Jobless claims down, Unemployment up

Real Estate News & Commentary by Chris McLaughlin, May 7, 2009
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Jobless claims down, unemployment up

The US Labor Department released a report showing that initial claims for unemployment benefits fell last week, as the number of people filing claims on an ongoing basis rose to a fresh record high. Economists had expected 635,000 new claims, according to a consensus survey by Briefing.com, but according to the report, in the week ended May 2, 601,000 people filed initial jobless claims, down 34,000 from an upwardly revised 635,000 in the previous week. This report comes on the heels of the two private sector reports we told you about yesterday, and seems to strengthen the notion that the rate of decline is slowing, even if the numbers of people on unemployment is rising. The unemployment rate is forecast to rise to 8.9% from 8.5%. Hey, let’s be optimistic and call it good news.

Stress test preview

Regulators have told Bank of America it needs $34 billion of capital, Citigroup needs $5 billion, Wells Fargo needed $15 billion, Morgan Stanley needs $1.5 billion and GMAC needs $11.5 billion, according to recent leaks. The reported capital shortfalls are much larger than analysts had expected, but investors aren’t panicking, because the banks seem able to handle the shortfalls, and in any event any news is better than uncertainty. Treasury Secretary Timothy Geithner said that no U.S. banks face the risk of insolvency, even though more than half of the 19 tested are presumed to be in need of capital, if we can believe the flood of leaks in the media lately. “None of those 19 banks are at risk for insolvency,” he said, according to a transcript of a television interview. Geithner also said the pace of the U.S. economic decline was slowing, even as the economy still faced enormous uncertainty, but we all knew he’d say that, didn’t we? He and Bernanke say it about twice a day these days. It kind of covers all bases and leaves a backdoor open; if the economy improves, they can claim credit, and if it goes south, they can claim it’s due to the “uncertainty.”

Stress test backlash

With the government set to release the official results this afternoon, following a steady stream of leaks to the news media, criticism of the stress tests is growing. Banking analyst Bert Ely has this to say about them: “”There are strongly different opinions on the conditions of these banks. This has aggravated it without necessarily settling anything. The majority of the sentiment in the market is that the stress tests results [will be] too optimistic.” Paul J. Miller, banking analyst at FBR Capital Markets, goes even further: “I think the government’s policies have all run against each other — they keep throwing things out there to see what sticks.”

According to these critics, the stress tests may be intended to shore up banks’ capital, but more capital won’t solve the real problem, which is an estimated $1.5 to $2 trillion in toxic assets clogging up their books. In fact, far from helping, the dilatory effect of converting government owned preferred stock into common shares to raise the capital only hurts shareholders and feeds a creeping nationalization of the industry. “It doesn’t change anything fundamentally,” adds Miller. “You cannot continue to have non-performing assets grow at 50 percent a quarter. Losses will swamp earnings. Our argument is that because we are not addressing the real problem in getting these toxic assets off their balance sheets we’re just going to jump from crisis to crisis.”

On top of all this, the seal of government approval—before or after they need capital injections—will make it even less likely banks will participate in the government’s Public-Private Investment Partnership to move toxic assets.

Should American banks be more like Canadian banks?

Given the scuttlebutt lately about how the American banking system should look more like Canada’s — former Fed chairman and Obama administration adviser Paul Volcker said the model he is considering “looks more like the Canadian system than it does the American system” — this is a relevant question. Marie-Josee Kravis, in a Wall Street Journal opinion piece, makes some good points about Canadian banks. She begins with an introduction of Canadian banks: “Canada’s five largest banks would pass the U.S. government stress test brilliantly. They were profitable in the last quarter of 2008, are well capitalized now, and have had no problems raising additional private capital. On average only 7% of their mortgage portfolios consisted of subprime loans (versus 20% in the U.S.). And no major Canadian bank has required direct government infusions of capital.”

But, she points out, that has more to do with the fact that Canadian banks aren’t compelled by laws like the Community Reinvestment Act to lend to less creditworthy borrowers. Nor does Canada have agencies like Fannie Mae and Freddie Mac promoting “affordable housing” through guarantees or purchases of high-risk and securitized loans. Canadian banks held a larger share of them on their balance sheets because there’s a lot less incentive to hide their true worth and sell them off. Bank-held mortgages tend to perform more soundly than securitized ones. Kravis concludes: “For obvious political reasons, debate in Washington spotlights the need for future financial regulation while glossing over the role of government housing and other regulatory policies in the current crisis. This is dangerous: Without a thorough review of relevant government housing policies, laws and regulations, layering new reforms on top of our current system may only set the stage for another housing crisis in the future.”

Short Sales and Swine Flu – Lessons Learned

Watching the unfolding of a global bug is a great way for short sale investors to pick up a few pointers about human behavior. In fact, there could be more than what meets the eye when it comes to lessons learned once you take a closer look.

Lesson #1 – Catchy phrases stick. Officially the government is attempting to change the name from the rather ambiguous “swine flu” to the much more correct “H1N1 of 2009” title…with minimal success. Plain and simple, H1N1 simply doesn’t have the staying power associated with the easy to remember and even easier to confuse “swine flu”. Take away…become memorable even if it’s not strictly correct.

Lesson #2 – Confusion and mis-information rules. The emotions and beliefs surrounding swine flu range from sheer panic to total disbelief as each stakes their claim less on information than pre-existing concepts. Those that are “in the know” tend to have a practical yet down-to-earth approach that centers on educating themselves about the facts and figures while the rest of the population seems content to follow the sensationalized or cynical views upheld by their favorite media pundit. Take away…information is power especially when the masses insist upon remaining mindless. Fortunately for short sale investors, information is available for those that seek it.

Lesson #3 – Bugs travel even faster than bad news. Thanks to the Internet this is the first time in the history of mankind that the majority of the population was able to watch the spread of a potentially bad bug in real time. Unfortunately, the virus still has been able to spread even faster than the ability of the media or medicine to keep up with changes. Take away…keep your eyes and ears open for potential problems rather than rely only upon the media. Despite the speed in which modern communication takes place, it is still no match for good old common sense. Whether you are dealing with bad bugs, bad banks or bad business it’s essential to keep your wits and learn to recognize the signs of an epidemic early.

Lesson #4 – Under stress the quacks come crawling out from the corners. They seem so normal until put under stress and then, like a piece of bad jewelry, the truth comes out. Just taking a few minutes to read through some of the more colorful messages posted by people throughout the world in relation to the swine flu shows why psychotropic drugs remain best sellers. Fear, confusion and outright paranoia quickly become evident. Take away…short sale investors shouldn’t assume they are always dealing with rational people. Despite your best attempts, a significant number of people either will not or cannot cope. Learn to recognize the symptoms and deal with it accordingly…but don’t become part of the problem or share in their delusions.

Less #5 – Planning and preparation never go out of style. Within hours of the media breaking the big news 3M reported they were ramping up production of face masks due to shortages while pharmacies throughout the nation reported runs on Tamiflu and basic disinfectants. It’s the same whether the emergency is a hurricane, disease or financial melt-down…by the time the masses are informed about the problem it’s too late to plan and prepare. Take away…planning and preparation never go out of style. Short sales are not just any old investment; they are the road to wealth and capital preservation. Millions of Americans will eventually come to the conclusion that this recession really was different as they face retirement without their pension plans, portfolios or other protection in place. Everything from life insurance policies to retirement plans are in danger. Learn how to create your own retirement plan by investing in short sales instead.

See you at the top!

Chris McLaughlin

http://www.shortsalesriches.com/welcome.html

P.S.

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Copyright Loss Mitigation Institute 2009.
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About the author:

Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.

* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid flipping of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner and Supervising Broker of one of Florida’s
largest Real Estate firms, running 4 different
offices, supporting nearly 450 agents, uniquely
positioning him to help thousands of investors
make money in the biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
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