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Five Things You Need to Know: What If...?


Bear with us while we imagine what a real estate "adjustment" spillover to the broad economy might look like.


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

1. Consumer Spending Picks Up!

Consumer spending in the U.S. rose more than forecast in January, according to data from the Commerce Department. Sounds bullish, right? Or at least less bearish? Well, allow us to rain on the parade.

The Commerce Department reported that consumer spending rose 0.4% in January. The question is, how? Look at the three categories. Durable goods expenditures plummeted 1.3% and has now fallen for four consecutive months. Nondurable goods fell 0.2%. Only services rose, up 0.4%.

Meanwhile, what consumption there was came at the expense of savings. The Personal Savings rate in January was -0.1%, the third consecutive month that the rate has been negative.

2. "More Americans Using Credit Cards to Stay Afloat"

According to USA Today, credit bureau analyses of consumer payment data show that financially squeezed borrowers have begun paying their credit card and car bills before their mortgages. Why would this happen? Simple. Credit cards are being used as cash flow items. Consequently, the immediacy of their value precedes the long-term value of retaining the home as a result of the intensity of the home price deflation.

An Equifax analysis shows that 38% of delinquent mortgage borrowers had kept all their credit card bills current, and 62% had kept all their auto loans current in the two-year period ending in July 2007, USA Today reported.

This reversal in payment priorities helps explain why the rise in credit card and auto loan defaults - which occur when lenders give up trying to recover a debt - hasn't matched the pace of mortgage defaults, the newspaper says. It also suggests that credit card and auto loan default models being utilized by banks may be underestimating looming default rates.

A story in the Washington Post yesterday made a valiant attempt to put a positive spin on the "increased standard of living" for most Americans, especially middle class, but a closer look at chart in that article used to bolster their case actually served to undermine it.

Take a look at household assets and income in the chart below. Taken alone, those would seem to be pretty good. But factor in the debt explosion and the reality is one of shocking leverage. Or, think of it this way; if these figures represented a portfolio manager's trading account statistics, would you let that manager handle your money?

Click to enlarge

SOURCE: Survey of Consumer Finances, Bureau of Labor Statistics, U.S. Census Bureau, Bureau of Economic Analysis | The Washington Post - February 28, 2008

3. A Record Year... for Dividend Cuts

Companies in the S&P 500 have decreased or killed their dividends this year a record nine times, according to Standard & Poors. The latest company to join the list was Sprint Nextel (S), which yesterday reported a $29.5 billion quarterly loss. And over the past 12 months 21 companies have either cut or eliminated dividends, also a record.

Eight of the nine dividend cuts this year have been by financial companies, S&P said. MBIA (MBI) appears twice on the list due to two separate actions. Other companies taking dividend actions include Citigroup (C), Progressive (PRG) and Sovereign Bancorp (SOV).

4. Flashback March 27, 2007

Almost a full year ago we put our bear cap on (over top of our bear hat, bear hair, bear brain and bear skull) and posited a dark, What If scenario. Let's take a look back:

From Five Things - March 27, 2007

What If...?

Ok, we all know the Fed insists that the "ongoing adjustment" in the housing sector isn't going to spread and impact the broader economy. But we're defensive pessimists, always searching out the worst possible scenario so that anything better than the worst is - to us anyway - actually an upside surprise! So bear with us while we imagine what a real estate "adjustment" spillover to the broad economy might look like.

First, one might see home improvement-related companies such as Home Depot (HD) and Black and Decker (BDK) reporting a downturn in sales momentum as fewer home sales translates into fewer home remodels.

Next, appliance makers such as Whirlpool (WHR) and Maytag would probably report deteriorating profits and we'd see headlines like this:

Of course, subprime lenders such as New Century would definitely feel the pinch.

Then, borrowers situated in that gray area between subprime standards and premium credit ratings would probably begin to show signs of stress, especially if their mortgages were adjustable-rate mortgages and they were convinced to take on more home than they could afford.

That would then spillover to lenders with so-called Alt-A exposure, such as Countrywide (CFC), GE's WMC Mortgage, and IndyMac Bancorp.

While the layoffs in the home building and construction sector would be widely expected, job losses in the mortgage industry and even among Realtors would probably surprise many by virtue of the stunning job growth in those employment sectors over the past five years.

Consequently, lenders would be forced to protect themselves by tightening standards and scrutinizing borrowers more carefully. Unfortunately, that would remove what was formerly a layer of demand from the market at exactly the same time the inventory of homes on the market is bulging, causing pricing power to evaporate.

Meanwhile, state and local governments would begin to get phone calls and letters from homeowners upset at property taxes that now seem too high relative to declining home values.

Faced with little choice but to cut property taxes, or be booted from office, capital projects would likely begin to disappear from budgets and government employees in some of the hardest hit areas would themselves be joining the ranks of the unemployed as services and staff are cut.

But wait, if the real estate "adjustment" were truly spreading we could expect still other areas of the economy to take a bruising... such as newspapers. Newspapers would very likely see sharp drops in advertising as real estate and real estate-related advertisers - one of the newspapers' most lucrative segments over the past five years - cut back.

Ho, ho, no worries! This is just our own twisted & perverted "nightmare" scenario!

Can you even begin to imagine the horror if this scenario were to really be taking place... right before our very own eyes?! Why, there'd be widespread calls for government intervention!

A "blame game" would surface in the ivory towers of academia, where the intelligentsia would take turns debating just who is to blame for this growing real estate disaster.

Ultimately, lenders and borrowers would likely square off against one another to see who gets to jail whom!

Yes, it's a good thing none of this is happening.

5. Minyanville's Tax Guide for Gamblers

It's hard to believe that the crush of tax season is already upon us. Meanwhile, a story in USA Today warns not to forget that if you cash a big ticket at the track, or if your savvy bracket picks in next month's office NCAA pool result in a sudden windfall, be sure and report your winnings to the IRS. Thanks a lot, USA No Fun Today!

Did you know that gambling winnings are taxable at your ordinary income tax rate?

Were you aware that nearly 60% of taxpayers reported being "not very likely" to report gambling winnings to the IRS?

Can you believe only 35% of taxpayers said they were aware that they were required by the IRS to report gambling winnings?

It's true! And depressing! Taxpayers are supposed to report all gambling winnings on Line 21 of Form 1040, the USA Today says. To help you, Minyanville has prepared a brief primer on handling gambling winnings with the IRS.

Minyanville's Tax Guide for Gamblers

1. If you win more than $600 while gambling, and the payout is more than 300 times your initial wager, then for IRS purposes you should consider yourself "A Pretty Good Gambler" and quit your job immediately so that you can gamble full time.

2. A form W-2G for Certain Gambling Winnings is required by the IRS to be issued if you win more than $1,200. Make sure your bookie issues you a W-2G for all winnings. Refuse to pay any losses if your bookie fails to provide you a receipt with his taxpayer identification number.

3. For payouts that exceed $5,000, casinos often withhold as much as 25% of your winnings to pay federal taxes. Make up the difference by letting the remainder ride on one more roll of the dice.

4. In certain states, gambling winnings may be subject to state tax, but in others there is no state tax. To avoid confusion, drift aimlessly from one casino and racetrack to another, never staying put for more than two or three weeks at a time. After all, you're a gambler, not a square.

5. The amount you deduct for gambling losses can't exceed your winnings. Therefore, the easiest way to save on taxes is to always make sure your winnings never exceed your losses.

6. Non-cash gambling winnings and prizes are taxable too. For example, if you gamble that your boss won't notice the office supplies you stole, and you win, then you must report the stolen property as gambling winnings. But not to your boss, because then they would become gambling losings.

7. Although your lucky shirt is necessary to win at poker or blackjack, it is not deductible as a gambling expense. The IRS is very clear about this.

8. Keep meticulous records of your gambling activity. Follow your bookmaker, photograph his hangout, record his calls and try to photograph the organized crime boss he reports to.

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