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Five Things You Need to Know: Easing Worries?, Speaking of Consumer Risk Aversion, Speaking of Complacency, Speaking of Subprime Loans, Speaking of National Bubbles


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Easing Worries?

Whew. Did you hear that? That's the sound of my economic worries easing. Also, possibly the Fed.

  • A "better-than-expected" November jobs report "eased economic worries," according to news reports.
  • But then the stock market went down.
  • So the news reports were revised to say that while "solid" jobs growth "eases" economic worries, it has now, among other things, "sparked concern" that the Fed won't cut interest rates as soon as "hoped."
  • Meanwhile, is a print of 132,000 an all-clear signal?
  • Merrill's David Rosenberg this morning noted the following:
    - In November 2000 nonfarm payrolls came in at 216,000, above consensus expectations for 140,000.
    - Unemployment at the time was 3.9%, below the expectations of 4%.
    - The Fed cut rates intra-meeting by 50 basis points exactly a month later.
  • Look, the only people "hoping" the Fed cuts interest rates are bears because the way we get to lower interest rates is via the path of weaker economic growth, consumer risk aversion and asset deflation.

2. Speaking of Consumer Risk Aversion

The Fed's quarterly Flow of Funds data often gets short shrift. Fortunately, we are long shrift... in size.

  • The Fed's Flow Funds data is published each quarter and contains a wealth of economic data going back to the Great Depression.
  • For some reason the Fed's Flow of Funds doesn't garner much attention, maybe because it's usually released in the afternoon.
  • Anyway, what little attention it does garner often lacks a complete story.
  • For example, the headline reading from yesterday's Flow of Funds data is that Household Net Worth increased at a 5.8% annual rate in the third quarter.
  • Well, that certainly sounds good, but what does it really mean?
  • Net worth is calculated by subtracting liabilities from assets.
  • So, yesterday the Flow of Funds report showed that household assets grew by $1.04 trillion to $67 trillion in Q3 while liabilities increased by $267 billion to $13 trillion.
  • What does that mean? Put in perspective, household net worth actually fell to just 5.64 times disposable income as equity in real estate fell to a record low of 53.6% of market value.
  • As MacroMavens' Stephanie Pomboy noted on the Buzz & Banter yesterday, household debt growth rose at its slowest pace since 2000.
  • Mortgage debt grew at its slowest rate in eight years.
  • A possibility is that the consumer is finally... finally beginning to focus on balance sheet repair.
  • But who cares? Not me, because, like you, I am complacent. The data also showed that corporate sector savings reached a new high... yet again. That means just one thing: plenty of money out there for corporations to repurchase stocks.

3. Speaking of Complacency

Let's talk about complacency for a moment.

  • Ownit Mortgage Solutions, a California-based home lender, closed this week and told more than 800 workers not to bother coming back to work.
  • The Los Angeles Times reported that Ownit simply ran out of cash needed to meet obligations.
  • According to Bloomberg, Nonprime News, an industry newsletter, ranked Ownit as the 11th-largest U.S. issuer of subprime mortgages.
  • A reasonable question to ask is, didn't anyone at Ownit see the problems with subprime lending coming?
  • Apparently not. Bloomberg says Ownit issued $5.46 billion of loans during the first half of the year, 44% more than a year earlier.
  • Of course, Ownit's lack of vision isn't isolated... either to the subprime industry itself or to Wall Street's white shoe firms.
  • Merrill Lynch bought a minority stake in Ownit last year.
  • Meanwhile, Merrill this year has sold at least $4 billion in bonds packaged from Ownit home loans, according to Bloomberg.
  • Ownit joins Ameriquest Mortgage Co., Countrywide Financial Corp., H&R Block Inc.'s Option One, BNC Mortgage Inc. and other lenders in shutting operations or laying off employees.
  • Meanwhile, Sebring Capital Partners, a specialist in subprime loans, ceased operations on Friday, according to the company's Web site.
  • Here's where the complacency enters the picture. The closure of lenders such as Ownit isn't where the story ends.
  • Consider Merit Financial, one of Washington state's largest mortgage brokerages which laid off 300 employees and shut its doors this past spring.
  • According to the Seattle Times, the closure of Merit has left a trail of angry ex-employees, expensive lawsuits, unpaid taxes and government investigations.

Angry ex-employees?
Expensive lawsuits?
Unpaid taxes?
Government investigations?
That rings a bell.

4. Speaking of Subprime Loans

So what is the real source of the problems in subprime lending? Is it weak underwriting? Rising interest rates? And why, specifically, are loans which originated in 2005 experiencing higher default rates than other years?

  • According to the mortgage industry news source, Mortgage Daily, Michael Youngblood, a research managing director for Friedman, Billings, Ramsey Group, believes local economic conditions and natural disasters are the reasons subprime lenders are facing hard times.
  • A white paper by Youngblood examined the reasons why subprime loans originated in 2005 are experiencing higher default rates than loans of the same age originating in the two previous years.
  • According to Mortgage Daily, in the year ending July 2006 the weighted-average of mortgage rates of all subprime ARMs in each of the nation's 361 metropolitan statistical areas actually fell by 35 basis points over the year to 7.12%.
  • Youngblood also dismissed deteriorating underwriting as the reason for higher defaults.
  • He noted that key aspects of subprime loans, combined loan-to-value ratio, debt-to-income ratio, and credit score, did not diverge from long-run averages.
  • So why the problems? Youngblood concluded that weak economic conditions in 95 of the 361 metro areas and the ongoing aftermath of Hurricanes Katrina and Rita in Louisiana and Mississippi are to blame for the increase in default rates in the more-recently originated subprime loans, Mortgage Daily said.
  • This is all a fancy way of saying "there is no national housing market, so there can't be a national house-price bubble," which is precisely what Youngblood said in a May 2006 interview in BusinessWeek.
  • Tell it to UK-based HSBC, the world's third-largest bank, which on Wednesday said it had underestimated borrowers' ability to repay mortgage loans in the U.S.
  • Much of HSBC's woes stem from its 2003 purchase of Household International (now called HSBC Finance Corp.) a lender for high-risk borrowers.
  • HSBC Finance generated 31% of HSBC's North American profit... but 65% of its non-performing loans, according to the National Post of Canada.

5. Speaking of National Bubbles

A survey of more than 1,000 men in India has concluded that condoms made according to international sizes are too large for a majority of Indian men, the BBC reported.

  • The two-year study was carried out by the Indian Council of Medical Research.
  • Over 1,200 volunteers were measured precisely, down to the last millimeter, the BBC reported... smugly.
  • Doctor Chander Puri, a specialist in reproductive health at the Indian Council of Medical Research, told the BBC there was an obvious need in India for custom-made condoms.
  • Most of those currently on sale are too large, he said, before quickly adding, "But not for me. And you can print that. In fact, I insist you print that in your article. Please? Please print it? Just put in there somewhere that I have absolutely no "fitting" problems. None. Zero. I am good to go. I don't even check the brands. I just tell the clerk, "Give me some condoms, any brand.""
  • The study has prompted health officials to call for condoms to be provided in smaller sizes designed specifically for Indian men, while prompting Indian men to call for health officials to "Please, please just shut up."

Status Symbol?

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