Five Things You Need to Know: Department of Obviousness; Crony Socialism; Why This Is a Crisis, Not a "Hiccup"; Department of Understatements; What FedEx's Rate Hike Really Means
What you need to know (and what it means)!
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Department of Obviousness: When People Make Less, They (Eventually) Spend Less
Consumer spending slowed more than expected last month as income growth stagnated, the Commerce Department said.
- The Commerce Department data show personal income and personal spending rose 0.2% in October, well below consensus expectations for 0.4% and 0.3% increases respectively.
- The real personal spending rate (adjusted for inflation) was actually flat in October.
- And the real personal income number was negative.
- Inflation-adjusted spending on durable goods, such as autos, furniture and other long-lasting items, fell 0.6%.
- Purchases of non-durable goods fell 0.1%, and spending on services, which accounts for almost 60% of personal spending, increased a paltry 0.1%.
- The Fed's closely-watched core PCE price index rose 0.2% in October with the year-over-year rate coming in at 1.9%, unchanged from September due to an upward revision.
2. Crony Socialism
The U.S. government and major financial institutions are in the final stages of completing a deal that will allow them to pursue a similar path to that of the Japanese government and banks in the wake of the 1989 Japanese stock market crash; namely, by socializing Wall Street and the national mortgage market, and institutionalizing the conditions necessary for a decade or more of a protracted deflationary credit contraction.
- According to the Wall Street Journal, the plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies that includes Citigroup (C), Wells Fargo (WFC), Washington Mutual (WM) and Countrywide Financial (CFC).
- Interest rates on more than two million adjustable mortgages are scheduled to reset at higher rates over the next two years.
- The plan being proposed works like this: certain borrowers with adjustable-rate subprime mortgages and who are living in their homes but unable to afford the mortgage reset will get extensions on the teaser rate for at least five years.
- But wait, doesn't this freeze pretty much screw the investors who hold securities backed by mortgages?
- Yes. It does.
- Basically, the plan reduces the number of people being screwed.
- See, there's no free lunch on Wall Street (except for those banks and lenders in bed with the government cartel, the banks in the Fed system), so somebody has to get screwed, it's just a matter of determining which category of victims makes the most expedient category to screw.
- Of course, keeping people in their homes sounds like a great idea, but just as there's no free lunch for most investors, there is no free lunch for those who are willing to sacrifice property rights for the greater good.
- Minyanville Professor Scott Reamer notes, "The idea of property rights for creditors is something no one thinks of, no one."
- "Essentially, creditors are allowed to plunder a little for a long time, thanks to the inflation of credit, then occasionally the government steps in and says, 'Sorry, boys, gotta screw you, but don't worry, you'll make it up on the back end,' which is basically what the Savings & Loan crisis was all about."
3. Why This Is a Crisis, Not a "Hiccup"
Wonder why this is a full-blown crisis and not simply an economic hiccup? According to Moody's U.S. Home Equity Index Composite, the rate of loans at least 60 days past due or that entered the foreclosure process was 16.53% in September, the highest level in more than a decade.
- For perspective, a year ago the delinquency rate was 7.93%, so it's more than doubled.
- Moody's index is made up of three types of loans:
1) home equity loans and lines of credit made to prime (low-risk) borrowers
2) high Loan-to-value second-lien loans to people with imperfect credit
3) first-lien loans to subprime borrowers
- Meanwhile, speaking of past due loans, a third of adjustable-rate subprime home loans in the U.S. were delinquent as of August, according to a study by the Federal Reserve Bank of New York Bloomberg reported.
- Unsurprisingly, the study by the Fed found that the highest rate of delinquencies was in the adjustable-rate subprime category.
- Twelve percent were more than 60 days delinquent, 7% were in foreclosure, and another 13% were less than 60 days overdue.
- For comparison's sake, June figures from the Mortgage Bankers Association showed that 3.2% of all subprime mortgages were more than 60 days past due, and 1.4% of all mortgages of all types were in foreclosure.
- The Fed study was based on a sample of 1% of securitized nonprime loans in the U.S., Bloomberg said.
4. Department of Understatements: "I'm concerned that this may be a big problem here"
You remember that Florida State Board of Administration Fund that was forced to suspend withdrawals yesterday as Florida local governments and school districts pulled money due to more than $700 million in losses on defaulted debt? Well, that was just an isolated event, because... oh, wait...
Montana local governments and school districts this week pulled out $247 million of their funds from the state's Short Term Investment Pool over concerns about its exposure to subprime loans, according to the Billings Gazette.
The Short Term Investment Pool, or STIP, is like a money market fund in which local governments, school districts and state agencies put their extra cash until they need it, the newspaper said.
Guess now they "need it." But there's just one hitch.
"I'm concerned that this may be a big problem here," said Sen. Dave Lewis, R-Helena, former executive director of the Board of Investments. "How long do you continue to let the withdrawals be at par (face value)?"
Good question. After all, nobody wants to be forced to (gasp!) take a loss! It's just not fair.
5. What FedEx's Rate Hike Really Means
FedEx Corp. (FDX) this morning said it will increase 2008 rates for FedEx Ground and Home Delivery by an average of 4.9%. The shipping price increase was expected in the wake of similar rate boosts announced earlier by both UPS (UPS) and DHL Express. The ground rate increases are the largest since 1998. FedEx recently cut its fiscal 2008 profit forecast for a second time due to rising fuel costs and weak freight demand.
But let's cut to the chase. It's the holiday season and, like most of us, what you really want to know is if these price increases mean it's no longer cheaper to mail yourself overnight to your parents' house than fly commercial. Below, we compare the shipping costs for mailing yourself home overnight for the holidays versus flying a commercial air carrier.
Holiday Travel Comparison
Avg. Total Travel Time
(JFK to ATL)
Peak Holiday Schedule
Bags Mishandled/10,000 passengers
Cost One-Way Travel
3 days, 14 hours
3. US Air
Guaranteed Next Day by 8 a.m.
$641.73 based on average airline seat dimensions
Guaranteed Next Day by 8 a.m.
$704.77 based on average airline seat dimensions
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