In the midst of this epic and monumental election campaign, which I do sincerely hope you go out and vote, the number one issue which is the economy is now fluttering into the abyss at a much quicker pace. On Monday, automotive sale numbers came out and the numbers were downright shocking. U.S. auto sales dropped to levels unseen in 25 years. General Motors U.S. sales are down 45 percent from a year ago while Toyota is down 29 percent. For those holding out on decoupling coming back that dream may be shattered once again with sales dropping 40 percent in Spain and 19 percent in Italy. Every major auto manufacturer was impacted with Ford dropping 30 percent and Nissan following 33 percent. These are across the board collapses. Later in the article, I will go into the detail of what these numbers mean for the overall U.S. economy.

If that wasn’t enough to highlight the sad state of the economy, big ticket flat screen seller Circuit City announced that it will be closing 155 of its 700 stores meaning more job cuts are in the pipeline. Circuit City has about 43,000 employees and recent estimates are looking at an additional 7,000 job losses. This is simply another testimony that consumers are tapped out and the silent depression is making its full fledge attack on the consumer economy. What this also means is people need to get ready to see more folks driving their cars a little bit longer.

What we will also be seeing in the weeks to come is a “surprise” drop in foreclosures. It really won’t be a surprise for those that are following the news with Bank of America, JP Morgan, and IndyMac Bank and their great experiment in mass mortgage modifications. JP Morgan recently announced a moratorium of 90 days on foreclosures on loans targeted for modifications. Why is this big? Well because they now own uber toxic mortgage dealer Washington Mutual that went buck wild here in California with the wonderful Pay Option ARMs.

These are 3 trends to follow in the next 90 days. Let us dig deeper into the numbers and see what this will mean for the economy.

Beware the Phony Drop in Foreclosures

Nationwide foreclosure filings are still running at a record pace. We are in the path of a tempest and will see 3,000,000 foreclosure filings this year:

[click for larger chart]

As you can see from the chart above, we are clearly running higher than 2007 and still much higher from 2006. So why will we see a slight drop in foreclosures? Well two of the largest banks JP Morgan and Bank of American will be on a campaign of massive loan modifications. JP Morgan now the proud of owner of Washington Mutual, Wells Fargo with new baby girl Wachovia, and Bank of America who now owns poster boy of mortgage greed Countrywide Financial.

So what does this effort look like?

JP Morgan:

$70 billion in loans targeted

Potential mortgage pool: 400,000 mortgages

Freezing foreclosures for 90 days to setup process

Bank of America:

Two-tier modification

1st Potential mortgage pool: 265,000 mortgages targeted (all kinds)

Second-tier modification

2nd Potential mortgage pool: 400,000 subprime and option-ARM customers serviced by Countrywide. Deal hashed out with 14 state attorney generals.

Wells Fargo:

Potential mortgage pool: Large number of roughly $120 billion option ARM pool in portfolio from Golden West purchase by Wachovia in 2006.

So we’re talking a large number of loans. In addition, California recently through SB 1137 recently announced a few more measures lenders will need to go through in order to help borrowers with their loans. But if recent shenanigans at government run IndyMac Bank are any indication, borrower responses may be low. You need to remember that a large number of this pool is right here in California. Washington Mutual has a disproportionately large number of loans here in California especially of the option ARM flavor. The Golden West lunch special bag of mortgages is largely California based. Countrywide? Oh yeah. Get the picture? This get out the modification effort is largely targeted at the tsunami we’ve been talking about for over a year which is the $300 billion in option ARMs here in California. Will this work? No. But it’ll sure make the numbers look a bit better for a few months.

It is an American Right to Have a Plasma in Every Home

Circuit City, the technology store went from having a market cap of $5 billion to currently having the market cap of $60 million. If you want to see the collapse of the big ticket consumer economy just take a look at this:

That is a shocking decline. Year to date the company is down 91% which of course isn’t saying much now that it is trading under $1. Yet think about the massive implication here. Circuit City employs 43,000 people. What do you think is going to happen? More importantly, who is going to go out there and load up on $5,000 plasma televisions? Not many. If you think this is strictly a problem facing Circuit City look at big kid on the block Best Buy:

Best Buy is down 47 percent year to date and that is with the recent jump up. However, you’ll notice that most of the decline came in September and October. Why? Well first, I think the last bastion of steroid consumer dogma was just shattered during the epic market decline we have recently lived through. People realize that without easy credit and people having near heart attacks opening up those October 401k statements, people are not going to be in the mood to load up on expensive technology gadgets. In economics there is a thing called elasticity. That is, these stores sell items with elastic goods. For example, a person can easily forego a $4,000 surround sound system and go with the generic Wal-Mart brand for $200. They’ll still get sound but not at the quality of the more expensive unit. They’ll survive. Inelastic goods are items such as insulin where someone has no reasonable substitutes in the market. The consumer will pay whatever price is demanded.

These industries are getting hammered. But take a look at Wal-Mart and Family Dollar Stores for the year:

Wal-Mart and Family Dollar Stores are up 17 and 40 percent respectively for the year. Why? Well they sell items at lower prices including household goods like food, clothes, and medicine which people will need no matter what. I have yet to see a study but I am willing to bet that maybe for a brief time, while folks decided to stay away from Best Buy and Circuit City electronics, Wal-Mart goods in this area did well. Only for a short timeframe as the market adjusted but now, everyone is hurting including higher priced goods at Wal-Mart.

What do you Mean I Can’t Trade in my Car?

There is only one word to describe auto sales. Pathetic. The data on this is so stunning that it would have sent the markets down if it weren’t for the world on hold for a historic election. Let us take a look at the raw and startling data:

Every single area got hammered into the ground aside from one tiny group that barely edged up, small car sales and that is if we look at year to date performance only. If we go back to October of 2007 sales are down 23%. SUV sales are down 53.8 percent across all sizes since October of 2007. Large car sales are down 40.6% from the same timeframe.

Aside from insane oil prices for much of the year, what else contributed to this decline? Can it be that Americans are broke? That is one factor. But another factor is the sudden desire for standards in the industry when it comes to loaning money out. GMAC, the financing arm of General Motors is now requiring a 700 FICO score for MSRP prices:

“GMAC Leaders and NAO Team:

In light of the disruption in the credit markets, GMAC NAO is announcing a temporary, more conservative purchase policy for retail auto contracts in the United States. In the short term, we will limit auto contracts to those consumers who have a minimum 700 credit bureau score, with an advance rate equal to or less than dealer invoice. This means that consumers will be required to make a down payment. In addition, we will restrict approval of contract terms beyond 60 months, except for those customers qualifying for GM-supported 72-month incentives currently advertised.

These are extraordinary times, and we must take these prudent steps to focus our resources on high quality retail contracts and critical areas such as dealer wholesale financing, until the credit markets are stabilized. To assist dealers, GM has enhanced its retail incentive programs in October to utilize more cash incentives. GM and GMAC will continue to work collaboratively through these challenging financial market conditions.

Barbara Stokel

Executive Vice President, North American Operations”

[source: Financiapocalypse]

What do you mean I now need good credit and a down payment to buy a new Corvette? Suddenly people are looking for good credit and are coming to realize very few Americans fall in this area. And those that do have good credit for the most part have it that way since they are financially prudent and not out there buying gas guzzlers! It is a paradox. I have to tell you a quick anecdotal story that captures this sentiment. This weekend I went down to my local Ralphs supermarket for some angus steak. It felt like a good weekend for a steak and a good Laker game versus the Denver Nuggets. As I was coming out of the store, there is a local recycling center in the parking lot. In Southern California, these are all over. What I couldn’t help noticing though was a younger guy pulling up to the center in a brand new Jaguar. The car was loaded with cans, plastic bottles, and empty beer glasses. Out come these items from the passenger seat, the back seat, and finally the trunk which was completely full.

Now I’m all for recycling but this wasn’t someone recycling for keeping the planet green. This was someone looking for the cash it would bring. And the line was twice as long from normal weekends. The car was a newer model leased within the past year since the plates had a “leased at…” type frame. And you wonder why homes across the country are defaulting in record numbers.

Only in Southern California folks can you make your monthly Jaguar payment by recycling cans.

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