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| September 22, 2009 |
Issue 21 | |
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"Preparing you for the financial road ahead" | |
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| -Ask DWM- |
Q: What do I need to know about (and do with) my credit score(s)?
Answer: Great question. As banks tighten their lending standards, your credit score becomes most critical, even for high net worth individuals. When lenders are determining whether to extend credit and at what interest rate, they look at your credit score.
Actually, you don't have one score, but many. You have a Fair Isaac Corp. ("FICO") score and scores from Equifax, Experian and TransUnion. Each is a score on a particular day of how much of your available credit you have used. If you use credit cards to get more reward points (even if you pay the balance in full each month) that reduces your score. Consider not using credit cards for 60 to 90 days before you seek your next mortgage or car loan if you want to temporarily improve your scores.
Avoid late payments. One late payment can hurt your score for more than a year. If you're out of town or just flat out miss making the payment on time, call the credit card company and beg them to waive penalties and most importantly, to not report this infraction to the credit bureau.
Be aware that credit inquiries hurt your score. When you shop for a mortgage, a car or an education loan, those inquiries count against your score. However, multiple inquiries about your credit within a few weeks, typically count only as one "demerit".
Once a year, you can get a free credit report by going to www.annualcreditreport.com. This will provide details of what's in your credit file but not your score. It will cost you extra ($7.95 extra at TransUnion) for your score, but that's worth it. You can also get a free FICO report but the score on the free one may not necessarily be the score a potential lender would receive. A full FICO report costs $15.95.
We encourage you to take a look to see where you stand and take steps to maintain great credit scores. Like your other assets, they need to be maximized and protected.
For additional information in The Wall Street Journal's September 8th article click here | |
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-Bailout- |
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The Devil's Dictionary- Financial Edition  Just as the financial crisis has morphed into a daily grind instead of a daily fire drill, its peculiar jargon has found its way into everyday conversations. Back in 1906, Ambrose Bierce's "Devil's Dictionary," originally published as "The Cynic's Word Book," provided a guide to the political and cultural language of the day.
Based on Bierce's book, Matthew Rose last week provided an updated Financial Edition for the Wall Street Journal.
We thought you would enjoy these excerpts:
AAA, n., obsolete. A rhetorical device used to dupe buyers into purchasing securities backed by shacks dressed as houses, and to secure the highest possible spot in telephone directories. Common usage: AAA Septic Drainage and Mortgage Backed Security Services.
BAILOUT, n. First known use: Noah. Novel regressive taxation scheme whereby vast sums of capital are transferred from those citizens who didn't participate in the illusory Bacchanalia of the housing bubble to those who did and weren't clever enough to get out in time.
BANK, GOOD, n., archaic. Sober, conservative, risk-averse institutions designed to midwife customers' capital and enable prudent lending to deserving businesses and consumers. See Capra, F., the Bailey Building & Loan Association.
BANK, BAD, n. 1. Everyone else. 2. Especially Goldman Sachs.
CREDIT-DEFAULT SWAP, n. loose translation from the original Latin "ubi mel ibi apes," or "where there's honey there are bees." 1. A complex financial instrument vital to the functioning of a modern economy in the way it spreads risk among consenting parties. (Greenspan, A., pre-Sept. 2008.) 2. A complex financial instrument that nearly destroyed modern capitalism (Greenspan, A., post-Sept. 2008).
CREDIT LINE, n. A set amount of borrowed money available only to those who don't need it.
GREEN SHOOTS, n. 1. The first signs of spring, often clobbered by summer's heat and autumn's rain. 2. A sign the economy is falling apart more slowly than previously thought. Related: DAISIES, PUSHING UP. See also THINKING, WISHFUL.
PPIP, or PUBLIC-PRIVATE INVESTMENT PARTNERSHIP, v.t. Orig: Gladys Knight. To use a form of hypnotism in which merely saying you intend to fix a problem has the effect of making everyone forget about the problem. Usage: "We really peepipped Congress on those AIG bonuses." See ASSETS, TOXIC.
SECURED CREDITORS, n. In modern American capitalism, the parties last in line for repayment after a company's failure. The others in line include the government, unions, sundry suppliers, friends of the union, friends of the government, unsecured creditors and people vaguely familiar with the matter.
STRESS TEST, n. 1. A measure of arterial blood flow to the head. 2. Alchemic process by which struggling, undercapitalized banks are transformed into paragons of modern finance. (See BANKS, GOOD.) Also known as the "Timothy F. Geithner Seal of Approval," which some bankers insist is good until it isn't anymore. (See BANKS, BAD.)
TANGIBLE COMMON EQUITY, n. unknown origin. Definition unknown; purpose unknown; how it's calculated, unknown; what federal regulators think it means, unknown. Usages: "Macbeth," Shakespeare, W., Act II, Scene (i): "Is this TCE which I see before me...I have thee not, and yet I see thee still."
TARP, n. acronym. 1. A synthetic device designed to cover up an unsightly mess, or to protect perishable goods (firewood, banks) from the ravages of the elements, typically costing somewhere between $12.99 and $700 billion.
U-SHAPED RECOVERY, n . An opportunity for economists to incorrectly predict the timing and nature of the recession's end just as successfully as they incorrectly predicted its inception, depth and duration. Variants include V-shaped recovery, L-shaped recovery and :-( shaped recovery.
By Matthew Rose
For additional information in The Wall Street Journal's September 17th article click here |
| -Consumer Spending- |
Retail Sales Higher Than Expected in August
According to the Commerce Department, retail sales for August exceeded the forecasted two percent gains with a rise of 2.7% in sales. Apparently, the back to school sales combined with higher auto sales due to Cash for Clunkers helped create a late summer buying "binge".
The jump in retail sales followed a revised 0.2% decline in July, worse than the initial estimate of a 0.1% drop.The sharp increase in August retail sales surprised most analysts who had expected a 1.9% increase.
The auto sales index was up 11.9% in July. Gas sales (up 5.1%) and clothing and department store sales (up 2.4%) were also among the positives. Furniture (down 1.6%) and building & garden equipment (down 1.2%) were leading sectors that still struggled with the tough economy. Some analysts were eager to instill a sense of reality from investors and consumers who might read too much in to the August retail sales gains. Excluding auto sales, retail sales rose 1.1% in August, stronger than the average consensus forecast of 0.4%. Stripping out auto and gasoline sales, so-called "core" retail sales rebounded in August, rising 0.6% after falling 0.4% in July.
Retail sales were better month-over-month, but nearly all of it was because of the Cash for Clunkers program. Consumer confidence has yet to show that Americans have completely bought into the sentiment that the worst is over and brighter days are ahead. Despite commentary from Bernanke and other top economists in the last several weeks, consumers appear to be much more cautious about diving back into the buy and spend way of life.
What's next? A $296 million rebate plan to boost sales of energy-efficient home appliances may give struggling companies a glimpse of hope. The program will authorize rebates of $50 to $200 for purchases of high-efficiency appliances that bear the Energy Star seal. Home appliance makers need a lot of help, but this new federal cash for kitchen clunkers program may not generate much demand.
For additional information in Financial Time's September 15th article click here
For additional information in CNN Money's September 15th article click here |
| -Real Estate- |
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Commercial Real Estate Crisis Threatens Recovery
The recent uptick in home sales, green shots of new housing starts and rebounding stock market has some suggesting the recession is over. Unfortunately, the second wave of the credit crisis caused by the unfolding collapse in commercial real estate is threatening the recovery.
Commercial real estate, valued at some $3.5 trillion, has experienced a 39 percent decline in prices from the peak only two years ago, according to the MIT center for Real Estate. Of that decline, 18% came in the second quarter of 2009. Most commercial properties bought or refinanced in the last five years are "upside down" and most are now coming up for refinancing. Over $1 trillion in commercial mortgages are scheduled mature between now and 2012.
From 2004 through 2007, "cap rates" (the primary factor used in valuation) were averaging 6% and lenders were providing 75-80% financing. Now, with cap rates at 9%, values are 40% less and, according to Deutsche Bank, 65% or more of commercial real estate loans coming due will fail to qualify for refinancing. Banks are holding $1.3 trillion in commercial mortgages and $536 billion in construction and development loans. Just when profits and capital are starting to recover, most banks don't want to start recognizing huge write downs in their real estate portfolios. However, many are starting to do just that. They apparently want to unload inventory before a potential sale-off (aka fire sale) occurs.
Commercial-Mortgage Backed Securities (CMBS) are securitized loans which pooled mortgages and sliced them into different categories of risk for investors face an added layer or complexity. Generally, those investors with the most protected securities want to liquidate their positions as quickly as possible and get their money back now. Those with riskier positions resist taking an immediate loss. So, who decides when to sell? The "servicers" do.
Patrick C. Sargent, president of the Commercial Mortgage Securities Association, said that the servicers, despite an apparent conflict of interest, are required to maximize the proceeds for the investment as a whole (for all investor classes). And, by the way, while they are deciding the best time to liquidate the property, the servicers continue to make fees each day by administering the loans. It's not surprising that some of the servicing companies have tripled in size and others are also hiring asset managers.
Two government bailout programs, TALF, Term Asset-Backed Securities Loan Facility, and PPIP, Public-Private Investment Program, were established to provide funding for commercial mortgages. Recently, there has been a rash of initial public offerings by companies who will raise money and then leverage it using TALF and PPIP to purchase commercial real estate.
The economic impact of the impending commercial real estate meltdown is staggering, with massive defaults and losses in the billions of dollars for lenders and property owners. Ultimately, prices will have to fall to levels necessary to draw in other capital to clear the markets. While the bankruptcies and foreclosures will be painful, the stage is being set for new buyers with cash.
For additional information in The New York Times' September 2nd article click here
For additional information in Investors.com's August 20th article click here |
| -Market Update- |
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