Wall Street Strategies'  Instablog

The Mortgage Bankers Association reported that mortgage delinquencies and foreclosures hit another quarterly record in the third quarter (after setting another record during the second quarter). The percentage of all mortgages that are at some stage of delinquency is 14.4%, up from 13.2% the previous quarter. I don't think these numbers are particularly surprising to anyone; we all knew foreclosures and the likes are still worsening, especially with unemployment still on the rise. However, this is just the proof that housing is indeed still a major problem for the economy, and probably our single biggest risk for going into that dreaded double-dip recession.

The percentage of mortgages in delinquency is at 9.6% while foreclosures are being reported on 4.5% of mortgages. Although subprime and other deceptive lending practices were the root cause of housing to begin with, the problem has spread well beyond that, with prime fixed-rate mortgages representing the biggest proportion of foreclosures. The percentage of FHA loans is also on the rise, with 1.76% in foreclosure. Although the government is doing its best to help out the housing situation, and to allow homeowners to borrow cheaply with low rate FHA loans, even those loans can go sour. The big question at hand now is just how effective the government's foreclosure prevention plan will work. Currently, over 500,000 people are enrolled in a three month trial period for the program, which will lower payments for struggling borrowers, however we have yet to see what percentage will ultimately be enrolled in the full program, or what percentage who do get enrolled eventually go back into default.

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To hear Congress and the White House suggest if their plans had been in place before the current financial crisis started things would have been different is interesting. That's rich to say the very least. What model is the government going to use to just walk into a bank and begin dismantling machines and removing furniture? If there is someone on Capitol Hill that knows the exact point where risk-taking becomes too detrimental then that person is wasting a multi-billion dollar talent. This is a plain old fashioned power grab not unlike a soviet-style invasion of Baltic States and rock strewed countries. There are some things that make sense, like capital ratios and excessive leverage, but the idea of lawmakers as the watchdogs is farfetched anyway you slice it.

If an institution is too big to fail then it must be too big to exist, so I would guess antitrust laws would apply. But, what we are seeing is the notion that success is a bad thing and should be greeted with the ability for government to make things right. A company must understand that if it runs off we'll take the wreckage, allow rivals to salvage working parts, and bury the rest. It was interesting listening to Treasury Secretary Geithner brag about renewed confidence visa vie a year ago, but also attempt to sell the notion that confidence returning is contingent upon whirlwind financial regulatory reform. That's talking out of both sides of your mouth. By the way, confidence numbers are dropping like a rock. The exchange between Geithner and Congressman Kevin Brady (R-TX) was especially entertaining and revealing. When the Treasury Secretary tried to blame the guys in the last administration he had to be reminded of his last job.

I was struck when the testimony began yesterday how much the Treasury Secretary looked like the guy from the movie "Eraserhead"...I think it's his new game face. That new face, by the way, turned beet-red when Congressman Brady began talking about firing the Treasury Secretary. When there is talk of gains being "more broadly shared' I got red-faced. When I heard "just and necessary" more than once it lost the feeling of compassion and empathy and became a bumper sticker for the goal of spreading the wealth. It's all about controlling the economy through key industries including health, energy, and finance. It's very transparent, and really despicable. Over pounding the easy target in the room doesn't make me feel better, it makes me feel more vulnerable. The priorities are backward. There should be a mantra in the administration that goes something like this..."jobs, jobs and more jobs."

I've never watched the movie but from what I've read the movie "Eraserhead" is some kind of disgusting version of an urban decay show as a surreal art film. Well in many ways what's going on with our nation is surreal. Of course, there is a big jobs summit around the corner so help is on the way, who knows maybe Geithner will get frustrated enough to call it a day in time for the avalanche in jobs.

Healthcare Bill Update

Tweaks made to the Senate Finance Committee's bills were designed to appease unions and Democrats and drill deeper (literally and figuratively) into the rich. Still, the plot continues to thicken, and this thing will come down to the wire. In the House today, a 1.2% pay hike was passed for doctors that take Medicare payments. The new payment could kick in next year if the Senate passes the bill, which is unlikely. If you wondered why the AMA backed the healthcare bill perhaps it had something to do with the fact there was a scheduled 21.0% pay cut in the cards for these same doctors. What a massive shift in fortunes. In the meantime, the change is going to cost $210.0 billion over ten years...but it's not included as an official cost of healthcare reform. And, then, there's the assumption costs can be pulled out of Medicare which kicked off with the promise of a $65.0 million maximum annual tab. The tab is north of $400.0 billion, and counting.

• This bill will punish doctors that seek too many second opinions or ask for testing of patients. The plan kicks in for 2014, but the taxes begin immediately.
  
• The real tab is $2.0 trillion since this ten year plan is really a five year execution.
  
• The rich, or so-called rich, are going to be crushed but small businesses will be crushed even more.
  
  
• By the time the plan goes into effect there will be millions more uninsured as many businesses will sit on the sidelines.
  
  
• Many younger people will only buy insurance when they get sick, and the years they aren't paying will have to be paid by someone else.
  
  
• In the end, however, the most alarming aspect of this bill is the cost which will be more than the $2.0 trillion mentioned above.
  
  
• The bill tackles two birds with one stone, punishing those that have the audacity to work to be more than average and ropes more people into indentured servant status with the government.
  

The Welfare State is taking shape right now and it includes unlimited unemployment benefits (look for another extension any day now). The government will pay your rent, energy bills, and take care of your health and all you have to do is keep voting Democrat. The plan has worked like a charm in (most of) the black community where people have been made to feel grateful for the crumbs they are given in exchange not only for their votes but for their silence. Their dreams are limited, their confidence confined to physical endeavors, their mindset wrapped around the notion they are entitled to the basics (but feel better when there is higher minimum wage action).

Color on Dell Earnings Bomb

The now number three computer company, behind Hewlett Packard (HPQ) and Acer, reported a bomb of a quarter after the close of trading yesterday. Sales missed consensus by a wide margin, and earnings per share, despite increased cost cutting, missed sell-side analyst modeling. Although CEO Michael Dell noted improving demand for its products, it will be hard to convince investors to buy the stock on weakness in the near-term given the array of fundamental challenges that lay ahead.

The price of crude oil is trading down today by about $2.00 at $77.43. The latest move in black gold comes in the wake of the dollar staging a recovery (amazing action in the dollar since Bernanke's show of force earlier in the week) in the session after being in a secular decline for some time. The fact that the dollar is rising against a basket of other international currencies has put the entire commodity complex in a tailspin today. The dollar has an inverse relationship with oil and other commodities. Gold has fallen from its record highs.

Exacerbating the move down is the release of data which suggests that the economic recovery in the U.S. is far from robust (see LEI details below). This prompted market participants to lock in profits as much of the rally in equities to this point have been predicated on the fact that the broader economy was on the mend. Although in many respects the economy is still recovering, there is a growing sentiment that the pace of the rebound will not marry well with generally rising financial estimates for corporate America.

Oil traders and investors have been taking their cue from the equity markets in recent sessions so it comes as no surprise that the movement in the commodity would parallel that of stocks. The action today also underscores the sentiment that the market appears to prefer a weaker dollar as this would more easily facilitate a sustained recovery. Now that the dollar appears to be showing signs of stabilization, the stock market has taken notice.

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With a straight face the White House wants us to believe it's going to create more entitlement programs while cutting waste, fraud, and abuse. At face value, it's a farfetched notion to be sure, but in the real world it's just a false pledge. Yesterday, the Office of Management and Budget reported that government waste surged by $26.0 billion to $98.0 billion. Some of the (official) blame goes to a new modeling system and overall government spending, but what's going to happen when the healthcare scheme kicks in? We are looking at billions of dollars in waste, fraud, and abuse. The plan at one point was supposed to bring down the cost of healthcare, right? By the way, the majority of waste in the government (drum roll)...Medicare.

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The market is hanging in there which to me is a lukewarm buy signal because stocks should be under more pressure. The housing data was really something of a disappointment and there wasn't anything on the earnings front to capture the imagination or spark a move higher. Stocks have been down all session long, and the periodic bounces haven't triggered sustained buying. Still, sellers have the option to blow out here and count their cash. Yesterday, there were more hints at a late move higher that I'm not seeing so far today.

Housing Data Details

David Urani

A couple of weak pieces of housing data came out this morning, but strangely enough housing is one of the best performing sectors in the market today. Primarily, the fact that the fate of the nationwide homebuyers' tax credit was unknown until just a couple of weeks ago is skewing some of the recent trends in housing. First up were mortgage applications, which showed a 2.5% drop last week from the previous week. The standout item from the report was the 4.7% drop in purchase applications, which fell to the lowest level since November 1997, indicating demand for home buying is at its lowest in more than a decade. As noted, the tax credit was extended on November 6, and for several weeks before that buyers became skittish, as it had become too late to buy a house before the November 30 deadline.

We are inclined to attribute the continued decline in purchase applications last week to the fact that word of the extension will take time for the public to become fully aware. In addition, although purchase applications are at a 12-year low, the figure is not quite as bad as it looks given that in the current environment, home order cancellation rates are very low historically, and therefore a higher percentage of applications are likely being converted into sales.

It is somewhat strange that refinancing activity also dropped given that mortgage rates fell once again to 4.83% from 4.90%; mortgage applications have historically mirrored mortgage rates as you can see in the chart below. However, the decline was only 1.0% week to week, not as steep as purchase applications, and looking at the chart, one can see that applications are still generally in an uptrend.

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There have been many exciting football players in the history of the National Football League, but maybe a handful can claim to be as electrifying as Barry Sanders. Drafted third in the 1989 draft, he was not only one of the best ever but he was humble as well. Case in point; he took himself out of the last game of the season although he only needed 10 yards to win the rushing title. Something like that would never happen these days when it's all about "me" and reality television shows. Still, even with his reputation for being humble few could understand when he called it quits at the height of his career. It took years before the tight-lipped Sanders confessed to quitting because of a culture of losing in the Detroit Lions organization, saying it was too much to deal with. Sanders went on to say that the culture robbed him of his competitive spirit and he saw nothing to suggest things would ever get better. He began crying at the end of his last game.

Well the crying continues in Detroit where the entire town has been
suffocated by a culture of losing. The high school dropout rate is the highest in the entire country at 75%, and property values are lower than similar sized parcels in Baghdad. (That's only partially tongue in cheek.) The hip hop mayor of the town is in the joint and the city is clinging to jobs that are only there through government largess. Barry Sanders called it a day in the summer of 1999, and maybe the town should have taken its cue then because it has only gotten worse since. Yesterday saw the exclamation point to the nosedive the town has endured when its beloved sports stadium was sold for an amount that couldn't even get you an outhouse in Manhattan. The Detroit Silverdome fetched $583,000 thirty-five years after it was built for $55.7 million.

This is really shockingly sad, but has to serve as a lesson to all. It's not about bashing unions or Democrats, or the idea of fighting against corporate prosperity, but those things helped to sink the city that had capitalism flowing through its veins. The town that was the birthplace of the U.S. auto industry and rags to riches stories like Motown is now boarded up and falling apart. There is hope as a notion of creative destruction is forcing its way into the realities of the city, which must find a way to compete. Companies like Compuware (CPWR) offer hope, and a revitalized Ford (F) fights on with the spirit of 1908 (introduction of the Model T). There are other templates on how to turn it around, including Pittsburgh, which has managed to maintain a culture of winning on the football field and in other sporting endeavors. (That new television series "Three Rivers" sucks, however.) We've witness the fall of a great American city, we know how it happened and it should serve as more than a cautionary tale.

It's not a coincidence that Ford's stock peaked in the summer of 1999, back then Detroit had already begun losing market share but it didn't stop management and unions from battling each other while their foreign rivals were pushing ahead.
One has to ask what the heck was Barry thinking about to walk away from all of that money even on a team that didn't embrace a winning culture. It's plain to see now he made the kind of tough decision many people don't want to make these days. Taking the pain and acting out of principle in a period of stimulus spending, TARP, zero percent Fed fund rates, and other measures designed to mask the pain and create a soft landing do nothing to address how things will actually get better. Not only do the policies of the White House and Federal Reserve breathe life into the notion of propping up failure, but it is further deepening a culture that long ago derailed a great American city.

Ford is turning the corner the hard but right way and as a result its shareholders are beginning to be rewarded. Of course, the unions are treating it differently than General Motors or Chrysler, but some cultures never change. I'm rooting for Detroit and I'm rooting for Ford. One understands what has to be the done while the other just took a $55.0 million haircut on a piece of property that was once a jewel.

Stop me if you've heard this one before...

Democratic leaders are saying that they are working on passing a bill aimed at jump-starting highway construction projects and providing small businesses with tax credits. House Majority Leader Steny Hoyer (D-Maryland) says the employment situation is such that action must be taken. I'm glad that at 10.2% unemployment the situation is finally resonating on Capitol Hill. Of course I thought, when Stimulus I was being rammed down our throats it was for shovel-ready jobs and would halt the growth of unemployment at 8.0% or less.

The President says that there is a chance of a double-dip recession, and I'm not sure if it's a sign of the apocalypse, a wake-up call, or a public relations move designed to take advantage of panic. It would allow the White House cover to finish pushing through the agenda that is obviously losing steam.

Economic Data

Housing Starts/Permits

The latest on housing starts and permits was a bit of unwelcome news. Permits were down sharply in the South and West regions. Starts were lower in all regions, with particular weakness in the West. Now that the tax credit has been expanded and extended, it's possible that these numbers begin to pick up in November.

Consumer Price Index

Consumer prices were contained in October as the lingering impact of the recession weighed on pricing power. Core CPI for the month rose 0.2% (consensus: +0.1%); excluding new and used vehicles, which accounted for 90.0% of the core increase, prices were clearly under wraps. However, the headline CPI rose 0.3% (consensus: 0.2%) as prices for raw materials advanced. Higher energy prices are not yet being reflected in consumer prices as corporations are eating these outlays. But if they continue to trend higher, it's likely that corporations, who have cut deeply into their economic models, will pass along these costs.