I suggest everyone visit http://www.storyofstuff.com/ and watch. This is the mess we have gotten ourselves in as a society and we need to come up with solutions for a more sustainable way of life for our financial well being, our health, and for our environment.
Friday, January 18, 2008
Thursday, January 17, 2008
Wealthy People Can Be Stupid Too
This is a perfect story illustrating why the housing market problems are not a "subprime" problem as is commonly argued in the media. This is a poor interpretation of the problems that are occuring. The correct thesis is that homes were overvalued and lenders were far too willing to lend way above traditional multiples of incomes or property values. This is, unfortunately coming soon to a neighbourhood near you. This story rings so true of the Vancouver area - a facade of wealth and a chronic over-extension of family and personal finances.
From Reuters (emphasis mine):
By Nick Carey HINSDALE, Illinois (Reuters) - A house in this wealthy Chicago suburb is far beyond the reach of most Americans. Unfortunately, Hinsdale may also now be too expensive for some of the people who already live here.
"There is a section of the population here that over-extended themselves to buy here and then keep up the facade of wealth," said Sharon Sodikoff, a broker associate at local real estate agency Prudential Homelife Realty. " In the next year or so they'll be forced out in dribs and drabs."
With a picturesque little downtown area and large, expensive houses -- according to the Headrick-Wagner Consulting Group, the average home sale price here in the 12 months to September 30, 2007, was around $1.15 million -- Hinsdale seems a world away from the housing slowdown that may have brought the U.S. economy to the brink of a recession.
But even here, far from the housing crisis' epicenter, high earners with good credit may be heading for trouble as their adjustable rate mortgages (ARMs) adjust beyond their means, local real estate agents and others say. In a normal housing market they'd be able to sell, but now they are stuck.
"The next wave of problems will come from prime borrowers who bought too much house or borrowed too much against it," said Michael van Zalingen, director of home ownership services at Neighborhood Housing Services of Chicago. A "prime" borrower is one with good credit.
Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans.
Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans.
"For those who utilized home equity loans for five to ten years to finance their lifestyle, the chickens are coming home to roost," said Chicago-based real estate agent Marki Lemons.
There are also signs some lenders are warily eyeing "prime" borrowers. Tom Kelly, spokesman for Chase Home Lending, a unit of JPMorgan Chase & Co, said the company raised its reserves for possible home equity loan loss for subprime and prime borrowers by $635 million in the second and third quarters last year.
"The concern is people who have borrowed a large percentage of the equity (in their homes)," Kelly said. "Now the value of their homes is falling and they can't refinance."
"Some just stop paying and walk away," he added.
"Some just stop paying and walk away," he added.
SHORT SALE
Getting into property during the boom was easy, with mortgages freely available for no money down.
Then came the subprime crisis and the credit crunch, slowing the market, pushing prices down and home inventories up. In Hinsdale, for instance, the supply of homes on the market rose to more than 17 months in early October from less than 6 months in January 2006. While it's apparently a buyers' market, Lawrence Yun, chief economist at trade group the National Association of REALTORS, says high-end borrowers are put off by the high interest rates now applied to so-called "jumbo" mortgages, those for $417,000 or more.
"Potential buyers say 'no way am I buying at that price,'" Yun said. "If people can't enter the market, this slows everything down and puts pressure on foreclosures."
If some borrowers can't get into the market, there are others who can't sell to get out. Home owners who bought recently with no money down are the ones most likely to abandon a property when they fall behind on the mortgage.
"I've seen people who bought less than a year ago and have no equity in their homes simply walking away with no regard for the consequences," said Genie Birch, a real estate agent at Chicago-based Koenig & Strey GMAC who covers the city's wealthier districts.
Real estate agents say speculative investors who bought to make a profit are also walking away as the rents they charge fall behind the mortgage payments as their adjustable-rate mortgages readjust.
The home owners who find it harder to walk away are those who took out large home equity loans before prices started falling and now owe far more than their home is worth.
"It's difficult for home owners in that situation to sell as they'll still be left owing money," said Dave Hanna, managing partner of Prudential Preferred CRE, which owns Prudential Homelife Realty in Hindsale.
Unlike subprime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender, rather than end up in foreclosure. The alternative solution available to them is to opt for a short sale.
Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated, but is not stuck with a foreclosed property. The borrower's credit rating is damaged, but not as badly as if they had lost the home.
"You won't see many foreclosed homes here because that would involve public embarrassment," Prudential Homelife Realty's Sodikoff said. "But they will call their realtor and get them to quietly broker a deal to get out of their homes."
Tuesday, January 15, 2008
RBC Economics Report
No time to do a post today so here is a RBC Economics Report that outlines some of the reasons for today's market action. These bad numbers were in addition to the massive asset writedowns at Citigroup and CIBC. Interesting times indeed.
U.S. retail sales growth dropped 0.4% in December
Rishi Sondhi, Economist
U.S. retail sales growth dropped 0.4% in December, a much weaker result than the market’s expectation of flat sales. However, the sales decline was following a very robust, although downwardly revised, 1% gain in November. Ex-autos, sales were down 0.4%, again weaker than expectations.
The drop in retail sales in December was, in part, attributable to nominal sales at gasoline service stations dropping 1.7%. However, this partly reflected a decline in gasoline prices. Excluding this component along with the volatile motor vehicle and building material components, sales were actually up 0.2%, building on November’s downwardly revised 0.8% gain (previously reported at 1.3%).
The portion of retail sales that feeds into quarterly spending — retail sales ex autos, building materials and garden equipment, and supply stores — fell a slight 0.1% after surging 1.6% in November. During the November-December holiday period, sales were up 0.3% on average, compared to 0.7% in 2006 and 0.4% in 2005.
The U.S. retail sales figures are consistent with a drop in real spending in December, which we currently estimate to be -0.1%. Despite the likely decline, November’s real spending surge makes it highly likely that spending will come in above 2.5% in the fourth quarter. Slower spending in December does suggest somewhat softer spending momentum heading into the first quarter of 2008. We expect consumer spending growth to weaken to a 1.5% annualized pace during the first three months of the year.
The softer first-quarter 2008 momentum implied by the weaker-than-expected retail sales data will likely keep the Fed aggressive with their policy actions in order to mitigate the downside risks to growth. We are expecting that the Fed will opt for 50 basis points of cuts at their January 29-30 policy meeting.
Modest decline in U.S. producer prices; core prices rise
Paul Ferley, Assistant Chief Economist
The December producer price index fell 0.1%, a substantial slowing from the 3.2% monthly increase in November. The earlier strong increases are keeping the year-over-year rate high at 6.3%, although this is down from the 7.2% recorded in the previous month. On a core, or ex food and energy, basis, December prices were up 0.2% and 2.0% during the past year. The monthly increase was down from 0.4% in November, although the year-over-year rate was unchanged from the previous month.
The moderation in the overall monthly increase was largely a reflection of the 1.9% fall in energy prices in December after surging 14.1% in November. The moderation was tempered by a 1.3% rise in food prices after recording no change in the previous month. Upward pressure was evident in a number of food components, including fresh vegetables, beef and veal, and processed fruit and vegetables.
The moderation in core prices largely reflected a 0.9% drop in passenger cars after a 0.6% jump in November. Car companies are likely cutting prices to help move out the remnants of the old car lines as the 2008 models are rolled into the showrooms.
Today’s report indicates that earlier energy price increases are keeping the annual increase in producer prices high at 6.3%. The year-over-year increase in core prices is rising a much more moderate 2%, although this is likely at the upper end of what is deemed as acceptable by the Fed. As well, Fed Chairman Bernanke has gone to great lengths to emphasize that the Fed had not taken its eye off the risk of higher energy prices putting even greater upward pressure on the core measure. However, despite these risks, the near-term focus of the central bank is to ensure that the economic expansion continues in the face of the ongoing financial market volatility and attendant credit tightening. Thus, today’s report does not alter our view that Fed funds will be lowered a further 100 basis points during the first half of this year, with the first installment, a 50-basis point cut, coming at the conclusion of the next FOMC meeting in January 29-30.
U.S. retail sales growth dropped 0.4% in December
Rishi Sondhi, Economist
U.S. retail sales growth dropped 0.4% in December, a much weaker result than the market’s expectation of flat sales. However, the sales decline was following a very robust, although downwardly revised, 1% gain in November. Ex-autos, sales were down 0.4%, again weaker than expectations.
The drop in retail sales in December was, in part, attributable to nominal sales at gasoline service stations dropping 1.7%. However, this partly reflected a decline in gasoline prices. Excluding this component along with the volatile motor vehicle and building material components, sales were actually up 0.2%, building on November’s downwardly revised 0.8% gain (previously reported at 1.3%).
The portion of retail sales that feeds into quarterly spending — retail sales ex autos, building materials and garden equipment, and supply stores — fell a slight 0.1% after surging 1.6% in November. During the November-December holiday period, sales were up 0.3% on average, compared to 0.7% in 2006 and 0.4% in 2005.
The U.S. retail sales figures are consistent with a drop in real spending in December, which we currently estimate to be -0.1%. Despite the likely decline, November’s real spending surge makes it highly likely that spending will come in above 2.5% in the fourth quarter. Slower spending in December does suggest somewhat softer spending momentum heading into the first quarter of 2008. We expect consumer spending growth to weaken to a 1.5% annualized pace during the first three months of the year.
The softer first-quarter 2008 momentum implied by the weaker-than-expected retail sales data will likely keep the Fed aggressive with their policy actions in order to mitigate the downside risks to growth. We are expecting that the Fed will opt for 50 basis points of cuts at their January 29-30 policy meeting.
Modest decline in U.S. producer prices; core prices rise
Paul Ferley, Assistant Chief Economist
The December producer price index fell 0.1%, a substantial slowing from the 3.2% monthly increase in November. The earlier strong increases are keeping the year-over-year rate high at 6.3%, although this is down from the 7.2% recorded in the previous month. On a core, or ex food and energy, basis, December prices were up 0.2% and 2.0% during the past year. The monthly increase was down from 0.4% in November, although the year-over-year rate was unchanged from the previous month.
The moderation in the overall monthly increase was largely a reflection of the 1.9% fall in energy prices in December after surging 14.1% in November. The moderation was tempered by a 1.3% rise in food prices after recording no change in the previous month. Upward pressure was evident in a number of food components, including fresh vegetables, beef and veal, and processed fruit and vegetables.
The moderation in core prices largely reflected a 0.9% drop in passenger cars after a 0.6% jump in November. Car companies are likely cutting prices to help move out the remnants of the old car lines as the 2008 models are rolled into the showrooms.
Today’s report indicates that earlier energy price increases are keeping the annual increase in producer prices high at 6.3%. The year-over-year increase in core prices is rising a much more moderate 2%, although this is likely at the upper end of what is deemed as acceptable by the Fed. As well, Fed Chairman Bernanke has gone to great lengths to emphasize that the Fed had not taken its eye off the risk of higher energy prices putting even greater upward pressure on the core measure. However, despite these risks, the near-term focus of the central bank is to ensure that the economic expansion continues in the face of the ongoing financial market volatility and attendant credit tightening. Thus, today’s report does not alter our view that Fed funds will be lowered a further 100 basis points during the first half of this year, with the first installment, a 50-basis point cut, coming at the conclusion of the next FOMC meeting in January 29-30.
Friday, January 11, 2008
U.S. grains explode, raise inflation fears
By K.T. Arasu
CHICAGO, Jan 11 (Reuters) - U.S. grains exploded on Friday, with bullish government data helping corn, soybeans and wheat soar and build on their impressive gains in 2007 while raising concerns over food price inflation that has been edging up.
The catalyst for the rally was a slew of reports from the U.S. Agriculture Department on crop production and stocks in the United States and across the globe -- keenly awaited data that had a few surprises in store for traders.
"What a report today," Rich Feltes, senior vice president of MF Global said. "Corn stocks tops the list of surprises. Corn could quite easily be limit-up today," he said on a CME Group-hosted panel discussion of the reports more than an hour before the Chicago Board of Trade opened for business.
Corn futures did open 20 cents per bushel higher, the most the market can move either way on a day, and ended that way.
Soybeans and wheat futures also rose by the daily trading limit of 50 cents and 30 cents a bushel, respectively.
"It's like a perfect storm," said analyst Dax Wedemeyer of U.S. Commodities, based in West Des Moines, Iowa.
He said high prices for corn, however, along with those for wheat and soybeans, could translate into further increases in the price of food products for consumers.
"For the buyer, obviously there will be economic concerns because before too long this will cause higher prices for food. We are already seeing this happen," he added.
MF Global's Feltes said the USDA needs to "choke off ethanol usage in the country," adding that the high price of corn, fueled in part by demand from the renewable fuel sector, was hurting livestock operations that depend on corn for feedstock.
He said the livestock sector was going "deeper into the red" because of the high cost of corn, which gained 14 percent in value last year and hit 11-year highs this year.
The U.S. Agriculture Department on Friday forecast U.S. surplus corn stockpiles at 1.438 billion bushels at the end of the 2007/08 marketing year on Aug. 31.
The tally is down from the USDA's December estimate of 1.797 billion and compared with trade estimates for 1.709 billion. The USDA pegged soybean ending stocks at 175 million bushels, down from December's 185 million and compared with trade estimates for 172 million.
The USDA forecast wheat ending stocks in the 2007/08 season that ends May 31 at 292 million bushels, up from its December estimate of 280 million bushels and compared with 271 million estimated by traders and analysts.
The USDA reported 2008 U.S. winter wheat seedings at 46.610 million acres, up 4 percent from 2007, but below the average trade estimate of 48.6 million.
Feltes said grain and oilseed markets are going to be very sensitive to developments in crop weather in South America, where Brazil and Argentina are key producers of soybeans, corn and wheat.
He said CBOT futures posted gains in Asian trading hours on Friday "just on a turn in the Argentine weather to a drier tone."
Dan Basse, president of research firm AgResource Company, told the panel that the reports would put pressure on the USDA to move land out of the Conservation Reserve Program, where farmers are paid to idle farm land for environmental reasons.
CBOT March corn rose the 20-cent limit to $4.95 a bushel, with the May crossing the $5 mark. March wheat rose 26-3/4 cents to $9.09-1/4 while May rose the 30-cent trading limit to $9.22-1/2.
March soybeans ended 42 cents higher at $12.86, while May ended 38-1/2 cents higher at $12.98-3/4 after rising the 50-cent limit. (Reporting by K.T. Arasu, editing by Matthew Lewis)
CHICAGO, Jan 11 (Reuters) - U.S. grains exploded on Friday, with bullish government data helping corn, soybeans and wheat soar and build on their impressive gains in 2007 while raising concerns over food price inflation that has been edging up.
The catalyst for the rally was a slew of reports from the U.S. Agriculture Department on crop production and stocks in the United States and across the globe -- keenly awaited data that had a few surprises in store for traders.
"What a report today," Rich Feltes, senior vice president of MF Global said. "Corn stocks tops the list of surprises. Corn could quite easily be limit-up today," he said on a CME Group-hosted panel discussion of the reports more than an hour before the Chicago Board of Trade opened for business.
Corn futures did open 20 cents per bushel higher, the most the market can move either way on a day, and ended that way.
Soybeans and wheat futures also rose by the daily trading limit of 50 cents and 30 cents a bushel, respectively.
"It's like a perfect storm," said analyst Dax Wedemeyer of U.S. Commodities, based in West Des Moines, Iowa.
He said high prices for corn, however, along with those for wheat and soybeans, could translate into further increases in the price of food products for consumers.
"For the buyer, obviously there will be economic concerns because before too long this will cause higher prices for food. We are already seeing this happen," he added.
MF Global's Feltes said the USDA needs to "choke off ethanol usage in the country," adding that the high price of corn, fueled in part by demand from the renewable fuel sector, was hurting livestock operations that depend on corn for feedstock.
He said the livestock sector was going "deeper into the red" because of the high cost of corn, which gained 14 percent in value last year and hit 11-year highs this year.
The U.S. Agriculture Department on Friday forecast U.S. surplus corn stockpiles at 1.438 billion bushels at the end of the 2007/08 marketing year on Aug. 31.
The tally is down from the USDA's December estimate of 1.797 billion and compared with trade estimates for 1.709 billion. The USDA pegged soybean ending stocks at 175 million bushels, down from December's 185 million and compared with trade estimates for 172 million.
The USDA forecast wheat ending stocks in the 2007/08 season that ends May 31 at 292 million bushels, up from its December estimate of 280 million bushels and compared with 271 million estimated by traders and analysts.
The USDA reported 2008 U.S. winter wheat seedings at 46.610 million acres, up 4 percent from 2007, but below the average trade estimate of 48.6 million.
Feltes said grain and oilseed markets are going to be very sensitive to developments in crop weather in South America, where Brazil and Argentina are key producers of soybeans, corn and wheat.
He said CBOT futures posted gains in Asian trading hours on Friday "just on a turn in the Argentine weather to a drier tone."
Dan Basse, president of research firm AgResource Company, told the panel that the reports would put pressure on the USDA to move land out of the Conservation Reserve Program, where farmers are paid to idle farm land for environmental reasons.
CBOT March corn rose the 20-cent limit to $4.95 a bushel, with the May crossing the $5 mark. March wheat rose 26-3/4 cents to $9.09-1/4 while May rose the 30-cent trading limit to $9.22-1/2.
March soybeans ended 42 cents higher at $12.86, while May ended 38-1/2 cents higher at $12.98-3/4 after rising the 50-cent limit. (Reporting by K.T. Arasu, editing by Matthew Lewis)
Thursday, January 10, 2008
Credit Cards in Canada
Credit card use in Canada is a prolific and a very profitable business for financial institutions. At the end of 2006 there were over 60 Million Visas and MasterCards in the pockets of 30 million Canadians. There were over 26 Million active Visa and MasterCard accounts. So, irrespective of American Express, Diner's Club, and department store cards, every man, woman, and child in Canada has 2 cards each.
What do we do with all of this available credit? We spend, a lot. Visa and MasterCard transacted over $214 Billion dollars worth of business in Canada in 2006 and were able to charge over $29 Billion dollars of interest and fees on the 26 Million active accounts.
Over the past 10 years, the number of active credit card accounts has doubled, credit card transaction volume has tripled and the profit from these transactions has quadrupled for the card issuers. Credit cards have been a high growth business to be sure.
Canadian are diligent about paying their credit card bills too. The delinquency rate on credit card balances is low at less than 1% and has remained quite low for at least 15 years. A seemingly low risk business with very large profit margins. I wonder what the future has in store.
How do you feel about the large profits being generated by the credit card companies? How do you use your credit cards? Merchant fees can sometimes be high and I often wonder how much that affects the price of the goods we buy.
My wife and I use our Visa card for nearly every purchase we make because we get cash back and don't have to carry cash or pay any banking fees for using a debit card. We also pay off our balance every month and haven't paid a cent in interest or fees since having these cards. I know that isn't necessarily typical among the general population but is likely fairly representative of the readership of this blog!
What do we do with all of this available credit? We spend, a lot. Visa and MasterCard transacted over $214 Billion dollars worth of business in Canada in 2006 and were able to charge over $29 Billion dollars of interest and fees on the 26 Million active accounts.
Over the past 10 years, the number of active credit card accounts has doubled, credit card transaction volume has tripled and the profit from these transactions has quadrupled for the card issuers. Credit cards have been a high growth business to be sure.
Canadian are diligent about paying their credit card bills too. The delinquency rate on credit card balances is low at less than 1% and has remained quite low for at least 15 years. A seemingly low risk business with very large profit margins. I wonder what the future has in store.
How do you feel about the large profits being generated by the credit card companies? How do you use your credit cards? Merchant fees can sometimes be high and I often wonder how much that affects the price of the goods we buy.
My wife and I use our Visa card for nearly every purchase we make because we get cash back and don't have to carry cash or pay any banking fees for using a debit card. We also pay off our balance every month and haven't paid a cent in interest or fees since having these cards. I know that isn't necessarily typical among the general population but is likely fairly representative of the readership of this blog!
Subscribe to:
Posts (Atom)