Banks and Builders Suffer Further

Mike Larson takes a closer look at the continual slump that banks and builders are facing. In this issue of Money and Markets, Mr. Larson discusses how each industry is suffering even more losses.

Jupiter, Fla. (PRWEB) May 25, 2008 -- Mike Larson takes a closer look at the continual slump that banks and builders are facing. Mr. Larson discusses how each industry is suffering even more losses.

Bank of America, National City, and American International are all at 52-week lows. Countrywide Financial and Wachovia are almost there, too.

Condo and single-family home builder WCI Communities recently plunged as low as $1.45. The company is losing money hand over fist and Standard & Poor's just downgraded its corporate credit rating deeper into junk territory, citing concerns over the firm's liquidity. A bankruptcy filing can't be ruled out.

Standard Pacific, a California-based builder, went for $6.50 as recently as early April. It's worth a bit over $2 now. The company lost $216.4 million in the most recent quarter thanks to a steep sales decline and hefty impairment charges.

Home Depot, which recently reported its first annual sales decline, will fire 1300 workers and close 15 underperforming U.S. stores.

Larger builder Centex is getting close to setting a fresh 52-week low, while shares of home improvement retailers Home Depot and Lowe's are hitting the skids again. The problem is that Home Depot's same store sales are falling at a greater-than-6% rate, while Lowe's reported an 18% year-over-year drop in first-quarter profits.

These threats are rather straightforward, a combination of bearish developments that underscore why Larson has been warning not to believe what Wall Street has been saying.

• Higher long-term interest rates: Long-term rates haven't been falling along with the Fed cuts. They've been rising. And naturally, since bond prices move in the opposite direction of interest rates, bond prices have generally been declining.

• U.S. long bond futures topped out at around 121 earlier in 2008. They're going for 116 and change now. Thirty-year fixed mortgage rates bottomed out at 5.48% in mid-January, according to Freddie Mac. They were recently up to 6.01%.

• And have the Fed rate cuts helped? Well, a 30-year fixed loan went for 6.38% in September when the Fed started slashing the funds rates willy-nilly. So that means 325 basis points of Fed cuts have bought you essentially 37 basis points in long-term, fixed rate mortgage relief.

A recent University of Michigan survey found that consumers expect inflation to run at 5.2% over the next year, the highest 1-year expected inflation rate since 1982. A separate measure of the difference between yields on nominal 10-year Treasury note yields and yields on 10-year Treasury Inflation Protected Securities (TIPS) is now running around 256 basis points. That's the highest since August 2006; a red alert warning from the bond market that investors think the Fed is losing control.

Meanwhile, the Fed is shifting into neutral. Long-term rates are not going down due to concerns about inflation. However, the news has been better for short term rates. The Fed's cuts in the federal funds rate have helped bring down the London Interbank Offered Rate (LIBOR) and the prime rates quoted by major banks. That has helped lessen the magnitude of rate and payment adjustments for many adjustable rate mortgage holders. It has also lowered the rates on things like home equity lines of credit, which usually track the prime rate.

But even here, the news is getting grimmer. The Fed is belatedly realizing that it has helped turn smoldering inflation into a five-alarm fire that is burning out of control.

Meanwhile, it seems like every few days another bank, broker, or insurance firm is seeking billions of dollars to shore up its capital base. The credit market damage is so severe that some of the largest U.S. banks on the NYSE are raising billions of dollars in an attempt to stave off insolvency.

Sovereign Bancorp just raised $1.9 billion through the sale of stock and debt. National City raised $7 billion by selling common and preferred shares. UBS is raising $15.5 billion by selling rights to purchase shares. And AIG is topping them all, raising a whopping $20 billion via various stock and debt offerings.

"The problem? These financial firms are being forced to offer exorbitant yields to attract investors. They're selling shares at sharp discounts to current values. And they're dramatically increasing their share counts. Result: They're massively diluting the value of the stakes that current shareholders own and raising their cost of capital. That, in turn, will pressure future profitability," Larson states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspx?Banks-and-Builders-Stocks-are-Value-Traps-1807

About Mike Larson and Money and Markets

Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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