Subprime is a known problem, so it is spun as contained, minimal impact, worst is behind us, etc. This is just like the homebuilders: the market for new homes is bad, that can no longer be denied, so they say it has bottomed, and will improve in 2008.
Few people talk about Alt-A problems or other negative effects of the real estate recession, because they are still deniable. They are still a question mark in most peoples minds.
Its all about spinning a rosy scenario about what everybody already knows is bad, while denying any other problems exist until they can no longer be denied.
They are now even claiming "sub-prime crisis" is over.... but in any case they put the blame on others:
"In an impassioned yet somewhat contrived and disingenuous finger pointing appeal to the National Press Club, the Mortgage Bankers Associations Chairman John Robbins yesterday placed the blame of the subprime meltdown squarely at the feet of unethical predatory lenders while simultaneously insisting that the extent of the damage has been overblown."
A few things he said that interested me:
He stated that standards always decline when the demand for mortgages declines. This is very serious if true since loan volume is shrinking (CFC notwithstanding).
He said that we need to teach that "plastic is not cash" but he didn't mention home equity loans or refinancings as a means of living beyond ones means.
He cited the rise in insurance premiums and taxes as factors in homeowner's (and lenders) financial stress. He neglected to mention that the root cause (real estate appreciation) has facilitated home ownership and lender profits.
He mentioned the Dodd "principles that all agreed to". We know of at least one exception.
He stated that each foreclosure cost lenders 40-50k. This would be much higher in California.
He blamed brokers for much of the foreclosure problems. Given more time he might have added appraisers and greedy MBS bondholders. He did blame lenders (the dead ones) for their lax standards. He pointedly did not blame sub-prime or ARMS. He didn't mention no-docs. He would have us believe that mortgage problems are minor, contained and behind us.
He was faithful to the party line, as might be expected. This video is not worth the time, except as an example of deliberate deception or self-deception.
Recent statistics show growth in the U.S. may accelerate. Consumer sentiment rose in May for the first time in four months as strength in the labor and stock markets helped overcome record gasoline prices.
``The U.S. economy will probably regain momentum in the third quarter and the same thing can be said about Japanese exports to the country,'' said Kato.
I'd like to see inventories start to get worked down,'' Jack Lake, a research analyst at Victory Capital Management in Cleveland, whose mutual funds held more than 1 million Toll shares at the end of March, said before the earnings were released.The market just needs to see signs of stabilization.''
In understand many of these jobs disappeared down a statistical rabbit hole. However, its worthwhile to think about the situation "on the ground". The public homebuilders all reported a dramatic and surprising decline in spec inventory in the past quarter (through discounting and a mini-bounce in demand). Now they face a choice: keep idle land on the balance sheet or increase specs.
IMO, the marginal cost of a spec home on owned land is the structure (plus developing the site). In places like California, this is about half the cost of a house.
So wouldn't you say they would maximize profits by building specs? OK, they'll have to discount the spec to make sure it "takes share" from existing homes in inventory. As long as that discounted price (minus the structure cost) exceeds the future price of the land minus carrying costs of 5% p.a., they come out ahead.
So its all about future land price expectations. If they are declining, then spec starts should balloon here, and some of the "down the rabbit hole" lost jobs should be recovered.
Why did starts drop so steeply last year? Still fits in this model, as the homebuilders thought it was better to delay new specs in expectation of a rapidly improving market. That expectation did not pan out.
Of course its not as "idealized" as all that, since public homebuilders only have about 40% share, and the others probably don't have much land inventory. Or do they?
Another restatement in the works, a new convertible, securing a credit line with arguably the most valuable asset left, and another SEC request for documents. Keep your eye on the moving accounts payable and liquidity, this is starting to unravel.
At some point when one is crunching numbers and comes up with the product of all that work there is a critical step. Taking a big step backwards and ensuring that the number makes sense in the context (in this case the slowdown in housing yet our still seeing increases). Somehow BLS has avoided this critical step. But, when you get a number that surprises to the good side, then the motivation is dampened to poke holes in it.
Why would the BLS undercount the number of illegal workers being laid off and /not/ undercount those same illegal workers when they were hired? In other words, if they missed the illegal workers when they were laid off, then they missed them when they were hired. Thus the employment data accurately reflects the changes in the workers that are actually reported. This is a case of making up explanations for data that doesn't fit the story one is trying to tell. The contribution of the uncounted workers shows up in the financial of the companies that hire then as revenues and costs. The housing slump may or may not be over, but making up fairy tales about why it is or isn't doesn't consititute evidence one way or the other.
The rate of adding new ilegals could be very diffrenet from the rate of letting them go. So if what was added during 5 years is being let go over 6 month the down side has more economical meaning.
Birth/Death model is wrong at turns. Even the payroll data, as published, show the pace of hiring is slower now, on average, than in 2005 or 2004, so we can probably assume the model is wrong now. If the downward revision to Q3 hiring suggested by tax data is correct, then the huge plug from the model applied to April data is likely to be hugely wrong.
Now, before the recriminations begin, think a minute about what it is that statisticians at BLS want to accomplish. They were not tasked with churning out numbers to help financial markets price debt appropriately in the short run. They want to characterize activity in the labor market as accurately as their modest budget will allow, over a period in which that is a reasonable goal. The plug is an effort to make up for things they know are going on, but cannot measure. Can anybody think of a better way to do that?
Skeptical Empiricist said: "... This is a case of making up explanations for data that doesn't fit the story one is trying to tell..."
Amen. Otherwise, you wind up in an unwinnable land-war in hostile territory on the other side of the world, or you miss a recession forecast by 3-5 years.
Recent statistics show growth in the U.S. may accelerate. Consumer sentiment rose in May for the first time in four months as strength in the labor and stock markets helped overcome record gasoline prices.
If the U.S. economy does re-accelerate the big picture only gets gloomier. Now it's U.S. businesses that have begun binge borrowing along with consumers. The one bright spot in the economy over the past few years is that corporations were repairing their balance sheets. No more. Companies are now flipping other companies and gorging on high risk assets using borrowed money, mirroring the housing and sub-prime mess almost exactly.
All the growth we have now is growth that's being borrowed from the future. The government, consumers, and corporations are now all piling on massive amounts of debt at the same time.
Historically these types of situations end very badly.
When people talk about the economy accelerating as a sign that all is getting better, I help myself to a bracing shot of Steven Roach talking about the dangers of an asset-based approach to savings (aka stocks and real estate):
"On the surface, the world economy appears to be doing just fine. After four years of the strongest global growth since the early 1970s, the consensus forecast is for two more years of the same. The problems lie beneath the surface largely an outgrowth of profound saving imbalances stemming from the excesses of an asset-dependent US economy. As always, the unintended consequences of these imbalances pose the greatest challenge to the global economy and world financial markets. The combination of Washington-led protectionism, a Chinese equity bubble, and Middle East dollar-concentration risk is especially worrisome in that regard.
In days of froth, it never pays to worry. But when the tide goes out, it could be a different matter altogether. That could be especially the case in the current climate. Watch out for a crack in the dollar, a related increase in real long-term US interest rates, a widening of credit spreads, and a pullback in global equities. Only then will the long-overdue rebalancing of global saving have begun in earnest."
ac said: "...If the U.S. economy does re-accelerate the big picture only gets gloomier. Now it's U.S. businesses that have begun binge borrowing along with consumers. The one bright spot in the economy over the past few years is that corporations were repairing their balance sheets. No more. Companies are now flipping other companies and gorging on high risk assets using borrowed money, mirroring the housing and sub-prime mess almost exactly..."
Companies are using their earnings to buy back their own stock.
Another possible answer for the construction employment "conundrum."
"WASHINGTON, May 24 (Reuters) - Sales of new U.S. homes rose 16.2 percent in April, the sharpest climb in fourteen years, while prices fell a record 11 percent, according to a government report on Thursday that showed home builders taking extraordinary steps to move houses..."
Companies are using their earnings to buy back their own stock.
That's a circular agrument. That's like saying homeowners were using their house-price appreciation to buy second homes and driving up their house-price appreciation.
Yes, binge borrowing creates enormous earnings and the appearance of prosperity in the short-term. This comes at the expense of future earnings and prosperity.
We saw the same thing in the tech bubbble - earnings soared as stock prices rose, and then plunged as stock prices fell.
New home sales 981k annualized, up 16.2% in April. The rise was due overwhelmingly to a 27.8% rise in the South. That may also account in large measure for the 11% m/m decline in median price of homes sold.
I'm not entirely convinced. Why would the home buying public (which home builders report have showed up in smaller numbers on new home sites recently) by 16.2% more homes in April than in March, even after accounting for seasonal factors? Buyers conspiracy?
ac said: "...That's a circular argument. That's like saying homeowners were using their house-price appreciation to buy second homes and driving up their house-price appreciation..."
Earnings from an ongoing business aren't the same as stock-price appreciation. You know that, right?
A more accurate analogy would be an owner of rental property using his profits (rent minus costs) to pay-down his mortgage.
Companies/management usually buy back stock because they think it's a bargain. They are effectively doubling their bet on their own success.
The two most common and logical reasons are to then resell at a higher price or, consolidate ownership and control.
Lama,
Rarely do companies resell their stock at a higher price, they will "resell" at a lower price in the form of option exercizes, but option grants have been dropping since now they actually count as an expense (gee who would have thought that what you pay your top exec's was actually an expense). No the key reason is to reduce the number of shares outstanding, and thus raise EPS by lowering the denominator. At the individual company level this can be a good way to raise EPS (as opposed to the alternative of investing in the business and raising EPS by increasing net income, or the numerator of EPS). From a macro perspectve the two methods of increasing EPS are not equivelent, even if they are for an individual company. You are right that the valuation of the firm makes a big difference in the wisdom of the buyback route. If the stock is trading for 10x earnings, then you get a 10% return on investment through buyback, if it is at 20x you get a 5% return. Provided you dont totally distroy your balance sheet and thus your bond rating, then the key determinant will be the P/E ratio (actually the earnings yeild or E/P ratio) relative to after tax bond yields. Right now that is conducive to buybacks for most companies.
Dirk,
I don't think we disagree on all this. In an attempt to be economical, I used the term "consolidate ownership" which is; stock based compensation (as you said), elimination of small minority owners, staging for taking private. As far as taking in shares for possible resale, that simply does happen.
Whatever the reason, the shares are taken to Treasury because management thinks it's a good price.
That reminds me of an interview I had with a dot.com company in the late 90's:
I asked: "Are you planning to go public?"
The President said: "Why would I go public? Unlike most other internet companies, I make money."
A more accurate analogy would be an owner of rental property using his profits (rent minus costs) to pay-down his mortgage.
That is a terrible analogy... if the corps were buying their bonds obligations instead of stock I'd agree with that analogy but in many cases they aren't.
You do know the difference between debt & equity correct?
A better analogy would be a couple who owns a rental and they take the rent money to buy one of them out... then the couple separate. One walks away with cash the other holds the equity in the rental.
The one holding the equity better hope s/he has enough cash should a rainy day come along & the roof needs replacing.
Generally a buy back means the management feels the environment isn't sufficiently solid to warrant more 'investment'... i.e. even if rents are coming in today the rental market looks sufficiently sucky that building more apartments is off the table.
dryfly said: "...That is a terrible analogy... if the corps were buying their bonds obligations instead of stock I'd agree with that analogy but in many cases they aren't..."
Obviously, the best analogy is that a business with profits from their operations buys back their stock using those profits.
Obviously, the best analogy is that a business with profits from their operations buys back their stock using those profits.
... and forgoes buying down existing debt or investing in future products or expanding operations. Tells you a lot about what they think about the future.
i was a bit sceptical about the construction job numbers too. But then i realise that the majority of construction firms are very small and since the BLS only survey businesses that are above a certain size, i could only imagine that most of the job losses weren't captured.....
If you have extra time you can watch this:
Paper Economy - A Real Estate Bubble Blog
Subprime is a known problem, so it is spun as contained, minimal impact, worst is behind us, etc. This is just like the homebuilders: the market for new homes is bad, that can no longer be denied, so they say it has bottomed, and will improve in 2008.
Few people talk about Alt-A problems or other negative effects of the real estate recession, because they are still deniable. They are still a question mark in most peoples minds.
Its all about spinning a rosy scenario about what everybody already knows is bad, while denying any other problems exist until they can no longer be denied.
They are now even claiming "sub-prime crisis" is over.... but in any case they put the blame on others:
"In an impassioned yet somewhat contrived and disingenuous finger pointing appeal to the National Press Club, the Mortgage Bankers Associations Chairman John Robbins yesterday placed the blame of the subprime meltdown squarely at the feet of unethical predatory lenders while simultaneously insisting that the extent of the damage has been overblown."
A few things he said that interested me:
He was faithful to the party line, as might be expected. This video is not worth the time, except as an example of deliberate deception or self-deception.
CR: is the crisis really over ?
Japan exposrt to the US fell but....
Recent statistics show growth in the U.S. may accelerate. Consumer sentiment rose in May for the first time in four months as strength in the labor and stock markets helped overcome record gasoline prices.
``The U.S. economy will probably regain momentum in the third quarter and the same thing can be said about Japanese exports to the country,'' said Kato.
Toll Brothers Net Slumps on Writedowns, Drop in Housing Demand
Toll Brothers Net Falls on Writedowns, Drop in Demand (Update5) - Bloomberg.com
I'd like to see inventories start to get worked down,'' Jack Lake, a research analyst at Victory Capital Management in Cleveland, whose mutual funds held more than 1 million Toll shares at the end of March, said before the earnings were released.The market just needs to see signs of stabilization.''
REbear: Didn't you get the memo ?
Sub-prime crisis solved . Housing recovered. LIquidity in 2ndary market resumed. there was never a problem in the non-sub-prime mortgages.
yeap, the problem will go away if we ignore it. Postive thinking is all we need
CR,
In understand many of these jobs disappeared down a statistical rabbit hole. However, its worthwhile to think about the situation "on the ground". The public homebuilders all reported a dramatic and surprising decline in spec inventory in the past quarter (through discounting and a mini-bounce in demand). Now they face a choice: keep idle land on the balance sheet or increase specs.
IMO, the marginal cost of a spec home on owned land is the structure (plus developing the site). In places like California, this is about half the cost of a house.
So wouldn't you say they would maximize profits by building specs? OK, they'll have to discount the spec to make sure it "takes share" from existing homes in inventory. As long as that discounted price (minus the structure cost) exceeds the future price of the land minus carrying costs of 5% p.a., they come out ahead.
So its all about future land price expectations. If they are declining, then spec starts should balloon here, and some of the "down the rabbit hole" lost jobs should be recovered.
Why did starts drop so steeply last year? Still fits in this model, as the homebuilders thought it was better to delay new specs in expectation of a rapidly improving market. That expectation did not pan out.
Of course its not as "idealized" as all that, since public homebuilders only have about 40% share, and the others probably don't have much land inventory. Or do they?
Another restatement in the works, a new convertible, securing a credit line with arguably the most valuable asset left, and another SEC request for documents. Keep your eye on the moving accounts payable and liquidity, this is starting to unravel.
GM Taps the Well Again - WSJ.com
General Motors sees $7 billion exposure from Delphi - MarketWatch
http://www.autospectator.com/modules/news/article.php?storyid=9778
GM Receives New SEC Request, Raises Tab for Delphi (Update8) - Bloomberg.com
At some point when one is crunching numbers and comes up with the product of all that work there is a critical step. Taking a big step backwards and ensuring that the number makes sense in the context (in this case the slowdown in housing yet our still seeing increases). Somehow BLS has avoided this critical step. But, when you get a number that surprises to the good side, then the motivation is dampened to poke holes in it.
Why would the BLS undercount the number of illegal workers being laid off and /not/ undercount those same illegal workers when they were hired? In other words, if they missed the illegal workers when they were laid off, then they missed them when they were hired. Thus the employment data accurately reflects the changes in the workers that are actually reported. This is a case of making up explanations for data that doesn't fit the story one is trying to tell. The contribution of the uncounted workers shows up in the financial of the companies that hire then as revenues and costs. The housing slump may or may not be over, but making up fairy tales about why it is or isn't doesn't consititute evidence one way or the other.
Anyone have further thoughts on the BLS "birth death model"?
Skep,
The rate of adding new ilegals could be very diffrenet from the rate of letting them go. So if what was added during 5 years is being let go over 6 month the down side has more economical meaning.
Oops, should have looked around first. TheBigPicture is citing the birth death model in a post "WSJ: Overstated Job Market Strength?".
Birth/Death model is wrong at turns. Even the payroll data, as published, show the pace of hiring is slower now, on average, than in 2005 or 2004, so we can probably assume the model is wrong now. If the downward revision to Q3 hiring suggested by tax data is correct, then the huge plug from the model applied to April data is likely to be hugely wrong.
Now, before the recriminations begin, think a minute about what it is that statisticians at BLS want to accomplish. They were not tasked with churning out numbers to help financial markets price debt appropriately in the short run. They want to characterize activity in the labor market as accurately as their modest budget will allow, over a period in which that is a reasonable goal. The plug is an effort to make up for things they know are going on, but cannot measure. Can anybody think of a better way to do that?
Safehaven | Investment Flash: Derivatives Say Bernanke Will Be Wrong | Printer Friendly Version
Skeptical Empiricist said: "... This is a case of making up explanations for data that doesn't fit the story one is trying to tell..."
Amen. Otherwise, you wind up in an unwinnable land-war in hostile territory on the other side of the world, or you miss a recession forecast by 3-5 years.
Sebastia
Recent statistics show growth in the U.S. may accelerate. Consumer sentiment rose in May for the first time in four months as strength in the labor and stock markets helped overcome record gasoline prices.
If the U.S. economy does re-accelerate the big picture only gets gloomier. Now it's U.S. businesses that have begun binge borrowing along with consumers. The one bright spot in the economy over the past few years is that corporations were repairing their balance sheets. No more. Companies are now flipping other companies and gorging on high risk assets using borrowed money, mirroring the housing and sub-prime mess almost exactly.
All the growth we have now is growth that's being borrowed from the future. The government, consumers, and corporations are now all piling on massive amounts of debt at the same time.
Historically these types of situations end very badly.
When people talk about the economy accelerating as a sign that all is getting better, I help myself to a bracing shot of Steven Roach talking about the dangers of an asset-based approach to savings (aka stocks and real estate):
Morgan Stanley - Global Economic Forum
"On the surface, the world economy appears to be doing just fine. After four years of the strongest global growth since the early 1970s, the consensus forecast is for two more years of the same. The problems lie beneath the surface largely an outgrowth of profound saving imbalances stemming from the excesses of an asset-dependent US economy. As always, the unintended consequences of these imbalances pose the greatest challenge to the global economy and world financial markets. The combination of Washington-led protectionism, a Chinese equity bubble, and Middle East dollar-concentration risk is especially worrisome in that regard.
In days of froth, it never pays to worry. But when the tide goes out, it could be a different matter altogether. That could be especially the case in the current climate. Watch out for a crack in the dollar, a related increase in real long-term US interest rates, a widening of credit spreads, and a pullback in global equities. Only then will the long-overdue rebalancing of global saving have begun in earnest."
ac said: "...If the U.S. economy does re-accelerate the big picture only gets gloomier. Now it's U.S. businesses that have begun binge borrowing along with consumers. The one bright spot in the economy over the past few years is that corporations were repairing their balance sheets. No more. Companies are now flipping other companies and gorging on high risk assets using borrowed money, mirroring the housing and sub-prime mess almost exactly..."
Companies are using their earnings to buy back their own stock.
http://www2.standardandpoors.com/spf/pdf/index/031507_500BuyBacksQ4.pdf
Sebastia
Another possible answer for the construction employment "conundrum."
"WASHINGTON, May 24 (Reuters) - Sales of new U.S. homes rose 16.2 percent in April, the sharpest climb in fourteen years, while prices fell a record 11 percent, according to a government report on Thursday that showed home builders taking extraordinary steps to move houses..."
Business & Financial News, Breaking US & International News | Reuters.com
Sebastia
Never mind, Seb. You heard the man, it's gloomy if things slow down, it's even gloomier if they speed up. :^)
Companies are using their earnings to buy back their own stock.
That's a circular agrument. That's like saying homeowners were using their house-price appreciation to buy second homes and driving up their house-price appreciation.
Yes, binge borrowing creates enormous earnings and the appearance of prosperity in the short-term. This comes at the expense of future earnings and prosperity.
We saw the same thing in the tech bubbble - earnings soared as stock prices rose, and then plunged as stock prices fell.
New home sales 981k annualized, up 16.2% in April. The rise was due overwhelmingly to a 27.8% rise in the South. That may also account in large measure for the 11% m/m decline in median price of homes sold.
I'm not entirely convinced. Why would the home buying public (which home builders report have showed up in smaller numbers on new home sites recently) by 16.2% more homes in April than in March, even after accounting for seasonal factors? Buyers conspiracy?
ac said: "...That's a circular argument. That's like saying homeowners were using their house-price appreciation to buy second homes and driving up their house-price appreciation..."
Earnings from an ongoing business aren't the same as stock-price appreciation. You know that, right?
A more accurate analogy would be an owner of rental property using his profits (rent minus costs) to pay-down his mortgage.
Sebastian
Companies/management usually buy back stock because they think it's a bargain. They are effectively doubling their bet on their own success.
The two most common and logical reasons are to then resell at a higher price or, consolidate ownership and control.
Lama,
Rarely do companies resell their stock at a higher price, they will "resell" at a lower price in the form of option exercizes, but option grants have been dropping since now they actually count as an expense (gee who would have thought that what you pay your top exec's was actually an expense). No the key reason is to reduce the number of shares outstanding, and thus raise EPS by lowering the denominator. At the individual company level this can be a good way to raise EPS (as opposed to the alternative of investing in the business and raising EPS by increasing net income, or the numerator of EPS). From a macro perspectve the two methods of increasing EPS are not equivelent, even if they are for an individual company. You are right that the valuation of the firm makes a big difference in the wisdom of the buyback route. If the stock is trading for 10x earnings, then you get a 10% return on investment through buyback, if it is at 20x you get a 5% return. Provided you dont totally distroy your balance sheet and thus your bond rating, then the key determinant will be the P/E ratio (actually the earnings yeild or E/P ratio) relative to after tax bond yields. Right now that is conducive to buybacks for most companies.
Dirk,
I don't think we disagree on all this. In an attempt to be economical, I used the term "consolidate ownership" which is; stock based compensation (as you said), elimination of small minority owners, staging for taking private. As far as taking in shares for possible resale, that simply does happen.
Whatever the reason, the shares are taken to Treasury because management thinks it's a good price.
That reminds me of an interview I had with a dot.com company in the late 90's:
I asked: "Are you planning to go public?"
The President said: "Why would I go public? Unlike most other internet companies, I make money."
A more accurate analogy would be an owner of rental property using his profits (rent minus costs) to pay-down his mortgage.
That is a terrible analogy... if the corps were buying their bonds obligations instead of stock I'd agree with that analogy but in many cases they aren't.
You do know the difference between debt & equity correct?
A better analogy would be a couple who owns a rental and they take the rent money to buy one of them out... then the couple separate. One walks away with cash the other holds the equity in the rental.
The one holding the equity better hope s/he has enough cash should a rainy day come along & the roof needs replacing.
Generally a buy back means the management feels the environment isn't sufficiently solid to warrant more 'investment'... i.e. even if rents are coming in today the rental market looks sufficiently sucky that building more apartments is off the table.
dryfly said: "...That is a terrible analogy... if the corps were buying their bonds obligations instead of stock I'd agree with that analogy but in many cases they aren't..."
Obviously, the best analogy is that a business with profits from their operations buys back their stock using those profits.
Sebastia
Obviously, the best analogy is that a business with profits from their operations buys back their stock using those profits.
... and forgoes buying down existing debt or investing in future products or expanding operations. Tells you a lot about what they think about the future.
i was a bit sceptical about the construction job numbers too. But then i realise that the majority of construction firms are very small and since the BLS only survey businesses that are above a certain size, i could only imagine that most of the job losses weren't captured.....