Tuesday, 22 April 2008

Are Things Getting Better or Worse?

A few articles that run counter to the rosy outlook some major market pundits are claiming:

S&P: Home Equity Delinquencies Rise Rapidly

Standard & Poor's said delinquencies on home-equity lines of credit issued in 2005 and 2006 shot up in March, underscoring continued trouble in the U.S. economy.
S&P said that 9.19% of lines issued in 2005 and 11.45% of loans issued in 2006 are delinquent, up 6.49% and 6.51% from February.

Big rise seen in unoccupied office space Vacancy rate expected to jump from 13.6% to 18% by end of 2009; takeaway: cheaper leases

Office vacancies rose sharply in the first quarter, a trend that is expected to continue as a result of layoffs and new construction adding to supply.

According to the real estate services firm Grubb & Ellis, first-quarter office vacancies rose to an average 13.6% nationally, up from 13% in the previous three quarters.

“With demand turning negative at the same time that the construction pipeline will deliver the 94 million square feet still underway, vacancy is expected to peak at 18% by the end of 2009,” Grubb & Ellis economist Robert Bach wrote in a research note today.

The recession’s impact on employee levels “is just getting started, so the office market is reacting pretty quickly and I would suspect that it will rise to a vacancy rate of 15% to 16% by year end,” he said in an interview

Mr. Bach expects that by the end of 2009, vacancies will peak at about 18%, a level that was seen in the last two economic downturns, during the first quarter of 2004 and the third quarter of 1991.

In addition, about 15.1 million square feet of new construction was completed during the first quarter. But net absorption—the amount of new space coming to market that found tenants—came in at a slim 1.8 million square feet. That’s the lowest rate of absorption since the second quarter of 2003, Grubb & Ellis said.

How about some more rosy news from financial companies to add to yesterdays news from BofA and National City? From Bloomberg:

RBS to Sell $24 Billion in Shares After Markdowns

-- Royal Bank of Scotland Group Plc, the U.K.'s second-biggest lender, will sell 12 billion pounds ($23.7 billion) of new shares to investors to boost capital depleted by writedowns.

RBS fell as much as 5.7 percent in London trading today after saying it marked down 5.9 billion pounds of assets and will cut the 2008 dividend. Chairman Tom McKillop defended Chief Executive Officer Fred Goodwin, saying ``our executive team has all the ability to steer the bank through this tricky period in financial markets.''

RBS's capital cushion has shrunk after credit markdowns and its part in last year's 72 billion-euro ($114 billion) purchase, mostly in cash, of ABN Amro Holding NV with partners Banco Santander SA and Fortis. The Edinburgh-based company said the outlook still is ``inevitably clouded'' by market turmoil sparked by the U.S. subprime mortgage market meltdown.

Downey Announces First Quarter 2008 Results and Dividend

NEWPORT BEACH, Calif., April 21 /PRNewswire-FirstCall/ -- Downey Financial Corp. (NYSE: DSL - News) reported a net loss for first quarter 2008 of $247.7 million or $8.89 per share on a diluted basis, compared to net income of $42.9 million or $1.54 per share in the year-ago first quarter.

In addition, the Board of Directors has declared a quarterly cash dividend of $0.12 per share payable on May 20, 2008, to shareholders of record on May 6, 2008. The Board also decided to suspend future dividend payments. Maurice McAlister, Chairman of the Board, commented, "Although it was a difficult decision, our Board of Directors believes the suspension of future dividends is in Downey's best interest, as it will allow us to preserve capital during this difficult operating environment. The Board plans to reassess the dividend when economic conditions normalize."

Also of interest yesterday was the comments from BofA's CEO in the conference call. From Calculated Risk:

BofA Conference Call Excerpts

As you realize by now, first quarter was much worse than our expectations three months ago with the most notable duration in the latter part of the quarter. The issues we faced in capital markets in the fourth quarter continued into the fourth quarter with March being particularly difficult. Consumer credit quality deteriorated substantially from fourth quarter, particularly in home equity. ... Credit quality will continue to be an issue with charge-offs at least at first quarter levels but probably higher for the rest of the year."....

....We believe net charge offices in home equity will continue to rise given softness in the real estate values and seasoning in the portfolio....

....Two issues that is playing home equity and could drive losses are a prolonged deterioration in home values and further deterioration in the economy."

Comments from CEO's suggest that things were getting worse toward the end of the March quarter. LIBOR is on the rise and 30 year home mortgage rates are rising. Things are going to get worse before they get better.