The GM Affect

Interest rates have gone haywire the last couple of days. You won’t hear it reported in the media though. Why? Because it would look bad for certain economic positions and actions taken by the current Administration …at least that’s my take on it…

The problem is that the bond markets are upset about the way the Obama Administration has handled the bond holders for Chrysler and fear the same will happen with GM. At the administrations urging, the judge in the Chrysler bankruptcy case forced the bond holder to take on more risk.

Usually bond holders are the first to be protected in a bankruptcy but this time it was other interests that were protected first. (think Unions) The bond holders took a back seat to almost every other concern.

Before you go saying those ‘evil’ bond holders (lenders) deserve it, think about this. Bond holders invest in companies by making loans to them because they are risk adverse. Investing in normal stocks is to risky for these investors. There reason? They are investing money from pension funds and insurance companies. This money needs to be invested in areas with very little volatility and steady returns with low risk to the money. (think about your pension, you want safety right?)

The way these bond holders are being treated is a huge change from how large restructuring like this normally takes place. And this sets a dangerous precedent going forward. So with a bankruptcy from GM looming on the horizon, the bond market got very, very nervous and everyone backed out of the market in one day!

I’m calling this The GM Affect because it was so awful. We saw rates jump 1% in less than 24 hours ….by the way… That is completely unheard of!

Rates have come back down today, but I don’t know how long that will last. Rates jumped up to 5.5% from a low the previous day of 4.5%. Rates today are back down to 5% but no one knows for how long.

With a very scary economic report just out about a 5.7% decline in GDP the first quarter of this year and about companies slashing inventories and jobs (approximately 2,000,000 more jobs lost) I’m not sure how much longer rates can stay this low.

So while the Administration rolls our their latest campaign touting the ‘good’ that the stimulus package has done and while they roll out the parties for the supposed 150,000 jobs that were created, our economy has had the second largest contraction since 1981. (By-the-way, only about $11 million of the $45 Billion that has hit the economy was for worthwhile make- work projects. The rest was for one-time payments for welfare and Medicare and for the extension of unemployment benefits.)

I know that this sounds like political commentary and I apologize because it is truly not meant to be a political view point. I'm commenting on my concern about the numbers The numbers don’t lie, and since they don't lie, then someone or something else is lying. Could that something be the government, maybe both parties? Some will point back to the Bush administration as an excuse to support Obama’s actions. Guess what? Bush was wrong as well!

All the economic tricks and gimmicks being tried today have been attempted before. We did here in the late 70's to early 80's. and it didn't work. Heck countries all around the world have tried what we are doing and they will tell you it doesn’t work.

Call it Keynesian Theory, call it Social Democratization, call it whatever you want but understand this. If it is illegal for you to 'kite' checks to cover your debt, then why do we allow the government to do it? (Kiting a check is when you deposit a check from one of your own checking accounts into another and then from that account back into the original account in a never ending circle just to cover checks that you right elsewhere, at some point it will catch up to you.

So why are we allowing our government to do a thing that we would be put in jail for doing? Because of some ‘theory’? Does this make sense to anyone?

At some point we will not be able to print enough money to buy our own bonds to fund our bloated and bureaucratic government. I’m hoping for the best and preparing for the worst. Here’s a link to a great article with the bad news/good news that can help you make up you own mind. http://www.marketwatch.com/story/us-gdp-revised-to-57-decline-in-first-quarter

U.S Foreclosures Filings Sets New Record High

The second wave of foreclosures has arrived. Is the American economy ready?

The tide of potential foreclosures has been rising for quite some time. The U.S. economy had a brief respite while banks and lenders tried to decide which way the political winds were blowing. This may have briefly delayed many of the recent filings.

Now that the new administrations policies are clear, the cleansing of the banks balance sheets begins anew. Combined with holdover filings from last year, we are beginning to see the start of the ‘second’ wave of foreclosures.

This so-called second wave is caused by the Alt-A and Option ARM loans that are scheduled to adjust or come due between now and November of 2009. Many of the resets on these loans will cause real estate investors and laid off workers to default.

A recent article on MarketWatch.com (http://www.marketwatch.com/story/us-foreclosures-reach-record-rate-in-april ) suggests that the delay was caused by the moratorium on the industry that were recommended by regulators. Some believe that the recent stabilization in overall values across the nation may hold steady even though there is this new round of repossessions hitting the books.

Opportunity abounds for real estate investors with the means or the creative drive. With multiple options available, investors can still invest in real estate and with rising rents and low prices real estate investor activity in the market place appears to be increasing again.

While many thought that greed and over zealous real estate investors were partly to blame for the bubble in the economy, some economist have argued that prudent and professional real estate investors need to be active in the market in order to truly stabilize home values.

There are many lenders that have started to lend to investors again. Cautiously these lenders have entered the market and are lending to those that can prove experience and credit worthiness. Still other real estate investors are slowly testing the markets using creative strategies that skirt the traditional lenders and allow them to access capital that allow them to build and manage large portfolios of rental properties.

The time is ripe for real estate professionals. These are the times when fortunes in residential real estate are made and many people are seeking out the abundant opportunities in this market. Is the time right? Is America ready for the second wave? Only time will tell…

You Know it is the Bottom When...

In a shocking display of just how bad the foreclosure crisis got in California, a Texas bank decided that it was more cost efficient to destroy 16 brand new homes in a development they took back through foreclosure than to try and finish and sell the homes.

This is true evidence of exactly how far prices have crashed and is the perfect indicator of what happens when a crash begins to reach the bottom. When the decisions like this can be made and are sound business decisions it can be a sign of that things have gotten about as bad as they are ever going to be.

This is called capitulation and it is what many experts have been looking for in order to 'call' a bottom. This is exciting because positive signs after this may be not be false positives. Future positive market activity may be the real thing.

Stay tuned.... Ben Bernanke speaks today, analysis tomorrow.