First Stocks, Then Real Estate, Now Oil?

Perhaps we are living in a perpetual bubble economy. Speculators now hold up to 45% of all oil contracts. The underlying world supply and demand data are pretty much the same as when oil was $75 a barrel. I wonder how soon before this particular bubble also comes crashing down around us?

Sprint Loses $29.5 Billion

Sprint Nextel Corp. posted a $29.5 billion loss and scrapped its dividend after writing down most of the Nextel Communications acquisition from two years ago. Sprint sank as much as 13% in New York trading and its credit-default swaps reached a record. The company reported a fourth quarter net loss of $10.36 a share. Sales fell 5.7% to $9.85 billion, missing analysts' estimates, and the carrier borrowed $2.5 billion under a credit line. The writedown put Nextel's value at 80% less than when it was acquired and the loss is the fifth-largest among S&P500 companies since 1990. Sprint expects 1.2 million subscribers to leave this quarter, as many as it lost in all of 2007. CEO Dan Hesse, who took over in December, said business is deteriorating.

$29.5 billion!! Another useless acquisition by another idiot executive. Perhaps Sprint should concentrate on improving its crappy customer service (yes, I will probably be one of the 1.2 million who leaves this quarter when my contract expires).

Home Price Declines

Home prices fell 8.9% in 2007, the largest decline in the Case-Shiller home price index in 20 years. The index fell 5.4% in the fourth quarter alone. Prices in 17 of 20 major cities fell, with eight cities falling by double-digits. After adjusting for inflation, real home prices were lower in all 20 cities. For the fourth straight month, nominal prices in all 20 Case-Shiller cities were lower than in the previous month. The 20-city index fell 2.1% in December and 9.1% for the year. The original 10-city index fell 2.3% in December and 9.8% for the year.

The biggest annual declines were seen in the former bubble areas in Florida and the Southwest. Home prices in Miami were down 17.5% in the past year, while prices fell 15.3% in Phoenix and Las Vegas. Phoenix had the largest decline in December, falling 3.5%, followed by San Diego at 3.4% (down 15% for the year) and San Francisco at 3.2% (down 10.8% for the year). But even in non-bubble cities, such as Atlanta, Cleveland, Chicago, Dallas, Detroit and Minneapolis, prices are dropping. Detroit, down 13.6%; Minneapolis, down 8%; Cleveland, down 6.3%; Chicago, down 4.5%; Atlanta, down 3.4%; Dallas, down 2.4%. Other major cities: Los Angeles, down 13.7%; Washington, down 9.4%; New York, down 5.6%; Boston, down 3.4%.

Visa going public

Visa is moving ahead with its plans to sell $17.1 billion to $18.8 billion worth of stock late next month. It would be the biggest IPO offering in US history. Since going public in May 2006, Visa's smaller rival MasterCard has risen 408% and has a market value of $26 billion.

Stay out of my wallet, Congress!

A proposal circulated by a bank to members of Congress warns that as much as $739 billion in mortgages is at "moderate to high risk" of default over the next five years and that millions of families could lose their homes.

Well, excuse me if I sound callous, but aren't many of these "families" actually flippers who bought, refinanced, sold and re-bought their way into outsized profits while I took the safe route? Now that the pyramid scheme has collapsed on them, the gummit wants to pick my pocket to bail them (and their bankers) out? To be fair, maybe they are talking about the folks who lied about their income (sometimes by 50%+) to qualify for Alt-A mortgages they couldn't afford? No? Perhaps they are talking about the folks who got interest only loans (or even negative amortization loans) because when they rates kicked up "they would definitely be making more money" and/or "real estate always goes up"?

Not sure how any of this is MY problem. As one of my professors used to say many years ago, "Lack of planning on YOUR part does not constitute an emergency on MY part."

More Bad News From Citi

Citigroup warns it may be forced to take further write-downs due to continued crumbling of the U.S. housing market. It says in its most recent 10-K that it has been forced to move a $10 billion hedge fund onto its balance sheet after major losses and revealed it has an exposure of $4 billion to the troubled bond insurance sector. It also disclosed that its traders suffered daily losses exceeding $100 million on 15 occasions in 2007. The disclosure may signal that Citigroup's problems go beyond mortgage-related losses.

Failed muni auctions

In recent days, over 100 bond auctions by US municipal borrowers and providers of student loans have failed to attract enough buyers amid concerns about the viability of bond insurers. Banks and dealers underwriting these sales have declined to buy the unsold debt given their already constrained balance sheets. This leaves local government entities facing sharply higher borrowing costs and some analysts say the market faces further failed auctions and possible extinction as a viable source of funding.

GM $38.7 Billion Loss

GM lost $38.7 billion in 2007, almost exclusively due to a non-cash charge of $38.3 billion to write down deferred tax assets. Excluding special items GM essentially broke even (a $23 million loss). The company also said it was offering a new round of buyouts to all of its 74,000 US hourly workers who are represented by the United Auto Workers. Perhaps, they will all take the company up on it, and GM can shutter its unprofitable US operations and concentrate on better opportunities abroad.

DJIA Changes

Bank of America and Chevron will replace Altria Group and Honeywell International in the benchmark Dow Jones Industrial Average effective February 19. The change is the first in four years and reflects the index's continued shift away from industrial firms and into other sectors such as energy and financial services. Excluding thinly traded Berkshire Hathaway, Bank of America and Chevron are the two biggest US companies by market capitalization that currently are not in the DJIA.

Option ARMs

The US housing crisis has focused attention on ARMs and the danger posed by their spiking interest rates, but mortgage bankers, industry experts and nonprofit officials say that the impact of Option ARMs has yet to be felt. And, they say, it will hit prime borrowers and subprime borrowers alike. People like Bruce Rose, who never should have got a loan. Rose bought his home in Boston in 1986. After stress and depression forced him to retire as a state employee in April 2006 he maxed out his credit cards on his annual income of around $16,000. On medication, he refinanced his debts through Countrywide (who else?). The new loan totaled $439,000. Rose said he did not know his mortgage broker and Countrywide used a stated income loan -- also called a "liar loan" because no proof of income is required -- and that they claimed his monthly income was $12,166. "If I had known what I was signing I would never have agreed to the loan," he said. "Now I may lose my home." With an Option ARM, borrowers can make a minimum monthly payment like a credit card, but if they do the principal increases. Rose's minimum payment rose from $1,200 a month to $2,800 and his loan now totals more than $500,000. He is fighting foreclosure. "No reasonable lender would have given him a loan like that."

If the story is trying to evoke sympathy for Mr Rose, it fails miserably. He didn't know what he was signing? He didn't know he couldn't afford a $439K mortgage on an annual income of $16K? I'm sure he took cash out (probably several years worth of income) when he refinanced; he didn't understand he'd have to pay it back? Did he think the mortgage fairy was giving away money? Gimme an effin' break!

China's latest export is inflation

After falling for years, prices of Chinese goods sold in the United States have risen for the last eight consecutive months. American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear, and other consumer goods — just as the United States faces a possible recession. Whether Chinese factories will succeed in making wholesalers pay more for their goods and whether retailers will be able to pass much of their higher costs on to American consumers is unclear, analysts say. Starting last June, for instance, China removed or reduced tax rebates on hundreds of items for export, including toys, garments, leather, wood and other goods. The moves are also part of Beijing's desire to move China higher up the global manufacturing chain — away from the least finished products, like plastic children's toys, toward more advanced exports that require skilled labor, like small electronics and even automobiles. Whatever the government's motivation, many Chinese exporters say the timing of the rebate cut was disastrous. Their factories had been struggling to cope with an array of other problems, including power shortages, higher raw material costs, rising wages (up to 80% in some places) and inflation in other areas. Many Chinese factory owners say a tough, new labor law, which went into effect on Jan. 1, complicates the hiring process and threatens to raise labor costs even more, at a time when parts of the country are already plagued with labor shortages.

It looks like the days of outsourcing manufacturing to obtain cheap imports from China are at an end. There's that labor arbitrage at work again.

Microsoft bids $45B for Yahoo

Microsoft to pay a $44.6B (a 62% premium) for Yahoo, in order to take on Google. This is probably not good news for Google, whose shares were already under pressure. It must be pretty nerve-wracking when Microsoft turns its guns on you. Just ask Lotus, WordPerfect, Novell, Borland and Corel about that.

News of the Day

Merrill Lynch's new CEO, John Thain, announced the firm will leave the subprime, CDO and structured credit businesses. In related news, Merrill Lynch agreed to pay $13.9 million to settle a dispute with the city of Springfield MA over CDOs that sank in value. Merrill said it agreed to reimburse Springfield after finding the city did not expressly consent to the CDO purchase. I'm sure there's more news like that in Merrill's future.

John Mack, CEO of Morgan Stanley, said the firm will stick with proprietary trading, despite trading losses that resulted in a $9.4 billion fourth-quarter writedown. It's a risky strategy for Morgan Stanley, which may face as much as $2 billion in additional writedowns for the current quarter.

Pershing Square manager William Ackman warned that the bond insurance industry might suffer crippling losses and has bet against the insurers' shares. He said MBIA and the Ambac Financial Group might lose $24 billion on the securitized mortgage investments they have guaranteed, a loss that could set off a chain reaction.

Motorola may be divesting the cellular phone business that represents half its revenue. This division has been beset with problems for the better part of a decade. The market actually greeted this news by driving Motorola stock higher; apparently the smaller company is expected to be more profitable.