Five Things You Need to Know: A Return to New York's "Pre-Gilded Age"?
Be careful for what you wish.
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. The Price is Right... When It Comes On Down
First, the good news. This morning the National Association of Realtors reported that sales of existing homes increased 2.9%. Lawrence Yun, NAR chief economist, said the gain is encouraging, naturally. "We're not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing," he said.
Now, for the bad news. The national median price fell 8.2% year-over-year. But wait, there's more. Remember the good news? It's not "real" good news; it's seasonally adjusted good news.
What does that mean? Well, existing home sales measured from January to February, seasonally one of the slowest times of the year for existing home sales, simply show the measurement of seasonal differences, not real stabilization or improvement. Looked at year-over-year, existing home sales plunged nearly 24%.
2. Time to Run for Cover?
Please know we're not setting out to pick on our friends at Barron's, but we couldn't help but notice the cover of this week's magazine:
Perhaps Barron's is right and financials have hit bottom. After all, just this morning JP Morgan (JPM) raised its "bid" - and we use the word "bid" in the loosest possible sense - for Bear Stearns (BSC) from the equivalent of $2 a share to $10.
The problem we see, however, is that while everyone stares at the stock market, the real issues of debt and credit market turmoil have not improved at all. Why? See today's number three...
3. What Credit Line Drawdowns Really Mean
Last week we looked at an article on Bloomberg noting how Sprint (S) and Porsche are among a new wave of companies drawing on their credit lines. The move may force banks to raise an additional $40 billion in cash to protect their balance sheets.
Why is this a sign credit problems are not yet over? Well, think about why a company would draw upon a line of credit. Frequently this is only done as a last resort, which is why banks typically make them available during good times for very small amount. No one expects the company to actually use the line of credit.
Second, consider what this means for the banks. At the same time banks are raising cash to protect their balance sheets, and in doing so trying to reduce the size of the balance sheet, these companies are essentially forcing banks to expand them by drawing on their credit lines and taking out a new loan.
The net result is that somebody somewhere will see their access to credit diminished as a consequence of weak companies drawing on pre-existing credit lines. Put another way, companies tapping credit lines is not a sign that credit market conditions are re-opening, but a sign they are worsening. And they are getting worse at exactly the wrong time.
Remember, this is a process, not an event. There is still a long road ahead.
4. FHLB to Buy More Mortgage-Backed Securities
And then there's this: Federal Home Loan Banks May Buy $150 Billion of Bonds.
Federal Home Loan Banks were freed to increase their purchase of mortgage-backed bonds by about $150 billion as part of a government effort to pump money back into the market, according to Bloomberg. Just last week Fannie Mae (FNM) and Freddie Mac (FRE) were cleared to buy at least $200 billion of mortgage securities.
Well, $350 billion should help, right? Keep in mind that there are about $4.5 trillion of mortgage securities backed by Fannie, Freddie and Ginnie Mae outstanding.
5. Careful What You Wish For...
How's this for selective memory? An article in the New York Times over the weekend (You Say Recession, I Say 'Reservations!') discussed the fantasies of some of New York City's middle class of a return to the "pre-gilded age."
"Andre Anderson, 34, an account executive at TheDeal.com, a financial news Web site, would like to buy a Manhattan apartment with his girlfriend, but he said their combined incomes still make it nearly impossible to afford one.
Like many, he is rooting for what could be called a Bear Stearns discount, as newly unemployed financiers cut back on the buying binges that inflate the cost of life in the city.
"If there is greater good for everyone, is it worth a few people losing their jobs?" Mr. Anderson asked. "I think so. I hate to see people lose their jobs, but prices in the city have become ridiculous."
We say, be careful for what you wish. Recessions and economic downturns do not come without social cost, not even in New York City. A brief refresher course on New York City circa the 1980s can be found here.
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