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Get ready for the consumer credit crunch
Forget the double-dip recession; we could be in for a second helping of credit crisis, this one hitting consumers and their credit companies. Here's what that could mean -- and which stocks could take hits.
By Jim Jubak
Are we headed for an unexpected double-dip credit crunch?
All the attention is on the possibility of a double-dip recession -- the chance that economic growth will slow enough to push the economy back into recession only a year after the three-quarter recession of 2001.But while we’re all waiting to see how the macroeconomic numbers turn out, we shouldn’t ignore company-specific numbers suggesting that an avalanche of bad loans could be gathering. That, in turn, could cause lenders to choke off credit to a significant segment of the economy. Again.
Remember the first credit crunch?
It developed in two stages. In stage one, telecommunications and networking companies such as Lucent Technologies (LU, news, msgs), Nortel Networks (NT, news, msgs), Cisco Systems (CSCO, news, msgs), Nokia (NOK, news, msgs), and Ericsson (ERICY, news, msgs) extended more and more credit to increasingly risky customers. As the pressure mounted to keep earnings growth high -- even as real growth began slumping -- many of these companies stopped worrying about the ability of their customers to repay loans. Every order was critical to making Wall Street revenue projections for the current quarter. Minor questions such as when and whether the seller would actually see cash could be answered later. That turned out to be a mistake; many of these customers did indeed prove unable to return the money they’d borrowed. Sellers had to admit that the sales they'd made to these companies weren’t real. Then, under intense scrutiny from investors, the companies simply stopped lending to most customers.
http://moneycentral.msn.com/content/P29760.asp?special=msn
Foreclosures at record high
Risky loans, marginal buyers drive rising delinquencies
By Steve Kerch, CBS.MarketWatch.com
Last Update: 6:26 PM ET Sept. 9, 2002
The mortgage delinquency rate -- the percent of homeowners at least 30 days behind on payments -- also rose in the quarter, the Mortgage Bankers Association of America reported Monday.
"There is an unprecedented amount of debt that people are putting on their houses," said Gary Gordon, a mortgage-finance analyst with UBS Warburg. "They are running down their savings. It's akin to taking money out of a 401(k) or borrowing against Social Security."
At the end of June, foreclosure proceedings were started on 0.4 percent of all mortgages and 1.23 percent of mortgages were somewhere in the process. Both figures, the highest since the MBA began tracking them in 1972, stem from the growth of low down-payment mortgages and loans to less creditworthy borrowers since the 1990-91 recession, experts said.
"The last decade has seen a lot of product innovation to produce new kinds of mortgages. These loans are getting stress tested under poor economic conditions for the first time," MBA Chief Economist Doug Duncan said.
http://www.marketwatch.com/news/yhoo/story.asp?guid=%7BBE730D6C-934F-406A-9847-35FDA571307E%7D&s...
10:07 ET CSCO Cisco Systems making cautious comments at conference (13.08 +0.31)
We are hearing that CSCO is making some cautious comments at Salomon Smith Barney's tech conference; says Aug was weaker than expected, and for the July qtr the co had a 1.0 book-to-bill and did not build a backlog, possibly indicating that risks are increasing for the Oct qtr.
What’s wrong with falling prices?
Look to Japan to see the perils of a ‘deflationary spiral’
By Mike Robbins
CNBC ON MSN MONEY
Sept. 5 — Everyone likes low prices. Wal-Mart Stores founder Sam Walton knew it. The folks in line for the early-bird special at Denny’s know it too. So why fret over recent falling prices on everything from apparel to electronics?
ONE REASON CAN be found 5,000 miles west of California. Prices in Japan have been falling so broadly and so consistently that that former economic powerhouse has become mired in a “deflationary spiral.”
Usually when prices fall, consumers decide it’s a good time to buy, and their increased spending helps prices rebound.
In a deflationary spiral, consumers expect prices to continue to fall. So rather than take advantage of low prices, they sit on their wallets and wait for prices to fall further still. Corporations can’t be counted on to end the deflationary cycle, either.
http://www.msnbc.com/news/803952.asp?cp1=1
11:58 ET S&P may downgrade Merrill, Morgan Stanley, JP Morgan this month
We are hearing from traders citing Bloomberg that an S&P analyst says the agency will probably cut MER, MWD, and JPM credit ratings near the end of the month. (Note that last month S&P put the co's credit ratings on review for downgrade, so this shouldn't necessarily come as a surprise.)
Check Point reaffirms 3rd-quarter outlook
(Reuters 09/05 07:14:09)
NEW YORK, Sept 5 (Reuters) - Check Point Software
Technologies Ltd <CHKP.O> Chief Financial Officer Eyal Desheh
on Thursday reaffirmed the company's third-quarter financial
outlook, but noted there was still a month to go.
"We see a similar environment to the second quarter, but
it's one month at a time and we have to remember that," he told
Reuters after a presentation at a Salomon Smith Barney
technology conference here.
Desheh reaffirmed the software maker's third-quarter
guidance for earnings per share of 25 cents on sales of $108
million.
"There's no reason to change anything we said about
guidance," he said. But he cautioned that, like most software
companies, Check Point does the majority of its business in the
last month of the quarter. "We have almost one full month ahead
of us and making predictions is a dangerous game."
He said the spending environment was very similar to the
second quarter, and that he expects the fourth quarter to be
better than the third.
((--Siobhan Kennedy, New York Newsdesk (646) 223-6000))
REUTERS
S.RT CHKP-O BUS.R IL.R US.R RESF.R CHKP
A Looming Depression?
By Martin Walker
UPI Chief International Correspondent
Published 9/4/2002 8:37 AM
FRANKFURT, Germany, Sept. 4 (UPI) -- One of Germany's top economists is warning the country's leading bankers that Europe, and the rest of the world, are in dire danger of following Japan into a deflationary depression -- far more serious and prolonged than a conventional recession.
"The people running the world's central banks and those responsible for economic policy should take the signs much more seriously," argues Norbert Walter, chief economist for Deutsche Bank, Germany's largest, in a paper made available exclusively to United Press International.
Walter, sunk in gloom after returning from a research trip to Asia, is circulating the paper in a bid to influence the world's financial leaders at the autumn meeting of the International Monetary Fund and World Bank in Washington at the end of the month.
Speaking in his Frankfurt office as the New York and European markets followed the plunge of the Tokyo stock market Tuesday, Walter warned, "If we don't get this right, we face a second leg of recession, a double-dip, combining with deflation."
The world last experienced deflation on a serious scale during the Great Depression of the 1930s. It is a condition when prices start falling, investors stop investing and companies and individuals still committed to paying off old loans go bankrupt because lower prices and lower wages give them no money to repay.
"Look at the facts," Walter said. "Japan has watched deflation over the past three years. Consumers and entrepreneurs in all areas are postponing purchase decisions. The other Asian giant, China (including Hong Kong), is also experiencing a decline in the price level.
"In the U.S., consumer price inflation is running at just barely 1 percent. As studies like the Boskin report have shown, the method of price measurement overestimates the actual price level by about one-half to a full percentage point. This means the price level in the U.S. is practically stable, and the augurs now speak of a double-dip, a second drop in economic activity."
http://www.upi.com/view.cfm?StoryID=20020904-043745-2655r
QLGC ses guidance at high end:
theflyonthewall.com: 14:12 EST QLogic- QLGC sees guidance at high end of range 3-8% from conf@SBSH
12:09 ET Hearing that Secret Service issues alert for man with explosives
The individual is believed to be heading to D.C.
NSM halted.
Record bankruptcies reflect '90s debt, great deals
Wed Aug 21, 5:42 PM ET
By LAURIE KELLMAN, Associated Press Writer
WASHINGTON - Consumers and businesses amassed so much debt in recent years that record numbers filed for bankruptcy protection for the second year in a row, the Administrative Office of the U.S. Courts said Wednesday.
The 1.5 million new cases filed during the year ending June 30 represented an 8.6 percent increase over the record number of cases filed during the year ending June 30, 2001.
Individual bankruptcies totaled 1.47 million in the year ending June 30, up 8.6 percent from a year earlier. Business bankruptcies rose to 39,201, 5.6 percent more than the year before.
Experts said bankruptcy filings do not reflect the current economy.
"They're telling us what happened last year. It's just the recession," said Michael Evans, a Florida economist formerly with American Economics Group.
High-profile corporate bankruptcies such as WorldCom and US Airways do not portend improvement in the numbers for at least another year, he said.
"In the months and quarters ahead the bankruptcy statistics will show further worsening," Evans added.
For consumers, last year's recession meant car deals and low interest rates, which prompted consumers to spend heartily. The temptation continued when the travel and other industries, hoping to limit economic damage from the Sept. 11 attacks, offered substantial savings.
"Both individuals and public companies are working through the difficult fallout from the debt binge of the 1990s and there's no early end in sight," said Samuel J. Gerdano, executive director of the American Bankruptcy Institute.
http://story.news.yahoo.com/news?tmpl=story&u=/ap/20020821/ap_wo_en_po/us_bankruptcy_surge_1
14:56 ET EMC said to be reaffirming guidance (6.47 -0.29)
Company is presenting today at the Salomon Smith Barney Tech conference.
Commodities Heading Toward Biggest Rally Since 1983 (Update1)
By Claudia Carpenter
New York, Sept. 2 (Bloomberg) -- Prices of commodities from crude oil to cocoa are having their strongest rally in 19 years in a jump that analysts and investors say shows few signs of ending as supplies tighten.
A three-month drought in the Midwest has dimmed prospects for U.S. crops and sent corn and soybean prices up by almost a third this year. Crude oil is up 46 percent on concern the U.S. will attack Iraq, disrupting Middle East exports. Gold, which languished for years, is up 13 percent as investors sought refuge from tumbling stocks.
``Prices have been going crazy,'' said Gilbert Raske, a director at JGC International LLC, a Chicago-based exporter of grain, fertilizer, coal and fuel. ``Our customers are much more aggressive about securing supplies'' than they were before the rally, said Raske, whose company recently won a contract to supply corn to South Korean livestock-feed companies.
The Reuters-Commodity Research Bureau index, which measures 17 commodity futures markets, rose 1.79 to 219.20 on Friday, the highest level since May 2001. The index, rebounding from a two- year low last October, has gained 15 percent so far this year and is heading toward its biggest rise since 1983.
Another benchmark, the Goldman Sachs Commodity Index, which is weighted toward energy and includes more industrial metals, is up 27 percent this year. In comparison, the Standard & Poor's 500- stock index has declined 20 percent so far this year.
Corn has surged 28 percent this year and soybeans are up 29 percent. Prices have been climbing partly because overseas processors have been eager to lock in shipments before prices climb even higher, traders said.
``Commodities are up because supplies are down,'' said Paul Kasriel, chief economist at Northern Trust Securities in Chicago. ``Next year we'll probably see some commodity prices go even higher.''
Cotton Mills
A 31 percent rise in cotton prices this year probably won't start showing up in higher jean prices for at least another year, some buyers said.
Cone Mills Corp., the world's biggest denim maker, locked in cotton prices when they were at a 29-year low last year because of record world production. The purchases have allowed the company to reduce its cotton costs by about a third from last year, said Scott Wenhold, treasurer of the Greensboro, North Carolina-based company.
``We're always hedged 12 months out, so the higher prices won't start to impact us at least for another year,'' Wenhold said. ``And that's assuming we couldn't pass on the higher costs'' to customers.
Few manufacturers stuck with paying higher raw-material costs have been able to raise the price of their products.
U.S. economic growth slowed to an annual rate of 1.1 percent in the second quarter from 5 percent in the first quarter, the Commerce Department said. The slowing economy has kept producers from raising their prices for fear of losing business, analysts said.
`Damper' on Prices
``If anything, the weak global economy has been a damper for commodity prices,'' said William Byers, senior managing director at Bear, Stearns & Co. in New York. Prices have been climbing this year largely because of reduced supply, not demand, he said.
Placer Dome Inc., the world's sixth-largest gold producer, plans to reduce by 20 percent the amount of gold it sells before it's mined, a strategy gold companies use to lock in prices. The practice, used to help companies avoid price declines, also keeps them from benefiting from rallies.
Gold will probably rise further this year ``as we go into the holiday seasons in the West and the marriage season in India,'' Wayne Murdy, chairman and chief executive of Newmont Mining Corp., said on Bloomberg TV. Newmont is the world's largest gold producer.
Unlike gold and agricultural commodities, petroleum prices have been climbing for political reasons.
Iraq Concerns
Crude oil prices in New York are close to $29 a barrel after rising to an 18-month high above $30 in August on concern that supplies from Iraq or its Persian Gulf neighbors might be disrupted by U.S. military action.
Estimates of the so-called war premium vary between $1 a barrel to as much as $8, analysts said.
``If oil is at $29 then maybe $4 to $5 is related to bullish market psychology, which is principally related to Iraq,'' said James Burkhard, associate director of Cambridge Energy Research Associates in Boston.
Members of the Organization of Petroleum Exporting Countries will gather in Osaka, Japan, on Sept. 19 to decide on oil production levels for the final three months of the year.
Saudi Arabia, the world's biggest oil exporter and most influential OPEC member, wants to raise output, an OPEC official has said. An increase might stunt this year's rally, analysts said. Most other members of the group favor keeping production levels unchanged.
``If we take into account reports on inventories of crude and products, existing supplies'' are sufficient, Ali Rodriguez, president of Venezuelan state oil company Petroleos de Venezuela SA, in an interview with Union Radio. Venezuela is OPEC's third biggest member, after Saudi Arabia and Iran.
SUN CFO SAYS TECH SPENDING ENVIRONMENT MAY BE WORSENING
(Reuters 08/29 13:39:00)
REUTERS
S.RT DPR.R ENT.R US.R RESF.R
NVLS Novellus guiding lower (24.29 +0.11) -- Update --
On its conference call, company guides lower. Q3 revenue and EPS goes to $230 mln and breakeven vs Multex consensus of $250 mln and $0.10...stock at 24.06.
Nortel's 3rd-Quarter Sales to Miss Target, More Job Cuts Planned
Tuesday August 27, 7:40 pm ET
TORONTO -- Nortel Networks Corp. Tuesday night warned its third-quarter revenue won't meet expectations and that it plans to cut costs even further, including the elimination of up to 7,000 more jobs.
The beleaguered telecommunications-equipment maker said the sales shortfall was "primarily due to further reductions in spending by service providers in the United States."
Nortel last month projected third-quarter revenue to be "essentially flat" with the second quarter's $2.77 billion, but is now forecasting a drop of up to 10%.
But despite the revenue warning, President and Chief Executive Frank Dunn said the company is still expecting its bottom line excluding items to improve in the third and fourth quarter because of its ongoing restructuring effort. Nortel had a second-quarter loss excluding items of $323 million, or nine cents a share. The mean estimates of analysts surveyed by Thomson First Call are for a third- quarter loss of six cents a share and a fourth-quarter loss of three cents a share.
http://biz.yahoo.com/djus/020827/1940000734_1.html
ARBA chosen by MetLife:
(after the bell)
Wednesday August 21, 4:05 pm Eastern Time
Press Release
SOURCE: Ariba, Inc.
MetLife Selects Ariba to Manage Spend and Reduce Purchasing Costs
SUNNYVALE, Calif., Aug. 21 /PRNewswire-FirstCall/ -- Ariba®, Inc. (Nasdaq: ARBA - News), the leading Enterprise Spend Management (ESM) solutions provider, today announced that Metropolitan Life Insurance Company (MetLife), one of the largest insurance and financial services companies in the U.S., has selected Ariba solutions to improve management of corporate-wide spend, streamline the purchasing process and reduce costs.
http://biz.yahoo.com/prnews/020821/sfw071_1.html
16:51 ET SNPS Synopsys tops estimates (44.00 -0.00)
Reports Q3 (Jul) earnings of $0.53 per share, $0.03 better than the Multex consensus of $0.50; revenues rose 34.1% year/year to $236.1 mln vs the $235.2 mln consensus; sees Q4 revenue between $305 million and $312 million vs the current consensus estimate of $316.9 million.
MetLife selects ARBA:
16:07 ET ARBA Ariba solution selected by MetLife (2.44 +0.17)
Announces that MetLife has selected Ariba solutions to improve management of corporate-wide spend, streamline the purchasing process and reduce costs.
I know this is unusual, but it has to be done, simply because of its wide implications, and the fact that it might be the hinge on which the American economy swings. More and more letters have come to me about these columns on housing. Letters from South Carolina, California, Maine, Maryland, Ohio, Las Vegas, and numerous places. Letters that tell of lots of for sale signs, and no sales. Lots of letters telling of reduced prices. Columnists speaking of the housing bubble that will break. It is plain common sense that what goes up unnaturally, will come down either slowly, as did gold and silver after the 1980 peak, or quickly, as in the NASDAQ fall. Housing is the only thing that is keeping the economy afloat, I truly believe.
Ever-escalating housing prices, are the same as the ever escalating stock market bubble…that burst. Why did it burst? There was no true value in the stocks. Only hype. There was no profit, the PE ratios were either absurd or non-existent, and it was pure fluff, similar to the tulip bubble, and Louisiana land bubble, which took the French economy with it; thanks to John Law. The stock crash, percentage wise, has been almost identical to the 1929-1931 crash, which took real estate with it.
Argentina is gone. People are starving, and literally, the land is in ruins. Uruguay is going fast, with more paper insertions by America and the IMF (which are the same) only postponing the inevitable for a short time. Brazil will be next, with debts many times those of Argentina, and a situation far more hopeless. Japan has faded, and zero interest has failed to prop up a real estate market that has failed, taking investors with it. Foreigners have slowed buying US government paper, due to the falling dollar and low interest. Lots of foreigners are cashing in their US debt. The US cash outflow (balance of trade deficit) is over $400 billion per year, meaning we are spending far more than we take in, and have virtually ceased to manufacture the things we consume. The Dow Jones "industrial" average of 30 prime stocks, hardly represents "industry" any longer, and has banks, Walt Disney, and other non "industrial" stocks as part of its consist. We are doing each other's laundry, and believe we are OK. It's all so pitiful.
Just like stocks going up with no value, real estate has done the same. The cost to build a home, plus land, in 90% of the cases, has gone up to twice, or much higher in dollar price in many cases, and especially in higher priced neighborhoods, such as Washington DC, but also in California, and other so called "hot spots." DC is an anomaly all its own, and prices there and in its environs, can be lain at the always growing federal government. Government will never shrink, but continue growing like Topsy. Government produces NOTHING, creates no wealth, and is a detriment to wealth production. It eats capital, resources, and causes wealth production to slow, and in many cases cease all together; as in mining. (Everything has to be initially either grown or mined) DC real estate prices may go up for a long time, because like a cancer, government keeps growing, and destroying the rest of us. Washington DC is indeed a cancerous growth that no one knows how to stop or cure. Real estate prices there, may go on, but this is not the rest of America. D.C. is a world of its own.
Sir Allen Greenspan and his cahoot bankers, caused the money supply and consequent stocks to go far too high, which mandated a crash. It is mortgage bankers, Freddie Mac, Fannie Mae, and others that have created money out of thin air, to bolster sales of ever higher priced housing and assessments, with no actual increase in value, as was true with stocks. The stock crash took hundreds of thousands of jobs with it, as well as the retirement hopes and dreams of millions, plus the savings of millions, and the destruction, it is said, of $7 trillion. The housing bubble could pop, leaving America with nothing. The stock market crash has cost the jobs of people who can not pay their mortgages, and retirements of those who realize they cannot continue living at the level that they had become accustomed to, so they attempt to downsize. Expensive homes go first, but others will surely follow.
A friend in California, had a 1400 square foot home he paid $140,000 for several years ago. He sold it for well over $500,000 to some sap, who will probably watch it go down, even though southern California is a "hot spot." Jim laughed all the way to the bank, and now resides in a much lower priced community, in a much larger home, that cost less than half of what he sold for in Caalifornia. Can this nonsense go on forever? I think not.
I am certain that the PPT, and every person in the know with a checkbook or authority in DC, is working overtime to keep everything in place till after the elections in November, and hoping against hope that the terrorists don't mark their first anniversary with another attack, but it may not happen as they wish. The loss of a job has a devastating effect on the psyche of the individual, and of his ability to pay a mortgage. It is said that some up and coming yuppies have committed 35-45% of their paychecks to live in these sumptuous, overpriced homes. The dot com crash has left these areas with thousands of for sale signs, and few are buying. "Do you know the way to San Jose?"
While the woes of Brazil, Argentina, Uruguay, Japan, and others may seem far off, they aren't. Argentina, a couple of years ago, was a wonderful place to live, and Buenos Aires was one of the truly great cities in the world. It has gone like a lightning flash. "Us collapse? You must be kidding. Why, we have a wonderful life style, beautiful cities and farms, and our currency is even pegged to your dollar. You are out of your mind." That could be a quote from a resident of Argentina or Uruguay, who prides itself in its banking system and high standard of living. Debt was, and is, the problem in South America, Mexico, and a host of other lands. Does America have debt? You must be kidding. America's corporate, personal, mortgage, and government debt is the largest debt in the entire world. Besides that, Citibank, and JP Morgan-Chase, it is said, are already bankrupt and have a derivative hang-over of hundreds of trillions of dollars. It's all paper, just like the debts of the other countries. When the paper falls to nothing, due to the utter worthlessness of it, people go rummaging through trash cans to get something to eat. Banks close, prices go to the sky in worthless currencies, jobs are lost, and it all comes crashing down. Savings of a lifetime will buy a meal when currencies go bust, and insurance policies become pointless. Already Met Life has had so many failures in its investment portfolio of commercial shopping centers, stocks, bonds, and other instruments, that its stock and dividends are plunging.
What is keeping the whole thing afloat, now that stocks are a joke? Real estate. The continual creation of money, through mortgages, refinancing to pay existing debt, and new construction, has kept the economy barely chugging along. Even probably fraudulent government figures show a marked slowing of the GDP, and that figure includes government spending. The so-called "consumer confidence" ratings are in the pits, and these are probably faked also. Why should a government that is afraid for its very life, exude correct figures? All the while, of course, CNBC extols everything, and suckers log on to a brief jump in the Dow, believing the broadcasters and polls, when they say, "this is the bottom."
Sir Greenspan knows that reducing interest rates will give it a bit of breathing room, and this will undoubtedly happen. But Japan has zero interest rates, and it hasn't helped. Just like it took 54 years for the Dow to regain its former status after the crash, why can't it happen again? The dollar is no longer backed by anything, and the whole world is based on worthless paper currencies, bonds, stocks, government promises, and yes…hype. The dollar has lost a lot of its value already, causing Europe and Japan to be skeptical. As if theirs have more to offer. If the process of ever-expanding amounts of greenbacks, equities, mortgages, bonds, and paper, paper, paper doesn't continue…it'll all come down with a crash. Those South American lands had the same worthless paper as do we. If expansion stops or slows, it collapses. It must be kept going. History and logic proves it.
The "price" of things, is based on their replacement after they are sold. If you buy a roast beef from a market, that market has to make a profit, and replace it in their meat-case, for someone else to make a purchase of roast beef, other wise their inventory is gone, and they are out of business. If the currencies are going down in value, it will cost more to replace, so the retail price has to increase to cover profit and replacement. Wages remain the same, while prices go up. Wages can't go up, because due to the inflation, profits are not there to give a wage increase. The wage earner, therefore, is unable to buy food, or anything else, and his employer is unable to give a wage increase. The whole thing is a chain reaction, and with inflation escalating, as it always does once it really gets going, the chain leads to a quick collapse, with banks closing their doors due to runs on them by savers, who just want to get their failing money out, so they can spend it before it goes further down, or even just to eat and pay bills. Then people are unable to pay bills, utilities, taxes, or anything, and total collapse is in the offing, with no way to stop it. IMF loans aren't even a finger in the dam, and are worthless, as the loans are consumed immediately…never to be repaid. This causes the dollars loaned by the IMF, Citibank, or J P Morgan-Chase to be un-recoverable, as with Enron or World Com, and they go down, due to insolvency. The fed then "prints" billions to bail them out, and collapse has begun here in America, because of mass increases in the currency supply. Gold, silver and everything else goes to the sky in prices of those currencies, thereby giving their owners solvency, whereas those who saved in the diminishing currencies, watch their life blood drip away, and are unable to do anything about it. Clear?
Example. Suppose Coca Cola goes to $50, as would happen with inflation getting underway in a manner that it is unstoppable. (When I was a kid it was a nickel, homes were $3500, cars $600, etc.) It's always unstoppable anyway, but can be slowed, if the supply of currency can be kept under control. Currency collapses can occur overnight, as witness Argentina. With Coke at $50, your $150,000 home would be worth $2 million, O.K.? You've saved your surplus assets in T-Bills, savings accounts, money market accounts, or whole life insurance. Follow? You will soon be bankrupt, because YOUR DOLLARS ARE BECOMING WORTHLESS. Maybe an ounce of silver will then be $500. Your ounce of silver, which you may have bought for $5, is still the same silver, but with the currency collapsing, you have "hedged" yourself, and your ounce of silver will still buy the same goods as it did when it was $5. The "money," is rapidly becoming worthless, but your silver or gold still have the same purchasing power they did before the collapse. You will eat, and those that had their money in banks or in currency denominated instruments, will be rummaging through trash cans. Remember also, that your 30-year mortgage will still have the same payments every month, so your ounce of silver may make a payment, or your 500 Silver Eagles may pay it off completely. It is possible, and I think probable…in our lifetime. How do you suppose those Americans felt when their paper money went to zero after the War Between the States, or Revolutionary War? Those that had their paper money tucked away in mattresses or banks, "for a rainy day," lost everything, even though they STILL HAD THE SAME AMOUNT OF CURRENCY. This is happening RIGHT NOW in various parts of the world. Why do Americans think it "can't happen here?" Sound familiar?
No one ever learns from experience. May I close with a quote from Benjamin Franklin? "Experience conducts a dear school, but a fool will learn in no other." Protect yourself!
Don Stott
August 9, 2002
11:06 ET S&P may cut Morgan Stanley, Merrill Lynch, Goldman Sachs
In addition to the announcement that S&P may cut JPM's counter-party credit rating mentioned earlier (10:32), the agency at the same time announced that it may also cut MWD, MER, and GS as well.
11:26 ET KLAC KLA-Tencor reaffirms guidance (36.58 -0.32)
We are hearing that KLAC at the Piper Jaffray conference is reaffirming their Q1 guidance given on July 30 for EPS of $0.25-$0.26 on revs of $370-380 mln.
09:49 ET Consumer Electronics Fallout
Warnings out of consumer electronics retailers BBY (-36%) and ULTE (-41%) are weighing on competitors CC (-13%), RSH (-10%), TWTR (-6.4%), CDWC (-5.7%)... The warnings are also impacted video game makers ATVI (-5.5%), THQI (-4%), ERTS (-2.5%).
15:44 ET Q plunges late; bankruptcy fears cited (1.50 -0.19)
Consumer Credit: A Crunch May Be Coming
Thank Amy Bell for helping keep the U.S. economy afloat. Bell, a 27-year-old benefits manager in Atlanta, bought a studio condominium with no money down, leased a Volkswagen Passat, and spent $2,300 on a set of living room furniture--all in the past six months. "I have been going a bit crazy with the spending," she says.
That's for sure. Bell and plenty of other people are piling up huge debts. The amount that Americans owe on loans for houses, cars, credit cards, and other purchases adds up to nearly 100% of their annual income after taxes. That's up from 75% in 1992, after the last recession ended.
Even if consumers are willing to take on more debt, lenders--and more important, the investors who buy many of the loans they securitize--may soon decide that enough is enough. If the credit crunch now squeezing business starts to hit consumers, whose spending accounts for two-thirds of gross domestic product, the U.S. economy could wind up in a world of trouble.
For now, a consumer credit crunch is hardly inevitable. Unlike businesses, consumers still have an easy time raising money. When they max out one credit card, it's a cinch to sign up for another. Outstanding consumer credit, most of it from credit cards and auto loans, rose 5.7% in the 12 months ended in May. And the amount of home-mortgage and home-equity loan debt outstanding keeps rising, too. It's up 10.5% for the year ended in March.
Banks have been eager to expand consumer lending, because profits from their commercial loan, brokerage, and investment banking departments have tanked. Income at Citigroup's (C ) consumer businesses, for instance, grew 25%, to $2 billion, in the second quarter.
For now, the combination of rising debt and falling interest rates continues to fuel consumer spending. In the past two months, mortgage refinancing has given consumers a further $40 billion to $50 billion to spend, estimates Bank One economist Diane C. Swonk. In nearly two-thirds of recent refinancings of loans owned by Freddie Mac Corp. (FRE ), people took out bigger loans than the ones they paid off, freeing up cash for more spending. And despite being burned repeatedly, lenders still increase loans to subprime borrowers. Swonk thinks that's a big factor in strong auto sales.
But there are signs a consumer credit crunch could be in the offing. Delinquencies on non-mortgage consumer debt reached 1.86% of debts at the end of 2001, up a third from 1.4% a year earlier and the highest in a decade, according to the Consumer Bankers Assn. In the past year, Providian Financial (PVN ), Metris, and NextCard have been crushed by bad debts. The Federal Deposit Insurance Corp. estimates that the liquidation of NextCard Inc. will cost taxpayers up to $400 million.
As a result, the government is stepping up oversight, which in turn could cut the supply of credit to some consumers. So far, attention is mainly on subprime lenders. "We want to put more focus on the higher risks," says David Gibbons, deputy comptroller at the Office of the Comptroller of the Currency. On July 22, bank regulators announced guidelines to prod credit-card lenders into increasing reserves and disclosing defaults promptly, after discovering that many were pushing the limits in their accounting. Some lenders may drop out of the market, predicts Reilly Tierney of boutique investment bank Fox-Pitt, Kelton Inc. in New York.
But credit concerns could also begin to infect higher-grade credits in coming months. That's the way nearly every crunch unfolds: from the bottom up. And the quantity of debt is so large that bad news could cause lenders to retrench, even without regulators' warnings. Analysts warn that any of a number of factors could spook lenders: a decline in house prices, a rise in interest rates, or a softening of the job market that pushes up unemployment and moderates wage gains.
Mortgage lenders would tighten up in a hurry if housing prices soften. That's a distinct possibility, given what Freddie Mac Corp. estimates is a 37% average increase in prices in the past five years. Many homes today are purchased with downpayments of 5% or less, so even a modest decline would leave people owing more than their house is worth. That would cool cash-out refinancings, which have propped up consumer spending. And it would frighten lenders, who would lose the ability to make themselves whole through a repossession. "It could bring to the fore a great deal of hidden credit risk," says Stuart A. Feldstein, president of SMR Research Corp. in Hackettstown, N.J. "In mortgage lending, the [profit] spreads are so thin that there's no room for big losses."
An increase in interest rates by the Federal Reserve could be the trigger for a fall in home prices. Right now, a Fed rate hike remains unlikely. But if the stock market keeps rebounding and the recovery continues, it will strengthen Fed hawks who argue that low rates and excessive money creation are inflating new bubbles in the economy.
For lenders, the problem is that consumers are dangerously dependent on today's superlow rates. When rates fall, the cost of servicing debt should fall, too. Yet the Federal Reserve says that household debt-service payments were more than 14% of disposable income in the first quarter, near the highest level in 22 years. If rates go higher, the burden of debt service will increase. Mortgage Bankers Assn. economist Phil Colling says that approximately 30% of outstanding mortgage debt has adjustable rates. And about 40% of non-real-estate consumer debt is revolving credit, much of which has adjustable rates. A credit crunch could set in if a rate rise triggers a wave of defaults by holders of adjustable mortgages and revolving debt.
Aside from rising rates, the other nightmare for lenders would be a lull in the job market. Thanks in part to tax cuts, disposable income after inflation rose 5% in the year ended in the second quarter. That helped hold down the debt-to-income ratio. But lenders would be more reluctant to extend credit if the unemployment rate spikes or real incomes slow their rise, because they would be worried about getting paid back. And rates are already so low that the Federal Reserve couldn't easily use further rate cuts to lure consumer lenders back into extending credit.
A final wild card is the new bankruptcy bill, which will take effect six months after President Bush signs it into law. Feldstein of SMR Research says some shaky credit-card issuers could be driven under if many of their cardholders file at once to obtain protection from creditors under the old, more lenient law. That, in turn, could disrupt the flow of fresh credit.
The credit crunch on business has been painful. But for Amy Bell and the home buyers, car shoppers and mall walkers like her across the country, a credit crunch would be a real killer.
By Peter Coy and Heather Timmons in New York, with Brian Grow in Atlanta, David Welch in Detroit, and Mike McNamee in Washington
http://businessweek.com/magazine/content/02_32/b3795043.htm
Consumer Credit: A Crunch May Be Coming
Thank Amy Bell for helping keep the U.S. economy afloat. Bell, a 27-year-old benefits manager in Atlanta, bought a studio condominium with no money down, leased a Volkswagen Passat, and spent $2,300 on a set of living room furniture--all in the past six months. "I have been going a bit crazy with the spending," she says.
That's for sure. Bell and plenty of other people are piling up huge debts. The amount that Americans owe on loans for houses, cars, credit cards, and other purchases adds up to nearly 100% of their annual income after taxes. That's up from 75% in 1992, after the last recession ended.
Even if consumers are willing to take on more debt, lenders--and more important, the investors who buy many of the loans they securitize--may soon decide that enough is enough. If the credit crunch now squeezing business starts to hit consumers, whose spending accounts for two-thirds of gross domestic product, the U.S. economy could wind up in a world of trouble.
For now, a consumer credit crunch is hardly inevitable. Unlike businesses, consumers still have an easy time raising money. When they max out one credit card, it's a cinch to sign up for another. Outstanding consumer credit, most of it from credit cards and auto loans, rose 5.7% in the 12 months ended in May. And the amount of home-mortgage and home-equity loan debt outstanding keeps rising, too. It's up 10.5% for the year ended in March.
Banks have been eager to expand consumer lending, because profits from their commercial loan, brokerage, and investment banking departments have tanked. Income at Citigroup's (C ) consumer businesses, for instance, grew 25%, to $2 billion, in the second quarter.
For now, the combination of rising debt and falling interest rates continues to fuel consumer spending. In the past two months, mortgage refinancing has given consumers a further $40 billion to $50 billion to spend, estimates Bank One economist Diane C. Swonk. In nearly two-thirds of recent refinancings of loans owned by Freddie Mac Corp. (FRE ), people took out bigger loans than the ones they paid off, freeing up cash for more spending. And despite being burned repeatedly, lenders still increase loans to subprime borrowers. Swonk thinks that's a big factor in strong auto sales.
But there are signs a consumer credit crunch could be in the offing. Delinquencies on non-mortgage consumer debt reached 1.86% of debts at the end of 2001, up a third from 1.4% a year earlier and the highest in a decade, according to the Consumer Bankers Assn. In the past year, Providian Financial (PVN ), Metris, and NextCard have been crushed by bad debts. The Federal Deposit Insurance Corp. estimates that the liquidation of NextCard Inc. will cost taxpayers up to $400 million.
As a result, the government is stepping up oversight, which in turn could cut the supply of credit to some consumers. So far, attention is mainly on subprime lenders. "We want to put more focus on the higher risks," says David Gibbons, deputy comptroller at the Office of the Comptroller of the Currency. On July 22, bank regulators announced guidelines to prod credit-card lenders into increasing reserves and disclosing defaults promptly, after discovering that many were pushing the limits in their accounting. Some lenders may drop out of the market, predicts Reilly Tierney of boutique investment bank Fox-Pitt, Kelton Inc. in New York.
But credit concerns could also begin to infect higher-grade credits in coming months. That's the way nearly every crunch unfolds: from the bottom up. And the quantity of debt is so large that bad news could cause lenders to retrench, even without regulators' warnings. Analysts warn that any of a number of factors could spook lenders: a decline in house prices, a rise in interest rates, or a softening of the job market that pushes up unemployment and moderates wage gains.
Mortgage lenders would tighten up in a hurry if housing prices soften. That's a distinct possibility, given what Freddie Mac Corp. estimates is a 37% average increase in prices in the past five years. Many homes today are purchased with downpayments of 5% or less, so even a modest decline would leave people owing more than their house is worth. That would cool cash-out refinancings, which have propped up consumer spending. And it would frighten lenders, who would lose the ability to make themselves whole through a repossession. "It could bring to the fore a great deal of hidden credit risk," says Stuart A. Feldstein, president of SMR Research Corp. in Hackettstown, N.J. "In mortgage lending, the [profit] spreads are so thin that there's no room for big losses."
An increase in interest rates by the Federal Reserve could be the trigger for a fall in home prices. Right now, a Fed rate hike remains unlikely. But if the stock market keeps rebounding and the recovery continues, it will strengthen Fed hawks who argue that low rates and excessive money creation are inflating new bubbles in the economy.
For lenders, the problem is that consumers are dangerously dependent on today's superlow rates. When rates fall, the cost of servicing debt should fall, too. Yet the Federal Reserve says that household debt-service payments were more than 14% of disposable income in the first quarter, near the highest level in 22 years. If rates go higher, the burden of debt service will increase. Mortgage Bankers Assn. economist Phil Colling says that approximately 30% of outstanding mortgage debt has adjustable rates. And about 40% of non-real-estate consumer debt is revolving credit, much of which has adjustable rates. A credit crunch could set in if a rate rise triggers a wave of defaults by holders of adjustable mortgages and revolving debt.
Aside from rising rates, the other nightmare for lenders would be a lull in the job market. Thanks in part to tax cuts, disposable income after inflation rose 5% in the year ended in the second quarter. That helped hold down the debt-to-income ratio. But lenders would be more reluctant to extend credit if the unemployment rate spikes or real incomes slow their rise, because they would be worried about getting paid back. And rates are already so low that the Federal Reserve couldn't easily use further rate cuts to lure consumer lenders back into extending credit.
A final wild card is the new bankruptcy bill, which will take effect six months after President Bush signs it into law. Feldstein of SMR Research says some shaky credit-card issuers could be driven under if many of their cardholders file at once to obtain protection from creditors under the old, more lenient law. That, in turn, could disrupt the flow of fresh credit.
The credit crunch on business has been painful. But for Amy Bell and the home buyers, car shoppers and mall walkers like her across the country, a credit crunch would be a real killer.
By Peter Coy and Heather Timmons in New York, with Brian Grow in Atlanta, David Welch in Detroit, and Mike McNamee in Washington
http://businessweek.com/magazine/content/02_32/b3795043.htm
10:43 ET CSCO Cisco Systems rumors (12.57 -0.62)
The rumors on Cisco revolve around possible executive departures and the possibility that CEO and/or CFO are not signing off on the financials. With the Aug 14 deadline for CEO/CFO sign-offs on financials approaching, many such rumors will no doubt surface and should generally be treated with skepticism.
10:23 ET BRCD Brocade falls on conference cancellation (17.74 -1.01) -- Update --
We are hearing that BRCD (-5.4%) has cancelled an appearance at the Pacific Crest technology conference due to a "vacation conflict"; the firm has confirmed that BRCD has pulled out, although we have not been able to confirm the reason for the cancellation with the co.
Rubin may be called to testify to Congress on Enron
(Reuters 07/31 12:16:04)
By Susan Cornwell
WASHINGTON, July 31 (Reuters) - A key Senate Democrat said
on Wednesday there was a possibility that former Treasury
Secretary Robert Rubin would be called to testify on Capitol
Hill about his knowledge of the demise of Enron Corp.
<ENRNQ.PK.
But Sen. Joseph Lieberman, chairman of the Senate
Governmental Affairs Committee, suggested the panel had no
plans at the moment to call Rubin, now a Citigroup <C.N
executive who last autumn asked the Bush administration to
intervene on Enron's behalf with Wall Street credit rating
agencies.
Lieberman, a Connecticut Democrat, said his committee's
staff would be examining whether it would be "constructive" to
invite Rubin to testify.
Recently congressional investigators have accused Citigroup
and J.P. Morgan of helping Enron for years to hide debt that
ultimately led to the energy-trader's collapse in December,
when the Houston-based company filed for bankruptcy.
Republican Sen. Peter Fitzgerald of Illinois, a member of
Lieberman's committee, wrote to Lieberman this week suggesting
that Rubin be invited to testify along with Sanford I. Weill,
chairman and chief executive of Citigroup.
In the House of Representatives, Republican Rep. Mark Foley
has been more vociferous, charging that Lieberman -- a
potential Democratic presidential challenger in 2004 -- and his
fellow Democrats have "turned a blind eye" to Rubin's possible
involvement with Enron because of Rubin's close ties to
Democrats. Rubin served as treasury secretary under former
President Clinton for over five years.
"It's a possibility," Lieberman said of calling Rubin to
testify. "We're going to now look at what we know about any
involvement Bob Rubin had and whether calling him would be
constructive."
"I wouldn't hesitate to call him if we can prove that
there's anything to add to our investigation," Lieberman added,
speaking to reporters in a Capitol Hill hallway.
Lieberman said as soon as the Senate has passed homeland
security legislation this autumn, the Governmental Affairs
Committee would return to its long-running Enron probe and may
schedule more hearings. In May the committee subpoenaed White
House records of official interactions with Enron.
'PREPAYS' EXAMINED
Congressional investigators working for a subcommittee of
Lieberman's committee this month fingered Citigroup and J.P.
Morgan. They said the bank, along with J.P. Morgan, provided
Enron with $8.5 billion in loans disguised as commodity trades
conducted through offshore shell companies.
But spokeswoman Kathleen Long said that the subcommittee
probe had not found evidence of Rubin's involvement in the
"prepay" transactions that allegedly helped Enron hide debt.
"The investigation has centered on the so-called
prepays, and there is no evidence that Mr. Rubin was involved
in the prepays," she said. Long is a spokeswoman for Michigan
Democrat Carl Levin, chairman of the investigations
subcommittee.
Fitzgerald says Rubin should be called to testify anyway
because of his known attempt to try and help Enron avoid having
its credit rating downgraded last autumn as the company's debt
situation was imploding.
The Bush administration disclosed in January that Rubin had
called a top Treasury Department official, Peter Fisher, in
November, asking Fisher to intervene with rating agencies on
Enron's behalf.
Fisher declined. Moody's Investor Service has also reported
receiving a call from Rubin in November as it was poised to
downgrade Enron's credit rating status. Moody's also rejected
Rubin's appeal and issued the downgrade. Enron filed for
bankruptcy on Dec. 2.
((Washington congressional newsroom, 202-898-8390))
REUTERS
S.RT ENRNQ-PK C STX.R POL.R US.R ELC.R WASH.R BNK.R FIN.R INS.R C-L
NVIDIA <NVDA.O> SAYS REVENUE DOWN ON BROAD WEAKNESS IN PERSONAL
(Reuters 07/30 13:27:32)
COMPUTER MARKET
REUTERS
S.RT NVDA-O ELC.R ELI.R EN.R US.R RES.R RESF.R NVDA
15:33 ET Rumored that IBM considering a bid for PriceWaterhouseCoopers
Qwest Says Used Improper Accounting
Sunday July 28, 10:28 pm Eastern Time
Reuters Business Report
Qwest Says Used Improper Accounting
DENVER (Reuters) - Qwest Communications, already under federal investigation for its accounting practices, said on Sunday it used improper accounting methods in 1999 through 2001 and will restate its financial results.
http://biz.yahoo.com/rb/020728/telecoms_qwest_8.html
JPM Derivatives Monster Crashes
This week the stock of elite money-center bank JPMorgan-Chase plummeted. Will JPM's precipitous plunge adversely affect its enormous derivatives positions?
What an extraordinary week in the markets!
It is not every week that the stocks of major money-center banks crash, frantic rumors fly of derivatives meltdowns and secret Federal Reserve meetings, and investors and speculators are left gaping in awe. As the ancient Chinese curse said, we certainly do live in “interesting times” and there is seldom a dull moment in the greatest bear market in three generations.
http://www.zealllc.com/2002/jpmcrash.htm
13:30 ET KLAC KLA-Tencor says Sept orders will be flat (41.10 -2.17) -- Update --
Soundview says that KLAC's CFO indicated that he expects the co to exceed guidance this qtr of at least 10% order growth, although Sept orders are expected to be flat; firm continues to believe that orders will be up in June by 15%, but says that the co effectively lowered Sept guidance since they had previously said orders would be up.
what time does the congressional hearings begin?
10:08 ET Notable weakness in banks
Standouts to the downside include Citigroup (C -12%), Northern Trust (NTRS -3.5%), State Street (STT -3.6%), Bank of America (BAC -1.9%), Mellon Financial (MEL -4%), Fifth Third Bancorp (FITB -1.6%).
Citigroup, J.P. Morgan Marketed Enron-Type Deals to Other Firms
Tuesday July 23, 1:07 am Eastern Time
Citigroup, J.P. Morgan Marketed Enron-Type Deals to Other Firms
Citigroup Inc. (NYSE: C - News) and J.P. Morgan (NYSE: JPM - News) Chase & Co . , already facing scrutiny for devising allegedly deceptive transactions for Enron Corp., marketed similarly structured deals to a slew of other companies, Tuesday's Wall Street Journal reported, citing testimony that a senior congressional investigator will give at hearings that start today.
The names of the other companies weren't disclosed.
The hearings, part of a Senate investigation into the role banks played in Enron's troubled finances, are the latest in a series of investigations into the two banks regarding their ties to Enron, which filed for bankruptcy-court protection late last year. The investigations include separate probes conducted by the Securities and Exchange Commission and the office of Manhattan District Attorney Robert Morgenthau.
Now, a person familiar with the matter says, the Justice Department's Enron Task Force also is looking into the roles that financial institutions, including Citigroup, J.P. Morgan , Merrill Lynch & Co . and National Westminster Bank, now a unit of Royal Bank of Scotland PLC, may have played in Enron's demise.
Citigroup and J.P. Morgan declined to comment on the hearings or the investigations. Merrill and Royal Bank of Scotland couldn't be reached for a comment.
The deals under congressional scrutiny include arrangements known as Yosemite, devised by Citigroup, and Mahonia, devised by J.P. Morgan , both of which were designed to make Enron's public disclosures more appealing to investors, according to the testimony.
An official familiar with the investigation will testify at today's hearings before that panel that Yosemite, Mahonia and other deals allowed Enron to understate its debt by 40% while overstating cash flow by as much as 50%, according to a draft of his statement. Cash flow is a crucial measure of financial health for energy companies such as Enron.
"The evidence indicates that Enron would not have been able to engage in the extent of the accounting deception it did, involving billions of dollars, were it not for the active participation of major financial institutions," says a copy of the testimony.
Banks such as J.P. Morgan and Citigroup were "willing to go along with and even expand upon Enron's activities."
J.P. Morgan , in fact, had a "pitch book" to sell other companies on similar financing vehicles, according to a copy of the testimony. J.P. Morgan entered into similar transactions with seven other companies, while Citigroup shopped such deals around to as many as 14, with at least three entering into such relationships, the testimony says.
The hearings will focus on a commodity-trading vehicle known as a prepay, in which a financier gives money in exchange for future delivery of a commodity such as gas, gold or oil. Such arrangements are common, but in the hands of Citigroup and J.P. Morgan , they became the building blocks for extremely complex transactions that Enron used to disguise debt as trades and create the appearance the company was generating cash, people familiar with the matter said.
Wall Street Journal Staff Reporters Jathon Sapsford and Paul Beckett contributed to this report.
http://biz.yahoo.com/djus/020723/200207230107000037_2.html
Banking System in Trouble?
The United States Banking System has shown strength and resiliancy since recovering from the September 11 terrorist attacks in New York and Washington. One can see this strength in looking at the charts of moneycenter banks during the fall of 2001. These companies provide many financial services other than banking but we'll call them banks for convenience.
http://www.gold-eagle.com/editorials_02/moy072202.html