Now, this is something new

Aside from ski trips back in the 1980s, it's been almost thirty years since we woke up to see a fresh blanket of snow outside - the adjustment to the new neighborhood continues.
The snowplows were busy early in the morning and some drivers apparently just had to get to work, causing a handful of accidents on local roads. Unfortunately for the school crowd, no classes were scheduled due to the holiday break. One of the best parts about a childhood on the East Coast was waiting around for school closures to be announced on the radio.
It looks as though we got three or four inches but it's already melting away. At this elevation (3,500 feet) it usually only snows a few times a year and it usually only lasts a few days - just enough to keep things interesting without becoming a real bother.
There are still piles of leaves that haven't been raked up and bagged - they'll probably still be there after the snow melts.

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Oil and gold contest update #7

Wow. What a difference a week makes. What appeared to be a battle between SC, IIO, bBdaBeerman, and lowercase cp in the "Guess the Year-End Price of Oil and Gold" contest has now turned into a three-way race between uppercase CP, VP, and Eric.
Markets are open a half-day on Monday and who knows how much the price of oil and gold might move during thin trading in the morning. Whatever happens, a winner will be announced sometime on New Year's Eve or New Year's Day.

Largely due to the continuing declines in crude oil stockpiles, a weaker dollar, and political events now unfolding in Pakistan, crude oil finished the week at just over $96 per barrel and gold ended at almost $839 per ounce.

Here are the top eleven guesses at this point (yes, it's eleven and not ten so that your humble scribe can get his name mentioned once again).
For a complete list of entries and other fascinating details about this contest, see this post from October and this one from September.

The winner will receive a free one year subscription to Iacono Research where the model portfolio rose 2.5 percent on the week and now sports a +23.5 percent gain for the year.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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New home sales plunge ... again

The Census Bureau reported yet another plunge in new home sales during November, a nine percent drop from October, to fresh 12-year lows at 647,000 units.
Data for the last three months was revised sharply lower and the current level of sales is down 34.4 percent from one year ago.

Despite huge discounts and incentives, inventories of unsold homes rose from 8.8 months to 9.3 months, just below the recent high mark set three months ago. Subsequent revisions to the data will likely see the November inventory number revised upward.

Even with the large number of unsold home, prices were stable, rising 4.2 percent from last month to a median price of $239,000, down only 0.5 percent from last year at this time. These prices, however, do not include incentives which often total tens of thousands of dollars or more.

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The end of a love affair with debt

Two stories about the personal finances of two families in the current issue of Money Magazine paint a disturbing picture of Americans and their money, one that is probably far more representative of contemporary life in the U.S. than most would like to admit.

• Our Kids Are Driving Us Broke - Budgeting basics for kids and parents
  
• Burned out: Recovering from a fire - On the brink of financial disaster
  

The first report tells of the Miller family in Utah where it appears to be much easier to watch the HELOC grow than to say "No" to their kids.

Kerri and Mike Miller have a spending problem. Three of them, in fact.

There's 12-year-old Kate, a seventh-grader who covets a pair of $160 boots, prefers clothes from American Eagle rather than Target and recently got a $300 cell phone.

There's nine-year-old Landon, who has a voracious appetite for video games. And their youngest, four-year-old Claire, will soon start taking ski lessons (cost: $224, not including equipment).

All three kids attend summer camps that run about $60 a day for each child. And then there's the cost of babysitting ($200 a month), preschool ($4,000 a year) and braces ($3,000).

Even with Mike's six-figure salary in commercial finance, the Park City, Utah, couple's ends are nowhere close to meeting.

"I look at how much money we spend and I think, 'Where is it going?'" says Kerri, 44, who is a stay-at-home mom.

It's not all going to the kids, of course: Mike and Kerri have their own indulgences, like the hot tub they put in last year.

The home-equity line of credit they opened two years ago to pay for home improvements now often serves as a safety net when they come up short at the end of the month. The balance is almost $50,000.
...
Study participants said that a desire to keep up with the Joneses led them to splurge on their children. No wonder the average upper-income family will spend $182,000 on each child by the time he or she turns 17, according to a survey by the U.S. Department of Agriculture.

Of course, all kids need stuff, and there's no reason to completely deprive them of things that they'll enjoy and even show off to their peers.
...
When it comes to expensive activities, such as skiing or an over-the-top Sweet 16, consider: Are you paying for this because your kids will really enjoy it or because the neighbors do?

"There's nothing that says you have to have a party as big as everyone else's," says Plantation, Fla. financial planner Ben Tobias.

Do parents teach their kids anything about money these days?

The word "No" would be an excellent beginning to a conversation about what money is, where it comes from, and how, generally, it's a bad idea to spend more than you make.

Actually, this conversation would be much more helpful for the parents than for the kids.

Does anyone teach parents about money these days?

Meanwhile, after the recent fires in Southern California, Kevin and Nicole Martin are digging out from the pile of rubble that used to be their house and the pile of debt that used to be their personal finances.

The Martins had just spent three years renovating their four-bedroom home; the property, including the land, had recently been appraised at $1.4 million. It burned to the ground in less than 2½ hours. The family escaped safely but lost most of their possessions, as well as Emily's cat, Trina Tree Stump. The date was Oct. 22- Kevin and Nicole's 13th anniversary.

How does a family bounce back from such a catastrophe? Like so many victims of last fall's California wildfires - which destroyed at least 1,500 homes from Santa Barbara to the Mexican border - the Martins were devastated. In the weeks immediately following, Kevin and Nicole couldn't eat, Emily had nightmares, and Haley, the baby of the family, suddenly didn't want help from anyone.
Cracks in the financial foundation

The Martins are also facing severe financial repercussions. They were initially euphoric at receiving $1.1 million from Farmers, their insurance company, just two weeks after the fire ($785,000 of the total was earmarked for rebuilding the house). But they've since learned that the settlement probably won't come close to covering the cost of rebuilding, replacing their belongings and living in temporary housing until the work is completed.

The fire also exposed the cracks in the solid financial foundation the couple thought they stood on. They earn a comfortable living: Kevin, 38, an industrial engineer with Qualcomm, and Nicole, 37, who runs a home-based window-treatment business, make $145,000 a year.

But the couple had borrowed heavily against their house, in part to pay for a risky real estate venture, leaving them with loan payments that eat up more than two-thirds of their net income. And while they do save steadily for retirement, they have little cash on hand for emergencies. As Hal Schweiger, a financial planner in San Diego who reviewed the family's finances, put it, "They're right on the brink".

Their plan would have worked spectacularly if home prices had kept going up at 20 percent or more every year.

One of the major cultural changes that has occurred over the last few decades is the astonishing change in the way many in the U.S. view personal debt. Not only are we, as a nation, more comfortable with owing more and more money to banks, we seem to embrace the whole idea because we get more and more trinkets in return.

Of course it looks like that love affair may soon be coming to an end.

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Mad and bewildered Presidents

Earlier today, the U.S. Mint provided a sneak peak of the four Presidential $1 dollar coins that will be released in 2008.

Following last year's group of four coins featuring the first four presidents, next year will see odd caricatures of James Monroe, John Quincy Adams, Andrew Jackson, and Martin Van Buren.

The look on George Washington's face says it all - a copper coin blended with small parts zinc and nickel along with some manganese to provide the appearance of gold is just a bad idea.

It is almost a mockery of what the founding fathers thought money should be, even without the weird images.

They'll clink just like other base metal money and the bigger the base metal coin the dopier it is. According to Coinflation, the nickel has a higher melt value (almost 6 cents versus 5.5 cents for the new dollars) because the nickel actually uses the metal nickel which costs about four times what copper fetches these days.

The Presidential $1 coins are glorified pennies.

Uh, actually, make that "pre-1982 pennies" since only those were made mostly of copper versus today's shinier ones that are made out of zinc (copper pennies have a melt value of over 2 cents).

Here are next year's coins:
James Monroe looks like some sort of Cro-Magnon man, Andrew Jackson looks bewildered, and John Quincy Adams looks like a child molester or ax murderer, possibly a combination of the two. Martin Van Buren is about the only one that looks mostly normal, but then he was kind of odd looking in real life so, they probably just didn't know how to deal with that.

Obviously, they got some of the images from the same place they did for this page at the White House website, but all they had to do was go to Wikipedia to get better images with which to start.

This isn't the first time criticism of the U.S. Mint has been voiced here - have a look at this commentary about something I wrote some time ago about the dopey "numismatist" commercials which can still be seen on TV from time to time.

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The California labor market

There have been quite a few reports in recent days about the labor market in California after the state released the November employment data last Friday. This Los Angeles Times story covers most of the details and there were many reports in Central Valley newspapers about the rapidly rising local unemployment rates where, in some counties, this measure now tops ten percent.

From the LA Times story, the net addition of only 900 jobs in November was the most telling indication of a labor market that is changing very quickly - the modest gain comes after month-to-month job losses in two of the previous four months. While the unemployment rate was unchanged at 5.6 percent in November, it is up considerably from 4.7 percent reported last year at this time.

Total seasonally adjusted nonfarm employment grew by just 0.6% in November from a year earlier, according to the Economic Development Department. Employment in construction fell 3.8%, and the financial sector saw a 1.9% drop.

In November, the state lost a net 13,000 jobs in the construction, financial activities, manufacturing, trade, transportation, utilities and government sectors. It gained 13,900 jobs in natural resources and mining, information, professional and business services, educational and health services, and leisure and hospitality.

"We are on recession watch right now," said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.

The national statistics tell much the same story about where jobs are being lost (construction, financial activities, etc.) and where jobs are being created (education and health services, leisure and hospitality, etc.), however, at the national level, year-over-year job growth has shown no major deceleration as is now the case in California.

A couple charts from the California Employment Development Department website add some important detail to the current situation.

First, the Golden State is probably once again signaling the beginning of a trend that is about to go national.

Earlier this year, the unemployment rate began to rise from under five percent to its current level of 5.6 percent, this rate now holding steady for a third consecutive month. In contrast, the national unemployment rate has ticked up only slightly.

With job losses now centered in construction and financial activities, the spill-over effect into areas such as retail sales within the trade, transportation, and utilities sector has accelerated recently.

From year-ago levels, construction employment has fallen 3.8 percent and jobs in the financial sector have declined 1.6 percent, however, over that same period, employment in trade, transportation, and utilities is about flat.

However, from October to November, it was the trade category that showed the biggest decline with a job loss of 4,200 positions while the financial sector lost 3,600 jobs and construction declined by 1,900. This is the second month of sharp declines in the trade category after having been resilient through most of the last year.

More telling about the California labor market, however, is the regional nature of the current reversal. The Central Valley, otherwise known as "subprime central", has seen the biggest jump in unemployment recently as foreclosures mount and home prices tumble.

To make the outlook even worse, as a result of a rapidly rising budget gap for the current fiscal year, California Governor Arnold Schwarzenegger has announced a "fiscal emergency" which will likely result in at least some job loss in state and local government along with the education and health services category - these sectors have been major areas of job growth over the last year.

It is shaping up to be an interesting year ahead with employment probably turning into a major issue, not just in California, but across the entire country.

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UPDATE: Dec 27th, 9:40 AM

This chart probably makes the point better than the one above regarding recent changes being systemic rather than seasonal.

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Japan, you're next

As expected, Netherlands didn't last very long in the number eight position of the official world gold holdings as tabulated by the World Gold Council and as modified here to include the streetTRACKS Gold Shares ETF (NYSE:GLD).
The combination of recent sales by the Dutch and the steady creation of GLD shares lately (another 10 tonnes in the trust as of the close of business today) made this one all too easy to call, as was done here just a couple weeks ago.

With the gold ETF (a.k.a. the common man's sovereign wealth fund) now 138 tonnes behind the amount of gold reserves held by the central bank in Japan, at first glance you might think it would be some time before GLD moves into the lucky number seven spot, however, it may not take very long at all.

Based on the current rate of growth, as shown in the chart below, it will be only about five more months before the last major Asian central bank with a pitiful percent of reserves held as gold bullion is surpassed by the gold ETF.
You'd think that China and Japan would, at some point, want something more tangible than dollar-denominated treasuries, GSE debt, or stakes in U.S. financial companies in exchange for the U.S. dollars that accumulate after trading with us Americans - we probably would if we were the ones with mounds and mounds of yen and yuan piling up in our vaults.

Full Disclosure: Long GLD at time of writing.



To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Giving the gift of gasoline

Commodity inflation finally meets the electronic age of Christmas consumerism in the U.S. as this Bloomberg story details another interesting sign of the times.

Spending on holiday gift cards may climb 25 percent to $35 billion this year, according to Archstone Consulting LLC, boosted by cards that aid consumers contending with higher food and fuel costs and the deepest housing slump since 1991. That tops some estimates for holiday sales on Web sites.

Gift cards that pay for gasoline at Exxon Mobil Corp. stations, groceries at Wal-Mart Stores Inc. or medical bills through health-insurer Highmark Inc. will help increase the category to 5.9 percent of total U.S. holiday spending this year, according to Stamford, Connecticut-based Archstone. That's up from 4.9 percent in 2006.

"The practical usage of gift cards is the biggest story this year, due to economic fears of many consumers and tighter budgets," said Heather Dougherty, director of research at Experian Group Ltd.'s Hitwise in New York, which measures Web traffic. "We see people who are searching for things like gas and grocery gift cards."
...
"We've seen a cultural shift in how we view gift cards, from a thoughtless, lazy person's gift to a thoughtful gift," said Scott Krugman, a National Retail Federation spokesman. "It's becoming a practical gift for practical purposes."

It's too bad that the $25 gift card above will only buy about a half a tank of gas.

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Broadbased, record declines in home prices

A short time ago, Macromarkets released the October data for the S&P/Case-Shiller Home Price Indices showing a 6.7 percent year-over-year decline for the 10-City Composite Index, the steepest decline on record. Indices for individual cities are shown below:
The drop in the 10-City Composite Index exceeded the previous record decline of 6.3 percent from April of 1991 and the current 20-City Composite Index showed a similar year-over-year decline of 6.1 percent.

Robert Shiller, Chief Economist at MacroMarkets LLC, commented:

“No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim. Not only did the 10-City Composite post a record low in its annual growth rate, but 11 of the 20 metro areas did the same. If you look at the monthly figures, every MSA went down in both October and September. Eleven of the 20 MSAs, in addition to the two composites, recorded their single largest monthly decline on record in October. For both the 10-City and 20-City composites this was a decline of 1.4% over September”

In tabular form, the October data looks like this:
Miami showed the biggest annual decline at minus 12.4 percent, followed by Tampa, Detroit, and San Diego. Charolotte, Portland, and Seattle are the only areas still showing higher home prices than a year ago, however, these areas have all declined in recent months.

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You better watch out, you better not cry

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'Twas the night before Christmas

Image courtesy of Crazy-Jokes.com.

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A nice stocking-stuffer from Congress

USAToday reports that Congress has temporarily done away with the "debt forgiveness" tax that would usually result when a borrower defaulted on their mortgage and the house went back to the bank.

The tax break is retroactive to January 1st, 2007 with a planned expiration of 2009 and is aimed at helping ease the pain of foreclosures that began to mount earlier this year.

Shortly before adjourning last week for the year, Congress approved a tax-relief bill designed to help families who had a portion of mortgage debt forgiven. Some families have had such debt forgiven through a foreclosure, a short sale or a loan restructuring that enabled them to stay in their homes. (In a short sale, a home is sold for less than the amount of the loan.)

Ordinarily, forgiven debt is treated as taxable income. In the past, families who lost homes because they couldn't afford mortgage payments were sometimes stuck with a huge tax bill.

The tax "is a double whammy, and it's kind of a surprise whammy," since most don't realize that forgiven debt is taxable, says Mel Schwarz, partner at Grant Thornton's national tax office.

The law of unintended consequences dictates that this might not help too many families and that it will only make the foreclosure situation worse.

Here's why.

The old debt forgiveness tax only applied to the amount of canceled debt that exceeded a (former) homeowner's net worth. In other words, if you had $100,000 of debt canceled but on the day after the house was sold, your net worth was only $5,000, you only owed taxes on $5,000.

While there are no statistics available on the subject, it would not be an unreasonable guess that the bulk of the foreclosures in the subprime sector are probably not too different than the above example (in many case the net worth being negative) and, as a result, there's not a whole lot of "tax relief" to be had.

The potentially more important case involves more "well-to-do" trade-up buyers who may have gotten in over their heads back when everyone was going gaga over real estate and are now looking to walk-away from their upside-down McMansions without getting hammered at tax time.

For someone who has a sizable retirement account, the old tax rules presented big problems because if you had $100,000 in debt forgiveness but retirement accounts worth $150,000, then you would have probably owed taxes on the full $100,000.

This may have unintended consequences in mid-range to upper-range housing where one obstacle to walking away from an "investment gone bad" has now been removed.

Fortunately, Congress saw fit to have this apply only to principle residences, so second-home buyers and speculators will get no relief at all.

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Some holiday cheer from Ambrose Evans-Pritchard

Filled with the holiday spirit in this story at the Telegraph U.K., blog favorite Ambrose Evans-Pritchard cites a few reasons to be worried (and not happy) this holiday season.

Crisis may make 1929 look a 'walk in the park'
As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.

"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.

Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor - the interbank rates used to price contracts and Club Med mortgages - are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.

York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.

"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.

"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.
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Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.

Section 13 (3) allows the Fed to take emergency action when banks become "unwilling or very reluctant to provide credit". A vote by five governors can - in "exigent circumstances" - authorise the bank to lend money to anybody, and take upon itself the credit risk. This clause has not been evoked since the Slump.

The Slump? That's what they call the Great Depression in the U.K. - The Great Slump.

ooo

Kal at The Economist appears to be taking a short break but left behind this Dancin' Dubya animation:

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