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Friday, October 12, 2007


Sorry for the sloppy posting over the last week, I’m fighting the kind of pestilence only a kindergarten teacher (the wife) could bring home.

Yesterday markets pulled a sudden and significant u-turn. First ‘better’ than expected results from Wal-Mart gave the futures a lift.

Wal-Mart Lifts Profit Forecast After Cutting Expenses (Update5): “Wal-Mart Stores Inc., the world's largest retailer, raised its forecast for third-quarter profit after countering slowing sales growth by reducing packaging and energy costs.

The discounter, which accounts for $1 of every $11 spent at U.S. retailers, rose the most in a month in New York trading, helping drive the Standard & Poor's 500 Index to a record.”

A close look reveals that top sales growth slowed and that it was aggressive discounting that resulted in better numbers. Buried in the numbers was the fact that Wal-Mart significantly reduced expenditures on store improvements.

Target, Nordstrom and JC Penney sales all trailed estimates. That is not a good sign for consumers. (Although it was once again blamed on the weather.)

Foreclosures Doubled in September as Loan Rates Rise (Update6): “U.S. home foreclosures doubled in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages, RealtyTrac Inc. said.

There were 223,538 foreclosure filings last month, including default and auction notices and bank repossessions, an 8 percent decline from August. California had the most with 51,259 filings and Florida was second with 33,354. The national foreclosure rate was one for every 557 households.”

No big surprise here. The surprise is that markets keep melting higher, hitting record after record. The worst is still to come as the number of ARMs resetting is going to increase significantly… and we all know what that means:

“Foreclosures are deepening the U.S. housing recession by pushing more homes onto a market where sales and prices are dropping. There's a 10-month supply of unsold homes, the highest in at least eight years. As many as half of the 450,000 subprime borrowers whose mortgages will re-set through December may lose their homes because they can't afford the higher payments, according to data complied by UBS AG and Credit Suisse Group.”

Play with this interactive Subprime Tidal Wave map.

U.K. September House Prices Decline for Second Month (Update3): “U.K. house prices fell in September for a second month, the first back-to-back drop since 2005, after higher interest rates and concern about the economic outlook hurt confidence, the Royal Institution of Chartered Surveyors said.

The number of real-estate agents and surveyors saying prices dropped outnumbered those reporting gains by 15 percent, London- based RICS said today. That compares with 3 percent in August. Among 12 regions surveyed, prices only rose in London and Scotland.”

Just in case you still thought the real estate bubble was only a US problem… (Its easy to dismiss the seriousness of the situation with equity indices making new highs daily.)

“The number of potential homebuyers fell the most since 2003, RICS said. A jump in credit costs led to a run on the deposits of mortgage lender Northern Rock Plc and five interest-rate increases in a year has increased households' record debt burden.”

Winnebago 4th-Quarter Profit Rises 59% on New Models (Update5): “Winnebago Industries Inc., the biggest U.S. motor-home maker, said fourth-quarter profit rose 59 percent, beating estimates, on higher sales of luxury models.”

Foreclosures double. Winnebago sales rise 59%. Got it?

On the road again, I just gotta get on the road again....

Oh and here is a little taste of the consequences:

California Retail Sales and Use Taxes
Sept 2007: $2,038,416,000
Sept 2006: $2,201,717,000

September sales tax revenue was off 7% compared with last year. Can you say massively widening budget deficits?

Beazer to Restate Earnings After Mortgage Unit Probe (Update6): “Beazer Homes USA Inc., the homebuilder under investigation by the Securities and Exchange Commission, will restate earnings going back to 1999 after an internal probe found its mortgage unit violated federal regulations.

The inquiry also found accounting errors in the company's sale-leaseback program. The revisions will affect financial statements from 1999 to 2006 and include parts of this year. A settlement with regulators may cost as much as $15 million, the Atlanta-based company said today in a statement.

Beazer, for the first time, said there was evidence that employees of its mortgage unit violated certain U.S. Department of Housing and Urban Development rules related to the agency's down payment assistance program. Beazer shares fell to a seven- year low this year as the SEC and the FBI started investigations of its accounting and lending practices. Today's disclosures signal the company may be trying to resolve its legal matters.”

Reminds me of the tech bubble days… when that bubble started to deflate more and more aggressive accounting and pure scandals from the boom days started to see daylight. Expect to see more of these. The really juicy ones will come from the financial sector. Level 3 and Level 2 gains. When they start to unravel the real fun will begin.

SLM's Lord Says `Merger Mess' Has Hurt Profit Growth (Update3): “SLM Corp.'s legal fight over J.C. Flowers & Co.'s $25.3 billion buyout offer has distracted the student-loan provider and hurt profits, Chairman Albert Lord said.

“It's costing us earnings momentum,” Lord said today on a conference call with investors after the Reston, Virginia-based company, better known as Sallie Mae, reported a third-quarter loss of $344 million. “The merger mess has gone on too long. We've got to get it sorted out.””

Just think, a private equity firm had been ready to pay $25 billion for the privilege of owning and further LEVERAGING UP a company that just lost $344 million this quarter. WTF? Oh, and the CEO thinks the merger troubles are responsible for reducing ‘earnings momentum’. COME ON. You’re in the student loan business.

Countrywide Says Bad Mortgages Rise, New Loans Fall (Update4): “Countrywide Financial Corp., the largest U.S. mortgage company, said late payments at its servicing unit rose, foreclosures doubled and new loans fell 44 percent as housing sales slowed.

Overdue loans as a percentage of unpaid principal increased to 5.85 percent in September from 4.04 percent a year earlier, the company said in a statement. Foreclosures climbed to 1.27 percent from 0.51 percent. Mortgages funded by the Calabasas, California-based company last month declined to $21 billion.”

FORCLOSURES DOUBLED AND NEW LOANS FELL 44%. Countrywide is a great barometer for the US mortgage market as a whole because their servicing portfolio is almost 15% of total US home loan debt.

All this didn’t matter though. The markets continued to motor higher… UNTIL a monster momo stock, Baidu, was downgraded. That was signal to take profits, hard. THAT was the catalyst that pulled the entire market down. Go figure.

U.S. Producer Price Index Rises, Spurred by Oil Costs (Update2): “Prices paid to U.S. producers rose in September as oil costs climbed, while core inflation was less than forecast.

The 1.1 percent increase in total producer prices followed a 1.4 percent decline in August, the Labor Department said today in Washington. The core measure, which excludes fuel and food costs, rose 0.1 percent after a 0.2 percent gain in August.”

Stronger PPI should add some upside risks to next week’s headline CPI number.