Saturday, December 29, 2007

Snail Mail Update - 5%

Effective December 31, 2007:

  • UPS Ground and UPS Standard to Canada services will increase 4.9%.
  • Air and International express services will increase a net 4.9% through a combination of a 6.9% increase in rates and a 2% reduction in the air and international fuel surcharge.

Friday, December 28, 2007

Just the Numbers: Week 52, The Finish Line or Near to It?

THE NUMBERS

Romney and McCain firm, going into Iowa next week. Clinton does, as well, but not as much. Thompson is unloved, not making a stir in the VP standings, either.

THE STRATEGIES

I don't like binary bets, much. The Clinton-Giuliani parley has collapsed. If you think that they will be the two, there is gold available, right now. The contract may fair quite well if that is the ultimate outcome, and offer some near-term 'protection', if Clinton does well, while Giuliani slides further on the heels of possible losses in Iowa and/or NH.


TABLES

[n.b. changes are from three weeks ago.]

Next PresidentPr (%)Chg Wk.bid-ask
CLINTON(H)443.92%
GIULIANI11.9-63%
OBAMA13.6-2.57%
HUCKABEE4.3-3.95%
ROMNEY8111%
McCAIN8.65.93%
PAUL3.20.631%
2007 Week 52: Last week newspaper endorsements favor McCain and Clinton. Campaigns sprint to the end.
GOP NomineePr (%)Chg Wk.bid-ask
GIULIANI30.3-9.20%
ROMNEY22.43.53%
MCCAIN18.19.94%
HUCKABEE14.5-5.34%
PAUL6.41.42%
THOMPSON(F)3.1-216%
RICE0.6-0.5n.m.
DEM NomineePr (%)Chg Wk.bid-ask
CLINTON674.80%
OBAMA23.4-5.66%
GORE2.1-0.310%
EDWARDS5.20.34%
RICHRDSN0.2-0.1n.m.
BIDEN0.1-0.2n.m.
DODD0.10n.m.
SenatePr (%)Chg Wk.bid-ask
DEM83.32.310%
GOP10-0.189%
Next ExecutivePr (%)Chg Wk.bid-ask
DEM61.21.61%
GOP37-1.51%
OTH2010%
DEM VP NomineePr (%)Chg Wk.bid-ask
OBAMA6.8-4.359%
BAYH17-0.911%
FIELD13.61.41%
RICHARDSON11.8-0.722%
GORE9.2-1.429%
CLARK12.20.29%
WEBB4.2-126%
GOP VP NomineePr (%)Chg Wk.bid-ask
FIELD23.3-1.971%
HUCKABEE21.1-7.218%
PAWLENTY7.20.838%
THOMPSON(F)2.6-2.6250%
GIULIANI3.93.685%
GINGRICH6.31.22%
BUSH(J)2.5-2.5132%
President ParleyPr (%)Chg Wk.bid-ask
CLINTON-GIULIAN23-10.29%
CLINTON-ROMNEY15.52.510%
OBAMA-GIULIANI8-21%
CLINTON-HUCK9-0.149%
OBAMA-HUCKABEE5.6-2.471%
OBAMA-ROMNEY82.513%
CLINTON-McCAIN11.37.315%
OBAMA-McCAIN5378%
src: intrade.com; bid-ask are not points, but spread as a percentage of the bid. Polls comparison, via RealClearPolitics.
IMPORTANT DISCLAIMER: this is just an informational note and not a solicitation or recommendation to buy or sell securities and there is no guarantee implied and people can lose all money on all investments. Numbers are believed to be correct, but do your own math and make your own conclusions or consult with an advisor before making any decisions.

Caucus/CandidatePr (%)Chg Wk.bid-ask
Iowa Caucus
Democratic
CLINTON40.13.17%
OBAMA37.6-8.52%
EDWARDS21.211.118%
FIELD0.1-0.1n.m.
Republican
ROMNEY307.715%
GIULIANI0.2-0.2n.m.
THOMPSON(F)1.51n.m.
FIELD5.54.498%
HUCKABEE59.8-10.20%
MCCAIN2.52.4176%
New Hampshire Primary
Democratic
CLINTON55555%
OBAMA35426%
EDWARDS1.60.5n.m.
FIELD0.10111%
Republican
ROMNEY47-13.915%
GIULIANI1.2-6.565%
THOMPSON(F)0.30.2n.m.
FIELD6.51.254%
HUCKABEE3.8-9.6149%
MCCAIN26.317.5n.m.
South Carolina Primary
Democratic
CLINTON40.15n.m.
OBAMA5013.6n.m.
EDWARDS1.3-0.7n.m.
FIELD0.10146%
Republican
ROMNEY10-0.410%
GIULIANI5.3-11.7168%
THOMPSON(F)7.1-8.8n.m.
FIELD526.6n.m.
MCCAIN10.19.1150%
Florida Primary
Democratic
CLINTON70.1-10n.m.
OBAMA15.12.5190%
EDWARDS2-0.510%
FIELD0.10100%
Republican
ROMNEY76100%
GIULIANI46.1-23.9n.m.
THOMPSON(F)20.8n.m.
FIELD214.9n.m.
MCCAIN10.18170%
New Jersey Primary
Democratic
CLINTON0-80n.m.
OBAMA10598%
EDWARDS10.90%
FIELD0.10200%
Republican
ROMNEY5.10.1393%
GIULIANI50.250.2n.m.
THOMPSON(F)10n.m.
MCCAIN85.9500%
Nevada Caucus
Democratic
CLINTON35-45n.m.
OBAMA5.1-524%
EDWARDS10.9329%
FIELD0.10n.m.
Republican
ROMNEY16.2-12.931%
GIULIANI25.60.4n.m.
THOMPSON(F)6.11.1n.m.
MCCAIN5.65.5n.m.
Pennsylvania Primary
Democratic
CLINTON50-20n.m.
OBAMA105n.m.
EDWARDS11n.m.
FIELD0.10n.m.
Republican
ROMNEY5.10n.m.
GIULIANI65.2-6n.m.
THOMPSON(F)50n.m.
FIELD10.52.5n.m.
MCCAIN107.9n.m.
California Primary
Democratic
CLINTON50-25n.m.
OBAMA105n.m.
EDWARDS10.9n.m.
FIELD0.10n.m.
Republican
ROMNEY10.10.1n.m.
GIULIANI54.9-10.1n.m.
THOMPSON(F)50n.m.
MCCAIN10.18.1n.m.
Michigan Primary
Democratic
CLINTON40-40n.m.
OBAMA102.5n.m.
EDWARDS00n.m.
FIELD00n.m.
Republican
ROMNEY40.140.1n.m.
GIULIANI5.1-20.9n.m.
THOMPSON(F)0.7-4.3n.m.
MCCAIN20.619.5n.m.

Friday, December 21, 2007

Consumers Are Making and Spending

SANTA SAYS NO RECESSION, YET, VIRGINIA

These numbers don't look like everyone will be revising their growth outlook, do they?

DPI is stalled in real terms as prices tick up, indicating stress; but still growing year-to-year.

It's not 'high-quality' growth, as savings is slipping a bit, but hardly over the cliff.

PERSONAL INCOME AND ITS DISPOSITION

2007:Sep\r\2007:Oct\r\2007:Nov\p\
PCE


Real, %yoy3.22.73
Deflator-All2.533.6
Deflator-Core1.922.2
Real, %m0.20.10.5
Deflator-All0.30.30.6
Deflator-Core0.30.20.2




DPI


Real, %yoy3.62.72.1
Real, %m0.2-0.2-0.3




Personal Income, %m0.50.20.4
Wages/Salary, %m0.600.6




Savings/DPI0.50.3-0.5
Personal Income BEA
*PCE=personal consumption expenditures; DPI=disposable income, Deflator=price index, Core=prices ex Food,Energy

REVISIONS TO PRIOR MONTHS
CHANGES2007:Aug\r\2007:Sep\r\2007:Oct\p\
PCE


Real, %yoy00.20.3
Deflator-All00.10.1
Deflator-Core0.100.1
Real, %m00.10.1
Deflator-All000
Deflator-Core0.10.10

000
DPI000
Real, %yoy00.10
ReaL, %m00-0.1

000
Personal Income, %m0.10.10
Wages/Salary, %m00-0.1

000
Savings/DPI0-0.2-0.2

The Fed's Salt Water "Taf"fy Facility

ENOUGH LIQUIDITY TO PREVENT INSOLVENCY?

No one can answer that question, but here's the Fed's new Taffy auctions, two of which completed this week (before many banks have year-end).

Candy takers get to remain anonymous.

Maximum bid is $2 billion (for last auction). No info on how many put in bids for the max, though.

93 bidders and no non-competes at this time. Does that seem high to you?

Discount window rules for collateral apply, however. So, if you want cash, you can get it, but it's not easy love with high collateral requirements.

Thursday, December 20, 2007

Rearview Mirror on US GDP

Not much change to the GDP figures in today's final revision. Growth in Q3 was strong, but corporate profits were weak. (National Defense at nearly a trillion dollars, at annualized rates ...)

To note: Housing, falling at 20% per annum on these figures, knocks about 1% off GDP growth. Growth in Government spending continues to offset that as does a remarkable rise in net exports.

Tomorrow's personal income figures will be more interesting.


%Contrbution%GrowthGDP-$B
Percent change at annual rate:%ContrbRev'd
%Contrb
%G-Rev'dR-Chng
%Grwth
GDP-$B
Gross domestic product4.904.9013,971
Personal consumption expenditures2.010.132.80.19,786
Durable goods0.350.044.50.51,082
Nondurable goods0.460.072.20.32,846
Services1.20.022.805,858
Gross private domestic investment0.77-0.155-0.92,163
Fixed investment-0.11-0.05-0.7-0.32,128
Nonresidential0.96-0.019.3-0.11,500
Structures0.520.0616.42.1483
Equipment and software0.44-0.076.2-11,017
Residential-1.08-0.05-20.5-0.8627
Change in private inventories0.89-0.09---
35
Net exports of goods and services1.380.0114.70.1-695
Exports2.10.0219.10.21,686
Goods1.960.0226.20.41,191
Services0.14040494
Imports-0.72-0.024.40.12,380
Goods-0.670.014.8-0.12,007
Services-0.05-0.031.70.8373
Government0.74-0.013.8-0.12,717
Federal0.50.017.10.1
National defense0.47010.10990
Nondefense0.030.011.10.2674
State and local0.24-0.021.9-0.2317
Overview of NIPA Accounts
BEA Primer on NIPA

Housing Storm - The Same

Home starts and foreclosures this week indicate that the national housing markets remain stressed, but not getting rapidly worse.

Fixed mortgage rates have ticked up slightly in the past few weeks.

The futures markets appear to have reassessed the prospects for Los Angeles downward. However, these markets are extremely thinly traded, from what I can tell, so it is hard to make firm conclusions.

Case-Shiller Real Estate Index Contract Futures by Month
% rise or fall from last Index reading

FUTURES08Feb08May08Aug08Nov09Feb09May09Nov
Composite-2%-4%-7%-9%-9%-9%-14%
Boston-2%-5%-6%-6%-8%-9%-12%
Chicago-1%-2%-3%-4%-4%-5%-6%
Denver-2%-3%-4%-7%-8%-9%-12%
Las Vegas-4%-6%-7%-9%-10%-12%-13%
Los Angeles-3%-6%-8%-12%-14%-11%-16%
Miami-4%-7%-11%-14%-15%-18%-18%
New York-2%-3%-6%-6%-8%-9%-11%
San Diego-2%-4%-6%-6%-8%-10%-12%
San Francisco-3%-5%-6%-7%-10%-13%-15%
Washington-3%-5%-6%-8%-8%-10%-11%


Changes since
Nov-28
08Feb08May08Aug08Nov09Feb09May09Nov
Composite0%0%-1%-2%-1%0%-4%
Boston0%0%0%0%0%0%0%
Chicago0%-1%-1%0%0%0%0%
Denver0%-1%0%0%0%0%0%
Las Vegas-1%0%0%-1%0%0%0%
Los Angeles0%-1%-2%-5%-6%-2%-6%
Miami-1%-1%-1%0%-1%-2%-1%
New York1%2%1%2%1%2%1%
San Diego0%-1%-1%0%0%0%0%
San Francisco-1%-1%0%1%0%0%0%
Washington0%0%0%0%0%0%0%

Changes include changes to term interest rates, that may affect futures prices.

RealtyTrac suggests that the real test for foreclosure rates will come in the next quarter, which makes sense if there are seasonal patterns and Nov-Dec is a seasonally weak period.

Many of the foreclosure series have months during which the foreclosure rate spikes.

Wednesday, December 19, 2007

Mankiw Ignores the "Allocation" Evidence from the Current Subprime Mess

The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace. - Greg Mankiw
humm....

This isn't nuanced enough.

The Right uses inefficiency as an excuse, as much as anything, arguably. One could give a long discourse on 'an excuse for what', perhaps, but that's best left to those willing to think about it themselves.

The Left ... has had numerous critiques of 'market mechanisms' that need correction, some of which do not have to do with "power" (especially monopoly or monopsony power).

Right now, major banks and brokerages are writing off billions - billions - of dollars. If the Government did that, the Right would be at arms, waving an "I told you so". Yet, somehow we are meant to accept that Government is inefficient versus ... how well resources have been allocated, just recently.

What's more, one seldom sees right-wing economists writing or talking about how efficiently or inefficiently the government manages the largest part by far of the taxes it collects, the spending on National Defense in America.

If taxes are "deadweight loss" - to whatever degree - and the government is inefficient, by definition, why do Right-wing economists seldom insist that the government minimize its National Defense budget, eh?

Sunday, December 16, 2007

Just the Numbers: Week 50

THE NUMBERS

Obama continues to have the mo. Huckabee tops out at last week's 20%.

The GOP race has widened, even as the DEM race has narrowed. McCain and Ron Paul both showing some late-day strength.

THE STRATEGIES

The crosses (parley contracts) continue to look attractive, in particular if Obama goes all the way. The past week alone would would have profited 48% for an Obama-Giuliani contract (before a sizeable 10% paid for the wide bid-ask)!



Next PresidentPr (%)Chg Wk.bid-ask
CLINTON(H)38.2-1.92%
GIULIANI15.5-2.45%
OBAMA18.121%
HUCKABEE6.1-2.17%
ROMNEY7.80.819%
McCAIN3.10.413%
PAUL4.624%
2007 Week 50: Clinton campaign gets blowback from comments about Obama; last of the "debates" for GOP and Dems.
GOP NomineePr (%)Chg Wk.bid-ask
GIULIANI35.6-3.90%
ROMNEY22.63.710%
HUCKABEE16.5-3.34%
MCCAIN9.81.62%
PAUL8.53.51%
THOMPSON(F)4.5-0.69%
RICE0.2-0.9n.m.
DEM NomineePr (%)Chg Wk.bid-ask
CLINTON58.6-3.61%
OBAMA33.14.10%
GORE2.60.28%
EDWARDS4.8-0.12%
RICHRDSN0.30n.m.
BIDEN0.2-0.1n.m.
DODD0-0.1n.m.
SenatePr (%)Chg Wk.bid-ask
DEM81.10.111%
GOP10-0.11%
Next ExecutivePr (%)Chg Wk.bid-ask
DEM59.3-0.31%
GOP38.3-0.23%
OTH2010%
DEM VP NomineePr (%)Chg Wk.bid-ask
OBAMA11.70.634%
BAYH15.5-2.419%
FIELD12.60.413%
RICHARDSON11.6-0.928%
GORE12.11.523%
CLARK14.12.17%
WEBB5.30.113%
DEM VP NomineePr (%)Chg Wk.bid-ask
FIELD23.8-1.467%
HUCKABEE28.1-0.26%
PAWLENTY6.40117%
THOMPSON(F)5.30.187%
GIULIANI2.62.396%
GINGRICH5.1055%
BUSH(J)5.10.127%
President ParleyPr (%)Chg Wk.bid-ask
CLINTON-GIULIAN31-2.22%
CLINTON-ROMNEY13.10.115%
OBAMA-GIULIANI14.84.88%
CLINTON-HUCK100.934%
OBAMA-HUCKABEE8030%
OBAMA-ROMNEY7.11.661%
CLINTON-McCAIN5160%
OBAMA-McCAIN2065%
src: intrade.com; bid-ask are not points, but spread as a percentage of the bid. Polls comparison, via RealClearPolitics.
IMPORTANT DISCLAIMER: this is just an informational note and not a solicitation or recommendation to buy or sell securities and there is no guarantee implied and people can lose all money on all investments. Numbers are believed to be correct, but do your own math and make your own conclusions or consult with an advisor before making any decisions.

Friday, December 14, 2007

Hired Economist Outlook

HOW TO SPIN EVEN BAD ECONOMIC NEWS

Bad inflation news today for the USA.

It's true, Virginia, Santa Claus is ... riding on a different sleigh, as he approaches. We can still "import inflation" (see the apparel figures).

But here's the thing. [No Kathy Griffin imitation].

General inflation is bad for financial assets, right, especially accelerating inflation; but it is positive, in a relative way, for real assets.

REAL ESTATE

So, if you were to spin this number positively, you might say that it gives a macro boost to the struggling real-estate prices market. It makes real estate relatively more attractive as an asset class.

:-)

Sunday, December 9, 2007

Just the Numbers: Week 49

THE NUMBERS

The big moves have been in Obama and Huckabee. The latter has been astonishing and could have made a lot of money, for anyone who had the foresight to buy after his straw-poll win in Washington, D.C. with evangelical groups.

Huckabee's advance has come at the expense of Romney, particularly in Iowa.

There are new contracts for the number of seats in the Senate and House (as well as a contract on Ron Paul to enter as an independent, even though he continues to say "no" to that possibility, it's traded at 15, last).

THE STRATEGIES

Obama is on the move in the parleys, and those betting the Obama ticket(s) could have doubled their money in the past month or so (although the bid-ask spreads will eat you alive).

McCain continues to look flat.

There is still significant probability on Edwards in the Iowa caucuses that seems to be an opportunity.

Next PresidentPr (%)Chg Wk.bid-ask
CLINTON(H)40.1-92%
GIULIANI17.90.81%
OBAMA16.18.12%
HUCKABEE8.205%
ROMNEY7-2.83%
McCAIN2.70.411%
PAUL2.6-0.919%
2007 Week 49: GOP debates "youTube" in SC, just as news of Giuliani's security blanket on girlfriend breaks; Oprah in Iowa; Clinton, Bill in SC; Romney with flashy Faith-in-America speech
GOP NomineePr (%)Chg Wk.bid-ask
GIULIANI39.5-63%
ROMNEY18.9-8.24%
HUCKABEE19.811.61%
MCCAIN8.21.21%
THOMPSON(F)5.10.22%
PAUL5-14%
RICE1.1-0.3n.m.
DEM NomineePr (%)Chg Wk.bid-ask
CLINTON62.2-94%
OBAMA2911.93%
GORE2.4-2.221%
EDWARDS4.9-0.52%
RICHRDSN0.30n.m.
BIDEN0.30n.m.
DODD0.10n.m.
SenatePr (%)Chg Wk.bid-ask
DEM81-1.111%
GOP10.1-4.998%
Next ExecutivePr (%)Chg Wk.bid-ask
DEM59.6-42%
GOP38.53.89%
OTH20.45%
DEM VP NomineePr (%)Chg Wk.bid-ask
OBAMA11.1-46%
BAYH17.9-0.19%
FIELD12.20.216%
RICHARDSON12.5-3.227%
GORE10.64.250%
CLARK12221%
WEBB5.21.613%
DEM VP NomineePr (%)Chg Wk.bid-ask
FIELD25.22.257%
HUCKABEE28.31.15%
PAWLENTY6.41.1116%
THOMPSON(F)5.21.287%
GIULIANI0.3-5.3n.m.
GINGRICH5.1053%
BUSH(J)5-0.432%
President ParleyPr (%)Chg Wk.bid-ask
CLINTON-GIULIAN33.2-5.88%
CLINTON-ROMNEY13-7.138%
OBAMA-GIULIANI105.927%
CLINTON-HUCK9.1047%
OBAMA-HUCKABEE8063%
OBAMA-ROMNEY5.52.52%
CLINTON-McCAIN4-1.163%
OBAMA-McCAIN21.750%
src: intrade.com; bid-ask are not points, but spread as a percentage of the bid. Polls comparison, via RealClearPolitics.
IMPORTANT DISCLAIMER: this is just an informational note and not a solicitation or recommendation to buy or sell securities and there is no guarantee implied and people can lose all money on all investments. Numbers are believed to be correct, but do your own math and make your own conclusions or consult with an advisor before making any decisions.

Caucus/CandidatePr (%)Chg Wk.bid-ask
Iowa Caucus
Democratic
CLINTON37-13.118%
OBAMA46.117.117%
EDWARDS10.1-4.957%
FIELD0.20.1n.m.
Republican
ROMNEY22.3-23.248%
GIULIANI0.4-2.9n.m.
THOMPSON(F)0.5-0.9n.m.
FIELD1.1-6.1n.m.
HUCKABEE7008%
MCCAIN0.1-0.2n.m.
New Hampshire Primary
Democratic
CLINTON0-79.9n.m.
OBAMA311213%
EDWARDS1.1-0.1n.m.
FIELD0.10n.m.
Republican
ROMNEY60.9-8.66%
GIULIANI7.7-4.356%
THOMPSON(F)0.1-1.4n.m.
FIELD5.3-3.755%
HUCKABEE13.4054%
MCCAIN8.81.841%
South Carolina Primary
Democratic
CLINTON35.1-44.750%
OBAMA36.421.454%
EDWARDS2-1285%
FIELD0.10n.m.
Republican
ROMNEY10.4-14.646%
GIULIANI17-316%
THOMPSON(F)15.9-9.155%
FIELD45.432.810%
MCCAIN1-3.5n.m.
Florida Primary
Democratic
CLINTON80.1-0.910%
OBAMA12.60.183%
EDWARDS2.50.460%
FIELD0.10n.m.
Republican
ROMNEY1-5n.m.
GIULIANI70-9.97%
THOMPSON(F)1.2-4.8n.m.
FIELD16.110.124%
MCCAIN2.1-0.4310%
New Jersey Primary
Democratic
CLINTON80013%
OBAMA5-0.1n.m.
EDWARDS0.1-1n.m.
FIELD0.10n.m.
Republican
ROMNEY51.9200%
GIULIANI0-80n.m.
THOMPSON(F)1-4.1n.m.
MCCAIN2.1-1.9376%
Nevada Caucus
Democratic
CLINTON800.16%
OBAMA10.12.198%
EDWARDS0.1-5n.m.
FIELD0.10n.m.
Republican
ROMNEY29.11724%
GIULIANI25.2-33.8113%
THOMPSON(F)5020%
MCCAIN0.1-1.9n.m.
Pennsylvania Primary
Democratic
CLINTON70-1027%
OBAMA5-0.1n.m.
EDWARDS0-1.1n.m.
FIELD0.10n.m.
Republican
ROMNEY5.1-3192%
GIULIANI71.2-0.812%
THOMPSON(F)50100%
FIELD80n.m.
MCCAIN2.10329%
California Primary
Democratic
CLINTON75013%
OBAMA5-5n.m.
EDWARDS0.1-1n.m.
FIELD0.10n.m.
Republican
ROMNEY10-0.150%
GIULIANI6508%
THOMPSON(F)54200%
MCCAIN2-0.1350%
Michigan Primary
Democratic
CLINTON80024%
OBAMA7.5-7.5227%
EDWARDS0-2.1n.m.
FIELD00n.m.
Republican
ROMNEY0-46.5n.m.
GIULIANI26034%
THOMPSON(F)50140%
MCCAIN1.1-5n.m.

Wednesday, December 5, 2007

Being a Contrarian Can Dull Your Prospects

How much does herd mentality dictate opportunities?

These charts on home ownership recall a 1996 presentation that I did in which I suggested that, while the housing "boom" had been going a long time and builders were printing quarter after quarter of records, major worries that it was all going to "roll over" "just around the corner" were probably not right, if only because home-ownership rates could move up another leg, against the backdrops of retirement booms in Phoenix and Florida, if for no other.

They did. I didn't. Gulp! *sigh*


(h/t Calculated Risk)

By the way, I'm unconvinced that sub-prime, at the margin, has greatly increased home ownership (and this is not what the Fed Atlanta studying is saying. The biggest years for sub-prime lending were 2005 and 2006, and you can see that homeownership rates did not nudge up).

FHA: Don't raise the caps just because ...

Interesting piece on sub-prime, from the auto market experience (from NBER).

Money quote:

This kind of sensitivity of repayment to loan size is the driving force in moral hazard models of credit imperfections.
Some evidence that the proposed reforms of the FHA, specifically to raise the cap and to pretend that protection to do so exists by raising insurance premiums at the outset, is the wrong way to go.

A STYLIZED ABC's OF BEST PRACTICES FOR SUBPRIME

As best one can say, from a distance, is that sub-prime lending works best, (a), when amounts are small, (b), leverage in the loan portfolio held by the bank is kept low and, (c) the packages held are financed long-term.

All three of these good-business practices seem to have been violated.

Low doc real estate loans let the amounts lent grow. Those holding the portfolios leveraged up, maybe even as much as regular-way mortgages held. Last, a lot of brokers with portfolios and, apparently, SIVs, ended up with liquidity nightmares, because they financed a big bucket in the short-term markets.

Paulson's Four Categories - Now We Need the Numbers

What would be interesting would be to understand the relative proportions that he thinks are in each category.

How many are affording 11% mortgages?

More importantly, how many can re-finance to fixed rates?

That's a number I'd really, really like to know, because it is an indicator, possibly, of how many people got "sold" an adjustable-rate nightmare. (I'd be willing to wager that figure as high as 66% of all the categories). Refinance applications are soaring, in the current quarter, if that is any indication ...

Hank Paulson's thinking on how to analyze the problem:

While the reality is a bit more complex, in the interest of simplicity, there are four categories of subprime borrowers.

  • There are those who can afford their adjusted interest rate; these homeowners need no assistance.
  • There are also a substantial number of homeowners who haven't been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners will become renters again.
  • A third category of homeowners might choose to refinance their mortgage - putting them in a sustainable mortgage while keeping investors whole. This is the first, best option. Servicers should move quickly to assist those who can refinance.
  • And the fourth category is those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate. We are focusing on this group, determining who they are and what steps may appropriately assist them

Santi-Claus In Town

You know that Santa Claus is in town when the stock markets react positively to both good and bad news ...

Challenger and ADP say that the job market, overall, is not falling apart, despite a trickle of somewhat high-profile layoff announcements. ISM says that services part of the economy is expanding. Those two - That's good enough for Santa (remember that "recessions" are labor shedding events ...).

Holiday sales - not so hot, on an adjusted basis.

Prices ... will the run-up in costs of all kinds squeeze margins a bit?

Tuesday, December 4, 2007

The Myth of Managing Your FICO Score ...

So much more to say, so little need to:

In one of the cases cited by the subcommittee, Marjorie Hancock of Arlington, Mass., wound up with interest rates on her four Bank of America credit cards of 8 percent, 14 percent, 19 percent and 27 percent, even though her credit risk is the same for all four.

Monday, December 3, 2007

"The Institute" Reports - Just Slow U.S. Growth

The ISM, formerly the National Association of Purchasing Managers (NAPM) and now all grown-up into an Institute, report that activity is on-balance positive, but hardly zippy. (Read it yourself. That's best).

Worrisome points included a falloff in the employment index. Also, prices are rising - natural gas, plastics, - everything!

Encouraging points included an accelerating export versus import picture. Also, inventories reported to be in quite good condition.

Saturday, December 1, 2007

Social Security

Ruth Marcus has a really balanced synopsis.

I have an idea, an "income singularity year" for Social Security benefits, starting now.

Each generation gets means-tested for one year (based on some sufficiently long period of income, so that it cannot be gamed).

I wonder what the impact of that would be. (I mean apart from those who would probably immediately want 2 years and more, once they got one year...).

As for worrying about a 75-year actuarial balance ... Ruth, I'm more concerned about winning against the microbes, I think, in the meantime.

Friday, November 30, 2007

Real Rates Low

NEAR TERM OPPORTUNITY LIMITED

I may have spoken too soon. Real rates are already pretty low, only 0.25% from as low as they went in March, 2004, when Fed Funds was at 1%.

Chart 1. US Treasury 10-yr TIPs (inflation protected bonds) - last at 1.61 on Nov. 29th. [click to embiggen]
Free Image Hosting at allyoucanupload.com
src: US TreasuryDirect

PRICES OUT OF WHACK, ONE WAY OR THE OTHER

What's interesting is that the implied real rate is lower than the observed rate.

Despite the tax-advantage of muni bonds, they are trading at the same or better yields as treasuries. Without reviewing the data series, there are only a few times in history when that has been the case, I'd guess.

This suggests (a) an expected decline in inflation (CPI) to around 2.3% from the 3.5% most recent read; (b), a rise in nominal rates on bonds; or (c) some combination of the two. [update: or (d), a continued fall of real-rates on TIPs to even lower levels]

The most sensible is (a). However, if that turns out to not be true, then nominal rates are too dear, right? In fact, the CPI is not likely to fall, I don't think, that much. [Nor are real rates likely to skid so much further, without a full-blown recession.]

It's a continuation of the conundrum, in a way.

MUNICIPAL BONDS BEING OVERLOOKED?

What's a clear piece of confirm evidence that these yields are too dear is the relative price to municipal bonds, that also come with a AAA rating. Despite the tax-advantage of these bonds, they are trading at the same or better yields as treasuries. Without reviewing the data series, there are only a few times in history when that has been the case, I'd guess.

I don't know any ETFs that hold muni bonds, however... I suppose one would want to sell treasuries to buy munis.

BEST SOURCE OF U.S. FUNDING?

How good are the 5-yr TIPs as a funding source? I don't know how many of these bonds are available for borrowing (or at what price), but at 1% yield (or less, this week), it seems like the chances of a price rise would be slim...

Its Probably Time to Become a Dollar Bull

There are lots of reasons to dislike the dollar.

However, my heresy is telling me that it is probably a good time to become a dollar bull.

It's probably a little early, but early is better than late, most often...

Smalltime folk don't need a fancy futures account for dollar trading. There is an ETF! Some financial innovation actually does benefit the little guy.

No Recession, Just Slow Growth, So Far

Today, the Commerce Department estimates that personal incomes were up about 2.4%, at an annual rate. Also, spending did not trail off more than income (of course, these numbers don't tell the whole tale, but they are ... indicators).

That's about in-line with the forecast put up here for slow 2008 GDP growth (see below) and its personal consumption component. All the same, the real consumption and income figures were slower than my expectations - enough to be worrisome.

Inflation ticked up a bit.

Sounds like a good recipe for inflation-protected bonds, right, which have been going gangbusters for a couple of months now. They may have just a bit more to go.

It's going to be a rough go in the first quarter. Wall Street is going to have to get used to a slow growth economy.

But for now, Santa has a nice hat. Leading indicators are soft, but not flashing deep or harsh recession. In fact, activity levels seem high, outside residential construction, so folks may not even "feel" a slowdown, much. It's a pinch, not a slug, so far.

Naked, Financially Speaking

Morgan Stanley goes to the bench and comes up with a sales guy to help it manage risk...

Eh, it's their capital.

Meanwhile, it's still a bit of a question mark of how MS and Merrill, not big distributors of subprime, ended up with so much subprime and CDO exposure.

Was it all puts on CDOs or bonds?

Was it credit default swaps (CDS) that physically settle? If so, that's a big, bad trial for the credit derivatives market - all derivatives markets have problems when there is illiquidity in the underlying ... It's not just continuous hedging. Sometimes it is the ability to get rid of a position that you end up with through exercise.

Was it providing liquidity to clients (i.e. being nice)? It seems unlikely, but there has been a lack of conspicuously large investors - pension funds, mutual funds - who have recognized CDO losses, right?

More to be written in the saga, no doubt.

Thursday, November 29, 2007

More Problems with "Free Markets"

Two words: collective action.

Sometimes, it makes economic sense, even when a cartel is not implied.

Check out the Atlanta Mortgage Consortium, that helps banks avoid "excess" foreclosure costs while simultaneously helping them to spread the risk of continuing to lend. The consortium buys up the property at a "market price", one that may even keep the lender whole compared to a foreclosure/liquidation price. The property is then re-mortgaged, to the same or to a new lender, but the loan risk is shared among the consortium of banks.

Basically, they act like a clearing house for lender foreclosures.

What incentive do banks have to participate? Says one with first-hand experience:

Leadership, lender cooperation — not competition — can get us through this crisis. This is a challenge for the financial community and American families caught in "interest only" and high-interest loans. It is not the problem for all taxpayers.

Ugly Lenders or Successful Market Innovation

While the book on the free market and financial innovation is being written about sub-prime lending, comes a view that lenders may have pushed people during re-finance into subprime loans (or similar terms) to make money.

I suspect from anecdotal evidence that this allegation is not wholly untrue.

The notion that is evocative, that the innovation ultimately brought more or as many existing borrowers down into a new category of finance, rather than expand the set of borrowers altogether...

Do Your own Economic Forecast ...

Revisions to GDP data for third quarter suggest that you can bump up the estimate for net export growth substantially, up another $10-20 billion or so.

A draw in inventories (and declines in durables, nondurables) - a cut in production, is to be expected in a slowdown, so this confirms that with these data. I don't really have a big loss in jobs associated with that, however (apart from what is expected in construction industry) humm....

Investment, including residential investment, mostly at rates expected.


Table. NIPA 1.1.1, 1.1.2
Revisions: Revisions to percentage contribution to growth; growth, and revision to growth:

Percent change at annual rate:Chng
%Contrb
%GrwthChng
%Grwth
Gross domestic product14.91
Personal consumption expenditures-0.232.7-0.3
Durable goods-0.044-0.4
Nondurable goods-0.171.9-0.8
Services-0.022.8-0.1
Gross private domestic investment0.795.95.1
Fixed investment0.17-0.41.1
Nonresidential0.159.41.5
Structures0.0614.32
Equipment and software0.097.21.3
Residential0.02-19.70.4
Change in private inventories0.62---
Net exports of goods and services0.4414.63.6
Exports0.2918.92.7
Goods0.2125.82.8
Services0.0842.4
Imports0.164.3-0.9
Goods0.184.9-1.3
Services-0.010.90.5
Government consumption expenditures and gross investment0.023.90.2
Federal0.0170.2
National defense0.0210.10.4
Nondefense00.90
State and local0.012.10.1

Foreclosures Level Off, Reposessions Up

A least one tracker of home mortgage foreclosures says that the rate is not increasing, but leveling off. At the same time, banks are taking up the property (a.k.a. "collateral") at significant rates to re-sell it.

Foreclosure filings for October rose 2% from September and 94% from a year earlier, but foreclosure activity in general appears to have "leveled off" since peaking in August, a foreclosure-listing service said.

According to RealtyTrac Inc., default notices for October dropped nearly 9% from a year ago. "Some of the efforts on the part of homeowners, lenders and advocacy groups to find alternatives to foreclosure may be starting to have an impact," said RealtyTrac Chief Executive James J. Saccacio. He added, however, that bank repossessions during the month jumped nearly 35% -- "evidence that more homeowners who enter foreclosure are losing their homes."

RealtyTrac, Irvine, Calif., said 224,451 foreclosure filings were reported in October, compared with 219,850 in September and 115,568 a year ago. Nationally, there was one filing for every 555 households [0.18%] during the latest month as credit pressures and tumbling home values continued to hurt homeowners. By contrast, there was one filing for every 566 households in September and one for every 1,001 households in October 2006 [0.10%].


It's probably too hard to translate these default rates into specific portfolio default rates, but at least it gives a sense that it is not one in four mortgages that are in default, or something! The rising repo rate will give politicians a run.

Meanwhile, the next thing to find out is the so-called "severity" or what the banks are getting in liquidation for their collateral. That's the MOST important figure, economically, although it is not intuitive. Severities greater than 30% are ... approaching the wall, so to speak, versus where some conservative folks ration their risk.

Separately, dealJournal noted yesterday that subprime debt ticked up and is trading at 20-cents on the dollar, for ABX indexes (run by markit.com), which, from what I gather based on other reporting, are mostly the 2006 vintage debt (some say that may be the most 'vulnerable' year of mortgage originations). It's sounds crazy, but 20-cents is a lot better than zero. Something tells me that to be a vulture for this debt is going to be quite profitable ...

The original Brady debt traded that low, didn't it (I honestly don't remember), and most of those bonds turned out to be good risks to take, difficult as it always is to stomach it.

Wednesday, November 28, 2007

Expectations Market for Home Price Declines

The CME futures markets on the Case-Shiller home price indexes predict the following home price declines for these markets and for the national, composite average:

Table 1. Contracts by year-month, at last traded price.


FUTURES08Feb08May08Aug08Nov09Feb09May09Nov
Composite-2%-4%-6%-7%-8%-9%-10%
Boston-2%-5%-6%-6%-8%-9%-12%
Chicago-1%-2%-3%-4%-4%-5%-6%
Denver-1%-3%-4%-7%-8%-9%-12%
Las Vegas-3%-5%-7%-8%-10%-12%-13%
Los Angeles-2%-4%-6%-7%-8%-9%-11%
Miami-3%-6%-10%-14%-14%-16%-17%
New York-3%-5%-7%-8%-9%-11%-12%
San Diego-2%-4%-5%-6%-8%-10%-12%
San Francisco-2%-4%-6%-8%-10%-13%-15%
Washington-3%-5%-6%-8%-8%-10%-11%

These suggest that those who are worried about massive declines (20%+) in the upcoming year, due to foreclosures in their home markets or whatever, can still successfully hedge against that further decline.

Those who just want to hedge against a non-specific, generalized fall have less opportunity in the long-term contracts and would need to look toward rolling near-term contracts over.

These are not heavily traded contracts, presently, although interest may pick up.

This note is for informational purposes (commentary) only. Don't buy or sell anything just based on this or any other note here.

Welcome to Conduit Hell

Tripped Up, While Just Passing Through

Fortune continues its series on ... how banks and brokers screwed themselves in the process of passing along junk credit.

Money quote (pun intended):

None of this would have been a dire problem for Merrill if it hadn't gone from simply manufacturing CDOs and reaping fees to becoming a huge investor in the CDOs it created - getting high on its own supply, you might say.

The hellishness of "the liquidty put"
What's in the pandora's box?

Here's my stylized summary.

IN THE BEGINNING, MBS

In the old days (1980s), there was the novel creation of mortgage-backed securities (MBS), now often called residential-MBS or (RMBS) for precision. These were fancy new securities that promised to behave like tried-and-true, mostly, at higher yields. When rates rose, they didn't. Merrill Lynch took the largest ever single-day trading loss in history, at the time, in its mortgage business on its mortgage desk. Today, the RMBS market is 'well understood' and functions to the benefit of all involved. A great deal of the collateral for MBS is provided by Fannie and Freddie, who buy up "conforming mortgages", as defined by their regulator, and provide a backstop to help sell them on. This middle-man role keeps money flowing to home seekers and lowers the costs to them, when it works well.

Shortly thereafter, the collateralized-mortgage obligation (CMO) was created. These were just a re-package of the re-packaged, MBS stuff. CMOs are not securities, per se, they are conduits, or legal entities that buy assets and sell participation in those assets' returns, in one way or another.

THE EMERGENCE OF SUB-PRIME AND ALT-A

In the mid and late 1990s, Wall Street had a spin with 'sub-prime', in the form of manufactured housing lending. This was a chance to try to price low-credit risk high enough to cover the costs of it. Luckily, the amounts stayed low, because ... well, the margin for error was not large, and folks took a bath, eventually, as the eagerness to book fee revenues ... (I don't know where the market for this stands today).

In the late 1990s, the CDO was "invented", as a way to get to higher yields, again promising the same performance as tried-and-true. The "traditional" CDO, if such a thing exists, has about 80% "good stuff", 10% medium-good (maybe alt-A mortgages), and 10%, "sub-prime". Unlike MBS, the "stuff" can be most anything.

Some of the credit agencies even slapped, reportedly, "AAA" ratings on these securities (I cannot confirm this). If one pretended that sub-prime defaults were limited to, say, 10% of 10%, or 1% of the total CDO value, it would all be good, even moreso since 10% would never be hit by all geographic locations at once (and 1% was small compared to 11% annual interest rates charged, too boot). By the end of 2006, delinquencies - not defaults! - on subprime debt had climbed to the 15-20% range. By mid 2007, some portfolios had been sold at 20% discounts, suggesting, perhaps, that no one was willing to pay for the 'other stuff' given its uncertainties, even if it had likely value.

It appears that even the agencies, Freddie and Fannie, got involved in buying alt-A and subprime credits. [I will check the proportions for you when I get a chance.]

There is more.

ENTER THE CONDUIT - SKIING OFF-PISTE

If you buy up stuff and re-package it for sale, it can balloon your balance sheet and cramp your style (and growth). The "answer" is to create a legal entity to put the stuff off balance sheet. These are "SIVs", special investment vehicles, or "SPVs", for special purpose vehicles. They can also be "hedge funds", which are special legal vehicles for certain types of investors.

They have no capital requirements (that I know) and little regulation, certainly not bank regulation, directly. Some of the structures may have capital ratio requirements, by design, as may be suggested by HSBC indicating this week that it would rather put assets on its balance sheet than recapitalized because of a decline in value.

Anyone can try to set-up an SIV to get into the game. The big banks all have them, reportedly, as well as most if not all the big brokers. (Even the mortgage bond-insurance firms may have been tempted to get involved as well. So far, I don't know any insurance companies that took a spin.).

According to Fortune, you run an SIV like a Broadway show. Someone, a producer, gives upfront money (for a fee), you hired someone to direct the show (buy "stuff" AND carve it up into structured products to sell), then you sell tickets (get investors to buy the carved-up stuff). It appears that some of these SIVs run like mini-banks, in which the upfront money stays in the conduit, refinanced in the short-term commercial paper market.

Whether these SIVs, also called "CDOs", stuck to the 80/10/10 formula, no one knows for certain. There is some indication that they may have, from prior sales that came in at 20% discounts.

there is more
SOLD WITH RECOURSE - PUTS

The producers appear to have also 'sold tickets' that could be returned. "Attaching liquidity" is something that has been done a long time, as a way to enhance a bond enough to entice buyers. This is done by offering to buy-it-back (giving a put to the investor), if something adverse occurs, like a credit downgrade in the next 24 months or so, say.

According to Fortune, these return tickets appear to have been part of what happened to Merrill Lynch. Someone should have been keeping track of how many were sold ...

there is more
LIQUIDITY CRUNCH, ON RETURN

If the tickets sold were 'put' back to the SIVs, you can see the problem. Suddenly, you have to raise financing (sell new tickets) or sell assets (stop producing the show).

It appears that something of both is going on. The inter-bank markets and the commercial paper markets suggest that people are worried that these SIVs are being financed in the money-markets (short-term, ahem!). I don't know how much of that is true. Also, some of the assets appear to have made their way onto the balance sheets of some companies, say, Merrill Lynch.

It's not clear (to me), whether "stuff" was returned directly to Merill or to the SIVs (in the end, some of the "stuff" may just be contracts, rather than securities, I'd guess, but I don't know). But you can see the issue. When it comes back, it needs to be financed (or financed again)... AND marked to market.

We appear to have a variety of cases. Goldman's hedge fund took in additional capital to keep financing the assets and to avoid fire-sale. Merrill appears to have used its own balance sheet. Bear Stearns appears to have sometimes worked without providing recourse, simply liquidating its hedge funds, leaving the investors holding the bag, this summer.

there is more
MARK-TO-MARKET

Whether or not stuff stays off balance sheet, sooner or later it has to be marked-to-market and the realized losses (if any) must be recognized - in whole or in part, and over time.

There are two big problems.

Almost no one wants to buy subprime, so there is probably no traded market value. A 20%-35% haircut might estimate the losses outside of the "good stuff" inside a CDO, based on a ultimate default and recovery assumptions, that will play out over the life of the loan, but most significantly, it would seem, in the next few years. [update: the market is trading now, well below that, indicating that people are not willing, perhaps rightly so, to 'pay up' for scenarios that may not be as bad as expected.]

The second part is potentially just as large. Prices on the good stuff have fallen, not just related to a flight-to-quality and sensible repricing of risk, but also to legitimate worries about recession (loss of employment) and adverse (and stupid) loan terms (resetting interest on low-credit loans) leading to record level delinquencies and defaults. That might be 10-25% on 80%, or a 8-20% "hit", which is just as large as the credit-related hit on subprime.

there is more
SYNTHETICS

As life went along, a non-cash or derivatives market for CDOs developed AND took flight.

In this case, you don't have to take up financing (find a producer), getting your hands dirty with cash up-front.

In a synthetic CDO, you just reference the securities prices in question, like a futures contract might or like a credit default swap (CDS) might do. Oh, yeah, I think these are all off balance sheet risks, too, but I'm not 100% sure.

Derivatives markets are a good thing, but they have to be well capitalized. Many of the well developed derivatives markets trade several times the notional value of the cash markets, meaning that they can grow fast, and require adequate growth in risk capital. (see chart for growth estimates)

One can hedge the risk in regular-way credit protection on a corporate or municipal bond, say, with pretty good success. Well see how well people hedge away mortgage credit risks, including subprime risks. Also, we'll see who was on the "wrong side". So far, it seems like Goldman was ahead of the curve in using derivatives protection, but someone had to write that protection...

The overall CDO market might be $2 trillion. I could guess that synthetics might be one-third to a half of that. A 20% mark-to-market loss seems steep to me, on this, but if OAS spreads have doubled on a 20-year instrument, it might be right. That could get one to $200 billion dollars, spread out over the combination of market makers and investors, in some unknown set of proportions.

Of course, if the general level of rates falls and credit spreads tighten, too, some of that could get offset. If rates fall as part of an expectation of a growth slowdown, however, it's not at all clear that the price of credit will fall alongside. Spreads could simply widen...

Whatever the case, it is still possible to at least estimate a floor.




The emergence of synthetic deals has clearly boosted the CDO market. The market is dominated by synthetic deals, and today 75% of CDOs issued are synthetic CDOs. This marks a clear evolution in the CDO market. In fact, the two most recent products, single tranche CDOs and ABS-backed CDOs, now account for, respectively, 66% and 25% of the synthetic CDO market. The market is moving toward "on demand" credit risk, where an investor can specify a product’s risk/return and the bank originates the "raw material" (bonds, ABS, etc.) and then distorts the risk/return ratio of its portfolio and delivers a new product to its client.

The development of the synthetic CDO market on the back of the CDS market is having a tremendous impact on the credit market, reorganizing the credit value chain. The development of the credit derivatives market and especially CDOs has had a tremendous impact in the positioning of banks in the risk management value chain," says Pierron. In the medium term, regional and smaller banks will concentrate on sourcing risk (especially via loans), while brokerage houses and investment banks will focus on deal structuring. The distribution will be shared between various players, from large banks to insurance companies, he adds. - pic link

Tuesday, November 27, 2007

The Roof Over Your Head, Formerly Known as Piggy Bank

NEW HOME PRICE DATA

The Case-Shiller home price indexes came out today, for period ending September.

There is not an accelerating decline overall, but the slip did broaden in the month, as a few more cities in the composite showed a fall than had earlier (in fact, all 20 of them fell in the period for the first time, some just slightly).

NO ACCELERATION, YET

Among the major markets, New York, Boston, and Washington, their was a decline in the rate of fall. San Francisco, which has been moving down very slowly, showed a downtick. Chicago did as well, but that market did not have nearly as much a run-up as did the other majors. Last month's sharp figure for Los Angeles did not repeat.

Phoenix, which is not a large part of the overall national market, put in a pretty bad number, if there is follow-through on it. A retirement destination, this has been one of the hot markets in the past fifteen years.

I don't have the geographical patterns of mortgage delinquencies (or defaults) and sub-prime lending. The notion that foreclosures are going to greatly accelerate the home-price decline is not in the national numbers, right now.

PARTS OF THE MARKET HIT FOR DIFFERENT REASONS, SO FAR


Markets like Miami, Tampa, Los Angeles, and San Francisco, that have had the largest run-ups, might be vulnerable to forced selling (foreclosure). Other markets, in the so-called non-coastal areas, might be subject just to the general credit and economic woes of working out the exuberant lending practices of the Bush era.

Non-"Recession" Economy Selling at "Recession" Prices

Discounting a significant recession seems way overblown.

WORST CASE SCENARIO

One has to really believe that the U.S. consumer is going to not just stop spending more, but actually retrench, in order to get to negative growth for the full year next year.

Plugging in a calculation for an oil-related retrenchment and a continued, harsh, steep fall in residential construction, one gets to flatish growth (including even a significantly negative contribution from inventory investment).

On my figures, one would have to see year-to-year negative growth in (real) consumer spending in excess of 2%. Such numbers didn't occur in the last two slowdowns, even in the early 1991, when things were looking more bleak, in many ways. (PCE, personal consumption expenditures, haven't been negative since 1980, when it dropped just slightly for the whole year...).

THE WILD CARD - OIL

Oil is acting like a "financial variable", these days, divorced from supply and demand. Speculation here continues to be a significant downside risk.

WHEN WILL CALM RE-EMERGE?

Guesses: For financials, it may be when the first quarter prints without "special charges", probably as soon as 1Q08.

For the market as a whole, probably sometime in the same period, as more data comes in that the consumer is not retrenching, fast and furious.

At that time, one might guess that the value of stocks, as measured by the broad S&P500, might move from a "lower" range of, say, 1370-1460 to an "upper" range of 1460-1562 (or higher, depending ...).

REALITY CHECK

David Wyss, who has been tracking this stuff as long as anyone, these days, looks at the "wealth effect" on consumer spending and comes up with numbers not to far from my own:

Overall, we expect real consumer spending to slow to 2.2% in 2008, down from 3.0% in 2007. The saving rate will tick up to 1.5% from this year's 0.8%. Consumers aren't likely to stop, but they will tap the brakes.
Also:

We expect a total drop in existing home prices of 11% (they're already down 4.4%).
Finally:

How much housing wealth translates to consumer spending remains unclear. Even correcting for the direct effect on consumption caused by the imputation of spending and income on owner-occupied housing, estimates range from near-zero to 5% of increases in home prices will be spent each year. At the high end, the impact would be a two-percentage-point rise in the saving rate, and an equivalent slowdown in spending.
On my figures, a sharp 2% rise in the savings rate alongside a sustained oil impact would lead to negative growth ... a gradual rise, not so much.

Interesting Chart from S&P

Irrationality in the Financial Stocks?

Amidst the uncertainty, there are glimmers of rationality.

For Citibank, for instance, throw in a known amount of capital raising and a likely restructuring charge, and one can come up with a price that fits, rather tightly.

We now know that dilution due to capital raising is going to be $7.5B rather than the $6B in my estimate, or about 30-cents a share more.

We can guess at a $1.5 billion dollar "restructuring charge" in Q4, which is about 20-cents after-tax. (It's doubtful it will all be realized, I'd guess...).

Credit is more expensive, now, and this will cause a mark-to-market loss of some kind. This is really hard to estimate, because there may be offsetting amounts gains. What's more, if the price of credit is near its high, now, then some amount of these charges will reverse next year or so.

Baking all those in, one comes down to a book value of $21.12, which might equate to a stock price of $29.57, fairly conservatively put. Citibank closed at $29.76 yesterday ...