Dollars and Jens
Friday, February 29, 2008
Berkshire Hathaway letter
A lot of old hat. What I found most interesting was that he didn't really say anything about the recent legal issues with General Re.

I also kind of hoped for some acknowledgment that, yes, we're still sitting on a huge pile of cash. I had a dark-horse theory that he might declare a dividend. I didn't really expect that, but I did expect some kind of boilerplate "we still think that's worth keeping on the balance sheet until prices of potential acquisitions come down."

Berkshire Hathaway
The Berkshire Hathaway annual report and accompanying letter to the shareholders from Warren Buffett are out.
Some major financial institutions have, however, experienced staggering problems because they engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”
I'm still on the first page.

PCE inflation
The trimmed mean PCE inflation rate for January was an annualized
3.4 percent. According to the BEA, the overall PCE inflation rate
for January was 4.5 percent, annualized, while the inflation rate
for PCE excluding food and energy was 3.7 percent.

Thursday, February 28, 2008
The intermediate report for Q4 GDP is out.
.6% 3.8% 4.9% .6%
Consumption 2.56
Inventories-.65 .22 .89 -1.49
Fixed investment-.70.49 -.11 -.53
Net Exports-.511.32 1.38 .90
Government Spending-.09 .79 .74 .43
Cf. the advanced report. Every component came in weaker this time except for net exports, which were revised significantly upward. If it weren't for the trade improvement, real GDP would have shrunk.

Wednesday, February 27, 2008
Another Term Auction
The fed auctioned another $30 billion for 28 days, this at 3.08%. Secondary sources I've read focus on the fact that the rate at the auctions has been coming down, but I'm more interested that it came in that high; the minimum bid allowed was 2.81%, as that was the average market-expected fed funds rate for those 28 days, a premium of 27bp; earlier this month an auction came in at 3.01% with a minimum bid at 2.86%, and the one before that executed only 2.3bp above the forward rate. It seems a bit disconcerting to me that $30 billion worth of borrowers think it's a good deal to borrow at 27bp above the average rate at which private banks will be lending to each other; are they paying 27bp above the average for overnight funds, or are they feeling risk averse?

Thursday, February 21, 2008
mortgages and bankruptcy
Kim and Robert Canfield filed for bankruptcy last summer to save their home from foreclosure. The Saugus couple makes about $5,500 a month after taxes. Their monthly mortgage payment had climbed above $3,000. The house has been in Robert's family since the 1920s, but they could no longer afford the payments.
Mortgages are treated differently in bankruptcy than most other secured credit, and there's a bill in Congress to make the treatment more similar.
The bill is strongly opposed by the mortgage industry, which warns that interest rates would rise for all borrowers. The industry says the mortgage exception protects lenders against a potential loss of revenue, which lets them offer lower interest rates. The legislation would apply solely to existing loans, but the industry says it still would undermine investor confidence that future mortgages won't again be modified.
While there will be some people who might file for bankruptcy to strip down a mortgage who wouldn't otherwise, and some people, like (apparently) the Canfields, will enter bankruptcy with much more undersecured mortgage debt than non-mortgage debt, the primary impact of this legislation is to move creditors' assets from mortgage holders to other creditors. Mortgage rates for people with bad credit would go up, but interest on other kinds of loans might well come down as a result of this.

One always wonders exactly what it is that happened to someone to get them into a mortgage with monthly payments more than half their take-home pay, so I'll include the rest of the story:
The Canfields bought their home from a relative in 1996 for $155,000. For the next five years, they made regular payments on a conventional mortgage loan. Then, between 2001 and 2004, they refinanced three times, ultimately borrowing $330,000. They used much of the money to repay thousands of dollars in credit card debts.

The last loan, from Long Beach Mortgage, a subsidiary of Washington Mutual, carried an introductory monthly payment of $2,400. The Canfields were making as much money as they ever had. Robert pulled in good overtime driving a trash truck. Kim was working three jobs. The payments were affordable.

Over the next two years, Kim took a full-time job at a call center and Robert's overtime diminished. In 2006, when the interest rate on the mortgage loan started climbing, the Canfields fell behind.
A combination, then, of a drop in income and a simple piling of debt onto a loan that seems to have had at least some kind of interest rate adjustment, though I'm a little surprised that it only took the payment from $2400 to $3200. In any case, note that this is one of the reasons, under current bankruptcy law, that people are sometimes advised not to borrow against their homes to pay down unsecured debt: much of this originated as ordinary unsecured consumer debt that could have been adjusted in bankruptcy without their losing the home.

Monday, February 11, 2008
Raising Funds in a Hurry
This is probably just my own ignorance, but I hadn't heard of this idea of raising funds by issuing your own shareholders deep in-the-money stock options (other than as a takeover defense). I like the idea, at least intuitively. For one thing, any of the urgency discount they have to give to raise funds quickly accrues to existing shareholders. It also seems to me that the company could argue, on that basis, that the price they got for the shares is not the price they would have had to settle for (though that Bloomberg article doesn't indicate that they're doing so). They couldn't reasonably sell a large block shares at a discount to a third party without getting as much for them as they could without jeopardizing their financing, but what they did is part-way between an offering and a stock dividend; the only reason for not setting the strike price at zero is that they kind of need the money.

Economic Report of the President
It's out.

Friday, February 08, 2008
Janet Yellen
What I find most interesting about these comments from Janet Yellen is
I consider it most probable that the U.S. economy will experience slow growth, and not outright recession, in coming quarters.
Me, I'm increasingly confident that recession started in November or December. Yellen is perhaps the most dovish FOMC participant — more than any of the governors or any of the other 11 bank presidents — and I kind of thought she had a softer view of the economy than that, though I did think it mostly came from a prioritization of short-term growth over price stability. (She claims to be sanguine on that front.)

Friday, February 01, 2008
more data
Real consumer spending dipped slightly last month. Income from labor was up, but not at a great-guns clip.

The unemployment rate dipped to 4.9%, though the number of payroll jobs was reported to decline; there were some benchmark/census-related revisions. The household survey indicated a drop in the number of people unemployed and in the number of people not in the workforce, while the payroll number for last month was revised up. In short, if you're hearing "negative job growth" and nothing else, you heard the single most malign data point from a report that was, on the whole, mediocre rather than terrible.

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