Discover Crunches Credit Further

Discover restricts credit further as seen in the e-mail below:

Discover Business Card Affiliates,

As a result of the current economic downturn, Discover Business Card has taken a look at credit risk and has made a decision to pause online acquisitions of its business products (Business Card, Business Miles and Business card with Cash Back Bonus) as of January 1st. At the turn of the year, the intention is to evaluate performance and the credit risk model so that the cards can once again be offered to online prospects in 2009.

Please note that this message relates only to Discover's Business Cards and not its Consumer or Student cards. You are free to continue to promote the latter and, in fact, we encourage you to do so in place of business cards.

An Update on the Energy Patch - Part II

I just returned from an Energy conference in New Orleans and wrote a little on it in this post here.

It seems that investors are waiting for three events before deciding whether to invest in these stocks in 2009.

First, to state the obvious, most institutional investors are waiting for the price of the commodity to stabilize, fearful for how far it will fall before a bottom is reached.

They also appear to be waiting until after the final round of exploration and production companies set capital budgets for 2009. While a decline in spending is discounted in the shares of the services and drilling companies, there is concern about how much more will be cut.

Also, many exploration and production companies will be forced to value reserves at the end of 2008 using a lower price deck than expected. This will cause reserve writedowns at many of these companies. Since "proving" up reserves is the main business model for many, this will also be a painful adjustment.

An Update on the Energy Patch - Part I

I just returned from an Energy conference in New Orleans, and what a difference a year makes. At this same conference last year, if the maid who cleaned my hotel room wanted to raise a billion dollars to start an oil company, she probably could have gotten the capital. Not so this year, as a resigned outlook on the current downturn colored everyone's attitudes.

One company attendee told me that currently there was no spot market for rigs. As soon as a contract ended, the rig was being sent back to the owner. There is not even a conversation about a lower rate. It's basically - here's your rig, we'll call you.

A Nineteenth Century View of Speculation that May Apply Today (Part II)

This is a continuation of my post from yesterday on a book published in 1887 called "Twenty Eight Years In Wall Street," written by a gentlemen called Henry Clews. He wrote an interesting section on speculation that I wanted to share:

"Speculation for a fall in prices is based upon the presumption of an over-supply. If it succeeds, the production of the particular product is checked until prices recover, and in the meantime production is diverted to articles less abundant. Thus speculation proves a regulator both of values and production. Speculation for a rise in prices is based upon a presumption of scarcity or short supply, and its direct effect is to quicken production and restore the equilibrium of prices."

This one is a perfect explanation for the rise in Oil prices, and the forces that corrected it to where it is today. These same forces will also lead to a recovery sometime in the future.

"Speculation, moreover, makes a market for securities that otherwise would not exist. It enables railroads to be built through the ready sale of their bonds, thus adding materially to the wealth of the whole country, and opening a more profitable market to labor. In this it becomes the forerunner of enterprise and material prosperity in business."

Without the lure and illusion of easy wealth that investing in the Stock Market provides to people, how much capital could American businesses attract?

"I believe the men of most experience, not only in Wall Street, but in other departments of finance and commerce, will bear me out in the statement that a market where even values are considerably inflated by speculation, is more desirable than a period of depression. The result, in the long run, is the greatest good to the greatest number. I don't believe that the ghost of Jeremy Bentham himself could rise up and consistently condemn this statement."

We shall find out of this is true since according to the conventional wisdom we are entering a depression.

Here is a direct link to the book.

A Nineteenth Century View of Speculation that May Apply Today

I recently came across a book published in 1887 called "Twenty Eight Years In Wall Street," written by a gentlemen called Henry Clews. He wrote an interesting section on speculation.

"Speculation is a method now adopted for adjusting differences of opinion as to future values, whether of products or securities."

I never quite thought of it that way but he does distill it down to a mathematical definition.

"This is more common now than in former years because the facilities for procuring information have increased with the greater intelligence and celerity with which all business is now conducted, and also from the greater rapidity with which such information can be transmitted by telegraph and cable."

Obviously, the "facilities for procuring information" was the nineteenth century equivalent of the Internet.

"Speculation brings into play the best intelligence as to the future of values. It has always two sides. The one that is based principally on the facts and conditions of the situation wins in the end, and the result of the conflict is the nearest possible approach to correct values. The consequences of speculation are thus financially beneficial to the country at large."

Is this where Warren Buffett got his famous line about the the voting machine and the weighing machine in regard to the Stock Market? What would Mr. Clews say about our recent spasm of speculative excess today? Is it beneficial to the country? If it is beneficial, then is our government doing the wrong thing in not letting it run its course?

Part II on Monday.

Haven Trust Bank Fails

Haven Trust Bank of Duluth, Georgia, was the second bank to be seized by the Federal Deposit Insurance Corporation (FDIC) on Friday. My post on the first bank is here

Haven Trust bank had total assets of $572 million and total deposits of $515 million as of December 8, 2008. BB & T assumed the operations of the bank.

Haven Trust Bank was relatively new, and was formed in 2000, to ride the wave of real estate prosperity that engulfed the Southeast in the early part of this decade.

Its capital ratios were much lower than Sanderson State Bank, which was the other bank taken over by the FDIC on Friday:

Haven Trust Bank Capital Ratios (9/30/2008)

Equity capital to assets - 4.44%
Core capital (leverage) ratio - 4.42%
Tier 1 risk-based capital ratio - 4.90%
Total risk-based capital ratio - 6.16%

The bank had $437 million in real estate loans, with $260 million in Commercial Real Estate, and $133 million in the toxic construction and land development category.

Sanderson State Bank of Texas Goes Down

We had a doubleheader by the Federal Deposit Insurance Corporation (FDIC) as they seized two banks on Friday evening. The first was the Sanderson State Bank of Texas.

This bank was taken over by the Pecos County Bank. Sanderson State Bank was a small bank and had total assets of $37 million and total deposits of $27.9 million at December 3, 2008.

Sanderson State Bank was first established in 1907, and had only one branch. It was able to survive the Panic of 1907, and the Great Depression in the 1930's, but not the most recent calamity to strike our economy.

The interesting thing to note was how quickly the situation deteriorated for Sanderson State Bank. At 9/30/2008, the bank had a Tier 1 risk-based capital ratio of 12.55%, and a Total risk-based capital ratio of 13.80%.

Ninety percent of its loans were real estate and maybe it was one concentrated loan that did them in. A sad end to a 100 year old bank.

More Credit Tightening

I got this e-mail below from Discover today since I run an ad on my blog promoting its credit cards:

"Due to the recent economic downturn, Discover Business Card has made some changes to its lending criteria. After applying for a Discover Business Card, applicants may now be asked to provide additional information in order for Discover to make a credit decision. These changes will have an impact on the Discover Business Card approval rate and therefore you may likely see the overall conversion rate for the product decline. These changes were made in mid-November."

Just another brick in the wall I guess.

Is The Housing Market About To Turn?

I know it is fashionable to be bearish on housing, but are things about to pivot and turn? Put these two items together:

1) The Housing Affordability Index reached 141.1 in the most recent release. This was the highest in at least six years. As one blogger noted, this will move even higher next month due to a drop in fixed mortgage rates to the current 5.75%.

2) The U.S. Treasury is considering a plan to drive mortgage rates down to as low as 4.5%. They would accomplish this by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac.

Would low housing prices and a generational low in mortgage rates prove too tempting to home buyers and cause a mini boom in housing and begin to clear inventory?

Disclosure - I am long the XHB and ITB.