still fighting desperately to stave off foreclosure.

"Right now, we are in the process of losing our home. We will probably go to my mother-in-law," Deborah said Monday.
. . . .

U.S. consumer confidence plunges to record low
Job, economic worries worsen as financial crisis takes toll


On the bright side - Stranger buys foreclosed home for woman on hard times

 

[mheslep]

I think this could be confusing micro (like the evaluation of companies) with macro (like countries) economics. National account numbers are historical figures (which, roughly, in the event of a recession the GDP growth rate declines over 6 months or more, and in a depression GDP growth itself declines for that period). Companies, otoh, are valued on their future earnings, for say a year in advance, involving variables, some knowable, that include EBITDA, like price to earning ratio, dividend yield, free cash flow multiple... With the speed of this crisis Analysts, in most cases, haven't yet revised their projections.

There are also the large number of private or small firms that help make up annual GDP numbers but are not reflected in the publicly traded stock markets. Yet the figures are still connected, with GDP reflecting earnings for the nation, and the stock market _should_ be reflecting a valuation of the publicly traded part those company's earnings, or more precisely the expected present value of future earnings. That is, the market _should_ reflect not just a company's earnings for one year in advance, but _all_ of its expected future earnings calculated as net present value.

 

[fuzzyfelt]

There are also the large number of private or small firms that help make up annual GDP numbers but are not reflected in the publicly traded stock markets. Yet the figures are still connected, with GDP reflecting earnings for the nation, and the stock market _should_ be reflecting a valuation of the publicly traded part those company's earnings, or more precisely the expected present value of future earnings. That is, the market _should_ reflect not just a company's earnings for one year in advance, but _all_ of its expected future earnings calculated as net present value.

I see, Ok.

Arguably, the markets are below long term fair trade, basis $70 earnings for S&P 500 companies, that that number should be around 925 theoretically, with compelling value, based on historical data, around the 580-650 range. But then, when is it likely to trade there, 5 years time, sooner? I also wonder how connected, given other influences like global money flows, currency and emerging markets risks, crude, or internally, capital destruction, savings, etc..

 

[mheslep]

I see, Ok.

Arguably, the markets are below long term fair trade, basis $70 earnings for S&P 500 companies, that that number should be around 925 theoretically, with compelling value, based on historical data, around the 580-650 range. But then, when is it likely to trade there, 5 years time, sooner? ...

Good point, illustrating why investment in the market requires a ~5 year window at least.

 

[Astronuc]

World markets cheer Fed rate cut- AP

World stock markets rose Thursday after the U.S. Federal Reserve slashed interest rates to help revive the world's largest economy and opened new credit lines with other central banks.

Shell reports 22 percent rise in 3Q profit- AP (before the price of oil fell)
VW's 3Q net profit up 28 percent to 1.2B euros- AP
Cigna reports 53 percent drop in 3Q profit- AP (financials are still problematic)


Stocks signal sharply higher open after rate cut
http://biz.yahoo.com/ap/081030/wall_street.html

Global stocks, euro rally on emerging market gains
http://news.yahoo.com/s/nm/20081030/ts_nm/us_markets_global

. . . . The Fed also opened up dollar liquidity aid beyond traditional markets, with four new $30 billion currency swap lines with Brazil, Mexico, South Korea and Singapore.

"The Fed's statement has paved the way for further rate cuts ...Its policy outlook is softer, and is pushing the dollar lower," said David Tinsley, economist at nabCapital.

"The Fed is doing its bit to shore up emerging economies, so that's improving risk appetite toward those currencies."

The MSCI world equity index rallied by nearly 3 percent, driven by gains of over 9 percent in the benchmark emerging equities index.

Emerging equities have bounced by 24 percent from four-year lows set on Tuesday.

. . . .

The support of the markets in Brazil, Mexico, S. Korea and Singapore is interesting. Some people will make some major bucks.

But have systemic problems been addressed? I think not.

 

[Jimmy Snyder]

Hopes that the US is in recession were given a hearty boost today as the Commerce Department reported a contraction of 0.3% in the GDP in the last quarter. This is the worst quarter since 2001. Actually, I find that encouraging in the light of predictions by half the people that this would be the worst quarter since the great depression, and the other half predicting it would be the worst quarter since the nation's founding. GDP was forecast to drop 0.5% according to the median of 75 economists surveyed by Bloomberg News. This is inconsistent with my view that economists are completely nuts, but is consistent with the opinion that they are 66% nuts.

We have not had two consecutive quarters of negative growth, so I doubt the NBER will give you what you want this quarter. However, recent events do not point to growth and other indicators have been weak as well, so you should definitely not give up hope for the future.

 

[Astronuc]

Adding to jimmysnyder's great news -

Where Did A.I.G.'s Cash Go?
http://www.nytimes.com/2008/10/30/business/30aig.html

The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October, The New York Times's Mary Williams Walsh writes.

Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

"You don't just suddenly lose $120 billion overnight," Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz., told The Times.

A.I.G. said it could not provide more information ahead of its quarterly report, expected next week, the first under new management.

Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.

Certainly there is a lot of skepticism about the book-keeping at AIG. Makes one wonder about the book-keeping elsewhere.

AIG was bailed out because it was considered solvent, i.e. had capital (collateral), besides being too big to fail. Lehman Brothers was allowed to fail since it was insolvent, i.e. no capital, no collateral. Now some are wondering if AIG actually didn't/doesn't have adquate capitalization.

So how come John McCain isn't campaigning on the successes of the republican stewardship of the economy - and the prosperity that has trickled down to everyone?

 

[Astronuc]

Exxon Mobil posts biggest US quarterly profit ever
http://news.yahoo.com/s/ap/20081030/ap_on_bi_ge/earns_exxon_mobil

HOUSTON – Exxon Mobil Corp., the world's largest publicly traded oil company, reported income Thursday that shattered its own record for the biggest profit from operations by a U.S. corporation, earning $14.83 billion in the third quarter.

Bolstered by this summer's record crude prices, the Irving, Texas-based company said net income jumped nearly 58 percent to $2.86 a share in the July-September period. That compares with $9.41 billion, or $1.70 a share, a year ago.

The previous record for U.S. corporate profit was set in the last quarter, when Exxon Mobil earned $11.68 billion.

Revenue rose 35 percent to $137.7 billion.

On average, analysts expected the company to earn $2.39 per share in the latest quarter on revenue of $131.4 billion.

Company shares fell 69 cents to $73.96 at the open of trade.

Exxon Mobil's results got a boost of $1.62 billion in the most-recent quarter from the sale of a natural gas transportation business in Germany. It also took a special, after-tax charge of $170 million related to a punitive damages award related to the 1989 Exxon Valdez oil spill.

. . . .

The definitely benefitted from high gas and oil prices, which have fallen preciptiously in the last month or so. I doubt the current quarter will be as good.

 

[Astronuc]

Alabama County On Brink Of Bankruptcy
http://www.npr.org/templates/story/story.php?storyId=96344546

Jefferson County is home to Birmingham, the state's largest city, and if it declares bankruptcy, it would be the largest municipal filing in history. The county owes $90 million as payment on bonds, and it does not have the money. There are efforts to have the state and Federal government step in. With or without bankruptcy, the taxes or public service fees will have to increase - at the time there is an economic downturn.

Meanwhile -

Missouri Farming Couple Worries About The Future
http://www.npr.org/templates/story/story.php?storyId=96323476

All Things Considered, October 30, 2008 · Bryan and Christina Truemper are struggling to make a living off their organic farm in Frohna, Mo. They're thinking hard about their future — and the country's future.

They worry about the economy and their finances running the four-acre Farrar Out Farm, and they hope a change in the presidency will make a difference.

In the week before the election, NPR traveled through Missouri as part of a series of stops along the Mississippi River to take the depth of voters and gauge how the economy is affecting them.
. . . .

 

[Proton Soup]

Alabama County On Brink Of Bankruptcy
http://www.npr.org/templates/story/story.php?storyId=96344546

Jefferson County is home to Birmingham, the state's largest city, and if it declares bankruptcy, it would be the largest municipal filing in history. The county owes $90 million as payment on bonds, and it does not have the money. There are efforts to have the state and Federal government step in. With or without bankruptcy, the taxes or public service fees will have to increase - at the time there is an economic downturn.

heh, i live in this county. i think there's a lot more to it than simply "the economy".

 

[Astronuc]

heh, i live in this county. i think there's a lot more to it than simply "the economy".

They did mention something about 4 former county commissioners have been prosecuted for corruption, including one who accepted gifts from an investment banker who handled the sewer bond deal on which the county may default.


Meanwhile - At Planet Money, a multimedia team of reporters tracks down the economists, investors and regular folks who are trying to make sense of the rapidly changing global economy.
http://www.npr.org/templates/story/story.php?storyId=94427042

 

[Proton Soup]

They did mention something about 4 former county commissioners have been prosecuted for corruption, including one who accepted gifts from an investment banker who handled the sewer bond deal on which the county may default.

yes, that is a big part of it.

 

[jal]

How do capitalist manage to survive in a socialised system?
Please read to whole article and pass me a clean hankie

http://www.bloomberg.com/apps/news?pid=20601109&sid=aX6xQJdexEEo&refer=exclusive
Wall Street Won't Surrender on Bonuses, Veterans Say (Update1)
By Christine Harper
``Wall Street bank executives are set to walk away with billions of bonuses at the end of this year,'' Barack Obama, the Democratic presidential candidate, said in a campaign speech on Oct. 28. ``We call that an outrage.''
Gutfreund, the former Salomon CEO, said Wall Street executives are likely to find ways to pay bonuses and manage the political uproar.
``I'm sure there are creative ways,'' he said. ``There are all kinds of devices to cover yourself in terms of paying people.''
Last Updated: October 30, 2008 09:59 EDT

 

[jal]

Insight: The masters lost our trust
By Aline van Duyn
Published: October 30 2008 17:43 | Last updated: October 30 2008 17:43

The focus now has become the nine US banks which are receiving $125bn of public money. They have spent or reserved $108bn for employee pay and bonuses in the first nine months of 2008, nearly the same as last year. Henry Waxman, chairman of the House of Representatives oversight committee, has rightly asked them to explain this and has questioned the ”appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of billions of dollars in bonuses, especially after one of the financial industry’s worst years on record”. This issue is the one that people not working on Wall Street talk about the most – I have had discussions about it at the school gate and in practically every social encounter.
For Wall Street to really restore the confidence, it needs to understand why its pay make others not just bristle, but angry. Getting paid as much as last year looks really bad, it is as simple as that. Indeed, with such a large amount of their expenses eaten up by compensation costs, curbing payouts last year and the year before would have presumably left the banks is a less dire financial condition than they are now.
The story of Sherman McCoy ends in utter disaster, the dire consequence of his initial decision to avoid assuming responsibility for a crime. Behaving as if it’s business as usual when it clearly is not can have devastating effects
Copyright The Financial Times Limited 2008

That bonus money is coming from your grandma's saving, from your pension account, from an IOU that your kids will need to pay for.
jal

 

[Astronuc]

7.5 million homeowners 'underwater'
http://money.cnn.com/2008/10/30/real_estate/underwater_borrowers/index.htm
Nearly a fifth of U.S. borrowers owe more on their mortgages than their homes are currently worth - and that number is growing!

NEW YORK (CNNMoney.com) -- At least 7.5 million Americans owe more on their mortgages than their homes are currently worth, according to a real estate research firm's report released Friday.

In other words: If they sold their homes today, they'd have to bring a check to the closing. Ouch.

Another 2.1 million people stand right on the brink, according to the report by First American CoreLogic. Their homes are worth less than 5% more than the mortgages they're paying on them.

The technical term for this phenomenon is negative equity; more colloquially, these borrowers are often referred to as being "underwater."

"Being underwater leaves homeowners vulnerable to foreclosure," said Mark Fleming, CoreLogic's chief economist.

That's because these borrowers are left with no home equity to tap - via refinancing or a home equity loan - if they run into financial trouble. Negative equity has contributed much to the soaring increase in foreclosures over the past year.

The report on the growing problem of negative equity is a conservative estimate. Some organizations, including Moody's Economy.com, estimate that as many as 12 million borrowers may be underwater.
. . . .

This is an indication of the severity of one of the fundamental weaknesses in the US economy.


Mortgage Plan May Irk Those It Doesn’t Help
http://www.nytimes.com/2008/10/31/business/31bailout.html

As the Treasury Department prepares a $40 billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge: not making the plan too tempting to people like Todd Lawrence.

An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.

If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.

“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

The plan, still under development by Treasury, is part of the economic rescue package passed by Congress earlier this month. It is aimed at aiding up to three million beleaguered homeowners by reducing their monthly payments.

Washington and Wall Street are frantically seeking to stabilize markets by curtailing the onslaught of foreclosures. There are now at least four major plans to aid homeowners. But experts say it is difficult to design these programs in ways that reduce the indebtedness of the distressed without giving everyone else a reason to mail the keys back to their lenders.

“If the lunch truly is free, the demand for free lunches will be large,” said Paul McCulley, a managing director with the investment firm Pimco.

. . . .