Andy Sutton's Extemporania

Weekly Commentaries and Occasional Observations

About Sutton & Associates

Archives: February 2011

Housing Prices Hit New ‘Post-Bust’ Lows

by TwoCentsEditor

Published on: 02/22/2011

Categories: Current Events, Economics, Financial Markets

Tags: bonds, Economics, Federal Reserve, housing, housing crash, stocks

Comments: 1 Comment

WASHINGTON (AP) — Home prices are hitting new depths in most major U.S. cities and are expected to fall further over the next six months.

In a majority of metro areas tracked by Standard & Poor’s/Case-Shiller, prices have fallen to their lowest points since the housing bubble burst.

High unemployment, stricter lending rules and fears that prices will continue to fall are among the reasons why few people are buying homes. A rising number of foreclosures are also weighing down prices. And as more people get stuck in depreciating homes, housing could slow the economy.

Across the country, the housing industry is recovering unevenly. Many of the cities now setting new lows have been struggling with high unemployment, more foreclosures and, in some cases, a delayed response to the housing bust in 2006 and 2007.

Homes in more established areas — those that had little room to build during the housing boom — are doing a better job holding their value. Coastal cities in California and Northeast are seeing much smaller price declines. In Washington and San Diego, home prices even rose over the past year.

Still, many people who want to buy can’t. Nearly 25 percent of households cannot move because they owe more on their mortgage than their home is worth, according to Capital Economics. An additional 25 percent can’t qualify for a new mortgage because selling their homes would leave them with too little money for a down payment.

“We’re likely to see new lows hit across most major markets at some point in 2011,” said Mark Vitner, a senior economist at Wells Fargo Securities. “We’re afraid of all this turning into another vicious cycle.”

Housing prices in all but one of the 20 cities tracked by Standard & Poor’s/Case Shiller fell in December from November. And the overall index declined for the sixth straight month. Washington was the only metro area where prices rose month to month.

Eleven of the markets hit their lowest point since the housing bubble burst in 2006 and 2007: Atlanta, Charlotte, N.C., Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Seattle, Tampa, Fla., and Portland, Ore.

The housing sector is struggling even while much of the economy is recovering slowly but steadily. The latest evidence of the divide came Tuesday when the Conference Board said its Consumer Confidence Index rose in February to its highest point in three years. The report suggested that many people are more hopeful about hiring and income gains over the next six months.

By contrast, the outlook for housing this year is dim. Construction of new homes is on pace for little more than half the million units a year that economists consider to be healthy. And the number of vacant homes is near a record high.

Some of the worst declines in home prices are in cities hit hardest by high unemployment and foreclosures. A home that sold for $250,000 in Detroit in 2000, for example, now sells for roughly $163,150, according to the housing report. The unemployment rate there was 11.1 percent.

One in 24 Detroit-area homes with a mortgage was at risk of foreclosure last year, according to foreclosure tracker RealtyTrac Inc. — the fifth highest rate among major cities.

Homes in Las Vegas, on average, have lost more than half their value since 2006. They now sell for less than they did in 2000. The city had a record-high 14.9 percent unemployment rate in December. It also led the nation in foreclosures last year.

Three out of every four sales in southern Nevada are foreclosures or “short sales.” These sales occur when a bank lets a homeowner sell a home for less than what’s owed on the mortgage.

“You can see how many people’s dreams just didn’t make it,” said Karin Wilson, a real estate agent with Century 21 in Las Vegas.

For many, the problem is getting worse. In Phoenix, about 70 percent of all homes with a mortgage were at risk of foreclosure in January, according to the Arizona Regional Multiple Listing Service.

The median home price has dropped by half since 2008, to roughly $110,000. Prices in one central Phoenix zip code have plunged 81 percent in the past three years.

In Tampa, foreclosures and short sales dominate the housing market. One in 20 households with a mortgage was at risk of foreclosure last year. Home buyers are mainly interested in distressed properties, real estate agents say.

“They all want to steal them,” said Stephanie LeFew, owner of Tampa Home Buy Realty. “I had someone call me from Australia the other day wanting an inexpensive property for $20,000.”

Tougher lending rules have scared away some potential home-buyers. Banks have been hesitant to extend new credit. Many are demanding that buyers put down a larger down payment. During the housing boom, people in many cases were able to buy homes with little or no money down.

In many depressed markets, a significant percentage of buyers are really investors and private equity firms looking to cash in on cheap real estate, Realtors say.

The federal government is trying to deter this practice, at least in cities hit hardest by foreclosures. In Detroit, the city is using money from the U.S. Department of Housing and Urban Development to offer suburban homes to police officers with only a $1,000 down payment.

But locals have yet to take advantage. The average home price in Detroit fell 7.5 percent in the October-December quarter, to $73,200, the lowest in the nation, according to Zillow.com.

“People don’t qualify for loans anymore, and banks have continued to price homes lower and lower,” said Mike Shannon, a suburban Detroit real estate agent who specializes in foreclosures.

Millions of foreclosures are also expected to flood the market this year. That will force prices still lower. For many, the big question is, when will prices bottom? Some have tried to time their purchases to buy at the bottom. It often hasn’t worked.

Matthew Hartman, a 38-year-old sales manager in Chicago, thought he was getting a steal in 2009 when he bought a four-bedroom house for $395,000. He sold it last month for $370,000.

“We kind of thought that the market was toward the bottom, especially when we moved here in August of last year,” he said. “We thought we got a great deal on this house.”

Leaked Cables: China Used Debt Holdings to Influence US Policy

by TwoCentsEditor

Published on: 02/21/2011

Categories: Current Events, Economics

Tags: bonds, China, debt, foreign exchange, forex, treasury bonds

Comments: No Comments

Editor’s Note: We needed leaked cables to tell us this??

willingness to translate its massive holdings of US debt into political influence on issues ranging from Taiwan’s sovereignty to Washington’s financial policy.

China’s clout — gleaned from its nearly $900 billion stack of US debt — has been widely commented on in the United States, but sensitive cables show just how much influence Beijing has and how keen Washington is to address its rival’s concerns.

An October 2008 cable, released by WikiLeaks, showed a senior Chinese official linking questions about much-needed Chinese investment to sensitive military sales to Taiwan.

Amid the panic of Lehman Brothers’ collapse and the ensuing liquidity crunch, Liu Jiahua, an official who then helped manage China’s foreign reserves, was “non-committal on the possible resumption of lending.”

Instead, “Liu — citing an Internet discussion forum — said that as in the United States, the Chinese leadership must pay close attention to public opinion in forming policies,” according to the memo.

“In that regard, the recent announcement that the United States intends to sell another arms package to Taiwan increases the difficulty the Chinese government faces in explaining any supporting policies to the Chinese public.”

His comments came days after the Pentagon notified Congress it was poised to sell $6.5 billion worth of arms to China’s arch rival Taiwan.

The much-delayed package was eventually sold, but did not include requested F-16 jets.

Taiwan and the mainland have been governed separately since they split in 1949 at the end of a civil war, but Beijing sees the island as part of its territory awaiting reunification, by force if necessary.

In the same meeting, Liu — wary about Chinese losses — also pressed US officials for a government guarantee that any investments in US financial institutions would be back-stopped.

“Liu remained non-committal on the possible resumption of lending, but agreed that (China’s State Administration of Foreign Exchange) had sufficient confidence in those institutions and would consider a system whereby the Federal Reserve or other US government agency would act as a guarantor,” according to the cable.

Trying to allay his concerns, Liu’s US interlocutors pointed to the government’s ability to “guarantee bank liabilities to support the banking system and address the systemic financial risk that could be caused by a potential bank failure.”

Another cable, dating from March 2009, showed US sensitivities about possible changes in the composition or level of those holdings, which could have major repercussions for US finance.

China is the largest holder of US debt, underpinning US government spending. Its holdings of US Treasuries have more than doubled since 2007.

A week after Premier Wen Jiabao stated publicly that he was “‘concerned” regarding the security of its US Treasury holdings,” the US embassy in Beijing sent a cable to Washington hoping to answer the question: “What Did Wen Mean?”

“Wen’s remarks immediately generated intense speculation that China might be contemplating some adjustment in its foreign reserve management policy,” the note said, reporting that a senior Treasury official had also sought clarification.

The writer pointed to China’s concern about US inflation — which could reduce the value of Chinese dollar holdings — stemming from the Federal Reserves’ ultra-easy monetary policies.

Detroit Ordered to Close Half of Public Schools

by TwoCentsEditor

Published on: 02/21/2011

Categories: Current Events, Economics

Tags: bonds, debt bubble, municipal debt, public debt, schools

Comments: No Comments

Lansing— Swift and severe changes are coming to Detroit Public Schools.

State education officials have ordered Robert Bobb to immediately implement a financial restructuring plan that balances the district’s books by closing half of its schools, swelling high school class sizes to 60 students and consolidating operations.

This week, Bobb, the district’s emergency financial manager, said he is meeting with Detroit city officials and will set up a meeting with Wayne County Regional Educational Service Agency to discuss consolidation opportunities in areas such as finance, public safety, transportation and other areas.

Bobb also is preparing a list of recommended school closures and Friday said layoff discussions are under way and would be announced closer to April, when notices would be issued. “We are moving forward with the plan,” he said “Right now my focus is on my transition plan and the DEP (deficit elimination plan).”

Bobb’s last day with DPS is June 30. After that, the state plans to install another financial manager who must continue to implement Bobb’s plan, according to a Feb. 8 letter from Mike Flanagan, the state superintendent of public instruction.

In the letter, Flanagan said the Michigan Department of Education gave preliminary approval to Bobb’s plan to bring the 74,000-student district out of its financial emergency. As a condition of approval, Flanagan said Bobb cannot declare the district in bankruptcy during the remainder of his contract.

Bobb, appointed emergency financial manager in March 2009, filed his deficit elimination plan with the state in January, saying it would wipe out the district’s $327 million deficit by 2014. On Feb. 9, he told state lawmakers the plan is the only way DPS “can cut its way out” of its legacy deficit.

At the same time, Bobb said he doesn’t believe the proposal is viable because it would drive more students away, exacerbating the district’s financial emergency. But on Friday, Bobb confirmed he is working to implement the plan that will shrink the district to 72 schools for a projected 58,570 students in 2014.

“I believe the district can work its way out of these challenges,” Bobb said. “It will take some time. I am firm believer we have to continue to make the deep cuts, and they are going to be painful. In the long run, the district will be stronger. There can be no retreat.”

Bobb said he continues to work on an alternative plan — one similar to a General Motors-style restructuring — but has yet to release details or announce a sponsor for such a bill.

“Whatever comes out of the transition plan and whatever my new thinking is will be a part of that,” he said.

District needs loan access

Earlier this month, Bobb told members of a joint House and Senate education committee he needed legislation to assure the district’s continued access to loans to stave off insolvency.

The district needs $219 million by March, and its bond insurer, Assured Guaranty Municipal Corp., wants the state to guarantee DPS won’t file for bankruptcy. Bobb told lawmakers the district has no such intentions.

Bobb has said school closures, bigger classes and other measures would be needed if he cannot get help from lawmakers to restructure finances in the state’s largest school district. DPS considered but declined to file for bankruptcy in 2009 Experts say DPS has an uphill battle for financial stability.

Revenue is down dramatically, enrollment losses average 8,000 students a year and pension and health care costs weigh on the district.

And the bad news continues. Among DPS’ fiscal challenges: An expected loss of $273.87 in its per-pupil foundation grant of $7,660. The loss is the result of a projected 83 percent property tax collection rate in Detroit for fiscal 2011. Last week, Gov. Rick Snyder proposed a $470 per-pupil cut for all Michigan districts.

A general fund budget strapped with annual fixed costs such as $52.6 million in pension costs, $44.6 million for health care, $26.8 million in utilities, $6.6 million in public safety and $3.5 million in unemployment. Continuing enrollment declines. DPS has lost 83,336 students in the last decade, leading to a loss in state aid of more than $573 million.

The district’s deficit grew by $100 million in the last year — to $327 million — forcing it to deepen its reliance on short- and long-term borrowing, which costs DPS $55 million a year in principal and interest payments.

New business model

Patrick Anderson, founder of the Anderson Economic Group, a Lansing-based economic consulting group, said DPS has no choice but to change its business model — dramatically.

“If this was a businesses entity, it would be in perilous straits and probably headed to bankruptcy,” he said. “When 50 percent of your customers leave and a substantial amount of revenue goes toward paying debt, the survival of your enterprise is in doubt.”

Anderson said he doesn’t fault lenders for having a lack of faith in DPS, given its deep history of fiscal mismanagement. “The question is, does the state want to indicate it will get itself further on the hook for a unit of local government that has mismanaged itself financially?” he said.

DPS slashed $548 million in requests for fiscal 2010, and Bobb said he expected the budget of about $1.2 billion to be balanced.

Steve Wasko, a DPS spokesman, said the district then learned of the following revenue losses: a $7 million property tax charge-back from Wayne County after the bankruptcies of the Greektown Casino and General Motors, an $11 million drop in state aid from property tax shortfalls and the loss of $9 million as a result of the state’s early retirement incentive program.

Increased expenses included $23.6 million for the recall of employees scheduled to be laid off, $72.2 million in unrealized labor savings and $9.1 million in unrealized savings when some school closures were canceled.

All told, the unexpected revenue losses and cost increases led to a deficit for fiscal 2010 of $113 million, Wasko said.

Last week, state Sen. Phil Pavlov, R-St. Clair Township, proposed a bill that would give the emergency financial manager the power to cancel government or teacher union contracts. DPS spends nearly two-thirds of its budget on personnel costs, or $677 million a year.

State Rep. Paul Scott, R-Grand Blanc, chairman of the joint House and Senate Education Committee, said there are concerns about the state taking on the district’s liability.

“I don’t feel the taxpayers of Michigan are willing to become liable for that money with all the structural and institutional problems that exist,” Scott said.

“We need a long-term solution for public schools for Detroit and the state,” he said. “We just don’t have the solution right now.”

Oil Soars on Libya, Mideast Unrest

by TwoCentsEditor

Published on: 02/21/2011

Categories: Current Events, Economics

Tags: bp, middle east, oil, oil production, peak oil, saudi arabia

Comments: No Comments

Editor’s Note: The happenings of the past two weeks are re-defining the term ‘geopolitical risk’.

(Reuters) – Brent crude oil prices hit $108 a barrel for the first time since 2008 on Monday on fears that spiraling violence in Libya could lead to wider supply disruptions from the OPEC member.

U.S. oil prices led the rally to jump by more than $5, the most in over two years, as traders also rushed to cover short positions in the key Brent/WTI spread, which had blown out to a record $16 a barrel. The April spread narrowed to $10 during the day, but widened to over $12 in after-hours trade.

The focus was on deadly clashes in Libya, where one oil firm was shutting down some 100,000 barrels per day (bpd) of production and others evacuated staff. The leader of the Al-Zuwayya tribe threatened oil exports to the West would be cut off unless authorities stopped violence.

“The market is on edge about the potential for Middle East and North Africa supply disruptions,” said Mike Wittner, head of commodities research, Americas, at Societe Generale.

“If you’ve got reports that actual disruptions are starting to occur, it’s going to have a supportive impact. A lot of it is high-quality crude and that is important as well.”

The increasingly violent protests that appeared to put Muammar Gaddafi’s four decades of rule in jeopardy were the realization of weeks of mounting concerns that Egypt-inspired unrest would seep into nearby oil producers.

Brent oil futures, which have climbed more than $10 this year largely due to the increasing geopolitical risk premium, jumped $3.22 a barrel, or 3.2 percent, to settle at $105.74 a barrel. They jumped another $2 to trade as high as $108 in after-hours dealing, the highest since September 4, 2008.

The March U.S. crude oil contract, which expires on Tuesday, surged $5.22 a barrel to trade at $91.42 a barrel in late-afternoon activity — the highest in two weeks.

Overall trading volume was less than one-third the 30-day average due to the U.S. Presidents Day holiday, and the U.S. market won’t issue an official settlement until Tuesday.

The more-active April contract jumped as much as $5.75 to a high of $95.47 a barrel, at one point narrowing the Brent/WTI contract by nearly $3 to $10 a barrel as traders covered short positions built up as the spread ballooned from about $3 in January to a low of $16 last week.

Brent’s after-hours rally forced the spread back out to $12.40 a barrel.

LIBYA UNSETTLES

In Libya, scores were killed in anti-government protests as one of the region’s bloodiest revolts hit Tripoli for the first time, while army units defected to the opposition and Gaddafi’s son vowed to fight to the last man standing.

On Sunday, Shaikh Faraj al Zuway, the leader of the Al-Zuwayya tribe in eastern Libya, told Al Jazeera: “We will stop oil exports to Western countries within 24 hours” should the violence not stop.

Ninety percent of Libyan oil exports come from the eastern region of Cyrenaica, epicenter of the revolt, and unrest there could pose a graver threat to oil supplies than in other nations if separatists target infrastructure and look for a bigger slice of revenues, analysts say.

“Libya is a significant producer and exporter of good quality crude oil, and threats by the tribal leader to stop production are worrisome,” said Christophe Barret, an oil analyst at Credit Agricole Corporate and Investment Bank.

What Economics is NOT

by TwoCentsEditor

Published on: 02/18/2011

Categories: Current Events, Economics, Financial Markets, My Two Cents

Tags: andy sutton, austrian economics, Economics, government, keynesian economics, My Two Cents, stocks

Comments: No Comments

It is starting again. It is a phenomenon that occurs more regularly now, especially with daily talk of massive imbalances right along with a massive boost in activity. More and more people are scratching their heads wondering what gives. Once again, economics has become a debating society. There are Keynesians, Austrians, the Classic folks, and those who will use ridiculous rationale and textbook, but not applicable accounting definitions to try to assert that we’re really getting rich every time the government borrows another dollar. It is no wonder people are confused. Like so many other areas of our society, particularly morality, the definitions have been skewed, the lines, blurred, and the waters made muddy.

I am not going to sit here and explain the difference between the schools of economic thought because it isn’t necessary. I’m not going to sit here and tell you what you already know, because you already know it. What I am going to do is spend a few minutes giving you some good reasons why you should follow the laws of economics and tune out the nonsense from politicians, the pundits, and the bank-financed media.

Economics is not a debating society. There are laws. These laws are immutable. This is not just my opinion; rather, it is a fact that has been borne out time and time again throughout history. Obey the laws of economics and you will fare well; cross them and you’re in trouble. The biggest caveat in all of this is that the punishments are often not immediate. If you put your hand on a hot stove you’ll know instantly the consequences of your actions. The same goes for jumping in a cold lake in the middle of January. However, when it comes to money and economics, it is often possible, and very normal, to get away with bad behavior for a time. This is dangerous because people often forget that their proverbial hand is an inch above the hot stove.

Econ 101

This is precisely the point we are at in the progression of America and most of the world. Our hand is an inch above the stove and we’re clueless because we’ve gotten away with breaking the laws of economics long enough that we are convinced that we have a free pass and can continue our behavior in perpetuity. We look at our television sets and the massive social unrest in other parts of the world and feel insulated because we live in America. We’re watching others partake in the negative consequences of violating the laws of economics yet we’re secure in the naïve notion that it can’t happen here.

It is a simple law of economics that if you consume more than you produce that you’re going to become poor, not rich. Our government and media would have you believe the exact opposite and so many of you have tried it their way and lost badly. Think of the family who month after month consumes beyond their production. They go into debt and become a slave to the creditor. They become destitute, insolvent, and eventually go bankrupt. It is happening all the time. Why is a nation any different? It isn’t. Sure, a nation has more resources than the individual to kick the can down the road a little longer, but in the end, the result is the same. The law has been violated and the consequence awaits.

Bankruptcies

Wealth doesn’t come from a printing press or a credit card. This is another intellectual fraud that has been perpetrated on people the globe over. Wealth is a result of work, foregoing of consumption, and investment of the resultant savings. Notice it starts with work, not Bernanke’s printing press or VISA. We earn a living from the sweat of our brow, not by being wards of the government printing press. We have been told the exact opposite though. We’ve been told that we’re prosperous even while our debts balloon. We’ve been told we have a healthy economic recovery without putting the unemployed back to work. These claims are fraudulent and should be ignored.

We’ve also been conditioned to believe that we are exempt from the consequences of economic malfeasance because we issue the world’s reserve currency. This is another prevarication. First of all, the Dollar is not issued by the US government, the people of America, or any other American institution. The Dollar is issued by a privately owned, privately held corporation that has its own best interests in mind, not America’s. And even if the US Treasury did issue the Dollar and there was no Fed, it still would not cloak us in immunity from a sound economic beating for over issuing currency and spreading inflation around the world.

We did get a little bit of truth from Mr. Ben a few weeks back when he was asked about near record high global food prices and what affects quantitative easing (another fraud) was having in the commodities markets. Ben answered, essentially admitting that QE has been holding up our financial markets. QE is just another tool being used to kick the can down the road and push the consequences of our poor decisions another day into the future when another Congress and another generation will have to deal with it. And guess what? They won’t be any better equipped to handle it than we are today. They won’t be any smarter. The only real thing we’ve learned from history is that we don’t learn from history. Our best hope at dealing with our economic problems is now, on both a personal level and in the aggregate.

Economics is not some Pandora’s black box of evil-looking equations, charts, and terms that are not meant to be understood. On the surface all you really need to know is what has been stated in the past two pages. The laws of economics are common sense. Sure, we can get detailed in trying to explain and analyze that common sense, but the explanations are not economics, the common sense is. Keep that in mind as you follow what is going on and make decisions in your own life.

.Com Bubble Bust 2???

by TwoCentsEditor

Published on: 02/17/2011

Categories: Current Events, Economics, Financial Markets

Tags: .com, bonds, bubble, Federal Reserve, inflation, tech stocks

Comments: No Comments

Editor’s Note: This is what happens when the Fed pours trillions of hot funny money into anything that moves. Pretty soon firms that hold goat races in Antarctica will have P/Es of 100…

Talk of bubble trouble is rife again in Silicon Valley. Private internet companies with names barely known in the financial world a year ago are suddenly the focus of heated price-talk – even if they have yet to prove they can raise money at some of these lofty levels.

Zynga, a social gaming company valued at about $5bn by private share sales little more than three months ago, is looking to raise a fresh round of capital at a valuation of $9bn or so, according to one person familiar with its plans. Groupon, the group-buying site that turned down a $6bn buy-out offer from Google late last year, is entertaining pitches from bankers looking to take it public this year at a value of $15bn-$20bn. And Facebook, the social networking site that only last month was accorded a $50bn valuation in a deal led by Goldman Sachs, is said to be considering helping its staff sell some of their stock, at a valuation of $60bn.

Given how quickly figures like these have escalated in a matter of weeks, it’s tempting to write it all off as the product of an overheated market, made worse by a lack of much real information about the performance of these private companies.

Such a blanket dismissal would be to ignore the bigger forces at work. Social networking and the mobile internet are changing the nature of online behaviour, and technology sea-changes like this have a habit of throwing up new leaders – though they are often also an excuse for a good, old-fashioned investment bubble.

There are three basic tests for the new band of internet darlings: whether they have found a profitable revenue model; whether the markets they are creating will turn out to be big enough to support their valuations; and what impact competition will eventually have on constraining both their growth rates and profit margins.

On the first two counts, there is already evidence of some powerful forces at work. Groupon, according to one person familiar with its finances, anticipates that its revenues could double this year, reaching $3.5bn-$4bn – roughly half of which the company pockets, with the rest going to the merchants who are its customers.

By one estimate, meanwhile, Zynga is expecting revenues this year to jump by 150-200 per cent from the near-$1bn it reached last year. The group, which makes most of its money from selling virtual goods to people who play games, such as FarmVille, while on Facebook, also has a highly profitable business model.

Zynga’s success has a knock-on effect on Facebook itself: thanks to the 30 per cent tax it collects on revenues Zynga generates from Facebook’s users, a large chunk of the games company’s earnings fall straight to Facebook’s own bottom line.

By this test, Twitter, the micro-blogging site, still remains the most glaring example of a consumer internet company whose value is based more on hope than business achievement. In spite of an effort nearly 18 months ago to shift its focus to making money, Twitter’s revenues are still projected to reach little more than $100m this year. Talk of its value has ranged widely (and wildly) in recent weeks, from $4bn to $8bn or more.

But are the growth rates and profit margins of these new stars sustainable in the face of rising competition? This is where things get harder to call. With low barriers to entry, the internet can be a ruthless place. E-commerce has turned out to be a highly price-sensitive endeavour, where volume counts – and there are already powerful players to contend with.

The bull case rests on the “category killer” argument: that network effects, brand recognition and the chance to reach massive scale faster than the competition combine to give the early players in any new online market an unassailable lead.

This theory is about to be put to the test. Groupon’s conspicuous success with offering “daily deals” on the internet seems to have put it in the crosshairs of every e-commerce and local advertising company around. The test will be whether it can reach significant scale quickly enough to withstand the inevitable decline in its margins.

Zynga, meanwhile, is in the hits business – a precarious place to make a living, as many games companies have discovered to their cost. Through massive data-mining of the online behaviour of its users, and by cross-promoting new games to its already sizeable audience, Zynga is now out to show that it can insulate itself against the vagaries of online fashion.

Even if the early category killers can support their valuations, what of the many other start-ups hoping to follow in their wake? Much of the money being thrown at private internet companies is in search of new markets, or at “me-too” companies that hope to emulate the success of others.

The history of the dotcom bubble illustrates the risk that goes with this kind of wishful thinking and copycat investing. There will be winners – but a lot of blood will get spilt along the way.

JP Morgan racks up ‘perfect’ trading record

by TwoCentsEditor

Published on: 02/15/2011

Categories: Financial Markets

Tags: fraud, insider trading, jp morgan, naked short selling, Wall Street

Comments: No Comments

Editor’s Note: Anyone who thinks this is normal and can be done without the benefit of inside information and blatant cheating needs a lesson in probability analysis.

Feb. 15 (Bloomberg) — JPMorgan Chase & Co. racked up a perfect trading record for the second half of last year, making money every day after accomplishing the same feat in the first three months of the year.

Traders at the New York-based bank made an average of $76 million a day last year, down from $84 million in 2009, according to an investor presentation today at the bank’s New York headquarters. JPMorgan’s average daily trading revenue was $21 million in 2008, $39 million in 2007, $47 million in 2006 and $37 million in 2005, according to JPMorgan’s presentation.

The investment bank lost money on eight days last year, all in the second quarter. That’s down from 42 days of losses in 2009, 97 in 2008, 46 in 2007, 33 in 2006 and 52 in 2005, according to the presentation.

World Bank: Food Prices at Dangerous Levels

by TwoCentsEditor

Published on: 02/15/2011

Categories: Current Events, Economics

Tags: bonds, central banks, debt, food, infilation, quantitative easing

Comments: No Comments

WASHINGTON – World Bank President Robert Zoellick says global food prices have hit “dangerous levels” that could contribute to political instability, push millions of people into poverty and raise the cost of groceries.

The bank says in a new report that global food prices have jumped 29 percent in the past year, and are just 3 percent below the all-time peak hit in 2008. Zoellick says the rising prices have hit people hardest in the developing world because they spend as much as half their income on food.

The World Bank estimates higher prices for corn, wheat and oil have pushed 44 million people into extreme poverty since last June.

Zoellick said he expects food prices to continue to rise, and that export bans and weather disruptions are partly to blame.

US Debt Now 100% of GDP

by TwoCentsEditor

Published on: 02/14/2011

Categories: Current Events, Economics, Financial Markets

Tags: bonds, debt, interest rates, national debt, stocks

Comments: 1 Comment

Editor’s Note: I just love how now the admissions of the stolen (errr borrowed) Social Security and Medicare fund dollars are all over the place. For decades, this was denied and those who spoke about it were labeled as nutjobs.

President Obama projects that the gross federal debt will top $15 trillion this year, officially equalling the size of the entire U.S. economy, and will jump to nearly $21 trillion in five years’ time.

Amid the other staggering numbers in the budget Mr. Obama sent to Congress on Monday, the debt stands out — both because Congress will need to vote to raise the debt limit later this year, and because the numbers are so large.

Mr. Obama‘s budget said 2011 will see the biggest one-year jump in debt in history, or nearly $2 trillion in a single year. And the administration says it will reach $15.476 trillion by Sept. 30, the end of the fiscal year, to reach 102.6 percent of gross domestic product (GDP) — the first time since World War II that dubious figure has been reached.

In one often-cited study, two economists have argued that when gross debt passes 90 percent it hinders overall economic growth.

The president’s budget said debt as a percentage of GDP will top out at 106 percent in 2013, but only if the economy booms.

“I still don’t see a sense of urgency from the president about the massive federal debt,” said Sen. Lamar Alexander, Tennessee Republican. “His budget calls for too much government borrowing – even though the debt is already at a level that makes it harder to create private-sector jobs.”

Speaking on MSNBC on Monday, Jacob “Jack” Lew, the White House budget director, said their long-term plan to lower deficits will stabilize the debt.

“When we came into office, when President Obama took office, the deficit was climbing to over 10 percent of the economy. We have a plan that would bring it down to 3 percent,” he said. “That is the most rapid reduction in the deficit in history. It is what we have to do to be able to say we’re paying our bills and we’re not adding to the debt.”

The administration said debt as a percentage of GDP will stabilize at about 105 percent in the middle of this decade, though those calculations assume economic growth levels significantly above projections of the non-partisan Congressional Budget Office.

The government measures debt several ways. Debt held by the public includes the money borrowed from Social Security’s trust fund.

Housing Crash Hitting Cities Once Thought to be Stable

by TwoCentsEditor

Published on: 02/14/2011

Categories: Current Events, Economics, Financial Markets

Tags: bonds, Economics, housing, housing crash, stocks

Comments: No Comments

Few believed the housing market here would ever collapse. Now they wonder if it will ever stop slumping.

The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune — economically diversified cities where the boom was relatively restrained.

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.

The bubble markets, where builders, buyers and banks ran wild, began falling first, economists say, so they are close to the end of the cycle and in some cases on their way back up. Nearly everyone else still has another season of pain.

“When I go out and talk to people around town, they say, ‘Wow, I thought we were going to have a 12 percent correction and call it a day,’ ” said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. “But this thing just keeps on going.”

Seattle is down about 31 percent from its mid-2007 peak and, according to Zillow’s calculations, still has as much as 10 percent to fall.

Mr. Humphries estimates the rest of the country will drop a further 5 and 7 percent as last year’s tax credits for home buyers continue to wear off.

“We went into 2010 feeling gangbusters, thanks to Uncle Sam,” Mr. Humphries said. “We ended it feeling penniless, with home values tanking.”

The fact that even a fairly prosperous area like Seattle was ensnared in the downturn shows just how much of a national phenomenon the crash has been.

The slump began when the low-quality loans that drove the latter stage of the boom began to go bad, but the resulting recession greatly enlarged the crisis. Many people could not get a mortgage, and others simply gave up the hunt.

Now, though the overall economy seems to be mending, housing remains stubbornly weak. That presents a vexing problem for the Obama administration, which has introduced several initiatives intended to help homeowners, with mixed success.

CoreLogic, a data firm, said last week that American home prices fell 5.5 percent in 2010, back to the recession low of March 2009. New home sales are scraping along the bottom. Mortgage applications are near a 15-year low, boding ill for the rest of the winter.

It has been a long, painful slide. At the peak, a downturn in real estate in Seattle was nearly unthinkable.

In September 2006, after prices started falling in many parts of the country but were still increasing here, The Seattle Times noted that the last time prices in the city dropped on a quarterly basis was during the severe recession of 1982.

Two local economists were quoted all but guaranteeing that Seattle was immune “if history is any indication.”

A risk index from PMI Mortgage Insurance gave the odds of Seattle prices dropping at a negligible 11 percent.

These days, the mood here is chastened when not downright fatalistic. If a recovery depends on a belief in better times, that seems a long way off. Those who must sell close their eyes and hope for the best.

Those who hope to buy see lower prices but often have lighter wallets, removing any sense of urgency.

Arne Klubberud and Melissa Lee-Klubberud paid $358,000 for a new, 960-square-foot townhouse on trendy Capitol Hill a few weeks after that Seattle Times article was published. Now, with one child and with hopes for more, they need more space.

They just put the townhouse on the market for $300,000.

“Obviously, this is not the ideal situation,” said Ms. Lee-Klubberud, a 32-year-old lawyer. They are hoping to take advantage of the sour market to buy at a good price, but first, they must sell for an amount that is acceptable.

“Everyone has their limits,” she said. “We have ours.”

On a dark, dank Sunday, a handful of people came to look at the three-level unit. One of them was Katherine Davis, who had just sold her house in the far eastern suburbs. It took 14 months, during which she had to drop the price several times.

The equity she had accumulated over the decades disappeared quickly.

“At first, I thought it would be nice to come out of this with $200,000, but I adjusted my expectations,” Ms. Davis said. She ended up with less than half of that. Her goal is to buy a small place in the city, but not yet.

“Selfishly, I’m hoping the market continues to drop,” she said. Increasing numbers of sellers are simply surrendering.

Megan and Ryan Dortch tried to sell their one-bedroom Eastlake condo for $325,000 two years ago. They rejected an offer of $295,000 as inadequate. A year later, they relisted it for $289,000, then $279,000, which was less than they paid.

Without a sale at that price, they could not afford to buy a place big enough for them and their new baby.

They have given up on real estate. They are renting out their old apartment at a small loss every month, and living in a rented house.

“I don’t expect the market to get better,” said Ms. Dortch, 31, a customer service consultant.

Neither does Gene Burrus, another frustrated seller who became a landlord. “Rent is so cheap it doesn’t make sense to buy now,” he said. He might reconsider if 10 or 15 percent more comes out of the market.

Redfin, a real estate brokerage firm based in Seattle, says foot traffic began picking up in the last several weeks. Mortgage rates are rising, which could nudge those who need to buy to make a deal now for fear rates will rise even more.

But whenever the market finally does pick up, all those accidental landlords will want to unload, putting another burden on the market.

“So many sellers are waiting in the shadows,” said Redfin’s chief executive, Glenn Kelman. “The inventory is going to expand and expand and expand. I don’t see any basis for significant price increases.”

While almost every economist is expecting another round of price declines for the next few months, many see a leveling off in the second half of the year.

Fiserv, the company that produces the monthly Case-Shiller Home Price Indexes, analyzed prices in 375 communities. About three-quarters of them will be stable by December, Fiserv calculates.

“We’re at a period near the bottom but with more volatility than we normally see at this point,” said David Stiff, Fiserv’s chief economist. “This sort of double dip is unprecedented for housing.”

Maybe that is why belief in a bottom is as elusive now as fears of a top were in 2006.

“We would love to have a house,” said Dan Cunningham, a 41-year-old renter. “I have more than enough for a down payment. I’m preapproved for a loan. But I have to have confidence it’s not going to lose another 20 percent.”

He plans to wait until he sees prices rising before making any offers.

« page 2 of 3 »

February 2011
S	M	T	W	T	F	S
« Jan				Mar »
		1	2	3	4	5
6	7	8	9	10	11	12
13	14	15	16	17	18	19
20	21	22	23	24	25	26
27	28