California Dreamin' ...

Or is that a nightmare that won't end ?

WSJ: “California has more at stake in congressional efforts to ease the credit crisis than many states. Its housing market -- the largest in the country -- is still in a deep slump. In August, the median price of an existing home in the state fell 40.5% to $350,140, from $588,670 a year earlier, the latest in months of consecutive declines, according to the California Association of Realtors.

"California foreclosures, meanwhile, continue to soar. In August, foreclosure filings in the Golden State jumped 41% from the previous month, compared with a national increase of 12%, according to RealtyTrac Inc., a real-estate tracking firm based in Irvine, Calif.

Yet : “Nearly half of California's congressional delegation -- 24 of 53 members -- voted against the bailout plan backed by congressional leaders and President George W. Bush. "No" votes came from an unlikely mix of left-leaning Democrats and conservative Republicans.”

Let's do a bit of exegesis on this. The median two income family income in California is about $60,000. Standard norms for the share of that income allocated to housing is 28%, for principal, interest and taxes ("PIT"). So that means $16,800 can go to PIT. Now real estate taxes there are 1% of value for new purchases. A buyer of the median house will have to pay $3,500 per year, leaving $13,300 for the mortgage. For a conventional 30 year amortizing mortgage at 6%, the debt service constant (P&I) as a % of the original loan amount is 7.19% per year.

So therefore the median income family in California can afford a mortgage loan of $184,861. This is far, far, far below the value of the median sales price for homes in California - just 53% of the median sales price even at today's depressed prices. By the way, the national median sales price is about $200,000, hence a California person CAN afford a house in the rest of the US with a mere 10% down payment.

And if you live in the sprawl of California, your gasoline bills will be huge. And your income taxes are huge. And your sales taxes are huge. Overall, that state is a disaster in progress for the common man. Of course the rich radicals in Hollywood and the winery & pearls crowd of Nancy Pelosi don't feel the pain.

Why do I bring this up now ? I was buying a bunch of municipal bonds for Mrs. B yesterday morning and summarily rejected all bonds from California, which is the future "Jefferson County" in my verily humble opinion.

Markets

FT: “… overnight interbank lending rates reached painfully high levels in the main currencies, with overnight dollar Libor leaping 4.3 percentage points to a seven-year high of 6.88 per cent.”

FT: “Investors in gold are demanding “unprecedented” amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen. Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.”

The ECB is living in a fantasy world, maintaining interest rates at 4.25%.

WSJ: “The tightening of funds to auto dealers underscores another way the credit crunch is affecting large companies and small business owners. In a similar move, lenders are shrinking credit to restaurant franchisees, making it harder for owners to remodel existing locations and buy new restaurants. General Electric Co.'s (GE) GE Capital and Bank of America Corp. (BAC), large commercial lenders, are becoming more stringent in pricing and issuing loans for new franchisees.

“Most recently, Bill Heard Enterprises Inc., one of the largest Chevrolet dealers in the U.S., filed for Chapter 11 bankruptcy protection Sunday after shutting down last week. “The company, which operated 14 Chevy dealerships in seven states, sought Chapter 11 protection in the U.S. Bankruptcy Court in Decatur, Ala., listing assets and debts of between $500 million and $1 billion each. The company, which opened its first dealership 89 years ago, put nearly 3,200 people out of work when it shut down Wednesday.

“ In court papers, Bill Heard said high gas prices, the downturn of the U.S. economy and the reluctance of some auto lenders to extend credit to customers have caused new car sales to plummet, prompting a "financial liquidity crisis" at Bill Heard dealerships.

Congress fiddles while Rome burns.

WSJ: “The Securities and Exchange Commission and the U.S. accounting-standard setter issued guidance that will allow companies to use more flexibility when valuing securities in a market that has dried up, a move the banking industry hopes will relieve pressure on company balance sheets. … “

“The clarifications allow executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices. They were welcomed by banking and financial-services groups that have lobbied the SEC and FASB to change the rules. Those efforts were ramped up in recent days as Congress was drafting a rescue bill.

Too late. The fear was felt and exists. Tossing a sheet over it won't help now. People aren't horses.

Doing nothing. Alpha Fund is in cash. For Krypto Fund, I put some new cash to work in TIPs - Treasury Inflation Protected Bonds, as their prices have come back to Earth. Plus bought the municipal bonds aforementioned for Mrs. B. By the way, those were yield-to-maturity at least 5%, no ATM bonds, non-call 5 years for 20 year bonds and non-call 10 years for 30 year bonds, rated at least "A" by two rating agencies - no "A-", broad diversification by type and location. By the way, I had no trouble finding these bonds on a visit to her broker's office.

PS: Interesting, yesterday I deposited some large checks at my bank ... they are holding the funds a couple days longer than a larger amount about a few weeks ago ... and a couple years ago, much larger sums had no hold. No change in my average balances. So I asked the telling in a friendly manner. She said with all the problems, they were being more cautious.

Word of the Day

"Recreant" - adjective and noun [$10] literary
Recreant means (adjective) 1. craven, cowardly; 2. apostate; (noun) 1. a coward; 2. an apostate.
Sentence: Recreant Congressmen continue to do nothing as the economy comes to a slow grinding halt as credit bleeds from the businesses of the common man. The new Senate effort is being festooned with pet programs like wind power. Arghhhhhhhhh. The cupidity of Congress shows no bound.