Home Prices Case-Shiller

New home price data out today, in the form of the Case-Shiller Index.

CNBC Interview with Standard And Poor's David Blitzer regarding the Case-Shiller index.

Transciption of Interview:

CNBC Interview with David Blitzer, S&P 500 Index Committee Standard & Poor's managing director/chairman
Date: 10-27-2008
Interviewers: Erin Burnett, Mark Haynes, CNBC Squawk On The Street

Erin Burnett: We want to talk about the latest housing data to come out. S&P/Case-Shiller’s new report says the downturn in residential real estate, continues, no surprise. There are not many bright spots, but here are the overall numbers. Prices down 16.6% in August from a year ago. Joining us first on CNBC to dissect the data, Standard and Poors’ David Blitzer, chairman of the S&P 500 Index Committee.

Now David, I just have to be blunt, my main question sir, on this data, is that it’s August [August data]. And that appears to be ions ago, because it was before sort of the world fell apart. So can you give us an honest assessment of the relevance of this data, whether things have dramatically accelerated from here?

David Blitzer: I think what we’re beginning to see, what we see the beginnings of in this data, and what we’ll see as we roll forward over the next several months, are the impact of foreclosures more than anything else.

Based on discussions we had yesterday, we’re definitely seeing foreclosures begin to show up here. And the initial impact will be to continue the price fall, probably accelerate the price decline, throughout the Sunbelt cities that we’ve been worried about so much over the last year or more, and so on. That’s where the foreclosures are likely to be concentrated, that’s where the price impact will be. What it means for the overall index, is we’re going to see increasingly a split. The Sunbelt, Miami, Tampa, on the East Coast. Phoenix, San Diego, Las Vegas, Los Angeles, and rolling in San Francisco, even though it may not be sunny, on the West Coast. Those areas will continue to go down.

Other parts of the country are beginning to show some stability. And my guess is, by the end of this year, when we’ve had a lot more data about housing in the recent turmoil, we will see a clearer split in the division. We’ll see signs of recovery in parts of the Northeast, and in some other spots around the country. But the Sunbelt, unfortunately, is going to have a long, long way to go.

Mark Haynes: So that, kind of that, crescent from Florida, across the South up to California is the problem area. The Northeast…we had some pretty good property appreciation in the Northeast; ah, ah, ah, what I mean is, during the bubble, so…

David Blitzer: yeah, [nervous laughter] we don’t have any recent good property appreciation at any price unfortunately.

David Blitzer: That’s true, but…Northeast, I mean if you look at Boston for a moment. Boston was the first city to peak way back in September in 2005. So that’s 3 years back, you know, which is a long time for half of the housing cycle, which is what we’re going through.

So I think between time, and the fact that you didn’t have the kind of rampant development in sections of the Northeast; because there wasn’t that much empty land to rampantly develop. That’s going to mean a little bit more stability, and that’s where you’ll begin to see some more improvement.

New York is a bit of a wild card because of financial services; and, you know, we all, unfortunately, know that story. But, I think we’re going to see this, sort of, splitting off. The Sunbelt continuing to sink, or sink even more quickly over the next few months because of foreclosures. The rest of the country, beginning to get toward stability.

No place, or price, is about to go sky high, or straight up. That’s a 2009 or 2010 story, according to most of the people we hear from.

Erin Burnett: David, thank you, as always, for being with us, we appreciate it. David Blitzer with Standard and Poors’ on that latest data on the housing market.

Washington Mutual - RIP

The shutting down of WAMU no doubt is hastening the takeover of Wachovia. Talk about denial, insiders disputing how close it was to failing...That is simply incredible. WAMU had a portfolio of Option Arms, by far the most toxic mortgage instrument on the market today. They simply couldn't unload these assets on the open market for a price that would've allowed them to stay in business.


WaMu's desperate last days

http://seattletimes.nwsource.com/html/businesstechnology/2008210320_wamu28.html

Regulators and insiders paint a picture of a deeply troubled bank that only reluctantly put itself up for sale, though they dispute how close it was to failing.

Why Now?

So what caused Secretary Paulson and Fed Chairman Bernanke to act now, as opposed to next week, next month, after the election?

I believe you'll find the answer in these charts.

A Week For The History Books

Collapse and Capitulation

On September 2, see blog entry below, we warned that "we are directly in front of a major financial hurricane". Obviously, this is exactly what has occurred. Today, we are in the front end of the hurricane. This market has the potential for a full-fledged meltdown.


After the government bridge loan of $85 Billion to AIG, a loan the government tried desperately to avoid making, you've really got to ask: "Are we out of money." My guess is, there are no further bailouts coming, simply because the government cannot afford any more bailouts. Heck, I don't think they could afford this AIG bailout. They were damned if they did, and damned if they didn't.


And today's market selloff, the Nasdaq is currently -3.26%, certainly has the potential to continue to accelerate down.


Critical Long Term Support


Below is a chart illustrating an absolutely critical long term support line for the Nasdaq, connecting the October 1990 lows with the October 2002 lows. This critical support line is currently at 2037, roughly 90 points away from the current level of 2122.

Interest Rates
Interest rates for the safest governement bonds are coming down rapidly. The rate on the government 10 Yr. Note hit 3.25% early in the trading session before climbing significantly higher, with a closing high at 3.496%. Tremendous volatility. Yesterday's low at 3.25% actually was below the January low for rates which was at 3.28%.

Today, interest rates are headed lower again, current at 3.368%.

Below is a one year chart of the 10 yr bond index.

Mortgage rates are very grudglingly following Treasury rates lower. For example, at the low in the 10 Yr in January, the 30 yr mortgage rates were actually at 4.875% at par for a brief moment (approx. 4 hours) in January. Today, they sit at 5.50%. Spreads have widened.

I am strongly recommending that those looking to refinance into a 30 year fixed rate, anything at 5.50% or lower looks extremely attractive historically. This is no time to play footsy with interest rates, there is far too much volatility in the interest rate market, and far too much uncertainty in the markets in general.

Lessons of Bear Stearns

Terrific blog entry by Barry Ritholtz at The Big Picture:

The Terrible Lessons of Bear Stearns

As Lehman Brothers (LEH) turns into a single digit financial midget on its way to zero, as Washington Mutual (WM) works its way towards a buck, as Wachovia (WB) drops more than 80% over a year, as Fannie Mae (FNM) and Freddie Mac (FRE) become divisions of the United States of America, and are now priced in pennies -- we need to reflect upon the ongoing lessons learned from all these interventions by Treasury, Congress and the Federal Reserve.

The lesson from the Bear Stearns' bailout -- $29 Billion in Federal Reserve bad paper guarantees -- are quite stark:

• Go Big: Don't just risk your company, risk the entire world of Finance. Modest incompetence is insufficient -- if you merely destroy your own company, you won't get rescued. You have to threaten to bring down the entire global financial system. The fear and disruption caused by a Bear collapse is why it was saved. (AIG has the right idea on this)

• If you cant Go Big, Go First: Had Lehman collapsed before Bear, then the same fear and loathing of the impact to the system might have worked to their advantage. But having been through this once before, the sting is somewhat lessened -- especially for a smaller, lets interconnected firm like LEH. (First mover advantage!)

• Threaten your counter-parties: Bear Stearns had about 9 trillion in its derivatives book, of which 40% was held by JPMorgan (JPM). Some people have argued that the Bear bailout was actually a preventative rescue of JPMorgan. Its a good strategy if your goal is a bailout -- risk bringing down someone much bigger than yourself.

• Risk an important part of the economy: If your book of derivatives is limited to some obscure and irrelevant portion of the economy, you will not get saved. On the other hand, if Mortgages are important, credit cards and auto loans are too. Securitized widget inventory is not. To use a dirty word, Lehman's exposure is "contained."

• Balance Sheets Matter: Focus on the media, complain about short sellers, obsess about PR. These are the hallmarks of a failing strategy -- and a grand waste of time. Why? Its call insolvency. ALL THAT MATTERS IS THE FIRMS' BALANCE SHEET. Lehman's liabilities exceed its assets, and they are now toast. Merrill Lynch got a lot of the junk off of its books, and got a takeover at 70% premium to its closing price. And Credit Suisse, who dumped much of its bad paper many quarters ago, is in a better tactical position than most of its peers.

• Unintended Consequences lurk everywhere: When the Fed opened up the liquidity spigots via its alphabet soup of lending facilities, the fear was of the inflationary impacts. But the bigger issue should have been Complacency. The Dick Fulds of the world said after Bear, these new facilities "put the liquidity issue to rest." Lehman got complacent once liquidity was no longer an issue -- perhaps they acted to slowly to resolve their insolvency issue in time.

Unfortunately, Moral Hazard has created terrible lessons in 2008 -- via Bear Stearns (BSC), Lehman (LEH), Fannie Mae (FNM) and Freddie Mac (FRE).

Lehman Brothers - RIP 2008?

It certainly looks like Lehman Brothers is going under...The govt is drawing a line in the sand, no backstopping of Lehman debt.

Barclays Walks from Lehman Deal
In Frantic Day, Wall Street Teeters

Special Resk Reduction Trading Session Called by ISDA Re Lehman Bankruptcy
ISDA confirms a risk reduction trading session is taking place between 2 pm and 4 pm New York time today (September 14) for OTC derivatives. Product classes involved are credit, equity, rates, FX and commodity derivatives. The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing. Trades are contingent on a bankruptcy filing at or before 11:59 pm New York time, Sunday, September 14, 2008. If there is no filing, the trades cease to exist. These trades are subject to a protocol which is being distributed by ISDA (International Swaps and Derivatives Association). Traders should execute the protocol and email a copy of the signature page to Mark New at ISDA (mnew@isda.org) with LEHMAN PROTOCOL in the subject line. Click here for Protocol Text. An explanatory statement regarding the Protocol can be found here.
MARKET PARTICIPANTS HAVE INDICATED THAT THEY ARE WILLING TO TRADE UNTIL AT LEAST 6:00 NEW YORK TIME. PARTIES SHOULD COMMUNICATE WITH EACH OTHER AS TO THEIR WILLINGNESS TO TRADE LATER THAN 6:00.
International Swaps and Derivatives Association - Lehman Risk Reduction Trading Session Protocol

Bank of America walked away from Lehman, and is in talks with Merrill Lynch.
Bank of America In Talks To Buy Merrill Lynch

This news is going to hit all markets.

In my opinion, the reason that the stock market has not gone down more, until now, has been the belief that the government was going to backstop nearly every financial failure. That assumption has been taken away. First with the Fannie/Freddie deal, and now with the apparent Lehman failure, the government safety net for equity holders is gone.

We spoke a couple of weeks ago about the Elliot Wave formation calling for an upcoming stock market collapse. The last two weeks we've seen some deterioration, but, imo, the collapse begins in earnest this week (tomorrow). It could get very, very ugly.