Under 5%, Mortgages May Be Near The Bottom
The Federal Reserve is going to extraordinary lengths to push down long-term interest rates, including home-mortgage rates. But those hoping mortgage rates will fall sharply from current levels, already historically low, may be disappointed.
Mortgage firms Thursday were quoting rates averaging 4.75% on 30-year fixed-rate mortgages, according to Zillow.com, a real-estate information service. That is down from more than 5% two days ago and about 6% in mid-November. But further big declines will be hard to achieve, partly because the mortgage-lending market has grown less competitive in the past year as hundreds of small banks and independent mortgage lenders have collapsed. The big banks that dominate the market are eager to boost their profits margins, not give deeper bargains to consumers.
Rates for borrowers with the strongest credit are likely to be in a range of roughly 4.5% to 4.75% for the rest of this year, says Mahesh Swaminathan, a mortgage strategist at Credit Suisse in New York.
Others say that is too optimistic. Assuming no big change in government policy, Walter Schmidt, an analyst at FTN Financial Capital Markets, sees a range of 4.75% to 5.5% for most of this year.
The Fed began driving mortgage rates down in late November when it announced plans to buy as much as $500 billion of mortgage securities this year. On Wednesday, the Fed expanded that program, saying it will spend as much as $1.25 trillion on such securities in 2009. That is enough to provide funding for more than half of all home-mortgage loans likely to be made in the U.S. this year.
The Fed also is buying long-term Treasury bonds to drive down rates on those securities, whose pricing affects mortgage rates.
By historical standards, rates look incredibly low. Until recently, 30-year fixed-rate mortgages hadn't been below 5% since the 1950s. For the past couple of months, rates have been bobbing between about 5% and 5.25%. The 30-year rate averaged 4.98% in the week ended March 19, down from 5.03% the prior week, according to Freddie Mac's survey. Fifteen-year fixed-rate mortgages averaged 4.61%, down from 4.64%.
One reason mortgage rates often tick back up after a decline is that a rush of people seeking to refinance quickly causes backlogs at lenders, which frequently don't have enough employees to process all of the applications.
"If lenders are working people overtime to close loans, they don't have an incentive to compete too hard on price," says Arthur Frank, who heads research on mortgage securities at Deutsche Bank in New York.
The situation highlights a conundrum for the government. It wants low rates to spur the housing market, but also wants the banks to make profits on loans so they can return to financial health.
Many of the small mortgage banks that remain are struggling. Mortgage banks, often small, family-owned companies, aren't licensed to take deposits and so lack that source of money for their loans. Instead, they typically borrow money for short periods from so-called warehouse lenders. They use this short-term credit to make loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to government-backed mortgage investors Fannie Mae and Freddie Mac.
But this warehouse credit is much harder to obtain than it was a year or two ago because many of the big banks and Wall Street firms that used to provide it have exited that business.
Despite these constraints, the Fed's action is "going to be a plus" for the housing market, says Thomas Lawler, an economist in Leesburg, Va. Lower rates make it more likely that home prices will hit bottom in many parts of the country later this year, Mr. Lawler says. The recovery, though, is likely to be gradual, partly because rising unemployment reduces housing demand.
Christopher J. Mayer, a real-estate professor at Columbia Business School in New York, says the Fed's moves to cut rates are "helping to put a floor under the housing market." But he worries that the Fed could face huge losses on the mortgage securities if inflation fears eventually push interest rates much higher.
Still, the consumers who need these low rates the most aren't likely to get much help. Many people can't qualify for these low rates because their credit scores aren't high enough or they can't afford a down payment of 20% or more on a home purchase. Such people will be socked with fees that can drive up their housing costs considerably. Banks also have become far pickier about appraisals and are nixing many purchases as a result.
Others can't qualify for a refinancing because they owe far more on their homes than the estimated current market values. Fannie Mae and Freddie Mac have new refinancing programs that will let some borrowers refinance into lower rates even if they owe as much as 105% of the home value, but only for current loans owned or guaranteed by Fannie or Freddie.
Monday, March 23, 2009
Wednesday, March 18, 2009
By Cody Willard
March 13, 2009 1:15PM
The banks/Illuminati/whatever will use Geithner’s welfare to buy back the crap the Fed’s welfare is buying from the banks
Right now, the Fed’s buying assets probably for about 20-60 cents on the dollar from the Banks (I’ll play along and call them “the Banks” in this column, even though they’re actually now all outright welfare institutions) like Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS), Wells Fargo (WFC) and JP Morgan (JPM).
The Fed needs to get rid of those assets but since they’re overpaying even at 20-60 cents on the dollar, there’s nobody on the planet willing to buy the stuff right now. (if they weren’t overpaying for it at the levels they’re paying for it, then, by definition, there’d be a bid for those assets right now in the natural, free market). Thus, “there’s no market for this stuff right now.” Again, why would there be a market for this stuff if the only entity willing to buy this worthless junk at 20-60 cents on the dollar is the FED.
Moreover, since the Fed’s price for this stuff is, even overpaying, at a 40-80% markdown from where the banks still have the vast majority of this crap marked on their books, and since the Banks are still levered up 10x-20x, that means they’re still insolvent. So guess what – “there’s no market for this stuff right now”.
And guess what’s coming next –
The Treasury says they’re going to lend welfare dollars at artificially low rates to the Banks to buy this stuff back from the FED now. The Banks will likely pay the actual 5-10 cents on the dollar that this stuff is actually worth.
And in the end, if this plan works – the Banks keep the profits, and if the plan doesn’t work, the banks won’t pay back the welfare loans, so the losses are socialized anyway.
The upshot: The government uses welfare dollars to overpay for junk from the Banks, which then turn right around and borrow MORE welfare money so that they can underpay for that same junk, and if it all works out they keep the profits.
Want it to stop? Tell your reps. Tell ‘em to make the FED and Treasury come clean. Tell us what’s happening. Send them this article and ask them to explain in any way, shape or form how I am wrong. Be preemptive and join the fight. Write your local newspaper. Send them this article and ask them to ask your Congressperson to explain in writing how ANY of what I’ve written above is wrong
Here’s hoping I am. Wrong about how the banks/Illuminati/whatever will use Geithner’s welfare to buy back the crap the Fed’s welfare is buying from the banks. We all know I’m not though.
The banks/Illuminati/whatever will use Geithner’s welfare to buy back the crap the Fed’s welfare is buying from the banks
Right now, the Fed’s buying assets probably for about 20-60 cents on the dollar from the Banks (I’ll play along and call them “the Banks” in this column, even though they’re actually now all outright welfare institutions) like Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS), Wells Fargo (WFC) and JP Morgan (JPM).
The Fed needs to get rid of those assets but since they’re overpaying even at 20-60 cents on the dollar, there’s nobody on the planet willing to buy the stuff right now. (if they weren’t overpaying for it at the levels they’re paying for it, then, by definition, there’d be a bid for those assets right now in the natural, free market). Thus, “there’s no market for this stuff right now.” Again, why would there be a market for this stuff if the only entity willing to buy this worthless junk at 20-60 cents on the dollar is the FED.
Moreover, since the Fed’s price for this stuff is, even overpaying, at a 40-80% markdown from where the banks still have the vast majority of this crap marked on their books, and since the Banks are still levered up 10x-20x, that means they’re still insolvent. So guess what – “there’s no market for this stuff right now”.
And guess what’s coming next –
The Treasury says they’re going to lend welfare dollars at artificially low rates to the Banks to buy this stuff back from the FED now. The Banks will likely pay the actual 5-10 cents on the dollar that this stuff is actually worth.
And in the end, if this plan works – the Banks keep the profits, and if the plan doesn’t work, the banks won’t pay back the welfare loans, so the losses are socialized anyway.
The upshot: The government uses welfare dollars to overpay for junk from the Banks, which then turn right around and borrow MORE welfare money so that they can underpay for that same junk, and if it all works out they keep the profits.
Want it to stop? Tell your reps. Tell ‘em to make the FED and Treasury come clean. Tell us what’s happening. Send them this article and ask them to explain in any way, shape or form how I am wrong. Be preemptive and join the fight. Write your local newspaper. Send them this article and ask them to ask your Congressperson to explain in writing how ANY of what I’ve written above is wrong
Here’s hoping I am. Wrong about how the banks/Illuminati/whatever will use Geithner’s welfare to buy back the crap the Fed’s welfare is buying from the banks. We all know I’m not though.
Thursday, March 12, 2009
See, some good news for once
March 3, 2009
Texas Continues to Be a Hot Spot for Some
By Jennifer Harmon
PLANO, TX-The Texas market appears to be continuing to do relatively and somewhat anomalously well compared to the rest of the country, and not just because of refinancing.
At least that's the case for one top-ranked mortgage originator here who as of January had seen application volume and closing volume go up 600% since November. Rodney Anderson, executive director and senior managing partner of Rodney Anderson Lending Services, who handles FHA and VA loans, closed between 900 and 1,000 mortgages in 2008 and doubled his volume in December. In addition, he estimated 70% of his new mortgage loans in December were to borrowers purchasing homes. He foresees an additional 50% higher production this year. "Our housing values have only dropped 2.8% year-over-year. Our home-equity loan loss limits the amount of people who could take out cash refinances. In Texas, you can only go up to 80% in the appraisal value where many states were 100%, 120%," said Mr. Anderson. "Texas is a flatland area. You can build everywhere. In the Dallas-Forth Worth area, you can build north, you can build east, west and south. There is always room for growth. And our cost of living has also been really good."
Based on loans he originated in December 2008, new mortgage activity doubled when compared to loan activity from December 2007. Mr. Anderson originated 331 pre-approvals in December of 2007 and 683 in December of 2008. "Despite the stagnation we're hearing about in the retail and automotive sector, there are still individuals out there who are buying homes and taking advantage of lower rates in this buyer's market," he said.
With seven of the 10 applications he took when rates dropped most dramatically at the end of 2008 and the beginning of 2009 being purchase mortgages rather than refis, Mr. Anderson found his business experiencing a purchase-to-refi ratio that was the reverse of what the Mortgage Bankers Association index recorded at the national level.
Dennis Hedlund, president of iEmergent, a Des Moines company that provides market-specific data to the mortgage banking industry, said he wasn't surprised that Mr. Anderson experienced a high number of purchase loans rather than refis in Texas during a period of low rates, especially given that Mr. Anderson has done FHA for so long in the Texas market. As far as whether this points to an opportunity, Mr. Hedlund said it might depending on a particular company's or originator's individual circumstance and product mix. He said that, the right strategic purchase vs. refi mix "comes down to really your lending strategies in communities, and where those opportunities are to get you through this. If you have over 4 million purchases, where is it distributed within your footprint? Should they be FHA or something else?"
Mr. Hedlund said this is "a significant leadership issue. We are seeing a lot of small lenders and banks actually doing loans. The largest lenders in a lot of ways are not getting the revenue they had previously. It's about those who know a lot about their markets."
According to Mr. Anderson, Texas didn't take the same hit as the rest of the country or see the gigantic price appreciation spikes as other states.
If a particular market, like Texas, has loan sizes that have been fairly stable, which have not ballooned up in previous years as part of the housing bubble, that part of the country might still have good loan availability, according to Mr. Hedlund. FHA originators like Mr. Anderson may have strong fundamentals, good sources, and use their personal book of business to make loans to past customers plus get new ones, he said.
"Texas ... affordability was fairly decent, especially for middle income to maybe lower income borrowers," he said. "Go farther north, through parts of the Midwest, and it's fairly stable. The places in the country with the biggest problems, metro areas around the Great Lakes, they have the triple whammy. Employment is plunging, and they have very little household growth. People got into [risky] mortgages ... and, as they default, there is no household growth to be able to buy those properties."
Mr. Hedlund forecasts there will be 130,000 FHA loans originated across the 254 counties located in Texas, totaling $15.9 billion. "The interesting thing is that 50 of those counties will generate 124,000 loans," he said. "Texas has a lot of counties that don't have many people in them. The largest of the originations will be concentrated in Harris County with 27,000 loans."
In today's market, Mr. Hedlund says some wholesale aggregators might see the loans as simply a transaction to make money. In these instances, he said the market could see people push programs like FHA, and as a result, the documentation would have less quality to it. "The first problems show up in early delinquency. That is part of the issue with expanding too fast in any program," he said.
In places like North Carolina and Texas, there is a great deal of experience working with FHA, but in other states in the Midwest, for instance, there is a lot of volume and no FHA experience. "National lenders need to be aware of where the possibilities are for having quality loans."
Around Austin and Houston, business has been fairly resilient, he added. The greatest risk in employment could come in the oil industry in the Houston area. "Unemployment will trigger what happens in these communities. Texas has some unemployment occurring in the electronics field. If the economy continues to be negative, it could make good places start to struggle."
Lenders have had a tendency to chase transactions rather than form them, he added. For 2009, he said loan originators need to better position themselves by keenly studying where their volume will come from and building relationships from the bottom up in local communities. "Because investors can only buy this very narrow band of product, it changes to be a local issue, heavy in relationships. Be careful if you are in the place of just chasing transactions, how many will really close? Make sure borrowers are meeting lending criteria and lending standards. Make sure you are balanced right across all markets. Texas will remain more stable than a lot of other places, it's a place where still have household growth, migration opportunities, and lenders have things going for them."
This may be why Mr. Anderson has been relatively optimistic. In January alone, which he says is normally the worst month of the year, Mr. Anderson predicted that he would close 170 loans. "I do a tremendous amount of advertising here. I have two radio shows. I'm also on TV every week," he said. "I invest about $2 million a year in advertising."
He said the market should see some stability in 2009 if builders get their inventory under control. "They could continue to see trouble, though." He predicted, "The first six months will see tougher times but the second half of 2009 will see some increase in numbers."
Mr. Anderson predicts that if rates continue to decline, the country will see an increase in purchases as well as refis. However, he cautions against any attempts to time the market, saying that "should not be the primary factor in deciding whether or not to purchase a home. [Recently rates have been] at their lowest point in nearly four decades, and despite what you may hear, lenders are still loaning money in the housing market. There's definitely still purchase and refinance money available for qualified borrowers."
Texas Continues to Be a Hot Spot for Some
By Jennifer Harmon
PLANO, TX-The Texas market appears to be continuing to do relatively and somewhat anomalously well compared to the rest of the country, and not just because of refinancing.
At least that's the case for one top-ranked mortgage originator here who as of January had seen application volume and closing volume go up 600% since November. Rodney Anderson, executive director and senior managing partner of Rodney Anderson Lending Services, who handles FHA and VA loans, closed between 900 and 1,000 mortgages in 2008 and doubled his volume in December. In addition, he estimated 70% of his new mortgage loans in December were to borrowers purchasing homes. He foresees an additional 50% higher production this year. "Our housing values have only dropped 2.8% year-over-year. Our home-equity loan loss limits the amount of people who could take out cash refinances. In Texas, you can only go up to 80% in the appraisal value where many states were 100%, 120%," said Mr. Anderson. "Texas is a flatland area. You can build everywhere. In the Dallas-Forth Worth area, you can build north, you can build east, west and south. There is always room for growth. And our cost of living has also been really good."
Based on loans he originated in December 2008, new mortgage activity doubled when compared to loan activity from December 2007. Mr. Anderson originated 331 pre-approvals in December of 2007 and 683 in December of 2008. "Despite the stagnation we're hearing about in the retail and automotive sector, there are still individuals out there who are buying homes and taking advantage of lower rates in this buyer's market," he said.
With seven of the 10 applications he took when rates dropped most dramatically at the end of 2008 and the beginning of 2009 being purchase mortgages rather than refis, Mr. Anderson found his business experiencing a purchase-to-refi ratio that was the reverse of what the Mortgage Bankers Association index recorded at the national level.
Dennis Hedlund, president of iEmergent, a Des Moines company that provides market-specific data to the mortgage banking industry, said he wasn't surprised that Mr. Anderson experienced a high number of purchase loans rather than refis in Texas during a period of low rates, especially given that Mr. Anderson has done FHA for so long in the Texas market. As far as whether this points to an opportunity, Mr. Hedlund said it might depending on a particular company's or originator's individual circumstance and product mix. He said that, the right strategic purchase vs. refi mix "comes down to really your lending strategies in communities, and where those opportunities are to get you through this. If you have over 4 million purchases, where is it distributed within your footprint? Should they be FHA or something else?"
Mr. Hedlund said this is "a significant leadership issue. We are seeing a lot of small lenders and banks actually doing loans. The largest lenders in a lot of ways are not getting the revenue they had previously. It's about those who know a lot about their markets."
According to Mr. Anderson, Texas didn't take the same hit as the rest of the country or see the gigantic price appreciation spikes as other states.
If a particular market, like Texas, has loan sizes that have been fairly stable, which have not ballooned up in previous years as part of the housing bubble, that part of the country might still have good loan availability, according to Mr. Hedlund. FHA originators like Mr. Anderson may have strong fundamentals, good sources, and use their personal book of business to make loans to past customers plus get new ones, he said.
"Texas ... affordability was fairly decent, especially for middle income to maybe lower income borrowers," he said. "Go farther north, through parts of the Midwest, and it's fairly stable. The places in the country with the biggest problems, metro areas around the Great Lakes, they have the triple whammy. Employment is plunging, and they have very little household growth. People got into [risky] mortgages ... and, as they default, there is no household growth to be able to buy those properties."
Mr. Hedlund forecasts there will be 130,000 FHA loans originated across the 254 counties located in Texas, totaling $15.9 billion. "The interesting thing is that 50 of those counties will generate 124,000 loans," he said. "Texas has a lot of counties that don't have many people in them. The largest of the originations will be concentrated in Harris County with 27,000 loans."
In today's market, Mr. Hedlund says some wholesale aggregators might see the loans as simply a transaction to make money. In these instances, he said the market could see people push programs like FHA, and as a result, the documentation would have less quality to it. "The first problems show up in early delinquency. That is part of the issue with expanding too fast in any program," he said.
In places like North Carolina and Texas, there is a great deal of experience working with FHA, but in other states in the Midwest, for instance, there is a lot of volume and no FHA experience. "National lenders need to be aware of where the possibilities are for having quality loans."
Around Austin and Houston, business has been fairly resilient, he added. The greatest risk in employment could come in the oil industry in the Houston area. "Unemployment will trigger what happens in these communities. Texas has some unemployment occurring in the electronics field. If the economy continues to be negative, it could make good places start to struggle."
Lenders have had a tendency to chase transactions rather than form them, he added. For 2009, he said loan originators need to better position themselves by keenly studying where their volume will come from and building relationships from the bottom up in local communities. "Because investors can only buy this very narrow band of product, it changes to be a local issue, heavy in relationships. Be careful if you are in the place of just chasing transactions, how many will really close? Make sure borrowers are meeting lending criteria and lending standards. Make sure you are balanced right across all markets. Texas will remain more stable than a lot of other places, it's a place where still have household growth, migration opportunities, and lenders have things going for them."
This may be why Mr. Anderson has been relatively optimistic. In January alone, which he says is normally the worst month of the year, Mr. Anderson predicted that he would close 170 loans. "I do a tremendous amount of advertising here. I have two radio shows. I'm also on TV every week," he said. "I invest about $2 million a year in advertising."
He said the market should see some stability in 2009 if builders get their inventory under control. "They could continue to see trouble, though." He predicted, "The first six months will see tougher times but the second half of 2009 will see some increase in numbers."
Mr. Anderson predicts that if rates continue to decline, the country will see an increase in purchases as well as refis. However, he cautions against any attempts to time the market, saying that "should not be the primary factor in deciding whether or not to purchase a home. [Recently rates have been] at their lowest point in nearly four decades, and despite what you may hear, lenders are still loaning money in the housing market. There's definitely still purchase and refinance money available for qualified borrowers."
03/12/2009
Retail Sales for February fell 0.1%, however, this was a bit better than expectations
of a 0.5% drop. Adding to the positive tone was a significant upward revision to
January's Report to 1.8% from a previous number of 1%. Retail Sales is a very
volatile Report on a month to month basis, but the last couple of readings are
encouraging - perhaps showing some signs of economic stabilization.
One area of the economy that continues to struggle is the Job market...654,000
filed for Initial Jobless claims this past week, a bit more than expectations of
644,000. The number of people receiving unemployment checks in the week
ending Feb. 28 rose 193,000 to a record 5.32 Million. Let's hope that this economic
stimulus plan gets to work and starts boosting confidence and creating jobs, so that
this negative jobs trend can reverse.
For the better part of the last nine months Mark to Market was seldom discussed
except within our family of subscribers here at MMG. But now it is being discussed
like a hit Broadway show. And today at 10am, the curtains open on what could be
an extremely important hearing on mark-to-market accounting. As you know, we
have been discussing this issue forever and have provided plenty of materials on
the site to help you better understand how it has devastated the financial world.
Today, the SEC's Chief Accountant, the FASBs Chairman and the Deputy
Comptroller for Regulatory Policy in the Treasury Department are expected to
testify in front of the House Financial Services committee on mark to market. We
will be watching this very closely, as this will no doubt have a dramatic effect on
market trading today and well into the future. You can look to the Market News
section of the MMG website for updates throughout the hearing.
Mortgage Bonds have been able to hold above the 25-day Moving Average. We
will continue to float and watch carefully as sparks could fly during today's Mark to
Market hearing.
of a 0.5% drop. Adding to the positive tone was a significant upward revision to
January's Report to 1.8% from a previous number of 1%. Retail Sales is a very
volatile Report on a month to month basis, but the last couple of readings are
encouraging - perhaps showing some signs of economic stabilization.
One area of the economy that continues to struggle is the Job market...654,000
filed for Initial Jobless claims this past week, a bit more than expectations of
644,000. The number of people receiving unemployment checks in the week
ending Feb. 28 rose 193,000 to a record 5.32 Million. Let's hope that this economic
stimulus plan gets to work and starts boosting confidence and creating jobs, so that
this negative jobs trend can reverse.
For the better part of the last nine months Mark to Market was seldom discussed
except within our family of subscribers here at MMG. But now it is being discussed
like a hit Broadway show. And today at 10am, the curtains open on what could be
an extremely important hearing on mark-to-market accounting. As you know, we
have been discussing this issue forever and have provided plenty of materials on
the site to help you better understand how it has devastated the financial world.
Today, the SEC's Chief Accountant, the FASBs Chairman and the Deputy
Comptroller for Regulatory Policy in the Treasury Department are expected to
testify in front of the House Financial Services committee on mark to market. We
will be watching this very closely, as this will no doubt have a dramatic effect on
market trading today and well into the future. You can look to the Market News
section of the MMG website for updates throughout the hearing.
Mortgage Bonds have been able to hold above the 25-day Moving Average. We
will continue to float and watch carefully as sparks could fly during today's Mark to
Market hearing.
Headline News and Market Report
“Bond Market News and Perspective for Mortgage Professionals”
Thursday, March 12, 2009
Retail Sales Decline 0.1% in February, Less Than Forecast and Showing Some Stabilization, led by the slump in demand for cars, following a revised 1.8 percent jump in January. Excluding automobiles, sales unexpectedly climbed 0.7 percent. Retail sales in January were revised up sharply, surging 1.8% instead of rising by 1.0% as originally reported. Automobile and parts sales plunged 4.3% in February. Excluding autos, all other sales climbed 0.7% -- much better than the 0.1% gain expected by economists. Ex-auto sales in January had gone up an upwardly revised 1.6% -- following five straight, large drops. Gas station sales gave a lift to the overall retail number. Last month, gasoline station sales climbed 3.4%. Gas sales rose 2.8% in January. Stripping away sales at gas stations, demand at all other retailers decreased 0.4% in February.
Initial Jobless Claims Rose 9,000 to 654,000 Last Week. The 4-week moving average was 650,000, an increase of 6,750 from the previous week's revised average of 643,250. The number of people staying on benefit rolls rose in the previous week by 193,000 to a record 5.317 million.
Treasuries Are Little Changed Before $11 Billion 30 Year Bond Auction and as retail sales fell less than forecast. The long bond was the biggest loser along the Treasury curve Thursday morning. The Treasury Department will sell the 30-year bond at 1 p.m. EDT, the final leg of this week's $63 billion government bond supply. Supply pressure has also mounted from the corporate sector as they compete with the U.S. government for loans from investors. Other maturities, including the 10-year note, also gave up an early rally from soft equities. Bonds rebounded late Wednesday afternoon as bargain-hunters returned following the $18 billion 10-year note auction. The demand pushed down the yield on the 10-year note below 3% again, a key technical level.
Foreclosure Filings in U.S. Jumped 30% in February with A total of 290,631 homes received a default or auction notice or were seized by the lender. Some of the top U.S. lenders own as many as 700,000 foreclosed homes they have yet to offer for sale. The banks may be waiting to see how U.S. government plans develop before selling the properties. The combined percentage of loans in foreclosure or at least one payment past due in the fourth quarter was 11.18 percent, the highest on record. The percentage of loans 60 days past due and 90 days or more late also were at record levels. Nevada, Arizona, California post top state foreclosure rates and California, Florida, Arizona post highest foreclosure totals. Other states with foreclosure rates ranking among the nation’s 10 highest were Florida, Idaho, Michigan, Illinois, Georgia, Oregon and Ohio.
Mortgage Investors Call for Changes in Rescue Plan. Some investors say they are contemplating legal action because they think the administration's plan and legislation before Congress would violate their rights. They are particularly concerned about measures that would prevent lawsuits against mortgage servicers, which collect loan payments for the investors and are responsible for modifying loans with homeowners.
Preventing the Next Fire While This One Blazes. The worst financial crisis since the Depression isn't over, yet it's time to put the best brains to work at reconstructing the financial regulatory structure so we don't go through this again. Trying to wait until the fire is out will yield one of two bad outcomes: a simple-minded, myopic rush to regulation that will make the financial system no safer and the world economy worse off, or talk about "reform" that fades into inaction. Beginning the renovation of regulation will help speed the end of this painful episode.
Thursday, March 12, 2009
Retail Sales Decline 0.1% in February, Less Than Forecast and Showing Some Stabilization, led by the slump in demand for cars, following a revised 1.8 percent jump in January. Excluding automobiles, sales unexpectedly climbed 0.7 percent. Retail sales in January were revised up sharply, surging 1.8% instead of rising by 1.0% as originally reported. Automobile and parts sales plunged 4.3% in February. Excluding autos, all other sales climbed 0.7% -- much better than the 0.1% gain expected by economists. Ex-auto sales in January had gone up an upwardly revised 1.6% -- following five straight, large drops. Gas station sales gave a lift to the overall retail number. Last month, gasoline station sales climbed 3.4%. Gas sales rose 2.8% in January. Stripping away sales at gas stations, demand at all other retailers decreased 0.4% in February.
Initial Jobless Claims Rose 9,000 to 654,000 Last Week. The 4-week moving average was 650,000, an increase of 6,750 from the previous week's revised average of 643,250. The number of people staying on benefit rolls rose in the previous week by 193,000 to a record 5.317 million.
Treasuries Are Little Changed Before $11 Billion 30 Year Bond Auction and as retail sales fell less than forecast. The long bond was the biggest loser along the Treasury curve Thursday morning. The Treasury Department will sell the 30-year bond at 1 p.m. EDT, the final leg of this week's $63 billion government bond supply. Supply pressure has also mounted from the corporate sector as they compete with the U.S. government for loans from investors. Other maturities, including the 10-year note, also gave up an early rally from soft equities. Bonds rebounded late Wednesday afternoon as bargain-hunters returned following the $18 billion 10-year note auction. The demand pushed down the yield on the 10-year note below 3% again, a key technical level.
Foreclosure Filings in U.S. Jumped 30% in February with A total of 290,631 homes received a default or auction notice or were seized by the lender. Some of the top U.S. lenders own as many as 700,000 foreclosed homes they have yet to offer for sale. The banks may be waiting to see how U.S. government plans develop before selling the properties. The combined percentage of loans in foreclosure or at least one payment past due in the fourth quarter was 11.18 percent, the highest on record. The percentage of loans 60 days past due and 90 days or more late also were at record levels. Nevada, Arizona, California post top state foreclosure rates and California, Florida, Arizona post highest foreclosure totals. Other states with foreclosure rates ranking among the nation’s 10 highest were Florida, Idaho, Michigan, Illinois, Georgia, Oregon and Ohio.
Mortgage Investors Call for Changes in Rescue Plan. Some investors say they are contemplating legal action because they think the administration's plan and legislation before Congress would violate their rights. They are particularly concerned about measures that would prevent lawsuits against mortgage servicers, which collect loan payments for the investors and are responsible for modifying loans with homeowners.
Preventing the Next Fire While This One Blazes. The worst financial crisis since the Depression isn't over, yet it's time to put the best brains to work at reconstructing the financial regulatory structure so we don't go through this again. Trying to wait until the fire is out will yield one of two bad outcomes: a simple-minded, myopic rush to regulation that will make the financial system no safer and the world economy worse off, or talk about "reform" that fades into inaction. Beginning the renovation of regulation will help speed the end of this painful episode.
Tuesday, March 10, 2009
Credit Cards Are the Next Credit Crunch
MARCH 10, 2009
Washington shouldn't exacerbate the looming problem in consumer credit lines.Article
By MEREDITH WHITNEY
Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is underappreciated is the role of credit-card availability in that spending. Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon. While those numbers look small relative to total mortgage debt of over $10.5 trillion, credit-card debt is revolving and accordingly being paid off and drawn down over and over, creating a critical role in commerce in America.
Martin KozlowskiJust six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010.
Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines.
There are several factors that are playing into this swift contraction in credit well beyond the scope of the current credit market disruption. First, the very foundation of credit-card lending over the past 15 years has been misguided. In order to facilitate national expansion and vast pools of consumer loans, lenders became overly reliant on FICO scores that have borne out to be simply unreliable. Further, the bulk of credit lines were extended during a time when unemployment averaged well below 6%. Overly optimistic underwriting standards made more borrowers appear creditworthy. As we return to more realistic underwriting standards, certain borrowers will no longer appear worth the risk, and therefore lines will continue to be pulled from those borrowers.
Second, home price depreciation has been a more reliable determinant of consumer behavior than FICO scores. Hence, lenders have reduced credit lines based upon "zip codes," or where home price depreciation has been most acute. Such a strategy carries the obvious hazard of putting good customers in more vulnerable liquidity positions simply because they live in a higher risk zip code. With this, frequency of default is increased. In other words, as lines are pulled and borrowing capacity is reduced, paying borrowers are pushed into vulnerable financial positions along with nonpaying borrowers, and therefore a greater number of defaults in fact occur.
Third, credit-card lenders are currently playing a game of "hot potato," in which no one wants to be the last one holding an open credit-card line to an individual or business. While a mortgage loan is largely a "monogamous" relationship between borrower and lender, an individual has multiple relationships with credit-card providers. Thus, as lines are cut, risk exposure increases to the remaining lender with the biggest line outstanding.
Here, such a negative spiral strategy necessitates immediate action. Currently five lenders dominate two thirds of the market. These lenders need to work together to protect one another and preserve credit lines to able paying borrowers by setting consortium guidelines on credit. We, as Americans, are all in the same soup here, and desperate times are requiring of radical and cooperative measures.
And fourth, along with many important and necessary mandates regarding fairness to consumers, impending changes to Unfair and Deceptive Acts or Practices (UDAP) regulations risk the very real unintended consequence of cutting off vast amounts of credit to consumers. Specifically, the new UDAP provisions would restrict repricing of risk, which could in turn restrict the availability of credit. If a lender cannot reprice for changing risk on an unsecured loan, the lender simply will not make the loan. This proposal is set to be effective by mid-2010, but talk now is of accelerating its adoption date. Politicians and regulators need to seriously consider what unintended consequences could occur from the implementation of this proposal in current form. Short of the U.S. government becoming a direct credit-card lender, invariably credit will come out of the system.
Over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool. For example, 90% of credit-card users revolve a balance (i.e., don't pay it off in full) at least once a year, and over 45% of credit-card users revolve every month. Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. In fact, a relatively small portion of U.S. consumers have actually maxed out their credit cards, and most currently have ample room to spare on their unused credit lines. For example, the industry credit line utilization rate (or percentage of total credit lines outstanding drawn upon) was just 17% at the end of 2008. However, this is in the process of changing dramatically.
Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively.
Ms. Whitney is CEO of Meredith Whitney Advisory Group, LLC.
Washington shouldn't exacerbate the looming problem in consumer credit lines.Article
By MEREDITH WHITNEY
Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is underappreciated is the role of credit-card availability in that spending. Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon. While those numbers look small relative to total mortgage debt of over $10.5 trillion, credit-card debt is revolving and accordingly being paid off and drawn down over and over, creating a critical role in commerce in America.
Martin KozlowskiJust six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010.
Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines.
There are several factors that are playing into this swift contraction in credit well beyond the scope of the current credit market disruption. First, the very foundation of credit-card lending over the past 15 years has been misguided. In order to facilitate national expansion and vast pools of consumer loans, lenders became overly reliant on FICO scores that have borne out to be simply unreliable. Further, the bulk of credit lines were extended during a time when unemployment averaged well below 6%. Overly optimistic underwriting standards made more borrowers appear creditworthy. As we return to more realistic underwriting standards, certain borrowers will no longer appear worth the risk, and therefore lines will continue to be pulled from those borrowers.
Second, home price depreciation has been a more reliable determinant of consumer behavior than FICO scores. Hence, lenders have reduced credit lines based upon "zip codes," or where home price depreciation has been most acute. Such a strategy carries the obvious hazard of putting good customers in more vulnerable liquidity positions simply because they live in a higher risk zip code. With this, frequency of default is increased. In other words, as lines are pulled and borrowing capacity is reduced, paying borrowers are pushed into vulnerable financial positions along with nonpaying borrowers, and therefore a greater number of defaults in fact occur.
Third, credit-card lenders are currently playing a game of "hot potato," in which no one wants to be the last one holding an open credit-card line to an individual or business. While a mortgage loan is largely a "monogamous" relationship between borrower and lender, an individual has multiple relationships with credit-card providers. Thus, as lines are cut, risk exposure increases to the remaining lender with the biggest line outstanding.
Here, such a negative spiral strategy necessitates immediate action. Currently five lenders dominate two thirds of the market. These lenders need to work together to protect one another and preserve credit lines to able paying borrowers by setting consortium guidelines on credit. We, as Americans, are all in the same soup here, and desperate times are requiring of radical and cooperative measures.
And fourth, along with many important and necessary mandates regarding fairness to consumers, impending changes to Unfair and Deceptive Acts or Practices (UDAP) regulations risk the very real unintended consequence of cutting off vast amounts of credit to consumers. Specifically, the new UDAP provisions would restrict repricing of risk, which could in turn restrict the availability of credit. If a lender cannot reprice for changing risk on an unsecured loan, the lender simply will not make the loan. This proposal is set to be effective by mid-2010, but talk now is of accelerating its adoption date. Politicians and regulators need to seriously consider what unintended consequences could occur from the implementation of this proposal in current form. Short of the U.S. government becoming a direct credit-card lender, invariably credit will come out of the system.
Over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool. For example, 90% of credit-card users revolve a balance (i.e., don't pay it off in full) at least once a year, and over 45% of credit-card users revolve every month. Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. In fact, a relatively small portion of U.S. consumers have actually maxed out their credit cards, and most currently have ample room to spare on their unused credit lines. For example, the industry credit line utilization rate (or percentage of total credit lines outstanding drawn upon) was just 17% at the end of 2008. However, this is in the process of changing dramatically.
Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively.
Ms. Whitney is CEO of Meredith Whitney Advisory Group, LLC.
Friday, March 6, 2009
By MICHAEL J. BOSKIN
3/06/2009
Obama's Radicalism Is Killing the Dow
A financial crisis is the worst time to change the foundations of American capitalism.
By MICHAEL J. BOSKIN
It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.
Martin KozlowskiThe illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.
Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.
To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.
The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).
Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.
Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.
As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.
Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.
The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.
The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.
A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.
The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.
Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.
New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.
From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.
Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.
On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
Obama's Radicalism Is Killing the Dow
A financial crisis is the worst time to change the foundations of American capitalism.
By MICHAEL J. BOSKIN
It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.
Martin KozlowskiThe illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.
Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.
To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.
The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).
Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.
Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.
As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.
Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.
The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.
The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.
A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.
The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.
Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.
New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.
From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.
Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.
On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
Wednesday, March 4, 2009
Interest rates
03/04/2009
Everyday the 10 year bond swings 19/32 one way then the next day swings back 19/32 to the original position. Interest rates have been "stuck" in the range that they have been trading since December 2008. Most of my clients have been waiting on the sidelines to see how low rates will go only to be frustrated by the lack of movement. I have not seen anyone reporting on why this is happening--I guess we have to wait for the history books to be written.
I say all that to say right now, no one knows why this is happening. Stocks are due for a correction any day now and bonds will suffer and rates will climb. It is what it is.
Don't sit back and wait any longer--go buy that house you want and take your 5% range rate that is offered. I don't see rates in the 4% range for 30 year fixed so act now before I have to say "told you so."
Everyday the 10 year bond swings 19/32 one way then the next day swings back 19/32 to the original position. Interest rates have been "stuck" in the range that they have been trading since December 2008. Most of my clients have been waiting on the sidelines to see how low rates will go only to be frustrated by the lack of movement. I have not seen anyone reporting on why this is happening--I guess we have to wait for the history books to be written.
I say all that to say right now, no one knows why this is happening. Stocks are due for a correction any day now and bonds will suffer and rates will climb. It is what it is.
Don't sit back and wait any longer--go buy that house you want and take your 5% range rate that is offered. I don't see rates in the 4% range for 30 year fixed so act now before I have to say "told you so."
Monday, March 2, 2009
By PAUL RYAN
2/02/2009
By PAUL RYAN
Inheriting countless challenges, Congress and the Obama administration have moved quickly on many fronts to implement their economic agenda. After two months of drastic interventions, has hope replaced fear, and confidence pushed aside uncertainty? Hardly.
David GothardThe budget the president released last week, however, does provide some certainty about where we are headed: higher taxes on small businesses, work and capital investment.
Add to this the costly burdens of a cap-and-trade carbon emissions scheme and an effective nationalization of health care, and it is clear that the government is going to grow while the economy will shrink. In a nutshell, the president's budget seemingly seeks to replace the American political idea of equalizing opportunity with the European notion of equalizing results.
A constructive opposition party should be willing to call out the majority when it falls short. More important, Republicans must offer alternatives. In this spirit, here is what I would do differently:
- A pro-growth tax policy. Rather than raise the top marginal income tax rate to 39.6%, it should be dropped to 25%. The lower tax brackets should be collapsed to one 10% rate on the first $100,000 for couples. And the top corporate tax rate should be lowered to 25%. This modest reform would put American companies' tax liability more in line with the prevailing rates of our competitors.
We've seen 10 years of growth in our equity markets wiped out in recent months, while 401(k)s, IRAs and college savings plans are down by an average of 40%. The administration and congressional Democrats want to raise capital gains tax rates by a third. Instead, we should eliminate the capital gains tax. It supplies about 4% of federal revenues, yet it places a substantial drag on economic growth. Individuals already pay taxes on income when they earn it. They should not be socked again when they are saving and investing for their retirement and their children's education.
Capital gains taxes are a needless burden on investment, savings and risk-taking, activities in short supply these days. Getting rid of this tax could help establish a floor on stock prices and stem the decline in the value of retirement plans by increasing the after-tax rate of return on capital.
Democrats oppose this, playing on emotions of fear and envy. But while class warfare may make good short-term politics, it produces terrible economics.
- Guarantee sound money. For the last decade, the Federal Reserve's easy-money policy has helped fuel the housing bubble that precipitated our current crisis. We need to return to a sound money policy. That would end uncertainty, help keep interest rates down, and increase the confidence entrepreneurs and investors need to take the risks required for future growth.
I believe the best way to guarantee sound money is to use an explicit, market-based price guide, such as a basket of commodities, in setting monetary policy. A more politically realistic path to price stability would be for the Fed to explicitly embrace inflation targeting.
Transcripts from recent meetings of the Federal Open Market Committee meetings suggest that the Fed may already be moving in this direction. This would be an improvement over the status quo: It could help combat near-term deflation concerns while also calming the market's longer-term inflation fears.
- Fix the financial sector. A durable economic recovery requires a solution to the banking crisis. There are no easy or painless solutions, but the most damaging solution over the long term would be to nationalize our financial system. Once we put politicians in charge of allocating credit and resources in our economy, it is hard to imagine them letting go.
The underlying structural problem at our financial institutions is the toxic assets infecting their balance sheets and impairing their operations. In order to help purge these assets from the system, we need a government-sponsored, comprehensive solution, but one that is transparent and temporary, and which leverages -- rather than chases away -- private-sector capital.
The general idea is to establish an entity or fund to purchase troubled assets from financial institutions and then hold them until they could be sold once the market has recovered. The Treasury has announced its intention to use capital from the Troubled Asset Relief Program, along with financing from the Fed's soon-to-be operational Term Asset-Backed Securities Loan Facility, to set up such an entity. It will be a tall task to get all the details and incentives right, but the administration's general strategy appears to be sound.
A good model for this government-sponsored entity is the Resolution Trust Corporation (RTC), which helped clean up bank failures in the wake of the savings-and-loan crisis in the late 1980s and early 1990s by absorbing and selling off bad bank assets. The circumstances of today's financial sector are different, but the goals of our current efforts should mirror the general merits of an RTC-like entity. We should aim to recoup a portion of our initial expenditures, and we should leave only a fleeting government footprint on the financial sector and the economy.
- Get a grip on entitlements. With $56 trillion in unfunded liabilities and our social insurance programs set to implode, we must tackle the entitlement crisis. President Barack Obama deserves credit for his recent efforts to build a bipartisan consensus on entitlement reform. But we can't solve the entitlement problem unless we acknowledge why the costs are exploding, and then take action.
I have proposed legislation, called "A Roadmap for America's Future," that would bring permanent solvency to Medicare, Medicaid and Social Security. By transforming these open-ended entitlements into a system with a defined benefit safety net for the low-income and chronically ill, in conjunction with an individually owned, defined contribution system for health and retirement, we can reach the goal of these programs without bankrupting the next generation. It would also show the world and the credit markets that we are serious about our debt and unfunded liabilities.
Republicans can help Washington become part of the solution, not part of the problem. We can do this by pushing to enact tax policies that boost incentives for economic growth and job creation, focus the Fed on price stability, fix our banking system to get credit flowing again, stop reckless spending, and reform our entitlement programs.
Our economy is begging for clear leadership that inspires confidence and hope that the entrepreneurial spirit will flourish again. Our goal must be to offer Americans that leadership.
Mr. Ryan, from Wisconsin, is ranking Republican on the House Budget Committee and also serves on Ways and Means.
Please add your comments to the Opinion Journal forum.
Printed in The Wall Street Journal, page A15
By PAUL RYAN
Inheriting countless challenges, Congress and the Obama administration have moved quickly on many fronts to implement their economic agenda. After two months of drastic interventions, has hope replaced fear, and confidence pushed aside uncertainty? Hardly.
David GothardThe budget the president released last week, however, does provide some certainty about where we are headed: higher taxes on small businesses, work and capital investment.
Add to this the costly burdens of a cap-and-trade carbon emissions scheme and an effective nationalization of health care, and it is clear that the government is going to grow while the economy will shrink. In a nutshell, the president's budget seemingly seeks to replace the American political idea of equalizing opportunity with the European notion of equalizing results.
A constructive opposition party should be willing to call out the majority when it falls short. More important, Republicans must offer alternatives. In this spirit, here is what I would do differently:
- A pro-growth tax policy. Rather than raise the top marginal income tax rate to 39.6%, it should be dropped to 25%. The lower tax brackets should be collapsed to one 10% rate on the first $100,000 for couples. And the top corporate tax rate should be lowered to 25%. This modest reform would put American companies' tax liability more in line with the prevailing rates of our competitors.
We've seen 10 years of growth in our equity markets wiped out in recent months, while 401(k)s, IRAs and college savings plans are down by an average of 40%. The administration and congressional Democrats want to raise capital gains tax rates by a third. Instead, we should eliminate the capital gains tax. It supplies about 4% of federal revenues, yet it places a substantial drag on economic growth. Individuals already pay taxes on income when they earn it. They should not be socked again when they are saving and investing for their retirement and their children's education.
Capital gains taxes are a needless burden on investment, savings and risk-taking, activities in short supply these days. Getting rid of this tax could help establish a floor on stock prices and stem the decline in the value of retirement plans by increasing the after-tax rate of return on capital.
Democrats oppose this, playing on emotions of fear and envy. But while class warfare may make good short-term politics, it produces terrible economics.
- Guarantee sound money. For the last decade, the Federal Reserve's easy-money policy has helped fuel the housing bubble that precipitated our current crisis. We need to return to a sound money policy. That would end uncertainty, help keep interest rates down, and increase the confidence entrepreneurs and investors need to take the risks required for future growth.
I believe the best way to guarantee sound money is to use an explicit, market-based price guide, such as a basket of commodities, in setting monetary policy. A more politically realistic path to price stability would be for the Fed to explicitly embrace inflation targeting.
Transcripts from recent meetings of the Federal Open Market Committee meetings suggest that the Fed may already be moving in this direction. This would be an improvement over the status quo: It could help combat near-term deflation concerns while also calming the market's longer-term inflation fears.
- Fix the financial sector. A durable economic recovery requires a solution to the banking crisis. There are no easy or painless solutions, but the most damaging solution over the long term would be to nationalize our financial system. Once we put politicians in charge of allocating credit and resources in our economy, it is hard to imagine them letting go.
The underlying structural problem at our financial institutions is the toxic assets infecting their balance sheets and impairing their operations. In order to help purge these assets from the system, we need a government-sponsored, comprehensive solution, but one that is transparent and temporary, and which leverages -- rather than chases away -- private-sector capital.
The general idea is to establish an entity or fund to purchase troubled assets from financial institutions and then hold them until they could be sold once the market has recovered. The Treasury has announced its intention to use capital from the Troubled Asset Relief Program, along with financing from the Fed's soon-to-be operational Term Asset-Backed Securities Loan Facility, to set up such an entity. It will be a tall task to get all the details and incentives right, but the administration's general strategy appears to be sound.
A good model for this government-sponsored entity is the Resolution Trust Corporation (RTC), which helped clean up bank failures in the wake of the savings-and-loan crisis in the late 1980s and early 1990s by absorbing and selling off bad bank assets. The circumstances of today's financial sector are different, but the goals of our current efforts should mirror the general merits of an RTC-like entity. We should aim to recoup a portion of our initial expenditures, and we should leave only a fleeting government footprint on the financial sector and the economy.
- Get a grip on entitlements. With $56 trillion in unfunded liabilities and our social insurance programs set to implode, we must tackle the entitlement crisis. President Barack Obama deserves credit for his recent efforts to build a bipartisan consensus on entitlement reform. But we can't solve the entitlement problem unless we acknowledge why the costs are exploding, and then take action.
I have proposed legislation, called "A Roadmap for America's Future," that would bring permanent solvency to Medicare, Medicaid and Social Security. By transforming these open-ended entitlements into a system with a defined benefit safety net for the low-income and chronically ill, in conjunction with an individually owned, defined contribution system for health and retirement, we can reach the goal of these programs without bankrupting the next generation. It would also show the world and the credit markets that we are serious about our debt and unfunded liabilities.
Republicans can help Washington become part of the solution, not part of the problem. We can do this by pushing to enact tax policies that boost incentives for economic growth and job creation, focus the Fed on price stability, fix our banking system to get credit flowing again, stop reckless spending, and reform our entitlement programs.
Our economy is begging for clear leadership that inspires confidence and hope that the entrepreneurial spirit will flourish again. Our goal must be to offer Americans that leadership.
Mr. Ryan, from Wisconsin, is ranking Republican on the House Budget Committee and also serves on Ways and Means.
Please add your comments to the Opinion Journal forum.
Printed in The Wall Street Journal, page A15
By PAUL RYAN
2/02/2009
By PAUL RYAN
Inheriting countless challenges, Congress and the Obama administration have moved quickly on many fronts to implement their economic agenda. After two months of drastic interventions, has hope replaced fear, and confidence pushed aside uncertainty? Hardly.
David GothardThe budget the president released last week, however, does provide some certainty about where we are headed: higher taxes on small businesses, work and capital investment.
Add to this the costly burdens of a cap-and-trade carbon emissions scheme and an effective nationalization of health care, and it is clear that the government is going to grow while the economy will shrink. In a nutshell, the president's budget seemingly seeks to replace the American political idea of equalizing opportunity with the European notion of equalizing results.
A constructive opposition party should be willing to call out the majority when it falls short. More important, Republicans must offer alternatives. In this spirit, here is what I would do differently:
- A pro-growth tax policy. Rather than raise the top marginal income tax rate to 39.6%, it should be dropped to 25%. The lower tax brackets should be collapsed to one 10% rate on the first $100,000 for couples. And the top corporate tax rate should be lowered to 25%. This modest reform would put American companies' tax liability more in line with the prevailing rates of our competitors.
We've seen 10 years of growth in our equity markets wiped out in recent months, while 401(k)s, IRAs and college savings plans are down by an average of 40%. The administration and congressional Democrats want to raise capital gains tax rates by a third. Instead, we should eliminate the capital gains tax. It supplies about 4% of federal revenues, yet it places a substantial drag on economic growth. Individuals already pay taxes on income when they earn it. They should not be socked again when they are saving and investing for their retirement and their children's education.
Capital gains taxes are a needless burden on investment, savings and risk-taking, activities in short supply these days. Getting rid of this tax could help establish a floor on stock prices and stem the decline in the value of retirement plans by increasing the after-tax rate of return on capital.
Democrats oppose this, playing on emotions of fear and envy. But while class warfare may make good short-term politics, it produces terrible economics.
- Guarantee sound money. For the last decade, the Federal Reserve's easy-money policy has helped fuel the housing bubble that precipitated our current crisis. We need to return to a sound money policy. That would end uncertainty, help keep interest rates down, and increase the confidence entrepreneurs and investors need to take the risks required for future growth.
I believe the best way to guarantee sound money is to use an explicit, market-based price guide, such as a basket of commodities, in setting monetary policy. A more politically realistic path to price stability would be for the Fed to explicitly embrace inflation targeting.
Transcripts from recent meetings of the Federal Open Market Committee meetings suggest that the Fed may already be moving in this direction. This would be an improvement over the status quo: It could help combat near-term deflation concerns while also calming the market's longer-term inflation fears.
- Fix the financial sector. A durable economic recovery requires a solution to the banking crisis. There are no easy or painless solutions, but the most damaging solution over the long term would be to nationalize our financial system. Once we put politicians in charge of allocating credit and resources in our economy, it is hard to imagine them letting go.
The underlying structural problem at our financial institutions is the toxic assets infecting their balance sheets and impairing their operations. In order to help purge these assets from the system, we need a government-sponsored, comprehensive solution, but one that is transparent and temporary, and which leverages -- rather than chases away -- private-sector capital.
The general idea is to establish an entity or fund to purchase troubled assets from financial institutions and then hold them until they could be sold once the market has recovered. The Treasury has announced its intention to use capital from the Troubled Asset Relief Program, along with financing from the Fed's soon-to-be operational Term Asset-Backed Securities Loan Facility, to set up such an entity. It will be a tall task to get all the details and incentives right, but the administration's general strategy appears to be sound.
A good model for this government-sponsored entity is the Resolution Trust Corporation (RTC), which helped clean up bank failures in the wake of the savings-and-loan crisis in the late 1980s and early 1990s by absorbing and selling off bad bank assets. The circumstances of today's financial sector are different, but the goals of our current efforts should mirror the general merits of an RTC-like entity. We should aim to recoup a portion of our initial expenditures, and we should leave only a fleeting government footprint on the financial sector and the economy.
- Get a grip on entitlements. With $56 trillion in unfunded liabilities and our social insurance programs set to implode, we must tackle the entitlement crisis. President Barack Obama deserves credit for his recent efforts to build a bipartisan consensus on entitlement reform. But we can't solve the entitlement problem unless we acknowledge why the costs are exploding, and then take action.
I have proposed legislation, called "A Roadmap for America's Future," that would bring permanent solvency to Medicare, Medicaid and Social Security. By transforming these open-ended entitlements into a system with a defined benefit safety net for the low-income and chronically ill, in conjunction with an individually owned, defined contribution system for health and retirement, we can reach the goal of these programs without bankrupting the next generation. It would also show the world and the credit markets that we are serious about our debt and unfunded liabilities.
Republicans can help Washington become part of the solution, not part of the problem. We can do this by pushing to enact tax policies that boost incentives for economic growth and job creation, focus the Fed on price stability, fix our banking system to get credit flowing again, stop reckless spending, and reform our entitlement programs.
Our economy is begging for clear leadership that inspires confidence and hope that the entrepreneurial spirit will flourish again. Our goal must be to offer Americans that leadership.
Mr. Ryan, from Wisconsin, is ranking Republican on the House Budget Committee and also serves on Ways and Means.
Please add your comments to the Opinion Journal forum.
Printed in The Wall Street Journal, page A15
By PAUL RYAN
Inheriting countless challenges, Congress and the Obama administration have moved quickly on many fronts to implement their economic agenda. After two months of drastic interventions, has hope replaced fear, and confidence pushed aside uncertainty? Hardly.
David GothardThe budget the president released last week, however, does provide some certainty about where we are headed: higher taxes on small businesses, work and capital investment.
Add to this the costly burdens of a cap-and-trade carbon emissions scheme and an effective nationalization of health care, and it is clear that the government is going to grow while the economy will shrink. In a nutshell, the president's budget seemingly seeks to replace the American political idea of equalizing opportunity with the European notion of equalizing results.
A constructive opposition party should be willing to call out the majority when it falls short. More important, Republicans must offer alternatives. In this spirit, here is what I would do differently:
- A pro-growth tax policy. Rather than raise the top marginal income tax rate to 39.6%, it should be dropped to 25%. The lower tax brackets should be collapsed to one 10% rate on the first $100,000 for couples. And the top corporate tax rate should be lowered to 25%. This modest reform would put American companies' tax liability more in line with the prevailing rates of our competitors.
We've seen 10 years of growth in our equity markets wiped out in recent months, while 401(k)s, IRAs and college savings plans are down by an average of 40%. The administration and congressional Democrats want to raise capital gains tax rates by a third. Instead, we should eliminate the capital gains tax. It supplies about 4% of federal revenues, yet it places a substantial drag on economic growth. Individuals already pay taxes on income when they earn it. They should not be socked again when they are saving and investing for their retirement and their children's education.
Capital gains taxes are a needless burden on investment, savings and risk-taking, activities in short supply these days. Getting rid of this tax could help establish a floor on stock prices and stem the decline in the value of retirement plans by increasing the after-tax rate of return on capital.
Democrats oppose this, playing on emotions of fear and envy. But while class warfare may make good short-term politics, it produces terrible economics.
- Guarantee sound money. For the last decade, the Federal Reserve's easy-money policy has helped fuel the housing bubble that precipitated our current crisis. We need to return to a sound money policy. That would end uncertainty, help keep interest rates down, and increase the confidence entrepreneurs and investors need to take the risks required for future growth.
I believe the best way to guarantee sound money is to use an explicit, market-based price guide, such as a basket of commodities, in setting monetary policy. A more politically realistic path to price stability would be for the Fed to explicitly embrace inflation targeting.
Transcripts from recent meetings of the Federal Open Market Committee meetings suggest that the Fed may already be moving in this direction. This would be an improvement over the status quo: It could help combat near-term deflation concerns while also calming the market's longer-term inflation fears.
- Fix the financial sector. A durable economic recovery requires a solution to the banking crisis. There are no easy or painless solutions, but the most damaging solution over the long term would be to nationalize our financial system. Once we put politicians in charge of allocating credit and resources in our economy, it is hard to imagine them letting go.
The underlying structural problem at our financial institutions is the toxic assets infecting their balance sheets and impairing their operations. In order to help purge these assets from the system, we need a government-sponsored, comprehensive solution, but one that is transparent and temporary, and which leverages -- rather than chases away -- private-sector capital.
The general idea is to establish an entity or fund to purchase troubled assets from financial institutions and then hold them until they could be sold once the market has recovered. The Treasury has announced its intention to use capital from the Troubled Asset Relief Program, along with financing from the Fed's soon-to-be operational Term Asset-Backed Securities Loan Facility, to set up such an entity. It will be a tall task to get all the details and incentives right, but the administration's general strategy appears to be sound.
A good model for this government-sponsored entity is the Resolution Trust Corporation (RTC), which helped clean up bank failures in the wake of the savings-and-loan crisis in the late 1980s and early 1990s by absorbing and selling off bad bank assets. The circumstances of today's financial sector are different, but the goals of our current efforts should mirror the general merits of an RTC-like entity. We should aim to recoup a portion of our initial expenditures, and we should leave only a fleeting government footprint on the financial sector and the economy.
- Get a grip on entitlements. With $56 trillion in unfunded liabilities and our social insurance programs set to implode, we must tackle the entitlement crisis. President Barack Obama deserves credit for his recent efforts to build a bipartisan consensus on entitlement reform. But we can't solve the entitlement problem unless we acknowledge why the costs are exploding, and then take action.
I have proposed legislation, called "A Roadmap for America's Future," that would bring permanent solvency to Medicare, Medicaid and Social Security. By transforming these open-ended entitlements into a system with a defined benefit safety net for the low-income and chronically ill, in conjunction with an individually owned, defined contribution system for health and retirement, we can reach the goal of these programs without bankrupting the next generation. It would also show the world and the credit markets that we are serious about our debt and unfunded liabilities.
Republicans can help Washington become part of the solution, not part of the problem. We can do this by pushing to enact tax policies that boost incentives for economic growth and job creation, focus the Fed on price stability, fix our banking system to get credit flowing again, stop reckless spending, and reform our entitlement programs.
Our economy is begging for clear leadership that inspires confidence and hope that the entrepreneurial spirit will flourish again. Our goal must be to offer Americans that leadership.
Mr. Ryan, from Wisconsin, is ranking Republican on the House Budget Committee and also serves on Ways and Means.
Please add your comments to the Opinion Journal forum.
Printed in The Wall Street Journal, page A15
03/02/2009
Stocks around the globe are lower on fears that the recession is getting worse.
Last Friday, US Stocks closed February with their worst performance since 1933.
The S&P 500 dropped 10.9%, and has dropped 18.6% so far this year, the worst
start to the year on record. And Stocks are getting no relief at the moment as the
Dow trades below 7,000 for the first time since 1997.
Also pressuring Stocks lower is news that insurance giant AIG International is set to
receive another lifeline from Uncle Sam to the tune of $30B after losing $61.7B in
the 4th quarter of 2008...a record loss for a US company. Think about that. Losing
$61B is like losing almost 1 Billion dollars a day for every business day during the
quarter...or $125 Million per hour. Scary. And speaking of scary - Stock investors
are clearly worried as to how far prices will drop before reaching a bottom. There
have been many technical support levels that have been violated. Our charts show
that the next floor of support is at 716 on the S&P, which was tested today - that
floor goes back to December of 1996. Let's hope that level can hold.
With Stocks in the doldrums, you'd think Bonds would be off to the races. But that's
not the case as Bonds can muster only modest gains as they continue to trade
sideways, capped by both the 25 and 50-day Moving Averages. Bond Traders are
certainly aware that Stocks are due for a major relief rally...and when that happens,
Bonds will be sold off a bit. So the smart play for those Bond Traders is to not get
too long ahead of the inevitable Stock reversal. Bonds are near unchanged on the
day and are already well off the best levels seen earlier in the session. We can
Float carefully here, but don't be surprised if you get a Lock Alert, should Stocks
finally reverse higher.
In other news, households are hoarding their cash...in January, the Personal
Savings Rate rose to a 5% annual rate, a 15-year high. January Personal
Spending also rose to 0.6% versus estimates of 0.4%, while Personal Income rose
0.4%, higher than estimates of -0.2%.
Last Friday, US Stocks closed February with their worst performance since 1933.
The S&P 500 dropped 10.9%, and has dropped 18.6% so far this year, the worst
start to the year on record. And Stocks are getting no relief at the moment as the
Dow trades below 7,000 for the first time since 1997.
Also pressuring Stocks lower is news that insurance giant AIG International is set to
receive another lifeline from Uncle Sam to the tune of $30B after losing $61.7B in
the 4th quarter of 2008...a record loss for a US company. Think about that. Losing
$61B is like losing almost 1 Billion dollars a day for every business day during the
quarter...or $125 Million per hour. Scary. And speaking of scary - Stock investors
are clearly worried as to how far prices will drop before reaching a bottom. There
have been many technical support levels that have been violated. Our charts show
that the next floor of support is at 716 on the S&P, which was tested today - that
floor goes back to December of 1996. Let's hope that level can hold.
With Stocks in the doldrums, you'd think Bonds would be off to the races. But that's
not the case as Bonds can muster only modest gains as they continue to trade
sideways, capped by both the 25 and 50-day Moving Averages. Bond Traders are
certainly aware that Stocks are due for a major relief rally...and when that happens,
Bonds will be sold off a bit. So the smart play for those Bond Traders is to not get
too long ahead of the inevitable Stock reversal. Bonds are near unchanged on the
day and are already well off the best levels seen earlier in the session. We can
Float carefully here, but don't be surprised if you get a Lock Alert, should Stocks
finally reverse higher.
In other news, households are hoarding their cash...in January, the Personal
Savings Rate rose to a 5% annual rate, a 15-year high. January Personal
Spending also rose to 0.6% versus estimates of 0.4%, while Personal Income rose
0.4%, higher than estimates of -0.2%.
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