No Quick Fix for U.S. Economy Recession, According to Latest Issue of Money and Markets
Mike Larson takes a closer look at the economic recession in the U.S. and how difficult it is going to be to solve it. In this issue of Money and Markets, Mr. Larson examines the U.S. economy and the poor state it is in.
Jupiter, Fla. (PRWEB) February 10, 2008 -- Mike Larson takes a closer look at the economic recession in the U.S. and how difficult it is going to be to solve it. Mr. Larson examines the U.S. economy and the poor state it is in.
A key index that tracks the health of service businesses like restaurants, retailers, and real estate firms plunged to 41.9 in January. That's the worst reading since October 2001, right after the 9/11 attacks. New orders dropped sharply and employment fell to a six-year low. Earnings and sales warnings are popping up everywhere. In early February, there were sales warnings from chipmaker National Semiconductor, construction materials vendor Martin Marietta, consumer electronics company Apple, department stores Macy's and Target, and network equipment vendor Cisco Systems.
And on February 7, Wal-Mart said its same store sales gained just 0.5% in January. That was much weaker than the 2% gain that analysts were expecting, and its proof positive that consumer spending is deteriorating fast. The real estate industry would also probably like to forget last year. To briefly recap:
| | - Housing starts fell 25%, the biggest annual drop since 1980.
- Existing home sales dropped 13%, the biggest decline since 1982.
- New home sales fell 26%, the biggest drop this country has ever seen (data goes back to 1963).
- Meanwhile, the median price of an existing home fell from year-ago levels for the first time since the National Association of Realtors started tracking in 1968.
- Data from S&P/Case-Shiller shows that home prices were falling at an almost 8% rate in 20 top metropolitan areas as of late 2007, the biggest drop on record.
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That's causing major problems with residential mortgages. The home loan delinquency rate jumped to 5.59% in the third quarter of last year, the highest since 1986. The percentage of loans in foreclosure climbed to 1.69%, another record. Lenders are adding hundreds of millions of dollars to their loan loss reserves, and charge offs of souring home mortgages are rising fast throughout the banking industry. In short, the home mortgage problems are well known. But here's what investors are failing to appreciate: It's not just residential mortgages.
There were a record $1.4 trillion of leveraged buyouts in 2006 and 2007. These debt-financed corporate takeovers are now blowing up on the lenders who extended the loans and the junk bond buyers who snapped up the debt. And more than 25% of the bonds that financed these LBOs are already trading at distressed levels, meaning they yield more than ten percentage points more than Treasuries. All told, banks are stuck with a $230 billion pile of high-yield, high-risk debt, $160 billion in leveraged loans and $70 billion in junk bonds. With the price of all this paper falling, banks could be forced to take billions more in write-downs. That's on top of the more than $100 billion in write-downs they've already taken.
As for other consumer loans, the outlook is worsening. The delinquency rate on home equity loans is the highest since 2005. The delinquency rate on home equity lines of credit is the highest since 1997. And the delinquency rate on indirect auto loans is the highest since 1991.
This is devastating news for banking stocks. But it also has an economic impact. Specifically, rising losses are causing lenders to tighten lending standards dramatically. The Federal Reserve survey of top bank lending officials, conducted in January, found:
More than 3 in 10 lenders are tightening standards on commercial and industrial loans. That's the most since early 2002. More than 80% are tightening standards on commercial real estate loans. That's the tightest banks have ever been and the Fed has been keeping track since 1990. Seven out of 10 lenders were making it harder to qualify for subprime mortgages, while more than 8 in 10 were cracking down on "nontraditional" loans. And more than half of the lenders the Fed polled are making PRIME mortgages harder to get. That's the most ever.
"In addition, the Federal Reserve is cutting interest rates sharply. The federal funds rate has been slashed from 5.25% to 3%. The discount rate has also been cut to 3 1/2%.
The Fed has also been trying to flood the banking system with cash," Mr. Larson states.
To read this issue online, please visit:
http://www.moneyandmarkets.com/Issues.aspx?1431
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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