Roubini is Right on Housing

Roubini came out with a great post today on the housing market. Read the full article here. This quote is spot on:

The stock market is still blissfully ignoring the onslaught of lousy macro news deluding itself that the Fed easing – and more to come – will rescue the economy from a hard landing. But it had the same delusion in 2001 when the S&P500 rallied 18% in April and May on the expectations that the aggressive Fed easing would lead to a second half of 2001 rebound and would prevent a recession. Too bad that the recession had already started in March. It took three months – until June – for the stock markets to lose their delusion and realize that – in spite of a most aggressive Fed easing – the economy was in a hard landing; thus, stock prices started to sharply fall again starting June 2001 after the 18% “sucker rally” of April and May.

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Slowdown in Debt & Equity Markets

MarketWatch has an article today about the slowdown in both equity and debt capital markets.

$569 billion worth of deals were announced across the world in July, but that slumped to $227 billion in August, Dealogic data show.
This month, $99 billion of deals were unveiled through Sept. 18. That’s roughly $45 billion below the same period last year, according to Dealogic.

More interesting is the slowdown in the fixed income markets, almost half of which is the mortgage and CDO market:

Just one residential mortgage-backed security worth $510 million has been sold in the U.S. so far in September. That’s down from 45 worth $27.58 billion in August and 110 worth $84.23 billion in between Sept. 1 and Sept. 19, 2006, according to Dealogic.

The CDO market has felt a similar chill: Six CDOs worth $1.26 billion have been issued so far this month, down from 68 worth $31.16 billion a year earlier, Dealogic said.

Economy Hits a Rock

September 20, 2007 (Socialist Party) – For ten years Gordon Brown has claimed that New Labour have created economic stability, overcoming capitalism’s “cycle of boom and bust”. In the last week this claim has been shattered.The Northern Rock crisis, the first full-scale bank run in Britain for over a century, has laid bare the reality of Brown and Blair’s Britain.

In reality Britain has become a giant hedge fund, a casino, with an economy dominated by the City of London’s endless drive to make a quick buck by any possible means. Under New Labour the number of workers employed in manufacturing has fallen to the lowest level since 1841.

British capitalism, like US capitalism, has continued to grow only as a result of a series of huge credit (otherwise known as debt) bubbles. Personal debt has trebled under New Labour to £1.3 trillion. Our collective personal debts are now greater than Britain’s Gross Domestic Product.

As the socialist has repeatedly warned this situation cannot last forever. Capitalism remains a cyclical system, at a certain stage economic crisis is inevitable; and the unprecedented use of credit to prolong the boom will only make the crisis worse when it comes.

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It’s not just Foreclosures that Matter

It is not just the number of foreclosures that matter.  In fact, many of the current foreclosures are not in prime real estate markets, but rather in secondary markets such as Riverside County (California), Ohio, Atlanta, Michigan, and other non-prime areas.  Real estate prices have actually held up relatively well in major population areas such as San Francisco, Los Angeles, Chicago, and New York City.  However, as Levy points out here, that is changing and is the critical part of the continued slowdown and housing contagion.   

September 3, 2007 (MarketWatch) — Stephen Levy is worried about the health of the housing market in California.

Even if you haven’t heard of him or are simply tired of hearing about anything having to do with housing, Levy is a man who should be listened to. As senior economist at the Center for Continuing Study of the California Economy in Palo Alto, Calif., which he co-founded more than 35 years ago, Levy has seen more than his share of cycles.

This cycle doesn’t look like it is going to end well, he says. His reasoning is deceptively simple: “There’s a limit to what people can afford.” When the coastal areas of the state were reporting home prices that seemed unrealistically high in the late 1990s, Levy was among those who thought prices throughout the state, on average, could go even higher.

The centerpiece of his theory at the time was that prices remained below or in line with the national average in places such as Sacramento, Riverside and Fresno. “People would say, ‘It’s a long commute, but I can get a good home,’ ” Levy says.

Since then, fueled by what Levy terms “bizarre mortgages,” home prices have ballooned to 80% more than the national average in some of these markets. The median home price in the state recent price declines, notwithstanding hovered at $586,000 as of late July, according to the latest figures from California Association of Realtors. That is more than double the national average of $228,900.

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Rating Agency Short Rationale

Conflicted Model open to Lawsuits & Investigations, Declining Revenues

  • Approximately 80% of of subprime debt is rated triple-A (same rating as risk-free U.S. Treasury bonds)
  • Up to 40% of credit card bonds contain delinquent credit card debt
  • S&P has only downgraded about 1% of subprime debt that it rated in recent years
  • Rating agencies asked for “participation” from Wall Street firms to help structure transactions
  • From Moody’s 2006 Annual Report:

Approximately 80% of Moody’s revenue in 2006 was derived from ratings, a significant portion of which was related to the issuance of credit-sensitive securities in the global capital markets. The Company anticipates that a substantial part of its business will continue to be dependent on the number and dollar volume of debt securities issued in the capital markets. Therefore, the Company’s results could be adversely affected by a reduction in the level of debt issuance.

Gold to Hit $800 in 2008?

We are still significantly overweight in gold stocks, in particular GLD.  While it is difficult to guess what the Fed will do on September 18th, in either a largely deflationary or inflationary environment gold performs well.  Given that the dollar has broken through the psychological 80 level and global central banks continue to print money like Argentina, gold helps us sleep at night a lot better than GreenspanBucks.

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China Keeps Buying More Control of Resources

September 7, 2007 (Bloomberg) WOODSIDE Petroleum’s proposed Browse liquefied natural gas project, should it proceed, may be worth as much as $12 a share for the oil and gas producer, the broker UBS said.The West Australian project, which on Thursday signed up China’s PetroChina as its first customer, encouraged UBS to raise its 12-month share price forecast for Woodside by 3.8 per cent to $52.48. Woodside’s shares rose as much as 67c, or 1.5 per cent, to $46.77 yesterday, closing at $46.63, up 53c.

PetroChina agreed to buy 2 million to 3 million tonnes a year of liquefied natural gas over 15 to 20 years from Woodside’s 47 per cent-owned Browse project. Browse is Woodside’s biggest undeveloped gas asset, containing about 20 trillion cubic feet of gas and 311 million barrels of condensates.

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