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Friday, September 7, 2007

Just Like 1987

Today could be a big day.

Apple Offers $100 Credit, Apology to IPhone Buyers (Update3): “Apple Inc. Chief Executive Officer Steve Jobs apologized to customers who paid full price for the iPhone before he cut the cost by $200 yesterday.”

Like I said yesterday in the post The Stupid Tax, the price cut was not going to sit well, even with fanatically loyal Apple customers.

Countrywide Drops Below Bank of America's Deal Price (Update3): “Countrywide Financial Corp. shares briefly dropped below $18, erasing the $700 million paper profit Bank of America Corp. made when it invested $2 billion in the nation's biggest mortgage lender two weeks ago.”

Although not a good sign in general, I am pretty confident Bank of America managed to snap off a good hedge on this position while the getting was good.

U.S. Home Foreclosures, Delinquencies at Record High (Update4): “The number of Americans who may lose their homes to foreclosure reached a record in the second quarter as late payments by subprime borrowers surged to one out of every seven loans.”

ONE out of every SEVEN or 14% are late DURING an economic EXPANSION. What happens when things slow down further and when the US economy finally contracts ever so slightly? What happens when job losses accelerate even a little bit?

Deutsche Bank May Be Worst Hit by Rout, JPMorgan Says (Update3): “Deutsche Bank AG, Germany's biggest bank, will probably be the European securities firm most affected by fallout from rising U.S. subprime mortgage defaults, according to JPMorgan Chase & Co. analysts.”

Deutsche is wounded, that much we know. But how deep are the cuts? How long will they take to heal?

““Ackermann yesterday said banks should mark-to-market their assets “to restore confidence and credibility in the system.” Deutsche Bank said last month that it took a “not insignificant” charge in the second quarter, marking down the value of some outstanding leveraged-finance loans.

Marking-to-market leveraged loan commitments, assuming about half have been hedged, would result in a 625 million-euro ($853 million) charge for Deutsche Bank in the third quarter and charges of 1 billion Swiss francs ($831 million) for Credit Suisse and 375 million francs for UBS, JPMorgan estimated.”

Lower sustainable revenues in securitizations, leveraged finance, hedge funds and proprietary trading will impact 2008 and 2009 results.

Yen Advances as Carry Trades Reverse on Stock-Market Declines: “The yen headed for second week of gains and almost erased this year's losses as declines in stock markets prompted investors to shun the risk of trades funded with loans in Japan.”

Its either voluntary or forced, but risk reduction is the name of the game right now.

Greenspan Sees Echoes of 1987, 1998 in Current Market Turmoil: “Alan Greenspan, former chairman of the U.S. Federal Reserve, said forces behind current market turmoil are “identical” to previous economic upheavals, including the 1987 stock-market crash.

“The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987,” Greenspan said yesterday in a speech in Washington, the Wall Street Journal reported today.”

Wait, it could actually be WORSE than 1987:

““There are some parallels I think with '87, but this is worse because the economy starts off from a weaker footing, whereas the tightening factor was just beginning then,” Mortimer-Lee said in an interview today. “The stock sell-off in '87 was a bit of a financial panic. This is much more imbedded in the weakness in the housing sector, and that's why it's more worrying.””

I believe Mortimer-Lee is on the right track. The bursting of this credit bubble will pillage the middle class in America. Falling home prices result in falling home equity values. This is particularly painful considering Americans have long lived beyond their means and have relied heavily upon MEW. This will also lead to falling financial equity prices. This is the other major store of wealth for the middle class. Factor in some demographic trends and you’ve got an aging middle class that should have piled up enough equity to ease into retirement over the next several years. These dreams will now be dashed for most…

U.S. Payrolls Unexpectedly Drop First Time Since 2003 (Update1): “The U.S. economy unexpectedly lost jobs in August for the first time in four years, raising the risk the economy may stall in the second half and serving as a warning for the Federal Reserve to lower interest rates.

Employers cut 4,000 workers from payrolls, compared with a revised gain of 68,000 in July that was smaller than previously reported, the Labor Department said today in Washington. The unemployment rate held at 4.6 percent as almost 600,000 people left the workforce.”

Watch for the Bulltards out there. They will spin this Bullish with the argument that rate cuts are now guaranteed. Let me say it again: Bernanke is NOT Greenspan. First, a rate cut is far from guaranteed. Commodity prices have stayed elevated. The dollar is so weak it is almost dead and this is only the first seriously weak unemployment number. Second, it won’t help. Not even a little bit. The financial system is re-pricing risk and de-levering. Most of these crazy subprime products will no longer be offered at ANY price. Expiring teaser rates will result in massive rate jumps even if there IS a whole series of rate cuts. Lenders are lending less and with far more scrutiny at new, higher, risk-adjusted rates.

There is no quick fix. Such is the economic cycle. Past excesses will ALWAYS be purged at some point. This process can only be DELAYED but never PREVENTED and the FED has ALWAYS increased the amplitude of this process. Such is the nature of capitalism.


Party Boy said...

The drop in the iPhone being a sign of economic weakness might be a HUGE stretch. Simply put, Apple was releasing the iPod Touch, essentially an iPhone that won't call (without minor modifications). A significant percentage of iPhone purchasers polled have not activated and do not intend to activate their iPhone, thus using it for all the feature the iPod Touch is capable of. Simply, Apple discovered a new product they could sell without AT&T profit taking, which would not destroy their pact, and was already developed and easy to produce. Smart Apple decision. Not a sign of market decline. They sold 1mil iPhones. Thats huge:)

Ben Bittrolff said...

A 30% price cut 2 months after the product was launched is significant. I would argue that the iPhone demand curve is nott elastic enough for volume to easily make up for a price cut of that magnitude.

But your point is well taken: New products, especially if they are used other than first anticipated are hard to value early on.

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