Monday, June 2, 2008

Capital Punishment

Yes, a double entendre as Capital One is getting whacked along with its banking brethren. The CEO at Wachovia, out. CEO at WaMu, well, let's say he's been demoted. I guess presiding over the worst decisions in American banking history don't bode well for your tenure....

Retail beating next. A good article from AOL listing 36 retailers who have been forced to close some or all of their stores, including Disney, was recently published. I'm rooting against the mouse as it makes up a portion of XLY, of which I'm short. Some of their movies have produced poor returns lately finding themselves sandwiched between Iron Man and Indiana.

Scary article that hits close to home literally, from Joe Mysak of Bloomberg. "Consider the $50 million in special assessment bonds sold by the Monterra Community Development District in Broward County, Florida, for example. On May 7, the district disclosed that it had tapped its $1,279,200 reserve fund for $1,211,727.11." Muni bonds are starting to go under. My community issued similar bonds for which we pay an annual assessment. I can only imagine what the assessment will become if my builder taps out the bond proceeds.

And then there are homeowner articles like this one that drive me insane. "Housing Woes Hit Affluent Middle-Class Homeowners." The article from CNBC details how a poor family is stuck with their $1.2 million home while trying to pay for their new place. Their current asking price is all the way down to $850K! Wow, you poor bastards! The article also details how they had flipped 4 houses prior and that they thought they would just keep rolling over the profits to infinity. Now they might only get what they initially paid. That's too bad.

Fascinating article from the NBER about credit booms in both emerging and industrial nations. I posted some thoughts on iTulip, which some real economists read. I'll let you know about their thoughts if any, but in the meantime, here are some conclusions from the article....

"A credit boom is defined as an episode in which credit to the private sector grows by more than during a typical business cycle expansion."

"At the peak of booms, the average expansion in real credit per capita reached almost 30% above trend in emerging economies, twice what is observed in industrial nations."

"Our thresholds are defined as multiples of the country-specific standard deviaton of credit over the business cycle, which changes the threshold level of credit needed to define a boom..with each country's cyclical variability of credit. This ensures that a credit boom is a situation in which the deviation from trend in credit is 'unusually large'."

"EMs and ICs show booms with similar duration of about 6-7 years and upswings that last longer than downswings."

"Industrial countries show negligible changes in inflation, and rising (falling) equity and housing prices in the build up (declining) phase of credit booms. In emerging economies, inflation tends to spike after the credit booms peak..." Sounds a lot like us.

"Credit booms in emerging economies are often associated with currency crises, banking crises, and Sudden booms in industrial countries are only occasionally associated with banking and currency crises....moreover, industrial countries in a credit boom are more likely to experience currency crises than banking crises." We have both.

"Not all credit booms end in crisis, but many of the recent emerging market crises were associated with credit booms...the frequency of credit booms in emerging markets is higher when preceded by periods of large capital inflows but not when preceded by domestic financial reforms or gains in total factor productivity while industrial countries show the opposite pattern."

1 comment:

Tiger Coach said...

This is a nice article. I think you make an excellent case of the role that "greed" has played in the current financial crisis... particularly with the roll-the-profits family.

Boom and Doom tells a great story when he put a bid on a house at 429 it was rejected... and would not negotiate... so he bought somewhere else... the house IS STILL on the market... asking price is now 389... beautiful.

I dropped the ball on LEH... didn't buy it yet... I dumped KO today... enough was enough... BD I'll be rolling that into the Schwab account.