S.& P. 500 Enters Bear Market as Stocks Plunge [NYT]
(Photo: Christina T)

Dow enters bear market as stocks slide [Reuters]

The authorities said they believed the goods were sold at flea markets, street fairs and other places in the region. They added that they were still investigating the operation, which they said they believed had links to China. The police said they seized records of money transferred to banks in China.

Bear Stearns, facing a grave liquidity crisis, reached out to JPMorgan on Friday for a short-term financial lifeline and now faces the prospect of the end of its 85-year run as an independent investment bank.

With the support of the Federal Reserve Bank of New York, JPMorgan said in a statement that it had "agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days."

For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.

On Wednesday, Bear's chief executive, Alan Schwartz, said in an interview on CNBC that his firm had ample liquidity, but his words have not been enough to prevent what seem to be a classic run on the bank.

In a statement issued on Friday, he said: "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."

JPMorgan and Fed Move to Bail Out Bear Stearns [NYT]
(Photo:Getty)

Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies' finances. Like a homeowner's policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.

No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.

It would be as if homeowners, facing losses after a hurricane, could not identify the insurance companies to pay on their claims. Or, if they could, they discovered that their insurer had transferred the policy to another company that could not cover the claim.
...
"This is just a giant insurance industry that is underregulated and not very well reserved for and does not have very good standards as a result," said Michael A. J. Farrell, chief executive of Annaly Capital Management in New York. "I think unregulated markets that overshadow, in terms of size, the regulated ones are a real question mark."

Arcane Market Is Next to Face Big Credit Test [NYT] (Thanks, trai_dep!)
(Photo:Getty)

You never knew the ice cream bizness was so mad gangsta, did you? This is worse than the time Vanilla Bean took out Heath Bar Crunch. Bigger picture inside...

Other types of consumer debt, which have nothing to do with housing and nothing to do with subprime, are going bad, too. The Wall Street Journal reported today that "about 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month, according to a Lehman Brothers survey of companies servicing these loans." In October, Fortune's Peter Gumble warned that a similar plague may soon afflict credit-card companies. In October, credit-card giant Capital One Financial reported that the delinquency rate on credit cards for the third quarter of 2007 was 4.46 percent, up from 3.53 percent in the third quarter of 2006. "Given current loan growth and delinquency trends," Capital One reported, it "expects the U.S. Card charge-off rate to be around 5.25 percent in the fourth quarter."

The stock of First Marblehead, which has enjoyed explosive growth making private (i.e., not federally guaranteed) student loans, has been hammered in recent days because Moody's, the ratings agency, concluded that loans it had made "appear to be defaulting at a significantly higher rate compared to loans originated through school financial aid offices." The Wall Street Journal reported that "seventeen months after First Marblehead arranged one 2005 package of student loans, 2% had defaulted, according to the company's monthly reports to note holders. But last month, a comparable 2006 package—also 17 months after issue—had a default rate of 3.98%."

Debt Be Not Proud [Slate]
FURTHER READING: The Grapes Of Wrath [Amazon]
(Photo: Wikipedia)

Home prices fell in more than one-third of US cities last quarter as stricter lending standards caused a 14 percent decline in sales nationwide.

Prices dropped in 54 of 150 metropolitan areas in the third quarter, and the median sales price tumbled 2 percent nationwide, the National Association of Realtors said yesterday.

10 Best Housing Markets:

1. Salt Lake CIty
2. Charlotte, N.C.
3. San Jose, Calif.
4. San Francisco
5. Raleigh, N.C.
6. Austin
7. Pittsburgh
8. Seattle
9. San Antonio
10. Portland, Ore.

10 Worst Housing Markets:

1. Sacramento, Calif.
2. New Orleans
3. Riverside-San Bernardino, Calif.
4. Detroit
5. Las Vegas
6. Tampa, Fla.
7. Miami
8. Cleveland
9. Phoenix
10. Jacksonville, Fla.

Best And Worst U.S. Housing Markets [Forbes]
Home sales, prices decline nationwide [Boston Globe]
(Photo:Getty)

The 375 pounds of seized illegal cheese included panela, queso fresco and queso oxaca varieties, the [California Department of Food and Agriculture] says. It was a significant find, the department says.

"Illegally produced is cheese is serious threat to public health," says CDFA Secretary A.G. Kawamura.

Arrests drain bathtub cheese sellers [Central Valley Business Times via BarfBlog]
(Photo: jthorvath)

The directory lists 4,385 farmers markets throughout the U.S., and it's a good resource for locating nearby "direct to consumers" markets. It's also got a lot of other "fun" information. For instance, 94% of all U.S. farmers fit into the "small farmers" category of less than $250k in annual receipts, and for them, farmers markets are a good revenue generator.

Also: did you know that low-income mothers and senior citizens can receive WIC coupons to use at farmers markets?

USDA Farmers Market Locator
(Background photo: Stacy Y)

Both the regular and senior versions of the Farmers Market Nutrition Program (FMNP) distribute coupons, which "can be used to buy fresh, unprepared fruits, vegetables and herbs from farmers, farmers' markets or roadside stands that have been approved by the State agency to accept FMNP coupons." Sorry, no prunes, raisins, nuts, honey, maple syrup, or cider. (You can still sign whatever wacky petition is being circulated that day, though.)

Says the WIC site, "Currently, 45 State agencies operate the FMNP. They include the District of Columbia, Guam, Puerto Rico, and 37 States: Alabama, Alaska, Arizona, Arkansas, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, West Virginia, and Wisconsin. In addition, 5 Indian Tribal Organizations administer the Program: Chickasaw, Oklahoma; Osage Tribe, Oklahoma; the Mississippi Band of Choctaws; the Five Sandoval Indian Pueblos, New Mexico, and the Pueblos of San Felipe, New Mexico."

WIC Farmers Market Nutrition Program
Senior Farmers Market Nutrition Program
(Photo: Getty)

``The housing market is bad and is going to stay bad for some time,'' said Zach Pandl, an economist at Lehman Brothers Holdings Inc. in New York, who predicted a 3 percent drop. ``This number does not look good for existing home sales for August.''

The median forecast was for a decrease of 2.2 percent, according to a survey of 26 analysts. Estimates ranged from a drop of 4 percent to an increase of 1.5 percent.
...
President George W. Bush on Aug. 31 said he will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers. The new program will allow homeowners with a good credit rating who can't afford their current payments to refinance into FHA-insured home loans.

U.S. Economy: Pending Home Sales Plunge 12.2%, Most on Record [Bloomberg]
(Photo:stirwise)

Here's the bad news: If you've got great credit and need a loan for more than 417k—your interest rates are jumping. Lenders are no longer as interested in offering loans larger than the 417k Fannie Mae, Freddie Mac cut off point. According to the Times, this is shutting down the more expensive real estate markets.

From the NYT:

For months after problems appeared in the subprime mortgage market — loans to customers with less-than-sterling credit — government officials and others voiced confidence that the problem could be contained to such loans. But now it has spread to other kinds of mortgages, and credit markets and stock markets around the world are showing the effects.

Those with poor credit, whether companies or individuals, are finding it much harder to borrow, if they can at all. It appears that many homeowners who want to refinance their mortgages — often because their old mortgages are about to require sharply higher monthly payments — will be unable to do so.

Some economists are trimming their growth outlook for the this year, fearing that businesses and consumers will curtail spending.

"In the last 60 days, we've seen a substantial reduction in mortgage availability," said Robert Barbera, the chief economist of ITG, a brokerage firm. "That in turn suggests that home purchases will fall further. Rising home prices were the oil that greased the wheel of this engine of growth, and falling home prices are the sand in the gears that are causing it to grind to a halt."

In a Credit Crisis, Large Mortgages Grow Costly [New York Times]

[via Digg]

3. Is it organic? Fruit and vegetables are not organic just by virtue of their presence at a farmer's market.
2. What are the farm's sustainability practices? Do they rotate crops and utilize bio-diversity?
1. Are those free range eggs? Chickens that roam freely and much on grass produce eggs with a richer, orange-yellow yolk.

Farmer's Market Shopping Tips [wannaveg via Frugal For Life]
(Photo: _e.t)

As gas costs rise to $4 a gallon and oil companies earn around $100 billion each year, it's a good time to question what really goes into the price of gas.

The numbers on the gas station sign hide a complex set of transactions. Before gas can power your car, it must be discovered as crude oil, traverse three markets, and be refined from crude into gas.

Inside, we'll explain the three markets, walk you through the role of refineries, and show how oil companies use creative tactics to manipulate gas prices...

The Three Markets: Contract, Spot and Futures

Both oil and gas are traded on three markets: the contract market, the spot market, and the futures market. Each is influenced by different factors and impacts the price of gas at different stages of production. Unlike the futures market, the contract and spot markets are not the kind of markets found on Wall Street; they are informal networks of businesspeople.

The Contract Market
Though it seems like oil companies spend most of their time ruining your day by raising the price of gas, their primary business is exploration. Once an oil company finds a field and coaxes it into producing crude, it takes that unrefined oil and sells to refiners. The vast majority of oil is sold by contracts. A veritable orgy of contracts signed between oil companies and dealers, oil companies and refiners, refiners and independent dealers predetermine the fate of most oil and gas.

Refiners plan their purchasing and refining activity to ensure that these contracts are fulfilled. In exchanged for this privileged standing, refiners charge contract customers a premium.

The Spot Market
Need some extra oil? Got a spare barrel you need to sell today? The spot market is for you. The spot market fills the gap left by the contracts market. When a refiner needs extra oil to meet its contracts, they find people with surplus oil on the spot market. Unlike the contract and futures markets, which trade pieces of paper, the spot market involves the trade of actual barrels.

The best deals are often found on the spot market. Since neither the buyer or seller is locked into a prearranged deal, the laws of supply, demand, and free market are mostly in effect.

The Futures Market
Crude oil is the bees knees of the American Mercantile Exchange. A futures contract might stand for 1,000 barrels of West Texas Intermediate to be delivered at Cushing, Oklahoma. The futures market represents that collective state of the oil market at any particular moment. When you hear reporters talk about the price of oil reaching $100 per barrel, they're talking about the futures market. Because fluctuations on the futures market are driven by information, its prices guide the contract and spot markets.

The people buying and selling futures rarely, if ever, collect on their contracts; a seven year period saw 5 billion barrels traded, of which only 31,000 were ever delivered.

Refineries

Refineries are the temples where crude oil gets Bar Mitzvah'd into gas. Shifts in the refining world over the past two decades have helped ratchet up the price of gas. In the early 80's, there were over 350 refineries, mostly owned by the oil companies. The oil companies didn't see refining as a place to generate profit, but as an integral part of a larger operation.

By 2002, there were only 153 refineries, and most of them were no longer controlled by the oil companies. Refineries are now held privately and independently, and as with any independent businesses, profit is key. It is in the refiner's interests to supply only as much gas as is absolutely needed to stay on the profitable side of the supply and demand curve.

Gas emerging from a refinery is sold at what is known as the 'rack price.' The rack price is the cost of gas to dealers, and it is generally influenced by the spot and futures market. The rack price is also where branded gas begins to exert a price premium.

Branded gas from Exxon-Mobile, BP-Amoco, etc, isn't different from the unbranded gas found at Joe Schmoe's Gas Shack. Still, there are several costs associated with branding gas. The brand name carries a premium, since people might associate it with quality, and not grossly overcompensated executives. Branded gas is also sold under contract, giving buyers long-term stability that can't be duplicated by unbranded gas. Oil companies also add value to branded gas by providing ancillary benefits that command a price premium, like branded advertising and branded credit cards.

Refiner pricing strategies are almost as complex as the mating rituals of the red-sided garter snake. Though refiners want to maximize their profit, they don't necessarily want to gain additional market share. Refining capacity can't simply be ramped up on demand. Acquiring and refining crude oil takes considerable time, leading refiners to take a slow and steady approach to business. First and foremost, refiners care about fulfilling their contractual obligations. Leftover gas can be sold for profit on the rack.

If a refiner's rack price is consistently too high, dealers will take their business elsewhere when their contracts expire. If the rack price is too low, buyers might swamp the refiner, leaving it unable to meet its contractual obligations.

To ensure pricing continuity, refiners used to call each other and share pricing information. Activist judges on the Supreme Court called this "collusion." The refiners, unfazed by the justices, came up with a crafty alternative: publicly posting their rack prices. Somehow, the Ninth Circuit Court found this to be illegal, too. Nobody knows how refiners discuss their pricing arrangements nowadays, but we wouldn't be surprised if it involved a members-only group on Facebook.

Gas Stations

Ah, gas stations. Nourishers of our cars, wellspring of our rage. Gas stations are not all alike. Some are owned outright by the oil companies, while others are leased by dealers who sell only one brand of gas.

There are supposedly nine benefits to being a branded lessee-dealer:

(1) a wider variety of grades of gasoline than unbranded, which leads to higher gross profit margins,
(2) access to oil company credit card at no fee,
(3) oil company third party fee discount for VISA and MasterCard,
(4) "subsidies" in the form of soft loans and investments,
(5) marketing assistance,
(6) rebates based on incremental volume,
(7) training and support on how to run a profitable gasoline station,
(8) technical support and station startup design, and
(9) security of supply.

Finally, there are the true independents. These folks shop around for the best unbranded gas price, sometimes aided by a jobber. They almost never sign long term contracts and almost always get their gas from the rack or the spot market.

At the turn of the 20th century, the U.S. had just under 175,000 gas stations. Of those, about 55,000 are run by independent operators. Of the remainder, half are run by open dealers, and the other half is split between company-owned and lessee-dealer stations.

Fixing The Price Of Gas

Oil companies set the price of gas at company-owned stations. What they say, goes. With lessee-dealers, the relationship is more complex.

Lessee-dealers are charged a 'Dealer Tank Wagon' (DTW) price by the oil companies. The DTW price is set either by the oil company's central or regional office, and is driven by both the spot and futures markets. Most importantly, oil companies determine the DTW price by looking at the prices of other stations in the market. This is why two stations with the same brand a block away from each other can have different prices.

Lessee-dealers can't negotiate a DTW price since they sign contracts with just one oil company that require them to purchase a minimum amount of gas. Oil companies allow dealers to sell gas at a slightly inflated margin to ensure a profit stream so the dealers can put food on their family's table. That margin can range from 3-10 cents per gallon.

Why don't dealers just raise the prices more, like 20 cents a gallon, so they can give their families even more food? Some do. If they're caught, you can bet anything the next DTW price will be higher, bringing their profit margins back to normal - only now, their gas is more expensive than their neighboring stations and they have a competitive disadvantage.

DTW pricing is the product of an exceedingly complex and secretive pricing scheme known as zone pricing. A zone can be as small as a single gas station, or as large as a city. The testimony of a Mobil representative in 1997 revealed that Mobil had 46 zones in Connecticut. Most dealers have no idea what zone they are in, even though the DTW price given to their neighboring stations can determine their standing in a local market.

Oil companies, like politicians reapportioning voting districts, rely heavily on technology to slice apart local markets. The DTW price in each zone will be different, taking account several factors including nearby competition, demographics, and the historical demand of the zone. Oil companies also seek to determine the price elasticity of each zone, or how much the zone will pay for gas before looking for alternative suppliers. For some zones, that breaking point is a penny, for others, it two or three cents, and some will stay with their station out of a sense of loyalty. These factors can cause the price of gas in neighboring zones to fluctuate by as much as a dime.

Oil companies adjust zone price by considering what their competitors are doing. The price of rival gas stations will be surveyed two or three times a week, or the data will be relayed to the oil companies by refiners.

Taxes

State and federal taxes account for about 18% of the price of gas. The cost is a constant and is factored into the baseline price of gas.

Eliminating those taxes would reduce the price of gas by a few cents, but would do nothing to otherwise address the underlying factors involved in pricing gas.

Ok... so why IS gas so expensive?

A butterfly flaps its wings in the Saudi desert, causing the State Department to release a warning of increased terrorist activity. The futures market flips out, sending the price of crude skyward.

The higher price on the futures market makes it more expensive for refiners to acquire crude to refine into gas. When the refiner's work is done, the emerging gas will be priced accordingly higher. This raises the rack price and the prices on the spot markets. Oil companies and jobbers with long-term contracts might be insulated from the higher price, depending on their contracts.

Refining oil into gas isn't instantaneous, and there can be a lag before the higher price of the oil is reflected in higher gas prices paid by jobbers and oil companies. That, of course, didn't stop them from raising prices the moment the futures market jumped. So now that the oil that was purchased for refining at a higher cost is ready to hit the market as gas, the oil companies will raise prices again.

This double-dipped price is passed onto dealers as the DTW price, which is then inflated yet again so the dealers can turn a profit.

You paid more for gas thanks to a butterfly.

"It's just a !@$% butterfly!," you say. Sure, but it scared the hell out of the markets. Since the oil companies all move in lockstep, that butterfly can cause the price of gas to rise for several days as one oil company sees another raising prices and adjusts accordingly.

Eventually the markets will calm and the price will begin to fall. This allows the introduction of a friend much more insidious than the butterfly: price gouging.

Despite popular misconceptions, price gouging almost never occurs as prices rise. Instead, price gouging occurs when dealers keep prices artificially high in order to gain a little extra profit or recoup costs, even though the DTW price has declined.

Sticking with our butterfly friend, let's say she caused the DTW price of gas to spike for four days. It may be ten days before dealers lower their prices. That's price gouging.

Most people never notice true price gouging. They will complain that the price went too high, but that's the fault of the oil companies, not the dealers. Prices that stay high for too long go unnoticed. Just because the price of gas stays high does not mean that a dealer is price gouging. The price may actually be higher. That's why it's almost impossible to prove, let alone prosecute, price gouging.

Conclusion
In a past life we were asked to prove that local gas stations were price gouging New York City residents. We knew this to be false, and found the proof we needed in a meticulously researched report from the Senate Permanent Subcommittee on Investigations. Most of the above draws on their work. The entire 324 page report makes for a fascinating read. Direct links to the report sections are below:
Executive Summary
Introduction
The Production and Marketing of Gasoline
The Effects Of Market Structure And Concentration On Gasoline Prices
How Gasoline Prices Are Set

Unless you're a Saudi Arabian butterfly, you can't hope to control the oil market, but you can control your consumption. Reduce your gas costs by carpooling, biking, walking, using gas price finder sites to decrease the information asymmetry, and/or switching to a car with a better MPG. — CAREY GREENBERG-BERGER

RELATED:
Get 30 More Miles Per Tank: Turn Off Engine If Idling More Than 10 Seconds
Potentially Insane Ways To Increase Your Fuel Efficiency

(Photo: Getty)

Oh, sure, it sounds like a winning idea. But why stop there? Why not keep hogs in the employee stock room and slit their throats when someone wants a fresh slab of bacon? Or have a do-it-yourself steak buffet: just hand your customers a chainsaw, point to the slab of a corralled cow, and tell them to pick their choice of white or dark meat.

People seem to be getting upset about the moral element of this, which doesn't make us queasy at all. Chickens taste good and they got to be killed sometime... might as well be as soon before I eat it as possible. The real problem here is we're not to keen on shopping at grocery stores that stores perishables in close relation to chicken shit and headless hens running around in circles squirting gore.

Store's effort to serve fresh chickens raises concerns [9News] (Thanks, JPac!)

An Ohio couple had their PC repaired by Best Buy and was told their old hard drive would be drilled with holes and rendered useless. Instead, a few months later, a man called up and said, "My name is Ed. I just bought your hard drive for $25 at a flea market in Chicago."

The man was able to contact the couple through the info on the drive, including SSNs, bank statements and investment records.

In response, Best Buy said, ""Our company values and places the utmost importance on maintaining the privacy of our customers. We will fully investigate these allegations."

"Couple's Supposedly Destroyed Hard Drive Purchased In Chicago" [Channel5Cincinnati via BoingBoing]

Or so the tiresome chairman of the Lane County Republican Party is claiming out in Oregon.

Bob Avery said Monday that he is opposing the market "as a resident of Junction City" and not in his official capacity as the county's GOP chairman. But he said the latter role probably made him "more sensitive" to the political roots of SOD (Seeking Out Democracy), the group seeking a permit to operate the open-air market. And, while he has no plans to target established events such as Eugene's Saturday Market and the Lane County Farmers Market, Avery said, he's "alerted people in the party to be on the lookout for this kind of (political) activity around the county."

He has some other reasons why you shouldn't be able to buy succulent pears or ripe cheeses directly from a local farmer. A big one? A farmer's market is the first step towards turning the neighborhood into a crack alley. Everyone hold on tight: once the compression of a person's intellect due to political zealotry reaches a certain point, there's a significant chance of a black hole imploding into existence within his cerebellum.

Application for farmers' market draws fire [Register Guard Online]