Market Plunge

The Dow has shed nearly 800 points over the last couple of weeks and we can look to a plethora of reasons to blame for this.

Yesterday’s consumer confidence report was a major disappointment, falling dramatically and showing regional weakness obviously tied to the Gulf spill. The consumer confidence index fell to 52.9, a nearly 10 point decline the size of which usually corresponds with an economic shock. It sparked the huge sell off of 268 points on the Dow and over 33 points on the S&P 500 index. Consumers are now showing much more concern over the jobs market and over their income prospects. Those saying jobs are currently hard to get rose nine tenths to 44.8 percent. The size of this rise isn't overwhelming but the direction is definitely troubling - only the second negative monthly comparison since November. Add to that the expected monthly employment report Friday, which is presumed to show an increase in unemployment by 0.1 to 9.8 percent in June, and the picture gets uglier. More people see fewer jobs (20.8 percent vs. 17.8 percent) and fewer see more jobs (16.0 vs. 20.2). On the future income question, the unprecedented negative spread deepened between the optimists, now at 10.6 percent vs. May's 11.4 percent, and the pessimists, now at 17.2 percent vs. 16.4 percent. Consumers aren't going to be spending if they don't have confidence in their income.

Economically, worries about Europe are continuing to affect the markets. The euro, the common currency used by 16 European nations, fell to $1.2189. The currency has been seen as an indicator for confidence in Europe's economy following Greece's near bankruptcy and steep budget cuts around the continent to combat rising deficits. World markets have regularly dropped along with the euro in recent months. Greek workers walked off their jobs as part of another nationwide strike to protest the austerity measures the government put in place to try and reduce debt. The austerity measures were a requirement for Greece to receive a bailout from other European Union members and the International Monetary Fund. The new round of protests sparks fresh concerns about how well European countries will be able to stick to austerity plans in the face of public outcry against them. Investors have been worried for months that Europe's economy would grind to a halt and drag down the global economy with it.

On the home front, compounding the European situation, the markets have had a hard time adjusting to the President Obama’s intense regulatory administration. Although some feel these measures were long overdue, investors perceive these actions as bad for business. With health care reforms, financial regulations and a ban on offshore drilling, President Obama is only getting started. Next on the Obama's agenda is cap and trade, a green-house gas level reduction initiative that has failed to show any substantial results in a similar program instituted in Europe over the last five years. It may ultimately hurt the industrials and utilities along with card-check unionization, which could hurt retail and the banks.

With all the doom and gloom news circulating, what we can we expect next? On the short-term, technically, we see that the markets are very much over-sold and are due for at least a temporary relief rally. The professionals make a living by buying at the worst times, when investors are selling, and selling when everything seems fine (irrational exuberance) -usually when the public is buying near tops. Traditionally, July has been a good month for the markets, but it remains to be seen if we will get a summer rally. Whatever upside action does occur will probably be due to short covering for profit taking; most likely not due to positive economic or financial news.

C. Cohn
Cohn-Reilly Report

Organized Crime: Countrywide Swindled Homeowners.

According to the Federal Trade Commission, Countrywide financial Corp, now owned by Bank of America, cheated hundreds of thousands of customers facing foreclosure. The FTC contends that Countrywide took advantage of homeowners by inflating the cost of services for property inspections and foreclosure services by as much as 400 percent. Sadly, I'm not surprised, given the avalanche of fraudulent activities by U.S. corporations these days. To add insult to injury, Countrywide went so far as to overstate the amounts borrowers owed when they were in bankruptcy, and covertly added fees and bogus charges to homeowners’ accounts. For taking advantage of homeowners at their most vulnerable point - when they are facing possible homelessness - these guys should be forced to shut down their operation altogether. These charges demonstrate an egregious act of greed, illustrating how callous some of the mortgage lenders were, which contributed to the breakdown of the housing industry, that nearly brought the country to a standstill. I have heard many arguments that place 50% of the blame for the millions of foreclosures on the borrowers. Meanwhile, when you really put in perspective the impact of this kind of organized crime that was sweeping mortgage industry, borrowers didn’t stand a chance against this tidal wave of predatory practices that escalated to fraud in some cases.

Although the charges against Countywide involved activities which took place prior to Bank of America’s acquisition, it has agreed to pay the $108 million judgment against Countrywide as a settlement. This just another reason why the congressional leaders must remain committed to finalizing the Financial Regulations overhaul. It is long over due.

K. Reilly
Cohn-Reilly Report

Will There be Another Housing Bubble?

According to some there will be, which is strange to hear, as the country struggles to shrug off the worst housing crash since the Great Depression. According to a CNN article, the nation is simply not building enough homes to keep up with potential demand. Only 672,000 new houses were started in April; less than half the long-term run rate needed to meet the nation's natural population growth.

"It is ironic, but there is a growing consensus that there may be a new housing shortage coming," said James Gaines, a real estate economist with Texas A&M". “So far, the shortfall has been masked by a weak economy that has put a damper on home buying. Once the job market rebounds, however, people will look to have their own homes again. This pent-up demand could get unleashed on unprepared markets, causing shortages and rising local prices.”

“Household formation, the technical term for people moving in together, has been on hold during the past few years as young people, especially, have been unable to find jobs. In the past, an average of more than 1.3 million households were formed each year, causing demand for 1.5 million new homes (more homes than households are needed to replace those destroyed by fires, floods, teardowns and neglect.) In 2009, only 398,000 new households were formed, according to the Census Bureau. That is much lower than average and a quarter of the number formed just two years earlier.”

"The decline in household formation is artificial," said Gaines. "The young are moving in with their parents. There's even doubling up among working class people. There's a pent-up demand coming if and when the economy recovers."

Those doubting a new bubble point to a large inventory available. As many as 7 million homes are vacant but not for sale, according to the Census Bureau. That should provide a cushion to offset increased demand. "The housing market hasn't been this way before," said Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies. "The gravity of the problem is deeper and the challenges different. You have to get through that inventory."

The inventory number, however, can be deceiving for two reasons - people may not want to live in hard-hit areas, for example California exurbs and Detroit neighborhoods, or the homes may be beyond repair. "Many of these vacant homes may not be habitable or are in locations where nobody wants to live," Gaines said.

Ordinarily, the nation's homebuilders can react quickly to meet surges in demand. But several factors are preventing them from being nimble. The biggest is the difficulty getting loans, according to Jerry Howard, CEO of the National Association of Home Builders (NAHB). "When we came out of past recessions, there wasn't the difficulty of obtaining financing that there is now," he said. Many small builders have been unable to obtain construction loans or lost their financing in mid-project. That has prodded NAHB to support federal legislation that would make $15 billion in lending guarantees available for private builders.

Too many builders went out of business during the recession, so there will be fewer companies out there to do the building. The survivors will confront a transformed regulatory environment, according to Howard, that will make new homes harder to build and more expensive. "There is an increased focus on smart growth that will create regulatory barriers to the kind of sprawling development that has characterized a lot of recent building," said Retsinas.

Previous overbuilding of one-time boom towns, such as Las Vegas and Miami, should provide enough inventory of like-new homes to counter any strong pent-up demand that breaks free. It's the more constrained markets, where it's particularly hard to build such as New York, San Francisco and Seattle that will field the bulk of the new bubble problems, according to Retsinas. However, he is less worried about the purchase market than about rentals, the usual entree for the young buyers expected to lead the new housing market charge. "Nobody is building any rental inventory," said Retsinas.

Although there is still a surplus of houses for sale in many good areas, it is interesting to see people talking about a shortage in the not too distant future. That in itself is something that no one would have dared to mention, even a few months ago.

C. Cohn
Cohn-Reilly Report

Too Small to Succeed: Neighborhood Banks Becoming Extinct

There were hundreds of local banks that have struggled to survive the volatile economic wave over the past two years. Since 2008, 238 banks have failed, which translates to 613.2 billion in assets. Not to mention the amount of losses that had to be covered by the FDIC for depositors (the maximum insurance of $250,000 per account for each name on the account, which was increased from $100,000 prior to the recession). In 2009 alone, 140 neighborhood banks across the country were forced to shut their doors, accounting for nearly 60% of the total number of banks that have failed during this 2-year period. Apparently, they were too small to succeed. Totally passed over by the TARP bail outs distributed to banks identified as “too big to fail”, the small and midsized banks were left to sink or swim, with little or no support from the Federal Government.
It may appear to the layman, that neither the Bush, nor the Obama administration saw a need to include the little guys, who made up over a half a trillion dollars in assets. Meanwhile the small banks are the backbone of many communities throughout the country. It is the small bank that often provides construction loans, and mezzanine loans for housing development projects and small businesses that make up a more than 50% of our GDP. This year has seen 73 banks close, and we are only in the second quarter. I am not a big fan of banks, given their unsavory role in the near collapse of the financial markets, but I always take a stand for the overlooked and underserved.


K. Reilly
Cohn-Reilly Report

___________Comments

Charlie said.....
Great article! The media has not given this topic much headline space, but it is very important how this has affected regional areas around the country.

Katherine said.....
Thanks. Yes, you're right. The small neighborhood banks are a vital part the economic vitality of a community. They are responsible for fostering business development and growth, while stimulating the local economy. I am not quite sure why this has been completely under reported, but I suspect it’s not "sexy" enough for the Media. This isn't really an attention grabbing topic. Without an association or public figure advocating for the plight of the small bank, they don't have a voice to bring the much needed attention to this issue.

Follow-up: BP Deepwater Horizon Reminiscent of the Worst Accidental Spill in History

With over 40 million gallons of oil spewed into the Gulf, the disaster has already eclipsed the Exxon Valdez. It may become the worst accidental spill the world has seen. In 1979, the Ixtoc 1 blowout spilled between 126 million and 210 million gallons in Mexico’s Gulf Coast over a period of nine months, wiping out fishing in the area for over two years. Actually, during the Gulf War in 1991, retreating Iraqi troops intentionally spilled 462 million gallons, according to the Interior Department, making that the largest oil drop in history.

There are similarities between the two spills. Both involved the failure of a blowout preventer device, a kind of emergency shutoff valve. In each case metal domes were put over the well to stop the flow, without success. The Ixtoc 1 well was owned by Petroleos Mexicanos, Mexico's state oil company, known as Pemex. However, it was being drilled by Sedco, a predecessor to Transocean, owner of the BP Deepwater Horizon rig.

The Ixtoc 1 leak was finally capped on March 25, 1980; Pemex began drilling two horizontal relief wells soon after the spill in June 1979, but they did not reach the Ixtoc 1 well until November, five months later. The crews used the relief wells to pump mud and steel balls into the gusher, which finally succeeded. BP plans a similar maneuver, but claims the relief wells will not be ready until August. However, they must drill in 5000 feet of water compared to the Ixtoc 1 well, which was only in 160 feet of water. Based on BP’s past performance and reliability, who knows if this will really work? BP has tried other procedures that failed: The top kill method pumped huge amounts of mud into the well at a rate of up to 2,700 gallons per minute, without success; a robotic camera on the seafloor appeared to show mud escaping at various times during the operation. BP also attempted several times to shoot assorted junk into the well's crippled blowout preventer to clog it up and force the mud down the well bore and that failed too.

Many residents in Mexico now fear a repeat disaster. A variation in the Gulf currents that occurs every 6 to 11 months could eventually carry the oil toward Mexico, said Mike Pigott, a meteorologist with the AccuWeather forecasting firm."The winds are dead out there now, but in June, they're going to start blowing again," said Roman Dominguez of the Gavilan del Rio Fisherman's cooperative in Coatzacoalcos. "That's what people are worried about. Everyone here remembers Ixtoc." Likewise in the States, people are equally afraid. The currents may carry the oil to Florida’s Atlantic coast and potentially up the eastern seaboard. In Louisiana, the top official in coastal Plaquemines Parish, Billy Nungesser, said "They are going to destroy south Louisiana. We are dying a slow death here” - and hurricane season has just begun.

C. Cohn
Cohn-Reilly Report