Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: CalculatedRisk who wrote (843)	2/28/2004 9:43:54 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

The Art of Unhatched-Chicken Accounting: Mortgage firms' dubious assumptions. From Forbes Elizabeth MacDonald, 03.15.04 forbes.com The top four banks have taken significant charges for impairment of their mortgage-servicing rights. The bottom three have not. Countrywide Financial Corp., the mortgage issuer, really raked it in during last year's rush to refinance. Profit nearly tripled in 2003 to $2.4 billion on $8.5 billion in revenue. Or did it? Key to that profit figure was Countrywide's ability to count future mortgage-servicing income as income today. Right there on (nyse: CFC - news - people )Countrywide's 2003 earnings release is $6.1 billion in gains from the sale of loans and securities. These gains, by and large, do not take the form of cold, hard cash. Instead they represent mostly prospective future profits from servicing mortgage portfolios. In other words, unhatched chickens. "Servicing" means collecting the monthly payments and hitting the late payers up for penalties. Counting future servicing revenue is perfectly legal in the mortgage industry; without it many lenders that are in an objective sense doing quite well would look as if they were headed for bankruptcy. The problem is that counting future income involves a certain amount of guesswork, and sometimes those guesses prove to be too optimistic. In the first nine months of 2003 Countrywide had to take writedowns of $1.9 billion on its mortgage-servicing portfolio. Guesses made in earlier years, that is, turned out to be too optimistic. Whoops, some of the chickens never made it out of the shell. Take a writedown. Mortgage issuers differ greatly in their tendency to suffer these writedowns occasioned by faulty assumptions. Some, like Countrywide, seem to have more than their share. Other lenders, like Golden West, seem to be more conservative (see table). The writedowns usually show up on income statements as "impairment of mortgage-servicing rights." Guesswork The top four banks have taken significant charges for impairment of their mortgage-servicing rights. The bottom three have not. Company Recent price \|52-week high \| P/E Impact of charges* BAD EGGS Countrywide Financial $88.71 $91.00 7 72% Downey Financial 53.94 54.34 15 77 IndyMac Bancorp 33.44 33.90 12 36 Washington Mutual 44.93 46.85 11 18 GOOD EGGS Golden West Financial 108.05 108.20 15 0 GreenPoint Financial 44.90 47.30 12 0 New Century Financial 48.78 51.80 7 0 Prices as of Feb. 18. *Total of impairment charges for 2002 and 2003 as share of year-end 2001 mortgage-servicing asset (except New Century asset is for 2002). Source: Reuters Fundamentals via FactSet Research Systems. The reported net income figures, to be sure, are net of the impairment charges. But the charges are nonetheless unsettling, says Mark Agah, an analyst at Portales Partners, an investment boutique in New York City. In a busy year for refinancing, the huge profits to be made from issuing new loans soften the blow from impairment charges. What happens when the refi boom cools off? Ideally the impairment charges will recede as quickly as the gush of revenue from new loans. But they might not. That's the problem with guesswork accounting. Countrywide is certainly not unusual in wrapping its business around the economics of servicing mortgages. The value of servicing rights represents a substantial part of the revenues for mortgage lenders, says analyst Daniel Michles at Moody's Investors Service. That may be one reason investors are not exactly in love with mortgage issuers. Countrywide, one of the country's busiest mortgage issuers (with a volume of $435 billion last year), trades at a mere seven times trailing earnings. Another problem is that refinancing has already cooled off. The Mortgage Bankers Association projects that overall mortgage issuance will fall to $2 trillion this year, a steep plunge from last year's $3.8 trillion. To see how lenders get into the murky waters of future-income estimation, consider what happens when a lender commits to a hypothetical $100,000 loan. It may sell off the IOU on Wall Street (or to Fannie Mae, for example) for $100,000 or a bit more. If it retains the right to service the loan, it can count on an income stream of (typically) 0.37% of the loan balance annually, says Stanislas Rouyer, senior vice president at Moody's. That's $370 a year to start. If the loan lasts for seven years, that's $2,590 coming in. Now subtract future servicing costs--salaries for the people who dun late payers and so on. Now take a further haircut for the fact that a dollar coming in years hence is worth less than a dollar in the bank today. You might wind up with $1,000 as the putative value of the right to service a $100,000 mortgage. But who knows? There is guesswork at every turn. You don't know what your future salaries will be. You especially don't know how long the loan will stay on the books. In refinancing booms, loans don't last for seven years. If such accounting already wasn't sketchy enough, some lenders have pushed it beyond this point. They count not just the value of servicing for mortgages on the books but also the prospective future value of servicing rights for a portion of the mortgages that, not quite final, are the subject of interest rate commitments to borrowers. That's counting the chick before the egg is laid. The Financial Accounting Standards Board has proposed to outlaw this particular maneuver. Washington Mutual and Flagstar Bancorp used to indulge in it, but backed off in anticipation of the FASB move. IndyMacBancorp still counts these futuristic gains. Another slick maneuver has been perfected by the mortgage lending arm of tax preparer H&R Block. Block sells its loans to off-balance-sheet vehicles so it can book gains about a month earlier than it otherwise would. The company had $75 million of these chicklets on its books at the end of its fiscal 2003 year. Block notes correctly that what it does is totally within the rules. If you want to buy into a mortgage company or thrift, take a look at its history of impairment charges for a clue as to how aggressive it is in its accounting. Golden West, New Century and GreenPoint Financial (due to be acquired by North Fork) have pretty conservative accounting, says Agah, the analyst at Portales. They managed to get through the refinancing boom of the past two years without any net impairment charges. By contrast Washington Mutual, the nation's largest thrift, has booked $1.1 billion in impairment charges over the past two years, a sum that comes to a sixth of the $6.2 billion mortgage-servicing asset it recorded at the outset of 2002.

To: CalculatedRisk who wrote (843)	2/28/2004 10:19:16 AM
From: mishedlo	Respond to of 116555

Russ and Mish debate interest rates again Message 19859136

To: CalculatedRisk who wrote (843)	2/28/2004 10:35:34 AM
From: mishedlo	Respond to of 116555

I was asked how I am investing in this market and this reply might be of use to some. Message 19859066

To: CalculatedRisk who wrote (843)	2/28/2004 10:46:26 AM
From: mishedlo	Respond to of 116555

Free Trade Wars February 27, 2004 By John Mauldin Where Have All the Jobs Gone? More Dead Economists Repeat: The Fed is Not Going to Raise Rates Trade Wars and Other Disaster Scenarios Gold, the Stock Markets and the Dollar More Airports and Bull's Eye Investing This article is a good read. frontlinethoughts.com

To: CalculatedRisk who wrote (843)	2/28/2004 11:07:43 AM
From: mishedlo	Respond to of 116555

Mauldin..... mish note: We discussed the key paragraph in bold below, last week and I think we nailed it. Repeat: The Fed is not Going to Raise Rates You wonder why the Fed is willing to be patient on lowering rates? One of their mandates is to help foster employment. If you look at their predictions for GDP over the next year, they are suggesting over 4.5% annually. Yet their job growth number is not even 150,000 jobs per month, which is barely in line with the growth in population. What is unwritten in the assumptions is that it would take growth of over 5% to seriously cut into the unemployment number. And that level of growth is just not in the cards. Raising rates would slow things down and hurt job growth which would soon create a recession. We threw everything but the kitchen sink in the form of possible stimulus at the economy last year, and we are barely over 4% today. Without job creation, we are at the limits of GDP growth. Stephen Roach of Morgan Stanley and one of my favorite analysts, wrote an open letter today to Alan Greenspan, calling for him to immediately raise short term rates to 3%, so the Fed would have some room for rate cuts during the next downturn. This is not going to happen. Greenspan just touted the virtues of adjustable rate mortgages this week. (I simply do not understand why he would do this, even if his logic might be impeccable. He should not be encouraging risk taking and more debt.) In any event, do you think he would do that if he were planning to raise rates anytime soon? "Hmmm, let me see, what can I do to create the most harm possible? Tell people to get into adjustable rate mortgages and then raise rates? That would cement my reputation." A Financial Times article noted the problem with auto loans, as there are more and more taken out for 6 and 7 years, which is good for sales today, but borrows from future sales. The article goes on to make the point that these longer period car loans mean that it takes longer for borrowers to get to "break-even" on their loans, thus longer before they can buy a new car. Rising rates would make that period even longer. There comes a point where new car sales are going to suffer from the current trend of borrowing for longer periods. Next year, independent auto analyst David Littman projects that auto sales will start declining. "This year, he predicts, tax breaks and other political actions during the presidential election campaign will support auto sales by boosting disposable income even if interest rates rise. But next year he forecasts sales of cars and light trucks will drop to 16 million, from 16.8 million. That might not sound like much but it is the equivalent to a more than $22 billion revenue cut. 'That is the end of the world for a couple of automakers.'" We add to that this note from the normally upbeat Dennis Gartman: "The US' economic news was anything other than stellar yesterday. Jobless claims rose to 350,000 from 344,000. Debates rage amongst those who make jobless claims the focus of their lives regarding weather and problematic seasonal adjustment factors, but we pay little heed to it. To those in that debate we say, in all dispassionate honesty, 'Get a life!' If we must pay attention we note that the 4-week moving average rose to 354,000 from 352,000 and that this is the 4th week in a row that this smoother number has risen. This, we think, is worthy of note and this we think is bothersome. "Further, we note (disappointingly) that the sales of new homes fell 1.7% to just over 1.1 million units. That in and of itself was disappointing, but this is also the lowest level of home sales in 7 months. Worse still this slowdown in home sales is taking place even as the supply of new homes has risen to what is almost a decade long high of 370,000 units. "Finally, January building permits here in the US were revised to 1.92 million annualized units from the previous estimate of 1.899 million. In light of an already problematic increase in the supply of new homes, this revision is not 'wanted' news." Maybe Roach is right. Maybe raising short-term rates this year would not be the serious problem I think it would be. Maybe the economy keeps on chugging. But I think the Fed believes that raising rates today risks slowing the economy down at a time when there are not enough jobs being created, housing is showing signs of weakness, the auto industry would get hammered, borrowing costs for business would rise and thus profits hurt, etc. etc. It is Pascal's wager. Even if one might think risks are small, do you risk the greater harm? If Greenspan were to raise rates now and the economy began to slow, the mob would form and someone would start shouting "get a rope" as they head for the nearest tall tree.

To: CalculatedRisk who wrote (843)	2/28/2004 11:16:15 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Another Mauldin snip followed by comments: Bill King sent this tidbit my way: "The Kansas City Star's Diane Stafford noticed something in a new Bureau of Labor Statistics report. "Employers initiated more mass layoff actions in January than in any previous January in the nine-year history of the U.S. Bureau of Labor Statistics' mass layoff record keeping...The higher counts were contrary to a general downward trend over the past year for both the number of mass layoff actions - defined as those affecting at least 50 workers at a single work site - and the number of initial jobless claims resulting from the actions...For January 2004, there were 2,428 mass layoff actions nationally, affecting 239,454 workers. In comparison, January 2003 recorded 2,315 actions, affecting 225,430 workers." How can this occur with that monstrous stimulus last year? Guess what happens without the juice? "Manufacturing accounted for more than one-third of the layoffs nationally - 35 percent of the events and 37 percent of the individual unemployment claims....The government sector set a five-year record for the number of workers filing for unemployment in the month. Another sector that reported a higher number of initial claimants because of mass layoffs was the temporary help sector." Two of the leading engines of job creation last year, government and temps, are now in jettison mode. No wonder consumer confidence has collapsed. As Seinfeld says, "That can't be good." ============================================================ Comments from Splotto on my board on the FOOL This might truly be the leading sign of the slip back into recession. There have been many comments on how the employment creation had been skewed by the number of government hirings. If that has reversed, then that is one bad point. However, the temp job sign is more serious. Temp workers are a clear leading indicator to hiring. If they are slipping away now, we may see a serious reversal into a contracting economy. Splotto

To: CalculatedRisk who wrote (843)	2/28/2004 11:20:36 AM
From: mishedlo	Respond to of 116555

January's mass layoffs set record By DIANE STAFFORD The Kansas City Star Employers initiated more mass layoff actions in January than in any previous January in the nine-year history of the U.S. Bureau of Labor Statistics' mass layoff record keeping. Both the number of mass layoff actions nationally and the number of unemployment compensation claims filed as a result were higher last month than in the same month a year earlier. Labor market analysts had expected January layoffs to increase for seasonal reasons, but this increase exceeded expectations. The higher counts were contrary to a general downward trend over the past year for both the number of mass layoff actions — defined as those affecting at least 50 workers at a single work site — and the number of initial jobless claims resulting from the actions. The national unemployment rate stood at 5.6 percent in January, down from a cyclical peak of 6.3 percent last June. For January 2004, there were 2,428 mass layoff actions nationally, affecting 239,454 workers. In comparison, January 2003 recorded 2,315 actions, affecting 225,430 workers. Twenty-six of the actions last month occurred in Missouri, affecting 2,422 workers. In comparison, Missouri recorded 30 mass layoff actions in January 2003 affecting 2,351 workers. Fourteen of last month's notices were given in Kansas, affecting 954 workers. A year earlier, the state had 15 actions affecting 1,108 workers. Dave McDermott, regional economist in the Kansas City office of the statistics bureau, said many of the layoffs occurred in the retail sector, due to a post-holiday shopping slump, and in construction, which had weather-related slowdowns. “A substantial number of the layoffs were in places where we expect to see them this time of year,” McDermott said, “but even some of those industries had record numbers of layoffs for a January.” McDermott said the tide could easily turn as seasonally affected jobs open up again. Manufacturing accounted for more than one-third of the layoffs nationally — 35 percent of the events and 37 percent of the individual unemployment claims. Many of the manufacturing layoffs were in the transportation equipment industry. Some actions might reflect temporary layoffs when plants are on hiatus for retooling or have temporary production slowdowns. Also of note in the January report: The government sector set a five-year record for the number of workers filing for unemployment in the month. Another sector that reported a higher number of initial claimants because of mass layoffs was the temporary help sector. One enduring bright note in the monthly mass layoff reports was that Wyoming continued a months-long trend of recording zero mass layoff actions in the state. kansascity.com@tice.com&KRD_RM=2rkninprrqipliiiiiiiiiikrq\|Andy+\|Y

To: CalculatedRisk who wrote (843)	2/28/2004 11:24:00 AM
From: mishedlo	Respond to of 116555

RECOVERY MAY BE STARTING, BUT IT WILL BE SLOW Mercury News After three devastating years, Silicon Valley's job market still has not turned the corner. Experts predict a recovery will begin within months, and anecdotal evidence suggests there is some increased hiring right now. But job growth will be slow -- and will probably be outpaced by growth in other metro areas. Data released Friday by the state Employment Development Department shows the depth of Silicon Valley's decline: • Santa Clara County lost more than 25,000 jobs from January 2003 to January 2004. The county lost jobs in most industries, but manufacturing accounted for more than half the loss. The largest gains came in education and health services, which added 2,200 jobs. Three consecutive years of job loss is exceptional, said Steve Cochrane, senior economist at Economy.com. His records date to 1971, and in that time the county has never lost jobs three years in a row. The county had 837,700 jobs in January, the fewest since May 1995.... mercurynews.com