Bear Wisdom

In the final quarter of 2007, the GDP DECLINED by .2% instead of growing by .6% as they previously reported.

First-quarter of 2008, GDP actually only grew by 0.9 per cent, which was below the 1% previously reported.

In the 2^nd Quarter of 2008, GDP grew 1.9% instead of the 2.3% forecasted by the Commerce Department. The 2^nd Quarter GDP was supported by the $168 billion stimulus package, and the fact that America’s trade deficit shrunk to the smallest amount, $395.2 billion. This was the smallest deficit in the past 7 years, caused by the shrinking US dollar. Without these factors, the GDP would have contracted by .5%.

The Government seems determined to avoid a technical recession at all cost, especially to the taxpayer. I wonder if this mess would have been closer to being over by now, if not for all of the government intervention (stimulus packages, bailouts, bailouts, bailouts…) that appear to be slowing things down.

None of these institutions or people were complaining when they were making monster profits a few years ago… They wanted to stay as far away from the government as possible, now that the natural procession of price declines have taken place, they all have their hands out waiting for their bailout.

Can we believe the National Association of Realtors?

In 2005 the former chief economist of the NAR, David Lareah wrote a book titled, “Are you missing the real estate boom, why home values and other real estate investments will climb to the end of the decade and how to profit from them.”

8/05 – Lereah - called the doom and gloom forecast of real estate irresponsible.

11/06 – Lereah - the worst is behind us.

3/07 – Lereah - Housing remains a great long term investment.

NAR ran a TV ad encouraging people to buy – prices fell 14% since the ad, Lereah left the NAR that year.

11/07 – Yun – I don’t anticipate any more major sales declines.

1/08 – Yun – A meaningful recovery in home sales can occur as early as spring.

2/08 – Yun – The market is scratching the bottom.

8/08 – Yun – I think we’re nearing this housing downturn.

7/08 – Greenspan says that the housing crisis is nowhere near over.

The housing bailout that was just passed is supposed to help 400,000 families avoid foreclosure and help refinance them into affordable mortgages. The program offers government insurance to lenders who reduce the mortgages of at-risk homeowners to at least 90% of the homes current value. It will also provide $3.9 Billion dollars to communities for them to rehabilitate foreclosed properties.

The most important part of the bill for the government is that this bill will expand the assistance to Fannie and Freddie, and bail out the banks with government backed money. The bill provides UNLIMITED line of credit to the mortgage companies Fannie Mae and Freddie Mac, which are private but government-sponsored companies.

The housing bailout might help some people in need. The bailout is truly for the Freddie, Fannie, and the major banks. Sen. Conra and Sen. Dodd received VIP loans from Countrywide. I wonder why Dodd spearheaded the bailout bill, and I wonder why Bank of America still bought Countrywide after they hit rock bottom. Maybe they had a suspicion that a bailout was in the near future?

Ultimately housing bailout will cost another $800 billion dollar debt on taxpayers.

$168 billion government stimulus package was basically given to China.

And the next president will inherit a record budget deficit of US$482-billion for fiscal 2009, which begins on Oct. 1.  This does not include the cost of the bailout!

By the end of 2009 an estimated 5.5 million loans will default and half of them will go into foreclosure.

With the way things are going now, count on more government stimulus packages and housing bailout coming from the shoulders of the taxpayer….

The markets are officially in bear territory.  The S&P is down 20.5% since October of last year.   With the rise in oil prices and inflation, it appears that every industry is hurting these days.  And more people are getting laid off.

Starbucks is closing 600 stores, and letting go of 12,000 employees.

Northwest Airlines is going to cut 2,500 jobs.

IndyMac is going to stop accepting new loans, and cut its workforce by half, 3,800 jobs.  .

Siemens is eliminating 16,750 jobs, most of them white-collar jobs

08 June car sales compared to 07 June sales:  Toyota:  -21%, Chrysler: -36%, GM: -19%, Ford: -29%, Honda: +1.1% (Civic, Fit,) Hyundai: +1%

GM and Ford stock has fallen to lows that haven’t been seen in decades.  Maybe it’s a good time to buy… or not.

GM’s market value is currently at $6.47 Billion dollars.  Tata Motors, India’s automobile company is valued at $4.11 Billion.  I wonder if and when the American car companies will ever get to where the foreign car companies have come.  Companies such as Honda and Toyota seem to forecast cars that will be in demand in the present and future, while Ford and GM stick with the gas guzzlers…  Maybe GM should have stuck with the electric car (EV1) in the 90’s, now they’re working on producing another one, the Chevy Volt.  I wonder how advanced the EV1 would have been by now… Now they have to start from scratch. 

In recent bear markets, stock values diminished approximately 30% from their highs. The DOW is down 16% YTD, so how much more will it fall until it gets back on track? So many hard working Americans save and invest in their 401k plans, and see great returns during good years for the market, however in times like this we see our portfolios taking a major hit. How long will it take for an average American’s 401k plan to return to their highs after taking a 30% hit? The next time the market rallies, it might be a good time to get out of stocks. Here are just a few stocks that many of us owned through the years that jolted our portfolios, causing them severe losses, and some never recovered.

Cisco: 2000- $77 Now-$24.32

Lucent: 2000- $82 Now- $5.26

SUN: 2000- $233 Now- 16.40

AMD: 2006- $38 Now- $6.38

GBLX: 2000-$50’s Now-0

The FINANCIALS…

So much for dollar cost averaging, if history repeats itself, 9500-1000 might be a good time to get back into the market.

False Hope:

• UCLA experts say that in the recession of 2001, 358,000 manufacturing jobs were lost, and currently only 161,000 financial/construction jobs were lost, but they are comparing full job losses in 2001 when a full recession occurred to our current period where we already lost 161,000 jobs and still counting, and we’re not even in a full blown recession yet.How can they even compare the numbers already?

• The Wall Street expert analyst say that foreclosures are mainly affecting only lower income families, thus spending should continue to be normal with medium to higher income families however inflation affects everyone regardless of income.There are vacant foreclosed / bank owned properties in every city today, not only lower income cities.Foreclosures are affecting everyone.Furthermore 6% of Americans were delinquent on their mortgage payments in the fourth quarter in 2007.

The Collapse of Home Prices:

• CEO of Freddie Mac, Richard Syron stated that home prices will continue falling, and have only fell 1/3 of how much they are going to fall.

• Lower house values, equal lower property tax revenue for the state. Typically city revenues from property tax are about 20-30% of their total revenue. If this amount decreases, which it definitely will, it will have a detrimental effect on their revenue source, thus they must find additional funding somewhere or begin making cuts, which the Governor of California has already suggested making.

• For over a decade banks encouraged home owners to tap into their home equity to pay off bills such as cars, tuition, etc, however now they are freezing this line of credit, due to the falling values of homes.

• A lot of the growth in the economy during the housing bubble had to do with the new wealth that Americans experienced when home values increased tremendously. With values of real-estate falling that expendable income is no longer available.

Budget Deficits:

• California’s Budget deficit:$16 Billion

• City of Los Angeles projected budget shortfall for fiscal year 2007-08: $75 Million.

• The State and Cities are large employers for every state, and numerous cities have put a freeze on hiring new employees, and thousands of teachers and other employees in California have already received possible layoff notices.

• Possibly increasing taxes, or like the City of Los Angeles, in the past they have charged a special tax on phones or trash to supplement their lack of revenue, but increasing charges for services effects the disposable income for many families.

INFLATION:

• Consumer spending makes up 2/3 of the economy.

• On average Americans are paying for $3.22 for regular gas.

• Since the dollars demise, everyday its seems like oil is setting a new record, it surged close to $110 dollars yesterday and analyst at Goldman Sachs are say that $200 is possible.

• The cost of fuel has a very big affect on real income purchasing power.
• While the auto industry is down 6% this year, sales of all types of small cars rose 5%. Sales of the smallest and cheapest cars rose 34% last month from a year ago.

• Energy spending rose 6.4% of disposable income in January, the highest point since 1985.

• In a survey last month, 59% of consumers said they were cutting back on discretionary spending because of energy costs, according to the International Council of Shopping Centers and UBS.

If there is no imminent recession then why does the Fed need to continuously lower interest rates, and make emergency Fed rate cuts when the markets start to tank?

If there is no imminent recession then why does the Fed need to inject $200 Billion dollars to back worthless Mortgage backed securities?

Dow is up 417 points today, biggest one day jump since 2002. They Fed made an aggressive move by planning to lend $200 Billion in financial markets and accept Mortgage-Backed debt. The $200 Billion of Treasury securities to primary dealers will secured for 28 days, instead of overnight, which is the current standard. I wonder how long this rally will last.

UCLA Experts don’t buy Recession

Source = LA Times

Despite the housing slump and the job losses, UCLA economists believe that the Nation and California will not plummet into a recession. However they do believe that 2008 will be a miserable year for many Americans. Here are some of the reasons why they believe that there will not be a recession.

• Industrial production (i.e. refrigerators) remains strong.

• UCLA predicts that GDP will fall by 0.4% in the second quarter of this year, and then rebound. Anderson expects GDP to be growing at 2.5% by the end of this year.

• “In a recession, jobs are easy to lose and hard to find. This time there are not a lot of layoffs, so jobs aren’t easy to lose, but they are hard to find,” Leamer said.

• So far, most of the jobs lost in California and the nation have been in construction and financial services, but those losses are small compared with the severe manufacturing job losses in the recessions of 1990 and 2001.

• After the 2001 recession, 358,000 manufacturing jobs were lost in California, UCLA economist Ryan Ratcliff noted. By comparison, the state has shed 55,000 financial sector and 106,000 construction jobs since 2007.

• Statewide unemployment will peak at the end of 2008, and will decline slightly in 2009, but will remain close to 6% until 2010 — when it will fall to 5.5%, UCLA predicts.

Hope they’re right…

Since the dot-com bubble, the stock market has had some significant double digit gains, which positively affected our stock portfolios and 401K plans, but why would anyone want to give up those gains and ride out a bad market year, or years? Way too many people lost all their gains from 1995-2001 when the dot-com bubble crashed. Essentially, many merely broke even or lost more money then what they had originally put into their investment accounts.

No one can time the markets perfectly, however many anticipate that the markets are heading lower. If you knew that the real-estate market was heading south, would you buy a house tomorrow? Then why would you buy into the stock market when you know that stocks were heading down? Keep a close eye on your portfolio and be smart in what you invest in. Here are just a few alternative investment options. Be wise and do your research.

• Investing in Fixed funds (i.e. Washington Mutual Liquid Account with a 5% return,) available in many 401K accounts

• Tax Free Municipal Bond Funds that pay 5-8% tax free, so their more like a 7-12% actual return.

• Write or buy options on precious metal funds for Jan 09, many with a 15-25% return for 1 year.

For the second straight month the labor force has lost 63,000 jobs in February, the most since March of 2003.  In January, 08 we lost 22,000 jobs. 

Many Wall Street analysts forecasted that an additional 25,000 jobs would be added in February. 

Foreclosure rate hits record high in 2007.  Approximately 6% of all mortgages nationwide were delinquent during the fourth quarter of 2007, and approximately 2% were in foreclosure.  This is the highest point since the Mortgage Bankers Association began recording in the 1970s. 

California foreclosure rate in 2007 was 2.23% in 2007. 

Mortgage interest rates are up a point from last week, 5.5% to 6.5% this week.  The difference in a $400k loan is approximately $250.00/month.