The the intense daily swings in the market continue. However, some silver linings are appearing that should take note of as it indicates that the clean up after the part is underway!
Today the National Association of Realtors said Friday that sales of existing homes rose by 5.5 percent in September compared to August, the best showing since a 5.6 percent increase in July 2003, during the five-year housing boom. Even with the gain in sales, prices kept falling. The median sales price has dropped to $191,600, down by 9 percent from a year ago. The rise in sales was the biggest in 5 years. Hopefully it means that home prices are finding a bottom. More importantly, the loans that were made to buy these homes mean that the credit freeze is beginning to thaw. It was reported that 85% of these transactions were to owner users. We can also assume that they were made the old fashioned way, that is with the homeowner putting equity in of at least 25% maybe more. And, sales were up over 1% on a year over year basis as well.
Another important piece of news that is unfolded today. As reported by the AP: PNC Financial Services Group Inc. is acquiring National City Corp. for $5.58 billion, in one of the first concrete signs of how banks could use fresh investments from a U.S. government bailout program. The deal came within hours of PNC Financial receiving approval for $7.7 billion in cash from the government under the $750 billion government program aimed at relieving the ongoing credit crisis. The acquisition makes PNC Financial the nation's fifth largest bank by deposits and will give it the fourth most branches. The new combined bank will have about $180 billion in deposits and more than 2,700 branches. PNC will pay $5.2 billion for National City through a stock transaction that values National City at about $2.23 per share, an 18.9 percent discount from Thursday's closing price of $2.75. The remaining $384 million will be a cash payment to certain warrant holders. The government plan calls for the U.S. Treasury to purchase preferred stock and warrants from banks in return for fresh capital. The plan is designed to help banks that have been struggling since the middle of 2007 with rising mortgage defaults and a credit crisis that has essentially shut down lending among banks and severely restricted lending to consumers. The government will receive warrants to acquire a 15 percent stake in PNC Financial. The warrants will be good for 10 years unless retired by PNC. With the government investment, and after the acquisition, PNC said its Tier 1 capital ratio will be about 10 percent, well above regulatory standards for a "well capitalized" bank. PNC is taking over a regional bank that has been hit especially hard over the past year and a half by the downturn in the mortgage market. Earlier this week, National City posted a quarterly loss of $5.15 billion, or $5.86 per share. Excluding a special dividend, National City lost $729 million, or 85 cents per share. The company also said this week that it planned to cut 4,000 jobs, or about 14 percent of its total work force, over the next three years as it works on a previously announced initiative to reduce costs. PNC Financial said it will aggressively take write-downs and increase reserves on National City's loan portfolio when the deal closes.
As a backdrop to Alan Greenspan, came off the mountain (Godlike figure that some have made him out to be) to admit that mistakes were made. The longtime Fed chief acknowledged that he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions. Greenspan said it was "a flaw in the model that I perceived is the critical functioning structure that defines how the world works." If Greenspan knew how to speak in the types of sentences that you and understand readily he would say something like this; "Look, you and I know that I have spent my life being heavily influenced by the thinking of Ayn Rand. We believed that an unfettered free market is best for mankind. Unfortunatly we did not account for the extreme behavior that this would lead to in the name of profits and the next quarters results. I am sorry for the miscalculation. However, since he can not say that we have to translate what he means by a "flaw in the model".
So there you have it. Signs that things are straightening out and an an admission of the problem by its biggest proponent plus another wild and down week in the markets. This week ends as it began; leaving everyone asking where the bottom is.
The most sensible thing I read or heard this week was the following from Andrew Carpenter who writes "Investors Daily Edge". He asks:
If Warren Buffett were sitting in your living room having coffee and playing bridge with you and, say, financial guys from FOX News, CNBC and the Internet, whose investment advice would you take?
Yeah, that's what I'd do too.
I'd always go with the guy who built a $62-billion personal fortune from scratch.
I this helps you keep prospective. Have a wonderful weekend.
Please call if you'd like to talk; we are here for you (310-459-9196). Thank you for your continuing confidence. If you are a former subscriber or client, feel free to call as well. You can be assured that we will continue to ply our craft and we will get through this period and all of us will prosper again.Best Regards, Thanks for your continued support and trust.
David Fried
Fried Asset Management, Inc.
*Returns through end 2007, audit available on request. Returns include dividends and interest and are net of fees. Past returns do not guarantee future performance.
