Filed under: Forecasts, Bad news, Economic data, Housing

Retail sales declined 0.4% in December 2007 — worse than expected — as sales of most durable goods fell, the U.S. Commerce Department announced Tuesday in a report that raised concerns that the U.S economy has entered a recession.

Economists had expected December 2007 retail sales to decline 0.1%. Further, retail sales rose 4.2% in 2007, the smallest increase in five years.

Excluding autos, retail sales fell 0.4% in December, and declined 0.2% while excluding both autos and gasoline sales, the Commerce Department said.

Recession evidence piling up

Economist David H. Wang told BloggingStocks on Tuesday that the evidence indicating that the U.S. economy has fallen into a recession is mounting.

“This is a terrible December statistic. This is really bad, and it’s the weakest year for retail sales since 2002. It’s very bad news for the economy,” Wang said. “It offers clear evidence that the consumer is pulling back, and the Fed needs to recognize this fact.”

Meanwhile, the November 2007 retail sales statistic was revised lower, to a 1% increase, the Commerce Department stated.

‘Clear and present danger’ signal

Wang stated that even though the monthly retail sales statistic is subject to revision, a poor or below-average statistic for December — which includes sales for the critical holiday shopping period — invariably points to tougher times ahead for the U.S. economy. In this case, when combined with other negative data points, it advocates the U.S. economy has stalled.

“The December retail sales statistic is a ‘clear and present danger’ signal for the Fed. When you add the negative impact of the subprime housing issue and high oil prices, there’s tiny doubt now that we’ve entered a recession, with negative GDP growth for Q2,” Wang stated.

Wang stated the Fed should “cut interest rates more assertively.” Previously, Wang advocated a “50 and 50″ basis point rate cut by April or Might 2008. Now, he thinks the Fed should cut rates by 125 basis points, and with all rate cuts in Q1.

“I would cut rates by 75 basis points and then again by 50 basis points over the next two meetings,” Wang stated. “If the Fed drags the cuts out until Q2, it may be too late to prevent real damage being done to the economy. The data clearly shows that the U.S. economy needs the stimulus as soon as possible.”

Economist Steve Affinito concurred with Wang’s assessment.

“The December data clearly shows that the consumer has pulled back a lot. Inflation remains a concern for the Fed because of high commodity prices, but recession is the mounting concern now, so more massive rate cuts are needed,” Affinito stated. “But as I said earlier, fiscal stimulus will also be needed to fend off the effects of the recession, so it’s important that Congress and the president pass a fiscal stimulus package.”

President Bush and congressional officials are each outlining stimulus packages, with varying components. At this juncture, bipartisan support appears to exist for a $300-$500 tax rebate, as debate continues on additional fiscal stimulus components.

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Filed under: Management, S and P 500, DJIA, Housing, Federal Reserve

The Wall Street Journal is reporting this day that Alan Greenspan, whom some believe had fueled the housing bubble, has joined Paulson & Co., a hedge fund with nearly $30 billion under management.

The former Federal Reserve Board chairman has created an advisory firm, Greenspan Associates, and will be consulting with various firms in different industries.

Fed after 18 years as chairman, Greenspan left in January 2006. The Journal article quotes some (unnamed) Greenspan’s critics claiming that he “helped fuel the housing bubble by keeping interest rates at 1% from 2003 to 2004, and then raising them too slowly.”

Whether or not you view Greenspan as the cause of the problem, its symptom, or its savior, this is good news for Paulson, a firm which saw one of its credit hedge funds rise by about 590% thanks to bets that the housing market would weaken and that mortgages given to borrowers with sketchy credit would drop in value.

Good luck in your new job, Alan.

Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

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Filed under: Citigroup Inc. (C), Merrill Lynch (MER), Countrywide Financial (CFC), NovaStar Financial (NFI), Housing, Cramer on BloggingStocks

TheStreet.com’s Jim Cramer states a year of living dangerously almost destroyed Merrill Lynch and Citigroup.

To me the customers made out this time, the dealers didn’t.

When I look at the losses the dealers are taking, I keep wondering how the heck they all got caught. Think of it like this — if this merchandise were equities, you would ask: How did Merrill (NYSE: MER) (Cramer’s Take) and Citigroup (NYSE: C) (Cramer’s Take) get caught owning so much stock?

That’s why we have to be shocked at the losses at Citigroup and Merrill. It was like they were making a large bet on housing and just masking themselves as dealers.

Now it is true that they were merchandizing and got caught. Prince was such an idiot. I hectored this guy and the board for a year, but all they did was stand by and applaud him. He probably had no inventory controls because he never understood the instruments anyway. That’s OK, they were hard to understand. But he was the CEO, for heaven’s sake.

But you’ve to marvel that so many firms had so much of this gunk that didn’t sell. It was nearly as if right at the end they were calling NovaStar (NYSE: NFI) (Cramer’s Take), Countrywide (NYSE: CFC) (Cramer’s Take), Fremont (NYSE: FMT) (Cramer’s Take) and American Home Mortgage and saying, “Give us your worst stuff, we want to own it ourselves.” I bet a lot of that Citigroup loss this morning was directly related to American Home, which they were the real sponsor of.

When the book is written on this era, there is going to be a new realization that the book of business, the amount of money being bet by the house on product, can never be that huge again. Firms like Citigroup and Merrill are meant to be dealers, not accumulators. Nevertheless, that’s what they did, and the results are what we see this day.

Pathetic.

Think of all of the mistakes they made: 1. They dealt with unethical and stupid mortgage brokers who put together phony packages of no-doc loans. 2. They then borrowed a large amount of money to finance that inventory as they attempted to merchant it to hedge funds. 3. They ended up being caught with the worst paper. I say that because we have not seen massive writedowns on the buy side. It is all sell side.

Remarkably stupid. Both Prince and O’Neal should have been fired a year ago for these strategies. The year of living dangerously almost destroyed Citigroup and Merrill.

Now it looks like Citigroup took a large enough charge and dumped enough stuff to make it so its exposure is now cut by about a third.

There’s two-thirds that’s still to come. Hopefully some rate reductions will allow them to make more money as the charge-offs continue. It wasn’t “kitchen sink,” despite what you will hear. The savings from the dividend, the capital raising and the coming fire sale — albeit at higher prices because of all the capital raising — of extraneous businesses that Price moronically tacked on will at last make Citigroup a purchase.

But it is a disaster. No two ways about it.

Random musings: I see that Kevork-Hovnanian (NYSE: HOV) (Cramer’s Take) just made a large insider buy of stock. I hesitate to state it means anything anymore for the number of bottoms that firm has called. These guys are rich; they can blow a couple million trying to restore some confidence in the company.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com’s sites and serves as an adviser to the company’s CEO. At the time of publication, Cramer was long Citigroup.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider NovaStar, Fremont General and Hovnanian to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of more massive companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

RELATED LINKS:

• What Traders Can Learn From the New England Patriots
• It May Be Time to Refi, If You Play It Smart

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Filed under: Law, Money and Finance Today, Countrywide Financial (CFC), Personal finance, Housing

Countrywide (NYSE: CFC) has been playing with the numbers in cases involving foreclosures and bankruptcies and bankruptcy judges are finally starting to doubt them, according to a story in today’s Wall Street Journal. When caught, Countrywide always gives the excuse that it was an error, but judges are beginning to wonder why there are so many errors.

The case with the biggest error involves a home owner who questioned Countrywide’s insistence that he had to pay $4,800 a month during bankruptcy. When the judge went along with the borrower in questioning the amount, Countrywide admitted it erred and then reduced its claim in half to about $2,400 a month. In a hearing in December, Bankruptcy Judge A. Jay Cristol told Countrywide had been found “with its hand in the cookie jar,” according to the Journal story. He’s just one of the judges the Journal discusses today.

Countrywide told the Journal that it has already paid at least $400,000 in costs associated with a Justice Department investigation into Countrywide’s handling of loan payments and court claims across the country. Now that bankruptcy judges are starting to lose faith in Countrywide’s numbers, I hope they also take a closer look at the numbers from other mortgage servicers as well. I first wrote about this problem in November, and I’m glad to see the courts are finally acting to protect consumers already facing financial distress.

Lita Epstein has written more than 20 books including The 250 Questions You Should Ask to Avoid Foreclosure and the Complete Idiot’s Guide to Improving Your Credit Score.

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Filed under: Stocks to Purchase, Housing

It’s no secret that the entire real estate market in the U.S. is suffering. For investors owning REITs, we’re in the midst of a year of real pain. For long-term investors, some opportunities have arisen in the REIT space.

With people unable to get mortgages, the rental market has proven to be quite strong. Either from people who sold or forfeited their homes, to people who won’t qualify for a mortgage, to higher end buyers who believe prices will continue to fall — everyone still needs living accommodations. That’s why I think the market has it wrong with some of the REIT sectors.

REITs dealing with rental markets should be strong, but, alas, their stock has gotten slammed just as bad as everyone else’s. It’s a classic case of throwing the baby out with the bathwater.

My top pick in this sector is AvalonBay Communities (NYSE: AVB). AvalonBay develops, acquires, refurbishes, leases, and manages apartment complexes. The stock is down over 40% over the last year and currently sports a nice dividend yield of 3.9%. I think long-term investors will be richly rewarded on this stock.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer has no position long or short in any stock mentioned as of 1/14/08.

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Filed under: Scandals, Housing

As we read of writedowns, impending bankruptcies, and the faltering U.S. consumer, it’s interesting to get a glimpse at the players behind this whole snafu.

The Wall Street Journal published an article today about Magnetar Capital, a fund started by a star trader from Citadel Investment Group. Magnetar was a key player in the structuring of CDOs, or collateralized debt obligations. Magnetar acted as a “lynch-pin investor” in over $30 billion of these syndicated bundles of subprime mortgages and derivatives, according to the article.

In spite of the losses being racked up on Wall Street, the fund, with about $9 billion in assets, made about 25% returns last year.

According to the article, “Magnetar swooped in on securities that it believed could become troubled but were paying huge returns. CDOs are sliced based on risk, with the riskiest pieces having the highest yield but the greatest chance of losing value.” Magnetar concentrated its trading on these riskiest pieces.

While the article positions Magnetar as a scapegoat, the authors do admit that “on average, the [Magnetar] deals are performing superior than most other similar CDOs in the broader market, and many are still paying out interest.”

This is a huge mess, with toxic financial instruments being passed from one institution to another with ramifications these firms are just beginning to comprehend. It’s going to take a lot to unravel this mess and Magnetar is just one of many firms with a hand (arm?) in the debacle.

Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

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