by Calculated Risk on 10/23/2005 10:50:00 PM

My most recent post is up on Angry Bear: This Week's Housing Data.

Also see David Jackson's first hand account: Washington, DC Area Update

The big stories of the week will probably be Wilma and the Fitzgerald announcement. Wilma is now a dangerous Category 3 hurricane:


Map from: Weather Underground

Radar Key West.

And some thoughts on the Fitzgerald investigation: Not to personify the markets too much, but there is an old adage: Wall Street is not Republican or Democrat, it is Capitalist!

And market participants hate uncertainty. Once the Fitzgerald announcement is made, uncertainty will be removed and the market will probably rally short term. This is true if there are no indictments, or just a handful of aides are indicted. Most people on Wall Street don't care about Libby or Rove.

If a large number of people are indicted or Fitzgerald harpoons the Great White Whale (Cheney), then all bets are off. However I think this is an unlikely scenario.

Best to all.

by Calculated Risk on 10/23/2005 12:55:00 PM

The London Times reports: Profit warnings worst since 9/11

PROFIT WARNINGS by British companies hit their highest level last month since the September 11 attacks on America four years ago
...
So far this year there have been 370 profit warnings by quoted companies, up from 261 in the first nine months of last year.

"With profit warnings averaging 92 a quarter in the past 12 months, businesses are clearly finding it difficult to forecast in the current environment," said Andrew Wollaston, an Ernst & Young partner. "Though the economy is weaker than a year ago, this continued high level of warnings is a real concern."

The increase in profit warnings is blamed on rising costs, particularly for energy, and weaker-than-expected demand.

And Reuters adds: Slowdown in housing precipitates consumer pullback; debt correction ahead?

A UK housing market slowdown and subsequent curbs in consumer spending have precipitated companies' woes, E&Y's London head of corporate restructuring, Andrew Wollaston, said.

"The last three or four years there's been a credit boom, and now people are paying off debt."

The downward cycle continues (thanks to Joshua for the Times story).

by Calculated Risk on 10/21/2005 05:47:00 PM

Foreign Policy asks Morgan Stanley Chief Economist Stephen S. Roach: What Awaits the Next Alan Greenspan?

FP: If you had to give the current U.S. economy a grade, what would it be?

SR: I’d give it a gentleman’s C. On the surface, GDP is good, inflation is low, and so is the unemployment rate. Beneath the surface, we have unprecedented imbalances in terms of low national savings. Two of the three pieces of national savings—the consumer piece and the government piece—are in the red. We have a record balance-of-payments deficit. We have record levels of household-sector indebtedness, and [a record number] of consumers living beyond their means. Superficially, it looks ok. Beneath the surface, it looks disconcerting.

Roach is too generous. The biggest problem is that the US is not seriously addressing the 'unprecedented imbalances', and there appears to be no leadership even arguing to take the first step towards more fiscal discipline. For the consumer, they have been using their homes as ATMs, and even if prices just stabilize, the ATM will dry up.

FP: What’s the likelihood of a U.S. recession?

SR: I put a 40 percent chance on a recession next year, which is high.

[Rising energy prices] are a big concern because they are hitting a consumer that has been stretched in an unprecedented fashion. The consumer savings rate right now is negative 1 percent, the lowest it’s been since 1933, which was not a terrific year. [During] the last 3 energy shocks—mid 70s, late 70s and early 90s—the same savings rate averaged 8 percent. We had a cushion that we could use to fund higher energy expenses. There is no cushion today. Consumption is going to get hit hard unless there’s immediate relief on energy product prices such as natural gas and gasoline, and home heating oil.

See the interview for more.

by Calculated Risk on 10/21/2005 03:21:00 PM

The US Department of Justice Special Prosecutor Patrick J. Fitzgerald has launched a new website today: Office of Special Counsel

"I would strongly caution ... against reading anything into it substantive, one way or the other," [Fitzgerald spokesman Randall Samborn]said. "It's really a long overdue effort to get something on the Internet to answer a lot of questions that we get . . . and to put up some of the documents that we have had ongoing and continued interest in having the public be able to access."

Source: Fitzgerald Launches Web Site

I am not aware of any economic research correlating government scandals with changes in economic activity. My guess is the economic impact of a major scandal is probably minimal. After Watergate the economy went into recession, but most major scandals, like Teapot Dome, Iran-Contra or the Monica affair had no clear economic impact.

by Calculated Risk on 10/21/2005 12:51:00 PM

CNN reports: Stricter OCC rules on exotic mortgages may help stabilize housing prices as less buyers qualify

... the increasing use of interest-only and option adjustable rate mortgages has put federal regulators on high alert. This fall, the Office of the Comptroller of the Currency, along with other financial regulators, will issue guidelines for mortgage lenders that could make lenders think twice before readily offering exotic mortgages to potential buyers.

Will the inability to gain easy access to these creative mortgage products finally help let some of the air out of the inflated housing bubble?

It's certainly a distinct possibility, said Andy Laperriere, managing director at ISI Group.

"I think it will affect a meaningful amount of loans," he said. "It'll be enough to take the marginal buyer out of the hottest markets and therefore slowdown or even stop some price appreciation."

Experts certainly see some correlation between the availability of these products and the surge in housing prices. Laperriere added that in high-priced markets such as California and Washington, interest-only and option ARMs make up about 50 percent of the mortgages used to finance homes.
...
...
...there's no denying that exotic mortgages have climbed in popularity in tandem with the rise in housing prices. According to the Federal Reserve Board's latest quarterly survey of senior loan officers from July, nearly a third of respondents said that non-traditional mortgage products make up 5 to 16 percent of their dollar volume of residential mortgages while one bank said these products make up 50 percent of its dollar volume.

And more than half of respondents noted that the share of mortgage originations accounted for by non-traditional mortgage products had been higher over the past 12 months than over the previous 12 month period.

Dean Debuck, a spokesman for the OCC, which regulates financial institutions, said the organization will issue guidance for mortgage products, adding that growth in the industry has uncovered "some things that need to be fixed." While he declined to comment on the specific guidelines, he said the OCC is focused on "safety, soundness and good risk management."

Financial analysts expect the OCC to set specific credit-worthiness standards to prevent people from over-stretching themselves into debt and make sure that these products are aimed at individuals that are capable of repaying the mortgage when interest rates climb and their monthly payments increase significantly.