Friday, 30 November 2007

Jobless Claims Tick Higher

Last month I noted that Jobless claims were yet to rise to alarming levels. That may have changed yesterday with the highest jobless claims number for about 8 months. From

Number of Americans on unemployment nears two-year high

Continuing jobless claims - the total number of individuals collecting unemployment benefits -- rose by 112,000 in the week ending Nov. 17, to 2.66 million, the highest mark since Dec. 24, 2005, the Labor Department said.

Initial jobless claims - individuals applying for unemployment benefits for the first time -- also shot up in the latest week, the data show. Those claims rose by 23,000 to 352,000 during the week ending Nov. 24, their highest level since Feb. 10.

"This is the first time initial claims have broken 350,000 since February and thus perhaps an early sign of a more severe deterioration in the labor market," said Andrew Gledhill of Moody's

"At the moment, these two indicators are consistent with weakening labor market conditions," said Joshua Shapiro of MFR, Inc.

The four-week moving averages for both initial claims and continuing claims also edged up in the latest surveys. The four-week average of initial claims rose by 5,750 to 335,250, the highest since March 3. The continuing claims average climbed by 20,500 to 2.59 million. That number was the highest since Jan. 1, 2006.

Economists say the averages are a better indicator because they smooth out one-time events like holidays or strikes.

The graph above is the 4 week average of initial claims. As you can see it is hardly recessionary yet but it is starting to move up toward that 350,000 range. A few more weeks of 350,000 initial claims would lend support to a further deterioration in employment growth.

The Fed will be watching jobless claims as well as next week's NFP report for signs that they need to cut interest rates on December 11th. The bond market already has a quarter point baked in and is moving toward 50bps. Fed speak over the last few days also lends credence to the bond market's predictions. It will be an interesting couple of weeks between now and the next Fed meeting.

OFHEO Home Price Report


For the first time in nearly thirteen years, U.S. home prices experienced a quarterly decline. The OFHEO House Price Index (HPI), which is based on data from sales and refinance transactions, was 0.4 percent lower in the third quarter than in the second quarter of 2007. This is similar to the quarterly decline of 0.3 percent (seasonally-adjusted) shown in the purchase-only index. The annual price change, comparing the third quarter of 2007 to the same period last year showed an increase of 1.8 percent , the lowest four-quarter increase since 1995. OFHEO’s purchase-only index, which is based solely on purchase price data, indicates the same rate of appreciation over the last year....

I found this part interesting:

Many of the cities and states experiencing the sharpest declines this quarter were the same cities and states experiencing the sharpest increases just a couple of years ago, suggesting some price corrections in those markets.

Anyone looking for a bottom in house prices anytime soon is going to be disappointed. Nouriel Roubini has said home prices could fall more than 20% nationally, in some regions they already have. Roubini's estimate may turn out to be conservative.

US New Home Sales Revised Sharply Lower

There was a plethora of silly comments and headlines about yesterday's New Home Sales numbers in the US. Here is an example from

Builders slash prices to boost October sales

Builders slashed prices at the fastest pace in 26 years in October, boosting sales of new homes from a much lower level of September sales than was originally reported

Now if you read that you come away thinking that slashing home prices in October led to higher sales. However as the article goes on to note:

September's sales pace had originally been reported as 770,000. August's sales were also revised sharply lower to 717,000, down from 735,000 estimated a month ago and from 795,000 estimated in the first release.

As predicted last month a sharp downward revision to September numbers were made and if you go back further than two months you will see that every month since the beginning of summer has been revised lower. Not to mention that the large revision to August last month was not quite large enough and was downwardly revised again. Also consider that there is a 10% standard error in the last reported month's numbers.

What that means of course is that October sales will more than likely be revised down below that of September when November figures come out and so slashing prices didn't 'boost' October sales. The headline should probably read 'slashing prices cushioned plummeting sales.' Also of interest in yesterday's report:

Sales are down 23.5% in the past year -- a vivid reflection of the carnage in the home-building industry.

And over the past five months, sales have been on a 751,000-unit annual pace, 25% slower than a year earlier. In 2006, 1.05 million new homes were sold.

Meanwhile, the September-to-October median sales price fell 8.6% to $217,800 -- the biggest monthly price drop in 26 years. Median sales prices are down 13% in the past year, marking the biggest year-over-year decline in 37 years....

The Commerce Department said the inventory of unsold homes fell 6.7% to 516,000, representing an 8.5-month supply. The inventory peaked at 9.3 months in August.

On the plus side at least inventory levels fell for the second month from their August peaks. However taken together with existing home sales they have hardly made a dent in the backlog of homes on the market.

Thursday, 29 November 2007

US Exisitng Home Sales for October

From The National Association of Realtors (NAR):

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – eased by 1.2 percent to a seasonally adjusted annual rate1 of 4.97 million units in October from a downwardly revised level of 5.03 million in September, and are 20.7 percent below the 6.27 million-unit pace in September 2006.

The national median existing-home price2 for all housing types was $207,800 in October, down 5.1 percent from October 2006 when the median was $218,900, but there is a downward distortion from the temporary problems with jumbo loans that slowed sales in high-price markets, and that dragged down the national median.

Total housing inventory rose 1.9 percent at the end of October to 4.45 million existing homes available for sale, which represents a 10.8-month supply at the current sales pace, up from a downwardly revised 10.4-month supply in September.

The trends aren't good, sales are down and inventory is up. Prices are down and will continue to fall as lower prices will be needed to put a dent in the inventory buildup. Click here and here for some excellent commentary on existing home sales from Calculated Risk.

Wednesday, 28 November 2007

Roubini on Countrywide Bailout

I enjoy reading Nouriel Roubini's commentary but more so lately than usual as he has ripped into the causes and culprits behind what is turning into one of the biggest financial meltdowns in history. Yesterday Roubini took aim at the bailout of Countrywide Financial with public money. Below I have reproduced the first two and last paragraph of his post. Click on the link below for the full article. From RGE Monitor:

The Stealth Public Bailout of Reckless “Countrywide”: Privatizing Profits and Socializing Losses
The letter by Senator Schumer questioning the $51.1 billion that Countrywide borrowed from the Federal Home Loan Bank system (specifically the Federal Home Loan Bank of Atlanta) has finally revealed the little dirty secret - that was known only to a few insiders and was noticed on this blog a month ago – that Countrywide, the largest US mortgage lender, has received a massive stealth public bailout that has put at severe risk taxpayers’ money. Here is Countrywide - the premier poster child financial institution of the reckless and predatory lending practices of the last few years – getting in severe financial trouble because of its rotten lending practice in subprime, near-prime and prime mortgages – and whose CEO Mozilo is under SEC investigation for potentially illegal activities – now receiving a massive $51.1 billion of public bailout money with little official supervision of such lending. Mozilo is under investigation for his accelerated sales of Countrywide stock under a 10b5-1 plan. Mozilo has made more than $100 million on stock sales this year, while Countrywide shares collapsed more than 50%.

As the Schumer letter correctly points out the collateral against this $51 billion loan is mostly toxic waste subprime garbage whose market value is now much lower than the face value of such mortgages; so $51 billion dollar of taxpayers’ money has been put at risk with garbage as collateral for it....

The lesson of this sad and sleazy episode is that when profits are privatized and losses are socialized we get sleaze capitalism and corporate welfare that becomes public bailout of reckless lenders. All this from a US administration that hypocritically praises every other day the virtues of private markets capitalism. For all of us who do truly believe in free market economies where a variety of public goods are provided by governments and the financial sector is properly supervised and regulate this is not a capitalist system but rather socialism for the rich.

nuff said.

US Home Prices continue to fall everywhere

The graph above shows the year over year changes in house prices as measured by the Case Shiller Home price index for 10 major cities. For the month of September home prices fell 5.5% year over year for the 10 city index whilst the 20 city index saw declines of 4.9% from the year ago period.

Home prices fell in all 20 cities of the Case Shiller survey. The decline in the 10 city index is the biggest since 1991. Whilst it is interesting to ponder how deep the price declines can go, more importantly is for how long they will persist.

From the graph you can see the last time home price falls peaked quickly but still fell, except for a brief period 3 month period in early 1992, for 3 years following the peak. Cumulatively home prices fell for almost 5 years between 1989 - 1994. If we consider that the latest housing bubble is probably the biggest in history, home prices could easily continue to fall for at least the next 3 - 5 years.

This graph above comes courtesy of Calculated Risk and shows in real terms (inflation adjusted) home prices back to 1987. It gives you an idea of the massive bubble in prices and how far it may yet have to fall. From Calculated Risk:

The second graph probably provides a better first estimate of how far prices still need to fall (for the Case-Shiller universe). If prices fall to 120 (in real terms) that is about another 25% from the current level.

This could happen with falling nominal prices, or from several years of inflation, or a combination of both. Say nominal prices fall 15% over the next three years, with a 2% per year inflation rate, then real prices would fall to about 130 on the Case-Shiller index.

This suggests to me that price declines have just started, and that the process will last several years. It's important to remember that different areas will see different percentage price declines - the bubble areas will see the largest declines - and the time frames for each location will be different.

Again this is not going to work itself out in a couple of months or even quarters, the deflation of home prices will most likely be a slow decline spanning several years.

Tuesday, 27 November 2007

Desperate times at Citi

As CIBC world markets analyst Meredith Whitney predicted almost 4 weeks ago, Citigroup (C) has moved to shore up it's ailing capital position.

Citi Sells Stake to Abu Dhabi Fund

Citigroup said late Monday that the Abu Dhabi Investment Authority will invest $7.5 billion in the nation's largest bank, offering needed capital to offset big losses from mortgages and other investments.

The cash from the sovereign investment fund of the Gulf Arab state, which has been a beneficiary of this year's surge in oil prices, will be convertible into no more than 4.9 percent of Citigroup Inc.'s equity. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank.

The Investment Authority would become one of Citi's largest shareholders.

The Abu Dhabi investment, which was expected to close within the next several days, will be considered Tier 1 capital for regulatory purposes, helping Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said....

The Investment Authority will receive equity units that pay an 11 percent annual yield until they are converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.

At the time Merdith Whitney's article was published she also said that Citigroup's stock could trade in the low 30's. That has been another good call except I don't think she went low enough.

The Australian stockmarket was down over 100 points today and then reversed more than 60 points on the Citi news. It's amusing that dire moves such as this from Citi inspire confidence. That Citi had to go all the way to the middle east to find an interested investor should tell you something.

The exercise date of the investment into Citigroup shares is also interesting. Does Citigroup think it will take until 2010-2011 to get their ship in order?

Why A US Recession is Inevitable

Nouriel Roubini of RGE monitor is the preeminent bear market economist. A lot of his calls of 12 months ago were ignored however the bad news for the goldilocks camp is that he has been right on just about every one one of them.

Roubini has been consistently out in front of the credit crunch and housing debacle and has been predicting a recession for some time. He has recently become even more bearish and has shifted his stance to a hard landing scenario for the US economy.

If you have been asleep for the last 6 months Roubini's latest blog post summarizes all the details of what has led to an impending and unavoidable recession. I have quoted the last two paragraphs however I recommend reading the entire post.

Liquidity and Credit Crunch in Financial Markets is Back to Summer Peaks, Only Much Worse and More Dangerous

And now a perverse cycle of financial conditions and credit crunch worsening leading to a worsening of the real economy and, in turn, a worsening of the real economy increasing the financial losses and worsening the liquidity and credit crunch is creating a vicious circle that has significantly increased the likelihood of a now effectively inevitable US recession and of a global economic slowdown. Bernanke and Mishkin know a lot about the “credit channel” and “financial accelerator” effects as they have extensively written about these in their former academic life. This vicious circle is leading to fall in asset prices, fall in net worth, deleveraging, tightening of the quantity and price of credit and fall in durable and non durable spending by households and financial and corporate firms that, in turn, will worsen the financial conditions.

And indeed a saving-less and debt-burdened consumer is now on the ropes and at a tipping point as it is buffeted by a variety of headwinds: the beginning of the holiday season was weak as U.S. consumers spent on average 3.5 percent less during the post-Thanksgiving Day holiday weekend than a year earlier; add to this the most recent gloom in the auto sales, in consumption of durables and the worst housing recession ever . The combination of a severe and worsening liquidity and credit crunch, oil prices close to $100, a worsening housing recession and its wealth effects on consumption, a weakening labor market and a consumer that is buffeted by severe negative shocks means that a US recession is by now inevitable and that the rest of the world will not decouple from the US hard landing.

Monday, 26 November 2007

HSBC Shifts SIV's On Balance Sheet

It seems the good folk at HSBC couldn't wait for the super SIV to get up and running and so have decided to provide funding to their ailing SIV's. From

HSBC to provide $35 billion in funding to SIVs

HSBC Holdings on Monday said it would move two of its structured investment vehicles onto its balance sheet and provide up to $35 billion in funding, saying it doesn't expect a near-term resolution of the funding problems faced by the vehicles that it and other banks hold.

HSBC said it's moving Cullinan Finance and Asscher Finance, the two SIVs, onto its balance sheet to prevent a forced liquidation of what it called "high-quality assets."

The SIVs had funding through the end of the year, and the Asscher SIV was funded through April 2008, HSBC said. It's providing up to $35 billion in funding, and its balance sheet will expand by $45 billion.

But the banking giant insists earnings won't be materially impacted, because existing investors will continue to bear all economic risk from actual losses.

"We believe that HSBC's actions will set a benchmark and restore a degree of confidence to the SIV sector, while providing a specific solution to address the challenges faced by investors in Cullinan and Asscher, the two SIVs managed by HSBC," the bank said in a statement.

The last paragraph is a overstating the positive a little, if there were any confidence in the SIV sector someone would be willing to buy their paper and then HSBC wouldn't have to bring them back on balance sheet.

HSBC like Citigroup can afford to fund their SIV's but it still eats up capital that could be profitably put to use elsewhere and negatively effects their capital ratios.

HSBC will provide funding through April 2008, then what? Is everything supposed to be back to normal by then? Is this HSBC's own super SIV?, ie. is it just prolonging the pain?

Saturday, 24 November 2007

ABCP market decline reaches 30%

After a brief hiatus the ABCP market continued it's decline in the week ended 21st November as another $17.5 billion of Asset Backed Commercial Paper vanished from existence. From it's peak on August 8th at nearly $1.2 trillion the ABCP market has lost 30% or $359 billion of it's value.

No doubt the the decline will continue as long as the current risk averse climate remains and as credit spreads widen forcing some corporates to go elsewhere for financing.

Friday, 23 November 2007

The Myth Of Decoupling

An oft repeated mantra of the argument for a continuation of the bullmarket goes something like this: Despite a slowdown in US growth the world economy will pick up the slack as they are less dependent on the US economy. It all sounds nice but it is based on sound reasoning?

Governor of the Bank of England, Mervyn King, issued a grim warning last week about the state of the UK economy and by implication a large part of Europe:

He (Mervyn King) said the Bank's "central outlook for the UK economy is, in the near term, one of slowing growth and rising inflation. But further ahead that outlook is for a return of growth to its average rate and inflation to target...."

"With house price inflation easing and commercial property prices falling, residential and commercial property investment are likely to moderate, possibly quite sharply. And with tighter credit conditions in the future, the personal saving rate is likely to rise, bearing down on consumer spending...."

How about Asia and the other 'BRIC' economies? Even the Chinese government is warning that a US slowdown could have significant knock-on effects on Chinese growth.

US slowdown threatens Chinese export growth

China’s commerce ministry warned on Thursday that a slowing US economy would trigger a drop in Chinese exports that would mark a “turning point” for China’s rapid economic growth.

A global economic slowdown stemming from problems in the US subprime mortgage market and the resulting credit squeeze “will be the biggest challenge to China’s economy next year”, a report from the ministry’s policy research department said.

The report is Beijing’s first public comment on what repercussions it expects from the global credit crisis and a sign that the government does not support the view that Asian growth has “decoupled” from the US. “If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders,” the report said....

Exports to the US have slowed significantly since the start of the year, dropping from a 20.4 per cent year-on-year rise in the first quarter to a 15.6 per cent increase in the second. Growth fell to 12.4 per cent in the third quarter following the eruption of subprime loan problems.

You don't need to read between the lines here. The Chinese government don't believe the decoupling thesis and in a still largely centralized economy they should have the best idea. The chart below comes from Morgan Stanley Asia's Steve Roach which shows that Asian economies are more dependent than ever on export led growth.

Also picked up this story from the Wall Street Journal, although you need to subscribe to read the full article. However the following blog has kindly reproduced it, from

China Freezes Lending to Curb Investing Frenzy

Chinese authorities are slamming the brakes on bank lending, in their latest attempt to curb the runaway investment threatening to overheat what is soon to be the world's third-largest economy.

In recent weeks, regulators have quietly ordered China's commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals.

A China Banking Regulatory Commission official here confirmed that local and Chinese subsidiaries of foreign banks have been asked to ensure that loans at the end of the year don't exceed the total outstanding on Oct. 31. The official described the request as "guidance aimed at supporting the macro-control measures being implemented."

Over the past few years, Chinese authorities have repeatedly sought to rein in investment in sectors such as property development, where they deemed it was becoming excessive. But even in China a blanket edict to halt lending growth is unusual.

Click on the link above for the full article. You have to give the Chinese government some credit for trying to reign in excesses however the horse has bolted. It is inevitable given the rapid pace of growth in China and the relative immaturity of it's financial system that there will be some train wrecks in the wake of a global economic slowdown.

No doubt at some point a gradual decoupling from the US economy will come to pass but we are still a couple of decades away from that reality IMHO. The health of the US economy is still of vital importance to the rest of the world and thus the theory that Europe and China will carry the global economy is little more than wishful thinking.

Thursday, 22 November 2007

Last week the slide in the Asset Backed Commercial Paper market slowed to a mere $600m down from $29.5 billion the previous week. However I would suggest that was more of a pause than a bottom with the amount of dodgy SIV paper still floating around. Below is an example, from Rueters:

Fitch cuts Axon Financial debt to "D" on liquidation

Fitch Ratings cut debt of Axon Financial, a structured investment vehicle, to default status on Wednesday after the trustee decided to liquidate the portfolio due to major losses.

Bank of New York Mellon (BK.N: Quote, Profile, Research) is the security trustee, Fitch said. Fitch cut various Axon Financial debt to default status, including US and Euro commercial paper and medium-term note programs, Fitch said.

"The rating actions follow the security trustee's declaration of an automatic liquidation event in light of the rapid decline in the portfolio market value," Fitch said.

Axon Financial, managed by New York asset management firm Axon Asset Management, has around $8.5 billion of commercial paper and medium-term notes outstanding, Fitch said last month.

"The 'D' rating reflects the fact that all senior liabilities became due and payable upon such declaration and that such payment has not been made," Fitch said.

Axon is a SIV that takes leveraged credit risk by investing in a portfolio including commercial paper, medium-term notes and other debt.

Axon Financial's portfolio has more than a third of assets in residential mortgage-backed securities, followed by monoline-wrapped securities, collateralized debt obligations and commercial mortgage-backed securities.

Those SIV's without the backing of a Citigroup are destined to follow the same path as Axon. That's not to say that Citi's SIV's are out of the woods yet, they are just prolonging the pain.

Wednesday, 21 November 2007

Freddie Mac drops a big shoe

It's almost been 9 months since I noted that Freddie Mac (FRE) was buying anything in the mortgage arena and then changed their lofty standards to almost anything. That may have sounded extreme at the time but FRE confirmed those statements yesterday with the release of their 3Q07 results.

Below is the graph of Freddie's Loan loss provisions that I posted 3 months ago after Freddie Mac released 2Q07 results. At that time I noted that FRE's provision for credit losses had gone exponential.

The second graph below is after Freddie's latest results in which they set aside $1.2 billion for credit losses in 3Q07. It makes the second quarter provisions look miniscule by comparison.

Increased loan losses are just half the story, Freddie has recruited Goldman Sachs and Lehman Bros. to look at capital-raising options and may consider cutting their dividend. From

Freddie plunges; quarterly loss more than doubles

Freddie Mac's shares sank as much as 35% on Tuesday, plunging as its third-quarter loss more than doubled and the company raised the possibility of cutting its dividend in half....

In the fourth quarter, "market conditions are working against us," concurred Piszel on the same call. For the year to date, Freddie's recognized $4.6 billion in net credit-related items on a pre-tax basis, Piszel said.

Freddie's third-quarter loss grew to $2.03 billion, or $3.29 a share, from a loss of $715 million, or $1.17 a share, in the same period a year ago.

"The increased net loss, year-over-year, was primarily due to higher credit-related expenses and mark-to-market losses on the company's portfolio of derivatives and credit-related items," Freddie said in a news release.

Freddie said the fair-market value of its net assets fell by $8.1 billion in the quarter, adding that it's taken steps to address the challenges continuing to confront the mortgage market.

Specifically, the firm said it has hired Goldman Sachs and Lehman Bros. to study capital-raising options. Freddie has been having problems with its capital levels, like many other firms hit by the mortgage market's problems....

Also during the latest quarter, the company recorded mark-to-market losses totaling $2.7 billion, wider than $1.5 billion in the third quarter of 2006.

Remember that this is the company that was lobbying congress hard to increase the cap on the number of mortgages they could buy. You can forget about that now. However after today they will probably be lobbying to get their mandated capital ratio of 30% lowered.

Estimates of the amount of capital FRE needs to raise to shore up it's capital ratio range from $3 - $10 billion. An absolute disaster, however you can rest assured that FRE won't be the last company to consider capital raising and/or slashing of dividends. Stay tuned for news of more large shoes dropping off.

Best Housing Coverage on the Net

For possibly the best coverage of housing on the net Calculated Risk is a must read. Today's analysis of starts and completions makes my reporting look very amateurish. Below are some of the more important points in the analysis:

Housing Starts and Completions for October

The small increase in starts is just noise. With permits falling, starts will continue to fall in coming months. With record inventories, this report shows that the builders are still starting too many homes....

Completions were at a 1.436 million rate in October, but are about to follow starts down to the 1.2 million level. I'd expect completions to fall rapidly over the next few months, impacting residential construction employment.

In a second post on today's housing data Calculated Risk looks at the most important component of Housing starts - single unit structures.

Housing Starts for Single Unit Structures

This graph shows permits, starts and completions for single unit structures.
Starts and permits are shifted six months into the future.

Completions will fall significantly over the next 6 months, probably to under 900K at a seasonally adjusted annual rate (SAAR).

Different graph same conclusion, housing has further to fall.

Tuesday, 20 November 2007

Starts up Permits down


U.S. housing starts rise 3.0% in Oct. on apartments Building permits fall 6.6%

Builders broke ground on new apartments at a faster pace in October, the Commerce Department estimated Tuesday. However, building permits fell for the fifth month in a row to the slowest pace in 14 years, pointing to less home building ahead.

New construction of U.S. houses and apartments rose 3.0% in October to a seasonally adjusted annual rate of 1.23 million in October, following three months of decline, the department said.

Estimated housing starts were higher than the 1.17 million pace expected by economists surveyed by MarketWatch. Starts in September were revised up slightly to 1.19 million.

Building permits, a leading indicator of housing construction, fell 6.6% to a seasonally adjusted annual rate of 1.18 million in October from 1.26 million in September. It's the lowest level for permits since July 1993.

Remember that both Building Permits and Housing Starts are volatile and subject to large sampling and other statistical errors. However permits are generally considered a better indicator of building fundamentals than starts, which can be heavily influenced by weather conditions. The sampling error on permits is also lower.

Add to this yesterday's news that the NAHB Homebuilders index remained at a record low of 19 in November and the outlook for Housing remains bleak over the medium term.

Economists Lean A Little Harder Against The Fence

As I've said a number of times I believe a US economic recession is dead ahead. I would be very surprised if the US was not in one sometime in the first half of 2008.

As I pointed out in 'Why economists are good contrary indicators' the fact that most mainstream economists do not forecast a recession reinforces my view. A report released yesterday by the National Association of Business Economists showed an increasing number of economists are forecasting recession.

More Economists See U.S. Recession Ahead, NABE Says

The number of economists forecasting the U.S. will slip into recession almost doubled over the last two months, according to a survey by the National Association for Business Economics.

Nine of 50 economists pegged the odds of a contraction over the next 12 months at 50 percent or higher, according to a poll taken from Oct. 22 to Nov. 6. Just five of 46 held a similar view in September....

Now let's put this into perspective, the percentage of economists forecasting a 50% chance or more of a recession is still only 18% up from 11% in the last survey. Remember, they are not necessarily forecasting a recession. They think there is at least a 50% possibility of one.

As I asserted in Economists hedge their bets economies don't fall 50% into recession. You either have one or you don't. Forecasting a 60% chance of a recession doesn't make you right or wrong, it just makes you a fence sitter.

I wonder how many economists are forecasting a 100% chance of a recession? My guess is less than 3, and knowing what I know about the reliability of economists in picking turning points in the economy, that gives me greater comfort than ever that the contrarian view will prevail.

Monday, 19 November 2007

WSJ on Commercial Real Estate

The Wall Street Journal has picked up the scent of the impending implosion in Commercial Real Estate (CRE). From the WSJ:

Commercial Property Now Under Pressure

The value of commercial real estate, which nearly doubled in the past seven years, is now starting to decline due to the credit crunch, according to a report set to be released today by Moody's Investors Service.

The report found that the value of commercial property declined 1.2% in September from the previous month. Particularly hard hit were apartments in the West and office property in most states other than California.

The report is an early sign that the commercial-property sector is being dragged down by the growing reluctance of lenders to extend credit for anything related to real estate, which in turn could create a new drag on the economy and additional problems for investors. Declining commercial-property values could lead to an increase in default rates on commercial real-estate loans and on commercial mortgage-backed securities.

No one is predicting that defaults in the commercial sector will come close to rivaling those in the housing sector. The default rate for commercial mortgage-backed securities is about 0.4%, compared with a 20% default rate for subprime, or high-risk, home loans, the hardest hit segment of the residential mortgage market. And commercial rents in many markets continue to rise.

Tad Philipp, a Moody's managing director, says he wouldn't be surprised to see the commercial-mortgage default rate double or triple, but he notes that still won't be "alarming" because historically the default rate is about 1%.

I'm willing to bet Mr Tad Phillip is going to be in for a surprise. Whilst Commercial real estate won't be as bad as residential it has been subject to some of the same excesses.

Still, the latest trends "might represent the inflection point in commercial real estate values given the ongoing liquidity crunch," the report states. Commercial-property values are primarily being hurt by the increasing cost and declining availability of financing. Given the higher cost of debt, buyers need to pay less to get the return on equity they want.

Even a slight decline in values could make it difficult for property owners to refinance their mortgages, especially if they have been paying only interest on their existing debt and not paying down principal. Such interest-only mortgages have become increasingly popular.

...and that is one of the reasons why CRE is set for a big fall, interest only mortgages on properties that nobody wants to buy, you don't have to be Einstein to see where this is headed.

Subprime strikes again

It's difficult to find a day when somebody is not writing down something related to subprime. From

Swiss Re to take $1.1 bln loss after insuring swaps

Swiss Re on Monday said it was taking a $1.1 billion (1.2 billion Swiss franc) loss after insuring a client's portfolio exposed to the U.S. subprime mortgage meltdown and related credit-market turmoil.

Swiss Re's credit solutions division had put together protection to insure an unnamed company against a "remote risk of loss" -- a loss that materialized after Standard & Poor's and Moody's Investors Services slashed the ratings of a variety of debt instruments last month and as liquidity dried up in more exotic asset classes.

The portfolios had exposure to subprime mortgages and, worse from the reinsurer's view, asset-backed collateralized debt obligations, which are portfolios of various debt securities. A number of companies, including funds run by Bear Stearns and General Electric, have reported similar losses on such CDOs.

Shares of Swiss Re dropped 5.2% in early Swiss trading.

According to Markit Group, an index tracking the value of AAA-rated subprime mortgage-backed bonds has dropped 20% over the last month.

Swiss Re has written the value of the CDOs to zero, and the subprime securities down by 62%. The value of the portfolio, which was worth over 5 billion francs, is now 3.6 billion francs after October. The transactions continue to be exposed to market value changes, but Swiss Re says marking the CDOs down to nothing will mitigate further losses.

It doesn't get any lower than marking down to zero. At least Swiss Re is being realistic, the stuff is worthless but no doubt there are plenty of institutions out there clinging on to this stuff with more optimistic outlooks. I'm sure the move by Swiss Re sends shivers down the spines of other CDO holders.

Inflation is everywhere

Despite the lies and subterfuge of official figures inflation is rearing it's head everywhere particularly in energy and food costs. Higher input costs for US companies have been showing up in a variety of industries.

Kraft (KFT) third quarter earning were hit by higher dairy costs.

Starbucks (SBUX) has also been hit by higher milk prices.

Sara Lee (SLE) Sara Lee' was hit by rises in the price of wheat, poultry and pork, which rose 12% from a year ago.

Today higher input prices showed up in Australia's largest bread maker Goodman Fielder (GFF). From Bloomberg:

Goodman Fielder Ltd., Australia's largest bread maker, had a record decline in Sydney trading after saying profit growth may stall this year because of surging wheat, food oils and dairy prices.

Profit before one-time items is ``likely to be around the same level as for the previous financial year,'' Sydney-based Goodman Fielder said in a statement today. The stock fell 12.5 cents, or 6 percent, to A$1.98 at the 4:10 p.m. close of trading in Sydney.

Prices have risen so quickly companies have been unable to offload all the increases to consumers. However prices are rising for consumers and the game of pass the buck never ends well. Official figures in the US would have you believe that wage growth is offsetting the increase in inflation. However the official numbers are purpose built to play down real inflationary pressures. For anyone interested you can read more about it here at

Saturday, 17 November 2007

4 reasons why the US is headed for recession

There are significant headwinds building for the US economy. Many of these were obvious a while back to those who had bothered to take a look. Now that they are starting to appear more obvious even some of the Wall Street lemmings are taking notice, although denial still seems to be the predominant view. Below are a few of the more obvious signs that the US economy is headed for recession in 2008.


Not even the most optimistic of bulls can be optimistic about the outlook for Housing except maybe for NAR chief chucklehead Lawrence Yun. Below is a couple of graphs from the Federal Reserve Bank of Dallas Economic Newsletter in Novemeber. The first graph shows the deterioration of Subprime as well as Prime mortgages. Don't expect Fed cutting rates to 1% this time around to have same effect they did back in 2002. The lines on this chart are headed higher regardless of what the Fed does.

Considering the collapse in housing construction and home prices the chart below is particularly disturbing as it shows the majority of resets on adjustable rate mortgages are yet to come.

But don't take my word for it, listen to what the Fed's own Randall Kroszner said yesterday:

... conditions for subprime borrowers will get worse before they get better. First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house.

The likely consequences of these two factors--imminent interest rate resets and the difficulty of refinancing--will be yet higher rates of delinquencies and foreclosures over the next several quarters and, in turn, additional downward pressure on house prices. The overhang of unsold homes also will weigh heavily on the prices of newly built and existing homes. ...

Also don't forget the now observable downturn in Commercial Real Estate. Of course we all know that Housing is only 5% of the economy and can't on its own cause a recession. However, despite the chorus of lemmings on Wall Street that claim there has been next to no spillover to the the broader economy anyone with a modicum of common sense knows that housing busts don't occur in a vacuum.

Slowing Economic

Signs are everywhere of this but I just want to point out a couple. The ISM survey for manufacturing is sitting precariously on the fence that separates expansion from contraction. On Thursday the Philly Fed manufacturing index was a surprisingly robust 8.2 however the real news was in the forecasts. The index of future activity in the Philadelphia region fell sharply to 20.5 from 43.5 in October. The outlook index in New York fell to an all-time low of 30.5.

Yesterday Industrial production reported a -0.5% fall in October and capacity utilization fell 0.5 of a percentage point to stand at 81.7% in October marking the first decline since May. As John Hussman of Hussman Funds noted on Monday
from above 80% to below 80% has generally accompanied the beginning of recessions.

Downward Earnings revisions and Forecasts

This is obviously related to the previous point. Whilst there is nothing startling about downward earnings revisions it's the types of companies that they are coming from that is of interest here.

Federal Express (
FedEx cuts its quarterly outlook on rising fuel prices

Shares of FedEx Corp. struck a 21-month low on Friday after the country's second-largest packaging transporter lowered its fiscal second-quarter forecast due to rising fuel costs.

For the November quarter, the Memphis, Tenn.-based shipping company lowered its earnings outlook to $1.45 to $1.55 per share from $1.60 to $1.75. The company also dropped its full-year earnings estimate to $6.40 to $6.70 per share from previous guidance of $6.70 to $7.10.
I previously spoke about transport companies being good proxies for the health of the economy. However to put FDX's woes down to rising fuel costs would be oversimplifying. As the company itself states:

In addition, less-than-truckload freight trends in the FedEx Freight segment remain weak, which appears to mirror the decline in U.S. industrial production.

Also remember that the earnings downgrade from Fedex is a downgrade of a downgrade. Fedex slashed previous estimates back in September.

JC Penney (JCP)
J.C. Penney cuts outlook, adding to holiday jitters

J.C. Penney Co. reported Thursday a 9.1% drop in third-quarter profit, hurt by sweeping discounts to clear unsold merchandise. The department-store operator cut forecasts for the fourth quarter and the full year, citing macroeconomic concerns....

"We have to be realistic about our expectations for the balance of the year," he said, adding that "2008 is going to continue to be a difficult environment. We are planning 2008 very conservatively on expenses."

Kohl's (KSS)
Kohl's reports profit drops 14%, lowers outlook

Kohl's Corp. said Thursday third-quarter profit dropped 14%. The retailer, like its rival J.C. Penney Co., also lowered its forecast for the rest of the year, adding to retail jitters about the holiday outlook....

Assuming comparable sales of flat to 2% lower, Kohl's said per-share profit would be $1.45 to $1.51 for the fourth quarter and $3.52 to $3.58 for the year. Kohl's had previously forecast profit of $3.77 to $3.87 for the year....

Starbucks (SBUX)
Starbucks shares slip on trimmed forecast.

In a conference call Thursday, Starbucks Chief Executive Jim Donald said the company faces sluggish traffic at its U.S. stores and outlined plans to attract more consumers, including the company's first-ever nationwide TV ad campaign. The company also scaled backed its expansion plans to match current economic conditions.

"It is apparent that our customers are feeling the impact of the economic slowdown," Donald said. "We believe the combination of this slowdown and the price increases we implemented in 2007 to help mitigate significant cost pressures ... have impacted the frequency of customer visits to our stores."

Some fairly somber forecasts from the nations biggest transport company and some major retailers. Just so you don't think I'm picking on retailers:

Applied Materials (AMAT)
Applied Materials' income falls 6%; shares volatile

Applied Materials (AMAT) reported a 6% drop in earnings and said first-quarter revenue would also decline sequentially by 13% to 18%.

"It's a dynamic environment and caution signals from customers reflect uncertainty," he said on a conference call with analysts.

He (CEO Michael Splinter) said he expected chip capital expenditures to decline 5% to 15% in the coming year. He said he also expected investments in DRAM to "pull back" while investments by flash memory makers to continue to be strong

George Davis, the company's chief financial officer, said the first quarter of Applied's fiscal 2008 "reflects the softening in the semiconductor-equipment markets for orders and revenue."

This outlook squares with that of Cisco last week and shows that it is not just retailers, homebuilders, financials and transports that are feeling the pinch.

The broader picture of earnings going forward is what I've been saying for some time. Forecasts for 4Q07 and FY08 are too rosy and will have to come down. Analysts failed to predict negative growth this quarter but that's what we now have with almost all the S&P500 companies having reported this earnings season. I mentioned a while back that we were close to the end of this earnings expansion and now that has also become reality.

An ailing consumer

Despite the fanfare surrounding Walmart's 8% rise in earnings all is not well with consumers. The fact that the market gets excited by an 8% rise in earnings should tell you something about the type of environment we are currently in. The reports from retailers above should be evidence enough that there is a slowdown in retail spending.

The tepid retail sales number for October and plunging consumer confidence are also ominous signs. Tying in with the first point on housing, mortgage equity withdrawals (MEW's), which have have been one of the drivers behind consumer spending in the last few years is drying up as housing prices decline. Credit is harder to get and the consumer is feeling the pinch of higher gas, food and energy prices.

All this adds up to a simple conclusion, the US economy is headed for recession in 2008. As for the stockmarket, I'll give the last word to Mervyn King, governor of the Bank of England. From The Guardian:

Bank's grim warning over UK economy

The governor of the Bank of England issued a stark warning yesterday of a looming economic slowdown as he signalled that the next year will be the toughest for Britain in a decade.

Putting investors on high alert for a sharp fall in share prices, Mervyn King said the period ahead would be marked by slower growth, rising inflation, a weakening housing market and a falling pound. He expressed surprise that global stock markets had so-far shrugged off evidence of the slowdown.

The governor stressed that even the two quarter-point cuts in interest rates pencilled in to the Bank's forecasts would not spare consumers from a painful period of belt-tightening next year - and that the risk was that the UK economy would be even weaker than Threadneedle Street currently expects.

He said the Bank's "central outlook for the UK economy is, in the near term, one of slowing growth and rising inflation. But further ahead that outlook is for a return of growth to its average rate and inflation to target."

King stressed that the period of financial market turmoil that led to the run on Northern Rock was far from over and would be intensified by a tumble in share prices.

"It's very striking that despite developments we've seen in the last three months, equity prices are on average higher now than they were in August. This is true around the world and in emerging markets, they're 20% higher," King said.

Friday, 16 November 2007

Commerical Real Estate Orginations Fall in Q3

The impending drop in Commercial Real Estate is starting to be discussed in wider circles. I even hear the chuckle-heads on CNBC mention it yesterday.

Yesterday the Mortgage Bankers Association (MBA) provided confirmation of all the talk by releasing it's quarterly survey on Commercial and multifamily loan originations. From the MBA:

MBA Commercial/Multifamily Quarterly Survey Shows Decline in Mortgage Originations

Commercial and multifamily mortgage bankers' loan originations dipped in the third quarter, according to the Mortgage Bankers Association’s (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. Down from the second quarter, third quarter originations were four percent lower than during the same period last year. The year-over-year decrease was seen across most property types and investor groups.

Decreases in total commercial/multifamily mortgage originations were led by a drop in commercial mortgage-backed security (CMBS) conduit loans and commercial bank loans. These numbers show the impact of the recent credit crunch and other market disruptions.

"The on-going credit crunch slowed the volume of commercial/multifamily mortgage originations in the third quarter," said Jamie Woodwell, MBA’s Senior Director of Commercial/Multifamily Research. "Originations for commercial mortgage-backed securities (CMBS) fell 28 percent from the same quarter last year, and two-thirds from the second quarter of 2007. Originations for life companies, the government-sponsored enterprises (Fannie Mae and Freddie Mac) and commercial banks all increased between the second and third quarters, leading to an overall decline of just 4 percent between the third quarters of 2006 and 2007."

(click on image for a sharper view)

As shown above the Commercial / Multifamily Mortgage Bankers Origination Index fell to it's lowest level since 1Q2006 and dropped 30% from the high reached in 2Q07. Whilst this is a backward looking report it is useful for providing confirmation of the drop in off in Commercial Real Estate.

Thursday, 15 November 2007

More Writedowns Anyone?

Probably a good time to summarize the writedowns of the last few days.:

Bank of America (BAC) $3 billion.

HSBC (HBC) $3.4 billion.

Bear Stearns (BSC) $1.2 billion.

Barclays (BCS) $2.7 billion.

Stay tuned for more.

More 'Containment' Issues

Yet another shoe drops from the subprime centipede. This time hitting a short term bond fund run by GE. No doubt this will not be the last such fund to reveal losses from assets they should never have been invested in. From Bloomberg:

GE Bond Fund Investors Cash Out After Losses From Subprime

A short-term bond fund run by General Electric Co.'s GE Asset Management returned money to investors at 96 cents on the dollar after losing about $200 million, mostly on mortgage-backed securities.

The GEAM Trust Enhanced Cash Trust, a short-term bond fund with about $5 billion in assets, told non-GE investors on Nov. 8 that they could withdraw their money before losses mounted. Enhanced cash funds usually offer higher yields than money- market funds by investing in riskier assets.

All outside investors, who together held "several hundreds of millions of dollars" in the fund, pulled their money, Chris Linehan, a GE Asset Management spokesman in Stamford, Connecticut, said yesterday in an interview. Most of the fund's money before the redemptions came from GE's corporate pension plan and remains invested.

PBP Investor Update

Probiotech (PBP) held their Annual General Meeting today and released their unaudited earnings results for the first four months of the 2008 financial year.

Things look to be going well for the business and they are on track to meet their 2008 forecast of 30% profit before tax growth. Using the numbers given for the 4 months to October 2007 as a proxy gives the following forecast for the full year:

The above is calculated by simply multiplying the 4 month numbers by 3 to get a full year forecast. As you can see based on this estimate the company should be able to meet it's guidance of at least 30% profit before tax growth fairly easily. The above assumes that the company continues at it's current earnings rate, hopefully they can do better than that. The slight improvement in margins so far this financial year suggests they can.

Of course these numbers are excluding any potential liability from the Phoscal litigation claim, which, although being a one off item, is still a cloud over the stock in the short to medium term.

Wednesday, 14 November 2007

More on Commercial Real Estate

Back in September I started talking about the coming demise of Commercial Real Estate (CRE). I have been drawing mainly on the work of Mish at MGETA and at Calculated Risk as well my knowledge of economics 101 which reminds me that changes in Commercial Real Estate Investment lag changes in Residential Investment.

Nouriel Roubini came out with a rather strong post on his blog today with some fairly strong evidence for why CRE is headed into the abyss. Below is an excerpt:

The Next Shoe to Drop in the Credit Meltdown: Commercial Real Estate and Its Massive Forthcoming Losses

The reasons for this coming bust are clear. Commercial real estate – or more generally non-residential investment in structures - includes two main elements: office buildings, shopping centers/malls; and construction of structures for the manufacturing sectors (i.e. new factories). Both components are now under stress. The reason why we will observe a sharp slowdown in construction of new offices and shopping centers is that, with a lag, commercial real estate follows residential real estate.

Indeed, as the SF president Janet Yellen put it last year there are plenty of new residential ghost towns in the West in places like Nevada, California, Arizona, etc. So why would anyone want to build new shopping strips/malls, hotels and offices in such ghost towns. If the towns are empty the stores and malls and offices will be empty too? Thus, as suggested by formal research – such as that by McGraw Hill Construction – with a leg of a few quarters non-residential construction follows residential construction. Thus, you can expect in the next two quarters commercial real estate to follow the slump of housing and its rate of growth to fall from double digits close to zero.

The other main component of non-residential investment in structures is manufacturing structures (i.e. new factories). But with manufacturing slumping and real investment in equipment and software slumping too (capex spending by the corporate sector) the demand for new manufacturing structures is slumping too. If you don’t invest in new machinery you do not need new structures where such machinery produces goods. And capex spending is under severe pressure given the credit crunch, the uncertainty about the economy, the widening of credit spreads for corporate firms (junk bond yield are now up 300bps higher than before the summer crunch and heading above 500bps over US Treasuries) and the slowdown in the economy....

The coming meltdown of commercial real estate is also evident by the sharp widening in credit spreads for CRE mortgages and commercial mortgage backed securities (CMBS). One of the most clear signals of this extreme stressed in the non residential MBS (CMBS) market is given by the CMBX index that is reported by markit.

The data are scary: for BB tranches the spread is now over 1500bps; for BBB- the spread is 1,100; for BBB is 965; even for A is 540; and 326 for AA tranches. All these spreads have sharply widened compared to their spring 2007 levels. At these spreads the ability to finance any new CRE investment – apart from those already committed and financed – is practically null. After the pipeline of already financed projects is finished the market for financing and securitizing CRE – apart from the highest rates projects – is practically frozen. Indeed, the issuance of CMBS fell to $6.3 billion in October, down 84% from a record $38.5 billion in March that finance about half of commercial property purchases. So the CRE market now behaves similarly to the sub-prime market; it is totally frozen.

The chart above is one of the worst performers of the CRE indices Roubini mentions, the CMBX-NA-BB 2. As you can see the spread has increased by close to 1,000 basis points, not a pretty picture. Whilst Wall Street and the media obsess over the losses attributable to the residential real estate meltdown the the CRE market has gone largely unnoticed. However one gets the feeling they won't be able to ignore it for much longer.

Evidence of Commerical Real Estate downturn?

The graph above comes courtesy of Calculated Risk and shows Countrywide Financial's (CFC) Commercial Real Estate Pipeline at the end of October

Countrywide Commercial Real Estate Loan Pipeline

In October, Countrywide had $752 Million commercial real estate loans in their pipeline, compared to $1,824 million last October and $1,323 million in September.

That's quite a significant drop. The question is whether this is specific to CFC which has had trouble obtaining funding or whether it is because of a drop-off in Commercial Real Estate Investment. I suspect it is a bit of both.

Another month another NAR revision

From the National Association of Realtors:

Modest Recovery for Existing-Home Sales in 2008 as Credit Crunch Subsides

The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in September, rose 0.2 percent to a reading of 85.7 from an index of 85.5 in August. It was 20.4 percent lower than the September 2006 level of 107.6....

Existing-home sales are projected at 5.67 million this year, edging up to 5.69 million in 2008, in comparison with 6.48 million in 2006 which was the third highest year on record. Existing-home prices are expected to decline 1.7 percent to a median of $218,200 for all of this year and hold essentially even in 2008 at $218,300.

If you remember, chief cheerleader at the NAR, Lawrence Yun, downgraded his outlook for existing home sales last month for the eighth straight time, so this makes nine and undoubtedly he will make it 10 next month.

The NAR's forecasts for home prices in 2008 are equally laughable given the outlook for housing and in light of calls from other economists predicting anywhere from 5% - to 25% declines next year. The NAR expects median exisiting home prices to "hold essentially even in 2008". Yeah, OK Mr Yun... until next month.

Tuesday, 13 November 2007

Making sense of SIV's

SIV's or Structured Investment Vehicles have been thrust into the limelight as one of the main culprits in the latest round of credit market turmoil.

Essentially SIV's are entities used by banks to invest in long-term assets by borrowing short-term in the commercial paper market. The bank earns a fee for managing the SIV, but can keep the SIV's debt off the balance sheet because it doesn't take on the credit risk. However, many banks agreed to provide liquidity in the event that an SIV cannot roll over it's Commercial Paper.

The problem now is that noone wants to touch the Commercial paper that SIV's have been using to fund themselves because the assets they have been investing in are declining in value and now the always late to the party ratings agencies are downgrading them.

just how bad is the decline in value of these assets held by SIV's? According to a New York Times piece yesterday:

Prices vary, but even amid a deteriorating market, some analysts say that the bulk of SIV assets are still fetching between 97 cents and 98 cents on the dollar.

97 - 98 cents on the dollar doesn't sound too bad, but that;s just half the story. The other half is the massive amount of leverage the SIV's have employed. From Calculated Risk:

.... Fitch rated SIVs average 14 times leverage. So, if an SIV had $1 Billion in capital, and an additional $14 Billion in leverage (mostly from selling commercial paper and medium-term notes), the SIV would hold $15 Billion in assets. If the typical asset was "fetching between 97 cents and 98 cents on the dollar", that would be a loss of $300M to $450M, or a loss of 30% to 45% of capital (from the $1 Billion) giving a NAV of 55% (97 cents on the dollar) to 70% (98 cents on the dollar).

According to Fitch, if the NAV for an SIV falls below 50%, then the fund might face an enforcement event, and it might have to be liquidated. Once the assets of one fund were liquidated - say at 96 cents on the dollar - that would mean the NAVs for other SIVs would probably fall below 50% - and they might also have to be liquidated, further depressing prices.

That about says it all. Good old leverage is great on the way up but disastrous on the way down. A loss of 2 - 3 cents on the dollar can result in huge reductions in the NAV's of SIV's. The process of forced events feeds on itself into a vicious downward spiral.

Now you can understand all the fuss about the super SIV bailout fund being touted by, Henry subprime is contained Paulson. However even Paulson seems to have lost some enthusiasm for the proposal or at least he has had to take a does of reality about what it will actually achieve. Again from the New York Times:

Officials from Bank of America, Citigroup and JP Morgan Chase reached agreement late Friday, settling on a more simplified structure than had been proposed, said this person, granted anonymity because he was not authorized to talk for the group...

Now, Henry M. Paulson Jr., the Treasury secretary, is describing the proposal’s benefits as helping “at the margin.” In an interview on Thursday, before the latest agreement was made, he acknowledged that the proposed backup fund would not rescue troubled SIVs, only lead to a longer and more orderly demise.

“This is something that is not a savior,” Mr. Paulson said, noting that he expected the fund to begin operating by the end of the year. “Anything at the margin that will speed up liquidity is worth trying.”

So the whole point, as we already knew, is to put off the inevitable in the hope that the market for some of these assets recovers and that banks can avoid bringing them back on balance sheet. On the back of yesterday's market action it seems investors are still very skeptical about the benefits of the fund and rightfully so. Given that the fund may not get up and running until the end of December it may be too late for some SIV's that don't have the benefit of Citigroup standing behind them.

Monday, 12 November 2007

Keeping an eye on Credit spreads & CDS

Last week felt eerily similar to mid August when the carry trade started to unwind and credit spreads expanded rapidly. As shown below credit spreads are already back to mid August levels.

How about these Credit Default Swaps for the Homebuilders courtesy of MGETA:

Nasty stuff. If one of these Homebuilders doesn't go bust it will be a miracle.

Saturday, 10 November 2007

More US Homebuilder bankrupticies


Dunmore Homes files for bankruptcy protection

Seeking protection from creditors, Granite Bay home builder Dunmore Homes filed for bankruptcy late Thursday as it tries to restructure its tangled finances.

The move comes six weeks after Michael A. Kane, a Comstock Mortgage senior loan consultant in Sacramento, bought the firm from its second-generation owner Sid Dunmore. It's the first bankruptcy filing by a Sacramento-area home builder as dozens of firms struggle with a downturn in demand and prices for new homes.

and this from Yahoo Finance:

Levitt & Sons files for bankruptcy protection

home-building unit Levitt & Sons said on Friday that it had filed for bankruptcy protection, reflecting the badly battered Florida market.

The unit, which made most of its money in Florida, said Chapter 11 filing in U.S. Bankruptcy Court in the Southern District of Florida, was made "in response to unprecedented conditions in the home building industry, which have severely impacted the company."

We are getting closer to a major Homebuilder going belly up. Levitt & Sons is ranked as the 50th largest U.S. home builder by trade publication BuilderOnline. We are just getting started on homebuilder bankruptcies.

The Bear of all bears?

David Tice, who manages the Prudent Bear Fund may just be the bear of all bears predicting a 100% chance of a recession and a 50 - 60% decline in equity markets. Click on the image below to listen to his interview on Bloomberg:

Friday, 9 November 2007

A Question for Mr Bernanke

Senator Ron Paul questions the wisdom of combating inflation with more inflation. Bernanke must really dread these trips to Congress, Ron Paul is all over him like a bad rash and rightfully so.

Wachovia ups provisions

From Bloomberg:

Wachovia to Raise Allowance for Loan Losses in Fourth Quarter

Wachovia Corp., the fourth-largest U.S. bank, said it expects to increase its allocation for loan losses to as much as $600 million in the fourth quarter.

"Wachovia now expects to record a loan loss provision in the fourth quarter of 2007 by an amount estimated to be between $500 million and $600 million in excess of charge-offs for the quarter,'' Charlotte, North Carolina-based Wachovia said in a filing with U.S. regulators dated yesterday. The company cited "anticipated loan growth and the impact of continuing credit deterioration in our loan portfolio.''

The graph above assumes a 4Q07 provision for loan losses of $550m for Wachovia. That raises the full year total of loan losses for 2007 to $1,314m up more than 200% from the $434m in 2006.

Whilst not as bad, this is the same trend we see at Washington Mutual and you can bet that elevated loan loss provisions will persist into 2008 for Wachovia putting a dampening effect on earnings.

Signs of a Slow Christmas for Retailers

Signs that the US consumer are reigning in their spending is seeping into retailers reports. October same stores sales growth showed that 7 out of 10 retailers missed analysts forecasts. From

U.S. Retail Sales in October Trail Analyst Estimates

Sales at Wal-Mart Stores Inc., Macy's Inc. and other U.S. retailers trailed analysts' estimates last month after record-high temperatures in the Northeast reduced demand for jackets and sweaters.

Seven out of 10 retailers reported sales below forecasts, according to Retail Metrics LLC. A 4.2 percent drop in the average U.S. home price in September and gasoline prices that are one-third higher than a year ago buffeted consumers, raising concerns that spending may slow as the holidays approach....

U.S. October retail sales increased 1.6 percent, the worst for October since 1995's 0.2 percent increase, the International Council of Shopping Centers said today. The results, based on 44 chains, missed the New York-based group's 2 percent forecast and suggest a slowdown in holiday spending.

About 30 percent of retailers' annual profits occur in the three months through January, according to ICSC Chief Economist Michael Niemira. The group has forecast November and December sales to gain 2.5 percent, the slowest in three years. The National Retail Federation anticipates the smallest holiday sales increase in five years.

"Consumers are slowing down, being more discretionary in their purchases, and retailers are going to have to be promotional,'' said Lauri Brunner, a retail analyst at Thrivent Investment Management in Minneapolis, which has $70.6 billion in assets. "The promotions are starting earlier and earlier.''

The above table comes from Minyanville and tells the story for retailers in October. The accompanying post by Jeff Macke is well worth a read for commentary on some of the major names in the retail space.