TURKEYS ON THANKSGIVING

AAA predicts 1.4% fewer Americans will travel 50 miles or more this Thanksgiving. If the prediction proves correct, it will be the first decline in Thanksgiving holiday travel since 2002. The biggest percentage decrease will be in airline travel, a possible 7.2% drop. One exception are only Americans without easy access to a full Turkey spread this Thanksgiving, yet who have travelled furthest - to dine on the Space Station where the inmates there are eating early tonight at the same time as I could see them from my farmhouse at 6:38pm at 12 degrees SSW just above the horizon and clearly visible to the naked eye on a cold stormy night in Scotland! The astronauts normally drink their meals through straws, but like hundreds of millions of Americans, the 7 Endeavour astronauts and 3 permanent crew members are enjoying at least something of a traditional Thanksgiving even if it is only liquidised turkey, cornbread stuffing and green beans. But, unlike earthbound families and colleagues, they're floating while feasting (through straws from plastic sachets, in the shuttle-international space station complex about 220 miles above my head - something of a metaphor for the earth's financial problems. The astronauts, at no expense spared, took delivery of a bathroom, kitchenette, two bedrooms, exercise equipment, but then experienced problems with the system for recycling liquid waste. It purifies sub-prime ingredients, urine, sweat and condensation into just about paletable drinking water. Flight controllers had considered returning the urine-recycling special purpose entity, a $154 million water system, back to Earth. But after 5 days of tinkering, astronauts got it working, and it's now churned out 7 litres of recycled urine & condensation. But NASA wants to test the samples and run the equipment in orbit for at least 3 months (classic 90 days overdue default test) before allowing anyone human to drink the stuff. Meanwhile, what are the turkeynomics back in the real world on Earth USA? Over 46 million USA turkeys get roasted this Thanksgiving! That's 675m pounds weight of turkey (or $1.7bn at $1 for frozen to $4 fresh per pound, up 9 cents or 2%) and full Thanksgiving dinners are costing US celebrants 5.5% more than last year,$44.61, up from $42.26. Many families will not be thanking the turkeys for the credit crunch and recession this year, but most may be thanking their lucky stars they've elected Barack Obama and his team. Like the Obama Government's first budget, however, turkey prices are up 8%. Rolls, cranberries, sweet potatoes and even pumpkin pie are also more expensive. Though if I had turkeys on my farm looking like this they could have the run of the garden and I'd never eat it, valuing its decorative value more.But, as in any recession, the higher prices are not showing up in corporate profit statements, and in the case of many banks the turkeys are not even showing up for work at all this Thanksgiving, a finance sector non-sequitor? What happened is that commodity costs like home prices rose faster than consumers are willing to pay, resulting in lower gross margins all round that threatens the solvency of turkey wholesalers and retailers. President Bush in time-honoured fashion will be using his Presidential Pardon to pardon several turkeys connected to his outgoing amionistration. But, first he gets to pardon a feathered turkey, pardoned. As usual in recent years, the lucky henbird is some luckless variety from some Guantanamo style white battery cage, looking cowed and fearful; wouldn't squawk at a goose or a Bush, very unlike the more traditional image of an organic bird in colourful plumage and bonnet-style headress. Financial turkeys of 2008 must include all the banks that lost most of their share price since August and those that faile doutright especially Lehman Brothers' bankruptcy, Paulson's Troubled Asset Relief Program which didn't exactly do what it said on the label, Merrill-Lynch spending $5.27bn buying its own stock at $84.88 per share (now $11.53), TPG (Texas Pacific Group) putting $7bn into WAMU 5 months before regulators wiped out shareholders, Fannie Mae and Freddie Mac, and AIG, and in Europe, the hapless demise of Fortis, Hyporeal, Dresdner, HBoS's botched share-sale and subsequent collapse followed by RBS and now Bank of Ireland looking like it might sell 2/3 of itself for even less good value than Barclays is getting for 1/3, and others too nauseating to recall, except for two recent bank closures. Regulators shut down Houston-based Franklin Bank and Security Pacific Bank in Los Angeles on Friday, bringing the number of failures of federally insured banks this year to 19. The Federal Deposit Insurance Corp. was appointed receiver of Franklin Bank, which had $5.1 billion in assets and $3.7 billion in deposits as of Sept. 30, and of Security Pacific Bank, with $561.1 million in assets and $450.1 million in deposits as of Oct. 17. The turkey here has to be co-founder and chairman of parent Franklin Bank Corp, Californian, Lewis Ranieri, who invented mortgage-backed securities two decades ago, but was unable to save his own company from getting ensnared in the home-loan bust.Today's economic news from Thanksgiving USA include the following: Not good news that new unemployment claims fell this week to 529,000 from 543,000 last week! US unemployment is now at its highest since 1983. Personal Income rose at an annual rate 0.3% in October, up from 0.1% in September, while personal pending fell 1% month on month, a big drop, largest fall since 9/11. But it tells us household savings are increasing. New Home Sales fell, confirming a 40.1% annual fall, lowest since 1982. Inventories are now 3 times that of good years (4 months worth of new sales). Orders for durable goods of all kinds fell 4-7%. There is however sign of a little recovery in consumer confidence, but it is likely to be temporary as rising unemployment has still some way to go. There are reasons to think that stock markets have become so cheap it may be profitable, very profitable to buy equities again. This is a global business. My personal view is that a 5-6 months bull run is possible, after which the markets should sag and fall again. The most important investor sentiment with global impact is that of the USA and it is showing a mixed picture with only a possible shading in favour of bullishness. My personal view is that this cannot begin to become solid until real estate prices bottom out and begin rising, at least look as if the fall-off is slowing and the market turning. If home prices are to fall to the long run trend they have to fall half as much again from the 20% fall to date. To end on a more festive note the following image was sent to me as a celebratory greeting for Thanksgiving, which I pass onto all my American friends.

Crunch Images of US Bank Sector Losses

More Institutions Report Declining Earnings, Quarterly Losses: Troubled assets continued to mount at insured commercial banks and savings institutions in the third quarter of 2008, placing a growing burden on industry earnings. Expenses for credit losses topped $50 billion for a second consecutive quarter, absorbing one-third of the industry’s net operating revenue (net interest income plus total noninterest income). Third quarter net income totaled $1.7 billion, a decline of $27.0 billion (94.0 percent) from the third quarter of 2007. The industry’s quarterly return on assets (ROA) fell to 0.05 percent, compared to 0.92 percent a year earlier. This is the second-lowest quarterly ROA reported by the industry in the past 18 years. Evidence of a deteriorating operating environment was widespread. A majority of institutions (58.4 percent) reported year-over-year declines in quarterly net income, and an even larger proportion (64.0 percent) had lower quarterly ROAs. The erosion in profitability has thus far been greater for larger institutions. The median ROA at institutions with assets greater than $1 billion has fallen from 1.03 percent to 0.56 percent since the third quarter of 2007, while at community banks (institutions with assets less than $1 billion) the median ROA has declined from 0.97 percent to 0.72 percent. Almost one in every four institutions (24.1 percent) reported a net loss for the quarter, the highest percentage in any quarter since the fourth quarter of 1990, and the highest percentage in a third quarter in the 24 years that all insured institutions have reported quarterly earnings. Lower Asset Values Add to the Downward Pressure on Earnings: Loan-loss provisions totaled $50.5 billion in the quarter, more than three times the $16.8 billion of a year earlier. Total noninterest income was $905 million (1.5 percent) lower than in the third quarter of 2007. Securitization income declined by $1.9 billion (33.0 percent), as reduced demand in secondary markets limited new securitization activity. Gains on sales of assets other than loans declined by $1.0 billion (78.7 percent) year-over-year, and losses on sales of real estate acquired through foreclosure rose by $518 million (588 percent). Among the few categories of noninterest income that showed improvement, loan sales produced net gains of $166 million in the third quarter, compared to $1.2 billion in net losses a year earlier, and trading revenue was up by $2.8 billion (129.2 percent). Sales of securities and other assets yielded net losses of $7.6 billion in the third quarter, compared to gains of $77 million in the third quarter of 2007. Expenses for impairment of goodwill and other intangible asset expenses were $1.8 billion (58.6 percent) higher than a year ago. Loan Losses Continue to Mount: The industry reported year-over-year growth in net charge-offs for the seventh consecutive quarter. Net charge-offs totaled $27.9 billion in the quarter, an increase of $17.0 billion (156.4 percent) from a year earlier. Two-thirds of the increase in charge-offs consisted of loans secured by real estate. Charge-offs of closed-end first and second lien mortgage loans were $4.6 billion (423 percent) higher than in the third quarter of 2007, while charged-off real estate construction and development (C&D) loans were up by $3.9 billion (744 percent). Charge-offs of home equity lines of credit were $2.1 billion (306 percent) higher. Charge-offs of loans to commercial and industrial (C&I) borrowers increased by $2.3 billion (139 percent), credit card loan charge-offs rose by $1.5 billion (37.4 percent), and charge-offs of other loans to individuals were $1.7 billion (76.4 percent) higher. The quarterly net charge-off rate in the third quarter was 1.42 percent, up from 1.32 percent in the second quarter and 0.57 percent in the third quarter of 2007. This is the highest quarterly net charge-off rate for the industry since 1991. The failure of Washington Mutual on September 25 meant that a significant amount of charge-off activity was not reflected in the reported industry totals for the quarter.Growth in Reported Noncurrent Loans Remains High: The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased to $184.3 billion at the end of September. This is $21.4 billion (13.1 percent) more than insured institutions reported as of June 30 and is up by $101.2 billion (122 percent) over the past 12 months. The percentage of total loans and leases that were noncurrent rose from 2.04 percent to 2.31 percent during the quarter and is now at the highest level since the third quarter of 1993. The growth in noncurrent loans during the quarter was led by closed-end first and second lien mortgage loans, where noncurrents rose by $9.6 billion (14.3 percent). Noncurrent real estate C&D loans increased by $6.9 billion (18.1 percent), while noncurrent loans secured by nonfarm nonresidential properties rose by $2.2 billion (18.1 percent). Noncurrent C&I loans were up by $1.8 billion (13.7 percent) during the quarter. Nine Failures in Third Quarter Include Washington Mutual Bank: The number of insured commercial banks and savings institutions fell to 8,384 in the third quarter, down from 8,451 at midyear. During the quarter, 73 institutions were absorbed in mergers, and 9 institutions failed. This is the largest number of failures in a quarter since the third quarter of 1993, when 16 insured institutions failed. Among the failures was Washington Mutual Bank, an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDIC’s 75-year history. There were 21 new institutions chartered in the third quarter, the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002. Four insured savings institutions, with combined assets of $1.0 billion, converted from mutual ownership to stock ownership in the third quarter. The number of insured institutions on the FDIC’s “Problem List” increased from 117 to 171, and the assets of “problem” institutions rose from $78.3 billion to $115.6 billion during the quarter. This is the first time since the middle of 1994 that assets of “problem” institutions have exceeded $100 billion. Failure-Related Restructuring Contributes to a Decline in Reported Capital: Total equity capital fell by $44.2 billion (3.3 percent) during the third quarter. A $14.6-billion decline in other comprehensive income, driven primarily by unrealized losses on securities held for sale, was a significant factor in the reduction in equity, but most of the decline stemmed from the accounting effect of the failure of Washington Mutual Bank (WaMu). The WaMu failure had a similar effect on the reported industry totals for tier 1 capital and total risk-based capital, which declined by $33.6 billion and $35.3 billion, respectively. Unlike equity capital, these regulatory capital amounts are not affected by changes in unrealized gains or losses on available-for-sale securities. Almost half of all institutions (48.5 percent) reported declines in their leverage capital ratios during the quarter, and slightly more than half (51.2 percent) reported declines in their total risk-based capital ratios. Many institutions reduced their dividends to preserve capital; of the 3,761 institutions that paid dividends in the third quarter of 2007, more than half (57.4 percent) paid lower dividends in the third quarter of 2008, including 20.7 percent that paid no dividends. Third quarter dividends totaled $11.0 billion, a $16.9-billion (60.7-percent) decline from a year ago.

ART ATTACK!

The world art market is now crunched too - another financial safe haven bites dust, or as I explained in a conference call earlier to my Paris dealers, "La question de la contagion de la crise financière au marché de l’art est désormais centrale." The signs began in September, though eminently predictable. Some observers claimed the art market had not contracted since 1990, which is nonsense. It declined in the mid-'90s after the 92-93 crash, which hit all luxuries, and again after 2001-03 when a lot of wealthy IT options earners suddenly got hit for capital gains as their share options crashed 90%. Although art values survived 9/11 (when several great collections and collectors were lost in the twin towers and a warehouse fire in East London destroyed a vast collection of Brit Art), the current meltdown of the global financial system has been too much for the "social climbers' investment" market. From January levels, the average prices of auction house art by October was 14.5% down, and that's without a short-selling market. In art all investors go long on illiquid assets and hope that windows of opportunity will suddenly open to sell at a euphoric profit. With hindsight, the market's peak was a year ago. Damian Hirst and Jeff Koons did well, however, before prices deflated. All market segments, all artists - from classic investment grade to top-end speculative to entry-level affordable (<$10,000) - are dragged down by depreciation of "speculative" works, what we financial analysts call high risk high return "Junk". Prices are down in small provincial auction rooms as at major prestigious houses. The value wiped out is undoubtedly in the region of $tens of billions. Demand as ever was driven by the nouveau riche, recently from among the arrivistes of Asia, Russia and the Middle-East that kept prices buoyant until June and allowed savvy Western collectors to offload. Mrs Richard Fuld was a little late into the market but others like Charles Saatchi and Richard Grant among collectors did well. The bought-in rate (buyers failing to come up with the final bid price) has more than doubled in one year, growing from 25% by value at the end of 2007 to 54% in October 2008. Paradoxically, the prices of works presented above the $100,000 line successfully sold remained stable. This is a time to market problem, the period of weeks or months between when works are valued to being published in catalogues to being competed for and orchestrated at the auction sale, so that price adjustments are slow to reflect the actual market. As reserve price estimates are behind market reality, the first supply/demand disequilibria causes a jump in the bought-in rate. I sold parts of my collection recently and had them converted into my own version of Carl Andre's bricks or Damian's skull. Whereas the top-end of the market (4.1% of deals) has shown relative and temporary price inertia, on the more volatile cheaper market segments (less than $100,000) falls have been frictionless and act as lead indicators, falling 18% year to date! We can expect at least the same again in 2009. But, long before prices fall further market illiquidity cuts off further sales other than fire-sales and insurance claims. The impact of the crisis has shaken boardrooms and drawing rooms around the world. The global market is efficient as prices contracted in New York, Paris, Berlin, Rome and London just as it did simultaneously in new growth zones of Hong Kong, Singapore, Shanghai, Tokyo, Sao Paolo, Bombay and Dubai. The very latest results recorded in these new markets are extremely disquieting to those who bought heavily into Chinese art this year on the back of the Olympics euphoria or the new nascent Gulf buying e.g. the $16.9m by Christie’s Mid-East in its October sales in Dubai compared with the $32-43m expected. In Hong-Kong in October '07, Sotheby’s posted a bought-in rate below 10%. A year later, at the same sales, the ratio was 29%. For long term proven fundamentals, if buying contemporary art on Walter Buffet principles, though I doubt he ever bought any investment grade art, I recommend the works of Joseph Beuys (1923-1986), something he'd explain on the blackboard and then have a good laugh at. He still appears in more art shows a year (360+) than Andy Warhol (350+), despite dying 2 years earlier, and the capitalisation value of his entire oeuvre has retained its museum price value of somewhere in the $6billions region. At the beginning of this year, many warned including myself that the art market would see contraction in 2008, notably as ArtPrice put it uniquely "via a recrudescence of buyer vigilance (that) could well start to manifest at auctions". 2009 looks set to be a year of steeper price contraction throughout the entire market. Buying at distress prices is a must for serious collectors. Any investors reading this may wish to join my Art Vulture Fund offering 10 year returns of 200-500%. During the contraction of 1990-92, prices fell 44% in 2 years. This time round I'm expecting 60-80% falls depending on the segment given that in the USA prices rose 67% in 2005-08 and globally (partly currency exchange rate movements) by 48.9% measured in Euros. Part of this year's fall is the strengtening dollar given that most of the worlds' serious collectors live in the USA. Hence high investment grade art can act as a currency risk hedge. Art outpaced equities, though underperformed property. But like any equity market individual gains can greatly exceed the market average or greatly undershoot it. Equity and fixed income markets tend to react immediately to announcements by the Fed, BoE or the ECB in seconds. The art market functions with a different rhythm but is at least as vulnerable to insider trading and system gaming. But more like the real estate market, the art market has a natural "interval" between cause and effect with transactions often taking several months to conclude.
This time round, however, the art market barometer dropped 13% at the start of October in unison with the sharp falls on stock markets. Such prices falls will not effect tight markets for great dead artists where the work is in short supply and hard to transport and the artists are widely popular such as Jean Tinguely who turn junk into fine art as opposed to those of a more semantic games-playing approach to art who churn out junk merely for investment. Below is Jean Tinguely's Homage to New York. This may be related to a change in the future evolution of art prices following several exchanges opening to trade art options and futures. Personally, I'm keen to develop an artist limited edition signed bearer bond certificates market price gurantee system whereby artworks can be effectively securitized and have their spreads insured. Whereas over the summer when I found less than a quarter of artists and agnts, gallerists and collectors would openly anticipate a contraction in the fourth quarter, in October at London's Frieze the proportion of bearish embracers of this idea rose to well over half.