Nouriel Roubini Break Up

Nouriel Roubini Professor of Economics at New York University's Stern School of Business, breaks it up for us as to how ugly it is out there.

1. Initial claims for unemployment benefits now at their recession level signaling the beginning of a serious slack in the labor market.
2. Durable goods order falling – excluding transportation – for 4 months in a row; and non-defense capital goods orders and shipment falling, signaling that non-residential spending will show negative growth in Q4.
   
3. Consumer confidence still plunging close to recession levels. Polls showing that a majority of Americans expect a recession in the next 12 months.
4. Oil prices in the $90 to 100 range putting a dent to consumer pockets.
5. Retail sales falling in real terms during the holiday seasons. With consumption spending being over 70% of GDP a saving-less and debt burdened consumer that is buffeted by several shocks - falling home values, falling home equity withdrawal, rising debt servicing ratios with ARM resets, rising debt ratios, high oil prices, plunging consumer confidence, slack in the labor market - decided to throw in the towel in December and cut spending in real terms, for the first time since 2002.
6. The worst housing recession since the Great Depression getting worse and uglier with starts, permits, sales, prices, mortgage applications all sharply down and falling more; the only thing going up in housing is defaults, foreclosures and delinquencies.
7. Non-residential commercial real estate in serious trouble as a series of press reports and data suggest.
8. Forward looking indicators of economic activity signaling weakness ahead and manufacturing ISM likely to fall below 50.
9. Corporate earnings falling 8.5% (y-o-y) in Q3 and expected to fall more in Q4 and ahead.
10. Interbank spreads (Libor vs. policy rates, TED spreads, BOR/OIS spreads, etc.) still at very elevated levels in spite of massive central bank injections and policy rate easing by Fed, BoE and BoC.
11. Bond yields curve and credit spreads pricing recession ahead.
12. Credit markets are in turmoil.
1. Unraveling of the $350 billion SIVs and collapse of the Super-Siv scheme forcing banks to bring back on balance sheet SIVs assets, thus absorbing significant capital and liquidity and thus exacerbating the liquidity and credit crunch.
2. Signs of sharply increasing default rates on credit cards, auto loans and student loans leading the spreading of the credit crunch from mortgages to overall consumer credit. Banks and financial institutions have only recognized a small fraction of the total losses.
3. Monoliner bond insurance firms all under review for downgrade and one already downgraded to C and on the verge of bankruptcy. Risk of hundreds of billions of losses for the underlying securities and issuers of insured bonds.
4. Losses and writedowns by financial institutions that will increase as the crisis moves from subprime to near prime, prime, credit cards, auto loans, student loans, commercial real estate loans, leveraged loans, losses on ABS instruments, corporate loans.
   
5. Pressures, losses and runs on non-bank financial institutions, (hedge funds, money market funds, state funds, investment banks, SIVs and conduits) that borrowed short and illiquid and lent long and illiquid that do not have direct or indirect access to the central banks’ lender of last resort support.
13. US dollar falling and most of the financing of the still massive US current account deficit coming from central banks and SWFs, not private sector investors.
14. Geostrategic risks rising (being the assassination of Bhutto; unstable petro-states; high energy insecurity; political and policy uncertainty in the US as 2008 will be an election year).

All the above points make the possibility of recession much more likely.

Is This The Bottom For Housing Stocks ?

The housing market is definitely in deep recession. Every now and then pumpers try to convince retail investors that housing has bottomed, and this is the time to start buying housing stocks. CNN Money covers an article stating how experts completely got housing wrong. Another interesting article about the bottom can be found here.

The best way to come to a conclusion is to go over some facts.

1. Today sales of new homes plummeting 9% month to month to their lowest level in more than 12 years to a seasonally adjusted annual sales pace of 647,000. This slump was worse than analysts expected.
2. Over the last 12 months, new-home sales nationwide have tumbled by 34.4%, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.
3. The median sales price of a new home dipped to $239,100 in November. That is 0.4% lower than a year ago.
4. Would-be home buyers have found it more difficult to secure financing, especially for "jumbo" mortgages. The tighter credit situation is deepening the housing slump. A lot of borrowers are being disqualified for loans.
5. Mortgage application volume dropped 7.6%, despite a drop in interest rates.
6. Unsold homes have piled up, which will force builders to cut back even more on construction and give deeper discounts to lure prospective buyers.
7. Foreclosures have soared to record highs and probably will keep rising.
8. The current inventory will take minimum 18 months to be consumed.
   

Knowing these facts, i truly believe housing stocks have not bottomed. Even if I am wrong, it would atleast take a year or two before the home builders can show positive earnings. Once the house prices stablize, it would stay flat for a while before it can pick up. That means we wont see any growth from housing stocks for a while. So why then indulge yourself into buying housing stocks thinking it is the bottom ?

Recommendation: Do not believe the speculators and pumpers/dumpers to tell you about picking housing stocks. Go over the facts and either stay away or stay short.

Disclosure: Short bunch of housing stocks.

Drawing Attention: A Weak Dollar

A weak dollar could draw more attention in the coming year.

The dollar's slide against other major currencies in recent years has helped drive up prices for energy and food and in turn contributed to the economic hardship some consumers face. A further drop in the dollar in 2008 could spell more trouble.

Dave Minucci who works at JPMorgan Chase says a recent home heating bill was $120 higher than at the same time last year due to higher energy prices and a weaker dollar. He sees what many Americans may not realize: With commodities from oil to natural gas to grain to meat priced in dollars and becoming more expensive as the greenback falls, consumers have to take more out of their wallets to simply buy the same amount of goods. And a lower dollar can also raise the cost of imported goods.

The dollar has fallen because of concerns among investors worldwide about the U.S. economy, especially since a cascade of home mortgages has soured in the past year. And the dollar's slide itself has further eroded confidence among some investors who question whether currencies like the euro will be better able to hold their value in the coming years.

Overall inflation is running at 5.6%, largely due to sharply higher energy costs as oil approached $100 a barrel. But the costs of food, clothes and medical care are have also increased.

Minucci thinks people are too quick to blow off concerns about a weak dollar as irrelevant to their daily lives. But considering the numbers can be startling. The dollar has fallen 11% against the euro since the start of 2007 and 24% against the 13-nation currency since the beginning of 2006.

Few Negatives

• Since the start of 2007, milk prices are up 23%, while the cost of a dozen eggs has risen more than 40%.
• Energy and commodity prices become expensive. Imports become that much more expensive.
  
• US Treasuries become less attractive.
  
• Traveling abroad might not be as appealing for many American tourists either.
• Investors worldwide have to sort out concerns about the U.S. housing market as well as get a better sense of how many now shaky mortgages will go bad and hurt bank's finances before they'll be eager to snap up the dollar.
  

Few Positives

• Exports have risen as goods made in America are suddenly cheaper in many places outside the country. Plus, with stronger foreign currencies, both investors and shoppers from outside the U.S. see "sale" signs across much of America -- on everything from sweaters and iPods to businesses and real estate.
• Foreigners are coming here and buying retail items such as clothes and jewelry and technology.
• Companies with international presence see their earnings boost.
  

Recommendation: Go long on companies with strong international presence, emerging market funds, commodity sector and energy sector.

Consumer Spending Up, But Is It Good Or Bad

Consumer spending is closely watched because it accounts for two-thirds of total economic activity. Consumers put aside worries about slumping home sales and soaring gasoline prices and headed to the malls in November, pushing spending up by the largest amount in 3 1/2 years. Consumer spending surged by 1.1% last month, nearly triple the October gain. (That in my opinion is a bogus comparison. Obviously with holiday season November sales will be better than October)

The gain reflected various promotional efforts by retailers such as heavy discounting and longer store hours at the start of the holiday shopping season. (That means smaller profits for retailers. More the reason to stay away from retail stocks.)

Incomes were also up last month, rising by 0.4%, double the October increase but slightly below the advance that had been expected. (Income rising is a good thing. Finally something to cheer about.)

An inflation gauge tied to spending showed a 0.6% increase in November, the biggest jump in more than two years, reflecting last month's big surge in gasoline prices. (There you go. With inflation taken into account it looks a different story now)

Excluding energy and food, prices were up 0.2%. Core inflation is up 2.2% over the past 12 months, above the upper range of the Federal Reserve's comfort zone of 1 to 2%. (Above Fed's comfort zone, could it mean less chance of a rate cut ??)

The big jump in spending came at a critical time for retailers -- the start of the all-important holiday shopping season. But there have been more recent signs that sales slowed in December. (Good news or Bad news ??)

With spending rising at a faster rate than savings, the nation's savings rate dipped into negative territory in November at 0.5%. That meant that households spent all of their incomes and either dipped into savings or borrowed to finance the higher level of spending last month. (What is wrong with this country. Beats me)

Conclusion: Many economists believe that overall economic growth will be at a rate of 1% in the current quarter, as the country struggles with the fallout from the housing downturn and a spreading credit crisis that has made bank loans harder to get for individuals and businesses. While the risks of a recession have risen, the Federal Reserve is fighting to avert a full-blown downturn by cutting interest rates. It has not been as aggressive as financial markets want, however, because of Fed worries about inflation pressures. (Feds have a tough task ahead. Its financial markets versus inflation. Who will get preference over the next FOMC meeting. Additional rate cut means more inflation, weak dollar, high oils. No rate cut means deeper credit crunch. Pick one)

All Signs Point To A Recession

The index of leading economic indicators fell for the third time in four months in November, signaling an increasing risk of a U.S. recession. The deepest housing slump in 16 years is likely to worsen as foreclosures mount and banks restrict lending, economists said. Declining property values and rising energy costs may also hurt consumer spending, which accounts for more than two-thirds of the economy. The economy is projected to grow at a 1 percent annual rate this quarter and at a 1.5 percent pace in the first three months of 2008.

Jobs Report
More people signed up for unemployment benefits last week, suggesting that the job market is softening as the economy loses speed. The Labor Department reported Thursday that new applications filed for jobless benefits rose by a seasonally adjusted 12,000 to 346,000. It was a larger increase than economists were expecting.

House Of Pain
Moody's Investors Service cut its rating for home builders D.R. Horton Inc (DHI) and Ryland Group Inc (RYL) to junk status, citing persistent troubles in the U.S. housing market. Moody's does not see a sector recovery beginning before well into 2009 at the earliest, with any housing recovery likely to be very measured for some time thereafter. Moody's cut the senior unsecured debt of D.R. Horton and Ryland one notch to "Ba1," one step below investment grade, from "Baa3." The outlook for both builders is negative, indicating an additional cut may be likely over the next 12 to 18 months.

Mortgage Application Dropped
Mortgage application volume plummeted 19.5 % during the week ending Dec. 14, according to the Mortgage Bankers Association's weekly application survey.

Price Drop
A trade group for home builders said thursday that home-price declines won't stop until early 2009, as a lethargic economy and troubled mortgage market drop the bottom even lower. David Seiders, chief economist for the National Association of Home Builders, said he agrees with what he called an emerging consensus about the housing market: that median U.S. housing prices will drop by 10 to 15% from a peak in 2005 to its eventual bottom.

Foreclosures Increased
U.S. homeowners increasingly failed to keep up with their home loan payments in November, as the number of foreclosure filings surged 68% nationwide compared with the same month a year ago. In all, 201,950 foreclosure filings were reported last month, compared with 120,334 in November 2006.

Corporate Losses
Bear Stearns (BSC), the No. 5 U.S. investment bank, said a bigger-than-expected writedown in its mortgage portfolio caused the first quarterly loss in the company's 84-year history. The fiscal fourth-quarter loss after paying preferred dividends was $859 million, compared to a profit of $558 million, a year earlier. The company had negative net revenue of $379 million, compared to revenue of $2.41 billion a year earlier.

Merrill Lynch (MER), the third-biggest U.S. securities firm, may post an additional $8.6 billion in writedowns of subprime-related debt during Q4. The new writedowns would follow Q3 $7.9 billion reduction that the firm booked on the value of U.S. subprime home loans and collateralized debt obligations.

Morgan Stanley (MS), the No. 2 U.S. investment bank, reported a $9.4 billion writedown from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government. The writedown, nearly triple what Morgan Stanley warned of in November, pushed the investment house to the first quarterly loss in its 73-year history. For the full year, Morgan Stanley's profit plunged 62% to $3.44 billion from $9.10 billion in 2006. Revenue fell 6% to $28.03 billion from $29.84 billion in 2006.

MBIA (MBI) world's biggest bond insurer said it has exposure to $30.6 billion of collateralized debt obligations it insures, including a large exposure to risky bonds known as CDO squared, sending its stocks plummeting 26% in a day. MBIA also is vulnerable to $8.1 billion of CDOs backed by high-grade collateral, 85% of which are risky bonds known as CDOs of CDOs, or CDO squared.

Drug store operator Rite Aid Corp (RAD) posted a wider-than-expected quarterly net loss and cut its full-year estimates, citing a slow flu season and a more cautious consumer. Rite Aid said its net loss in Q3 was $84.8 million, compared with a year-earlier net profit of $1.1 million, but a per-share loss of 1 cent.

Discover Financial Services (DFS) posted a loss in Q4 after taking a $391 million charge because of its struggling card business in Great Britain. The credit card issuer reported a net loss of $84.1 million. Reason cited for the loss was bad consumer credit environment and housing slump. The company reported a profit in the same period last year of $186.5 million.

FedEx (FDX) Q2 profit falls 6% largely due to high fuel costs and a sluggish U.S. economy, and they offers Q3 outlook below Wall Street estimates.

Lone Savior
The only saving face for the economy is the tech sector, but is it going to be enough to save the economy from a recession ?

Oracle (ORCL) Q2 profit jumped 35% on increased sales. Research In Motion (RIMM) reported that its quarterly earnings more than doubled to $370.5 million, beating expectations, thanks to strong uptake of the company's products and services in the business and consumer user market segments. Wireless chip and technology developer Qualcomm (QCOM) raised its outlook for its fiscal first quarter, amid strong demand for advanced phones.

Conclusion: With plethora of bad news, each and every day, all points towards a mild recession which eventually leads to 15-20% drop in the stock market indexs. Invest with caution !!

Recommendations: Go long on tech/mining/energy sector. Go short on financials/housing/mortgage/credit affected companies/airline.

Why Its Time To Be A Bear

Financials Slide
Goldman Sachs Group (GS). on Tuesday gave a cautious outlook for Wall Street in 2008 because of the ongoing credit crisis, even as the world's largest investment bank chalked up another record-breaking year. During Q4, Goldman's $3.17 billion profit was fueled by higher investment banking fees, one-time asset sales, and surprisingly strong debt trading results. Though quarterly results easily surpassed Wall Street's projections, for some analysts they lacked the kind of power and finesse investors have come to expect. Goldman said it faced one of the worst Novembers on record, which has only somewhat loosened this month. Goldman's troubles were taken as something of an ominous sign for other investment banks yet to report results, particularly Morgan Stanley, which reports Wednesday, and Bear Stearns, which reports Thursday.

Lehman Brothers says its Q4 profit fell for the third straight quarter, slipping 11% from a year ago on net write-downs of $830 million on fixed-income trading assets

Home Builders Slumping
Fallout from the housing downturn and an accounting charge helped Hovnanian Enterprises Inc.'s (HOV) fiscal Q4 loss nearly quadruple. Despite the net loss of $469.3 million, the company generated $376 million of positive cash flow from operations in the quarter that ended Oct. 31 and projects that it will have more than $100 million in cash flow from operations in fiscal 2008. Hovnanian reported its 5th consecutive quarterly loss. Its Q4 net loss of $7.42 per share after paying preferred stock dividends compares with a loss of $117.9 million, or $1.88 per share, for the same period a year ago. Quarterly revenue fell 20 percent to $1.39 billion from $1.75 billion in the same period last year. Hovnanian and other homebuilders have been struggling amid the subprime mortgage fallout, as a record number of foreclosures has made it harder to get loans, weakening the housing market. Earlier this month, Toll Brothers Inc. (TOL), the nation's largest builder of luxury homes, reported its first quarterly loss in 21 years.

Construction Activity Down
Housing construction fell in November and single-family activity dropped to the lowest level in more than 16 years. Construction of single-family homes fell 5.5% to an annual rate of 829,000 units, the lowest level since April 1991, while multi-family construction was up 4.4% to an annual rate of 332,000 units. In a bad sign for future activity, the government reported that applications for building permits fell for the 6th straight month, dropping 1.5% to a seasonally adjusted annual rate of 1.15 million units, the slowest pace for building permits since June 1993. Field sentiment among builders remains at an all-time low for the 3rd consecutive month.

Oil Prices Rising
Oil prices rose ahead of the release of U.S. government data on petroleum supplies expected to show crude stockpiles fell for the fifth straight week. Light, sweet crude for February delivery added 29 cents to $90.37 a barrel.

Worst Year For Municipal Bonds Since 99
Wall Street's three-year love affair with debt sold by U.S. states and cities is over. Municipal bonds, whose returns trounced Treasuries and corporate debt from 2004 to 2006, are headed for their worst year since 1999. They may remain laggards after securities firms reduced their holdings at the fastest pace in at least 12 years during Q3. Citigroup (C), Goldman Sachs and the rest of the securities industry reduced holdings of municipal bonds in their trading accounts by more than 16 percent, to $45 billion. Securities firms are putting less into state and local debt after about $62 billion of writedowns on securities related to subprime mortgages. Borrowing costs are also rising in part because the housing market is enduring its deepest slump in 16 years. Falling property values may slash tax revenue for states and cities by more than $6.6 billion in 2008.

Inflation Concerns
The Labor Department reported the biggest jump in the consumer-price index (CPI) since September 2005, and the biggest gain in core CPI, which excludes food and energy costs, since January. Higher inflation, along with recent signs of resilience in the economy, could make it harder for the Federal Reserve to justify the need for the additional interest-rate cuts. In a further sign of worries about inflation, investors sold Treasury securities, sending the yield on the benchmark 10-year note to its highest level in a month.

Wholesale prices rose 3.2% in November, their largest monthly gain since August 1973, as surging energy prices raised concerns that inflation is beginning to take a toll.

Retail Sales
Consumer confidence fell for the fourth straight month during November, to 87.30. Following a lukewarm shopping weekend, consumers seem to be postponing more of their buying to the last minute compared to a year ago. To boost sales, retailers plan to expand hours and offer generous discounts. Based on early reports from analysts and malls on Sunday, sales results were generally unimpressive. Consumers, fretting about economic worries, were also delaying their shopping even more this year, knowing there's a full weekend before Christmas, when the bargains will be even better. Meanwhile, for online retailers, holiday sales didn't live up to industry's hopes as lower-income shoppers pulled back on spending amid a housing slump. After a strong Thanksgiving weekend, the official start of the holiday shopping season, business has slowed even more than normal, resulting in mixed November results for retailers and uneven business so far in December. Some 35 million Americans have yet to start shopping for holiday gifts.

Other Indicators

• Dollar is getting weaker against other currencies. With more rate cuts, the dollar can dive to new lows.
• Trade deficit is widening
  
• Gold has crossed 800$+ and looks to reach 1000$ by 2008-2009.
• Worst in housing is yet to come. 2008 will be ugly. Foreclosure rates will keep on increasing. Housing prices will slide in most parts of the country.
• Financials will be posting alot more writedowns in 2008 than 2007.
• Credit card companies and auto companies will be the next to suffer, once U.S. enters a mild recession.
• Emerging markets are over-valued and might cool off.
  

Conclusion: All the above reasons makes me mid-term bearish.

Recommendations: Consider going short on homebuilders (CTX, HOV, SPF, LEN, BZH, DHI), financials (C, MER), retailers (M, MW, BIG), credit card companies (COF, DFS, CIT), others (SBUX, DSL, FED, FBN, AMIE). Consider going long on oil/energy (HAL, SLB, MRO), mining (LMC, SLT, RIO, CMP, POT, TGB), solar (LDK, ESLR, STP, WFR)

Disclosure: Short position in DHI, BZH, CTX, LEN. Long positions in FXP, LMC, SLT, EJ, LFC

More Trouble Ahead For Financials

Bank of America said its provisions against loan losses would come to $3.3 billion in the fourth quarter amid deterioration in consumer real estate and small business loans. Bank of America's capital ratios continue to decline, and the bank may not resume stock buybacks until 2009.

Wachovia, the fifth-largest U.S. bank by market value, said that the Charlotte, N.C., bank is bracing for mounting loan defaults and another round of losses tied to risky mortgage investments. Wachovia, estimated that its provision for loan losses will be about $1 billion more than its charge-offs. Its previous forecast was between $500 million and $600 million. Meanwhile, the bank said its market-related losses -- including those stemming from mortgage-backed securities and collateralized debt obligations -- are on pace to exceed the third quarter's. Wachovia's losses on its exposure to collateralized debt obligations and other assets were about $1.4 billion in October and November, compared with around $1.3 billion in the third quarter.

Through Sept. 30, banks in the U.S. and Europe racked up some $38 billion in losses on their exposure to mortgage-related investments. More than $16 billion in additional write-downs are expected in the fourth quarter, which doesn't include the wave of fresh write-downs that banks have warned of over the past month.

Merrill Lynch on Wednesday recommended investors stop buying stock in Bank of America and J.P. Morgan and sell stock in Wachovia. J.P. Morgan, as one of the largest consumer lenders in the U.S., will be hard-pressed to avoid the pain of a recessionary economy, Merrill said of the third-largest U.S. bank.

Recommendations: Go long on SKF or short XLF

We're Heading Toward Financial Chaos

We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression.

Some lenders and hedge funds have failed, and some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.

But let me assure you, you ain't seen nothin' yet.

Rest of the article is....here

Another interesting article is... here

The Power of Rate-Cut

Swiss banking giant UBS warned today that it will write down the value of its subprime mortgage holdings by a further $10 billion, leading to a loss in the fourth quarter and potentially wiping out all its profits for the year.

Bank of America Corp. said today that it's shutting a $12 billion a money-market fund of sorts and halting cash withdrawals after losses from complex investments tied to the mortgage crisis.

Washington Mutual Inc., the nation's largest savings and loan, said today problems in the mortgage and credit markets are forcing it to close offices, lay off more than 3,000 workers and set aside up to $1.6 billion for loan losses in its fourth quarter. Additionally, WaMu slashed its quarterly dividend 73 percent and said it plans a $2.5 billion offering of convertible preferred stock.

However with the rate-cut due tomorrow, this kind of bad news had no effect on the market...infact the exact opposite thing happened. The market added 100+ points..

This is what i call power of the rate cut...!!

Bankers' write-downs

UBS	$13.7 bln
Citigroup	*$13.7 bln
Merrill Lynch	$8.4 bln
Morgan Stanley	$4.6 bln
HSBC	$3.4 bln
Bank of America	*$3.3 bln
Deutsche Bank	$3.1 bln
Barclays	$2.7 bln
Royal Bank of Scotland	$2.6 bln
Bear Stearns	$1.9 bln
Credit Suisse	$1.9 bln
JP Morgan Chase	$1.6 bln
Goldman Sachs	$1.5 bln
Wachovia Bank	$1.1 bln
Lehman Bros.	$0.7 bln
Total:	$64.2 bln