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Monday, November 16, 2009

Private Lending Tips

Are you in need of private money or hard money?

I can help!

Before you submit your deal to a Private Lender....!

1. A thorough application is required (What are the funds being used for and the story behind the deal)

2. Explain the issues on the credit bureau (what is the balance really..? Why are you in arrears...?)

3. Get a copy of existing mortgage statements (You ever have the scenario where they say “I think about $120,000” but the real balance is $160,000? “My mortgage is paid up to date” (really it is 2 payments behind) This could kill the deal! Get this information up front)

4. Get a copy of the Property tax statement (this will also disclose any arrears and save you time and energy!)

5. Get an appraisal up front..we all know the value rarely comes in as the client states..they always hope for more (and so do we!) Get the appraiser to do up a broker copy so it is not prepared for any lender!

6. While you are at it you might as well get a copy of the Fire Insurance! It is the last piece of the puzzle!

I know I know this seems like a lot of work upfront...however..there is nothing worse than a deal dying at the lawyers because of property tax arrears, or not enough money to payout a mortgage.

We will still fund a good deal even if there is mortgage arrears or property tax arrears!! We just need to know up front!

If you follow my Quick Tips you should have a quick and easy close because you will have all your figures in line!...and don’t forget to give me a call or email to break down the deal..that always helps too!

905-778-8100 ext 5161

Giuseppe

Monday, October 26, 2009

Interest rates to remain at historic lows: Carney

Interest rates will likely stay at their current historic lows through June 2010 in an effort to meet the Bank of Canada's inflation target of two per cent, says governor Mark Carney.

Speaking to CTV's Question Period Sunday, Carney confirmed speculation that interest rates would remain at 0.25 per cent, the lowest rate Canada has ever seen, well into next year.

When asked if Canadians should lock in to five-year mortgage terms on the news, Carney demurred.

"It's not my job to give investment advice to Canadians," Carney said. "But on the general point anybody, anytime they borrow for a longer period of time, wants to think about, 'Can I sustain that borrowing over the course of that time? What happens when interest rates ultimately normalize?'"

Carney reiterated earlier Bank predictions that the Canadian economy will continue to grow, by three per cent next year and by 3.3 per cent in 2011.

"That's more modest than usual recovery, so it's not going to feel like a gangbusters recovery," Carney said. "But it is a recovery and that's important."

According to Carney, government stimulus will continue to foster growth in the short-term. But investments from the business community will kick in by 2011 and beyond, when public money dries up.

"True growth comes from the private sector," he said. "And the private sector is starting, even after what has been a very difficult recession -- a short, but very deep recession -- is starting from a position of strength. Corporate balance sheets are in outstanding shape, the best they've been in 25 years in this country."

Saturday, October 17, 2009

CMHC's Growth Fuels Worries Over New Risks


Boyd Erman and Tara Perkins
Globe and Mail Update

The federal government has quietly given Canada Mortgage and Housing Corp. more financial muscle, raising concerns the multibillion-dollar agency is expanding at an unprecedented pace with little oversight.

For the second time since the beginning of 2008, Ottawa has raised the amount of mortgage insurance CMHC can have outstanding. The increase moves the cap to $600-billion, up from $450-billion and nearly double the $350-billion limit in place at the end of 2007.

CMHC is by far the largest provider in Canada of default insurance on mortgages, which home buyers are legally required to have if their down payment is smaller than 20 per cent. As home prices rise and smaller down payments become the norm, CMHC is selling more insurance each year.

That trend, combined with a ramped-up program of buying mortgages from banks as part of the government's strategy to spur the home-loan market, has turned the Crown corporation into one of the country's largest financial institutions. With $203.5-billion in assets last year, CMHC dwarfs the country's sixth-largest bank, National Bank of Canada, and its growth is blistering.

CMHC projects that its assets will hit $345.3-billion in 2009. Bank of Montreal had $415-billion in assets as of July 31.

Critics charge that such growth demands more oversight, pointing to the fact that even though CMHC is now central to the financial system, it is not regulated by the financial industry's main watchdog, the Office of the Superintendent of Financial Institutions. It's also a risk for taxpayers, because while CMHC sets aside billions as a cushion against losses, and is very well capitalized, Canadian citizens are ultimately on the hook for losses on its insurance should the housing market falter and those reserves prove too small.

“We need a debate, which I don't think we've had in my lifetime, about the role of the CMHC vis-à-vis our financial institutions and our housing market,” said Ian Lee, the director of Carleton University's MBA program and a former mortgage manager at Bank of Montreal.

The government and many economists credit CMHC for helping to pull the economy through the credit crisis of the past two years.

“The Canadian financial sector and housing market have remained sound throughout the recent crisis,” a spokesman for Finance Minister Jim Flaherty said.

“This has been in large measure due to the effectiveness of the roles played by federal institutions, including CMHC, in supporting markets, backstopping risks and sustaining the availability of credit.”

Canadian Imperial Bank of Commerce senior economist Benjamin Tal describes CMHC as the “secret weapon” that has now been revealed. “One of the main reasons we did not need a bailout [of banks] is because of CMHC, and the ability to provide cheap credit through its facilities,” he said.

“Did CMHC help to improve house prices today? Yes, they did because they gave cheap credit to bank and banks were able to provide credit and low mortgage rates, which I think is the main reason why house prices are rising now. That's a reflection of a system that works, in my opinion,” Mr. Tal said.

CMHC insurance helps to keep borrowing costs down for people with small down payments who would otherwise face higher interest rates from banks. That enables would-be buyers to bid more for houses, knowing that they won't be penalized for having a small down payment, and adds fuel to the housing market's soaring prices.

CMHC's securitization programs, through which it effectively buys swaths of mortgages from lenders, free up space on banks' balance sheets, allowing them to give out more mortgages than they otherwise could.

In an e-mailed response to questions, CMHC said housing affordability has improved over the years. The monthly mortgage payment on an average-priced house has decreased as a share of workers' incomes, the agency said.

As of the second quarter of this year, the mortgage payment on an average-priced house was 29 per cent of disposable income per worker, down from just under 39 per cent at the end of 2007.

The company attributes the need for the increases in the insurance cap to “a number of successive strong years of activity in the mortgage markets.”

CMHC also points to a trend of banks buying insurance for mortgages that aren't required to be insured, enabling them to sell the loans to investors to raise cash.

Whatever the reason, critics like Mr. Lee say that the institution's stunning growth deserves new scrutiny. Yet, because CMHC enables more people to buy homes, it's unpalatable for politicians to criticize it, Mr. Lee said.

“That value is embedded in the Canadian consciousness,” he said. “It's not as sacred a cow as health care, but it's right up there.”

Ottawa created CMHC in 1946 to house returning war veterans. Its main objective is now to facilitate access to more affordable and better quality housing for Canadians.

The two main programs it uses to achieve that goal – insurance and securitization – have ballooned in the past year. CMHC planned to insure 578,539 housing units last year for $86-billion in 2008. Instead it insured 919,790 units for $148-billion.

It guaranteed 2.5 times more mortgage securities than planned, an extra $64-billion, which is nearly double the 2007 level. Part of the reason for that is the emergency mortgage purchase program that Mr. Flaherty unveiled at the height of the credit crisis in October, 2008, to help ease the banks' funding costs. But even prior to that program's launch, CMHC's securitization activities were on a steep upward trajectory.

Canada Housing Trust, which carries out CMHC's securitization activities, has seen its assets grow by more than 20 times since it was established in 2001, according to Moody's Investors Service.

The opposition Liberal Party says the cap increases and the surging size of CMHC may warrant more attention.

“It's a lot of money and it could justify debate in Parliament,” said John McCallum, the Liberal finance critic. However, he acknowledged that suggesting the reins be pulled in on CMHC is ticklish for politicians and said that CMHC should be able to continue growing “as long as they're prudent.”

“I don't think we want the government to be rationing Canadian home-buying.”

Thursday, September 17, 2009

OECD forecast, factory data dampen hopes of fast rebound


Canada's recovery from recession is shaping up to be tepid, as new evidence underscores that the bulk of the demand in the world economy is being generated by government stimulus spending and companies remain reluctant to hire.



Continue reading: OECD forecast, factory data dampen hopes of fast rebound

Wednesday, September 16, 2009

Priceless: How The Federal Reserve Bought The Economics Profession

By Ryan Grim

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”


Continue reading How The Federal Reserve Bought The Economics Profession

Friday, September 4, 2009

A ‘long and winding' road to recovery

Globe and Mail Update
R
ecovery from the global recession is likely to arrive earlier than had been expected a few months ago, but the pace of activity will remain weak well into next year, the Organization for Economic Co-operation and Development said in a forecast Thursday. Canadian economists agree that the global economy is turning the corner. Here's a look at what that means for Canada:

Scotiabank's take: We'll get there, be patient

“Canadian domestic activity will revive in the months ahead as consumers begin to return to the malls in greater numbers and a myriad of government-funded shovel-ready projects actually get into the ground,” Bank of Nova Scotia chief economist Warren Jestin said in a research report this week.

“The Bank of Canada will likely nudge up interest rates as the economy recovers in 2010, but borrowing costs will not be an impediment to the revival of domestic demand. However, with foreign sales one-third of Canada's gross domestic product, the strength of the rebound will be tied to commodity markets and reversing the recent slide in U.S. sales,” Mr. Jestin said.

Canada is already benefiting from higher commodity prices in response to demand from China and other nations, he wrote, but global growth through 2010 will be tepid.

“The United States rebound will help bolster south-bound exports, but gains will be tempered if, as we expect, the loonie moves towards parity vis-à-vis the U.S. dollar as commodity markets strengthen further and the greenback comes under pressure on global currency markets,” Scotiabank said in its report.

“The bottom line – we will soon begin moving away from one of the most difficult economic setbacks experienced in our lives, but patience will be required because the road to recovery will be a long and winding one.”

Housing market recovering - but prices expected to moderate

Housing starts are expected to rebound in the second half of 2009, reaching a total of 141,900 for the year, and will increase to 150,000 in 2010, Canada Mortgage and Housing Corp. forecast Thursday.

This marks an improvement, but is well down from the 211,056 starts in 2008 as Canada came off a prolonged housing boom.

“Economic uncertainty and lower levels of employment tempered new housing construction in the first half of the year,” CMHC economist Bob Dugan said. “In the second half of 2009 and in 2010, we expect housing markets across Canada to strengthen.”

“Existing home sales … have rebounded strongly since January and will reach 420,000 units in 2009 and remain close to that level at 419,000 units in 2010,” CMHC said. “The average price is expected to moderate to $301,400 in 2009 and to increase to $306,300 in 2010.”

Jobless rate: still rising

Economists expect that the Canada's unemployment rate continued to rise in August.

Bank of Nova Scotia said in a note to clients that Friday's Statistics Canada release is expected to show a loss of 15,000 more jobs, and an increase in the unemployment rate to 8.8 per cent.

Furthermore, the labour market recovery will be slow, economists say.

“It is often said that employment is a lagging indicator, and that's particularly the case when the recovery is only modest, and that's likely to be the case in this cycle as well,” Bank of Montreal deputy chief economist Douglas Porter said this week in an online discussion on reportonbusiness.com.

“We don't believe that we will see a meaningful pullback in unemployment rates until the spring. Employers need to be convinced that the turn in the economy is for real, then they will shift part-timers to full-time, then go to overtime, and only after that begin to hire people again. And even then, payrolls may not rise as quickly as the underlying growth in the labour force,” Mr. Porter said.

Beyond the recovery: new world realities

“The road to recovery won't take us back to the world that existed before the sub-prime crisis began,” Scotiabank's Mr. Jestin said. The global financial system is being revamped, he noted, and “big government deficits are back and will be politically difficult to unwind…

“The global economic landscape is also changing, with developed nations like Canada and the U.S. likely to experience relatively subdued growth in the decade ahead,” Mr. Jestin said.

“World activity will be driven increasingly by China, India, Brazil and other emerging powerhouses, with their production and investment decisions having a major impact on world trade, commodity prices and financial markets.”

For Canadian businesses: tougher competition, new opportunities

“For many Canadian businesses, these new world realities point to tougher competition in traditional markets, but a world of opportunity in emerging ones,” Mr. Jestin said. “Our share of the U.S. market has dropped significantly over the past decade, with China gaining bragging rights as the largest U.S. supplier and, excluding energy products, the euro zone surpassing Canada in U.S.-bound sales.” This calls for new approaches.

“Focusing our collective attention and scarce national resources on supporting the familiar while avoiding the unfamiliar is a losing strategy,” Mr. Jestin said.

“At a time when the auto sector and other traditional manufacturing industries are shedding jobs, new enterprises associated with environmental remediation, global infrastructural development and emerging market demands have the potential for sustained, rapid growth.”

Monday, August 31, 2009

Soaring Prices for AIG, Fannie and Other Financial Stocks Sending Mixed Messages to Investors

William Patalon III
Executive Editor

Three of the financial institutions that were key catalysts to the global financial crisis – and that owe the federal government billions of dollars as a direct result of those problems – have seen their shares triple in price so far this month.

That could signal that a big rebound in bank-sector earnings is just around the corner. Or it could be merely a speculative “short squeeze” that all but confirms that these stocks are basically worthless.

Shares of busted insurer American International Group Inc. (NYSE: AIG) have soared from $13.14 to $50.23, as of Friday’s close, a gain of 282.3% so far this month. Shares of mortgage giants Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) posted similar gains, MarketWatch.com reported. Fannie’s shares advanced from 58 cents to $2.04, an increase of 251.7%. Freddie’s shares zoomed from 62 cents to $2.40 each, a gain of 287.1%.

AIG actually gained for a ninth straight day Friday, reaching a 10-month high, as short-shelling speculators got squeezed and were forced to buy back the shares they’d sold short, traders told MarketWatch. AIG has 21% of its “float” – shares available to the public sold short, the sixth-highest proportion in the Standard & Poor’s 500 Index, according to Bloomberg News.

But the gains might also sign that the banking sector is poised for a major profit rebound, according to some new analyst research.

"Dating back to 1995, bank-sector outperformance has typically preceded [earnings-per-share] growth outperformance by one to two quarters," Stifel Nicolaus & Co. (NYSE: SN) analysts wrote in a market-research note last week. “With sector earnings growth expected to exceed that of the general market in mid-2010, we question whether we will see another leg down in this rally before year-end. On the other hand, perhaps we should question the current growth expectations for the sector?”

Trading in financial-services stocks has dominated the stock-market volume this month. So-called “day traders” have gravitated to once-questionable financial stocks and helped fuel those stunning gains – and huge volumes.

Citigroup Inc. (NYSE: C), for instance, has seen daily trading volume topping 1 billion shares this week. The stock closed above $5.05 on Thursday and $5.23 on Friday. That represents a 439% gain from its 52-week low of 97 cents a share.

Financial stocks have led the market’s slingshot higher from the early March lows. Trading has been fierce in beaten-down shares of some companies that participated in the bailout, such as AIG, Citi and Bank of America Corp. (NYSE: BAC).

The New York-based AIG is trying to sell assets to repay government loans after accepting $182.5 billion in U.S. bailout money. AIG recently reported a profit for its second quarter – after having posted six straight quarters in the red. It engineered a so-called “reverse stock split,” in which AIG gave investors one new share for every 20 they turned in. The company did this to avoid a delisting action. That enhanced the short squeeze, since there were fewer shares available to for short-sellers to repurchase and “cover” their bets.

Despite the torrid run that AIG’s shares have been on, the insurance company’s bonds still trade at levels indicating the company’s shares may be worthless, Peter Boockvar, an equity strategist at Miller Tabak & Co., told Bloomberg.

“The value of the company is still the same,” Boockvar said. “AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government.”

AIG’s $3.24 billion of 8.25% bonds due in 2018 are quoted at 79 cents on the dollar, to yield 12.2%, Bloomberg reported. The insurer’s $4 billion of 8.175% percent bonds due in 2058 are quoted at 49.5 cents on the dollar to yield 16.7% Bloomberg said.

The Financial Select Sector SPDR Fund (NYSE: XLF), an ETF tracking the financial stocks in the Standard & Poor’s 500 Index, has rallied nearly 30% over the past three months and handily outpaced the market.

Market Matters

While the past few months have been anything but dull for the markets (euphoric may be more appropriate), investors enjoyed a few slow days of peace and quiet.

Another stimulus program came to a close as “Cash for Clunkers” ended with a last-minute flurry of activity. Analysts claimed that more than 700,000 cars were bought over the past month and August auto sales should rise on a year-over-year basis for the first time since mid-2007.



While dealerships enjoyed a nice rebound in activity (even if just temporarily), banks continued to experience challenges as the Federal Deposit Insurance Corp. (FDIC) reported that 416 institutions were on its “problem” list at the end of the second quarter, up from 305 on March 31, and also conceded that its insurance-fund reserves were dwindling.

Goldman Sachs Group Inc. (NYSE: GS) was in the news again as controversy has continued to surround the investment giant since the AIG bailout and Lehman Brothers Holdings Inc. (OTC: LEHMQ) failures. Regulators are investigating its weekly “trading huddles,” where its analysts allegedly gave short-term stock tips to select clients and traders, though most other customers were not privy to such insight.

Dell Corp. (Nasdaq: DELL) posted lower quarterly profits, though
the result still beat Street expectations and management projected stronger performance in 2010 when businesses get back in technology buying mode. Intel Corp. (Nasdaq: INTC) boosted its revenue projections for the next few months, another sign that chip demand is increasing and the business climate continues to improve.

The Dow Jones Industrial Average roared to eight straight days of higher closes, before hitting a stumbling block on Friday (though no one may have noticed as volume was so light) and the days of triple-digit moves ended (for a week at least).

The other indexes traded relatively flat during the week and even the positive news from Intel did little to generate any investor enthusiasm in the tech-heavy Nasdaq Composite Index. Fixed income fared better than most would have expected, considering another $109 billion in government debt hit the street.

Oil surged to a 10-month high before a larger-than-expected inventory report indicated that crude demand remained weak despite expectations of an economic recovery just around the corner. In fact, natural gas plunged to a seven-year low.

In perhaps the biggest news of the week, U.S. Federal Reserve Chairman Ben S. Bernanke will manage to avoid becoming a part of the so-called “jobless recovery” when he was nominated for another term as central bank chair by U.S. President Barack Obama.

While Bernanke certainly has his critics among grandstanding politicos from both sides of the aisle, few Fed watchers expect Congress to hold up his confirmation. For now, continuity seems to be the best thing.

The economic data of the week was relatively favorable with signs of renewed strength in both housing and manufacturing. New home sales jumped for the fourth consecutive month and the S&P Case-Shiller Index even depicted higher home prices last quarter for the first time since 2006. Durable good orders surged in July on increased demand within the transportation sector as both General Motors Co. (OTC: MTLQQ) and Chrysler Group LLC put bankruptcy in their rearview mirrors and boosted production, while other companies also benefited from the “Cash for Clunkers” program.

When second-quarter gross domestic product (GDP) was announced as a decline of 1%, many analysts expected a downward revision (perhaps significant) in the months that followed. Well, the initial revision again showed a 1% decline, a negative showing, but one that many economists believe will be the last contraction in overall activity for a while.

The U.S. consumer remains one big wildcard for the strength of the economy moving forward. Though the Conference Board reported a better-than-expected increase in its August consumer confidence report, the Reuters/U of Michigan sentiment index offered a contrasting view as it fell to its lowest level in four months. Personal spending in July got a nice boost from the increase auto sales (“Cash for Clunkers” strikes again), though the income component of the release was unchanged and concerns about the labor picture continued to hinder consumer activity.

Saturday, August 29, 2009

Desperate for Capital, the FDIC Backs Away From Tougher Rules Governing Private Equity Purchases of Failed U.S. Banks

By Shah Gilani
Contributing Editor
Money Morning

A new Federal Deposit Insurance Corp. (FDIC) plan to offload busted banks to vulture investors strikes an uneven balance between private equity players and public taxpayers and may inadvertently sow the seeds for another round of bank failures.

The FDIC currently insures bank depositors up to $250,000 – up from $100,000 prior to the financial crisis. So far this year, 81 banks have failed, costing the FDIC an estimated $21.5 billion.

And the situation is almost certainly going to get worse.
A Growing List of Troubled Banks

The FDIC reported yesterday (Thursday) that the number of distressed banks rose to the highest level in 15 years during the second quarter, thanks to an economic malaise that’s saddling banks with a growing level of bad loans.

The number of troubled banks rose to 416 at the end of June from 305 at the end of March. The FDIC hasn’t had that many banks on its “problem list” since June 1994, when there were 434, the agency said. Assets at these troubled institutions totaled $299.8 billion – the worst level since the end of 1993, according to the FDIC.

The FDIC’s insurance fund, as of March 31, was down to its last $13.5 billion. Bank failures in the second quarter cost the insurance fund an estimated $9.1 billion. These hits were mostly offset by an emergency special assessment of $6.2 billion and an additional $2.6 billion raised as part of the regular quarterly assessment on FDIC-insured banks.

The FDIC just took another hit due to the recent failure of Colonial Bank, which cost the fund an estimated $2.8 billion, and the failure last week of Guaranty Bank, which cost an estimated $3 billion. FDIC Chairman Sheila C. Bair is determined to not have an insolvent FDIC turn to the U.S. Treasury Department to draw on a $500 billion line of credit set up for just this purpose, although that move is clearly inevitable.

In a fatalistic twist of irony, however, the FDIC’s demand for another special assessment in the fourth quarter and another expected special assessment in the first quarter of 2010 may tip several more banks into failure.

Although there seems to be a desperate need for private equity capital to come running to the rescue, the reality unfortunately isn’t that simple.
A Disappointing Decision

As most all consumers and investors know, the FDIC only covers insured deposits. However, the ongoing cost of a busted bank becomes higher for the FDIC if the agency cannot merge that failed institution with a healthy player, or can’t sell it outright. When The FDIC can’t find a willing partner or buyer, the agency must instead manage the “unwinding” of every failed bank’s stockpile of illiquid and toxic assets. With so many more banks in trouble and so many fewer banks willing to acquire additional suspect assets, private equity firms have offered to step up and buy failed banks these professional investors believe can be turned around.

On July 9, the FDIC published and sought comments on its “Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions.” The controversial proposed policy statement suggested tough terms and conditions under which the federal agency would be willing to sell failed banks to non-traditional buyers – specifically, private equity firms.

A total of 61 comments were filed during the 30-day comment period – most of them from private-equity firms, their lawyers, financial-services trade associations and lobbyists. There were also comments from academics, four U.S. senators and six individuals. The FDIC also received 3,190 form-letter comments in support of the controversial proposal.

The FDIC issued its final decision on the matter on Wednesday. The new version was much weaker, once again underscoring the federal government’s proclivity for weakening banking regulations – a willingness we’ve repeatedly warned will have dire consequences for the U.S. financial system, as well as for the broader economy.

These alterations are setting the stage for an escalation in bank failures. The real losers will once again be the U.S. taxpayers, who will end up footing the bill for the FDIC’s failure to take a tough stand.

How much weaker were the new regulations, when compared with the earlier proposals? In one instance, instead of the initially proposed requirement that new investors maintain a 15% Tier 1 common equity capital ratio – three times what traditional bank holding companies are required to maintain – the new entry hurdle is only a 10% ratio.

Private equity firms will be spared the requirement of other bank holding companies and will not be called upon as a “source of strength,” should their investment in a bank need shoring up.

Bank holding companies have to make their resources available if their banking operation requires support. But private equity companies don’t want to expose their vast pools of capital to any one investment. Just as Cerberus Capital Management LP refused to put any more money into its failed Chrysler LLC investment – leaving taxpayers to bail it out – firms are loathe to be put into a position to support a bank holding with anything more than what was deemed as a suitable capital investment at the outset.

The FDIC granted other compromises granted in favor of private equity buyers. For instance, the agency spared them from having to cross-guarantee their portfolio-bank investments – unless they owned at least 80% of two or more banks.
Getting “Real” About Private Equity

Private equity interests certainly didn’t get everything they wanted. For one thing, the final policy statement prohibits “insider” and “affiliated” loan transactions and strips firms of using a controversial “silo” structure to obfuscate ownership and control positions.

The final policy statement reads like the painful enunciation of a split decision in a controversial heavyweight title fight. The valiant efforts Bair, the FDIC chairman, to keep the howling wolves of private equity at the door and out of the banking henhouse were ultimately undermined by the rapidly dwindling coffers of the Deposit Insurance Fund, which brought the FDIC to its knees. The compromises in the final policy statement grant the private-equity crowd a lot of what it was lobbying for while only momentarily sparing the FDIC the embarrassment of being knocked out.

But make no mistake. That day of reckoning is on its way. And not even the entrepreneurially gifted private-equity set will be able to keep that from happening.

Let’s be clear: We’re not saying that the private-equity sector is made up of angels (angel investors, yes, but outright angels, no way). Indeed, as we’ve demonstrated in past columns, the private-equity set is actually a group of uber-capitalists who are hell-bent on turning their gargantuan ambitions into extraordinary wealth – and who aren’t above shopping for regulators or hardballing Congress to get what they want.

Private-equity players demanded – and got – the FDIC to agree to share whatever losses they might incur, whereby the government (meaning taxpayers) must bear the brunt of the losses incurred when risky loan pools are acquired.

In all fairness to private equity firms, acquiring banks also have loss-sharing agreements with the FDIC. But they are regulated entities and private equity firms are not. Nor will private equity firms willingly become regulated in order to buy banks.

And there are actually some advantages in having private equity investors acquire failed banks – including a host of issues that critics describe as “self-serving,” grousing that the private-equity benefits come only at a cost to taxpayers.

Given the new set of rules, private equity firms can swoop in and pick up failed banks by banding together and dividing the equity commitment and investment liability assumed upon purchase. If there is no recourse against other private equity firm assets or even any cross-guarantees against other acquired banks, unless they are 80% owned, the consortiums cannot be called upon and certainly not relied upon to be a “source of strength” for their depository, taxpayer-backed portfolio banks.

Regardless of any rules on self-dealing, as sure as “bank” is a four letter word, private equity firms will find a legal way to lend from their taxpayer-backed banks to leverage their other portfolio companies and extract their usual exorbitant fees. If they don’t lend to their own portfolio companies, they will surely lend to other private equity firms’ portfolio companies in a modified version of the “club deals” that bind them together. These firms have a mutual interest in generating deal fees and in controlling their lucrative franchises.
A Glimpse of What’s to Come

The problem with banks is that they became too leveraged. When they couldn’t amass assets on their books, against which they had to set aside “reserves,” they established “off-balance-sheet” vehicles to acquire leveraged pools of assets. They were leveraged inside and out.

But now the originators of the leveraged-buyout business model want to control taxpayer-backed banks, to apply another round of leverage to already crippled banks in order to squeeze out all the profits possible. Although this comes at a cost to duped and already drained taxpayers, regulators, legislators and the American public would be foolish to expect anything else from the private equity crowd. If the FDIC thinks it has a problem now, wait until the next implosion of leveraged banks happens.

In a comment letter to the FDIC on the original policy proposal, the Private Equity Council, an industry advocacy group, without recognizing the irony of its comment, suggested that mandating higher capital ratios for private equity buyers of failed banks would actually increase the risk at those banks because their owners would essentially have to employ more leverage to generate sufficient returns to meet the higher capital standards – while still generating returns high enough to satisfy the investors in their private-equity funds.

If that’s not an advance look at the next round of financial-sector problems we could be facing, we are deluding ourselves.

Private equity should be allowed to buy banks, but should also be held to a higher standard. They have a proven record of success at leveraging companies when they have access to cheap funding, and they also have a record of spectacular failures that resulted from their leverage. The last thing that American banks need – especially right now – is a hyper-aggressive management that leverages them to the hilt in order to generate “acceptable” rates of return for a select group of private investors.

Unfortunately, we’ve once again placed ourselves in a position where the viable solutions to the problems that were created will end up causing an entirely new set of problems – problems that always seem to provide a benefit to the old crony network while leaving the battered U.S. taxpayer as the ultimate victim.

We have no one to blame but ourselves.

More town hall meetings and more vocal opposition to being duped and used by Wall Street would be a good place to start.

Wednesday, August 19, 2009

Why Asia Will Supplant Detroit as the Global Center of the Auto Industry

By Martin Hutchinson
Contributing Editor
Money Morning

Asia is poised to become the “new” Detroit.

Here in the United States, at a cost of a mere $3 billion, the “Cash-for-Clunkers” program appears to have given new hope to the U.S. auto industry.

But that new hope is destined to be short-lived.

It’s true that - in terms of value delivered for the money invested - “Cash for Clunkers” has eclipsed every other stimulus program that has been tried. But the program has a projected lifespan of only three months, meaning it can’t reverse the powerful global forces that are destined to turn the U.S. auto market from leader to laggard on the global stage.
Financial Crisis Fallout Reshapes Sector

Thanks to the financial crisis whose impact continues to be felt, worldwide automobile demand had dropped on an overall basis since 2008.

But regional differences are already emerging.

In the United States, for instance, the benchmark seasonally adjusted annual sales rate (SAAR) finally jumped up past the 11-million mark in July after failing to eclipse the “breakeven point” of 10 million vehicles in any prior month this year. But the actual year-to-date sales of 5.81 million vehicles through July was still 33% below the 8.55 million that had been sold by that point in 2008, and is 67% below the all-time annual record of 17.4 million achieved in 2000 and 65% below the decade average of 16.4 million.

(Prior to the global financial crisis and accompanying recession - which prompted the U.S. auto industry to restructure and shift its breakeven point down to 10 million vehicles - the breakeven point was actually 16 million vehicle sales in a year. Below that point, several or all of the U.S. “Big Three” would be spinning their wheels in red ink.)

It’s a much different story abroad, however, where several markets are in a long-term growth mode. In India, for example, sales were up 31% on a year-over-year basis, while auto sales in China were an astonishing 70% above those of a year ago. Even if U.S. auto sales continue to improve, China’s automobile market may outsell its U.S. counterpart for a full year for the first time ever.

Granted, India’s auto market - around 2.5 million cars and light trucks a year - is still much smaller than either China or the United States. However, its growth makes it comparable to the Japanese or German markets, the next largest automobile markets after its U.S. and China counterparts.

Thus, global automobile sales are undergoing a major reorientation towards Asia and away from the United States and Europe. This will inevitably have a huge effect on the structure of the sector.

That’s why Asia will become the new Detroit - the future center of the automaking world.
Gone For Good?

In the United States, General Motors Corp. and Chrysler Group LLC have lost market share because of the government takeover. They are unlikely to get it back in spite of the debt costs they have relinquished through bankruptcy.

For Chrysler, the partnership with Fiat SpA (OTC ADR: FIATY) is unlikely to help much. Fiat is among the weakest of the European companies, and has not been competitive in the United States since the 1980s. The U.S. market is undoubtedly moving toward smaller automobiles. That trend is being “fueled” by the new Corporate Average Fuel Economy (CAFE) standards for 2015 and probably by higher fuel taxes for environmental and budget reasons. Nevertheless, it seems unlikely that the Chrysler/Fiat partnership will have the models to compete.

General Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint venture with Shanghai Automotive Industry Corp., which expects to sell 1.4 million vehicles in 2009. Since GM is also selling Opel, its European operation, GM will find itself driven primarily by the demands of the Chinese market. Given the growth of that market, it will probably make the most economic sense for GM to become Chinese-owned. Politics may delay this, but probably only for a few years.
The United States’ One “Better Idea”

Ford Motor Co. (NYSE: F) has picked up market share in the United States from GM and Chrysler’s problems. It should benefit both from "Cash for Clunkers," and from the early stages of the U.S. market recovery. If GM and Chrysler continue to have difficulties, Ford may be in a good position here in the large U.S. market - as the most-effective manufacturer of the large automobiles that Americans continue to prefer - no matter what the government tells Ford to do.

Nor is that Ford’s only competitive advantage going forward. Ford Europe is big and viable enough to allow Ford to remain credible as a producer of smaller cars, primarily in the higher price brackets.

Outside the United States, European manufacturers will find themselves increasingly confined to the luxury end of the market. However, as global incomes rise and the newly wealthy become brand-conscious - particularly in the emerging economies of Asia - that upscale portion of the auto market should continue to be strong.

Japanese and Korean manufacturers will continue to dominate their domestic markets. And such companies as Honda Motor Co. Ltd. (NYSE ADR: HMC), Toyota Motor Corp. (NYSE ADR: TM) and Kia Motors Corp., will also do well in the United States and Europe, and in countries where they have been able to establish viable local manufacturing operations, and lower labor costs.

But it will be the players from China and India who are destined to be the big market-share gainers on a global basis.
The New Leaders

For U.S. investors, India’s Tata Motors Ltd. (NYSE ADR: TTM) is the best known of the newly emerging global auto elite. Tata’s $2,500 for-the-masses “Nano" car has been well received. Over the long term, the Nano may expand the entry-level portion of the worldwide auto market, forcing other manufacturers to produce equivalent low-price models.

Indeed, the introduction of $2,500 cars may greatly expand the market’s size in India and other emerging markets, much as Ford’s Model T did after its introduction in 1908, or the Volkswagen AG (OTC ADR: VLKAY) VW Beetle did in the 1950s and 1960s.

Tata looked to be in financial difficulty after it bought the loss-making Jaguar and Land Rover brands in 2008 at the top of the market. However, the $300 million loan for its Jaguar Land Rover Unit announced on Aug. 10 gives Tata the room it needed to maneuver. Market growth in India, combined with the strength of its Tata Group parent now suggest that Tata Motors has the strength to survive without dismemberment.

The bottom line: Tata and its India-based competitors - Maruti Suzuki India Ltd. (Mumbai: MSIL) and Mahindra and Mahindra Ltd. (London: MHID) - as well as such top China carmakers as Chery Automobile Co. Ltd. (still publicly owned), Geely Automobile Holdings Ltd. (OTC: GELYF) and Great Wall Motor Co. (OTC: GWLLF), are thus the companies that will see most growth in the automotive market of the decade to come.

By 2020, the global auto sector will look nothing like it does today. Given that most of the muscle will be in Asia, investors shouldn’t be surprised.

Friday, August 14, 2009

High Frequency Trading: Wall Street’s New Rent-Seeking Trick

Martin Hutchinson
Contributing Editor
Money Morning

Goldman Sachs Group Inc. (NYSE: GS) disclosed recently that it had 46 “$100 million trading days” in the second quarter of 2009. That was a record number, even for one of the biggest players on Wall Street.

When the U.S. economy is facing collapse and merger and acquisition volume is way down, it seems odd that investment banks like Goldman had record quarters.

Well, here’s the secret: They’ve found a new way to skim more of the cream off the top of U.S. economic activity. It’s called “High-Frequency Trading” (HFT).

High-frequency trading uses the speed of supercomputers to trade faster than a human trader ever could. Human owners of the supercomputers program them to take advantage of information milliseconds faster than other computers, and whole seconds faster than ordinary human traders. This is not a minor development; HFTs now represent about 70% of the trading volume in the U.S. equity market.

HFT computer servers are able to beat other computers because they are located at the exchanges. They take crucial advantage of the finite speed of light and switching systems to front-run the market. They also gain information on orders and market movements more quickly than the market as a whole. They operate not only on the New York Stock Exchange (NYSE), but also on the electronic trading exchanges such as the NYSE hybrid market.

According to a paper “Toxic equity trading order flow on Wall Street” by the brokerage Themis Trading LLC, there are a number of different types of HFT. Liquidity rebate traders take advantage of volume rebates of about 0.25 cents per share offered by exchanges to brokers who post orders, providing liquidity to the market. When they spot a large order they fill parts of it, then re-offer the shares at the same price, collecting the exchange fee for providing liquidity to the market.

Predatory algorithmic traders take advantage of the institutional computers that chop up large orders into many small ones. They make the institutional trader that wants to buy bid up the price of shares by fooling its computer, placing small buy orders that they withdraw. Eventually the “predatory algo” shorts the stock at the higher price it has reached, making the institution pay up for its shares.

Automated market makers “ping” stocks to identify large reserve book orders by issuing an order very quickly, then withdrawing it. By doing this, they obtain information on a large buyer’s limits. They use this to buy shares elsewhere and on-sell them to the institution.

Program traders buy large numbers of stocks at the same time to fool institutional computers into triggering large orders. By doing this, they trigger sharp market moves.

Finally, flash traders expose an order to only one exchange. They execute it only if it can be carried out on that exchange without going through the “best price” procedure intended to give sellers on all exchanges a chance at best price execution. The Securities and Exchange Commission (SEC) has now promised to ban this technique, and flash trading on the Nasdaq will stop on September 1.

This toxic trading has caused volume to explode, especially in NYSE listed stocks. The number of quote changes has also exploded and short-term volatility has shot up. NYSE specialists now account for only around 25% of trading volume, instead of 80% as in the past.

The bottom line for us ordinary market participants is that insiders are using computers to game the system, extracting billions of dollars from the rest of the market. While it is illegal to trade on insider knowledge about company financials, these people are trading on insider knowledge about market order flow. That’s how Goldman Sachs and the other biggest houses make so much from trading. By doing so they are rent-seeking, not providing value to the market.

There are two ways to stop this: Ideally, the SEC will employ both. First, they can introduce a rule that all orders must be exposed for a full second. That will reduce the volume of HFT, but still doesn’t truly protect non-computerized outsiders.

The second, and better, solution is to introduce a small “Tobin tax” on all share transactions. It could be tiny; maybe 0.1 cents per share. (The SEC would also need to ban “exchange rebates” to traders.) Such a tax would make the worst HFT types unprofitable without imposing significant costs on retail investors. It would also provide funds to help run the vast apparatus of regulation and control that seems to be necessary to run a modern financial system.

Goldman Sachs, and other financial institutions of its ilk, have imposed huge costs on the U.S. public with their “too big to fail” status. Now they are adding to the problem by scooping out money from the stock market through HFT. It’s about time the government imposed some taxes to stop the worst of these scams and recover the public some of its money.

Friday, July 24, 2009

The Three Reasons China Will Lead the Global Rebound

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

For U.S.-centric investors who question whether it’s really necessary to invest in “risky” overseas markets, here’s an important fact to consider: It’s China - not the United States - that’s leading us back from the brink of a global financial collapse.

At a time when the U.S. economy continues to wrestle with joblessness, a housing hangover, and heightened inflationary fears due to a questionable central bank “exit strategy,” Beijing just reported that China’s economy advanced at a 7.9% clip in the second quarter, up from 6.1% in the first quarter.

This is well ahead of what most mainstream analysts had been projecting - particularly those who were writing the Red Dragon’s eulogy back in January - but as we’ve been telling Money Morning readers since the start of the New Year, China could well be on track for growth of 8% or more this year.

If you factor in the cash that’s not included in official state statistics - but that does influence economic growth - it’s possible that China’s growth rate could grow by an additional 3% this year and as much as 5% in 2010.

That’s not likely, mind you, but it is possible. And Beijing knows it.

Largely attributed to China’s massive $586 billion stimulus program, the country’s economic acceleration may seem startling when juxtaposed against the travails of other major markets and the United States in particular.

While Corporate America has admittedly buoyed investor sentiment with some better-than-expected earnings of late, many stalwarts continue to struggle. Take General Electric Co. (NYSE: GE), which is widely regarded as a global company, and which saw its profits drop 47%. Credit spreads remain tight and lenders are certainly in the pits as has been amply displayed by CIT Group Inc. (NYSE: CIT), which teeters on the brink of bankruptcy. Moreover, consumers continue to struggle in the United States, Europe and Japan.

In China, however, there’s a very different story coming to light. Thanks largely to an emerging middle class of 330 million people (more than the population of our entire country), Chinese consumers are coming into their own. With savings that are as much as 35% of earned income and a desire to have what we have, goods are flying off of store shelves. The expected increase in Chinese consumer spending in 2009 is greater than the forecasted consumer spending increases in the United States, Japan and the Eurozone combined.

At the same time, China’s property markets are rising again, and home values are increasing as well. Automobile sales, always a litmus test for consumer health in any developing country, are up 48% from last year and are accelerating so rapidly that China is already supplanting the United States as the world’s largest car market - a full three years ahead of my projections.

But, critics ask, what happens when the music stops? They’re worried that once the money runs out, China’s markets could crash all over again.

To China’s credit, the government acknowledges that there still are challenges and, as a seasoned China watcher, that gives me comfort. I find it reassuring to see that China’s leadership understands the game they’re playing. In fact, there are three key areas that could trip up the country’s global-growth strategy, but to keep that from happening, China’s leadership is focusing carefully on each of the three: unemployment, lending and currency.

Let’s look at each one in detail.

Unemployment: President Hu Jintao and his cabinet are acutely aware that if unemployment gets out of control, social unrest will become a major problem. So China’s leadership will do everything it can to ensure that this doesn’t happen.

Most Westerners will no doubt read into this comment with an emotional overlay, especially when the media has been filled in recent weeks with stories of the waves of riots and killings in China’s Western Xinjiang region. But, they shouldn’t. The Uyghur riots, while extremely unpleasant by any measure, are racially motivated clashes. That’s not to downplay the tragic nature of this violence, but the very nature of these riots does suggest that the chance they’ll spread beyond the largely Muslim region is minimal.

What concerns Beijing when it comes to unemployment is that riots spawned by shortages of basic human needs are a very different phenomena because they could prompt a now-divided and largely indifferent populace to unite against the government across a much broader geographic area.

And that would not only risk China’s growth, but powerful ruling elite, too, which is why Beijing is so insistent on direct stimulus benefits that keep people working. If it hasn’t dawned on you, yet, I’m sure it will in short order - China is playing it smart.

Here in the United States, Washington took its turnaround plans to Wall Street.

But in China, Beijing has taken its plans to Main Street.

While our leaders continue to pay lip service to unemployment, they really don’t care so long as protected (and connected) institutions remain standing when they should have been put out of their misery.

Lending: Since this crisis began, China has largely avoided the financial plague that has devastated Western economies. This is due in large part to historically tight restrictions on local banking practices and the confinement of derivatives and other potentially toxic financial assets to a few externally focused banks. But now Beijing has a different issue to contend with.

To ensure that the stimulus programs flow freely throughout China - and have the beneficial impact that Beijing hopes - Beijing’s bankers have more recently liberalized lending and reserve requirements inside China. This has resulted in an explosion of debt that many Western analysts believe will come back to haunt China in much the same way the lending orgy here continues to haunt U.S. financial institutions today. They’re entirely different forms of lending, but the concerns seem to be inseparable.

To be fair, that might be the case. However, the thing to keep in mind is that China is not just changing the rules in isolation the way the United States did leading up to the financial crisis. Instead, we’re seeing stronger internal controls being developed, increasingly strict layers of banking supervision being installed, and a general rise in the quality of borrowers - all at Beijing’s insistence.

The result of all this is that China’s financial system should become increasingly stable even as it grows by leaps and bounds.

Obviously there will be fits and starts, but this is a far cry from the warped system U.S. investors have been forced to rely upon to date - a system whose hallmarks seem to be inept leadership, somnambulant or sleazy regulators, conflicted lenders and greedy Wall Street executives who focus on profits no matter the cost.

Chinese Currency: Many Western observers worry about China’s intentions when it comes time to purchase our debt. I think that’s overblown. The real question is what Beijing will do to manage the concentrated U.S. dollar risk it currently faces.

To the extent that China can keep a lid on its unemployment situation and maintain control over its banking system, expect China to maintain the status quo and to continue its purchases of U.S. Treasuries and U.S. dollars. But don’t expect it to sit still. China is acutely aware of the highly concentrated risks it faces because of its ongoing dealings with the United States.

Therefore it’s logical to expect China to diversify its holdings with additional oil, gold and resources purchases in the months ahead. Not only will resource-specific investments help hedge the $2.3 trillion currency-reserve risk China bears, but if the dollar collapses such “hard-asset” investments will maintain much of their value and will be eminently tradable via the $120 billion in yuan-based swap agreements that China has assembled.

Here’s one final thought to consider.

Unlike the West - which views the financial crisis as a burden, a mistake, or a bad dream to be lived through - China’s leaders see this as the most significant opportunity of a generation. It’s a chance for their country to establish itself as a leading global power.

That’s why China will continue to pull further ahead. And that’s why U.S. investors who don’t wish to be left behind can no longer ignore China.

Monday, July 20, 2009

Market Recoils as CIT Edges Toward Bankruptcy

By Jason Simpkins
Managing Editor
Money Morning

The probably bankruptcy of CIT Group Inc. (NYSE: CIT) could have major implications on the retail and manufacturing sectors this week, as many related companies are reliant on the financing giant.

With options running out over the weekend, CIT advisors began preparations for a bankruptcy filing. As of Sunday, JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (MS) were talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, Bloomberg News reported.

Bondholders held calls last week to discuss whether to swap some claims for equity to reduce indebtedness. Thomas Lauria, a lawyer at White & Case LLP, told Bloomberg that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy, but had yet to hear back from CIT management.

“It seems CIT was ill-prepared for this moment, so they’re scrambling,” Scott Peltz, a managing director at consulting firm RSM McGladrey Inc. told Bloomberg. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.”

While CIT is not nearly the household name of Citigroup Inc. (NYSE: C) or Bank of America Corp. (NYSE: BAC), the lender finances over 1 million businesses – including Dunkin Donuts and Eddie Bauer.

Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would undermine the industry supply chain.
“[Retailers] are unbelievably concerned right now,” New York bankruptcy lawyer Jerry Reisman told the Buffalo News. “What we may have here is a total disruption in small business.”

Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees.

An otherwise light week on the economic calendar gives way to the next round of earnings as Apple Inc (Nasdaq: AAPL) and Texas Instruments Inc. (NYSE: TXN) highlight the corporate releases this week, while consumer companies The Coca Cola Co. (NYSE: KO), McDonalds Corp. (NYSE: MCD), and Amazon.com Inc. (Nasdaq: AMZN) join the mix.

U.S. Federal Reserve Chairman Ben S. Bernanke will head to Congress where several critics await. As for the healthcare debate, the August deadline seems less likely, though the Senate has its two cents to add in the coming days. Expect plenty of politicized talk about the ballooning deficit and the impact on small businesses.
Market Matters

The financial sector appears to be on the mend as earnings season brought several positive signs that the worst is over and soon “business as usual” will return to Wall Street. Goldman Sachs Group Inc. (NYSE: GS) easily surpassed analysts’ earnings estimates on solid trading revenues, while JP Morgan got a boost from its investment banking division to shatter the forecasts.

Even Citigroup and Bank of America posted solid results (thanks to one-time gains), though both entities have many ongoing challenges to overcome before the Feds let them fend for themselves.

Of course, the possibility that CIT will file for bankruptcy protection has left panicked customers without a significant source of funding for their daily operations. After late hour negotiations failed, the government chose to pass on another sizable bailout and allow true capitalism to play itself out. CIT turned to private firm and bondholders to help devise a financing plan and avoid the fate of Lehman Bros. and others. But now, nervous retailers and manufacturers are lining up alternative funding sources with the hope of dodging significant business interruptions.

Bed Bath & Beyond (Nasdaq: BBBY) and Wal-Mart Stores Inc. (NYSE: WMT) are among CIT’s largest customers, though many are small independent operations. A CIT failure could prove devastating for those firms considered the lifeblood of American business.

In other earnings news, techs enjoyed another decent quarter as Intel Corp. (INTC) easily bested expectations (that is, before that $1.45 billion antitrust fine) and International Business Machines Corp. (NYSE: IBM) earnings grew by double-digits, while management raised its outlook for the next few quarters. Though both offered encouraging signs for the sector (and economy as a whole), Dell Inc. (Nasdaq: DELL) warned that lower margins are impacting its operations and Google Inc. (Nasdaq: GOOG) experienced its lowest rate of revenue growth since going public five years ago.

The travel industry continued to struggle as consumers and business professionals delayed trips and Marriott International Inc. (NYSE: MAR) and American Airlines parent AMR (NYSE: AMR) posted disappointing results.

Economically Speaking

The White House also experienced a “good news/bad news” week as House Democrats began to push forward a major healthcare overhaul. Before the real lobbying could begin in earnest, the Congressional Budget Office (CBO) Director proclaimed the proposal would have no positive results on reducing costs or expanding coverage and would actually increase government spending.

Investors shrugged off the CIT developments and focused on positive earnings and economic data. Stocks surged early on the Goldman news and soared right through the technology reports. Technicians joined the fun as the Standard & Poor’s 500 Index broke beyond resistance at 930, a strong sign for traders who monitor charts. Major indexes snapped a month-long losing streak and the tech-heavy Nasdaq Composite climbed to levels not seen since last October, while fixed income suffered reverse “flight-to-quality” trades. Oil rebounded on the favorable market and economic signs.

While the debate over a healthcare overhaul rages on, the Treasury Department reported that the budget deficit ballooned beyond a record $1 trillion and seemed prime to move even higher if Congress cannot reign in spending. Analysts fear that interest rates ultimately will move higher should the alarming trend continue and foreign investors shy away from U.S. securities.

But for now, inflation seems very much under control, despite sizable jumps in both the retail and wholesale gauges. Though gasoline prices surged by 17% in June, prices have already begun dropping at the pumps and most economists do not expect a repeat performance in the months to come.

Though retail sales increased in June for the second consecutive month, much of the gain was related to the rising gas prices and consumers remain reluctant to part with their hard-earned income in light of the weakening labor picture.

On a positive note, weekly jobless claims fell to its lowest level since January. However, naysayers claimed that much of the decline was due to calculation problems stemming from auto closures and layoffs are still very much on the rise.

Finally, the hectic economic calendar ended on a positive note as the housing sector showed renewed signs of a rebound as both new construction and permits for future activity experienced unexpected strength. Even Dr. Doom himself, NYU professor Nouriel Roubini, the man best known for predicting the current crisis, reversed course and claimed the global economy would move out of recession by late 2009.

The minutes from the June Fed meeting showed that policymakers revised (positively) their forecasts for economic activity in 2009 and 2010, though they expect the unemployment situation to remain weak through next year. Most Fed watchers do not see any change in the funds rate for the foreseeable future.

On another note, numerous renown economists (about 200), including a few Nobel prize winners, called on Congress to cease the grandstanding and stop criticizing the Fed’s handling of the financial crisis and economic downturn (particularly Bernanke’s “tactics” surrounding the Bank of America/Merrill Lynch deal). The strongly worded letter by some of the nation’s sharpest minds stated that such politicizing could prove detrimental to the recovery.

Friday, July 17, 2009

How to Profit From China’s “Hot Money” Strategy

China made headlines around the world this week when it revealed that its foreign reserves had eclipsed the $2 trillion market for the first time, rising by a record $178 billion in the second quarter – thanks to a flood of “hot money” that flowed into the world’s most promising economy.

Complete story
http://www.moneymorning.com/2009/07/17/china-hot-money-strategy/

Monday, July 6, 2009

Real Estate: Firing your agent is a serious matter

By BOB & DONNA McWILLIAMS, For The Capital

Published 07/05/09

When you sell your house with an agent, you'll enter into a written agreement with the agent and their brokerage firm to list your property for sale.

Depending on which company you select, these agreements may differ somewhat, but they all contain a lot of the same basic information. For example, the agreement will specify a term of the listing (many last for a period of six months); it will obviously contain the agreed-upon list price, and numerous other clauses will address the various other responsibilities of the broker, agent and seller. Not too long ago, listing agreements were only a page or two long. Today, they can be six pages or more. The additional detail is all directed toward making sure there is maximum clarity about who is going to do what.

One part of all these agreements is a paragraph that outlines the conditions and procedures for terminating the listing.

This brings us to the topic of our column - firing your agent. The process of selling a house can be a long and stress filled event. In this environment, even the best of client/agent relationships can be put to the test. Also, market conditions may change, causing a client to reconsider the whole concept of selling.

Regardless of the reason, terminating a listing agreement is a very serious matter and there are a number of things you should remember, before going down that road, including:

Does the agent deserve it? If you want to terminate the listing contract, because you've just decided you no longer want to sell, that's one thing. But, if you want to give the listing to another agent, that's an entirely different matter. As we have said in previous columns, agents get paid nothing unless a house goes to settlement. Agents pay out of their own pockets for virtually everything associated with putting a house on the market. So, if an agent loses a listing, not only are they obviously out the commission, they also realize a significant financial loss for things such as signs, showing services, brochures, Internet services, advertising and myriad other expenses associated with selling your house. Plus, an agent can quickly spend hundreds of hours of time establishing and servicing your listing. Add it all up, and an agent may have five or ten grand invested in your place in no time at all. Pull your listing, and it's all just money down the drain.

As a result, carefully examine the reason why you want to switch agents and make sure you have legitimate beef. Before you just haul off and give them the heave ho, call your agent and let them know what's bugging you. Chances are you may find out that your concerns are either ill founded or the agent was simply unaware of the existence or degree to which you had a problem.

In most cases, issues with an agent/client relationship can be traced to a lack of communication. Don't let an issue fester. Bring concerns up with your agent before they rise to the level where you want to terminate the agreement.

Finally, recognize that there are many things which are beyond your agent's control. Especially these days, market conditions are rapidly changing. Just because your agent said you could get $500,000 for your place, that could change - two months from now it might only be worth $450,000.

Being up-to-date with the competitive environment and how it might affect the sale of your house is an important duty for a listing agent. But, if the news is bad, don't shoot the messenger. It's not a perfect world and, from time to time, things are going to get messed up. We forgot who first said it, but we like the quote, "Excellence does not require perfection".

Know what it says in your listing agreement. If, for whatever reason, you've decided to terminate your listing agreement, make sure you understand the process for doing so. In most listing agreements, there will be a paragraph that says something like this: "Either Owner or Broker, by giving written notice, may cancel this Agreement so that it will terminate at midnight ( x ) days from the date of receipt of such written notice. Owner and Broker may also terminate this Agreement at any time by mutual written agreement." The number of days for that written notice is something you would have agreed to when you first signed the agreement. Many times, you'll see 30 days in there. But, once again, listing agreements can vary from company to company and agent to agent.

So, if you've decided you're going to call it a day with your agent and send in the written notice, please give them a call, talk it over one final time, and if the problem can't be resolved, let them know the letter will be forthcoming. It's not fair to the agent to just let a termination letter show up unannounced in their fax machine or e-mail. Remember, this thing works both ways. It's not unheard of to have agents fire their clients.

Understand the impact of terminating your listing. Even after you terminate a listing, this does not completely sever your relationship with the former agent. Most listing agreements will state that for six months (this time can vary) after you end the listing, you may still owe the agent a commission if you sell the house to someone who was made aware of the property during the time you had the property listed with that agent. This clause is usually in listing agreements to protect the agents from unscrupulous sellers who use an agent to attract a buyer, then try to dump their agent in an effort to avoid paying commissions.

Another misconception some sellers have is that changing agents will make their property appear as though it's new to the market. In this market, houses can be on the market for a long time and sellers worry that their property could become stale or stigmatized. But, unless you take your house completely off the market for at least 90 days, the counter that keeps track of how long you've been for sale will not reset to zero. Just changing agents won't help this. Besides, don't get too worried if your house has been on the market for a while. These days, seeing a house be around for 200 or 300 days isn't uncommon, and buyers don't see that as a red flag like they used to. In fact, some buyers may see a long time on the market as testament that a seller is ready to make a deal. In that way it can even be looked upon as a positive in generating an offer.

In conclusion, terminating a listing agreement is not something to be taken lightly. You have signed a contract with someone who is going to shell out considerable time and money on your behalf, all with absolutely no guarantee that there will be a pay day at the end of the road. Keep the communication going, and it will probably avoid the unpleasant process of parting ways.

Friday, June 12, 2009

How China Could Rescue General Motors

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How China Could Rescue General Motors

By William Patalon III
And Jason Simpkins
Money Morning Editors

For anyone who still disputes that we’re operating in a global economy these days, consider this bit of business irony: The long-term survival of America’s biggest car company could depend on how well it does in Mainland China.

As it works its way through bankruptcy and crafts a corporate turnaround plan, General Motors Corp. (OTC: GMGMQ) – derisively referred to as “Government Motors” by critics – has five factors on its side. The first four are pretty predictable fare for a U.S. auto company that finds itself on the ropes:

* First, bankruptcy will turn GM into a company whose smaller size is better suited to the diminished size of the post-financial-crisis U.S. auto market.
* Second, the bankruptcy process will also allow the company to turn billions in liabilities into equity, freeing up cash it can use to invest in its future.
* Third, even with the sale of Saturn and Hummer – and with the elimination of additional models and nameplates – General Motors has a stronger stable of products than most observers realize.
* And fourth, the consumer backlash against the bankruptcy likely won’t be as damaging as had been initially feared – meaning sales won’t just “fall off a cliff.”

But the fifth factor – the wild card – is still China, where GM has established a surprisingly strong and successful presence. That should allow General Motors to capitalize on a market that’s the world’s fastest-growing right now, and that will one day be the world’s biggest market, too. Eventually, GM will be able to use that low-cost market to build cars and trucks and ship them back to the United States for sale at competitive prices. China’s big carmakers are already planning to do just that. So why shouldn’t GM?
The bottom line: China’s car market could be GM’s savior.
Why China Could Save “Government Motors”

The good news for General Motors is that its Asian operations will be unaffected by the bankruptcy.

“Our operations are separate, they are profitable, they are well-funded, and we generate our own funds for future investment,” GM China President Ken Wale told reporters. “We do not see any change to our growth activities.”

GM China is trying to drive home this point by emphasizing to its Asian customers that it isn’t an extension of General Motors, but is actually a joint venture between GM and Shanghai Automotive Industry Corp. Each company owns 50% of the venture.

GM China has actually been one of the bright spots in General Motors’ operations. While U.S. sales have plunged, sales in China have advanced at a stunning rate. In the first five months of this year, GM China sold about 670,000 vehicles – a 33.8% increase from the same period a year ago. May sales surged 75% from last year.

"Shanghai GM is a brand name here by itself and its Wuling minivans and mini-trucks are selling like hot cakes all over the country," Zhang Xin, an analyst with Guotai Junan Securities Ltd, told Reuters. "I think it will be business as usual here, as whoever is calling the shots at GM eventually would make sure that its China business remains on the right track."

And while worldwide auto sales continue to plunge, sales in China are expected to grow between 8% and 9% this year. China actually overtook the United States as the world’s largest auto market for the first time in history in the first quarter.

“Within 10 years, this will be our largest market in the world,” Wale, the GM China president, told Time magazine.

GM China plans to double its sales in China to more than 2 million vehicles and introduce at least 30 new or updated models over the next five years. Meanwhile, General Motors will close or idle 14 U.S. plants and warehouse operations, shedding up to 20,000 workers.

As part of that streamlining effort, GM is looking at ways to roughly double the number of cars it builds abroad for sale in the U.S. market. Currently the company imports the Chevrolet Aveo and Pontiac G3 from South Korea. The Saturn Vue and Chevrolet HHR sport utility vehicles come from Mexico. And the Pontiac G8 comes from Australia.

The company could export small vehicles such as the Chevrolet Spark from China to the United States. That fuel-efficient mini car is to debut in 2011, GM’s Web site says.

But GM has been so successful in China that it is reportedly negotiating with U.S. lawmakers to send a greater proportion of the carmaker’s production overseas, the U.K.’s Telegraph reported.

No matter how those discussions go, GM will start shipping cars to the United States from Shanghai in 2011. While many carmakers import components from China to save on labor costs, this would make GM the first carmaker to actually import whole cars from Mainland China. But those numbers will be small – at least initially. The company plans to export slightly more than 17,000 vehicles in the first year, before ramping up to 50,000 cars a year by 2014.

In fact, GM sold more vehicles in Asia in the first quarter than it did in the United States. Only 26% of GM’s first-quarter sales came from the United States, a 36% decline from a year ago.
The Wild Cards that Could Cause GM to Crash

Of course, the plan doesn’t sit well with unions.

“GM should not be taking taxpayers’ money simply to finance the outsourcing of jobs to other countries,” Alan Reuther, a Washington lobbyist for the United Auto Workers (UAW) union wrote in a letter to U.S. lawmakers.

Indeed, the UAW and others argue that the whole point of bailing out the U.S. auto industry was to save American jobs and help prop up the sagging economy.

“I think that’s wrong,” Keith Pokrefky, a Michigan autoworker, told WILX, the Lansing TV station. “I think that’s wrong for America. I think it’s wrong for American jobs. It’s un-American.”

For its part, GM argues that it is only logical to produce cars where they’re going to be sold.

“GM’s philosophy has always been to build where we sell, and we continue to believe that is the best strategy for long-term success, both from a product development and business planning standpoint,” GM’s China office said in a written statement to the The Associated Press.

Harvard Business School professor Clayton Christenson – who was also a consultant to G. Richard Wagoner Jr., the former GM CEO who was also the architect of GM’s China strategy – told Time that inexpensive, Chinese-made Chevys, exported to the United States, could be the “disruptive” force the company needs to resuscitate its North American vehicle sales.

“It’s exactly the right thing for [GM] to do,” Christenson said.

While China keeps its data on labor costs under lock and key, analysts estimate that wages and benefit payments per factory worker are less than a tenth of what they are in North America, Time reported.

And as Ballard, the Michigan State economist notes, if GM fails, there are no jobs at all.

And perhaps that’s the reality on which everyone should focus. There was a time when what was good for GM was good for America. But somewhere along the line, the interests of the country and the carmaker diverged.

Even now, with the Obama administration having anted up with taxpayer money, the near-term steps that GM needs to take to survive may not be very popular with the “Buy America” crowd. In fact, having ponied up billions of dollars worth of federal assistance, U.S. President Barack Obama now finds himself trying to balance the competing interests of all the stakeholders, even as his administration tries to save GM – a balancing act that may prove impossible to pull off.

President Obama might be better served by focusing his energy on saving GM – allowing the company to employ the five factors that favor a turnaround to its own maximum advantage.

In fact, we’ll make this statement: These five factors could save GM. For the company to achieve long-term success, however, two specific things must occur.

* “Government Motors” must employ those five factors to their fullest potential.
* And the Obama administration must allow the company to do so.

Only time will tell if either or both of these happen.

Monday, June 8, 2009

Housing Starts

Financial Post Published: Monday, June 08, 2009

OTTAWA -- Housing starts rose more than expected in May, with increased construction seen in both single and multiple dwelling sectors, according to Canada Mortgage and Housing Corporation.

The seasonally adjusted annual rate of starts increased to 128,400 units during the month from 117,600 in April, CMHC said Monday.

"Housing starts are expected to improve throughout 2009 and over the next several years to gradually become more closely aligned to demographic demand, which is currently estimated at about 175,000 units per year," the Crown corporation said.

Economics expected housing starts to total 126,000 units in May.

The seasonally adjusted annual rate of urban starts was up 11.1% to 107,800 units in May, CMHC said. Multiple unit urban starts rose to 60,900 units and single unit starts increased to 46,900 units -- with both categories rising by a similar 11.1% from the previous month.

"The increase in May is broadly based, encompassing both the singles and multiples segments," said Bob Dugan, CMHC's chief economist.

Overall urban starts were up 22% in Ontario, 16.8% in the Prairies, 7.3% in Atlantic Canada and 3.3% in Quebec. Meanwhile, urban starts fell 5% in British Columbia.

Rural starts were little changed at 20,600 units in May.

"The broad-based nature of the increase in residential construction activity in May was an encouraging development for this beleaguered sector of the Canadian economy," said Millan Mulraine.

"Indeed, after plunging precipitously since late 2007, and appearing to be in free-fall in recent months, this rebound may be an indication that the sector is perhaps stabilizing.

"Nevertheless, with the Canadian labour market continuing to weaken and the overall economy remaining quite soft, we expect residential building activity to remain in the current depressed range for some time."

Canwest News Service

TABLE

Housing starts in May (seasonally adjusted):

Canada, all areas 128,400

Canada, rural areas 20,600

Canada, urban centres 107,800

Canada, singles, urban centres 46,900

Canada, multiples, urban centres 60,900

Atlantic region, urban centres 7,300

Quebec, urban centres 34,200

Ontario, urban centres 41,600

Prairie region, urban centres 15,300

British Columbia, urban centres 9,400

Source: CMHC

Wednesday, June 3, 2009

Geithner Opens Up Debt Dialogue With China, but the Dollar Still May be Doomed


By Jason Simpkins
Managing Editor
Money Morning

Two days of talks between U.S. Treasury Secretary Timothy F. Geithner and Chinese officials culminated yesterday (Tuesday) with both parties reaffirming their confidence in the value of the dollar, and the viability of U.S. debt.

Despite this public posturing, however, concerns remain about the dollar's near-term strength. And given the United States' precarious financial position, many observers question the dollar's long-term ability to remain the world's main reserve currency.

Chinese policymakers expressed "justifiable confidence in the strength and resilience and dynamism of the American economy," Geithner said during his first official visit to China.

China is the world's largest holder of U.S. Treasuries, with $768 billion of U.S. securities in reserve as of the end of March. In recent months, however, Beijing has increasingly voiced concerns about the value of its foreign-currency holdings, even going so far as to suggest the world adopt a new international reserve currency.

While Geithner's visit was initially described as an effort to promote stable, balanced and sustained economic growth, Geithner made sure to allay the concerns of China's leaders, including Premier Wen Jiabo, who just months ago called on the United States "to guarantee the safety of China's assets."

In remarks to China's state media, Geithner said the United States would "do everything necessary" to preserve the value of the dollar and to ensure that "the deepest, most liquid Treasury markets in the world" remain flexible.

For its part, China acknowledged the U.S. effort to open up a dialogue about fiscal responsibility that wasn't aimed at its own currency, the yuan. In January, Geithner accused the Chinese of "manipulating" its currency, keeping it artificially low to boost exports.

"You have established good working relationships with your Chinese colleagues and you are committed to increasing China-U.S. cooperation in tackling the international financial crisis," President Hu Jintao said at a meeting at the Great Hall of the People. "I appreciate that."

Still, not everyone was convinced that Geithner or U.S. Federal Reserve Chairman Ben S. Bernanke, are serious about shoring up the dollar. After all, the U.S. budget deficit is expected to balloon to $1.75 trillion in the fiscal year ending Sept. 30, a sizeable increase from last year's $455 billion shortfall. That figures to be about 13% of U.S. gross domestic product (GDP).

"We are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term," Geithner said during his visit to Mainland China. "This will mean bringing the imbalance between our fiscal resources and our expenditures to the point - roughly 3% of GDP - where the overall level of public debt to GDP is definitely on a downward path."

Still, Geithner failed to elaborate on how exactly he and the Obama administration will accomplish that feat. And that's something that worries some Chinese economists.

"I worry about details," said Yu Yongding, a former central bank adviser who interviewed Geithner for the China Daily newspaper. "We will be watching you very carefully."

On Monday, Yu told Bloomberg News that he was hopeful Geithner would provide specifics about his plan. He also warned that despite its sizeable commitment to U.S. debt, China has other options.

"I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds,'" said Yu. "The euro is an alternative. And there are lots of raw materials we can still buy."
Is China Ditching the Dollar?

Recent data supports Yu's position, as China appears to be putting more distance between itself and the dollar than ever before.

China bought less than a sixth of the Treasuries issued by the U.S. government in the 12 months through March, according to The New York Times. That stands in stark contrast to the Treasury market of two years ago, when China's demand for U.S. securities actually exceeded the United States' own borrowing needs.

Additionally, when China has purchased Treasuries, it has done so by swapping them with other U.S. assets, rather than exchanging foreign currencies or commodities. China has increased purchases of short-term Treasury notes - those that mature in a year or less - while at the same time unwinding its position in Treasuries with longer maturities. The takeaway: Beijing believes the dollar is safe for now, but has serious doubts that the greenback can shrug off the inflationary pressures that are certain to grow out of the United States' financial situation, and avoid major erosions in its value as a global reserve currency.
China has also paid for its recent Treasury purchases by selling off debt from such U.S. government-sponsored enterprises (GSEs) as mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).

Last year, China was the world's biggest buyer of GSE securities, spending about $10 billion a month, The Times reported. And last fall, as much as one-fifth of China's $2 trillion in currency reserves was invested in Fannie and Freddie debt. But in the year ended in March, China actually sold about $7 billion of GSE debt.

In yet another move to safeguard its massive currency reserves, China has boosted its investments in commodities. China imported record amounts of copper and iron ore in April, and has been stocking up such commodities as oil and grain. China said last month that its gold reserves have soared to 1,054 tons, up from just 600 tons in 2003.

"While companies in the United States, Great Britain and Europe are being forced to shed promising assets in order to compensate for massive losses or to pay down debt, cash-rich China has been able to operate as a buyer in a buyer's market," said Money Morning Investment Director Keith Fitz-Gerald. "While the rest of the world has interpreted this as a sign that China's interested in buying the things it needs to grow, what they have not understood is that China's also interested in using physical assets as a source of 'currency' that offsets an increasingly eviscerated U.S. dollar."

According to Fitz-Gerald, China isn't simply stocking up on raw material to fuel its massive $585 billion stimulus plan, but instead use those commodities to bolster its currency. Indeed, Beijing's ultimate goal is for its currency to supplant the dollar as the world's most widely accepted transaction currency.
Replacing the World's Reserve Currency

Ahead of the G20 Summit in April, Zhou Xiaochuan, Governor of the People's Bank of China, released an essay titled "Reform of the International Monetary System."

Without specifically mentioning to the U.S. dollar, Zhou asked this basic question: What kind of international reserve currency does the world need in order to secure global financial stability and facilitate economic growth.

According to Zhou, the dollar's unique status as the world's primary reserve currency has resulted in increasingly frequent financial crises ever since the collapse of the Bretton Woods system in 1971.

"The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies," Zhou said. "Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws."

Zhou called for the "re-establishment of a new and widely accepted reserve currency with a stable valuation" to replace the U.S. dollar - a credit-based national currency. The central bank governor noted that the International Monetary Fund's Special Drawing Right (SDR) should be given special consideration.

After questioning the dollar's viability as the world's main reserve currency, Beijing took another step in its quest to expand the role of its own currency, the yuan, by agreeing to a $10 billion (70 billion yuan) currency swap with Argentina.

Including that deal with Argentina, Beijing has signed about $95 billion (695 billion yuan) of currency deals with Malaysia, South Korea, Hong Kong, Belarus, and Indonesia over the past few months. And China and Brazil recently acknowledged that they are in the early stages of a currency swap agreement of their own.

These deals eliminate the need for China and its trading partners to buy dollars to facilitate cross-border transactions. It also gives China's currency a more prominent role in the global economy, and moves the yuan one step closer to supplanting the dollar as the world's main reserve currency.

"For Westerners who are struggling to come to terms with the notion of a disarrayed dollar, the thought of oil, gold or other commodities being priced in yuan instead of dollars has to seem about as likely as having another country put a man on the moon," said Fitz-Gerald. "But the Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange and the proverbial genie, as they say, is out of the bottle."

[Editor's Note: Thirteen trades. All profitable. Since launching his Geiger Indextrading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 13 for 13, meaning he's closed every single one of his trades at a profit. And he did this in the face of one of the most-volatile periods since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.]