Category: Economy

If you were dreading first quarter earnings season, you’re probably feeling some relief now. Although earnings in the financial sector were dreadful, many investors are happy that things weren’t worse.

Excluding financials, results for S&P 500 firms were up over 7-percent, in line with the long-term historic average for the market as a whole. And, although profits at financial firms fell 79% in the first quarter, that’s still better than the fourth quarter -- when the sector lost money.

Consumer Discretionary was the only other negative sector. It fell 23%. Some sectors, like energy and consumer staples, actually rose double digits.

Everywhere I look I see people struggling, working two or three jobs, trying to buy a home or maybe even losing their home, barely able to afford filling up at the pump, cutting back on groceries, and even staying home more often to save money.

I can relate to this group of people, especially when I’m sitting quietly at my second job (which happens to be a university library). It’s in those quiet moments when it hits me how bad the economy really is.

Usually I tune out, but lately I’ve picked up on peoples’ conversations around me. I listen to their frustrations about how hard it is to make it these days. These people range in age from millenials to baby boomers and from entry level to well established professionals.

Every time I do a story about the economy lately, analysts talk about the government stimulus checks that consumers have received or soon will be getting. That was again true today…although today there was greater focus on what that money would mean to retailers in the coming months. Will stores like Wal-mart or Target be the biggest beneficiaries of that extra cash from Mr. Bush…or will Americans pack that money away for a really rainy day?

No one knows for sure what the fickle U.S. consumer will do. But, I felt they would be more likely to spend it rather than save it. Sure, there are the rising costs for basic necessities like milk and cereal. But, I thought it would be more likely that our shop-till-you-drop American culture would result in spending on discretionary items…mainly flat screen TVs and ipods.

But, recently, I have changed my mind.

Gas prices make people crazy.

On the one hand, you get the "serves us right crowd." You know the argument: We deserve to pay $4 a gallon, because we drive big cars and haven't been serious about energy conservation for, oh, the last 20 years. Cutting the gas tax or slapping a windfall profits tax on oil companies would be silly since everything in this market is driven by supply and demand.

On the other hand, you find the "birthright crowd." These folks basically argue that gas was a dollar a gallon when they were kids and it should be $1 a gallon now. We deserve cheap gas, because it is so important. If only we drilled enough, cut taxes enough or pressured OPEC enough things would return to "normal."

To understand Fannie Mae and its “sister company” Freddie Mac takes a lesson in politics. There is a fierce political battle going on about how to regulate government sponsored entities like Fannie and Freddie. In general, Democrats support the companies taking on a larger role in the mortgage market. They support the companies' affordable housing missions and want them to help low income borrowers. Republican generally want a smaller role for the firms and worry about the risk to taxpayers that could come with letting the firms grow their portfolios. Obviously, it’s in Fannie Mae’s best financial interest for the housing market to stabilize. But the current volatility can work to the company's political advantage, as there seems to be more need than ever for it to “work.”

Unlike most cities in the country, the Manhattan real estate market was not initially touched by the subprime mortgage mess. In fact, as I report in our "A Tale of 5 Cities" series, up until recently there was little evidence of problems with subprime mortgages or foreclosures in Manhattan…and the real estate market here charged ahead much like it had in recent years.

The simple reason is that Manhattan is not a subprime mortgage market. In other words, people who can only obtain subprime loans don’t and can’t buy in NYC (at least not in Manhattan). That’s because the majority or homes sold in Manhattan are co-op apartments. And, co-op boards, which must approve all buyers, did a far better job vetting the finances of prospective co-op shareholders than banks typically did. On average, people buying Manhattan apartments put down 35 percent of the purchase price….and finance the remaining 65 percent. Simply put, if you need a subprime loan, you most likely won’t be buying a home in Manhattan.

Today’s employment report was a case of less bad news being good news.

Wall Street knew there would be job losses in April. But it believed they would be in the 80 thousand payrolls range.

So, when it turns out only 20 thousand positions were lost, the cuts don’t seem so bad!

Not surprisingly, the construction and manufacturing sectors were particularly hard hit.

Perhaps no real estate market in the U.S. will have as much trouble recovering from the current housing crisis as Southeast Michigan. Unlike a lot of areas, Detroit's housing market didn't become overheated by subprime mortgages. Rather, it is a region that has been on the decline for decades.

Detroit has yet to really recover from the race riots of the 1960s. Demographics reflect that. Detroit's population peaked in 1950 with about 1.8 million residents. By 1980 there were about 1.2 million people. Today there are only about 870,000.

Economics are another problem. Southeast Michigan has lost about 300,000 manufacturing jobs over the past few years. The auto industry accounts for about half of those losses. Those jobs won't be coming back, so the region is struggling along with other rust-belt communities to find new ones.

When real estate was booming, the mantra of people in the business of selling homes was that the DC market was “recession resistant.” The theory went that since the federal government is here, house prices would stabilize or continue to rise. While it is true that the DC economy is buoyed by the government’s presence, the region is not immune from the unwinding of real estate speculation and tightening of lending standards.

Prices are still falling in the most distant suburbs. This lower end of the housing market is where the subprime lending standards took their heaviest toll. There is still land to develop in these suburbs, which has also added to the supply of homes. When I asked John McClain of GMU’s Center for Regional Analysis if the problems were from overbuilding, he described it as “overbought.” There was a time when builders couldn’t keep up with buyer demand. Prices escalated as a result. But that’s over. Buyers backed out as lending standards tightened and prices stopped rising.

So what did I think of Warren Buffett’s kids? Here are some impressions of Susie, Howard, and Peter Buffett.

They are normal.
They are remarkably down to earth, considering their father is the richest man in the world with a net worth of $62 billion. When Howard greeted me at his home he was wearing shabby chinos, a khaki work shirt and muddy construction boots. He drove me to his farm in an old pick up truck. He is so “real” and it was refreshing to see that. When I asked Howard the size of the staff working on his 850-acre farm, his answer was “none”. He plants and harvests the corn and soybeans by himself. Sometimes he has a helper or his son gives him a hand. He can afford hiring a team of workers, but he chooses to do it this way, because he enjoys it. And I think it’s also part of his Warren Buffett DNA—keeping things simple and low budget.