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Thank You, Weak Dollar!

August 28, 2008 12:08 PM

ABC News' Bianna Golodryga reports: Thank you, weak dollar! For the second day in a row, Wall Street has been greeted by better-than-expected economic news.

Wednesday it was a better-than-expected durable goods orders report, for the second month in a row, no less.

This morning it was a better-than-expected revision in second quarter economic growth. GDP growth between the months of April and June was revised up to 3.3 percent after original estimates from the government called for an upward revision of 1.9 percent.

Hey, in this environment, it's kind of nice to have low expectations every once in a while, right? Especially after the pitiful 0.9 percent growth reported for the first quarter of the year.

The breakdown of the report explains it all: exports, exports, exports...

They were up 13 percent in the second quarter on the heels of foreign markets gobbling up U.S.-made products as if they were preparing for a storm (and I’m not talking about Gustav, but more on that later).

That same drive for U.S.-made products overseas also explains the uptick in durable goods orders, which climbed 1.3 percent in July. It's clear that even if U.S. consumers have gone on a spending diet, U.S. businesses catering to international buyers are still charging full steam ahead after a weak U.S. dollar has made them much more competitive in the global playing field.

That's right, folks -- it's all about the steep decline we've seen in the U.S. dollar and it may be one reason why the government and Mr. Paulson (while always sticking to the mantra of a strong dollar policy) have been lax about enforcing one over the past year.

In July, the U.S dollar hit a record low of $1.6038 against the euro, making U.S. products and U.S. real estate bargain investments. And in no place in the country is this trend more evident than in New York City, where every other person walking down the street is carrying bags full of merchandise, and nearly each on of them is speaking in a foreign tongue. On a recent flight back to New York from Texas, I overheard a conversation between two non-New Yorkers, who were visiting the Big Apple for the first time, discussing how every other person on the street is a foreigner. You know the saying, when everyone becomes an expert on a trend, be it dot-coms, real estate and yes, tourism, you've reached its peak? That could be the case here.

In recent weeks, the dollar has jumped more than 5 percent versus the euro, putting it on course for its best monthly performance in nine years. That resurgence has less to do with a strengthening U.S economy and dollar but more so with a slowing global economy. Coming on the heels of the U.S. slowdown, the global economy’s woes show that even despite globalization and its effects, when the U.S. sneezes, the world still catches a cold (though perhaps not as quickly as it used to).

It's becoming clear that the credit crisis is spreading beyond the U.S at a steady pace. Economic forecasts throughout Europe have been gloomy as of late. The housing markets in Spain and the U.K. are quickly deteriorating, while polls in Europe's largest economy, Germany, show a great deal of consumer and business worry and angst. The same is taking place in Japan and yes, even the unstoppable China (which, don't get me wrong, is still growing, albeit in the single digits -- analysts are now calling for China's economic growth to drop to 9 percent this year, down from 11.4 percent in 2007.)

So what will happen in September, which is historically a lousy month for the markets? Who knows? It's impossible to gauge where the market will close today, much less what it will be doing next month. As Arthur Cashin, head of floor operations for UBS, rightly pointed out this morning, the Thursday before Labor Day has "a rather negative history over the years, in the last 11 years, it has been down ten times."

Judging by today's strong open, it may break that trend, thanks again, to a weak dollar. But, with Tropical Storm Gustav charging ahead, and oil prices climbing in tandem, the hurricane could give the dollar a run for its money, literally. The AP has been reporting that if Gustav attacks the same region as Katrina, the Bush administration could tap into the Strategic Petroleum Reserve. Planalytics, a provider of business weather intelligence reports that the storm could force closed around 85 percent of oil-producing platforms in the Gulf of Mexico.

But for now, market bulls are in charge, as the Dow is up triple digits on news that the summer has not been nearly as bad as expected. The bears? Well, they are just reminding the bulls that those initial expectations were nothing to brag about.

August 28, 2008 | Permalink | User Comments (39) | TrackBack (0)

Women Strip for the Environment

August 27, 2008 4:39 PM

ABC News' Scott Mayerowitz reports: Customers often ask shopkeepers: “Does this look good on me?” “How much does this cost?” “Do you have any other sizes?”

But today customers at one chain were instructed to ask a slightly more -- um, how should I say this -- revealing question.

“ASK ME WHY I’M NAKED,” was the message today on aprons of employees -- yes, otherwise naked employees -- of LUSH Fresh Handmade Cosmetics.

So why are they doing this?

Probably to get reporters like me to cover their company and to get lunchtime passersby to stop in the 27 U.S. stores. I guess nothing like a little flesh to get free publicity, right?

The official line: This is to raise awareness about excess packaging and the impact on the environment.

The company said in a statement that “to protect the Earth’s scarce natural resources, shoppers need to take action by avoiding packaged goods. Unnecessary packaging can be found in almost every retailer: loose fruit individually shrink-wrapped or on plastic trays in supermarkets, the prolific use of plastic carrier bags and the mountains of plastic bottles used for cosmetic products are all contributing to the growing environmental crisis.”

And the solution to the problem? If you ask LUSH: it's buying the company’s “naked” products that do not require plastic bottles. For instance, they offer shampoo bars -- shampoo with the water removed -- that doesn’t need packaging.

Sounds great, but it might be hard to find that shampoo with all those naked men and women walking around.

August 27, 2008 | Permalink | User Comments (11) | TrackBack (0)

Will Rap for Gas?

August 27, 2008 3:52 PM

ABC News' Alice Gomstyn reports: Americans struggling with high gas prices, take heart: Diddy “feels you.”

The rap megastar is keeping his private jet grounded and flying commercial – American Airlines, to be exact – because “gas prices are too [expletive] high,” he says in a new video posted on YouTube.

In the video, apparently filmed as the rapper passed through an airport gate and boarded a plane, a clearly frustrated Diddy explains that flying his jet to Los Angeles twice a month now costs him between $200,000 and $250,000 round-trip.

“Can you believe this, I am actually flying commercial!” he exclaims, later adding: “We need to do something about this so tell whoever the next president is, um, we need to bring gas prices down.”

And while elected officials and others in the U.S. have stressed the need for energy independence, Diddy isn’t shy about asking for help from overseas.

“I want to give a shout out to all my Saudi Arabian brothers and sisters and all my brothers and sisters from, um, all the countries that have oil if you could all please send me some oil from my jet, I would truly appreciate it,” he says.

A representative for Diddy did not immediately return a call for comment on Wednesday.

August 27, 2008 | Permalink | User Comments (113) | TrackBack (0)

Will Windmills Slice the Big Apple?

August 21, 2008 11:39 AM

ABC News' Scott Mayerowitz reports: Make all the Don Quixote jokes you want, but even New York City -- where the smallest parcel of land comes at a premium -- is considering windmills to help power the metropolis.

Mayor Michael Bloomberg has proposed putting windmills on city bridges and rooftops as part of an ambitious push for renewable energy in the Big Apple.

But before you laugh too much at the concept too much, notice what The New York Times pointed out this morning: Way back in 1638, when New York was New Amsterdam, there were at least four windmills operating in the city. In fact, The Times also notes, the official city seal actually has a windmill smack in the center of it.

How realistic is the mayor’s dream?

Well, I recently visited a massive commercial-scale wind farm in rural Minnesota, where I learned just how much science goes into choosing an appropriate site for the windmills and how just a few feet can make a difference.

Even the mayor has backed down a bit from his original ambitiousness.

“Are you going to put a big windmill on top of the Empire State Building?” he said yesterday. “I think that’s very unlikely.”

August 21, 2008 | Permalink | User Comments (23) | TrackBack (0)

Even More Bad News from the Banks

August 19, 2008 6:07 PM

ABC News’ Bianna Golodryga reports: It's 4 p.m. on Wall Street. And for anyone not on vacation this week, Goldman Sachs came out with a nasty end of the workday report. A downgrade of virtually every major bank on the street. JPMorganChase, Lehman Brothers, Morgan Stanley and Merrill Lynch. The quiet before the storm?

As traders take the last two weeks of what has been a pretty gloomy summer off, what they're expected to face upon their return will quite possibly look worse than just two weeks before. There's another storm brewing on Wall Street, and it's not the one out in the gulf. Just when many on the street were hoping that the worst for the financials was behind them, comes word that another wave of write-downs is about to shake the street.

After what was "thought" to be the bottom for the market and the decline in financial stocks, rumblings about continued write-downs at Merrill Lynch began surfacing. The brokerage giant's CEO John Thain reiterated that "the firm is very well capitalized" in an Aug. 4 Interview he gave to CNBC. But he also didn't rule out continued write-downs going forward. This after the firm wrote down $5.7 billion in the third quarter. Merrill recently sold it's 20 percent stake in Bloomberg for more than $4 billion.

Then there's Lehman Brothers. Having some of largest exposure to the subprime market collapse, it has long been considered to be the least stable or liquid of the major brokerage firms. Following the Bear Stearns collapse, the firm is making waves again. JP MorganChase reported that Lehman may write down about $4 billion in credit-related for the third quarter. For weeks, there has been speculation that the firm was shopping its asset management business (Neuberger Berman) to a variety of private equity funds. Late this afternoon CNBC's Charlie Gasparino reported that Lehman is considering a deal in which it would sell 70 percent of it with a provision for a buyback opportunity down the road. Not that they are expected to get that cash back anytime soon. Goldman Sachs' downgrade of the firm now predicts that Lehman will lose not $2.75 a share for 2008 but rather more than $9 a share.

So what's to be made of all of this? On the one hand, financials are priced at lows not seen in years, if even. That's got dealmakers buzzing that many firms are ripe for the picking, and Wall Street matchmakers are already envisioning marriages between firms like Bank of America and Merrill. Wells Fargo, U.S. Bancorp and Wachovia are also being talked up. But on the other hand, there will be more shoes to drop. Which ones? How big? Well, according to one big name bear, Washington Mutual, Fannie Mae and Freddie Mac, will all be acquired by the U.S. government by this time next year.

There will be a recovery, there will be a bottom. There always is. But that day appears to be later rather than sooner. For now, these banks are still hurting, still bleeding. And still in triage. More than $400 billion of write-downs have been tallied so far. And by all accounts, that figure is nowhere near peaking.
You wanna know what those inside of the banks are saying? Here's a well known Wall Street blog from a Merrill Lynch employee.

August 19, 2008 | Permalink | User Comments (20) | TrackBack (0)

Foreclosures Bring Out Bargain Hunters

August 14, 2008 6:21 PM

ABC News' Charles Herman reports:  Homes in foreclosure shot up 55 percent this past July compared  with  a year ago. 

And for some, that’s good news.

The National Association of Realtors reported today that home sales actually increased in many parts of the country where foreclosure signs instead of “for sale” signs dot neighborhood lawns. 

From April to June of this year, home sales increased 26 percent in California, 25 percent in Nevada, 21 percent in Arizona and 10 percent in Florida from the first three months of this year.  By way of comparison, foreclosures increased 19 percent in California, 26 percent in Nevada, 25 percent in Florida and 36 percent in Arizona according to RealtyTrac.

Foreclosures and short sales --  in which  a homeowner can sell a home for less than the loan -- accounted for  one-third  of all sales of existing homes in the second quarter. 

But those lower prices pushed the home prices down across the nation.  The median existing single-family home sold for $206,500 in the second quarter, down 7.6 percent from a year ago. Home prices fell in more than three out of four U.S. cities.

Sales prices dropped dramatically in places like Sacramento (down 36 percent) and Fort Myers,  Fla.,   (down 33 percent) and Riverside (down 33 percent).  “Each of these areas has seen a strong buyer response in recent months to the big cuts in home prices,” said Lawrence Yun, chief economist with the realtors association.

While some home buyers profited from others homeowners misery, home sales nationwide dropped 16 percent.  Last year, 5.87 million units sold from April to June.  For this year, only 4.91 million homes were sold.

August 14, 2008 | Permalink | User Comments (2) | TrackBack (0)

Dude, Where's My Dorm Room?

August 11, 2008 2:31 PM

ABC News' Alice Gomstyn reports: Thought dorm-dwelling college kids would escape the housing crisis? Wrong. It looks as if they’ve got housing problems of their own.

At the University of Massachusetts at Amherst, college officials are blaming national economic trends  --  rising commuting and utilities costs  --  for the sharp increase in students'  seeking to live in dorms on campus instead of in once- popular off-campus apartments, The Boston Globe reports. A Massachusetts official told the Globe that dormitories at the Bay  State’s nine state colleges will be at  5  percent above capacity this fall.

More news came today of the faltering economy’s impact on today’s college students: There was a 16.3 percent increase in students filing for federal student aid  ---  for a total of 8.9 million -- in the first half of the year, according to this story in the  San Francisco Chronicle.

“Students who haven’t needed assistance before are coming in. You had to expect that this was going to happen with all the news of companies laying off thousands of people,” Richard Toomey, the associate vice provost at Santa Clara University in California, told the Chronicle.

But  getting student aid  --  student loans in particular  --  isn’t exactly easy these days: As we reported last month, many students have had to scramble to apply for new loans after their original lenders found themselves too strapped for cash to stay in the business.

August 11, 2008 | Permalink | User Comments (4) | TrackBack (0)

Going Beyond Gas and Oil Headlines

August 11, 2008 12:37 PM

ABC News' Charles Herman reports: TV news stories about high gasoline prices invariably have two elements: pictures of signs showing outrageously high gas prices and drivers complaining about those prices.

In an attempt to go beyond the expected, "World News With Charles Gibson" will air three stories this week focusing on three parts of the oil story: drilling in the Gulf of Mexico, refining oil into gasoline and other products and developing new, unconventional sources that could be the future of oil.  The series will conclude Wednesday night with Charles Gibson's interview with Rex Tillerson, CEO of ExxonMobil, the world's largest publicly traded oil company, Rex Tillerson.

With the goal of trying to give viewers a greater sense of why gas prices are so high, how complex the industry is and the challenges we all face, I have wanted for some time to produce a series like this, which goes beyond shots of the gas pump ringing up $100 totals for a tank of gas.

In the first story, David Muir and I traveled more than 190 miles south of New Orleans with Chevron to see firsthand what it means to drill for oil in the middle of the Gulf of Mexico. While presumptive presidential nominees John McCain and Barack Obama are now enmeshed in a debate about the merits of offshore drilling, for years I have wanted to go to an offshore rig and produce a story that showed what it actually looks like. In this case, we went to the Cajun Express oil rig, where engineers were drilling 4,300 feet below the surface of the ocean and then another 22,000 feet deeper– around 5 miles down – to where the company believes 400 million barrels of oil sit waiting to be tapped. But the process takes time and money, and six years after Chevron announced it discovered oil at this site, the nation’s second-largest oil company estimates the oil will only start flowing in 2009, after expenditures of $4.7 billion.

With Betsy Stark, we traveled to Port Arthur, Texas, where Motiva, a joint venture between Shell and Aramco, the Saudi Arabian oil company, is spending $7 billion to double the size of a refinery, making it the largest in the nation. Last summer gas prices rose as refineries couldn’t produce enough gasoline to meet demand. In the process, those same refineries saw huge profits. But this year, even after summer of record gasoline prices, the nation’s refiners have seen profits drop 85 percent from a year ago. How did that happen? As demand for refined products like gasoline has fallen and oil prices have stayed above $100 a barrel, refineries have been caught in the middle. That’s because those record-high oil prices - the basic ingredient refineries need to make gasoline, heating oil and jet fuel – have actually risen to higher levels and risen faster compared to gasoline prices. So why would a refinery spend money to expand if it is just barely making money? That’s what we wanted to find out. As it turns out, the reason has to do with the future of oil.

To answer the question, Bill Weir and I traveled to Ft. McMurray in the northern portion of Alberta, Canada, to report on what could be the future of oil. Canada exports more oil to the U.S than Saudi Arabia and, increasingly, that oil comes from an unusual source: oil sands. A gooey, dough-like dirt, oil sands have to be mined or steamed and then pumped up from the earth before the bitumen, the oil in the dirt, can be separated out and then upgraded into a barrel of oil. With its oil sands, Canada has reserves second only to Saudi Arabia and, for the U.S, that means a stable and secure source of oil. But it comes at a cost to the environment: increased greenhouse gas emissions, enormous man-made reservoirs of toxic water and destruction of the one of the world’s few remaining forests. Is it worth it?

Producing stories about the oil industry is always a combustible undertaking, as opinions are strong on all sides, especially as millions have suffered financially while oil companies have racked up record profits. As one analyst told me, he is no fan of oil companies, but when he tries to explain the “how” and “why” of gas prices, he is often attacked as an industry defender.

With gas prices, whether you are buying it or not, you see them every day, everywhere you go. In the morning on your way to work, you pass the same stations and see the prices higher or lower than the day before. There is no equivalent for any other product we buy.

I have always felt that gasoline prices give Americans a way to measure inflation on daily basis, just as people look to the stock market to give them a sense of how the economy is doing. Market up? The economy must be doing well. If it’s down, we must be in trouble. The same could be said of gas prices.
We want to know why prices are so high and what is being done about it. Hopefully, these stories will contribute to that conversation.

August 11, 2008 | Permalink | User Comments (25) | TrackBack (0)

Subprime Sequel

August 11, 2008 11:47 AM

ABC News' Charles Herman reports:  It was just over a year ago that the nation’s economy began to falter and start flirting with falling into an outright recession.  The source of the trouble was clear:  the collapse of the housing market. 

In particular, one word was used over and over to explain why homeowners were defaulting on their loans and banks were reporting a record number of foreclosures. 

Subprime. 

Few people outside of bankers, brokers and economists had ever heard of the word, least of all, the homebuyers who actually received subprime loans.  As a result, journalists would add some explanatory sentence next to the word such as "loans to people with poor credit."

Now that word has become old hat, and a year later, a new word is entering the lexicon that could be the source of the continued economic slowdown.

Alt-A.

Like subprime, alt-A describes a type of loan.  These are one step up from subprime, but still not as good as prime loans  --  loans provided to people with good credit (see, I did it right there, explaining a prime loan). 

Fred Cannon, banking analyst with Keefe Bruyette and Woods, described it this way:  "They are loans written to a borrower with better credit scores but with a lot less underwriting."  In other words, a borrower could have great credit but did not provide any documentation proving his or her income to guarantee the loan. 

What’s troublesome is that these borrowers are missing their payments at an alarming rate.  In the past year alone, the number of homeowners more than 60 days late has quadrupled to 13   percent, according to LoanPerformance.  And homeowners who received these loans in 2007 are defaulting at much quicker when compared with borrowers in previous years.   

You don’t need to tell that to banks like IndyMac, First National Bank of Nevada and First Priority Bank of Florida.  These three banks, especially IndyMac, were involved in issuing alt-A loans, and all three were taken over by the FDIC last month.

When IndyMac failed, one analyst said he thought it would be the first in a slew of future bank closings, especially on the West Coast.  Another banking analyst pointed out that the difference between IndyMac failing and other mortgage lending institutions that have gone bankrupt since the housing market collapsed is that IndyMac is federally insured. 

"Now the insured lenders are crashing for the same reasons" was how Cannon reacted to the news of IndyMac’s collapse, those reasons being loans defaulting at higher rates.  And it’s not just subprime loans; it’s now alt-A.

So what is an alt-A loan? 

First, the name.  In the mortgage world, "A" loans are prime loans while loans that have a greater risk of default are classified as "B" or "C."  So alt-A loans are loans that aren’t prime.

It can also be the type of loan, especially the option-ARM (or adjustable rate mortgage).  With these loans, a borrower can choose one of usually four mortgage payment options each month that range from the full interest and principal due to a lower interest rate and no principle. 

Another banking analyst walked me through an example of an option-ARM that illustrates how scary the problem can be for many homeowners.

Say you have a 30-year option-ARM for $100,000  in which  your "accrue" rate  --  the actual interest rate for the loan  --  is  6 percent  and the "pay rate"  --  the minimum rate you can pay each month  --  is 2  percent.

Monthly payments at 6 percent equal $599.55 a month in order to pay off the loan in 30 years. 

Monthly payments at 2 percent are only $369.62, nearly $230 less than the actual rate you should be paying.  Each month that difference --  $230 -- is added to your loan amount.  If you pay 2 percent for an entire year, you will add $2,760 to your loan.

If you do this for an extended period of time, at some point, you will hit the "cap" allowed on the loan:  This is the maximum amount that can be added, usually around 15 percent to 20 percent  of the original mortgage.  When this happens, you can’t pay the minimum anymore, the terms of your mortgage change and so will your payments. 

In the above example, if by the fifth year you now owe $120,000 and you hit your cap (20 percent above the original loan), your monthly payments adjust to the 6 percent rate and your loan now has to be paid off in 25 years (instead of 30 years). 

Bigger loan, bigger interest rate, less time.  Your monthly payments now come to $773.16!  That’s $403.54 more than what you had been paying or more than double.

Why in the world would anyone take a loan like this?  Probably to keep monthly payment as low as possible, or perhaps this loan allowed you to buy a more expensive home.  Maybe you worked freelance and when you did get paid, you were paid well.  Or maybe even you got a year-end bonus that could be applied to the loan all at one time to make up for what you hadn’t paid over the year.

For many borrowers, however, good credit and good salaries were not enough to finance a home in markets like San Diego, where housing prices soared.  An option-ARM gave borrowers that extra lift they needed to be able to purchase a home. 

And since everyone said how home prices always go up and never decline, if you ever approached the cap, you could just refinance or even sell your home if necessary. 

At least, that’s what everyone said

Instead, home prices have now dropped 16  percent  as measured by the S&P/Case Shiller index,  and many analysts expect another 10  percent  drop before the real estate market stabilizes.  Already, more than 9 million of 52 million homeowners with first mortgages owe more than their home is worth, according to Mark Zandi, chief economist with Moody’s Economy.com.

It all feels like some sort of scary movie, but with real world implications.  First, it was those horrid subprime loans.  And just when it looked like that might be getting that beast under control, we have the sequel, "Alt-A:  Son of Subprime."  Let’s hope this one is short-lived. 

August 11, 2008 | Permalink | User Comments (4) | TrackBack (0)

Will the Election Delay Xmas Sales?

August 07, 2008 11:17 AM

ABC News' Charles Herman reports: One thing the “McBama” campaigns probably won’t want to take credit for? Delaying your holiday cheer.

Then again, for those who can’t stand hearing Christmas carols before Halloween is even over, perhaps it's an early gift.

There’s speculation that retailers will delay putting up their Christmas lights and trees and candy canes until after the November 4 election. ABC News' Business Unit working to confirm the story.

What a thought: Christmas shopping season actually starting during the season!

The impact for retailers could be an increasing sense of urgency for shoppers to start thinking and shopping for Christmas starting on November 5. Then again, after all the political news that is sure to dominate the national dialogue, Americans might be ready for a little spiked egg nog and some post-election Christmas peace on earth and goodwill toward men. Especially between the two political parties.

August 7, 2008 | Permalink | User Comments (10) | TrackBack (0)