Big Discounts, Expanded Hours, More Foreclosures

Despite Economy, Malls and Stores Jammed as Stores Usher in Holiday Shopping Season With Big Discounts, Expanded Hours in Tough Economy.

Malls and stores were jammed for pre-dawn discounts on everything from TVs to toys on the official start of Christmas shopping as consumers shrugged off worries about rising gas prices and falling home values.

The aggressive tactics -- bigger discounts and expanded hours like midnight openings -- apparently worked Friday. Based on early reports, Macy's Inc., Toys "R" Us, K-B Toys Inc. and others that pushed big price cuts, reported bigger crowds for the early morning bargains than a year ago. Target Corp. and Wal-Mart Stores Inc., said they were also pleased with the shopper turnout.

My Comment: It's a bit premature to suggest that anything "worked". The key, at least for stores is whether or not they are making any money, and what happens for the rest of the shopping season. Are stores making up for what they are losing on loss leaders? Somehow I doubt it. The next question is "What is the default rate going to be on this shopping spree."

"I'm really looking for the bargains this year because I'm losing my job; they're moving our plant to Mexico after the first of the year, so I have to be careful," said Tina Dillow of New Richmond, Ohio, who camped out at a Best Buy store near Cincinnati at 3 a.m. because of a great deal on a laptop.

My Comment: Thanks Tina, for the laugh of the day. You are out of a job but were camping out overnight to buy a new laptop. That's a well thought out strategy.

"The tougher economic conditions are driving more shoppers to take advantage of early bird specials," said C. Britt Beemer, chairman of America's Research Group.

Marshal Cohen, chief analyst at NPD Group Inc. agreed, but he noted shoppers were buying selectively.

Best Buy Co. drew more than a thousand shoppers to West Paterson, N.J. and to its Manhattan store for early morning bargains on Sony laptop computers, cut to $399.99 from $749.99, and GPS devices from TomTom for $119.99, from the normal $249.99, according to store managers.

My Comment: Selective buying of loss leaders is not going to do much for store profits.

New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario

As shoppers shop till they drop, Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006 as the Nightmare Economic Scenario unfolds.

In the months ahead, millions of adjustable-rate mortgages will reset, leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

My Comment: "Might" is not the right word. "Will" is the right word.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

My Comment: "Could" is the wrong word. "Will" is the right word. For more on what the amount is likely to be, please see How Much Will The Credit Crunch Cost?

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

My Comment: Of course there's a way to tell how it will affect car sales, etc. Car sales are going to plunge. This will put companies like General Motors who cannot make a profit now in dire straights. For more on GM please see Desperation at GMAC and Implications of GM's non-cash writeoff.

Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the Sept. 11, 2001, terror attacks hurt the transportation and allied industries. Economists said the country was officially in recession from March to November of 2001, but the aftermath stretched to 2003.

My Comment: The housing boom was of unprecedented size. The buts will be similar. Thus the historical models on unemployment rate are far too conservative. Expect the unemployment rate to way overshoot current projections.

There is increasing evidence that another downturn has begun.

Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from Arlington, Va.-based investment bank Friedman, Billings Ramsey. That's making it even harder for would-be buyers to get new mortgages -- a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the third quarter from a year earlier, to 446,726 homes nationwide, according to Irvine, Calif.-based RealtyTrac Inc. That's one foreclosure filing for every 196 households in the nation, a 34 percent jump from just three months earlier.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

My Comment: The best thing for most of these people is to lose their home and start all over. There is nothing worse than being a debt slave forever. Competent financial counselors should be encouraging people to walk away. I talked about this in Sign Waving Demonstrators Picket Countrywide Financial.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

"There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle," Schumer said. "You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

My Comment: Sen. Charles Schumer is a complete fool. 1% interest rates caused the problem. 1% interest rates will not be the solution.

"We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it," said Lawler, who was once chief economist for Fannie Mae.

"We've never been in this situation before."

Indeed we have never been in this situation before because never before in history has the Congress, the Fed, and central bankers worldwide acted as recklessly as they have and still continue to act. Judging from what Schumer wants to do, we are going to keep at it until the whole economic system collapses.

Happy Shopping

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