Weekly Economic Potpourri November 29, 2008

Every week there are a numerous headlines that are worthy of mentioning but I simply run out of time. Here are a few headline news reports of interest from the past week.

by Mish

Japanese manufacturers reduced production in October and plan further cutbacks as a worsening global financial crisis weakens exports. Factory output fell 3.1 percent from September, when it rose 1.1 percent, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg estimated a 2.5 percent drop.

Exports fell last month at the fastest pace in almost seven years and companies are responding to the slump by cutting everything from production to jobs and investment. Sharp Corp. said last week it may have to reduce output of televisions and fire some of the people who work on production lines; Toyota Motor Corp. will get rid of half its temporary employees; and Canon Inc. has postponed construction of a new factory.

Canadian shopping enthusiast Heather Gore described to CTV’s Canada AM the long lineups at a Niagara Falls, N.Y., outlet mall where she was shopping at 12:01 a.m. on Friday morning.”I have been coming here on Black Friday for the past five or six years,” she said. “This year is the busiest I’ve ever seen it.” Gore, a Toronto lawyer and veteran cross-border shopper, said she had seen many Canadians at the malls on Friday morning.

Some U.S. retailers, in fact, appealed directly to Canadian shoppers, in an attempt to bring them across the border for Black Friday. In Detroit, mall owner Taubman Centers Inc., offered a $20 gift card voucher to the first 2,008 vehicles travelling through the Detroit-Windsor tunnel between 5 a.m. and 10 a.m. on Friday.

“For those Canadians who make Black Friday an annual shopping tradition, we would like to be their shopping destination of choice,” Taubman spokesperson Karen MacDonald said in a release.

Three violent deaths in two stores marred the opening of the Christmas shopping season Friday. In the first, a temporary Wal-Mart employee was trampled to death in a rush of thousands of early morning shoppers as he and other employees attempted to unlock the doors of a Long Island, New York, store at 5 a.m., police said.

Video showed as many as a dozen people knocked to the floor in the stampede of people trying to get into the Wal-Mart store, Fleming said. The employee was “stepped on by hundreds of people” as other workers attempted to fight their way through the crowd, Fleming said. “Several minutes” passed before others were able to clear space around the man and attempt to render aid. Police arrived, and “as they were giving first aid, those police officers were also jostled and pushed,” he said.

In the second, unrelated incident, two men were shot dead in a Toys “R” Us in Palm Desert, California, after they argued in the store, police said.

The nation’s real estate crisis has claimed its first title insurance giant, with Richmond, Va.-based LandAmerica Financial Group saying Wednesday morning that it had filed for bankruptcy protection amid a burgeoning mortgage crisis that, as of yet, shows no sign of slowing down.

The company said it and a subsidiary filed to reorganize under Chapter 11 of the U.S. bankruptcy code, and that it would sell its title underwriting subsidiaries, Lawyers Title Insurance Corporation and Commonwealth Land Title Insurance Company, as well as United Capital Title Insurance Company, to subsidiaries of Fidelity National Financial (FNF).

As the recession worsens, a lot of rich men are finding their gold-digging wives are taking to their heels.

The Toxic Wife is the woman who gives up work as soon as she marries, ostensibly to create a stable home environment for any offspring that might come along, but who then employs large numbers of staff to do all the domestic work she promised to undertake, leaving her with little to do all day except shop, lunch and luxuriate.

Like a frog, the Toxic Wife needs to hop safely on to another lily pad, and a rich one, before leaving her husband. She won’t stand on her own two feet. And finding a job is quite beneath her.

Lead fell to a two-year low in London as reductions in automobile production erode demand for the metal used mostly in car batteries. Copper declined. U.S. vehicle sales at the lowest since 1991 prompted cuts at General Motors Corp. and Ford Motor Co. China’s output of lead concentrate, used to make refined metal, climbed 14 percent in the first 10 months, according to Mainland Marketing Research Co.

Lead for delivery in three months declined $81, or 6.8 percent, to $1,105 a metric ton on the London Metal Exchange, the lowest since July 2006. Prices have dropped 57 percent this year. Inventories in warehouses monitored by the LME rose 250 tons, or 0.6 percent, to 41,200 tons, according to the exchange’s daily report.

Copper fell on concern a slumping U.S. economy will crimp consumption of Chinese imports and demand for industrial metals in the Asian economy. Some economic indicators in China showed a “faster decline” this month, National Development and Reform Commission Chairman Zhang Ping said in Beijing today.

Copper usage in the U.S., the largest buyer after China, fell 9 percent in the first eight months and demand in China rose 13 percent, according to the International Copper Study Group.

If you think the housing slump can’t get much worse, Martin Feldstein thinks that both home prices and the broader economy can — and very likely will — get a whole lot worse.

“There are now 12 million homes in the United States with a loan-to-value ratio greater than 100 percent. That’s one mortgage in four. The aggregate amount of that is some $2 trillion,” said Feldstein. “If you look at the median (midpoint) loan-to-value ratio in that 12 million group of underwater mortgages — mortgages with negative equity — the median loan-to-value ratio is 120 percent.”

That means about 25 percent of all U.S. mortgages are exceed the value of the homes the mortgages are financing. In the case of half the homes that are underwater, homeowners are paying a mortgage that’s now 20 percent higher than the value of the home.

That’s bad — but it’s likely to get worse.

A recent report by First American Core Logic, a real-estate data firm in Santa Ana, Calif., estimated that as of Sept. 30, 7.5 million mortgages, or 18 percent of all properties with a mortgage, had negative equity. The group thinks there are another 2.1 million mortgages that are within 5 percent of going underwater.

The implications for many homeowners are staggering. Before the recent housing boom of 2000 to 2006, homes increased in value at a historical annual rate of about 2.3 percent when adjusted for inflation.

That means that for homeowners who owe 35 percent more than their homes’ value, it would take, at historical averages, about 15 years just to break even on their home investment. They won’t build equity. It would be a huge incentive for millions to hand the keys back to the lender and seek cheaper housing.

Central banks around the globe have slashed interest rates to try to ease the flow of credit and restart stalled economies. Economic sentiment in Europe’s single currency zone hit 15-year lows in November and inflation expectations plunged, boosting the case for a big rate cut from the European Central Bank (ECB) next week. “The euro zone is in a deep recession, upping the pressure on the ECB to cut interest rates further,” said Christoph Weil, economist at Commerzbank. “We envisage a first move next week on a scale of 75 basis points to 2.5 percent.”

The Bank of England is also expected to cut rates by 50 basis points or more on Dec. 4, a Reuters poll showed. Benchmark rates are 3.25 percent in the eurozone and 3.0 percent in Britain, against 1.0 percent in the United States. China’s central bank cut interest rates by the biggest margin in 11 years on Wednesday in response to a crisis which is reining in its once runaway growth, bringing worries about social unrest as jobs disappear.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure. Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies’ credit.

“We’re probably in the first inning of the commercial mortgage problem,” said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey. That’s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Unlike home mortgages, businesses don’t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

Woolworths Group Plc was left on the edge of failure and MFI Retail Ltd. collapsed, putting more than 30,000 U.K. jobs at risk, after the economy’s slide into a recession caused consumer spending to slump.

As sales crumbled, the retailer was hampered by debt that totaled 295 million pounds when its first half ended on Aug. 2, more than 16 times its current market value. Woolworths had interest costs of 18.6 million pounds in the period, more than today’s market capitalization. The stock has plunged by nine- tenths this year after falling 62 percent in 2007.

U.K. home sales are at the lowest level in at least three decades, the Royal Institution of Chartered Surveyors said Nov. 11. A seizure in credit markets has restricted banks’ ability to lend even as the Bank of England cut interest rates to the lowest since 1955.The spending dropoff claimed victims from Ilva Furniture Ltd. to home wares retailer Rosebys Ltd., which both collapsed in September. Fashion chain MK One came under the control of administrators this month for the second time in 2008.

Life Plaza Center in San Gabriel used to teem with diners heading to Green Village, a Chinese restaurant in the middle of the horseshoe-shaped mall on Valley Boulevard.

But after the eatery closed five months ago, the 7,500- square-foot space remained vacant. With no tenants stepping forward and fewer customers clogging the parking lot, the plaza is quiet, with a curiously dark core.

It’s a scene repeated in various forms throughout the region, as the economic crash that started rolling through single-family housing more than a year ago begins to hit shopping centers, turning what had been a residential phenomenon into one that threatens commercial real estate as well.

Business is so bad that an increasing number of retailers are calling it quits — without waiting to see whether money can be made as the Christmas season gets underway.

For property owners, the loss of tenants means more than a reduction in the revenue that is collected from rents. If one store closes, customers are less attracted to the center overall, and the losses can snowball. Whereas in previous years it was easy to find new tenants, now they are scarce. And as the property owners find themselves getting in trouble, their typical recourses — to sell the building or refinance it — are also stymied by the stuck economy.

“We were charging $2.75 a square foot, but if we can get $1.75 for it, we’d be very lucky now,” said Art Ko, a leasing agent for STC Management. “It’s hard to even grasp what’s a fair market price now. Everything is up in the air. We’ve had many deals where people just walked away the last minute. It’s a buyer’s market.”

Satellite Asset Management LP, founded by former employees of billionaire George Soros, stopped client withdrawals from its three largest hedge funds and eliminated more than 30 jobs after losses reduced the firm’s assets to about $4 billion this year.

Satellite Overseas Fund Ltd., Satellite Fund II LP and Satellite Credit Opportunities Ltd. have declined as much as 35 percent in 2008, said a person with knowledge of the funds’ performance. Simon Rayler, Satellite’s general counsel, declined to comment and wouldn’t disclose how many people remain at the firm’s New York headquarters or London offices. Satellite oversaw about $7 billion for clients at the end of last year.

More than 75 hedge funds have liquidated or restricted investor redemptions since the start of the year as they cope with fallout from the global financial crisis. Investors pulled $40 billion from hedge funds last month, while market losses cut industry assets by $115 billion to $1.56 trillion, according to data compiled by Hedge Fund Research Inc. in Chicago.

Investors including private-equity firms may find it easier to acquire U.S. banks after the Federal Deposit Insurance Corp. said it will let groups without charters bid for the deposits and assets of failing lenders.

The FDIC change, announced in a press release today, will help ensure “failing institutions are resolved in a manner that will result in the least cost to the Deposit Insurance Fund” by marketing assets to “known, qualified and interested bidders.

”U.S. regulators this year have seized 22 banks, the most since 1993, amid a credit crunch that fueled more than $968 billion in financial-company losses and writedowns since 2007. The Office of the Comptroller of the Currency on Nov. 21 granted a new type of national bank charter called a “shelf charter,” also designed to find buyers for failed lenders.

“This is the government being flexible,” said William Sweet, a partner in the Washington office of law firm Skadden, Arps, Slate, Meagher & Flom LLP. “They simply are trying to accommodate the interest by investors and the need for capital.”

The Federal Deposit Insurance Corp. said Tuesday the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter — yet another sign of escalating problems among the institutions controlling Americans’ deposits.

The 171 banks on the FDIC’s “problem list” encompass only about 2 percent of the nearly 8,500 FDIC-insured institutions. Still, the increase from 117 in the second quarter is sharp, and the current tally is the highest since late 1995.

Banks that don’t make the list can end up collapsing anyway — the two biggest bank failures over the past year, Washington Mutual Inc. and IndyMac Bancorp, had not been on the FDIC’s list of troubled banks. Wachovia Corp., which nearly failed before it got bought by Wells Fargo & Co. in October, had not been on the list, either.

Nine banks failed in the third quarter, decreasing the FDIC’s deposit insurance fund to $34.6 billion from $45.2 billion in the second quarter. This quarter, the pace appears to be picking up — nine banks have already failed since Sept. 30, including Downey Savings and Loan Association, based in Newport Beach, Calif.

“To some extent, a bank failure is a regulatory failure,” Ely said. Regulators, if they address bank problems early on, can convince a troubled bank to sell off assets, raise capital or find a buyer, he said. “My hope is they’re moving faster on these problems.”

The FDIC said Tuesday that commercial banks and savings institutions suffered a 94 percent drop in third-quarter profits to $1.7 billion from $27 billion in the same period last year. Except for the fourth quarter of 2007, it was the lowest quarterly profit since the fourth quarter of 1990. Those institutions wrote off $27.9 billion in loans as uncollectible during the quarter.

Recently, community banks — defined as those with assets under $1 billion — have started to show similar stresses as their larger counterparts, the FDIC said.

A Federal Reserve Bank of Dallas survey released Monday says Texas businesses are reporting sharp drops in most indicators of current activity. And nearly two-thirds of the 101 firms responding to the November Texas Manufacturing Outlook Survey said their evaluation of general business activity had worsened.

Several indexes for future production fell to their lowest levels since the survey started four years ago. The volume of new orders sunk to a record low, with more than half of those surveyed reporting decreases.

Texas produces more than 8 percent of manufactured goods in the U.S., behind only California.

A farm couple got a huge surprise when they opened their fields to anyone who wanted to pick up free vegetables left over after the harvest — 40,000 people showed up.

Joe and Chris Miller’s fields were picked so clean Saturday that a second day of gleaning — the ancient practice of picking up leftover food in farm fields — was canceled Sunday. ” ‘Overwhelmed’ is putting it mildly,” Chris Miller said. “People obviously need food.”

She said she expected 5,000 to 10,000 people to show up Saturday to collect free potatoes, carrots and leeks. Instead, an estimated 11,000 vehicles snaked around cornfields and backed up more than two miles. About 30 acres of the 600-acre farm 37 miles north of Denver became a parking lot.

Coffee farmer Joao Carlos Terra says his trees will yield about a third less than planned next year because he can’t get a big enough loan to buy fertilizer and pesticide as the global credit crunch bites in Brazil.

Terra received only 10,000 reais ($4,300) of the 35,000- real loan he needed this month, so trees that should yield 250 bags of coffee next season will likely produce just 170, he said. Terra is planning to pick up extra work as a farmhand to support his wife and two sons.

“It’s kind of impossible to keep going like this,” said Terra, 29, who grows arabica coffee on about 10 hectares (25 acres) in Bom Jesus da Penha, a city in the southeastern state of Minas Gerais. “I don’t know what will happen.”

Freddie Mac’s portfolio of mortgage assets grew at an annualized rate of 44 percent in October after regulators directed the government-run company to ramp up purchases to ease constraints on the U.S. housing market.

The portfolio rose to $763.7 billion for the first full month that Freddie was under federal control, adding $26.8 billion in net new purchases of home loans and mortgage bonds, the McLean, Virginia-based company said in its monthly volume summary today.

Freddie had cut its holdings by $61.4 billion in August and September “as it struggled to remain independent,” Jim Vogel, a debt analyst at FTN Financial wrote in a note today.Freddie and Washington-based Fannie Mae, which slowed their growth to protect against rising delinquencies, were seized by regulators on Sept. 6 and directed to focus on helping struggling homeowners.

Puzzled zookeepers in northern Japan have discovered the reason why their attempts to mate two polar bears kept failing: Both are female.

The municipal zoo in the city of Kushiro in Hokkaido brought in a polar bear cub three years ago. They named it Tsuyoshi, after the popular baseball outfielder Tsuyoshi Shinjo, and waited until it reached reproductive age.

In June, the zoo introduced Tsuyoshi to its resident bear, an 11-year-old female named Kurumi, and waited for sparks to fly. But much to the disappointment of zookeepers, Tsuyoshi never made any amorous advances toward Kurumi. Earlier this month, zookeepers put Tsuyoshi under anesthesia to get to the bottom of the matter. That’s when they made their discovery: Tsuyoshi is a female.

Mike “Mish” Shedlock

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