Panic Over Oil

Sometimes I am nearly speechless over dumb ideas coming from this Congress. This is one of those times. Please consider the CNN article Senators to push for $100 gas rebate checks.

Most American taxpayers would get $100 rebate checks to offset the pain of higher pump prices for gasoline, under an amendment Senate Republicans hope to bring to a vote soon. "Our plan would give taxpayers a hundred dollar gas tax holiday rebate check to help ease the pain that they're feeling at the pump," Senate Majority Leader Bill Frist announced Thursday.

"It also includes strong federal anti-price gouging protection to protect consumers against anti-competitive behavior by oil companies or other suppliers of gasoline. Our free market system works, but it works best when there's full accountability and full transparency."

Frist said the rebates would go to single taxpayers making less than $125,000 per year, and couples making less than $150,000.

Republican senators said they hoped soaring gas prices would inspire Democrats to support their proposals.

Gas Tax Moratorium

The Democrats were inspired alright, inspired to come up with their own silly plan.
Democrats Propose 60-day Moratorium on Gasoline Tax.

Following President Bush's four-point plan outlined today, Democrats proposed legislation that would put a moratorium on the Federal gasoline tax for at least 60-days to provide consumers immediate relief at the pump. But the proposed legislation would also chop oil company tax benefits and burden refineries with unwarranted reporting requirements, making it unable to win enough support in Congress to have even a remote chance of passing.

For years, Democrats have been fighting to get tough on Big Oil and protect Americans from being exploited when they fuel their cars," said Senate Democratic Leader "give em hell Harry" Reid. "Unfortunately, for years Republicans have been more interested in protecting oil companies' profits than the American people's pockets. Now that gas prices are skyrocketing and Americans are struggling just to fill their gas tanks, Congress must act to ease the burden. Passing a federal gas tax holiday and repealing the tax giveaways in the Bush energy bill is a good start."

The Menendez Federal Gas Tax Holiday Amendment, an amendment to the Supplemental Appropriations Bill under debate in the U.S. Senate right now, will give Americans immediate relief from gas prices right at the pump by removing the $0.184 per gallon federal tax on gasoline and the $0.244 per gallon federal tax on diesel for 60 days. To recover the lost revenue, the amendment repeals huge and unnecessary subsidies for large oil companies included in the Bush energy bill and other legislation and handed out at a time when oil companies were enjoying record profits.

"More than six months ago, Democrats, led by Congressman Bart Stupak of Michigan, introduced legislation that gives the Federal Trade Commission (FTC) explicit authority to investigate and prosecute companies engaged in price gouging. Congressional Republicans voted three times against acting on this Stupak legislation.

"Democrats, led by Congressman Brian Higgins of New York, introduced a bill that would rescind billions of dollars in taxpayer subsidies for these oil companies, roll back these subsidies, tax breaks, and royalty relief given to big oil and big gas companies, and use those funds to help low-income Americans, farms, and small-businesses struggling under the weight of gas prices. And yes, the Republicans voted over and over against rolling back the subsidies even after they knew the oil companies were making historic, obscene, and record profits.

On the whole, the Republican plan is far dumber. But both plans want government to investigate "price gouging". Let's be serious here. Is there any evidence of price gouging? How much are we going to waste trying to determine if there is price gouging? Heck, why not give the contract to Halliburton?

Free Money

Now I am all in favor of lower taxes, but I am also in favor of lower spending. Neither plan comes close but the Republican plan seems like it is from Mars. Is there a fiscal conservative Republican anywhere to be found? Other than Ron Paul, who? When I first read the idea of free $100 bills I thought I was reading something from "The Onion".

How can anyone possibly think that "free money" can be given away with no repercussions? What planet are our senators and congressman from anyway? Isn't the national debt big enough already? If not, why stop at $100. Heck why not give every citizen in the country $100,000? That would buy a lot of gas. Or would it? Perhaps gas would go to $150 a gallon or more if they did that. Who knows? All I know is that there is no such thing as free money.

Strategic Oil Reserves Halted

Bloomberg is reporting Bush Halts Oil Reserve Deposits, Plans Fuel Waivers

President George W. Bush, facing voter concern over soaring fuel prices, said he will free up oil that is being added to the nation's emergency reserves and waive rules that are creating bottlenecks in U.S. gasoline markets.

Bush, in a speech today in Washington to the trade group for ethanol producers, said the country should raise fuel efficiency and develop alternatives to oil. He also ordered the Justice Department to look for possible price manipulation.

"We'll leave a little more oil on the market" by halting deliveries to the reserves, Bush said. "Every little bit helps."

Bush and Republicans in Congress face growing pressure from voters as crude oil soars to a record and gasoline pump prices near the all-time high reached after Hurricane Katrina last year. A CNN poll released yesterday showed 69 percent of U.S. adults say higher fuel costs are causing financial hardship.

The Energy Department will suspend deposits to the Strategic Petroleum Reserve through the end of summer, which is the period of peak demand in the U.S., Bush said.

Because the stockpile is nearly full, the effect of the halt may be minimal. The government has been adding an average of about 25,000 barrels of oil per day to the reserve so far this year. The U.S. imports about 10 million barrels a day.

"The first thing to do is to make sure Americans are treated fairly at the gas pump," Bush said. "This administration is not going to tolerate manipulation."

Boone Pickens, the Dallas hedge fund manager and a Bush supporter, said he was disappointed that Bush is talking about investigations.

"There's not anything there. There's not anybody gouging," Pickens said in an interview today at the Milken Institute conference in Los Angeles. "You have the Federal Trade Commission looking at gasoline prices every day."

Let's do a quick calculation. We import 10,000,000 barrels a day of which 25,000 goes to the strategic reserves. My math says that will help by 1/4 of 1%. In other words, Bush is touting something that is statistically irrelevant.

Ethanol Tax Credits and Tariffs

There are currently tax credits of 51 cents per gallon for suppliers and an extra 10 cent per gallon tax credit to provide extra help to small ethanol producers and farmers. If it takes 61 cents in tax credits to make something profitable for corn growers then that is 61 cents in tax credits not wisely spent. All Congress is doing is wasting taxpayer money by buying votes.

This should be proof enough: Brazil Finance Minister Asks US To End Ethanol Tariff.

Brazil's Finance Minister Guido Mantega asked the U.S. government to reconsider a tariff on imports of ethanol from Brazil, the Valor newspaper said Monday.

The U.S. currently slaps a tariff of $0.54 per gallon on Brazilian ethanol, mainly to protect domestic producers of the alternative fuel, who produce it far more expensively than Brazilians. But U.S. farmers are having difficulties keeping up with rising demand as refiners are substituting the gasoline additive MTBE with ethanol.

The tariff "is worse for the U.S. itself, as it makes the ethanol the country needs more expensive," Mantega is quoted as saying.

In a presentation, Mantega said that Brazilian ethanol currently had a cost of about $20 a barrel and that the fuel is an important piece in the search for cleaner energy sources.

Here we are supposedly struggling to lower gas prices and a non-opec country wants to supply us with cheaper ethanol than we can produce it, and this administration says "no thanks". Instead we worry about non-existent price gouging. Go figure.

By the way, Chris Puplava on FinancialSense produced some great charts in an article entitled ENERGY ECONOMICS 101 that make a mockery of gouging claims.

Breakup Oil Firms Proposal

Is that the end of dumb ideas coming from Congress about oil? By now, Mish readers know the answer to questions like that automatically: "of course not". Please consider a proposal by senator Charles Schumer (D-NY) to breakup oil firms.

"We also have to reexamine whether having only a handful of giant oil companies can coexist with the needs of the American consumer and a rational energy policy in this country -- I do not believe it does," Schumer declared. "And so I'll be offering an amendment to the supplemental that will require a complete examination as to whether or not we should break up the big oil companies."

"Enough is enough," the New York senator added. "We have no competition. There are signs of it. I've talked to business leaders who buy oil and gas products, major, conservative Republican business leaders, and they don't believe the market is on the level."

“If $75 a barrel, $3 a gallon isn't a wake-up call to this country, then what is?

“And prices are going to continue to go up. If we do nothing, we'll look back at the days when it was $3 a gallon, and say, "Boy, that was a lot better than it is today."

“So we need to do three things -- and we are pushing for three things in the real security package that the House and Senate leadership -- Democratic leadership on both sides -- have put together.

“First, we have to dramatically increase conservation. We're not doing any of that. The fact that China has higher mileage standards than we do should make us weep. And China is not a country caring about the environment -- they're doing it just to keep their economic strength.

How long ago was it that we broke up "Ma Bell" only to allow it to be put back together piece by piece? Was anything accomplished? If so what?

What is gold telling us?

On April 25th, Ron Paul, perhaps the only person in Congress with any clues gave a congressional speech about What the Price of Gold is Telling Us. Following are the key snips in a very lengthy article.

Since 2001 however, interest in gold has soared along with its price. With the price now over $600 an ounce, a lot more people are becoming interested in gold as an investment and an economic indicator. Much can be learned by understanding what the rising dollar price of gold means.

The rise in gold prices from $250 per ounce in 2001 to over $600 today has drawn investors and speculators into the precious metals market. Though many already have made handsome profits, buying gold per se should not be touted as a good investment. After all, gold earns no interest and its quality never changes. It’s static, and does not grow as sound investments should.

It’s more accurate to say that one might invest in a gold or silver mining company, where management, labor costs, and the nature of new discoveries all play a vital role in determining the quality of the investment and the profits made.

Buying gold and holding it is somewhat analogous to converting one’s savings into one hundred dollar bills and hiding them under the mattress-- yet not exactly the same. Both gold and dollars are considered money, and holding money does not qualify as an investment. There’s a big difference between the two however, since by holding paper money one loses purchasing power. The purchasing power of commodity money, i.e. gold, however, goes up if the government devalues the circulating fiat currency.

One of the characteristics of commodity money-- one that originated naturally in the marketplace-- is that it must serve as a store of value. Gold and silver meet that test-- paper does not. Because of this profound difference, the incentive and wisdom of holding emergency funds in the form of gold becomes attractive when the official currency is being devalued. It’s more attractive than trying to save wealth in the form of a fiat currency, even when earning some nominal interest. The lack of earned interest on gold is not a problem once people realize the purchasing power of their currency is declining faster than the interest rates they might earn. The purchasing power of gold can rise even faster than increases in the cost of living.

The point is that most who buy gold do so to protect against a depreciating currency rather than as an investment in the classical sense. Americans understand this less than citizens of other countries; some nations have suffered from severe monetary inflation that literally led to the destruction of their national currency. Though our inflation-- i.e. the depreciation of the U.S. dollar-- has been insidious, average Americans are unaware of how this occurs. For instance, few Americans know nor seem concerned that the 1913 pre-Federal Reserve dollar is now worth only four cents. Officially, our central bankers and our politicians express no fear that the course on which we are set is fraught with great danger to our economy and our political system. The belief that money created out of thin air can work economic miracles, if only properly “managed,” is pervasive in D.C.

In many ways we shouldn’t be surprised about this trust in such an unsound system. For at least four generations our government-run universities have systematically preached a monetary doctrine justifying the so-called wisdom of paper money over the “foolishness” of sound money. Not only that, paper money has worked surprisingly well in the past 35 years-- the years the world has accepted pure paper money as currency. Alan Greenspan bragged that central bankers in these several decades have gained the knowledge necessary to make paper money respond as if it were gold. This removes the problem of obtaining gold to back currency, and hence frees politicians from the rigid discipline a gold standard imposes.

The number of dollars created by the Federal Reserve, and through the fractional reserve banking system, is crucial in determining how the market assesses the relationship of the dollar and gold. Though there’s a strong correlation, it’s not instantaneous or perfectly predictable. There are many variables to consider, but in the long term the dollar price of gold represents past inflation of the money supply. Equally important, it represents the anticipation of how much new money will be created in the future. This introduces the factor of trust and confidence in our monetary authorities and our politicians. And these days the American people are casting a vote of “no confidence” in this regard, and for good reasons.

The incentive for central bankers to create new money out of thin air is twofold. One is to practice central economic planning through the manipulation of interest rates. The second is to monetize the escalating federal debt politicians create and thrive on.

Today no one in Washington believes for a minute that runaway deficits are going to be curtailed. In March alone, the federal government created an historic $85 billion deficit. The current supplemental bill going through Congress has grown from $92 billion to over $106 billion, and everyone knows it will not draw President Bush’s first veto.

Current policy guarantees that the integrity of the dollar will be undermined. Exactly when this will occur, and the extent of the resulting damage to financial system, cannot be known for sure-- but it is coming. There are plenty of indications already on the horizon.

Foreign policy plays a significant role in the economy and the value of the dollar. A foreign policy of militarism and empire building cannot be supported through direct taxation. The American people would never tolerate the taxes required to pay immediately for overseas wars, under the discipline of a gold standard. Borrowing and creating new money is much more politically palatable. It hides and delays the real costs of war, and the people are lulled into complacency-- especially since the wars we fight are couched in terms of patriotism, spreading the ideas of freedom, and stamping out terrorism. Unnecessary wars and fiat currencies go hand-in-hand, while a gold standard encourages a sensible foreign policy.

It’s a mistake to blame high gasoline and oil prices on price gouging. If we impose new taxes or fix prices, while ignoring monetary inflation, corporate subsidies, and excessive regulations, shortages will result. The market is the only way to determine the best price for any commodity. The law of supply and demand cannot be repealed. The real problems arise when government planners give subsidies to energy companies and favor one form of energy over another.

Energy prices are rising for many reasons: Inflation; increased demand from China and India; decreased supply resulting from our invasion of Iraq; anticipated disruption of supply as we push regime change in Iran; regulatory restrictions on gasoline production; government interference in the free market development of alternative fuels; and subsidies to big oil such as free leases and grants for research and development.

Meaning of the Gold Price-- Summation

A recent headline in the financial press announced that gold prices surged over concern that confrontation with Iran will further push oil prices higher. This may well reflect the current situation, but higher gold prices mainly reflect monetary expansion by the Federal Reserve. Dwelling on current events and their effect on gold prices reflects concern for symptoms rather than an understanding of the actual cause of these price increases. Without an enormous increase in the money supply over the past 35 years and a worldwide paper monetary system, this increase in the price of gold would not have occurred.

Economic law dictates reform at some point. But should we wait until the dollar is 1/1,000 of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become. Runaway inflation inevitably leads to political chaos, something numerous countries have suffered throughout the 20th century. The worst example of course was the German inflation of the 1920s that led to the rise of Hitler. Even the communist takeover of China was associated with runaway inflation brought on by Chinese Nationalists. The time for action is now, and it is up to the American people and the U.S. Congress to demand it.

Panic Time

Compare and contrast the fiscal sanity and wisdom of Ron Paul with the idea of giving every citizen $100 "free money" to help counteract rising gas prices.

It seems to me Bush and the Republican Congress and practically everyone else except for Ron Paul is in a panic over oil. Perhaps the following chart with thanks to Professor Pollkatz, just might explain why. For a much larger and easier to read gif file please click here.














The reason we are in such dire fiscal straights is there are too many politicians with their hands in the till, too many politicians that see nothing wrong with buying votes, too many politicians that do not understand what inflation really is, and quite frankly too many jackasses running the country counterbalanced by one Ron Paul whom everyone ignores.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Strong 1st Quarter GDP Growth

Reuters is reporting GDP growth strongest in 2-1/2 years.

The U.S. economy grew at its strongest rate in 2-1/2 years during the first three months of this year, snapping back from a lackluster fourth quarter on a surge in spending and investment, a Commerce Department report on Friday showed.

Gross domestic product grew at a 4.8 percent annual rate in the January-March first quarter, more than twice the 1.7 percent rate in the fourth quarter and the strongest for any three months since 7.2 percent in the third quarter of 2003. The first-quarter figure was only slightly below the 4.9 percent rate that Wall Street economists had forecast.

The pace of price rises declined from the fourth quarter. A gauge of personal spending excluding food and energy - a measure favored by the Federal Reserve - advanced at a 2 percent rate in the first quarter compared with 2.4 percent in the fourth quarter last year.

First-quarter GDP performance was boosted by increased government spending on reconstruction in the wake of last year's devastating hurricanes on the Gulf Coast. Federal government spending shot up at a 10.8 percent rate, a sharp contrast to the 2.6 percent rate of decline in the fourth quarter. It was the strongest government spending since a 22.1 percent jump in the second quarter of 2003.

[So the solution to our problems is more hurricanes and goverment spending? Exactly what are we getting for our money? Mish]

Federal Reserve Chairman Ben Bernanke told the Joint Economic Committee on Thursday that growth was likely to moderate as the year wears on, partly because of some softness in housing markets. He also indicated that U.S. central bank policy-makers might pause fairly soon in a campaign of steady rate rises, which have brought 15 interest-rate hikes since mid-2004.

Businesses robustly boosted their investment during the first quarter, with spending rising at a 14.3 percent annual rate. That was three times the 4.5 percent fourth-quarter increase and was the largest in nearly six years, since a 14.8 percent climb in the second quarter of 2000.

[And does anyone recall exactly what happened in the third Quarter of 2000? Mish]

Spending on equipment and software alone increased at a 16.4 percent rate in the first quarter - the strongest in six years - after a 5 percent fourth-quarter rise. The strong spending implies that corporations remain optimistic about their sales prospects and are willing to make the investments to expand their businesses.

[Ya gotta love it. After 15 freaking rate hikes corporations have turned more optimistic just as we are headed for a recession - Mish]

With demand strong, inventories grew at a slower rate in the first quarter. Stocks of unsold goods increased at a $21.9 billion rate, down from $37.9 billion in the final three months last year, leaving room for factories to keep churning out more goods as long as spending remains hearty.

[As long as spending remains hearty huh? - Mish]

Is anyone aware of how much consumer spending has been tied to housing gains? Has anyone looked at falling real wages, the negative savings rate, falling home sales, or rising home inventories?

Then again, I suppose it could be different this time. The one thing that remains to be seen is how much more money Congress and this administration is willing to waste to keep Republicans in control of the House and Senate.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

New Gold Standard

Sorry gold bugs this is not what you think. David Lereah, Chief Economist of the National Association of Realtors made a claim this morning that real estate is the "new gold standard."

I just received that message along with these notes from Mike Morgan taken at a meeting today where David Lereah spoke. Following are Mike Morgan's notes and comments:

Hello Everyone,

I just left a meeting where the Chief Economist of the National Association of Realtors (NAR) spoke. You all should have been there to hear his spin on the real estate market. Here are some highlights.

David Lereah was not as positive as he has been. After a few worn out jokes, he made an effort to put a positive spin on the markets. However, his wrap up summed it all up. “Some builders will get caught with their pants down, because they built too much”

He lead off by stating, the media is responsible as they are not looking at the data or putting it in the right place. I disagree emphatically. I believe the media is being conservative, as no one is looking at what these numbers are made up or where they come from. The recent release by NAR showing an increase in homes sales is a perfect example. With the Florida market being the largest component of this number, and Florida down 22%, there is no possible way to be up . . . without a footnote. There is a possibility we are seeing a spike in those folks in the Gulf Coast that lost their homes, buying new homes or renting the available inventory and forcing other market participants to buy versus rent. However, it is highly unlikely that the other States that make up the South could have boosted the numbers into positive territory . . . unless the sampling NAR does was in non-representative markets. Even with the Gulf Coast effect, that is temporary.

Mr. Lereah went on to blame the issues on FNMA making it easier to finance a home and, get this, the Internet making it easier for buyers to find homes.

Lereah noted that 40% of homes are second homes. He failed to note that most investors purchased homes and told the builders that these were primary homes. If they admitted they were second homes or investments, the builders would have either told them to walk or charged them 20% deposits. I can verify this, as many of my clients did this. Why? The home builders’ sales reps told us this was the way around the investment restrictions!

He continued to paint a rosy picture by stating that real estate was the, and I quote, “new gold standard.” That’s scary, as this has been the complete opposite. If we want to analogize this market for the last few years, let’s analogize it to options, derivatives, naked puts and the Big Wheel in Vegas.

On the flip side of the rosy picture he admitted, “Prices got a “little” too high, we got ahead of ourselves. . . . We need to catch our breath.”

He then noted, “It happened in the stock market. How many people purchased Qualcomm, Lucent, I doubled down on Lucent. We became irrational during the stock market craze.” Well, I ask, how does that balance with his statement about real estate, “There were lotteries to get into deals. I got into one!” He got into one? The Chief Economist of NAR?

A few more quotes, “Go to Miami to see the excess.”

“40% of all loans in 2006 were interest only. . . Prices went higher because of the artificial energy in the real estate market . . . that’s what took the punch bowl out of the party.” Party? Did he admit this was nothing more than a party? He sure did.

After his Miami reference he said, “Naples Florida is even worse. Misery loves company.”

“We are transitioning to a buyers market. It could be 1 month, 6 months, 12 months.” Very highly unlikely that this is one month or even six months.

“If you have a healthy local economy it is almost impossible to have a bubble burst!” Well, I got news for you, we don’t have a healthy economy with oil at $75 a barrel and the bulk of all jobs created during the last few years in real estate!

“You have a great future in real estate, but you need to cleanse your real estate markets. We made a mistake. It’s going to hurt. You are going to have a double digit drop. Expect it.” And in his very next breath, “2006 will be the best year ever.”

“No signs of a bubble bursting.”

Next breath, “Naples right now is experiencing some problems.”

“Conventional wisdom turned on its head.”

I love this one. “The laws of supply and demand have not been revoked.” Exactly. We have a supply that can be analogized to Dutch tulips.

“Is this a bad year. Yes. Your numbers will down. You got ahead of yourselves. The market got ahead of itself.”

Lereah said it will be the “middle of 2007 when you start to pick up again. I see Florida picking up in 2007. But there are particular markets that will not. It depends on inventory levels.”

I guess I must ask how 60,000 condos in Miami with a 2,500 a year absorption rate isn’t a supply and demand problem. Let’s take the 60,000 reported by McCabe Research and cut it in half, and then double the absorption rate. So we have 30,000 condos and 5,000 sales. Do the numbers.

I have warned my investor clients for more than a year that this was coming. If builders, banks and real estate agents acted responsibly we would not be in this situation. Many agents blast me for being so negative and “single handedly bringing down the market.” I take great pride in how I have conducted my business. Unfortunately, I will still take quite a bit of heat, as I recommend to my clients to rent for 6-12 months and then buy . . . unless there is some overpowering reason for them to buy now. That’s certainly not what my fellow Brokers want to hear, but my duty is to my clients. As a licensed professional, I must adhere to our Code of Ethics. I do what is best for my clients, not my fellow Brokers.

Great Day to You All,

Mike

OK, let's do the math as Mike suggests. 60,000 condos selling at 2,500 per year. Hmmm. It seems we have a 24 year supply of Florida condos coming online. OK let's double the sales rate to 5,000 and have the number built at the same time. 30,000 / 5,000 is a 6 year supply.

Not to worry, Real Estate is "The New Gold Standard". Besides, as everyone knows “If you have a healthy local economy it is almost impossible to have a bubble burst!” Excuse me but isn't everyone saying how healthy the economy is right now?

On one hand we see that there are “No signs of a bubble bursting.” Yet we see builders "caught with their pants down" even though bubble bursting is "almost impossible". Compare and contrast "We made a mistake. It’s going to hurt. You are going to have a double digit drop” with “2006 will be the best year ever.” Read back over Mike Morgan's notes and you will quickly see that David Lereah is talking out of both sides of his mouth at the same time, each side saying the opposite thing.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

McCabe Research April 2006

I had an interesting one hour conversation today with Jack McCabe of McCabe Research and Consulting, a firm specializing in micro/macro research of multifamily residential and commercial mixed use projects. It seems he found me after I put a double "black mark" on his soul and jokingly banned him from The Apologists Club on March 24th.

"That is a trend, not a blip," said Jack McCabe, chief executive of McCabe Research and Consulting in Deerfield Beach, adding that too many good people took out too many bad loans.

I was pleasantly greeted with a surprise phone call from him just today. I will try and summarize the conversation as best as I can. Here goes:

For starters, Jack McCabe was telling me that there are 290,000 real estate agents in Florida. "That equates to one out of every 57 people", he said. Imagine that. The real question I asked McCabe is "How many of them depend on sales commissions for their livelihood?" Let's face it I said, there are a lot of housewives masquerading as real estate professionals happy to get a sale or two a year as extra income. Jack estimated there are approximately 130,000 full time professionals based on the number of registered Florida association of realtors.

For the sake of argument let's call it 150,000 (assuming that there are some full time agents not registered with the association and others even if not full time very dependent on commissions for living expenses). That would make it roughly one in a hundred people in Florida are directly dependent on real estate for their livelihood. "But wait" Jack said, "That does not count loan originators, home builders, contractors, subcontractors, landscapers, or anything else housing related".

Jack is correct of course, and even though the others may not "need" the extra money, it is certainly flowing through the system. That is a theme I have been harping about for months as Mish readers know full well. As long as the building continues, people will have jobs. When it dies, it will be lights out.

"Look at Countrywide" McCabe said. "Countrywide?" I asked. It seems that with little fanfare Countrywide closed a South Florida office in December. With it perhaps a couple hundred people lost their jobs. "Not only that but Washington Mutual is laying off people", he said. A couple of hundred people might not sound like many, but the real question is how many home sales did a couple of hundred loan originators support?

Jack was telling me about "mezzanine financing". I had to ask him what that meant. It seems a lot of home builders were on short term financing, hoping to get projects completed "Wham bam thank you mam". Jack is now telling me that some of those developers now have a "cash flow problem". It is one thing when people are camping out overnight to get in line to buy a condo. It is a far different situation when projects are being delayed and even cancelled.

In fact, projects are now being cancelled left and right. McCabe told me of a development that has sold 2 units out of 250 after cancellations. Hello world! If that is a small time developer, that person has just been busted big time for speeding. The next step is bankruptcy.

Jack spoke of a project in Sarasota where because of a technical delay in condo document filing with the state of Florida, the developer had to recently do a special two week rescission period. Well guess what? It seems that 100 units that the developer thought were sold have now been cancelled. That is 100 out of 270! Given that not all of the units were presold, the cancellation rate is enormous. "Speculators are bailing every chance they get" he said.

I have one more interesting factoid. Jack is telling me that "as soon as ground is broken, the ability of investors to get back deposits is limited". I commented that seems like fertile ground for fraud. "Indeed", he said. It seems there are situations right now where developers are bringing in bulldozers and breaking ground "with no real intention" of getting underway with actual development. The reason they are doing this is because as soon as ground breaks at least a portion of deposits are not refundable. Some lawsuits are now underway.

Although McCabe Research specializes in Florida and the Southeast US, Jack is telling me of similar stories elsewhere including Las Vegas, San Diego, Chicago, Boston, New York, and Los Angeles. Interestingly enough, he thinks that housing is a "local problem". That was the good news. The bad news is that the "local problem" includes areas where a huge percentage of the population lives.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Exit Stage Left

I am in nostalgia mode. Perhaps it shows my age, but I can not help but think about that loveable pink lion "Snagglepuss".

After reading this post you may want to order the snagglepuss refrigerator magnet shown on the left. If so, I certainly can understand.

Enquiring minds can also preview a brief audio of "Exit Stage Left" here (The audio is free).

Before I could even ask, the telepathic thought lines were flooded with calls. "Mish what does Snagglepuss's "Exit Stage Left" have to do with the economy?

"Heavens To Murgatroid" I am pleased to announce that staging exits has once again taken center stage. Of course I have proof. Here it is:

Home Staging Tips

Barbara Corcoran has Tips for Staging Your Home. Now she does not say if it is an exit stage left or an exit stage right but she does say that "Simple Changes May Translate to Big Bucks". Let's take a look:

If you're selling your house, you should probably be staging it.

"It's always best to your put your best foot forward in any situation, and this is a way for your house to put its best foot forward," said real estate guru Barbara Corcoran.

Fixing up your home, or "staging" it, as the real estate business calls it, can raise your selling price anywhere from five to 20 percent, Corcoran says.

Here are her tips for staging your house.

Clean your house. A filthy bathroom is the worst, second only to a dirty kitchen.

Let the light in. Wash your windows, because dirty windows keep out light. And open the shades. Basically, people like light, so if your rooms have dark colors, you might want to consider repainting them.

De-clutter your house. Clutter makes your house look small and unloved.

Take a whiff. If your house has an odor, that's a huge turnoff. Make it smell nice. You might need an air filter.

Fix up the bathroom. First of all, make sure it's clean. Then, see how you can spruce it up. At the very least, re-caulk any areas that are falling apart.

Examine your front door. That's the first thing people will see. Does it need a coat of fresh paint?

Send your pets to grandma's house. A barking dog is unwelcoming. Plus, people might be allergic to yor pets.

The question I have is "Should it take a 'guru' to figure that out? I mean seriously, how can one take plain common sense and put a "staging" label on it? I think Snagglepuss had more common sense. Whenever Snagglepuss was in trouble he exited "Stage Left" although on rare occasions he did exit "Stage Right". Whether left or right, it should now be clear that the stages are being exited, sometimes by auction and somtimes by bankruptcy or other liquidation.

Bargain Basement Prices

The Palm Beach Post is reporting Bargain Basement Auction Prices.

Luxe properties go for bargain at Tesoro auction.
The gavel slammed down almost as soon as the bidding had started. In minutes. As fast as the words could tumble out of the mouth of the auctioneer, whose voice buzzed like a bumblebee: Sold for $165,000.

"We're in the basement, folks," the auctioneer said. "What a bargain."

Promising "prices we have not seen in years," auction organizers said the sea of sellers looking to unload properties was anything but a poor reflection of the Tesoro communities.

Trademark the Obvious

It seems "StagedHomes" is now a trademarked name.

The way you live in a home and the way you sell it are two different things. That's the premise of "Staging", a hot new trend that’s sweeping the country. In any real estate market, Staged Homes sell faster or sell for more money or both! In Home Staging, readers learn how to play up a home’s strong points and improve its presentation. This book helps readers look at their houses through the buyer’s eyes. From repairing a broken step and clearing out the clutter to trimming those overgrown bushes and painting a room, Home Staging shows readers how to play up a home’s strengths and minimize its weaknesses.

Plan "B"

Not all of our modern day Snagglepusses staged an exit at the right time.
Please consider They had a plan, then reality intruded.

A group of friends who set out to buy, fix up and "flip" a Palm Springs tract house haven't found the riches they were seeking. Four friends thought they could 'flip' a house, but cost overruns, bad timing got in the way.

In August, the four bought a three-bedroom, two-bathroom, 1,900-square-foot home that seemed like a good-enough deal at $425,000. Houses in Palm Springs had been appreciating consistently, and other homes on the same street were listed for considerably more. The plan was to spend $60,000 fixing up the house, then sell it in two months for about $650,000. According to Haughey's calculations, the profit would be $60,000 after all expenses, taxes and commissions, or $15,000 for each partner.

Spirits were high when the project began. The friends worked full time during the week and then spent weekends in Palm Springs on their project. They visited tile stores, drove around neighborhoods looking at paint colors, dined at their favorite local restaurants and generally enjoyed their time together.

But as the renovation went forward, the budget crept up to $67,000, mainly because the kitchen and bathrooms cost more than expected. The kitchen got a luxury makeover with oak cabinets, some with frosted glass doors, plus brushed aluminum hardware and granite counters.

The house went on the market in early November. [It's now April and there is still no sale]. The house is now listed for $629,000, and if it sells for that, each partner will pocket just $5,000.

"It's not risk-free," Nina Smith said of her first foray into speculative remodeling. "I need to better educate myself on finding a better property."

And if the house doesn't sell for the current price?

"We have all discussed Plan B," Scalero said. "The possibility of turning it into a vacation rental. We've been told that weekly rentals go for around $1,500."

Ah yes, the infamous "Plan B". They could not sell it for a profit in six months, pray tell what makes them think they can rent it in another six months? Even if they can, how long will all four of them be happy about the carrying costs? The good side is that those costs are now split four ways. But what is going to happen in those situations where one person is holding six mortgages hoping to flip them? If you think that scenario is not realistic then please check out 6 PROPERTIES, SELLER WILLING TO HOLD FINANCING

I am an investor selling the following properties. I am willing to hold financing so you can buy with no money down and in some cases, I am willing to stay on, FREE OF CHARGE, to continue to manage the existing tenants.

That poor guy wants to "Exit Stage Left" but the doors are now closed both left and right. Nationwide, the stage doors are getting tighter and tighter with every uptick in rates. Fewer and fewer speculators will be able to make it safely through the exit doors.

Mish note: The above appeared in a recent issue of Whiskey and Gunpowder. Since then I have come across more examples of staging and exits. Here goes:

Even home builders are into staging. Toll Brothers is staging easter egg hunts and refrigerator doors.

A refrigerator magnet in a Toll Brothers home may have a message to a fictitious family member about a relative that has to be picked up at a train station, demonstrating that mass transit is nearby. Or, a school jersey hung in a bedroom of the model home serves as a reminder of a good school district.

In addition to personal notes and school jerseys, Toll Brothers' marketing involves staging Easter egg hunts, Halloween parades as well as charity events or PTA meetings — another reminder of a neighborhood's school system — within a development.

George Pintye, a real estate agent in Hernando County Florida just sent me this nifty exit strategy by insurance companies: Strapped insurers flee coastal areas.

With the 2006 hurricane season starting in just five weeks, many home insurers from Texas to Florida to New York are canceling policies along the coast or refusing to sell new ones out of fear of another catastrophic storm.

In the widest insurance retreat from coastal property since Hurricane Andrew slammed Florida in 1992, insurers as far north as Long Island, N.Y., and Cape Cod, Mass., are shedding coastal homeowners policies to reduce their exposure.

In Florida alone, insurers that are undercapitalized or fearful of losses have notified the state of plans to cancel more than 500,000 homeowners policies. With $2 trillion each in coastal property, Florida and New York lead the USA in coastal exposure, followed by Texas and Massachusetts.

Companies including Allstate, the USA's second-biggest property insurer, say forecasts of more major hurricanes combined with soaring coastal real estate development have created unacceptable risk in some areas.

Last year's hurricanes cost insurers a record $60 billion in claims payouts. Now Allstate, which paid out a record $5 billion in hurricane claims last year, is canceling 95,000 policies in Florida and 28,000 in New York.

•Florida. Amid mass policy cancellations, state officials are declaring a crisis. Because mortgage lenders require home insurance, affected policyholders must find other insurance, probably at higher cost. Near the coast, annual premiums of several thousand dollars now rival a mortgage's cost. Florida's state-run insurer of last resort, which must provide insurance if no other company will, has a record 815,000 policies and a $1.7 billion deficit. At the urging of state Chief Financial Officer Tom Gallagher, a judge Tuesday began placing Florida's No. 3 home insurer, Poe Financial, into receivership because it lacks adequate reserves.

•Texas. Allstate just announced it won't write any new homeowners policies in 14 coastal Texas counties. Texas' insurer of last resort, the Texas Windstorm Insurance Association, has only $1.2 billion in cash and reserves going into the new hurricane season. The association wants to raise rates 19% on homes and 24% on businesses.

•New York. Allstate says it won't write any new homeowners policies in New York City, Long Island or Westchester County. Although Long Island hasn't been struck by a major hurricane since 1938, "The probability exists for New York to be hit," says Trevino. MetLife also is cutting back on new homeowners policies near the coast. New York's legislature is considering a bill to create a permanent, state-run insurer of last resort to provide wind and fire insurance for coastal homes.

Following are George Pintye's comments:

Hi Mike,
USA today has basically sounded the death knell for the Florida real estate market:

I still can't get my head around the 500,000 figure. And now, the State's # 3 insurer is going into receivership? Wonderful.

And need I mention that we've recently lost buyers (even one deal at the closing table) because of the outrageous premiums required for homeowner's insurance?

Its painful to think about what's going to happen to Florida this summer, much more as a homeowner and resident then a real esate agent.

Best Regards,
George

Let's finish up with one of the worst stage exits in history. Play the video and I am sure you will agree. Just don't let it happen to you.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

FAR vs NAR

Following is an update from Mike Morgan about the discrepancy between Florida Association of Realtors (FAR) numbers vs the National Association of Realtor (NAR) numbers:

Several of you have called to find out why yesterday’s Florida numbers are at the opposite end of the spectrum from the National Association of Realtor (NAR) numbers. Here’s what one analyst told me after he investigated a similar disconnect prior to this one.

NAR extrapolates. They survey 1-2% of the market and then multiply and add a “fudge” factor. He said he believes they intentionally avoid distressed markets like Miami, Naples, Vegas, Phoenix, DC, etc. There goal, as our Trade Association, is to promote the industry, not to report a comprehensive picture. If they avoid the hard hit markets, their numbers will consistently paint a much better picture than what reality is.

I have not been able to confirm this, but he is a top analyst with a top securities firm. He was able to speak directly with the right people at NAR.

What he says makes perfect sense when Florida shows a 22 and 23 percent drop in homes/condos, while NAR claim the numbers are actually up. From ground zero, I can tell you, without any question whatsoever, sales are down at least 25%. Folks . . . that’s being conservative. Moreover, listings to sales are in a runaway mode. I have stopped taking listings unless the client wants to pay a nonrefundable advance fee.

The other issue that is being ignored is what goes into Existing Home Sales. Many of these homes are flippers selling their homes that they just closed on as New Home Sales. It is not a normal number. As the flippers are being forced out of the market and walking away from contracts, we will eventually see the Existing Home Sales numbers fall substantially. However, NAR can simply avoid the markets they want to avoid, and simply use data from markets that will produce a “happy” number, as he notes.

The weekly numbers I report in regard to listings to sales are direct from our MLS system. These numbers track what FAR just reported. As my Grandpa once said, “Liars can figure, but figures can’t lie.”

Last Friday Mike wrote:

Engle is cranking it up a notch with a 25% boost to commissions to a lofty of 5%. A year ago the builders were paying 2% on average. Not only that, but they’re reducing prices $10,000 and giving away $15,000 in upgrades. It will be interesting to see where this all stops. Personally, I think we will see a lot of projects put on hold and a lot of condo projects failing.

Hmmm Let's see. Following is the second condo bankruptcy fiasco that I have seen lately. Condo construction halted; lender files for bankruptcy.

When a Las Vegas lender plunked down money from retirees, investors and even a medical research firm's pension fund to finance construction of a West Palm Beach high-rise condo, everyone gambled that red-hot Florida real estate was a sure thing.

Low-income residents of the apartment complex moved, heavy construction equipment rolled in, millions of dollars were borrowed and dozens of investors saw double-digit returns on investments.
Now, all bets are off.

Lender USA Commercial Mortgage Co. and its related companies — better known as USA Capital — filed for Chapter 11 bankruptcy protection in Nevada on April 14. The filing follows a Securities and Exchange Commission investigation of how the company and its affiliates financed construction projects.

"Up until last week, we had no inkling that anything was wrong," said Virgil Birgen of Nevada, who, with his wife, invested $150,000 to build Sail Club at Clear Lake.

About 200 people from across the country gave Nevada-based USA Capital or a sister company money to fund the four-tower, 590-unit luxury high-rise on Executive Center Drive.

"We have always gotten paid," said an investor in the local property who asked that her name not be used. But when she recently asked to withdraw her $100,000, there were weeks of delays. Then the company went into bankruptcy court.

"I didn't get anything back," she said.

Expect to see a lot more horror stories like that one. 50,000 condo units are coming online (or plan to) in the next couple years. That is close to a 10 year supply and many will not make it. A lot of would be flippers that bought these properties will not be happy with the results.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

A Look at Hyperinflation

Lately I see many people pointing to this that and everything else but especially rising home prices, gasoline prices, and commodity prices as if those constituted "hyperinflation". It is a word being bandied about without anyone having a firm grasp as to what it really means. Hyperinflation involves a complete and sustained collapse of faith in currency.

If you want to understand hyperinflation please look at Zimbabwe.

The BBC is reporting that Public hospitals fees have gone up from Z$300 to between Z$800,000 and Z$1m (US$10) with immediate effect, the state-owned Herald newspaper reported. The costs of consultations, maternity services, surgery and intensive care are also increasing.

The 333,200% increases come a month after the government lifted a freeze on private health care charges.

333,200% increases is (no ifs ands or buts) hyperinflation.

Back in the US, gasoline prices soaring 100% in response to peak oil has nothing to do with hyperinflation. In fact, soaring oil because of "peak oil" has nothing to do with inflation at all.

Oil soaring because of loose monetary policy does have something to do with inflation. Unfortunately it is very hard to see the difference.

Yet it is critical to understand the difference.
Please review:

• Inflation: What the heck is it?
• Inflation Monster Captured
• In Praise of Saville
  

In case you do not believe me or Saville perhaps you might believe Marc Faber. Please consider the article Marc Faber shatters prevailing market myths.

Q: How important is it to understand the role of the Federal Reserve to understand the world economy?

A: I think it is very important to understand the fact that we have a central banking system where the central banks can indicate, theoretically drop dollar bills from Helicopters. You wont be able to do that because all American helicopters are in Iraq. But they can print money, that is a fact and they can flood the system with liquidity.

Then you have to find a measurement of inflation. We measure inflation by rise in money supply. It would be wrong to think that the inflation is just consumer price increases. Inflation is a loss of purchasing power of your currency, dollar or Rupee. It can manifest itself by rise in consumer price but it can also manifest itself by a loss of purchasing power of money against real estate, or against stocks and real estate.

Q: What is the public enemy No 1 in your book, would it be inflation, or deflation?

A: In my book public enemy No 1 are the central banks. I think the world will be much better off under a gold standard. Other than that, I think the asset inflation is much more dangerous than consumer price inflation because asset inflation is driven by a huge credit bubble. Then asset prices become very expensive and when asset prices go down it leads to recession. So the Central Banks will support asset prices and see to it that they keep on going up. So they will inflate more and more and eventually you will come to an economic collapse.

Point blank, if the US was anywhere close to hyperinflation, Centex and other builders would not be knocking off $100,000 on the prices of their houses. I would not be able to buy chicken legs at .49 a pound on sale. Round roast would not be $1.69 lb on sale. I bought several roasts and had the store make ground round for me, paying zero% extra for the service. I recently bought whole turkeys at .69 lb and turkey breasts at .99 lb. Over Easter I bought a butt ham for .98 lb. Center cut pork chops not on sale are $5.49 lb. Phooey. Who needs that? At least once a month they are on sale for $2.29 lb or less. Seriously we are talking 1970's prices. I know because I worked as assistant manager in a grocery store back then. Heck I have no idea how they can even raise chickens at .49 lb. If you know then please tell me!

Yes, you can complain about medical prices, property values etc. But... If you have lived in your house for the last 5 years your expenses have gone down (assuming you were smart and refinanced anywhere close to the bottom). You can also complain about car prices but that will fall on deaf ears. We bought a brand new and very well equipped Hyundai Elantra (in 2005) for $10,500. Anyone paying $30,000 or whatever for an SUV and is now complaining about insurance costs and gasoline prices was simply asking for trouble in the first place.

Speaking of gasoline prices.......
The US has some of the lowest gasoline prices in the world.

'

Is that hyperinflation? Where?
To the extent that those prices are rising because of peak oil and not loose monetary policy, gas price hikes are not even a symptom of inflation at all.

Please do not mistake this post to mean I believe the CPI. I do not. It seriously understates energy prices, medical prices, education costs, property taxes, and a whole slew of other things. But the bottom line is that any talk of hyperinflation in the US is seriously misguided.

As for me, I am waiting for a turn down in credit expansion which is what the focus should be on. The threat is not where everyone is looking, and I guarantee you everyone is looking at inflation running out of control. Flashback 2002: does anyone remember the deflation threat? That the FED is now concerned about inflation after 15 consecutive rate hikes smacks of the same wrong way thinking of the Fed in 2000.

The Fed is almost always fighting the wrong battle so I agree with Faber that it should be abolished. A return to the gold standard and elimination of fractional reserve lending is just what we need. It would be a very painful adjustment to make, but a serious adjustment is coming anyway. We may as well make it the right one.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Canaries at the Periphery

Please consider the following chart.

Mish note: I can not read what the text says but if you can please send me a translation. Regardless of what the text says, however, the universal language of the chart makes it quite clear that whatever is happening is not pretty.



Enquiring minds may be interested to discover that the above chart happens to be a graph of the Saudi stock market.

The Financial Times is reporting the Saudi market plunges 8% more.

The Saudi stock market plunged another 8 per cent on Tuesday, taking its fall over the past nine days to 26 per cent. The Tadawul All Share index was trading at 12,994 late Tuesday, compared with 17,557 at the close of trading on April 9. It has fallen 37 per cent from its February peak to its lowest level for eight months.

Analysts said it was a dramatic reversal after the oil-fuelled boom that led to spectacular share price gains in 2004 and 2005 and saw up to 3m retail investors piling into the market in search of quick wealth.

Oliver Bell, senior investment manager at Pictet Asset Management in London, said the market still appeared to be over-valued.

“We estimate the Saudi market is trading on a forward multiple of nearly 30 times 2006 earnings. Despite the correction, valuations are still at extreme levels compared to other emerging market opportunities,” he said.

Reuters is reporting Saudis go online to vent anger over stock crash.

Normally submissive Saudis turned to the Internet on Tuesday to voice their anger about slumping share prices. A 37 percent tumble in the Arab world's largest bourse since late February has transformed the Web from a popular source of trading tips to a forum for small-time investors to vent their spleen.

"The market has become a burial ground for Muslim money and slaughtered ambition," said an Internet user on one site, who identified himself as "the Living Conscience".

The Saudi market began to tumble in February when the regulator tried to narrow the trading bands allowed each day, angering speculators.

The regulator's decision to suspend dealers for market manipulation earlier this month only exacerbated the slide and shares plunged more than 8 percent to new eight-month lows on Tuesday.

"The index has been bleeding for more than 45 days. All we can do is watch and shed tears, tears and more tears," said Mohammed9009.

Perhaps the most interesting thing in the above report was that attempts to stop the slide by narrowing trading bands suspending those accused of market manipulation seemed to exacerbate the slide.

An Active Role

Interestingly enough, Reuters recently reported Central banks should be active in a crisis.

Financial markets suffer destructive gridlock in a crisis as investors bolt for safer investments, but central bank intervention can keep the system up and running, according to a study presented at the Atlanta Federal Reserve on Monday.

The paper, written by economists Ricardo Caballero and Arvind Krishnamurthy, studied a flight to quality as market players protected themselves from worst-case assessments of the risks, even though the danger in their own market was small.

It was delivered at a conference on financial markets and systemic risk chaired by Fed Vice Chairman Roger Ferguson.

"Agents respond to uncertainty regarding other markets by requiring financial intermediaries to lock up some capital to devote to their own market's shocks, regardless of what happens in other markets," the paper said.

"While each Knightian agent covers himself against an extreme shock, collectively these actions prevent intermediaries from moving capital across markets to expediently offset shocks as they arrive," the authors said.

Knightian uncertainty -- based on the work of Chicago University economist Frank Knight -- is a theory in economics describing risks that are impossible to measure, which is why market participants overreact in seeking capital protection.

"This inflexibility leaves the economy overexposed to (moderate) aggregate shocks that are manageable by the private sector in the absence of flight to quality," they said.

With that paragraph, the Mish telepathic thought lines were flooded with questions.
The typical question was something like this: "OK Mish what does any of the above have to do with 'Canaries at the Periphery'?"

Canaries

The answer of course is that problems start at the periphery then work their way towards the nucleus. That is simply the nature of the beast. Please consider Canaries in the Coal Mine.

Against a backdrop of strong global growth, two small Western economies have hit upon hard times: Iceland and New Zealand. Their experiences, in the context of their geography and financial characteristics, could be heralding the onset of a fresh global financial crisis.

But regardless of whether the Kiwi/Icelandic break was due to speculation or spending, there are certainly some broad financial discrepancies that are showing at least some signs of rectifying themselves. And as the Asians discovered in 1997-1998, such "rectifications" are rarely pleasant processes.

The Hindenburg Omen

Closer to home John Hussman is writing about Market Action and Information.

In a richly valued market with upward interest rate pressures, it's a particularly unfavorable sign when within just a few days of new highs in the major indices, leadership “flips” so that the number of individual stocks achieving new 52-week lows actually exceeds the number achieving new 52-week highs. That's exactly what happened last week. The S&P 500 achieved a fresh bull market high on April 5th, at 1311.56, yet new lows have already flipped above new highs.

Hindenburgs

I've noted often that a great deal of the information conveyed by markets is contained in “divergences” between securities. While investors shouldn't read too much into any indicator, there's an interesting signal that has enough validity as a measure of divergence that it's worth mentioning here. Think of it as slightly more than entertainment value but far less than a reliable guide to investment.

The signal is based on new highs and new lows, and is cheerfully called a Hindenburg (the actual name given to it by Kennedy Gammage is the “Hindenburg Omen” but that strikes me as far too, well, ominous, because it's certainly not a sufficient condition for a market decline). It's a relatively unusual event that has often preceded fairly substantial market declines with a fairly short lead time (usually within 30-60 days, including declines in 1987, 1990, 1998, 2000 and 2001), but has sometimes proved to be meaningless or insignificant as well (such as a cluster of signals in September 2005, among others).

The basic elements are 1) the market is in a rising trend, defined as the NYSE Composite being above its 10-week average, 2) both daily new highs and new lows exceed 2.2% of issues traded, and 3) the McClellan Oscillator is negative – meaning that market breadth as measured by advances and declines is relatively weak (there's some dispute, which I will not join, as to whether the Oscillator has to be negative that day or turn negative later). Peter Eliades added a couple of other conditions to eliminate signals occurring in clearly strong markets: 4) new highs can't exceed new lows by more than 2-to-1, and 5) 2 or more signals occur within about a month (he uses 36 days) of each other.

As it happens, we observed a Hindenburg on April 7th (just 2 days after the market high) and another one on April 10, so those elements seem to be in place here. We'll see whether anything comes of it this time around.

When a well respected fund manager like Hussman is watching Hindenburgs and other technical divergences, perhaps you should too. I do know that Brian and I are carefully watching those divergences at the Survival Report.

Our view is that the longer this grind up occurs in the face of rising interest rates, deteriorating fundamentals, and huge divergences, the deeper the resultant plunge. Rot is now chewing its way at the periphery. It's only a matter of time before rot works its way to the core.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Condo Reversions

The South Florida Business Journal is reporting Condo conversions revert to rentals.

Six communities with 1,571 units - three in Broward and three in Palm Beach County - have made the switch from condo conversion sales back to rentals.

Some are dubbing it "the great conversion reversion of 2006." It's a move to reposition rental communities, which were slated for condominium conversion sales, back to apartment rentals.

"It's an early-stage trend that will probably accelerate as the market slows even more," said Jack McCabe, CEO of McCabe Research & Development in Deerfield Beach.

Mike Morgan of Morgan Florida sent me a couple of emails recently and had this to say:

I was out with a client yesterday and noticed a rental sign up on one of our largest condo conversions in Martin County. The converters have failed at selling the condos, so they have decided to revert back to apartments. A year ago they tried selling the condos starting at $249,000. Lately they have been offering them as low as $185,000 . . . and still no sales. By the way, there are more than 50 condo conversions in Orlando alone. The new catch phrase here is “condo reversions.” These guys are going to crumble, since rentals are off by as much as 50% with tens of thousands of flippers trying to rent homes they cannot sell. We no longer take any rentals from clients!

We have a lot of high rise ghost towns. It is only a matter of time before these developers and converters start defaulting on their loans and walking away. The banks are not going to be landlords. They will sell at auction for whatever they can get. Banks like Corus of Chicago have billion dollar exposures in Florida. Corus may have the largest exposure. Moreover, it is an exposure they cannot recover from once the developers start to fail.

By the way, if you’re looking for a company to call about the condo market, the largest publicly traded builder of condos in Florida, is WCI. They not only have the largest exposure, but they are primarily in the runaway markets like Naples. Naples was rated as the most overvalued market in the United States with an overvaluation value of 82%. The other segment of WCI is general real estate sales through Prudential WCI and mortgages. They are batting 0 for 3 right now.

I realize the media is taking a hit for reporting on the negative issues, but you haven’t even scraped the surface of what is going on here . . . statewide. The snowball effect will be horrible. More than 30% of the jobs created in Florida last year were in construction. We are now in a strong negative mode for construction jobs. As builders slow down and shut down, these guys are out of work. They are trying to relocate to New Orleans, but there is no place for them to live there. Talk about a Catch 22. I attended a luncheon yesterday where the president of the US Chamber of Commerce spoke. She owns a construction company in New Orleans. It was an eye opener and you could have heard a pin drop in a pile of hay as she spoke for 30 minutes.

There is no longer any doubt that Florida is ground zero of the bubble bust. The only debate is how quickly the mess spreads.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Financial War Games

Before getting to "War Games" let's recap some past wisdom from the man formerly behind the curtain.

1996 - Greenspan warns about irrational exuberance in the stock market
2000 - Greenspan embraces the "productivity miracle" and says there is no stock market bubble.
2001 - Greenspan said bubbles can only be detected in hindsight
2004 - Greenspan says there is no housing bubble
2005 - Greenspan says there is no national housing bubble even though he admits we have "froth"

It's Different This Time

Here are some select comments from just released FOMC minutes from May 16, 2000 meeting shortly after the Nasdaq blowoff top:

Chairman Greenspan:
My own judgment, and what I plan to recommend to the Committee, is that we have an opportunity now to move the funds rate up 50 basis points, remain asymmetric, and effectively adjust our longer-term posture to a better position than the one we are in at the moment. The reason I am not concerned about moving the rate up quickly at this stage is that I think the evidence indicates that productivity, indeed perhaps underlying GDP, is still accelerating. I recognize that the staff’s estimate of productivity growth for the first [quarter] is 1-½ percent. I don’t believe that estimate for a fraction of a second. Indeed, using the available data on income and profits, which essentially reflect the unit cost structure of nonfinancial corporations, the productivity growth number that falls out of that system according to staff estimates is a 6 percent annual rate.

I think we are in a quite different environment than we have seen in the past. In such an environment real long-term interest rates have to rise, and indeed they have risen very significantly in the last several weeks. Real long-term BBB rates are up over 50 basis points after gradually edging higher for quite some period of time. This indicates that the markets are adjusting rapidly to the evidence that overall demand forces are becoming very strong, driven in large part by the supply factors themselves.

I think what we have is still the beginning, or perhaps we are well into it at this stage, of a significant long-term change in the behavior of the economy. I believe the risks in moving 50 basis points today are not very large because I think the underlying momentum in the economy remains very strong. What is going to happen in the future is probably going to be dependent on a number of developments that we can't really forecast.

Mr. Hoenig. Mr. Chairman, everything you said convinced me that a 1/4 point hike seems right. Inflation is not taking off and in fact a lot of the evidence suggests some easing off in the expansion. Moreover, I don't think we should be validating the market necessarily. I think we should be looking at what is in front of us, and 1/4 point with asymmetric language seems most appropriate. A year ago when we were at 4-3/4 percent on the funds rate, there was a better case for moving more aggressively in the sense that we had put in a lot of stimulus. And yet we were very cautious in moving up.

Is it possible for anyone to have been more wrong?
In one meeting he was wrong about productivity, the strength of the economy, where the risks were, and most importantly right after the start of the Nascrash came out with one of his most absurd statements ever when he commented "I think we are in a quite different environment than we have seen in the past." Hook line and sinker Mr. Greenspan bought into "It's Different this time" logic, right as the bubble was bursting in front of his own eyes.

Greenspan on Financial Stability

What should have everyone worried right now is this Greenspan flashback from May 5th 2005 when he spoke about Risk Transfer and Financial Stability

Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth. The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions, which was so evident during the credit cycle of 2001-02 and which seems to have persisted. Derivatives have permitted the unbundling of financial risks. Because risks can be unbundled, individual financial instruments now can be analyzed in terms of their common underlying risk factors, and risks can be managed on a portfolio basis. Partly because of the proposed Basel II capital requirements, the sophisticated risk-management approaches that derivatives have facilitated are being employed more widely and systematically in the banking and financial services industries.

As is generally acknowledged, the development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively. In particular, the largest banks have found single-name credit default swaps a highly attractive mechanism for reducing exposure concentrations in their loan books while allowing them to meet the needs of their largest corporate customers.

The greatest evidence of the benefits of derivatives is spectacular growth? That sounds like bubble logic to me. There is $17 trillion in derivatives floating around with $1 trillion bet on GM alone even though GM has a market cap of $20 billion or so. Is that a sign of a spectacular success or is that a sign of unbelievable speculative leverage? Obviously Greenspan learned nothing from the stock market crash of 2000. He is now claiming that derivatives have permitted the unbundling of financial risks. Have they? I have a couple of questions for you Mr. Greenspan that might bring you back to reality. Is there not a counter party to those trillions of dollars worth of derivatives? Has that risk been magically offloaded to Pluto or Mars? If not, who has that risk?

Clearly Greenspan was babbling nonsense in May of 2005 just as he was in babbling nonsense in May of 2000 and at nearly every other point in his career as well.

Liquidity Concerns

On April 11 the IMF warns over credit derivative liquidity .

Investors in structured credit products risk not being able to sell or obtain an acceptable price following a market downturn because buyers may shun the fast-growing market, the IMF said on Tuesday.

The risk of liquidity disturbances is "material ... (and) certain products and market segments are particularly vulnerable," the International Monetary Fund said in its annual Global Financial Stability Report. The secondary market, away from the biggest banks, was more likely to be at risk, it said. In addition, the Fund said, the rapid growth of the $17.3 trillion market raised concerns over the potential for operational failures.

The Fund welcomed moves by regulators to tackle operational issues, but said the industry should be "encouraged to pursue these efforts expeditiously in order to avoid potential disputes in the event of a default".

In some cases more credit default swaps have been written on specific companies than there are bonds of that company outstanding. After a default there is a need for a system to settle the contracts without conventional delivery of a bond.

Still, IMF concern over credit derivative liquidity was set in the report against a largely positive overview.

"Credit derivative and structured credit markets help to improve financial stability by facilitating the dispersion of credit risks," the Fund concludes, as "banks, especially systemically important institutions ... shift credit risk to a broader set of investors."

Leave it to the IMF to ruin a decent report with "Greenspanesque" talk such as "Credit derivative and structured credit markets help to improve financial stability by facilitating the dispersion of credit risks." There is little evidence of dispersion but there is mammoth evidence of speculation when hedge funds and others have massively leveraged bets on whether companies go bankrupt or not even when they have no vested interest. Even the mortgage market is insane with everyone attempting to pass the trash to Fannie Mae while trying to keep the "good loans" on their books. Even if everyone did miraculously manage to disperse the risk, will it be a good thing if trillions of dollars in bets vanish on some sort of blowup?

It seems to me there is some sort of uncertainty as to what might really happen in a derivatives meltdown. Back on February 28 The Bond Market Association announced a "New Bank" To Provide Crucial Liquidity In Emergencies.

The Bond Market Association announced that it has accepted an invitation by a private-sector working group established by the U.S. Federal Reserve Board to develop and lead the creation of a so-called ‘NewBank’, a standby bank that would only be activated if one of two existing clearing banks in the U.S. government securities markets was suddenly forced to leave the business. Both government officials and market participants have long been concerned about the possibility, even if remote, of one of the banks suddenly exiting the markets and have agreed the NewBank concept is an appropriate precautionary measure.

Since the mid-1990’s all of the major participants in the U.S. government securities markets have depended critically on one of two clearing banks, Bank of New York and J.P. Morgan Chase, to settle their trades and to facilitate financing of their securities inventory positions. Interruption of a clearing bank’s services has the potential to severely disrupt those markets, as was evident in the wake of the tragic events of 9/11.

"Securities dealers need a contingency plan in the event one of the clearing banks is forced to exit the markets," commented Micah S. Green, President and CEO of the Bond Market Association. "Establishing NewBank is a prudent market-based initiative aimed at mitigating any potential problems caused by the sudden involuntary exit of one of the banks."

Preparation for a Crisis

Over in the Europe, the Times Online is reporting that EU regulators are told to Be prepared for a crisis.

Financial regulators in all EU countries are to be asked today to prepare for the collapse of a big hedge fund or a similar sudden financial shock. EU finance ministers and central bankers, meeting in Vienna, were told that the collapse of a hedge fund could now destabilise European financial systems as well as the financial markets.

They have equally raised anxieties about the rapid growth of private equity. They fear that this could unravel if one of the key sources of funds or markets for selling on companies dries up. Officials also argue that many regulators do not understand the risks involved in the £10,000 billion market in credit derivatives, which are traded privately between banks rather than on public exchanges.

A private report drawn up by finance ministry officials of EU states says: “Hedge funds can contribute to market efficiency and sharing of risks but can also be a source of systems risks.” The report urges the central banks and regulators to monitor banks’ exposure to hedge funds, both as lenders and as counterparties to massive speculative positions in financial and commodity derivatives. Banks are also heavy lenders to private equity buyouts, which provide them with more profitable but riskier business.

War Games

Also in the UK I am pleased to report that Europe simulates a financial meltdown.

Europe's financial regulators have held a "war game" exercise, simulating a continent-wide financial crisis, amid fears they are ill- prepared to stop a problem in one country spreading across borders.

The exercise involved simulating the collapse of a big bank with operations in several large countries to see whether the European Central Bank, national central banks and finance ministries could work together to contain the crisis.
It is understood the exercise took place at the headquarters of the ECB in Frankfurt at the end of last week. One person involved said: "It is like checking whether a nuclear power plant can survive a plane crashing into it."

Europe's vulnerability to a cross-border financial crisis was revealed in a confidential report prepared by officials for the Ecofin council. Regulators are particularly worried about the risks to financial stability posed by the growth in hedge funds and credit derivatives.

It said that "progress has been insufficient in most of the member states" in putting in place national structures for crisis management, and urged national regulators to stage their own crisis simulation exercises.

The EU has rejected the creation of a single European financial regulator to manage cross-border risks, and has instead placed its faith in national authorities working together.

What we are saying vs. What we are doing

Here is a recap of what Greenspan said:

• Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth.
• The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions.
• The development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively.

Here is what we are doing:

• Creating a ‘NewBank’ to provide liquidity in emergencies.
• Simulating financial meltdowns caused by an explosion in hedge funds and credit derivatives.

I have three questions:

1. If the explosion in credit derivatives is making us safer why do we need to create a new bank to deal with liquidity issues?
2. If the explosion in credit derivatives is making us safer why are we simulating financial meltdowns based on those very same derivatives blowing up?
3. How long will it take before Greenspan is proven spectacularly wrong once again?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Sinkholes and Hurricanes

Following are some emails from George Pintye, yet another real estate broker contact of mine from Florida. A few links, comments, and one image were added by me.

I am a Real Estate agent in Hernando County, Florida and a confirmed Bubble-ite.

I'm writing in hopes you will consider addressing an issue of paramount concern for the Florida Housing market on your blog: the coming Hurricane season and the perilous position of the Homeowner's insurance industry in Florida.

It’s an item that doesn't get much coverage outside of Florida, but the consequences may be national if it comes to pass.

As you may or may not know, many major insurance companies have decided to limit their exposure in Florida over the past few years and have dropped policies in high risk areas. Allstate and State Farm in particular are proceeding with a systematic & orderly withdrawal from the state.

Its not just claimants of hurricane damage that find themselves dropped, often long-time policy holders who never filed a single claim, but happen to live along the coast get their notice of termination out of the blue. Many of us with private coverage are grateful we haven’t been kicked to the curb (yet) by our respective insurers and absorb the yearly hikes without complaint because we know the alternative of Citizens coverage is much worse.

Citizens, as you may know, was created as an Insurance company of "last resort" following Hurricane Andrew. It was never intended to be what it has become: the primary insurer of new & resale home purchases along coastal Florida. By all estimates, it is in trouble.

According to the Florida Insurance Council Citizens Property Insurance is now facing a deficit of more than $1.7 billion for the 2005 hurricane season, three times the $516 million deficit from 2004 that produced a 6.8 percent statewide assessment. In addition, the Florida Hurricane Catastrophe Fund confirmed it will face a deficit from 2005 as well, currently projected at $264 million. So, even without a single hurricane coming through this year, Citizen’s policy holders can already count on a bump in their premiums next year. Not like the 60-100+% yearly increases they’ve had to weather the past two years wasn’t bad enough.

Mish, 2006 might be a watershed year for my state. Even without the threat of an active Hurricane season, property values are destined to head south because of rampant overbuilding & irresponsible speculation. What will happen though if Citizens is overwhelmed by claims from a major catastrophe? They can’t keep passing the cost onto the policyholders, simply because those policyholders are already stretched to the limit financially, especially elderly on a fixed budget.

Will the federal government step in? Will the private carriers be forced back into writing policies? What happens to property values if the entire insurance industry collapses under the weight of a major catastrophe (or heck, even a couple of moderate ones) because loan availability declines significantly?

It won’t take much, I assure you, to push Citizens Property into insolvency. There are still people with outstanding claims from 2004 that have yet to receive their checks from the company, and here we are in 2006 facing a Hurricane Season that by all accounts will be just as active as last year.

I hope you can find the time to address this issue on your website, as it is already impacting the housing market in my state, and hangs like a specter over Florida’s future.

Thank you for your time,
George Pintye

George followed up with a piece on sinkholes. Some names and situations in the following email were removed or changed by me to protect the innocent (or do I mean guilty). I also added links and an image.

Since I emailed you earlier this morning, I found out that a good friend of ours just got a notice from his insurance carrier today. They will not be renewing his policy once it's up in June (guess they'll take a pass on this Hurricane season). He paid $1,500 last year for her policy just to give you some perspective. Many people are paying between $2-3k/year for coverage through Citizens, and we're a relatively average county with a median home price near $200,000.

In addition, our county has an inordinate number of sinkhole issues which are also causing the insurance carriers to run for cover. And these sinkholes are being made worse with the dry winter and spring we've been having. To my knowledge, if you buy a house in Spring Hill, FL you can't find a private carrier anymore. State Farm will put you on a waiting list that is about 2 years long.

Here's an article about a recent slew of sinkholes forcing families out of their homes.

SPRING HILL - The first sinkhole tore a 40-foot gash in the ground early Friday afternoon. Then another appeared across the street, and still another on a nearby property.

By the end of the day, six sinkholes had cracked roads, swallowed the back end of a cement truck and threatened the stability of as many as 10 homes in this southwest Hernando County neighborhood.

The sinkholes forced four families to evacuate and rattled other residents in an area already reeling from hundreds of sinkholes and the corresponding spike in insurance rates.



Oh, and did I mention we're a true bubble area? For years, Hernando County was a refuge for retirees. But in the last two years, home values have doubled and speculators have overbuilt like you wouldn't believe. We're running about an 18 month inventory of new (what I define as 2005-2006 built) houses, and that's just what's in our MLS. That number doesn't include the hundreds of builder spec homes, FSBOs, and homes still under construction.

And its not if my area needed this insurance fiasco. We already are destined to have a rough time during the coming housing downturn. Our main industry is, you guessed it, housing. We don't have much of a local economy save for service & retail. We don't manufacture much to my knowledge, and people certainly don't move here for the job prospects. We lost most of our Tampa area commuter-buyers last year when gas hit $3/gallon. Hell, its practically that high now. Many agents are already withering on the vine as the number of buyers dries up.

It’s the perfect storm of calamity for any real estate market, and we are at the center of it.

I appreciate you considering my suggestion for blog piece. In the future, I'd be happy to keep you apprised of the situation down here, though I think the two of us know which direction its headed.

Best Regards,
George

Just in time for Easter I received this update from George about Citizens.

Hello again Mish,

I wanted to send you a couple more articles on the calamity that is Citizens Property Insurance. I guess whenever you hand over the reigns to government, it will always find a way to screw things up. Compare and contrast Millionaires Bank On Citizens with Too much fraud, too few remedies for Citizens.

On one hand, you have the rich getting a discount, and on the other, you have the middle class getting squeezed out of homeownership. It’s truly mind-boggling. Why I haven't seen this issue brought to national attention is beyond me. It’s more intriguing than Enron ever was, and the fallout after a possible Citizens collapse would be even more devastating.

Thanks again and enjoy your weekend,
Best,
George

Thanks George!
And as long as we are talking about Florida, let's take a good hard look at Panama City Beach where Sales as hot as afternoon sand cool down.

Several developers have put plans on hold in this Florida Panhandle town, some after starting construction, waiting for better times. Condo prices have — hold onto your beach umbrella — stagnated or even dipped. Much of Panama City Beach is for sale.

A year and a half ago there might have been a handful of beach condo units on the market, real estate agents say. Now there is a backlog of over 2,200. More than 250 of them are listed for $700,000 or more. Look-alike half-million-dollar units are for sale up and down the strip.

Many blame a building frenzy that outpaced even the feverish speculative buyers who swarmed here from places like Birmingham and Atlanta, a six- or seven-hour drive away. The median price for condos sold in Bay County leapt 130 percent from 2003 to last year. But when the potential for quick profit didn't continue to soar, the market sputtered.

About three years ago, Darrin Quick, a Dunwoody software salesman, put money down on three condo units in planned towers.

He bought in early, in the low $200,000s, and watched the price of units like his triple and then dip, though he says they remain above what he paid. He still expects to be able to sell the condos — still under construction — at a comfortable profit.

He's not worry-free, though. He was glued to the Weather Channel, gut clenched, every time a hurricane twisted off the coast last year. He expects the towers to survive a storm, but he worries about temporarily losing the beach's brilliant sand and area restaurants. Hurricane predictors say a current cycle of stronger and more frequent storms could last 20 years.

"My other big fear is that they may be overdeveloping" the Panama City Beach area, Quick says. "You kind of hate to see it turn into a South Beach thing with high-rise after high-rise."

Real estate agents in the Panama City Beach area say some banks are putting fresh limits on pre-construction sales in hopes of avoiding investors' becoming overextended.

A few developers are scrambling to sell their in-progress projects or trying to recruit partners to get them over the financial hump, says Zepponi, the real estate agent. Other projects have been halted. Motels or other businesses that were closed after they were sold to make way for development sit vacant.

Miracle Strip Amusement Park, once a staple for beach tourists, is among the closures where construction of a development that includes condos has yet to begin. Club La Vela, a giant nightclub known for wet T-shirt contests, remains open after plans for a condo tower there fell through.

Says Janet Roan, a local real estate agent, "Now is the time to buy. It's a buyer's market."

Zepponi advises condo owners to avoid putting their units on the market now if they can avoid it.

"If people would stop this panic, things would turn around sooner," she says.

Check out some of the quotes from that article. They are priceless.

• "My other big fear is that they may be overdeveloping"
• ""Now is the time to buy"
• "If people would stop this panic, things would turn around sooner"

Where do these dimwits come from?

Now is NOT the time to buy. Perhaps 3 or 5 or even 8 years from now will be the time to buy but certainly not now.

Check out the fear that they "may" be overdeveloping. Is there any freaking doubt about it? By the way, his big fear is misplaced. Since that buyer's condos are still under construction his big fear ought to be that builder goes bankrupt and just walks away leaving a bunch of totally worthless half built towers standing as a monument to stupidity.

Stop the panic? Pray tell when did it start?

Let's make a list of Florida attractions.

1. Hurricanes. check
2. Sinkholes. check
3. Condo Mania. check
4. Unsustainable Appreciation. check
5. Clueless Snowbirds. check
6. Wells Running Dry. check
7. Earthquakes. no
8. Unbearable Heat and Humidity. check
9. Insurance Problems. check
10. Mudslides. no
11. Termite Problems. check
12. Severe Affordability Issues. check
    

Florida is ground zero for housing bubble fallout, but rest assured the problem will spread. Trapped buyers have not yet begun to panic. They will.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/