A few times, we've said more than 100 banks will fail this year. It became official on Friday, when regulators closed seven banks with more than $1 billion of assets in five Midwestern and Southern states, bringing the total number of bank failures this year to 106. The FDIC is on the hook for the losses, totaling about $357 million.
And this is only the beginning. Banks are holding about half of the $3.5 trillion of outstanding commercial real estate obligations. I think we'll easily see hundreds more failures over the next few years. Remember, a bank is simply a levered play on the region in which it makes loans.
Big Brother is expanding his turf...
Demand for new homes is growing faster in Washington, D.C., than in any other major U.S. city. Nationwide, building permits fell 17% in the third quarter of 2009, compared to an 11% rise in the D.C. area. Housing construction starts in the area rose 21% in the third quarter – the biggest quarterly jump in two years, according to Metrostudy, a construction research firm.
It's easy to see where the new demand is coming from. In September, about 363,800 people were working for the government in the D.C. area, up 3% from the previous year. According to Stephen Fuller of George Mason University in Fairfax, Virginia, there are 1.7 new contractors added to the federal payroll for each new federal employee. With the national unemployment rate at 9.8%, D.C.'s unemployment is the lowest of the nation's 10 largest metro areas at 6.2%.
The Institute for Supply Management's manufacturing index grew for the third month in a row after 18 straight months of declines. The index rose 3.1% from September to 55.7 in October. When the index is above 50, it's said to indicate economic expansion is underway.
I would guess somewhere between the deflationary crush we felt earlier this year and the Third-World-style hyperinflation we may see in the next several years, there'll be times when things will feel quite sanguine.
One respondent to the ISM survey said, "Automotive demand still remains strong even after 'Cash for Clunkers,'" the second month in a row that's been reported.
Ford sure benefited from Cash for Clunkers. It booked a $995 million profit last quarter and $1.3 billion in positive cash flow. Every major division of Ford showed a profit, except Volvo, which it's trying to sell to China's Geely Automobile Holdings.
Ford's CFO said the company won't know until next year how it'll do without Cash for Clunkers. One thing I'll say about Ford: While GM and Chrysler were knocking on the government's door, it made its own deals with bondholders, buying back debt and exchanging it for new debt at fractions of par value.
Ford remains in horrible financial condition. It's got $26.9 billion in debt, $1.6 billion of it maturing in the coming year. And it'll soon add another $7 billion-$8 billion of debt to finance payments to the autoworker-union retirement fund. The Egan-Jones credit ratings agency actually upgraded Ford's rating from C to B-.
At an auction held yesterday in Philadelphia, art lovers paid a total of $1.35 million for the artwork that once hung on the walls of Lehman Brothers corporate offices in New York.
Never mind the absurdity of a shareholder-owned company spending money on expensive artwork. The Lehman art auction got me to thinking... These days, with the U.S. dollar rapidly approaching par with Charmin UltraSoft, maybe artwork is a better way to store wealth than cash...
But U.S. corporations seem to be on the wrong side of that bet. They're holding more of their assets in cash now than they have in 40 years. According to the Wall Street Journal, the 500 largest nonfinancial U.S. companies had about $994 billion in cash, or 9.8% of their assets, up from $846 billion, or 7.9% of assets, a year earlier.
Alcoa's CFO says "they'd have to beat me over my head" to get the company's cash out of his hands. Or look at Google. It holds 58% of its assets in cash. Google CEO Eric Schmidt says, "We're very happy to have it sit in our bank account and earn a modest interest rate."
To sum up: Government is expanding. Banks are going belly-up by the hundreds. And corporations are too scared to spend what profits they're making.
The reader feedback is a wasteland lately. Are you out there? E-mail us at feedback@stansberryresearch.com to demonstrate signs of life.
"Re Tom Olsen's little rant, I find it interesting that while 'His name is not OBAMA!' these days just a year or so ago another guy's name was always 'that !%$#!@! BUSH' and never Mr. Bush or President Bush." – Paid-up subscriber David Burge
"A Canadian gov't friend reports they will be docking her paycheck 54% to pay for a broken pension fund. How far behind can our socialist (let the rich pay for it) gov't be? Please don't print my name to protect my friend." – Anonymous
"Perfect weather... a golf course... and country club... all the money you could ever spend... and your 'BITCHEN' that your not free and your terrible Gov. won't let you alone... In any political, economic, religous... or other manmade system there are winners and losers... some of it is luck and circumstance... and some skill and luck again... You are one of the winners... then... you voted for a complete idiot [George W.] and now you want to blame the government and the system for wanting some of the money back... to me... you are self riteous... self engrossed... and selfish – you don't just want the good life... you want to make policy and be the boss – YOU want to rationalize and use statistics to justify what ever you think or believe – but often [like everyone else] what you believe is a bunch of 'BULL*****'... my friend... the top 10% wealthiest Americans control 60% of America's wealth... so paying half the taxes makes some sense – So you were good at this money game and fortunate to also be an American... in a political and economic system that has rewarded you well... I look at the top tax brackets when John Kennedy was President and the top brackets now... and I realize 'you guys' have gotten everything you wanted... less regulation... better tax rates... more monopolies... bankers running trillion dollar scams... and we are all worse off then ever in history... and now... you spoiled child... you want to leave the Country and be left alone – I understand... its your mess and you want to leave me behind to live in it... you damn...........!!!!!!!!!!!!!!" – Paid-up subscriber TP
Ferris comment: You're never going to make any money with that attitude.
Regards,
Dan Ferris
Medford, Oregon
November 2, 2009