Tuesday, August 25, 2009
New Subscribe Features
I have added new subscribe features to the website. The subscribe feature will notify you of updates when I post. You have two options: to subscribe in a reader, or subscribe by email. If you subscribe in a reader you can view updates in a reader of your choice, and it seems to be quicker than the email option. If you subscribe by email it is much slower, I receive emails about 10 - 12 hours after the post is published.
Monday, August 24, 2009
Credit Derivatives Still Forcing Banks to FDIC Takeover
A flavor of a credit derivative is a pool of mortgages that are packaged up into securities called Mortgage Backed Securities (MBS). No one knows just how large the MBS market is in total, but according to the Bank of International Settlements the total value of the credit derivative market is approximately $500 trillion. Warren Buffett said it the best when he stated back in 2002 that "derivatives are financial weapons of mass destruction". These financial weapons almost brought down the entire financial system in the US back in September/October 2008, and they are still doing damage today.
Here we are about a year later, how is the financial sector doing? Associated Press noted that as of August 21, 2009; "81 institutions have failed, which is the most since 1992 at the height of the savings-and-loan crisis". The Guaranty Bank with about $10 billion in assets failed this past weekend, which is the 10th largest financial institution to fail in US history. Wall Street Journal noted that, "Guaranty's woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation's worst lenders". Next question is what is the scope of this problem...
According to the FDIC, there are about 9,400 banks in the US. About 15% of these banks are involved to some degree with MBSes. In addition, banks have to deal with their losses in the commercial real estate market, which I outlined in the Commercial Real Estate Conditions article. Remember when the government performed financial institution stress tests earlier this year? There was much controversy on how that was done, and the results were largely skewed. Shortly thereafter, the Weiss Research Firm did their own more fair and much less criticized stress tests. Out of the nineteen banks stress tested, "seven institutions -- JPMorgan Chase & Co., Citigroup, Wells Fargo & Co., Goldman Sachs Group, GMAC LLC, SunTrust Banks, Inc., and Fifth Third Bancorp are at risk of failure". Let's see how the continuing domino effect of bank failures plays out later this year and into next.
Here we are about a year later, how is the financial sector doing? Associated Press noted that as of August 21, 2009; "81 institutions have failed, which is the most since 1992 at the height of the savings-and-loan crisis". The Guaranty Bank with about $10 billion in assets failed this past weekend, which is the 10th largest financial institution to fail in US history. Wall Street Journal noted that, "Guaranty's woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation's worst lenders". Next question is what is the scope of this problem...
According to the FDIC, there are about 9,400 banks in the US. About 15% of these banks are involved to some degree with MBSes. In addition, banks have to deal with their losses in the commercial real estate market, which I outlined in the Commercial Real Estate Conditions article. Remember when the government performed financial institution stress tests earlier this year? There was much controversy on how that was done, and the results were largely skewed. Shortly thereafter, the Weiss Research Firm did their own more fair and much less criticized stress tests. Out of the nineteen banks stress tested, "seven institutions -- JPMorgan Chase & Co., Citigroup, Wells Fargo & Co., Goldman Sachs Group, GMAC LLC, SunTrust Banks, Inc., and Fifth Third Bancorp are at risk of failure". Let's see how the continuing domino effect of bank failures plays out later this year and into next.
Monday, August 10, 2009
State of The Job Market and The Consequences
The most recent unemployment number is 9.4% as of the end of July 2009 despite a ~250k job loss. This is an improvement over the previous month's unemployment number of 9.5%, how can this be? The unemployment rate is determined by dividing the number of unemployed by the number of people in the labor force. The only way the unemployment number can contract is by shrinking the labor force, and that is exactly what the Bureau of Labor Statistics' unemployment number reveals. One last note on unemployment is that people who are unemployed are looking for work for a much longer period of time. According to EconomPic, 50% of the people whom are unemployed will be searching for work an average of approximately 15 - 27 weeks. This is certainly not good news for the various States' unemployment insurance programs, and it could not be at a more difficult time for most States.
The past 18 months or so have been tough on the job market, and it is no surprise that the amount of people on food stamps has broken a record. In October 2008, there were approximately 31 million Americans on food stamps. Currently, 34 million Americans are on food stamps, and the number is rising. About one in nine Americans are using food stamps.
Consumer spending accounts for about 70% of the United States economy. Is it any surprise that consumer spending has fallen the most it has in almost 30 years? According to Bloomberg, purchases slid 2 percent since the peak at the end of 2007 -- the most since a 2.4 percent decline in the 1980 recession. Not many people in our country have discretionary spending funds, so how easy is it to get some credit nowadays? Banks are maintaining their strict lending policies, and most people are not taking advantage of HELOC. According to the Federal Reserve, consumer credit (covers most common forms of credit like home loans, college loans, credit cards, etc.) is contracting at a 5% annual rate. Financial institutions are still hoarding all the bailout monies to improve their damaged balance sheets. In this country, we have to get to a point where the bailout money is enough for these financial institutions, and they can start lending again.
The past 18 months or so have been tough on the job market, and it is no surprise that the amount of people on food stamps has broken a record. In October 2008, there were approximately 31 million Americans on food stamps. Currently, 34 million Americans are on food stamps, and the number is rising. About one in nine Americans are using food stamps.
Consumer spending accounts for about 70% of the United States economy. Is it any surprise that consumer spending has fallen the most it has in almost 30 years? According to Bloomberg, purchases slid 2 percent since the peak at the end of 2007 -- the most since a 2.4 percent decline in the 1980 recession. Not many people in our country have discretionary spending funds, so how easy is it to get some credit nowadays? Banks are maintaining their strict lending policies, and most people are not taking advantage of HELOC. According to the Federal Reserve, consumer credit (covers most common forms of credit like home loans, college loans, credit cards, etc.) is contracting at a 5% annual rate. Financial institutions are still hoarding all the bailout monies to improve their damaged balance sheets. In this country, we have to get to a point where the bailout money is enough for these financial institutions, and they can start lending again.
Monday, August 3, 2009
Commercial Real Estate Conditions
According to the Fed, the commercial real estate (CRE) market size is $6.5 trillion, versus the residential market size at about $10 trillion. Although the size of the CRE market is smaller than the residential market in property value, this does not lessen the impact on our economy as the market becomes flooded with empty CRE space that cannot be sold. Take a look around your local community, and see all the lease signs up for businesses that could not make it through this depression.
The CRE impact from Wall Street to Main Street. Morgan & Stanley lost $1.2 billion. Regions Financial lost $912 million. There are many more losses, too many to mention but none larger than these. Take a look at the financial stocks, and see how many financial institutions blame their losses on the collapsing CRE market.
CRE property values are down by almost 50% since the 2007 peak. Too much supply and not enough demand. Good news is that we are bound to hit a bottom in the CRE market soon!
The CRE impact from Wall Street to Main Street. Morgan & Stanley lost $1.2 billion. Regions Financial lost $912 million. There are many more losses, too many to mention but none larger than these. Take a look at the financial stocks, and see how many financial institutions blame their losses on the collapsing CRE market.
CRE property values are down by almost 50% since the 2007 peak. Too much supply and not enough demand. Good news is that we are bound to hit a bottom in the CRE market soon!
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