U.S. ECONOMIC/FINANCIAL NEWS
Wall Street: Housing Bubble Is 'Waiting To Pop'
The Wall Street Journal was forced to admit July 3 that the residential housing market is "a bubble waiting to pop," as money continues to pour into a wide range of property investments at the fastest rate in years. Some new investors in real estate worry that they are getting in at the top of the market, and face getting burned as they did by falling stocks.
Sales of new and existing homes hit $522 billion so far this year, up from $451.3 billion a year ago; and $2.41 billion has flowed into real estate mutual funds, compared with only $307 million in the same period last year.
Fannie Mae, Freddie Mac No Longer Exempt from Law
Fannie Mae and Freddie Mac will be required to follow the same financial disclosure practices as other companies, including registering their mortgage-backed securities with the Securities and Exchange Commission, reversing the present exemption from Federal securities laws, under a new rule being developed by the the Office of Federal Housing Enterprise Oversight (OFHEO), the Federal regulator for the bankrupt mortgage-finance giants.
The proposed rule, as outlined in a June 28 letter from OFHEO Director Armando Falcon to the White House Office of Management and Budget, would require Fannie and Freddie to: 1) File quarterly and annual reports with the SEC, as comprehensive as those required of SEC-registered companies; 2) register their offerings of stock and debt; and 3) disclose information on interest-rate risk, derivatives, and mortgage-backed securities.
U.S. Layoffs Rise 12% in June on Telecom Meltdown
Layoffs rose 12% in June over the previous month, to 94,766, as telecom job cuts more than doubled to 30,455, with no signs of improvement in the second half of the year, according to a report issued July 2 by employment outplacement firm Challenger, Gray and Christmas. Waning investor confidence will likely lead to more layoffs, the study noted, starting with the financial sector. "We will probably continue to see significant job cutting," said CEO John Challenger.
WorldCom Defaults on $4.25 Billion in Loan Agreements
WorldCom, heading for bankruptcy, has defaulted on $4.25 billion in loan agreements, giving banks the right to demand immediate repayment of some of its debt; and it is being forced to repay $1.2 billion in loans backed by customer bills. The Nasdaq "high-tech" stock market told WorldCom that its shares would be delisted on July 5, unless the company appeals.
WorldCom, charged by the Securities and Exchange Commission with $3.85 billion in fraud for hiding losses during the past five quarters, said it is investigating possible new accounting problems with its reserve accounts. "Criminal charges may be too good for the people who brought about this mess," said SEC Chairman Harvey Pitt on NBC's Today program July 1. "The American people can be sure that there's a very tough cop on the beat here and that we are going to clean this mess up."
D.C. Telecom Sector Imploding, Real Estate Bubble Next
The Greater Washington, D.C. areaincluding Northern Virginia and adjacent counties in Marylandwith its many telecom companies, is considered by many to be Silicon Valley II. For example, the second-largest long-distance telephone company, MCI Communications, still has its headquarters in Washington.
By late 1999-early 2000, the share price of the telecom companies, and the larger "New Economy" sector, had reached their peak, pushing up residential and commercial real-estate values. At the market peak, in the Washington area, the collective stock valuation of the 27 telecom companies listed below, reached between $350 and $400 billion, or more.
Stock Price of 27 Telecom Companies
In Greater Washington, D.C.
|
Peak
Price |
Price on
6/28/02 |
Acterna |
$ 41.37 |
$0.41 |
Aether Systems |
315.00 |
2.95 |
Ardent Commun. |
43.00 |
0.03 |
Ciena |
149.50 |
4.19 |
Corvis |
108.00 |
0.65 |
Digex |
94.00 |
0.22 |
E-spire Commun. |
15.75 |
0.01 |
Global Telesystems |
45.00 |
0.00 |
Iridium World Commun. |
70.69 |
0.11 |
LCC Int'l |
45.00 |
1.43 |
MCIT |
19.09 |
1.68 |
Metrocall |
15.75 |
0.01 |
Motient |
40.00 |
0.00 |
Ntelos |
46.00 |
1.41 |
Network Access Solutions |
36.50 |
0.01 |
Net2000 Communications |
37.25 |
0.00 |
Nextel |
79.81 |
3.21 |
Primus Telecom |
51.69 |
0.70 |
PSINet |
59.81 |
0.00 |
Savvis Communications |
24.62 |
0.05 |
Startec Global Comm. |
29.87 |
0.01 |
Talk America |
20.12 |
4.13 |
Teligent Inc. |
97.00 |
0.00 |
Tessco Technology |
22.25 |
9.80 |
Via Net Works |
71.75 |
1.42 |
WorldCom |
61.99 |
0.83 |
XO Communications |
66.00 |
0.02 |
source: Washington Post, Bloomberg
As of June 28, some 12 of the 27 listed companies had stock values of $0.05 per share or less.
The telecome shakeout now threatens to blow out the Washington-area commercial and residential real-estate markets. According to the Washington Post July 1, "If WorldCom Inc. ... were to shut down tomorrow, pack up, send its 8,000 Washington area employees home, and put 'for rent' signs in front of all its facilities, Loudoun County's already high office-vacancy rate of 17% would almost double to a staggering 32.9% rate." The official commercial building vacancy rate for Northern Virginia is 15%, and in actuality, much higher.
The telecom sector, employing thousands, helped build up the Greater Washington home real-estate bubble: By March 2002, the average home price reached $340,000. Now, with the acceleration of the telecom sector layoffs, this bubble is primed to blow out.
U.S. Corporate Bankruptcies To Break Historic RecordsAgain
Last year, 255 publicly traded U.S. companies, with total assets of $260 billion. filed for bankruptcy protection, according to Bloomberg July 3. In terms of assets eliminated, this was the worst year ever in U.S. corporate history, almost tripling the previous record of one decade before. The 2001 bankruptcies included Enron, with $63.4 billion in assetsthe biggest ever U.S. bankruptcyso far.
However, bankruptcy filings continue to surge, and 2002 will most likely surpass last year's record. Already in the first 6 months, 113 listed companies with $149.3 billion in assets have filed for Chapter 11. In the last two weeks of June alone, Adelphia Communications with $24.4 billion in assets went bankrupt, as did XO Communications and Farmland Industries, the largest U.S. farm cooperative. Five of the eight largest Chapter 11 cases in history have been filed since December 2001: Enron ($63.4 billion in assets), Global Crossing ($25.5 billion), Adelphia ($24.4 billion), K-Mart ($17 billion), and NTL ($16.8 billion). Many more bankruptcies of large corporations are expected in the second half of this year, in particular in the airlines, energy, telecom, and metal processing sectors.
WorldCom, the troubled U.S. telecom group which, according to its own statements, runs half of the global Internet traffic, could be the next big shoe to drop. With $103.8 billion in assets, a bankruptcy of WorldCom would dwarf even that of Enron.
|