Five Things You Need to Know: The Next Next Shoe to Drop?
What are we, centipedes? How many shoes can one person wear?
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. The Next Next Shoe to Drop?
Every day it seems we see yet another story about "the next shoe to drop." What are we, centipedes? I mean, how many shoes can one person wear at once? The latest "shoe," according to the New York Times is home equity loans. If there is a silver lining in all these shoes dropping all around us, it's that sentiment in the near-term's quite negative and possibly overdone. The indicators we follow for equities, the Bullish Percent indexes, have now all reversed back up, a sign that probabilities favor at least a pause in the bearish action.
Americans owe $1.1 trillion on home equity loans, according to the Times article, and banks are increasingly worried they may not see those loans repaid. Why the concern? Simple math. While homeownership reached record highs in recent years, home equity's fallen below 50% for the first time in history, according to data from the Federal Reserve.
The Times piece noted that in December, 5.7% of home equity lines of credit were delinquent or in default, up from 4.5% in 2006, according to Moody's Economy.com.
Why is this particular shoe important? Because it relates directly to a cornerstone of the economy, consumer spending. It's not that home equity loans were directly responsible for consumption over the past five years, although they certainly helped, but that the ability to tap them if necessary, the security of having these loans available if needed, provided a strong psychological comfort cushion for consumers in the event of a recession... like the one we're in right now. Now that cushion's gone.
2. And Now, Good News
Below's where we stand with the point and figure bullish percent indicators for equities, based on Investors Intelligence data.
3. Lennar: "We're In Recession"
If there is a silver lining in all these shoes dropping all around us, it's that sentiment in the near-term's quite negative and possibly overdone. The indicators we follow for equities, the Bullish Percent indexes, have now all reversed back up, a sign that probabilities favor at least a pause in the bearish action.
Certainly no one expected homebuilder Lennar (LEN) to post good numbers this morning, but it was interesting to get President and CEO Stuart Miller's take on the economy.
According to Miller, the economy's now slipped into a recession. "The deterioration that took place so quickly in the housing market last year now seems to be happening at the same rapid pace in the overall economy," he said on the company's conference call.
"The only bright spot today is that when the news has become particularly dire and is confirmed in some way, the government and other market forces have acted quickly and decisively."
Well, that's one way to look at it, we suppose, but we wouldn't necessarily call that a 'bright spot." In fact, the irony in that statement is that when Miller says "market forces," he doesn't mean market forces, he means "market forces," as in forces intervening in the markets, not the markets themselves exerting any natural forces. Yes, we would be quite reluctant to call anything about this a "bright spot."
4. ConAgra to Sell Winners, Keep Losers
ConAgra Foods (CAG) has agreed to sell its commodity trading operations to hedge fund Ospraie Management for $2.13 billion after posting a 60% jump in fiscal third-quarter net income, largely due to that division, according to The Wall Street Journal.
ConAgra said it'll receive about $1.6 billion in cash, $525 million in debt securities and a portion of the unit's earnings for the remainder of the calendar year, the newspaper reported. The company said it expects the deal to mean "lower and more predictable ongoing working capital requirements" for the company.
5. No!!!!!! Not the Sports Stadiums!
The auction-rate bond crisis is raising borrowing costs on more than sewers and hospitals, according to Bloomberg. It's also forcing some states to pay three times higher interest rates on funding for sports stadiums and arenas.
Debt payments for Louisiana's Superdome, home to the National Football League's New Orleans Saints, ran the state about $1.8 million last month -- up from roughly $500,000 in
January -- after interest rates tripled to 12%, Bloomberg reported, and rates on bonds sold by owners of Super Bowl Champions, the New York Giants, are reaching 22% this week, the article said.
Forget Bear Stearns (BSC). Forget homeowners facing foreclosure. Now, sports stadiums are in trouble. This is serious!
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