Dead Banks Walking, Repo Man Calls, Home Sales

August 25

Dead Banks Walking? (August 25 – Minyanville - Bennet Sedacca)

Are there corporations that are "dead men walking"? When I first started in the industry in 1981 I was worried but about just one company, the Chrysler Corporation. Prior to that, Continental Illinois was in the forefront. Later in my career, in 1998, it was Long Term Capital Management, the hedge fund founded by John Meriwether, that captured my attention. Then we had Enron/WorldCom, and by early 2008 Bear Stearns became a worry and then a problem that needed fixing.

All of these events were isolated and dealt with, often with either direct assistance from Uncle Sam or an effort coordinated by America's benevolent/socialist government financial authorities. Markets would become unnerved, fear would grow, and then the government stepped in to make sure that the systemic risk that had finally come to the surface didn’t melt the entire planet.

But this is where it's "different this time" - not only is it different, I think it may be unprecedented in nature. When I look at my Bloomberg monitor each day that contains my 100 most important indices, companies, commodities, bonds, bond spreads, preferred shares, etc., I shudder. The reason for my concern is that my screen doesn’t have just one "problem child." It looks like a screen that contains many "dead men walking."

This is your “must read” article of the day. Bennet Sedacca has become one of my very favorite writers on this unfolding credit mess.

In this article, he details the process by which denial and then deception are used, how they can be spotted, and which companies are pretty much cooked. For those without time to read it, here’s the lists.

Cooked: Zions Bancorp (ZION), KeyCorp (KEY), Fifth Third Bank (FITB), Washington Mutual (WM), National City, Regions Financial, General Motors/GMAC (GM), Ford/Ford Credit (F), Wachovia (WB), CIT Group (CIT).

Probably OK: Bank of America (BAC), Bank of New York (BK), JP Morgan Chase (JPM), Northern Trust (NTRS), State Street (STT), US Bancorp (USB), ABN Amro , Deutsche Bank (DB), BNP Paribas, Royal Bank of Scotland, Barclays (BCS), Allianz (AZM)

He closes with this: As I stated earlier, when we have just one or two firms with issues, we can deal with it. But when we add rising unemployment, explosive debt growth in recent years, and non-performing assets to many hobbled financial institutions with trillions of dollars of exposure, it's hard not to be concerned.

For this reason, I remain cautious towards credit, and I expect a hard sell-off in stocks into 2010, consolidation in the financial services industry, and some pain, like it or not. I'm just not sure where the capital will come from to bail everyone out simultaneously. And even if the capital showed up, it would likely come at a cost that is uneconomic and would be dilutive for many years to come.
It's why I expect much lower-than-consensus earnings across the board and lower stock prices ahead. In the meantime, I sit with my historically cheap GNMA’s at the widest spreads in 20 years and continue to add to that position.

Boats, motor homes being repossessed as housing slumps (August 24 – San Diego Union-Tribune)

With paperwork in hand, Ashley Sparks set off in search of his newest target – a 2005 Winnebago motor home.

Sparks, an adjuster for ABA Recovery Service, found the vehicle on a well-manicured street in Point Loma, surrounded by homes nearing the million-dollar mark.

This was an easy one. The owner willingly handed over the keys, and Sparks' partner drove off in the latest luxury item repossessed by the Grantville company. Egley-Sparks' adjusters have hooked up and hauled away opulent motor homes worth $800,000 and powerboats with price tags of $300,000. They've picked up travel trailers, dirt bikes, all-terrain vehicles and the trailers used to carry them.

Never in her 28 years in the repossession business has Egley-Sparks seen so many discretionary luxuries being lost to hard times. And it's happening all across the country, economists and industry analysts say.

Even as the government stubbornly clings to the illusion that we are not yet in a recession (“Look! GDP is still positive and inflation is only 1%!), the anecdotes from the real world tell a very different story.

By the time people are coughing up $300k boats and motor homes in “record amounts,” we are deep into recession territory.

Soon people will be openly talking about ways to scrimp at cocktail parties, cheap will become the new chic, and everybody will wonder what all the fuss used to be about.

And, this close to the election, this scares Washington DC and their sacred 98% incumbent re-election rate.

U.S. Existing Home Sales Rose 3.1 Percent in July (Aug. 25 - Bloomberg)

Sales of previously owned homes in the U.S. rose in July from a 10-year low, while the gain wasn't enough to reduce the supply of properties on the market.

Resales rose 3.1 percent, more than forecast, to an annual rate of 5 million from 4.85 million in June, the National Association of Realtors said today in Washington. The median price dropped 7.1 percent from July 2007, and the number of homes for sale jumped to a record.

The increase in sales wasn't enough to keep up with the surge in properties coming into the market as foreclosures mount. There were a record 4.67 million unsold houses and condos on the market in July, representing 11.2 month's supply at the current sales pace, matching the highest ever.

Even at this late stage, we still get these same tired articles, where the NAR churns out some statistics showing improving sales and the media tirelessly trumpets the results.

As always, the fact is left out that bank repossessions and foreclosure auctions count in these results.

Knowing if sales are “up” or “down” is meaningless without knowing what the driver of activity really is.

Note to journalists: This is a really easy concept, and all you need to do is break out the foreclosure/repo activity from the sales numbers for us to be able to tell where we are. For the sake of accuracy and fair representation, please start performing this very simple step.

Of course, if you can read between the lines, the actual situation is discernable. Dropping prices are consistent with foreclosure auctions, and mounting inventory is consistent with weak buying activity.

All in all, I’d call this a very weak report, and my title would have been:  “Home prices still not low enough to trigger real demand; more weakness ahead.”