Filed under: Economic data, Housing, Recession

It’s heartbreaking to hear about the increasing numbers of homeless people as a result of the subprime mortgage crisis and the ensuing foreclosures. It’s even more distressing to read that 2 million kids will be affected as a result.

Many who join the ranks of the homeless are actually middle-class families. Many are renters of homes that were foreclosed. Practically all of them never expected to be in this situation. According to a study released in April by the National Coalition for the Homeless, “76% of displaced homeowners and renters are moving in with relatives and friends. About 54% are moving to emergency shelters. About 40% are already on the streets.”

Well, I find this whole situation infuriating for several reasons. One is personal responsibility. I can’t help but wonder how a middle-class family with two earners does not save enough for a rainy day. And if you can’t manage that, what were you doing buying a 3,000-square foot home in the first place?

Another reason this is all so infuriating is lack of proper laws to protect tenants of foreclosed homes. What are renters to do if they’re not even notified in time to arrange their affairs? What are they to do if they lose their deposits? What are they to do if the new owner doesn’t assume the rental responsibilities? More protection is required in such situations.

Then there’s good old plain greed and callousness. Somehow, they always seem to go hand in hand. The housing market is oversupplied, we hear. There is a great deal of inventory standing empty. Many foreclosed homes stand empty. So it wasn’t enough that lenders, with their greed, brought the country to this mess, now they can’t even see a way to redeem themselves. It’s true, they’re not in the business of renting homes out, but if there are empty homes, and there are homeless people, then perhaps they should. Or at least find a way to get those empty homes filled out.

Knowing them, they’ll prone to still manage exploit the public even in this while making a buck or two for themselves, then why not do something good for a change?

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Before the bell: Futures lower on UPS warning, oil, ahead of Fed meeting,

Filed under: Before the bell, Earnings reports, General Electric (GE), General Motors (GM), Market matters, Kroger Co (KR), United Parcel’B’ (UPS), Economic data, Oil, Housing, Federal Reserve

U.S. stock futures were lower early Tuesday ahead of the two-day Federal Reserve policy meeting. Meanwhile, oil climbed on supply concerns following further Nigeria unrest and new Iran sanctions and steadied above $137 a barrel. UPS (NYSE: UPS) also gave a profit warning.

U.S. stocks ended nearly flat Monday as the market digested some deal activity but remained concerned over oil prices with many investors staying on the sidelines ahead of the Fed meeting. Both the Dow industrials and the S&P 500 ended almost the same as Friday with the Nasdaq Composite dropping 20 points, or 0.85%.

Economic releases today include June consumer confidence to be reported at 10:00 a.m. EDT. Consumer confidence probably fell this month to the lowest level in more than 15 years, meaning many will try to economize on their spending. The Case-Shiller report on April home prices also is on tap.

Mostly, though, investors will be concerned with the Fed’s decision and statement Wednesday. While most on Wall Street believe the Fed will hold rates unchanged this time, many think the Fed will discuss a shift — to some extent — to focus more on inflation than the slowdown as well as hint at future rate hikes. The Fed’s balancing act between trying to stimulate the economy while keeping inflation under check is becoming a more difficult task by the day.

Incorporate news, shipping company UPS (NYSE: UPS) lowered its earnings expectations for the second quarter due to slowing U.S. economic growth and high fuel costs. The new guidance for second quarter earnings per share is 83 cents to 88 cents, compared with the 97 cents to $1.04 the company originally anticipated. UPS shares were down about 3.5% in after-hours trading Monday following the announcement.

Earnings are due from Kroger (NYSE: KR), Jabil Circuits (NYSE: JBL) and 3Com (NASDAQ: COMS). General Electric (NYSE: GE) will be making a presentation at an substitute energy conference.

General Motors Corp. (NYSE: GM) announced Monday it plans to idle plants, raise prices on 2009 models by an average of 3.5%, and run a sale offering zero percent financing for up to 72 months to help clear out high inventories of 2008 pickups, sport utility cars and bigger automobiles.

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Baum: Stagnant housing sector needs drastic action … such as lowered prices

Filed under: Forecasts, Economic data, Housing, Recession

The almost always-on-the-mark Bloomberg News columnist Caroline Baum reminds investors/traders — and potential home buyers — that one should not jump into summer by jumping into a home purchase (if you can avoid it).

Baum notes that one has to view April’s 6.3% increase in existing home sales in the proper context: housing has been down so much and for so long that each incremental pop up looks like a housing sector recovery. It isn’t.

New and existing home sales peaked in July 2005 and September 2005, respectively, but housing starts didn’t until January 2006. The result? A large inventory build.

A record housing recession

Single-family starts are down 63% from their January 2006 peak, easily ‘topping’ peak-to-trough declines of 38% in 1973-75, and 57% in 1984-1991, and approaching the 65% slide in the housing recession of 1977-1981, Baum states.

Further, homebuilders are lobbying Congress for a tax credit for first-time homebuyers, Baum added, but are hesitant to do the one thing that has historically sparked buyer demand in a hurry: lower prices. Builders are hesitant to lower prices for fear that they’ll alienate previous customers and encourage current buyers to seek to renegotiate contracts, Baum stated. But ultimately, that’s what’s need to get home sales headed in the right direction.

Housing Analysis: Baum’s point about the need for builders to lower prices of new homes is valid. Even so, the inventory of new and existing homes is so huge, (a 10-11 month supply at current sales rates), that more action is needed, including a federal tax credit for first-time homebuyers, a credit that should be double for any member of the U.S. Armed Forces serving, or who has served, in the Iraq War. The tax credit, combined with the new, higher Office of Federal Housing Enterprise Oversight conforming loan ceiling, $729,750 or 125% of the average home price in a metropolitan area) won’t, in and of themselves, create a housing boom, but they will get the housing ball rolling in the right direction.

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Filed under: Bad news, Industry, Lowe’s Cos (LOW), Options, Technical Analysis, Economic data, Housing

Lowe’s (NYSE: LOW) shares are falling today after the Commerce Department reported that Might home construction fell 3.3%, signaling continued weakness in the housing market and bad news for home improvement stores. If you think this stock won’t be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on LOW.

After hitting a one-year high of $32.53 in September, the stock hit a one-year low of $19.94 in January. This morning, LOW opened at $24.15. So far today the stock has hit a low of $23.45 and a high of $24.23. As of 12:20, LOW is trading at $23.62, down $0.43 (-1.8%). The chart for LOW looks bullish but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.

For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $27.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we will make a 13.6% return in four months as long as LOW is below $27.50 at October expiration. Lowe’s would have to rise by more than 16% before we would start to lose money. Learn more about this type of trade here.

LOW hasn’t been above $27.50 since October and has shown resistance around $24 recently. This trade could be risky if the company’s earnings (due out in late August) are a positive surprise, but even if that happens, this position could be protected by resistance LOW might find at its 200 day moving average, which is currently around $25 and falling.

Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that might include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in LOW.

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BloggingStockCast: More foreclosures hit

Filed under: Economic data, Housing, Videos

Another quarter of rising foreclosures has been observed.

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Filed under: Forecasts, Housing, Federal Reserve, Recession

The futures markets are predicting a stand-pat policy on interest rates by the U.S. Federal Reserve when it meets next week, according to The Wall Street Journal [subscription required]. Even so, some economists state investors should not feel overly emboldened by the futures outlook.

“I still put the odds of Fed rate increase at 30%,” economist Glen Langan told BloggingStocks Tuesday. “A stand-pat policy is not guaranteed. Not hardly.”

Langan’s case for a rate hike: core inflation increasing in the U.S., commodity prices increasing both domestically and internationally, and a need to support the dollar — the latter of which, via its decline, has increased inflation via price increases in dollar-denominated international goods.

Too many rate cuts in 2008?

Further, Economist David H. Wang said that the Fed hawks might also voice another factor during the upcoming monetary policy meeting: an overly accommodative stance by the Fed following the bursting of the U.S. housing bubble.

“On the one hand, there’s the sluggish U.S. economy, which the doves will argue necessitates low rates through the summer and probably longer. Their case is strong,” Wang stated. “On the other hand, the interest rate hawks will state ‘we shouldn’t have eased rates so much’ and that the Term Auction Facility and other liquidity tools the Fed launched addressed the housing and credit crunches at their roots, not interest rate cuts.”

Nevertheless, Wang states there’s only “a 20-30% chance” the Fed will opt to increase interest rates next week.

In an effort to jump-start the U.S. economy slowed by the nation’s worst housing slump in a generation, the Fed has cut short-term interest rates by 325 basis points to 2% since September 2007.

The Fed will announce its interest rate decision and release its policy statement on Wednesday, June 25, 2008 at 2:15 p.m. EDT.

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Filed under: International markets, Forecasts, Consumer experience, Economic data, Politics, Commodities, Oil, Housing, Federal Reserve, Recession

With oil at $135 a barrel - up 463% since January 2001, Washington wrings its hands and states there’s nothing it can do to lower the price. I think that’s nonsense. There are two things that Washington can do today to get the price down: raise interest rates and close the swaps loophole.

What’s the role of speculators in the price of oil and other commodities and what should be done to get those prices down? Some argue that oil prices are set by supply and demand. But if that were true, oil would drop because global demand is forecast to grow 1.2 million bbl/day — and demand in the U.S. is down 300,000 barrels a day — while global supply is expected to rise 2 million bbl/day.

Perhaps sixty percent of trading volume in oil is due to speculators — these traders bet on a declining dollar and a rising price of oil. Raising interest rates would help lower the value of the dollar which has lost 70% of its value relative to the Euro since January 2001. Our Fed Funds rate fell from 5.25% to 2% since last August whereas in Europe, their rate is 4% and expected to rise. This difference makes Euros a more attractive currency for investors. So if the U.S. raises interest rates, people will start to purchase dollars instead.

The New York Times reports that Sen. Joe Lieberman (D-CT) wants to ban speculators from trading oil. I would not go that far. But I would close the swaps loophole that allows investment banks and their clients — hedge and pension funds — to make unlimited bets on a declining dollar and rising oil prices. Closing that loophole would limit the size of those bets and grant regulators to monitor their trading more closely.

Our economy depends on consumers for 70% of its growth. But their incomes are down since January 2001 from $61,000 to $60,500. Meanwhile, oil and food prices have skyrocketed and the value of real estate — on which they’ve been relying for cash — has been tumbling. So consumers are being squeezed which will ensure an economic slowdown, more layoffs, and more squeezed consumers.

We’ve the ideal government money can purchase. In 2004, for example, the incumbent received $2.7 million from the energy industry and millions more from Wall Street. That money is buying an awfully profitable set of government policies. But the current regime is soon to change, and with it will go the policies that are putting the screws to the majority of Americans.

Raising interest rates and closing the swaps loophole could relieve some of that pressure fast — leading oil prices down to as low as $70.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

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U.S. foreclosure activity jumps 48% in May, RealtyTrac states

Filed under: Forecasts, Bad news, Economic data, Housing, Recession

Home foreclosure activity jumped 48% in Might compared to a year ago, as substantially more default notices, auction sales notices, and bank repossessions were reported than in the same month a year ago, research firm RealtyTrac announced Friday.

In May, one in every 483 U.S. households received a foreclosure notice, RealtyTrac stated, adding that foreclosure activity increased in 40 of 50 says in the same period.

Foreclosure filings - - which include default notices, auction sales, and bank repossessions - - totaled 261,255 in May, a 7% increase from April and a 48% increases from a year ago, RealtyTrac announced.

Housing recession continues

Economist Peter Dawson stated Friday it’s hard to sugar-coat May’s housing data from RealtyTrac. “The statistics continue to show a housing sector in deep recession, no two ways about it,” Dawson said. “Foreclosures remain at troubling levels, inventories are high, prices continue to fall, and lender stipulations are high. We’re in for at least another 2-3 quarters of housing doldrums, probably more, with disappointing sales and home building and that will weigh on the U.S. economy.”

In May, Nevada (1 in 118 households) had the U.S.’s highest foreclosure filing rate, followed by California (1 in 183), Arizona (1 in 201), and Florida (1 in 228). Vermont (1 in 103,186 households), West Virginia (1 in 20,900), North Dakota (1 in 13,991), and South Dakota (1 in 11,760) had the nation’s lowest foreclosure filing rates.

Housing Sector Analysis: The key statistic obviously is the massive - - 48% - - increase in foreclosure filing activity in Might compared to a year ago. The elevated activity rate indicates the U.S. housing sector remains in deep recession and isn’t prone to record a recovery in U.S. median home prices in 2008 - - something that, as Dawson noted, will weigh on U.S. GDP. Moreover, if median home prices started to recover before next year at this time (May 2009), that would be an unexpected (and welcomed) development.

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Might housing starts total 969k annual pace, slowest in 17 years

Filed under: Bad news, Economic data, Housing, Recession

U.S. housing starts decreased 3.3% in Might, the U.S. Commerce Department announced Tuesday, as builders attempted to reduce supply amid the nation’s worst housing slump in a generation.

Housing starts totaled a 969,000 annual rate in May, the Commerce Department said. It was the lowest housing start pace in 17 years.

Economists surveyed by Bloomberg News had expected housing starts to total a 985,000 annualized rate in Might.

Further, housing starts are down 32.1% in the past year and single-family home starts are down 41.2%. Over the past four months, housing starts have averaged a 1.02 million annual pace.

Meanwhile, building permits, a measure of future construction, decreased 1.3% to a 969,000 annualized rate in Might. Single-family permits decreased 4%. Building permits have declined 36.3% in the past year.

Economist Glen Langan told BloggingStocks Tuesday many potential homebuyers are remaining in wait-and-see mode, as the housing slump persists.

“When you consider it, if one didn’t have to move, say, for job reasons, why would you? New buyers and existing home owners are taking it one month at a time. If prices drop, they wait another month. As you know, many have been waiting several months, given price trends in various regions of the country,” Langan said. “Prices are still arcing downward and the housing start totals reflect that. That means it makes sense to wait if you’re in the market to purchase, but it’s the worst of all markets if you have to sell.”

Langan said it’s difficult to predict when home starts will rebound, given uncertainties in the U.S. economy. “Typically, the prospect of a Fed rate increase would push some potential new home buyers into the market, fearing higher mortgage rates in the quarters ahead. But concern about a possibly worsening U.S. economy will keep many of these buyers on the fence,” Langan said.

By U.S. region, in Might housing starts fell 25% in the Midwest, 10.3% in the West, and 4.4% in the South. Housing starts surged 61.5% in the East.

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Filed under: Before the bell, Earnings reports, Market matters, Ideal Purchase (BBY), Goldman Sachs Group (GS), Economic data, Housing, Federal Reserve

U.S. stock futures rose early Tuesday as the Street awaited earnings from Goldman Sachs that has tended to beat analyst estimates in the past. In light of the turmoil in financials, this would be a welcome treat. Also this morning, several economic reports are due about inflation, housing and industrial production. Given the Federal Reserve meeting next week, investors will keep a close watch on the inflation data.

On Monday, U.S. stocks ended blended as investors continued to worry about the economy and watch oil carefully. Downgrades of several Dow industrials stocks such as Verizon, AT&T and GE, caused the index to finish the day 38 points, or 0.31%, lower while the S&P 500 ended up a fraction of a point, or 0.01%, and Nasdaq Composite added 20 points, or 0.83%, getting a boost from possible approval of satellite radio merger.

A busy morning full of economic readings is ahead of us:
At 8:30 a.m. EDT, Might building permits and housing starts figures will be released. The recent declining trend is not expected to reverse course yet, despite some recent indication the housing market may begin to show a bottom. Both figures are estimated to drop further.
At the same time, a measure of inflation with prices at the wholesale level will be reported. May Producer Price Index is expected to rise 1%, while core PPI is expected to show an increase of 0.2% in May.
Then, at 9:15, May capacity utilization and industrial production numbers are also due out with the latter actually expected to show a slight growth in Might.

These will all be material for the Federal Reserve decision next week. And while many are anticipating a rate hike, or a series of hikes starting in August, and have already priced these in, both the Wall Street Journal and the Financial Times this morning report that the Fed “mood” doesn’t support a rate hike in August, and that the market has been overaggressive with its expectations of how soon and how many hikes the Fed will use to curb inflation. No doubt these reports have contributed to this morning’s more bullish sentiment.

Also due out are results from Ideal Purchase (NYSE: BBY).

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