Consumers started to spend a little more money last month, but many retailers are still finding themselves swimming with the sharks. Wal-Mart was one of the companies to report improved earnings while apparel companies like J.C. Penney dropped sharply. These earnings announcements are clear indications that consumer spending is quickly shifting from luxury goods to just the necessities. Credit card companies like MasterCard have confirmed this sentiment in their own earnings announcements saying that consumers are now purchasing more staples than anything else. So, while this is a relief to some consumers it is a clear indication that there are still many problems facing the economy...

From the New York Times:
Consumers gave the nation's stores some relief in February, spending a little more freely although they mostly gravitated toward discounters and grocers. The challenge for merchants in coming months is to get shoppers to splurge on spring fashions -- a tough task when Americans are worried about plunging home values, tighter credit and rising gas prices.

The mortgage mess is still not even close to being sorted out and today's news continues to reflect that belief. Defaults on home mortgages soared to another all-time high at the end of 2007 as resets on adjustable-rate and teaser-rate mortgages continue to wreak havoc on consumers. The news sent the stock markets lower while regulators are feeling more and more heat to move faster to contain losses and help troubled homeowners. Just how bad is it? According to the Mortgage Banker's Association, the number of loans past-due or in foreclosure jumped to 7.9 percent from just 6.1 percent in December of 2006.

From the New York Times:
Defaults on home mortgages touched another all-time high at the end of the last year as foreclosures surged on adjustable-rate mortgages, an industry group reported on Thursday. The latest data is expected to put further pressure on policy makers and the mortgage industry to move faster to contain losses and help more homeowners. In recent days, regulators and lawmakers have begun suggesting that the federal government might need to take a more interventionist role in the mortgage business.

The problems in the real estate market has been largely confined to subprime loans and ARM mortgages, but some are now fearing the commercial developers may begin to feel the heat. Previously, these loans were considered "safe" in that they are backed with operating and rent income, but now that these numbers are declining, banks are finding themselves in trouble. The credit crisis has many concerned that less companies and people will be willing to rent offices and homes, which may prompt an increase in defaults for commercial real estate loans. This could in turn cause more banks to fail in the coming years and make loans for everyone much harder to obtain.

From BusinessWeek:
Loans to homebuilders and other developers are the latest slice of the credit market under duress, and analysts say banks could face hundreds of millions of dollars in losses as a result. As commercial and residential real-estate prices decline, banks of all sizes face a growing number of loan defaults from builders unable to sell houses, and from developers whose malls and other properties turned out to be less desirable than anticipated.

Oil prices continued their rise today after a small drop on Tuesday despite concerns that OPEC is concerned about a fall in global demand for crude during the second quarter. Consumers have been hit hard by rising oil prices coming as a result of the lower U.S. dollar and supply-and-demand issues. Meanwhile, a Fed bent on continued interest rate cuts means consumer goods and energy prices are only likely to go higher while stocks and investments trend lower amid continued financial turmoil. And in the meantime, unemployment is on the rise with job pay remaining steady despite the declining dollar.

From BusinessWeek:
Oil prices rose Wednesday after dropping sharply in the previous session on the possibility that OPEC will raise output and on expectations that U.S. crude supplies are continuing to rise. Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said the cartel is shying away from boosting production due to expectations that global demand for crude will fall during the second quarter.

Recent earnings reports from the private sector are showing a disturbing new trend - companies are holding onto their cash. Many people believe this is a good thing since companies are now able to pay off their debts and distribute more wealth to shareholders. Unfortunately, the goal of the Fed cuts (at the expense of the US dollar) was to give companies more cash to pay employees in order to boost wages and jumpstart consumer spending. The fact that companies are stockpiling this cash does not bode well with consumers who now face stagnant wages, rising prices, and a declining US dollar. In fact, it appears as if the Fed's strategy is backfiring... again.

From the New York Times:
Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts. That should be good news in an economy unsettled by rising energy prices, tightening credit, gyrating stock prices and declining values for the dollar and the family homestead. Indeed, the Federal Reserve chairman, Ben S. Bernanke, cited strong corporate balance sheets as a bright spot in the darkening forecast he presented to Congress last week.

Many homeowners are facing a troubling dilemma these days as they are making payments on a home loan worth far more than their house. Fed Chairman Ben Bernanke addressed this issue today by imploring lenders to reduce the principle on loans for many people facing this problem as delinquency rates and foreclosures are continuing to soar amid declining housing prices. In their view, foreclosures must stop first in order to curb the falling housing prices and therefore curb the number of future delinquences and forclosures. The government's own attempts to stop this dangerous spiral have clearly not gone far enough and now private sector support may be needed.

From The New York Times:
The chairman of the Federal Reserve, Ben S. Bernanke, urged mortgage lenders and investors on Tuesday to reduce the principal on loans for many people whose homes are no longer worth as much as the amount they still have to repay. Noting that delinquency and foreclosure rates have soared over the last year, and that housing prices have not stopped falling, the Fed chairman warned that efforts by the government and by industry to prevent foreclosures had not gone far enough.

The housing market may be a little rough right now, but that just means a great opportunity to buy or many would-be homeowners. Thousands of people that have been renters for years are quickly finding that their rental payments are closing in on the cost of a mortgage payment, meaning that now could be a great time to make the switch and start building equity. Meanwhile, the many desperate sellers are willing to lower prices well below their asking price in order to seal a deal and get much-needed money. In the end, those who are on the fence about buying a house may want to take a close look now while rates are low and prices are even lower!

From SmartMoney:
INDIFFERENT TO THE bleak real estate headlines, 26-year-old Michael Klauer and his fiancée recently bought a two-bedroom condo in the desirable Lake View neighborhood in Chicago. They weren't in a rush to buy, but when an opportunity presented itself only a month after they started looking, they jumped on it. The apartment, listed at $519,000, was theirs for only $480,000 — an initial offer they didn't back down from, even though they knew the seller had bought the place 10 months earlier for $512,000. Factoring in the broker's fee and sales taxes, the seller lost more than $44,000 on that deal, according to the couple's realtor, Jay Michael, owner of the Estate Property Group in Chicago.

Oil prices rose to nearly $104 a barrel this morning, exceeding their inflation-adjusted high seen in the early 1980s during the second oil shock. Many analysts are attributing this surge in oil prices to investors seeking refuge in commodities to offset a slowing economy and declines in teh dollar, as well as to hedge against inflation. The big difference between now and the 1980s is the fact that supply was the issue then and demand seems to be the issue now..

From the New York Times:
Setting an all-time record, oil prices rose to nearly $104 a barrel on Monday morning, exceeding their inflation-adjusted high reached in the early 1980s during the second oil shock. Oil futures rose as much as $2.11 to $103.95 on the New York Mercantile Exchange. That level tops the record set in April 1980 of $39.50 a barrel, which would translate to $103.76 a barrel in today’s money.

Stagflation is hitting the US economy and it has many consumers pessimistic about the future. Increasing food and gasoline prices are edging their way into Americans' pocketbooks while their spending outlays even managed to spend more last month compared to December. Since income growth is slowing, this means that more Americans are likely turning to credit to get their daily allowance while saving nothing for the future. In fact, for the first time in 50 years, Americans spent more than they earned for the third consecutive month!

From the New York Times:
Rising prices are forcing Americans to spend more and save less, even as the growth of income slows. Consumer spending, which accounts for more than two-thirds of gross domestic product, was flat in January for the second month in a row, when adjusted for inflation, the Commerce Department said on Friday. Other reports showed a decline in consumer confidence and diminished business activity in the Midwest.

Americans are facing a credit crunch these days on the heels of increasing consumer goods prices and decreasing wages. The result has been foreclosures, bankruptcies, and defaults at a higher rate than we've seen in awhile. One thing that many didn't forsee is just how dependent Americans have become on credit to maintain their lifestyle. Now that many people can't afford their bills, some financial planners are reporting clients that prefer to pay their credit card bills over their mortgages! Why? Because they are living off of their credit card and would be ruined if they lost the credit.

From InternationalNews:
Seven years in the credit-counseling business didn't prepare Ann Estes for the alarming trend she began noticing last fall: As her clients' mortgage bills became unaffordable, a growing number of them began paying their credit card bills before — and sometimes instead of — their mortgages. "We've never seen anything like this," says Estes, who counsels clients by phone from her office in Richmond, Va. "Their homes are at risk, and they know it. But people say, 'I don't want to let my credit cards go because that's my cash flow.'"

Home equity lines of credit are finally beginning to dry up as banks see them as an even bigger risk than a first mortgage. The process cancels consumers' available credit and prohibits consumers from making additional draws against any unused credit line. In the past, lenders use to hike the borrowers rates as soon as they detected trouble in other accounts, but now this practice has come under scrutiny by Congress and they are being forced to cancel these lines of credit altogether. Countrywide became the first bank to do o after notifying 122,000 customers that they can no longer access their credit. This is a trend that is only likely to continue..

From CBS News:
When the real estate market was booming, millions of homeowners suddenly found themselves "house rich," using home equity lines of credit to cash in on their homes' growing values, and financing everything from remodeling projects to vacations. But now, people with a line of credit may be in for a surprise: Lenders are blocking the money pipeline, refusing to loan borrowers any more money. In this column, The Early Show's resident financial adviser, Ray Martin, explains why it's happening, and what recourse homeowners have.

The new problem facing credit card companies is the fact that they can't make enough money of poor customers to cover the costs of its good customers to whom it simply gives interest free loans. So, at least one Citigroup-owned bank in the UK has begun cutting perfect customers in an apparent attempt to profit more off of their poor customers. Egg Bank cut over 161,000 customer accounts including those who have spotless credit histories and even a few millionaires! Isn't it ironic that the UK couldn't yet learn from the USA the problems associated with lending only to those with poor credit histories..

From FinancialDirector:
Is it me or has the world gone mad? I remember my history teacher telling me that you have to study history – "it's like studying the future. Everything is always replayed," he used to say. He also used to bang on about the Americans invading our precious traditions, and their empire building. Which of course, we taught 'em. Which digression brings me to online banking outfit egg, and its recent delisting of customers it deemed to have poor credit. Since it chucked 161,000 customers off its register, it has been revealed that a "substantial amount" of those customers are, in fact, in possession of good credit ratings. And no one was safe from the exodus: even a city worker who earned £1m last year and owns £100,000 in Citibank shares – Citibank is the parent company of egg – received the dreaded letter of poor credit.

Many retailers have established private-label credit card programs designed to encourage consumers to make large purchases on credit while also making money on the interest revenues from the credit - a win-win scenario. The problem, of course, is when people start to buy things they can't afford and default on their payments. This is what happened when the housing market collapsed and wiped out home equity lines of credit that many people were using to pay off credit card bills. Now, these companies are losing big bucks on their credit card operations. The damage is spreading from just banks to retailers and other institutions now...

From CNN Money:
Home Depot Inc.'s (HD) profit-sharing gains from its private-label credit card program fell in the fourth quarter and will continue to hurt operating margins in 2008 as portfolio losses increase, Chief Financial Officer Carol Tome said Tuesday. Home Depot shares profits from its private-label credit card program with card issuer Citigroup Inc. (C), though the retailer doesn't hold any of the receivables on its books. About 30% of all 2007 sales were generated through consumers using the credit cards.

Visa announced that it would raise $18.8 billion in a record initial public offering on the New York Stock Exchange. The move comes at a time when the credit crisis continues to plague mortgages and consumer spending, but many investors are hoping that the stock will perform similar to MasterCard (which rose five-fold since its debut). The company is roughly twice the size of MasterCard, processing $4 trillion in payments every year. However, it has recently come under fire for high fees and an anticompetitive ownership structure. It will be interesting to see just how well this company does with many of its own consumers feeling the credit crunch...

From The Independent:
Visa has announced an $18.8bn (£9.5bn) fundraising that will rank as the biggest initial public offering ever seen in the US. It comes as the credit crisis continues to destabilise financial markets, and in the middle of an otherwise arid spell for stock market flotations.

There are an increasing number of experts who are insisting that the mess in the mortgage and credit markets may take a long time to unwind. Some are comparing the current crisis to the S&L crisis in the 90's that caused major problems and made loans hard to obtain for several years. However, let's not forget that the same problems back then offered enormous opportunities for investors - particularly, those like Sam Zell who invested in real estate while prices were low and made a fortune. His Equity Home and Equity Office companies are worth billions now and built primarily during the extended downcycle seem back then.

From the LATimes:
“ 'I look at this sort of like 1990 and 1991,' he said, referring to the savings-and-loan crisis. 'Against that background you had a $7 trillion economy that gave birth to the $300 billion Resolution Trust Corp. Now we have an $11 trillion economy and we’ve already seen $2 trillion of market capitalization going away' before many loans in the pools have actually defaulted, he said. "What about the people who argue that the impact of the mortgage mess will be muted because risks have been spread well beyond the banks and into many parts of the financial world? Mr. Farrell takes the opposite view. Spreading the risk beyond the banking system will make the task of fixing the mess much harder. “ 'Even if the Fed eases, it is probably not going to help the housing market,' he said. 'This repair cycle is going to take a lot longer because it is not concentrated in the banking system like it was in the 1990s. Back then, they could repair the banking system by dropping interest rates. Now they can’t bail out rich hedge fund guys in Greenwich.' "

Students loans are in trouble and it is already affecting for-profit education companies. Corinthian Colleges announced on Monday that student loan company Sallie Mae will no longer provide serial subprime private loans for current students. This could prove to be a precusor to problems at public institutions, which are not required to disclose such news publicly. Students may now be forced to find alternatives in the private loan markets from banks at much higher rates. This is bad news for low income students and those who are tight for money.

From Reuters:
For-profit education company Corinthian Colleges Inc said on Monday that student loan company Sallie Mae will no longer provide serial subprime private loans for current students, adding to worries that Corinthian students will have difficulty funding their education. Sallie Mae, the commonly used name for SLM Corp., will continue to fund all current subprime loans on the books but it will not provide new "serial," or subsequent, loans for these students, Corinthian said in a securities filing. Corinthian said it had earlier believed that Sallie Mae would provide serial loans for current students through the completion of their programs.