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Five Things You Need to Know: Credit Crunch; Existing Home Sales; All Real Estate is Local; Irony Alert; What Can We Speculate on Next!


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. Credit Crunch

Two important stories this morning point to why subprime may not be contained, and why it's relevant to just about everything else.

  • First, Chrysler (DCX) said this morning it is scrapping a planned sale of $12 billion of loans for its automotive business.
  • Chrysler was to use the financing to help fund its buyout by Cerberus Capital Management.
  • The company still intends to move ahead with a plan to raise $8 billion for its financing division... probably because the company has no choice.
  • Kohlberg Kravis Roberts & Co.'s banks, led by Deutsche Bank (DB) , failed to sell $10 billion of senior loans to fund the leveraged buyout of Alliance Boots, according to Bloomberg.
  • What does this mean?
  • In both cases, the financing plans were scrapped due to a lack of buyers.
  • They simply couldn't find anyone willing to offer credit for the terms they were seeking.
  • What do you call a situation where investment capital is increasingly difficult to obtain as banks and investors become more risk averse, perhaps wary of lending money to corporations and firms and consequently driving up the cost of debt products for borrowers?
  • Oh yeah, that's called a credit crunch.

    February 19, 2007: BusinessWeek. "It's a Low, Low, Low, Low-Rate World."

    It certainly was.


2. Existing Home Sales

Existing Home Sales fell for a fourth straight month in June, perhaps the least surprising news making the rounds this morning.

  • Existing Home Sales declined 3.8% in June, to an annual rate of 5.75 million, the slowest pace since November 2002, according to the National Association of Realtors.
  • Expectations were for a decline of 2.1%, according to Bloomberg.
  • On the bright side, inventories fell 4.2%, the first decline in existing home inventories this year.
  • At the current pace of sales, that's about 8.8 months' worth of inventory, the same as May.
  • Also, the median price of an existing home actually rose 0.3% in June, the first year-over-year increase in 11 months.

3. All Real Estate is Local

In discussing today's Existing Home Sales report, National Association of Realtors President Pat V. Combs, helpfully noted that, "Consumers should avoid making decisions based on what they hear about the national market because all real estate is local."

  • That's right.
  • Don't make your local decisions based on national news reports.
  • So when a national news service, such as Associated Press, reports somethng like "Countrywide (CFC) Squeezed by Falling Home Prices," people shouldn't listen to that kind of sensationalism and hysteria.
  • When a national news outlet such as CNNMoney reports, "Subprime Woes Spread to Junk Bonds," relax and pop a cold one... it's got nothing to do with you.
  • However, when the Patriot Ledger of South Boston reports, "Real estate market continues drop: Home sales, prices fall again in June," that's different.
  • When the San Mateo County Times notes, "The housing slowdown is hitting the Central Valley particularly hard," we can begin to get a little concerned.
  • Yep, when the Durango Herald out in Colorado starts reporting things like, "Number of Foreclosures in Area Jumps," Katie bar the door!
  • We know what you're thinking. What about the Twin Cities Daily Planet out in Minnesota? Now if the Twin Cities Daily Planet says "Foreclosures Have Made Problem Properties More Problematic," well, the problems may indeed run deeper than we feared.
  • And God forbid the Frederick News Post in Maryland should report that "Housing Market Problems Linger"!
  • Or the Pocono Record in Pennsylvania! If the Pocono Record says "Home Sales in Monroe Drop 29%" we may, in fact, be screwed!
  • And then there's Texas. Everything is bigger in Texas, as the Fort Worth Star Telegram made clear when they reported, "Tarrant County Foreclosures Hit New High"!
  • Et Tu Florida? Say it ain't so, Daytona Beach News, "Foreclosures Continue to Soar."
  • Yes, all real estate is indeed local.

4. Irony Alert

Minyan Tripp pointed out a bizarre bit of irony related to the Minyanville Mr. T and the Price of Gold video on Yahoo Finance this morning.

One of the sponsors of the video is Countrywide Home Loans, advertising a no-cost refinancing option. Get Cash Now!

We love it when a plan comes together.

5. What Can We Speculate on Next!

With a solid four years of stock returns under our belts and the S&P 500 up more than 70% since January 2003, we were sitting here the other day racking our brains for something more entertaining to speculate on.

Stocks, commodities, bonds, TIPs, options, preferreds, REITs, closed-end funds, CDOs, CMOs, agency bonds, emerging markets, emerging market bonds, currencies, this stuff is just too easy. It's like shooting fish in a barrel, which just happens to be a game made by a company called Fish Shooter Gaming that we've made a killing on by selling their fixed income securities and buying credit protection, leaving us with something similar to a call option on the underlying stock which we were able to pick up at a very low price before delta hedging our exposure to the underlying shares - but that's a different story.

Bottom line: What's left to speculate on? Baseball cards? Please. We said spec-u-late. Real, live basebal players? Eh. We're talking home runs, not singles. Art? Bo-ring! What about the average temperature in Rome over a specified time series? Hmmm. Can we get that bet in euro-denominated certificates? Apparently so.

  • Merrill Lynch (MER) is launching a two-year euro-denominated certificate that pays a return based on the average temperature in Rome, Italy as measured over the course of a year from mid-September.
  • If the average temperature is over 16.38 degrees Celsius, the certificate will pay interest of up to 16 percent, with the full payout achieved if the average reaches 17.38 degrees, according to Reuters.
  • Data for the current season, from mid-September 2006 to the present day and then forecast through to mid-September this year, show an average temperature of 17.2 degrees Celsius.
  • If over the course of the two years, the average temperature does not rise above 16.38 degrees, then investors do not receive a coupon payment, but receive 101 percent of their principal at maturity, the article explained.
  • This deal brings the product to a new audience, including smaller and retail clients, who have not been able to access the market before, Jens Boening, head of EMEA weather derivatives structuring at Merrill said.
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