Let Warren Buffett Buy Wells Fargo

Warren Buffet is the largest shareholder in Wells Fargo. He claims it is a "Fabulous Bank" and would like to buy it all. Is he serious or is he just talking up his shares?

Let's investigate staring with a look at Berkshire’s Buffett Calls Wells Fargo ‘Fabulous’ Bank.

Billionaire Warren Buffett, whose Berkshire Hathaway Inc. is the largest shareholder in Wells Fargo & Co., said the lender is a “fabulous” company.

“All banks aren’t alike by a long shot, and in our view Wells Fargo, among the large banks, has some advantages the others do not,” Buffett said today at Berkshire’s annual meeting in Omaha, Nebraska.

Buffett, who has said he values lenders partly on their ability to acquire funds from depositors, told shareholders today that he’d “love” to buy the entire bank and is unable to do so because Berkshire wouldn’t get permission from regulators.

Buffett Dismisses Stress Tests for Assessing Banks

Bloomberg is reporting Buffett Dismisses Stress Tests for Assessing Banks.

Berkshire Hathaway Inc. Chairman Warren Buffett dismissed the importance of the government’s stress tests of major U.S. financial institutions in helping him assess banks he invested in.

“I think I know their future, frankly, better than somebody that comes in to take a look,” Buffett said before the start of Omaha, Nebraska-based Berkshire’s annual shareholder meeting today. “They may be using more of a checklist type approach.”

If Buffet knew the future he sure would not have been shorting PUTS on the S&P when he did. He would have done it in March.

OK, so Buffett admits he is not concerned about the short term, nor is he particularly adept at timing it. However, shorting puts headed into a consumer led recession was an ill-conceived idea at best, regardless of how that bet eventually pans out.

In regards to Wells Fargo, it remains to be seen how their takeover of Wachovia turns out. Here is a quick recap of the chain of events that led to the demise of Wachovia.

• On May 7, 2006 Wachovia purchased of Golden West Financial for a cash offer of $25 billion. Under the weight of Golden West's mortgage portfolio (including massive exposure to Pay Option ARMs), Wachovia collapsed.
  
• On September 29, 2008 Wachovia announced its intention to sell its banking operations to Citigroup for $2.2 billion in an open bank transaction facilitated by the Federal Deposit Insurance Corporation; according to the FDIC, Wachovia "did not fail."
  
• The FDIC sponsored shotgun marriage in turn fell through when Wells Fargo made a better offer.
  
• Citigroup is still pursuing its $60 billion claims, $20 billion in compensatory and $40 billion in punitive damages, against Wachovia and Wells Fargo for alleged violations of the exclusivity agreement (i.e. the shotgun marriage arranged by the FDIC that subsequently collapsed).

The Pay Option ARM portfolio that Wells Fargo is sitting on via the above chain of events is still a ticking time bomb.

Buffett Supports Bailouts; Sees ‘No Signs’ of Recovery in Housing, Retail

Even though he is thrilled with the prospects of Wells Fargo, Buffett Says He Sees ‘No Signs’ of Recovery in Housing, Retail.

“There’s no signs of any real bounce at all in anything to do with housing, retailing, all that sort of thing,” said Buffett, 78, in a Bloomberg Television interview before the Omaha, Nebraska-based company’s annual shareholder meeting today. “You never know for sure, even if there’s a leveling off, which way the next move will be.”

Buffett, in his most recent letter to shareholders in February, said he supported the U.S. government actions, while predicting bailouts will cause “unwelcome aftereffects” including inflation.

Of course Buffet supports the bailouts. So does PIMCO and so does anyone holding corporate bonds of financial institutions in general. They stand to benefit from these taxpayer sponsored bailouts. It's as simple as that.

More Bank Losses On The Way

JPMorgan says $400 Billion More In Bank Losses On The Way. I think it's more like $1 trillion minimum. And if housing has not bottomed (I agree with Buffett that it has not), then some massive losses are coming up from Wells Fargo over Mortgage Backed Securities in general and Pay Option Arms specifically.

In my opinion, the only way it makes sense to own Wells Fargo, Citigroup, Bank of America, etc, is if taxpayers are forced to keep shelling out more money to keep the banks solvent. Otherwise massive shareholder dilutions will be right around the corner as banks scramble to raise still more capital.

Unfortunately, Geithner has every intention of protecting banks and corporate bondholders regardless of the cost to taxpayers. Please see Geithner's Plan Can Succeed as well as More Ugly Details Emerge On "Geithner's Heist America Plan" for details.

Let Buffett Buy Wells Fargo

To not let a well capitalized company like Berkshire Hathaway to acquire a bank when banks are clearly struggling to raise more capital makes no sense. Since Buffet claims he would “love” to buy the entire bank I suggest he should be allowed to do so. Then we would get to see if he really wants it or if he is just talking his book.

One thing's for sure: It's far better for shareholders to to take the hit when this mess blows the second time than taxpayers in general. Yet, if Buffet is indeed right about the prospects of Wells Fargo, then by all means, Berkshire Hathaway shareholders should be allowed to profit from that position.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How Banks Become Condo Rental Agents

Last month in a Boston foreclosure sale, John Hancock Tower Lenders Took, a 65% Haircut In 3 Years . Boston is back in the news today with another foreclosure auction. This time it's condo related, with Chorus Bank in the thick of things.

Please consider 441 Stuart Street: What Happened?

This week, the building at 441 Stuart Street was offered to the public through a foreclosure auction. The property was most recently purchased in 2004 for $37.5MM with the intent of converting the building to condominiums.



Recorded documents show that Corus Bank, a well-known condo conversion lender out of Chicago, placed $42MM in debt on the property in 2004.

The auctioner opened at $30MM and asked if there were any bids. There were not. Next he cut the bid in half and asked for $15MM, and the bids that followed were $15.1MM, $16MM, $16.1MM, and finally $17MM. There was only one 3rd party who bid the $15.1 and $16.1 against the bank. The lender bought the property back at $17MM.

Nevermind the fact that the highest 3rd party bid for the property was less than 40% of the known debt, consider the fact that the number represents only about $100/foot. Remember that this property is in Copley Square. If retail prices for completed condos are $600-900/SF and construction costs run $150-250 per foot then that’s a margin of 40% or better - isn’t it?

It's interesting that no one wants this building at $100 a square foot with completed condos going for $600 to $900 a square foot.

Corus Bankshares Receives 'Going Concern' Qualification

In Bank Watch (Apr. 12-18): CoStar is reporting Corus Bankshares Receives 'Going Concern' Qualification.

Corus Bankshares Inc. in Chicago announced that its audited financial statements for the year ended 2008 contained a 'going concern' qualification from its independent registered accounting firm Ernst & Young LLP.

Corus, with a portfolio consisting primarily of condominium construction loans, many in the hard hit areas of Arizona, Nevada, south Florida and Southern California, has seen a rapid and precipitous decline in the value of the collateral securing its loan portfolio. Thus, it is experiencing significant loan quality issues.

The net loss of $456.5 million it recorded in 2008 was primarily the result of significant increases in the provision for credit losses.

The company said its board of directors has formed a strategic planning committee to seek all strategic alternatives, including a capital investment, a sale, a strategic merger or some form of restructuring.

The company also reported that there are additional concerns that regulators may take other actions, including placing the bank into conservatorship or receivership.

Here are a few snips of other Banks in the CoStar Article.

Community Bancorp Feeling Heat of Declining Desert Area Real Estate

Community Bancorp, the Las Vegas-based holding company for Community Bank of Nevada and Community Bank of Arizona, is late filing its annual report for 2008 with the U.S. Securities & Exchange Commission.

Community Bancorp said it expects that it will report a loss for the year compared to net income of $20.4 million for a year earlier.

As a result of these losses, the company expects that federal and state regulators will require a formal agreement with respect to, among other things, asset quality, capital and earnings.

Preferred Bank Hit By Declining San Diego Property Values

Preferred Bank, an independent Los Angeles-based commercial bank focusing on the Chinese-American and diversified Southern California market, reported an additional revision to results for the quarter and year ended Dec. 31, 2008, due to the receipt of an appraisal on an impaired construction loan.

The March "appraisal indicates a value deterioration far beyond our estimation for that area and far in excess of published market statistics for that market area," said Li Yu, chairman and president of Preferred Bank.

Union Center National Bank Takes Back Warehouse Project

Union Center National Bank in Union, NJ, announced that for the first quarter of 2009, it intends to establish a loan loss provision of $1.4 million, which covers a charge-off of approximately $900,000 in connection with a $4.9 million commercial real estate construction project of industrial warehouses. It had recently downgraded the loan to non-accrual status and increased its level for loan loss allowance by $521,000.

"At March 31, 2009, the corporation expects non-performing assets to amount to $9.1 million -- up from $4.7 million at Dec. 31, 2008," said Anthony Weagley, president and CEO of the bank's holding company, Center Bancorp Inc.

The bank's other real estate owned will increase to $4.4 million, with the other asset being a residential condominium project that was taken back in the fourth quarter of 2008. The bank holding company is near completion of that project and has elected to begin to rent the units.

Expect to see more banks completing projects and electing to rent units as the recession wears on. Ironically, you can also expect to see the opposite extreme whereby banks acquiring real estate in foreclosure processes and tear it down because they do not want to become rental agents. For an interesting video of teardowns of brand new homes please see Extreme Home Makeover Depression Edition II.

Meanwhile, it's just a matter of time for Chorus Bank (CORS) heads into receivership. It was trading at $28 in April of 2006 and you can be a proud owner today at 31 cents.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Stupidity Squared

John Mauldin's weekly E-Letter, Sell in May and Go Away, is a good read. My favorite portion of the E-Letter is the section "A Dangerous End Game". Let's take a look.

The Fed and the Obama administration are playing a dangerous game. The Fed is going to print trillions of dollars to forestall deflation and try to re-ignite the economy. But for a variety of reasons we will go into next week, a real, sustainable recovery may be a few years away. What happens when the market start balking at high and unsustainable national deficits? What happens when inflation (finally) does return? Can the Fed remain independent and take back the money it is printing in the face of what will likely be a tepid recovery? And if they don't, what happens to the dollar?

Next year, we will be entering what will certainly be the most dangerous era in my lifetime for the US economy. It is not clear what will happen. There are a lot of paths that can be taken, though some are more likely than others. For those who are convinced that high inflation and a falling dollar are absolutely, unequivocally in the future I have just one word: Japan.

Yes, there are differences, but there are a lot of similarities. While I think the most likely outcome is a long Muddle Through recovery, the likelihood of a lost decade of deflation a la Japan is a very real potential outcome. And the possibility of stagflation and a seriously impaired dollar is also quite real.

Investors, businessmen, and entrepreneurs need to be as nimble as possible. A free market will figure out what paths to take, and I am still optimistic about the long term. But we have some very dangerous times in front of us, and we need to be realistic.

And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law.

If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations. As an aside, they are spending $12 billion to save 54,000 Chrysler jobs (at $22,000 per job). With 600,000 jobs a month being lost, why are these 54,000 jobs more special than those of the rest of the unemployed, who get a fraction of that amount in unemployment benefits?

Actions have consequences. The lenders who are forcing the Chrysler deal into bankruptcy court are not all "predatory hedge funds." They are mutual funds, pension funds, and other financial firms with small stakeholders as their investors.

Cerberus, the hedge fund that originally bought Chrysler, deserves to lose their money. They made a bad investment. But those who lent money deserve to be treated in accordance with the contracts they signed.

Demonizing investors and businessmen is hardly helpful. They are precisely the people we need to help get this economy moving. Governments don't create true job growth, businesspeople do, and mostly small businesses. I am not certain why small business owners, the job creation engine of the country, should see their taxes raised in order to protect bond holders of automobile companies or banks, or for union jobs to be preserved in companies that are clearly not competitive.

Consequences Indeed

Somehow Bernanke, Geithner, and Obama think they can ignore (or get away with) fraudulent bailout schemes, shameful treatment of auto bondholders to help out unions, and cotton candy treatment of bank bondholders.

While banks are happy and financial bondholders are ecstatic with the bailouts (at least for now), taxpayers are taking it on the chin.

What Happens ....?

In his article, Mauldin asks bunch of "What Happens?" type questions. He does not answer them. Perhaps there are no answers, at least not yet.

However, it's important to remember we are in this mess because Greenspan elected to blow another bubble rather than face what would likely have been a short-term recession of limited consequences. Instead, Greenspan elected to bail out his banking buddies who were in deep trouble with loans to dot-com companies and Latin America. The fruits of Greenspan's attempt to bail out banks were worldwide housing and credit bubbles of epic proportion that have now popped, leaving banks much worse off than before.

Compounding Greenspan's errors, the trio of Bernanke, Geithner, and Obama, like the trio of Bernanke, Paulson, and Bush before them, all seem to think the results will be better this time if we just do it again with more force.

I have news for all of them. While we may not be able to predict for certain the consequences of "Stupidity Squared" we can say for certain the result cannot possibly be any good.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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This Stuff Ain't Rocket Science

Pictured above are the students in last week's five-day lighting class in Paso Robles, CA. Teaching one of these extended classes was a first for me. And while I was expecting a fun, intense week, what was more interesting was watching the students to see how they learned.

That was an eye-opener, to say the least. We had a wide range of ages, personalities and learning styles. And I am more convinced than ever that anyone -- anyone -- can learn to light in a relatively sophisticated way in a pretty short amount of time.

Some thoughts, punctuated by their photos, after the jump.
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NOTE: Photos are credited at the bottom of the post. Click on any photo to see it bigger in a new window.


The Usual Suspects

One of my biggest apprehensions before the week was having no idea where the students would be, ability-wise, when they arrived. Would some of them be long-time pros? Would some be rank beginners? Worse yet -- maybe a mix of both?

So we spent some time Monday morning looking at photos and getting to know each other. And as it turned out, the class was a decent cross section of the readership of this site.

They were mostly amateurs, and some transitional pros. We had businesspeople, a dentist, a pioneering punk rocker-turned rock doc filmmaker -- even a cog in the military-industrial complex. We had all ages, from a 22-year old bachelor to several old far .. er, middle-agers.

In the end their age, profession, skill level and/or personality type really didn't matter when it came to seeing how they progressed. Which is really cool when you think about it, and also nukes about 90 percent of the excuses people have for not jumping into this stuff head first.


Left Brain, Right Brain

Many people look at lighting as a technical thing. In reality it is about as technical as playing with the bass and treble knobs on your stereo. And about as difficult, truth be told. I would rather be math-challenged and very creative and be learning this stuff than to be an engineer with the same goal.

Why? Because absolutely anyone can learn to do it. And when it is said and done, you'd rather be a creative person who knows how to light than a tech-head with yet one more new skill in your back pocket.

The biggest hurdle with learning to light is just deciding to do it. It's math anxiety, or being afraid to walk across the room and invite a partner onto the dance floor in sixth grade, or just about anything else that has seemed intimidating -- until you learned how to do it.


It's Not About the Gear, Either

Syl Arena is the proprietor of Paso Robles Workshops, where we were all learning together. (Syl's the guy under he mop of red hair at center left.) He and I originally planned on forming the class into teams based on their brand of gear and various synching methods. In the end we ended up rotating them into a completely new group every day, making for a more diverse experience for the whole class.

We quickly realized it was not the gear that was important. Throughout the week, I could not discern any correlation between how fast someone picked up new skills and the weight of their gear bag. To be sure, you do need some stuff. But you do not need to go into hock on a bunch of high-end bodies, lenses and strobes to get great results. So, for those of you who have more time than money, take heart.

In fact, to be honest I think being a gear hog can be a handicap when learning. Practice frequently and learn to use what gear you have. Then slowly add gear only when you have a specific need. You'll make better photos that way, plus you'll prolong the fun process of gearing up.


It's All About Balance

After this week I feel even more strongly that the key to understanding lighting is to become very comfortable with the concept of balance. We have talked about it in L101 and L102, and in just about every OA post. But everything comes down to how well you understand this concept. All of the other stuff is icing on the cake.

In its simplest form, begin by assessing your ambient. Make a normally exposed photo. Tamp down the exposure a little, until you get a photo that would make a nice "floor" exposure for your final, lit image. Then lay in your light, be it soft and flattering, hard and edgy, or anything in between. We have a little visual run-through of that process coming shortly. And that will reiterate just how easy it is.

Once you get that ambient/flash two-step down pat, you can begin your all-flash photos that way, too. Now you can lay in your fill, ensuring that whatever your key fails to illuminate will fall to exactly what you want. And now you have control over both the quantity and quality of your fill, which is when the photos really start to get interesting.

All of the various styles of key lighting, the light mods, synch methods, gelling, etc., rely on the foundation of balance. Unlock balance, and everything falls into place.


Build Muscle Memory

Once you get the concept, play. A lot. That is a big part of the strength of a five-day workshop -- total immersion learning. I demo'd on Monday, and they shot every other day.

But you can do it at home, too. Make headshots of family and friends. Photograph your own house as a project. Try new fill methods and accent lighting styles.

Reps matter -- every time you previsualize a photo in your mind then pull it off with your camera and flashes, you get better. Heck, by the time they walked in with their shoot on Thursday morning, many were almost looking a little cocky.

With practice, you also get more comfortable stretching your comfort zone. Do it again and again until you are so familiar with the balancing light that it is almost subconscious.

The majority of the fifteen people that showed up one week ago on an chilly Monday morning were amateurs who could best be described as "tentative" in their approach to lighting. We had some nice stuff in the opening images, of course. But most everyone there had more desire to learn than experience at that point.

By the end of the week the problems were far more granular, which is to say that the big stuff was being solved easily. And there was a comfort level that belied where they were just a five days ago. People were taking chances, engaging their subjects and lighting almost intuitively. Almost.


Don't Forget to Make a Picture

Lots of rookie lighting photogs crash here. They spend so much energy working out the light that they neglect the most important part of the process. Save your subjects' attention spans for when you are done with the lighting tweaks away and ready to start making photos.

Engage your subjects. Work through a steady stream of conversation. Don't stick them up there like a mannequin and bore them silly by shooting a frame and disappearing into chimping mode. Seriously, I see this a lot and it is a really bad thing.

That brings us back to muscle memory concept. It is just like doing math. The better your algebra is, the more comfy you will be with the trig. When lighting, if your technical stuff is effortless, you are free to engage the subject with all of your attention. That pays off with great photos -- that happen to be beautifully lit.


Collaborate

The dynamic of team learning is hard to beat. Go to a meetup. Find another local shooter and practice some together. They understand you way better than your poor spouse does. Another lighting photographer will be a VAL (voice-activated light stand) or VAB (same, but a boom) for you until their arms fall off, simply because they want to see what the light can do from way up there, too.

Collaborate with other photogs to gain confidence, then collaborate with subjects toward the goal of making interesting photos. Everyone wins, and you get better fast.


Seventeen Shooters, Eighteen Flashes

For our quickie group shot seen up top (it took us about ten minutes, soup to nuts) we decided to light entirely by flash. This was done by shooting at a 250th of a sec at a decent aperture -- way above the ambient. We had a PW'd Canon speedlight on a stand in a shoot-thru right next to the camera. Almost a ring light look, if you will.

We exposed for the umbrella fill and then closed down the aperture about two stops. At that point, all that was left was for everyone to light themselves with either an SU-4'd SB-800 or an LP120. (Tim, close to the middle, had a Canon speedlight with an off-board slave, I think.)

The contrast range was courtesy the ratio between the facelights and the umbrella fill; key light courtesy the subjects.


About the Photos on This Page

The images seen here were done by (mostly) amateur and transitional pro shooters, and for the most part without my involvement. We lectured hard on Monday afternoon and Tuesday morning, then shot each other on Tuesday afternoon. On Wednesday and Thursday we got access to models and two very different locations.

For Friday's assignment, we turned up the pressure several notches. (I wouldn't want to ruin the surprise unless we do it again, and if you tip anyone in the comments you won't be published.) But suffice to say I could have called in sick on Friday and these guys still would have knocked the cover off of the ball.

Credits, in order from top: Everyone in the group photo (it was a self-timer shot), Steven Nguyen, William Yu, Tim Bosma, Sam Graham, Sean Rolsen, Richard Clary and Victory Tischler-Blue.
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SPECIAL NOTE TO THE PRW STUDENTS: Whittling down the selects list was a bear, and very sorry to not have something from all 15 shooters. If you would like your credit to link someplace, shoot me an email from the address used in the Paso Robles group email list and let me know where to link it. I will do so ASAP-est.

Thanks much for for such an awesome week. It was a total pleasure to work with you guys.

4,820 California gov't workers collect annual pensions of $100K or more from CalPERS

The California Foundation for Fiscal Responsibility is reporting 4,820 CalPERS RETIREES RECEIVE ANNUAL PENSIONS IN EXCESS OF $100,000.

We have a lot to worry about these days. We’re worried that we may lose our jobs, that we may lose our healthcare insurance and that we won’t have sufficient retirement savings. We realize that without jobs we can’t make our mortgage payments; we know that our homes have dropped in value resulting in little or no equity, so we can’t afford to stay in or sell our homes.

In California there is one lucky group that doesn’t have those worries: state and local government retirees.

As of May, 2008, there were 4,820 CalPERS retirees receiving annual pensions in excess of $100,000. That didn’t include government retirees in 80 other plans in California—judges, UC, STRS, charter cities, and 1937 Act counties. About half of these retirees were public safety workers: cops, firefighters, prison guards. The remaining half includes former city managers, assistant managers, county executives, district attorneys, engineers, finance officers, personnel directors, computer scientists, and physicists.

Since May 2008, more than 120 new retirees have joined the “$100,000 Club” – each month - every month. That’s been going on for the last 12 months – more than 1,500 have joined that well-paid retirement group ; this rate of increase will accelerate as droves of retired public safety workers who are now in the $90,000 to $100,000 range receive annual cost of living increases.

...

We must stop this nonsense at the ballot box.

Indeed, the only way to stop this madness is at the ballot box, so get involved!

Search the $100,000 Pension Club database

Inquiring minds investigating the $100,000 Pension Club Database.

CalPERS Top 10



click on chart for sharper image

California Foundation for Fiscal Responsibility Weighs In

Keith Richman at the CFFR states: Unless changes are made, pension debt will overwhelm the state's ability to fund higher education, build roads and develop technology."

CFFR was founded in 2007 by Richman, a former 38th District Assemblyman. Richman says the foundation's sole purpose is to tackle the skyrocketing costs of public employee retirements.

"If we don't do something soon there may be several government entities that go bankrupt, and those that don't are going to die from a thousand cuts in services," says Richman. "And because of the strength of the public employee unions as a special interest group in California, I don't have any confidence at all that Sacramento will address this issue."

CFFR Reform Initiatives

Please consider the CFFR Recommendations to Solve Vallejo's Fiscal Crisis as well as the CFFR PUBLIC EMPLOYEE BENEFITS REFORM INITIATIVE.

The CFFR recommendations are certainly a big step in the right direction. However, the proposed changes are still way too generous. Stop the madness now. Get involved.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Auto Sales Plunge Near 30 Year Lows

Bloomberg is reporting Chrysler U.S. Sales Fall 48% as Toyota, Ford Trail Estimates.

Chrysler LLC’s U.S. sales plunged 48 percent in April as the automaker slid toward bankruptcy, helping drag Toyota Motor Corp., Ford Motor Co. and Nissan Motor Co. to declines that exceeded analysts’ estimates.

General Motors Corp.’s 34 percent drop and Honda Motor Co.’s 25 percent decrease were smaller than projections. Ford slumped 32 percent, Toyota tumbled 42 percent and Nissan decreased 38 percent. Chrysler also fared worse than estimates.

GM projected a annual U.S. sales rate of 9.6 million vehicles, less than the average estimate of 9.9 million vehicles among 7 analysts surveyed by Bloomberg before today’s results. The March rate also was 9.9 million, after a 9.1 million rate in February that was the lowest since 1981. Sales totaled 13.2 million in 2008, and averaged 16.8 million this decade through 2007.

Automakers’ spending on incentives averaged $3,031 for each vehicle, a 29 percent increase from a year earlier, according to automotive researcher Edmunds.com of Santa Monica, California. Still, that was down from the record of $3,165 in March.

Ford Overtakes Toyota

The Wall Street Journal is reporting Auto Sales Remain in a Rut; Ford Overtakes Toyota.

Ford Motor Co. reported a 32% drop in U.S. vehicle sales for April, but the healthiest of Detroit's auto makers outsold Toyota Motor Co. for the first time in at least a year.

The Japanese auto maker's U.S. sales fell 42%. General Motors Corp. said its sales fell 33% last month, however the auto maker noted that shipments were up significantly from March.

"We see that stabilization, along with the firming up of our fleet business and improvement in Silverado and Sierra sales, as an encouraging sign," said Mark LaNeve, GM's Nirth American sales chief.

GM sold 172,150 vehicles in the U.S. in April, down from 257,638 a year earlier. Its car sales fell 41%, while sales of light trucks – which include sport utility vehicles, vans and pickups – fell 27%.

Ford said in April it sold 133,979 light vehicles in the U.S., down from 195,665 a year earlier, but the company said it is gaining market share.

Ford, Lincoln and Mercury car sales dropped 31% despite record sales of its Fusion sedan. Sport-utility vehicles continued to tumble, falling 61% in April. Sales of pickups and vans dropped 36%.

Toyota sold 126,540 vehicles in the U.S., as both car and light-truck sales fell more than 40%.

Also Friday, Honda Motor Co. said its U.S. sales fell 25% to 101,029. Nissan Motor Co. reported a 38% drop to 47,190 vehicles, while Daimler AG's sales fell 31% to 15,910. Other auto makers will release their monthly results later in the day.

30-year lows

Reuters is reporting Auto sales plunge to near 30-year lows.

U.S. auto sales in April were on the road to plunging to their lowest levels in nearly 30 years according to sales reports released on Friday, the day after Chrysler LLC filed for bankruptcy.

Japan's Toyota Motor Corp posted the largest sales drop at 42 percent among major automakers in the U.S. market, followed by Nissan Motor Co Ltd at 38 percent.

Sales at U.S. automaker Ford Motor Co slid almost 32 percent last month, while sales General Motors Corp, which like Chrysler has been operating under federal supervision, fell 34 percent.

Honda Motor Co's sales were off 25 percent.

U.S. auto sales typically account for as much as one-fifth of all retail sales in the country and represent one of the first indicators of consumer demand every month. Both GM and Chrysler have announced plant shutdowns to slash bloated vehicle inventories.

Inventory Overhang

With a huge glut of inventory, GM set its second-quarter production forecast at 390,000 vehicles, down 53% from a year ago. GM has little choice but shut down its production lines for up to 11 weeks this summer. See Idled GM factories to affect more than workers for more details.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ARMs Reset Crisis Revisited

Just over a year ago I took a Close Look At The ARMs Reset Problem.

Inquiring minds may be asking "What's Changed?"

The answer is: there has been much improvement across the board, but especially for 5-1 ARMs. In addition, those in ARMs tied to the Cost of Funds Index (COFI), will be pleased to note that on April 30, the COFI sank to an all time low.

The History of COFI shows the March 2009 index value at 1.627, a record low. A year ago index value was 3.280. Last month it was 2.003.

COFI is the weighted average of the cost of funds (CDs, savings deposits, checking deposits, etc) for member banking institutions of the Federal Home Loan Bank of San Francisco (the 11th District). COFI is a lagging index. The index value for a given month is typically reported on the last day of the following month. For Example: At or after 3 p.m. on the last business day in September, the bank announces the August COFI.

The most common indices used to compute ARMs are COFI, 1-Year Constant Maturity Treasuries (CMT), 1-Year LIBOR, and 1-Month LIBOR.

Rate Comparisons - COFI, 1-Yr CMT, 1-Yr LIBOR



Those in interest only loans are frequently tied to 1-Month LIBOR.

1-Month LIBOR



All charts courtesy of Money Cafe.
Click on any chart to expand.

ARM Index Rates

COFI - 1.627%
1Yr CMT - .64%
1Yr LIBOR - 1.97%
1Mo LIBOR - .41%

ARM rates consist of an index rate (typically one of the above), plus a margin component (e.g. 1 Month LIBOR + a spread). The amount of the spread is based on credit risk and other factors at the time the loan. Regardless of what index rate is, ARMs that are now resetting are likely to be coming in at lower rates, perhaps even much lower rates.

1 Year CMT Table



One Month LIBOR Table



One Year LIBOR Table




COFI Table



Across the board, those in 3-year ARM rates that have recently reset or are about to reset, will do so at a much lower rate unless there is a floor. Moreover, with the specific exception of 1-Year LIBOR based loans, there will also be a reduction in 5-Year ARM rates when those loans reset. Looking ahead just one month, even 5-Year ARMs tied to 1-Year LIBOR are likely to reset lower.

Thus, even homeowners ineligible to refinance now because they are underwater on their homes, have already (or soon will) see a significant reduction in mortgage interest rates (assuming there is no floor that prevents rates from going lower). I do not have stats on the percentage of loans with and without a floor, but even with a floor, rates should not rise.

Principal Payments Need To Be Factored In

There is still one more issue to address, and that is higher payments when the interest only period ends. For example, a 5-year ARM loan typically goes from interest only payments to interest + principal amortized over 25 years on the first rate reset. Likewise a 3-year ARM loan typically goes from interest only payments to interest + principal amortized over 27 years on the first rate reset. Some ARMs have a 10 year interest only period which postpones this particular problem.

Across the board, those in 3-Year ARMs with principal and interest payments will likely see their total mortgage payment drop. However, those paying interest only, especially those in 5-1 ARMs, may see their total payments rise. Even so, the situation has hugely improved from a year ago.

Pay Option ARMs Still A Problem



The problem with Pay Option Arms is over 80% of POA mortgagees only make the minimum payment. Given that minimum payments typically do not cover interest owed, the loan balance increases every month. This is called negative amortization, and it has been going on for years.

Negative amortization is compounded by falling home prices. At some point, typically 110-125% of the mortgage, an enormous gotcha kicks in. That gotcha requires a fully indexed fully amortized principal and interest payment, amortized over the remaining years. People who could only afford the minimum payment will be forced to pay principal, plus interest, on top of a loan balance that has been growing monthly. Good luck on lenders getting all their money back on those loans.

The second problem in regards to POAs is that a huge portion of these loans originated if the least affordable, biggest bubble areas, like Florida, California, Las Vegas, etc. From a lender's perspective that hugely increases the likelihood of default as well as the size of the problem should default occur.

Conclusion

Other than the ticking time bomb of Pay Option Arms (which is still a huge problem, especially for California), the ARM reset problem has vanished for as long as rates stay low, or permanently if ARM holders roll over into affordable fixed rate mortgages.

Unfortunately, reset issues are not the only problem. The economy is still losing 600,000+ jobs a month and for every job lost there is another person who might be shoved into foreclosure as a result.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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