Effor.com

Here are the top 10 news stories today from Reuters Business News as of 4:55 PM ET.  Notice a pattern?

• Wall St pulled lower by banks, S&P below 700 - 14 minutes agoStocks fell in volatile trading on Tuesday, with the S&P ending below 700 for the first time since October 1996 as persistent uncertainty about the amount of money needed to shore up the financial sys…
• U.S. auto sales plunge as recession deepens - 57 minutes agoU.S. auto sales dropped by more than 40 percent in February to the lowest level in almost three decades as Americans pulled back from taking on more debt.
• Bernanke defends AIG rescue, says U.S. had no choice - 3 hours agoU.S. Federal Reserve Chairman Ben Bernanke on Tuesday defended the government’s latest bailout of embattled insurer AIG, telling irate lawmakers that he was also angry, but that the failure to act cou…
• Blockbuster hires advisers for debt overhaul - 11 minutes agoTop U.S. movie rental chain Blockbuster (BBI.N) said on Tuesday it has enlisted lawyers to help it raise capital and refinance debt, but stressed it has no plans to file for bankruptcy.
• Ford February sales plunge 48 percent - 2 hours agoFord Motor Co (F.N) reported a 48 percent drop in February sales on Tuesday and outlined sharply lower production targets for the second quarter compared with a year ago in the face of a deep slump in…
• Geithner: will work with Congress on bailout costs - 1 hour agoAcknowledging that U.S. financial bailout costs may rise, Treasury Secretary Timothy Geithner on Tuesday said the Obama administration will work with Congress to determine the size and shape of future…
• U.S. home sales plumb record low in January - 4 hours agoSales of previously owned U.S. homes tumbled to a record low in January, reversing the prior month’s gains, according to a report on Tuesday that indicated the economy’s downward spiral was gathering …
• Oil rises nearly 4 percent on OPEC - 51 minutes agoOil prices rose nearly 4 percent on Tuesday on expectations producer group OPEC will cut output again and as stock markets traded higher.
• Bank of NY, Russia to discuss legal settlement - 3 hours agoThe Bank of New York Mellon (BK.N) said on Tuesday it will meet with the Russian government to discuss settlement of a $22.5 billion lawsuit Russia has leveled against it.
• Treasury, Fed launch loan program, eye expansion - 5 hours agoThe U.S. Federal Reserve and Treasury on Tuesday extended a new securities loan program to include equipment and vehicle fleet leases and said a future expansion to $1 trillion may also include some o…

There’s not a single bit of good news.  Everyone is ready to call a bottom to the recession, housing, financial crisis, and stock markets, but why?  There have to be at least a few positive signs that things are going to get better at some point, and I don’t see any signs of that.

Eventually, things will pick back up, but I don’t see it happening yet.  And I’m not buying stocks yet either.

gk

Share on Facebook

It was all over the headlines yesterday – existing home sales rose 5.5% (seasonally adjusted) from August.  The median price dropped too – down 9% to about $191K.  Good news right?  It IS good news except for one minor detail absolutely no one reported.  Here it is straight from the press release that everyone’s story is from:

http://www.realtor.org/press_room/news_releases/2008/ehs_rise_on_affordability
“Compared to a fairly small share of foreclosures or short sales a year ago, distressed sales are currently 35 to 40 percent of transactions.”

Oops – it seems that foreclosures are counted as sales, and foreclosures and short sales are about 35% of all sales right now.

A short sale is where the bank agrees to the sale and take less money than you owe on the mortgage as payment in full.  For example, if you owed $100K on your house but you could only sell it for $80K, the bank would take it.  Why would they do this?  Because getting 80% of the money it better than getting none and having to go to the expense of foreclosure.  Then the bank is stuck with it and they’ll still need to reduce the price to sell it.

So a short sale cuts out the foreclosure process – but it’s the same result:  The bank didn’t get paid back in full, so they need to writedown that loan and take the loss.  Then the CDS’s (Credit Default Swaps) that were written on that loan need to be written down and taken as losses, and the “Traunches” (pieces of mortgages packaged together for resale to investors) need to be written down, then the “Super Traunches” (bundled groups of Traunches) need to be written down, etc.

Look at the example in this Wikipedia article: http://en.wikipedia.org/wiki/Tranche
(From what I’ve read, this example is a simple simple one, but it illustratates how one debt is packaged and repackaged.)

CDS’s, Traunches, Super Traunches and dozens of other alphabet soup abbreviations are all forms of derivatives, and this is why just a few percent increase in foreclosures (or short sales) can cause hundreds of billions (we’re at about $1 trillion now) in writedowns and losses.  And that’s why we’re nowhere near seeing the end of huge losses, and that’s a big reason the stock market is tanking.

To give you an idea of the size of the writedowns (losses) that need to happen, it’s estimated that the derivative market totals about $500 trillion.  The total GDP of the entire world is about $55 trillion.  These debt instruments have been repackaged and resold and repackaged and resold so many times that they total about 10 times the entire world ecomony.  That’s why Buffett (Warren, not Jimmy) called them WMD’s.  And unlike the ones in Iraq, these actually exist,and they will go off.

gk

Share on Facebook