Traderbill’s Financial Markets Weblog

Conference Call: Today, Thursday at 8am PST (11am EST; 10am MinnesotaST; too early for Hawaii and too late for Japan and Australia.) Details with tomorrow’s commentary. Call is free except any long distance charges to Kansas. Dial-in number is 785-686-2400, participant code: 321856. TB will be there five minutes early so call in before 8 if you can so we can start on time with few interruptions. Topic will be credit markets and auction rate securities. A good day for the call as weblog has now had 3,100 hits…thank you! TB

1. Inflation and the dollar…poor Ben Bernanke must feel a lot like Scotty. To heck with inflation (and thus the dollar) as focus shifts almost entirely on the economy…which is only secondary as it is the credit markets. Apparently, the markets took him at his word and decided to accommodate him as the S&P 500 closed down for the first time in four sessions and the Dow came back from negative territory to makes four straight up days of 400 points and while a mere 9 point gaine advanced the margin above the 40 day moving average to 192 points. Meanwhile the combination of inflation rising, while the core remains mired around acceptable targets for the Fed, and the continued deterioration in the housing market (although you wouldn’t know that by the seventh attempt to rally housing stocks), is taking its toll on the dollar. The Index is at an alltime low and the Euro closed well above $1.50 for the first time in its 9 year lifetime. Still over the past 12 months the Dow is up just 3.47% (5.86% with dividends reinvested…although if you had gotten fair value you would have earned nearly 6%), and -4.3% year to date, while the S&P 500  

is -1.9% (-0.03%), and 6% ytd. The beloved NDQ 100 is up 3.3% (2.67%) over the past 12 months and -13.7% year to date. There is trouble in paradise.

Over the weekend TB heard that Iran has now started an Islamic commodities bourse. Initially, it will only trade in oil but can be expanded to other commodities. So? Why go there. Because you can trade oil in any currency you like (doubtful there will be much interest in dollars there). Were it not for the Saudi’s we would not be trading oil in dollars…it would be a basket at least or if Venezuela’s Hugo Chavez had his way a basket ex-dollars. IF this trend catches on, you have not begun to see the weakness in the trade deficit, balance of payments, or the demise of the dollar. TB is not saying this will happen but we are no longer the most popular nation on the planet, especially since we just inflicted great pain on the banks of Europe and even a small town in Norway thanks to Wall Street’s financial engineering. Already the dollar is showing signs of strain and with a global commodities boom, bubble?  …we cannot avoid rising food and energy prices: over the past 12 months energy at the producer price level is +23.7% and food up 8.2%…over the past three months they are up at an annualized rate of 44.7% and 12% respectively, while the dollar index is down 4.2%, 13.5% annualized. Over the past six months the Euro is +11.1%…annualize that! Second most popular is the Yen +8.3%. Clearly, the preferred currency is not the dollar, or Sterling which has fallen from favor and TB attributes this to the failed actions of the BOE over Northern Rock. Since hitting $2.1162 on Nov. 8, it is down 6.2% vs. the dollar. TB will leave it to readers to look at Sterling/Yen or the Sterling/Euro cross.

Yet we continue to be told that inflation is good for stocks, as are the completed and pending rate cuts (probably another 50 basis points at the March meeting), and even with a gradually deteriorating dollar. Well, it isn’t gradually deteriorating and won’t as long as the currency markets expect more rate cuts. This is also bad for the Yen carry trade as the cost of borrowing is increasing although thankfully it isn’t a Euro carry trade. Remember credit markets are being constricted too.

2. Housing. TB’s friend in L.A. is back buying properties again…he said he has $100,000 instant equity. TB pointed out that means he could sell it tomorrow and net $100,000…haven’t heard back on that. Also we have Sam Zell saying commercial real estate has value which is either his observation or talking from position which is much lighter since he unloaded much of it to Blackstone (BX) a year or so ago. Perhaps this is an overture for a buyback at a discount…a deep one? Both TB’s friend and Zell seem to feel the rate cuts will lower mortgage rates but the data doesn’t support it. According to the latest MBA Survey released yesterday, the 30 year fixed mortgage rate has risen from 5.49% just before the back to back 50 basis point rate cuts by the Fed to 6.27% in last weeks survey…a year ago it was 6.16%. All classes are higher than before the rate cuts. From a year ago, the 15 year fixed is -10bp’s; 7 year balloon -77 bp’s; 5 yr balloon -57bp’s while a one year ARM is down just 10 basis points. This of course ignores the higher credit standards required to obtain a loan or refinance. According to the MBA Survey purchase applications are -10.7% from a year ago. Re-fi apps plunged 30.4% last week (remember these are not loans merely apps and due to credit multiple applications are being filed), but they are up 26% from a year ago!

Next we look at home sales. In January, Existing Home Sales fell 0.4% due to a 6.5% drop in condo sales which have been in decline since peaking in July and are down five of the last six months, while single family home sales peaked in Sept. 2005 and have been down all but 3 months since, with the last up month 11 months ago. Inventories are up 5.5% from the average for 2007 while the Months Supply has risen to 10.3 from 8.4 months (peaked at 10.5 months in Oct. dipped and is rising again). Anything above 9 months is a warning sign…and we have rapidly increasing delinquencies and foreclosures…don’t listen to those who tell you they are still low…Dennis Neale on CNBC said the other day that Countrywide (CFC) is undervalued since foreclosures are just 1% of the total portfolio. Looking thru the rear view mirror Dennis and it is only they percent of capital that matters for a financial institution. Breaking down the unsold inventories doesn’t help either: single family homes 10.1 months, condos 11.8 months! New Home Sales are bad too despite huge incentives by builders…TB predicts a major builder will file bankruptcy in the next six months, or be acquired on the cheap. Those sales were down 2.8% in January and are down 20% from the average in 2007…and spread pretty evenly across the geographical sectors (note that new home sales are not based on closings but on contract sales and those are not adjusted for cancellations which have been running 50% or more). Inventories are 2.2% above the average in 2007, while the supply is 9.9 months which is .5 months above the peak in the 1991 recession! The median sales price is -3.7% from a year ago due to the incentives helping to stabilize…while existing home median is -15.1%…and remember this includes tracts where the developer is now offering those incentives and are thus unsaleable…only way out is foreclosure.

State and local finances are deteriorating rapidly all over the country due to declining income, sales and property tax revenues and more to come as home appraisals are lowered. TB reported on Solano County where the assessor said he expects tax bills to fall by 20% next year! In California that is a double whammy because of Prop. 13 which only allows existing homes to be raised 1% per year above the purchase price…that spells deficits ahead. Vallejo, which is in Solano County will decide to declare bankruptcy today and thus be the first in California since Orange County in 1994 but the economy will not bail them out this time. The problem in Vallejo is rapid growth followed by a plunge in property values. TB could give instances all over the country of this and now Flint, MI, which has been in bankruptcy for years and in decline since GM pulled out (Roger and Me), and TB was told by a firefighter friend there that there were homes torched every night since they couldn’t be sold. Now Flint is joining Cleveland and other cities that are razing foreclosed homes to stabilize the market and lower crime. As stated: these are extremes but not atypical!     

What are the banks doing?…what they do best, exploit the situation. Remember just a year ago when TB told of a commercial from a loan company offering 102% financing? He thought it was a fly-by-night but nope…it was Wells Fargo Mortgage, the largest subprime lender (and seller although they stupidly held on to the home equity portion for what reason TB cannot even fathom). Wells is now out of subprime, but guess what? Already, TB has heard commercials for them as well as BofA with a new wrinkle…they are now writing reverse mortgages. If we missed you last time, we’ll get you now! Can you believe the audacity of this? Yet it makes sense as those are the safest loans over the long term and deeply discounted. There is black marble sculpture (more of a blob actually) in SF outside the BofA building, formerly headquarters, dubbed the Bankers Heart…how true…how true.

Hope to ’see’ you on the conference call…just remember TB is an observer not a seer.

All the best, 

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 28, 2008