The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

I’ve been racking my brain for the easiest way to get people to understand what GS did.

The best I could come up with was Mel Brook’s “The Producers.” They purposefully tried to create the worst play ever, lose their investors money and pocket the proceeds.

Its not much of a stretch to suggest that Abacus 2007 was Goldman Sachs’ “Springtime for Hitler.”

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Here’s how I would cast this:

Nathan Lane …….. Max Bialystock …. Fabrice Tourre (GS)
Matthew Broderick.. Leo Bloom ……. Lloyd Blankfein (GS CEO)
Will Ferrell ……. Franz Liebkind ……. John Paulson (Paulson & Co)

A back of the envelope calculation gives us an intermediate term downside target of $142 and change. (We are not short this).

The facts here are pretty damning according to what I read in the SEC press release and complaint. But the situation is fluid, and subject to more info coming out.

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Goldman Sachs, 2005-2010

Looks like another Magnetar type story:

SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages

Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.
Additional Materials

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO

April UoM Confidence was surprisingly weak, falling to 69.5 from 73.6 and is well below estimates of 75. It’s the lowest since Nov ’09 with both parts down. Current Conditions fell to 80.7 from 82.4 and the Economic Outlook dropped to 62.3 from 67.9, the lowest since Mar ’09 when it was at 53.5. Also of interest was one year inflation expectations rose to 2.9% from 2.7% to the highest since Oct ’09. The likely factor is gasoline prices which are at the highest level since Oct ’08 at $2.86 on average as it’s the most high profile pricing stat that consumers see every week. The weakness in confidence is likely due to a still tough labor market as while it is getting better, it’s not getting better fast enough. Confidence is also disconnected from the jump in consumer spending which has maybe been more led by pent up demand rather than a big change in income and job growth. People walking away from mortgages has also put extra cash in the pocket.

Wow, I never heard of Janelle Monae before, but she is brimming with talent. I love anything that is both retro soul but has an updated modern feel to it.

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Hat tip Farnum

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Update: December 18, 2010 9:43am

Chris C sends along this updated video of Janelle Monáe performing Tightrope on David Letterman is a YouTube

Every now and again, I see an economic commentary that is so ass backwards, I am compelled to call it out. Today is one of those occasions.

The commentary in question comes from the usually astute Housing Wire. Paul Jackson makes the case that voluntary mortgage delinquencies are driving retail sales.

I disagree.

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Our tale begins ~6 months ago, during the Q&A portion after a speech at a conference. I was asked this question by an attendee:  “How much of current retail sales are being driven by mortgage delinquencies and defaults?”

My short answer was “Very little.”

Given that we have lost 15 million jobs, that wages were static for a decade, and that the underemployment levels are near 17%, the progression of events from Employment to Housing to Retail are fairly obvious (to me at least).

From 2002-2007 or so, ultra-low rates combined with an abdication of lending standards to excite Real Estate. We had a credit bubble, and a housing boom. Combined, that brought 10-20 million marginal new buyers into the Housing market. These folks were renters or small condo owners who were not typically suburban housing buyers previously. Many were people who “reached” for homes they couldn’t afford. In addition to the low rates and lending standards collapse, these buyers utilized 105% LTV or piggybacks, had a very high debt service ratios, maintained unstable incomes and  often used I/O loans and even Neg Am mortgages.

There was zero margin for error. Then the trap door opened.

In my Q&A session, I described timeline of the credit bubble bursting and the housing boom busting. The sequence is fairly straightforward:

1. Home prices fell 33% (peak to trough)

2. Recession begins

3. Unemployment ~doubled to 10% as 15 million people lost their jobs. Under-employment was rampant.

4. The Real Estate market collapses. 5 million foreclosures so far, approximately 7 million people more than 30 days delinquent on mortgages.

5. About 4 years after real estate topped out, 2 1/2 years after the stock market peaked, 2 years after the recession began, and one year after the bailouts occurred, the economy has begun to shows signs of life.

That is the chronology.

For the family that is in a home they cannot afford, the standard chronology is like this: Someone loses a job, or has their hours cut back. As the family’s income comes down, they spend on necessities: Food, gasoline, water. People are living on their credit cards, so that has to be paid. Other non-necessities get postponed (Student loans? Ha!) Eventually, the income reduction leads to a place where its food or mortgage.

The mortgage loses.

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What do we know about Retail Sales? They have gained strength for 7 consecutive months. There gains have been concentrated in a few areas:

• Luxury sales rose 22.7%
• Furniture sales rose 13.8%
• Appliance sales rose 6.9%
• Auto sales gained 24% from year ago levels

Those people voluntarily not paying their mortgages are not buying luxury goods, for the simple reason they cannot afford them. The people behind on their mortgages in these days of tight credit are not qualifying for car leases or loans. And if you plan on abandoning a house in 6 months to a year, are you really buying appliances and furniture?

I think not.

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On to the post in question.

Paul Jackson, the Editor-in-Chief at Housing Wire who posted a train wreck of an anecdote as a substitute for actual analysis. His post, ‘For Consumers, Time to Shop (Until the Mortgage Drops)” used a quote from Bill at Calculated Risk.

Jackson took the following — he called it a “case study” as the typical ‘HAMPlicant.’ They had an $1,880 monthly payment on their mortgage they’d defaulted on, yet their bank statements for the past 30 days included the following expenses:

• visits to the tanning salon
• visits to the nail spa
• some kind of gourmet produce market
• various liquor stores
• A DirecTV bill that involved some serious premium programming or pay-per-view events
• Over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker

No one will dispute that this person is financially irresponsible, shows a “wanton disregard for minimizing spending”  and is not worthy of a mortgage mod. If you want to call them an idiot, I won’t argue.

However, one person is neither a trend nor proof of conclusion.

I have no problem with occasionally dropping an anecdote to add some color to a dry analysis. However, to take an outrageous example and draw a conclusion that its the norm is simply a recipe for getting the big picture wrong.

And I will even grant you that hundreds, maybe thousands of people who are behind on their mortgages are spending irresponsibly. Perhaps tens of thousands are. But there are over 7 million late mortgage payers, and 15 million people under or unemployed. That works out to be less than 1% of the delinquent homeowners. I’d like to see data

I wanted to double check the sourcing, so I tagged Bill at Calculated Risk last night. He confirmed the guest poster –Shnaps – was a mortgage industry insider. He also confirmed that he and Shnaps had discussed this individual. Shnaps stated that based on all of the data he reviews professionally and mortgage mod applications he processes, our tanned and manicured applicant was the exception, not the rule.

Jackson (apparently) never took bothered to ask. [UPDATE: Paul emailed me he did] Instead, he took an extreme example and drew a false conclusion from it. Unless he wants the usually excellent Housing Wire to become just another purveyor of Recession P0rn, he needs to consider doing actual research.

A few of the usual brain dead media suspects picked up his post as proof of some talking point or another. Merely repeating other people’s weak ass comments isn’t news — its somewhere between

Disappointingly, Diana Olick of CNBC also got drawn into the silliness. her work is more often than not excellent. Not this time, omitting both in depth research into retail sales and analysis of the actual data.

She should know better.

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Sources:
HAMP applicants tanned and juiced
CalculatedRisk, 3/23/2010
http://www.calculatedriskblog.com/2010/03/hamp-applicants-tanned-and-juiced.html

For Consumers, Time to Shop (Until the Mortgage Drops)
Housing Wire, April 5th, 2010
http://www.housingwire.com/2010/04/05/for-consumers-time-to-shop-until-the-mortgage-drops/

Mortgage Defaults May Be Driving Consumer Spending
Diana Olick
CNBC 12 Apr 2010
http://www.cnbc.com/id/36422316/

Mortgage Defaults Drive Consumer Spending: Experts Weigh In
Diana Olick
CNBC 12 Apr 2010, 14 Apr 2010
http://www.cnbc.com/id/36503380

March Housing Starts totaled 626k, a bit above expectations of 610k and Feb was revised up by 41k to 616k. The gain was solely led by a rise in multi family starts as single family starts dropped. Permits were 60k above expectations at 685k, the most since Oct ’08 as builders squeeze in what they can before the April 30th expiration of the home buying tax credit. Permits for both single family and multi family areas were up. Within weeks though we’ll be able to see the natural forces of supply and demand at work in the housing market without the influence of the distortion of some major government incentives (foreclosure process still influenced by HAMP). Overall, the US economy is definitely in a better place but juice, the steroid juice of cheap money is again having its influence and we can only hope that we can make the transition without it over the next few years better than we did last time.

Asian stocks across the board traded lower led by anything property and construction related in response to yesterday’s move by Chinese officials to raise down payment requirements on 2nd homes to 50% from 40% and said interest rates on these loans have to be at least 110% of benchmark rates. Fixed asset investment has been enormous in China and has been the main source of growth that was fed by the huge stimulus plan put in place in late ’08. US earnings continue to be great with GE overcoming a revenue miss, BAC far exceeding both revenue and earnings estimates and GOOG still seeing strong growth (stock lower but just back to last Friday’s close). Bonds in Greece and Portugal are lower again and the euro is at a one week low vs the US$ as investors are truly losing patience with the Greek situation. US consumer confidence and housing starts are out today.

Hat tip Flowing Data

Last month, Matt Trivisonno  shared his Daily Jobs Update research regarding payroll withholding taxes. (Payroll Withholding Taxes Surge in March).

Zero Hedge challenged the data (Now, About This Alleged Increase In Tax Withholdings By The Government). Here is Trivisonno’s response…

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In the attached chart, I used ZH’s own numbers. I combined the first 12 weeks of the year into three bars of four weeks each and calculated the year-over-year growth percentage. As you can see, the improvement has been dramatic.

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ZH’s second chart (below) isn’t really material. Since the first two months of the year were negative, of course the total for the year is still negative. But that isn’t the point, right? We are looking for a trend, after all. And since ZH did not take into consideration the tax-credit that began in April 2009, their unadjusted numbers understate withholdings for the first three months of this year by a substantial amount.

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Source: Zero Hedge

$450,723 million – Withholdings for Q109

$444,852 million – Withholdings for Q110

On the unadjusted data, there is about a $6 billion shortfall this year. However, using the guesstimates of the Congressional Budget Office, I estimate:

$463,027 million – Withholding for Q110 (adjusted)

So, it is very likely that the economy has added jobs for all of Q1. This page explains my adjustment methodology and has links to the CBO reports:

http://www.dailyjobsupdate.com/public/tax-cut-adjustments

ZH’s concept of “net withholdings” doesn’t make sense. The purpose of looking at the withholding data is to try and get an idea of how many paychecks are being cut, not to make an accounting of the federal government’s cash flow. If you back-out tax refunds, then you have to consider what changes to the tax code may have had an effect. And the
“American Recovery and Reinvestment Act of 2009″ had many provisions.

The bottom line is that there were almost certainly more paychecks for the IRS to tax in 1Q10 than there were in 1Q09, and that means that the economy is expanding.

ZH also included 6 work days in its Week #1 for 2009, and only 5 for Week #1 2010. Due to the New Year’s Day holiday, some of the carry-over is probably justified, but they cheated a little bit there.

Note: Since the tax credit began in April 2009 and is still in effect, starting this month we can make apples-to-apples comparisons with the raw data.

In the attached spreadsheet (Zero Hedge Rebuttal) I have broken the withholding data down into weeks, and then made three subtotals of four weeks each. Those subtotals appear on the chart, which is on the second page of the spreadsheet. Weeks 13 and 14 are not on the chart since they are part of the second quarter. Week 13 was weak, but Week 14 made up for it.

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-Matt
Daily Jobs Update
http://www.dailyjobsupdate.com/
Trivisonno.com
http://www.trivisonno.com/