Friday, January 30, 2009

Remain Calm. All is well.


The news services are continuously assuring us that the government is taking steps to straighten out the economy. See here and here. But a closer look at what is really going on is more disturbing than the bland assurances we read in news articles. The Director of the Congressional Budget Office, Douglas Elmendorf, has a blog. What he says in it is scary:

This morning I testified before the House Budget Committee on The State of the Economy and Issues in Developing an Effective Policy Response (click here for full text of my written testimony). My testimony discussed both the basis for CBO’s forecast (released earlier this month, click here for text) and reviewed the financial and nonfinancial developments that have occurred since that forecast was finalized. So far, the news has been generally consistent with the agency’s expectations– and does not alter the bleak outlook.

I touched on three key points this morning:

  1. The economy is currently weathering a recession that started more than a year ago, and absent a change in fiscal policy, CBO projects that the shortfall in the nation’s output relative to potential levels will be the largest– in duration and depth– since the Depression of the 1930s.

  2. Most economists agree that both significant fiscal stimulus and additional financial and monetary policy approaches are needed.

  3. H.R. 1, the American Recovery and Reinvestment Act of 2009, would, in CBO’s judgment, provide a substantial boost to economic activity over the next several years relative to what would occur without the legislation. (For the CBO ost estimate of H.R. 1, click here)

As the possibility of another round of fiscal stimulus is debated, it is not a surprise that employment effects of stimulus have emerged as a key measuring stick. According to CBO’s estimates, with enactment of H.R. 1, the number of jobs would be between 0.8 million and 2.1 million higher at the end of this year, 1.2 million to 3.6 million higher at the end of next year, and 0.7 million to 2.1 million higher at the end of 2011 than under current law.

Thursday, January 29, 2009

Credit Unions now need bailing out

Hat tip: Calculated Risk.

I had always thought of Credit Unions as being the more sober little banking brothers of the larger "problem-gambler" investment banks. I had these warm feelings toward Credit Unions even during the go-go credit days of 2005. I was somewhat taken aback at one point, however, when the Kern Schools ATM opening screen screamed in 200pt font:

"GOT EQUITY? GET CASH!"
"Ask about our Home Equity Line of Credit"



I guess they were trying to compete with junk mail advertising a $500,000 mortgage with a $650/month payment. Kern Schools was very late to the mortgage debt party, however. I assumed they would soon recognize the need to curtail the HELOC practice before they incurred massive losses - and they have. The gigantic mortgage-related losses that doomed Downey, WaMu, and Countrywide (true pioneers of bankers-gone-wild finance) did not wreck our local Credit Unions.

Credit Unions have always been near and dear to me, especially when contrasted to Banks. The interest Credit Unions charge on loans is typically lower than banks. The interest rates Credit Unions pay on savings and checking balances are typically higher. Credit Unions, unlike banks don't usually require you to commit a huge pile of money to get the best interest rates. Also a lot of the services (like notaries) are free or cheap at Credit Unions.

In spite of my longstanding warm fuzzy feelings towards Credit Unions, In mid 2008 I emptied all of my accounts. Pres. Obama might call it "an abundance of caution". For some reason I felt that a coffee can filled with bills seemed more secure than a twenty-something reading me an electronic balance from a screen at their station.

Now it looks like (with regard to Credit Unions at least) my head was indeed smarter than my heart. Even so, this is a tiny, tiny bailout, and the taxpayers are not on the hook for the losses for a change!



I've taken the liberty of bolding what I consider to be the more interesting parts.




From the Washington
Post
:

U.S. Aid Goes to Credit Unions
$1 Billion Infusion Sent to Firm That
Services Industry

The federal government yesterday expanded its bailout to another vulnerable sector, saying it will inject $1 billion into a nonprofit company that provides banking services to the credit union industry.



The government also will guarantee tens of billions of dollars in previously uninsured deposits in a move that aims to forestall a crisis of confidence in a system once considered unshakable because of its conservative business practices. The National Credit Union Administration, which regulates the industry, said it was acting to protect the nearly 90 million Americans who use a retail credit union. Most of those institutions have deep financial ties with the company that is getting the bailout, U.S. Central Corporate Federal Credit Union.



The federal aid comes from assessments on the industry, not from taxpayers. This latest rescue has a familiar plot. U.S. Central invested in mortgage-related securities advertised as safe and lucrative. They were not, and U.S. Central is running out of money, endangering the financial health of many of the nation's 8,400 credit unions, even as demand for their loans has reached record heights.



U.S. Central sits atop a three-layer cake. Credit unions -- cooperatives that lend to members at low interest rates -- are mostly small institutions serving a community, such as employees of a company. Those credit unions are members of 27 corporate credit unions, cooperatives that allow them to borrow from each other and aggregate money in investments with higher profit potential. U.S. Corporate similarly links together the corporate credit unions.



The corporate credit unions together invested about $64 billion from their members in mortgage-related securities, which have declined in value by $18 billion as the market has plunged. Accounting rules are forcing the corporate credit unions to acknowledge those declines. On Monday, U.S. Central told the NCUA it estimated a fourth-quarter loss of $1.2 billion on its loan portfolio. The NCUA board met behind closed doors yesterday and then announced the intervention.



"We figured this day might come, with the overall market conditions the way they are, but we were attempting to allow U.S. Central to work though it," NCUA chairman Michael E. Fryzel said. "Now we've done what we felt we needed to stabilize the system and to put confidence back in the system."



In addition to investing in U.S. Central, NCUA said it would guarantee the money that retail credit unions have invested in the corporate credit unions so that concern about their health, prompted by the rescue, does not precipitate the equivalent of a bank run. NCUA said it was launching a formal review of how to restructure the corporate credit union system to address the evident weaknesses.



This is the government's second attempt to stabilize the corporate credit unions. NCUA announced in December that it would lend billions of dollars through retail credit unions to the corporate credit unions so they would not be forced to sell the investments that have lost value. The agency has loaned $5 billion under the program and said it expects to distribute another $5 billion at the end of the month.



Fryzel said the loans have addressed the thirst of the corporate credit unions for liquidity, or money to lend, but not the depletion of capital, the money held in reserve against losses.

Refinery Shutting Down

From the Central Valley Business Times:

Big West shutting down Bakersfield refinery
by Gaylen Young, bakersfieldbusinessnews.comBAKERSFIELD

January 29, 2009 10:03am
• Closure is for indefinite time period
• Bankruptcy, supplies are at root of problem In a move that's sure to bring layoffs and probably raise the price of gasoline, Big West refinery says it will stop refining oil at its Rosedale Plant indefinitely.
Flying J, the parent company of the Big West Refinery in Bakersfield, filed for bankruptcy protection just before Christmas.
The Big West refinery at that time began to shut down, calling it an annual maintenance schedule, forcing many, like Fleet Card Fuels of Bakersfield, which normally gets much of its gasoline for shipment to its member stations from Big West, to have to drive trucks to Los Angeles and back to accomplish their deliveries.
Now, Big West says it is suspending gasoline production indefinitely.
“For now, we will be winding down refining operations at the facility as we continue to explore opportunities,” Big West Executive Vice President Fred Greener says in a news release.
“We hope that this suspension will be short-lived, and we are working very hard to find a solution that will allow resumption of operations,” the statement continues. “However, at this time, we cannot predict when that might occur.”
During the course of the shutdown, there were reports that Shell Oil Company, which previously owned the refinery, purposely denied Big West oil supplies, adding to its problems. Shell denied any wrongdoing, but state Attorney General Jerry Brown and U.S. Sen. Barbara Boxer both have been conducting an investigation into Shell's dealings with the refinery.
There are 150 people who work at the refinery who could be impacted by its shutdown.
This week's notice may be the first step in a union requirement that demands workers be given six months notice of any layoffs.

Cleaner valley air coming soon

Chart blatantly swiped from Calculated Risk: Story blatantly swiped from Yahoo News. Another very frightening indicator of economic activity. Again, I am not an expert, but this does not look like a healthy trendline. Expect transportation jobs to dwindle.

If there is a bright side to this, it is the fact that fewer thousands of soot-spewing big rigs will be plying the CA-99 and I-5 freeways 24-7. Perhaps in the interrim we can find a less fuel-intensive and polluting way to get goods where they need to be.


ATA Truck Tonnage Index Plummeted 11.1 Percent in December
Mon Jan 26, 5:13 pm ET
Contact: Tiffany Wlazlowski of American Trucking
Associations, +1-703-838-1717

The American Trucking Associations'
advanced seasonally adjusted For-Hire Truck Tonnage Index plunged 11.1 percent in December 2008, marking the largest month-to-month reduction since April 1994, when the unionized less-than-truckload industry was in the midst of a strike. December's drop was the third-largest single-month drop since ATA began collecting the data in 1973. In December, the seasonally adjusted tonnage index equaled just 98.3 (2000 = 100), its lowest level since December 2000. The not seasonally adjusted index edged 0.6 percent higher in December. "

ARLINGTON, Va., Jan. 26 /PRNewswire-USNewswire/ -- The American Trucking Associations' advanced seasonally adjusted For-Hire Truck Tonnage Index plunged 11.1 percent in December 2008, marking the largest month-to-month reduction since April 1994, when the unionized less-than-truckload industry was in the midst of a strike. December's rop was the third-largest single-month drop since ATA began collecting the data in 1973. In December, the seasonally adjusted tonnage index equaled just 98.3 (2000 = 100), its lowest level since December 2000. The not seasonally adjusted index edged 0.6 percent higher in December.
Compared with December 2007, the index declined 14.1 percent, the biggest year-over-year decrease since February 1996. During the fourth quarter, tonnage was down 6.0 percent from the same quarter in
2007.

ATA Chief Economist Bob Costello said the December reading confirms that the United States is in the thick of a recession. "Motor carrier
freight is a reflection of the tangible-goods economy, and December's numbers leave no doubt that the United States is in the worst recession in decades," Costello said. "It is likely truck tonnage will not improve much before the third quarter of this year. The economy is expected to contract through the first half of 2009 and then only grow slightly through the end of the year."

Note on the impact of trucking company failures on the index: Each month, ATA asks its membership the amount of tonnage each carrier hauled, including all types of freight. The indexes are calculated based on those responses. The sample includes an array of trucking companies, ranging from small fleets to multi-billion dollar carriers. When a company in the sample fails, we include its final month of operation and zero it out for the following month. This assumes the remaining carriers pick up that freight. As a result, it is close to a net wash and does not end up in a false increase. Nevertheless, some carriers are picking up freight from failures, and it may have boosted the index. Due to our correction mentioned above, however, it should be limited.

Trucking serves as a barometer of the U.S. economy, representing nearly 70 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 10.7 billion tons of freight in 2006. Motor carriers collected $645.6 billion, or 83.8 percent of total revenue earned by all transport modes.

ATA calculates the tonnage index based on surveys from its membership and has been doing so since the 1970s. This is a preliminary figure and subject to change in the final report issued around the 10th day of the month. The report includes month-to-month and year-over-year results, relevant economic comparisons, and key financial indicators.

The American Trucking Associations is the largest national trade association for the trucking industry. Through a federation of other trucking groups, industry-related conferences, and its 50 affiliated state trucking associations, ATA represents more than 37,000 members covering every type of motor carrier in the United States.
SOURCE American Trucking Associations

Wednesday, January 28, 2009

News from the International Monetary Fund

Link Here:



Global output and trade plummeted in the final months of 2008 (Figure 2,
view: Data Figure 2). The continuation of the financial crisis, as policies failed to
dispel uncertainty, has caused asset values to fall sharply across advanced and
emerging economies, decreasing household wealth and thereby putting downward
pressure on consumer demand. In addition, the associated high level of
uncertainty has prompted households and businesses to postpone expenditures,
reducing demand for consumer and capital goods. At the same time, widespread
disruptions in credit are constraining household spending and curtailing
production and trade.

This does not bode well for the near future. Like housing, there is no hint that the trend has begun a bottoming process.

IOU too...

From the Californian:




Who locally could see state IOUs instead of cash?

The Bakersfield Californian Wednesday, Jan 7 2009 6:36 PM
Last Updated: Wednesday, Jan 7 2009 6:38 PM

A local lawmaker said Wednesday he’d fight in court or through legislation any issuing of IOUs instead of cash state tax refunds as officials have warned they might have to.

State Controller John Chiang has projected California will run out of money Feb. 27 and be at least $2 billion in the red without a budget resolution, according to a spokesman. So, Chiang has said, he may have to start issuing IOUs as early as Feb. 1.

The people who’d first receive IOUs include taxpayers expecting refunds, legislators and top appointed aides, California Student Aid Commission grant recipients, about 1,700 judges and court-appointed lawyers. The state must first pay schools and bondholders with any cash on hand.



State Sen. Roy Ashburn, R-Bakersfield, said he may not buy that California coffers are about to run dry because the state takes in money year-round. And he said it would be “offensive” to refund taxpayers in IOUs.



"Offensive" is putting it mildly. How would the state of California respond if a taxpayer were to send an IOU rather than payment in full for a tax bill? Personally, my feeling is that if the state needs more money, they need to justify all their expenses and put a tax increase to a vote.

On the other hand, such a vote probably won't get very far. Check this out:
From Yahoo News:


State and local governments contributed $64.5 billion to pension plans in fiscal
2005-06, according to data from the U.S. Census Bureau. That’s about 57 percent
of the $113.2 billion spent on police and fire services.


Your tax dollars at work. How about getting state employees into a 401(k) program instead?



The state may very well elect to send you out an IOU rather than a refund check. Somehow that doesn't seem right, after you likely have sent thousands of tax dollars (vehicle registration tax, housing assessment, payroll tax and sales tax) over the course of the year. Legality and ethics aside, they can probably get away with this.



One thing a legitimately unhappy taxpayer might do in response: Adjust his/her state withholding to minimum, and go out of state for larger purchases. They can resume pumping massive amounts of tax money into pensions after April 16 of 2010.

Agricultural subsidies

Wiki has an excellent article discussing Ag subsidies.

There are a lot of pros and cons regarding such subsidies. I don't mind the idea of farmers having a stable income, when their prosperity (or failure) is so weather-dependent. On the other hand, where I grew up there was an old joke that went something like: "The fastest way to starve a farmer is to weld his mailbox shut". There are many aspects of the issue to like and dislike.

One thing that I *really* dislike about Ag subsidies is how they are distributed. Over half of our taxpayer dollars go to businessmen growing non-food crops! Here is the breakdown, again from Wiki (not a preferred source, but it's easier to find the info than searching the .gov pages) . This info is from 2004.


So there you have it: The top two crop subsidies, Feed Grains and Cotton, get 53.1% or 4.26 Billion of our tax dollars annually - more than all the other fully edible crops combined. "Feed Grains" is corn, sorghum, barley and oats. Uses of these products vary: For human or animal consumption, ethanol production or for export. In the end, however, the dollars go into the pockets of agribusiness.

Isn't it fascinating how the government spends our tax dollars?

Tuesday, January 27, 2009

When is a good time to buy a house?

This is the Case-Shiller housing price index. It tracks the pricing of the same set of homes that are sold and resold. Many economists prefer the Case-Schiller index to the more widely reported "Median Home Price". The reasons for this preference are twofold:
1) You are tracking the value of the same item over time, so there is no need to get fancy trying to infer the value of a newer home in comparison
2) Median is an average. It is very sensitive to outlying numbers. As an example: Five guys are shooting pool in Trout's. Their median income is $30K. Bill Gates enters the bar and joins in for a set of 9 Ball. The median income has just risen to $29.6 Billion (Gate's 175.6 billion in Dividends from Microsoft shares divided by six people)

Back to Case-Schiller (the superior housing value indicator ;)
I am by no means a real estate expert, but I CAN read a simple chart. My thought is that if you purchase a house right now, you will experience a prolonged loss of value over time.

From the look of the long-term trend, 70-75 appears to be the correct range for a non-bubbly housing market (i.e. where you get fair value for your hard-earned money). There is a distinct possibility that the market will overcorrect on the way down, possibly to the 60-65 range.

How far the trend drops depends on how much revulsion there is to real estate after people's wealth has been destroyed. Remember the suspicion toward dot.com stocks after the tech bubble burst? This may be the same afterwards.

On the other hand, even now it still appears to be a great time to SELL a house - assuming you can find a qualified buyer, that is! ;)


(Click on image to enlarge)


Further afield, we note that not much stuff is moving

The port of Long Beach is one of the busiest in the U.S. for imports and exports. Unfortunately it doesn't seem to be doing much business recently. Take a look at the first column, loaded inbound cargo containers.

And look here: All these cars were supposed to be shipped to dealers and sold. Instead they are piling up. I don't feel like getting $20,000-40,000 deeper in debt right now either. Do you?

One leading economic indicator...

... has always been how well the packaging materials business is doing. The thinking on this economic indicator is that if goods are being sold, they will be packaged. If the cardboard container business is booming, that means factories are making stuff, packing it up, and shipping it out for people to buy.

So you can imagine my horror upon learning that the packaging materials business is in Bankruptcy!

AP
Smurfit-Stone seeks bankruptcy protection
Monday January 26, 5:08 pm ET
By Mike Obel, AP Manufacturing Writer
Smurfit-Stone Container files for Chapter 11 bankruptcy protection, looks to restructure debt

NEW YORK (AP) -- Smurfit-Stone Container Corp., the largest producer of cardboard box materials in North America, on Monday filed for Chapter 11 bankruptcy protection as it looks to restructure a heavy debt amid a global credit freeze.

ADVERTISEMENT
The Chicago-based company, which employs nearly 22,000 people working at about 150 facilities across North America and in Asia, said it filed for protection from creditor claims in the U.S. Bankruptcy Court in Wilmington, Del., while it develops a financial reorganization plan. Its Canadian units will file under the companies' Creditors Arrangement Act in the Ontario Superior Court of Justice, the company said.

Smurfit-Stone has been struggling to repay its debt, which at the end of the third quarter was $3.5 billion -- nearly half its yearly revenue of roughly $7.5 billion.

Chairman and Chief Executive Patrick J. Moore said in a statement that by restructuring its debt Smurfit-Stone would create a better capital structure.

"The acceleration of the unprecedented global economic recession has weakened demand for packaging, and the frozen credit markets have prevented an out-of-court refinancing of our capital structure," Moore said in a statement. "While this is not the outcome we anticipated, we are taking this action to become a more financially healthy company."

The company said it expects to continue operations during the bankruptcy process and has received commitments for up to $750 million in debtor-in-possession financing to fund continuing operations. Of that $750 million, some $350 million is new incremental financing, while the remainder represents replacement of existing credit.

Earlier this month, a report said Smurfit-Stone was actively exploring bankruptcy protection and had engaged a law firm and financial advisers with expertise in bankruptcy filings.

Analysts responded positively to the filing.

"The main thing is that this was an expected event and overall being a Chapter 11, instead of a Chapter 7 filing, it is good for the company and good for the industry longer term," said Longbow Research analyst Joshua Zaret.

"My initial reaction is (that the $750 million in financing) should be sufficient but it will depend on the depth and duration of this current downturn which has so far been extremely nasty."

The bankruptcy comes as U.S. economic news continues to worsen. The median home sales price plunged to $175,400 in December, down 15.3 percent from $207,000 a year ago, according to the National Association of Realtors. The decline is the largest year-over-year drop in records going back to 1968.

Within hours, Standard & Poor's responded by slashing the company's debt rating to the lowest possible level, "D," or default status.

S&P analyst Pamela Rice also has the recovery ratings on the company's senior secured debt at "2," which indicates "our expectations for substantial (70 percent to 90 percent) recovery." Rice has the company's senior unsecured debt at "6," which indicates "our expectations for negligible (0 percent to 15 percent) recovery."

Smurfit-Stone's legal adviser is Sidley Austin LLP and its financial adviser is Lazard.

Its shares fell 1.7 cents to end at 4.3 cents. They traded as high as $9.99 over the past year but could be worthless after the reorganization.

Yup. Pretty much what I said...

From the Californian:

Dairymen hurt by falling prices for their milk


What I mentioned on January 13.

Monday, January 26, 2009

... but at least we aren't Fresno, LOL

Kern's unemployment soars to 11.8 percent
BY COURTENAY EDELHART, Californian staff writer
cedelhart@bakersfield.com | Friday, Jan 23 2009 10:30 AM

Last Updated: Friday, Jan 23 2009 5:05 PM

The unemployment rate in Kern County soared to 11.8 percent in December, up from 10.4 percent in November and above the same time last year, when the rate was 9.4 percent. Figures the California Employment Development Department released Friday show the rate here was higher than other regions. It was 9.1 percent statewide and 7.1 percent nationally.

Laid-off warehouse worker Stephen Van Dyke, 22, is among the job-seekers.

“I’ve had a few interviews, but nothing too promising yet,” said the married father of eight. “I’m just trying to keep the faith.”

Kern saw a year-over-year gain of 900 jobs, 800 of which were unrelated to farming. But from November to December, it lost 1,800 jobs, half in agriculture, half not.

The majority of year-over-year job gains (900) were in natural resources and mining, which includes the oil industry, followed by 300 government jobs. But both of those sectors are weakening.

City and county governments have implemented hiring freezes for all but the most critical positions. Filling vacancies will be decided on a case-by-case basis.

Carl Toney, 55, took advantage of his time out of the work force to return to school and complete a physical education degree. Since then he’s submitted more than 30 applications to all levels of government.

“I only got one response back, and it was a denial,” he said. “At first I thought it was my age, but now I’m wondering if it’s just the economy.”

The most job losses in Kern were in leisure and hospitality, which lost 800 positions. Another 300 jobs were lost in construction.

Former radio personality Rhonda Hunt, 45, has worked odd jobs since 2003, when she was badly injured in a car accident. Her last job was at a restaurant, but she’s been out of work almost three years.

“I can’t do too much bending or lifting, which is a problem, especially in retail,” she said. “I’ve been really diligent about looking, but the reception’s been cold, for me and a lot of others.

“I know a lot of good, highly educated people who are out there who are having a difficult time getting a job.”

Unemployment insurance claims are soaring.

In the week ended Jan. 17, seasonally adjusted new requests for unemployment insurance were at 589,000, an increase of 62,000 from the previous week’s revised figure of 527,000, according to the U.S. Department of Labor.

What to do with an abandoned house!

Party house invites 38 arrests
The Bakersfield Californian | Sunday, Jan 25 2009 1:40 PM

Last Updated: Monday, Jan 26 2009 7:12 AM

Bakersfield police arrested 38 people — including 25 minors — partying in a vacant house off White Lane and Wible Road Saturday night. The house, in the 3800 block of Sweet Water Street, is for sale, according to police.

When officers arrived shortly after 11:30 p.m., they arrested Ignacio Ramirez, 25, and Lucina Pena, 23, on suspicion of trespassing and contributing to the delinquency of minors.

The following adults were also arrested on suspicion of trespassing and other charges: Jose Jamarillo, 18; Jonathan Ponce-Iniguez, 18; Aaron Sy, 18; Diana Mojaica, 18; Gregory Clemons, 18; Nicholas Minor, 18; Sergio Esparza, 18; Loanda Sanchez, 18; Miguel Ramirez, 20; Sandra Guzman, 19; and Braulio Lopez, 18.

The 25 juveniles, who were not identified, were arrested on suspicion of trespassing and violating curfew.