Credit Crunch Alive and Well

Yesterday produced evidence that the tentacles of the credit crunch are contniuing to spread. The latest victim is American Express (AXP) which is seeing losses climb on credit cards and is forecasting a gloomy near term outlook. From marketwatch.com:

American Express reports 38% drop in net income
Credit card company says it won't meet targets until economy improves

American Express reported a 38% drop in second-quarter earnings Monday and warned that it won't be able to meet long-term financial targets until the economy improves.

The credit card company said that even its most creditworthy, long-standing customers felt the effects of the economic slowdown that's currently sweeping the U.S.

Without giving specifics, AmEx said it plans to cut staff and reduce other costs, noting that the resulting charges will will hit results in the second half of 2008. American Express shares fell 11% to $36.56 in after-hours trading following the report.

"With bad debt occurring even in the superprime card segment, AmEx's earnings clearly show that the credit crisis is going upscale, which does not bode well for the U.S. economy," Red Gillen, a senior analyst at consulting firm Celent, commented via an email exchange.

American Express is known for catering to wealthier customers, so some investors expected the company to withstand the economic slowdown relatively well. However, Gillen noted that richer clients were often given cards with bigger credit lines. Now that some of these customers are missing payments, the losses are bigger, he said.

American Express said second-quarter net income came in at $653 million, or 56 cents a share, vs. $1.06 billion, or 88 cents a share, the same period a year earlier.

The latest results include $600 million that the company added to reserves to cover bad loans in the U.S., the company said. There was also one other $136 million charge and a tax benefit of $101 million.

Of course this was all too predictable. The credit implosion that started with subprime was always going to spread to credit cards, auto loans and commercial real estate.


Also banks are still losing money hand over fist and the analysts don't have a clue how bad it is. Consider Washington Mutual's (WM) latest results today.

WaMu reports $3.33 bln quarterly net loss

...WaMu's (WM) net loss in the second quarter came to $6.58 a share. That compares to net income of $830 million, or 92 cents a share, a year earlier. Excluding one-time items, the lender said earnings per share would have been $3.34 in the second quarter....

....WaMu was expected to lose $1.05 a share, according to the average estimate of 12 analysts in a Thomson Reuters survey...

Only a miss of $5.53 a share, not to worry. In addition, Moody's is thinking of downgrading the stock. On to Wachovia (WB)

Wachovia jumps 30%; CEO says won't sell stock

Wachovia Corp shares, rebounding from double-digit losses in the previous session, soared almost 30% after the bank said it would work its way out of a credit quagmire without diluting current shareholders' stake in the company....

....Wachovia said it would again pare the dividend after it posted a loss of $8.86 billion, or $4.20 a share, for the second quarter, compared with profit of $2.34 billion, or $1.20, in the year-earlier period.

On an adjusted basis, the latest loss was $1.27 a share; analysts polled by FactSet Research had expected a loss of 71 cents a share.

The firm added $5.6 billion to its loan-loss reserve to cover net charge-offs and to increase the reserve by $4.2 billion.

The bank's dividend -- which had been raised three times since 2005 -- is being reduced to 5 cents a share, saving $700 million of capital per quarter. In April, Wachovia cut its quarterly dividend to 37.5 cents a share from 64 cents a share.

Another miss of more than 50 cents a share and the dividend all but eliminated. However, one analayst went out on a limb.

"We think Wachovia's poor second quarter 2008 should mark a bottom," Deutsche Bank analyst Mike Mayo wrote in a research report after the report.

Oh goody another bottom call. The stockmarket rallied on the news and sent bank shares considerably higher. The stockmarket is calling a bottom in financials, you see the worst is over. However for those of us who have been paying notice, we've seen this movie before and it doesn't end well.

P.S I am currently on holidays for a month and doing a bit of travelling in Australia so Blogging may be intermittent for a while.

RBA Done Raising Rates - Westpac

More evidence that the Australian economy is cooling came from the monthly reading from the Westpac – Melbourne Institute Indexes of Economic Activity report. From the University of Melbourne Institute website:

Growth rate in Leading Index falls further

The annualised growth rate of the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 2.1% in May, well below its long term trend of 3.9%. The annualised growth rate of the Coincident Index was 3.0%, also below its long term trend of 3.8%.

“In short, the growth profile of the Leading Index is consistent with our view that spending growth in the Australian economy will slow substantially through 2008 and 2009. Furthermore that slowdown is broadly consistent with the RBA's own forecasts and indicates that it will not need to further raise interest rates in this cycle."

Also today, RBA govenor Glenn Stevens suggested that the RBA may be done raising rates. from the smh:

Dollar eases on Stevens' inflation optimism

The Australian dollar fell from a 25-year high and two-year government bonds advanced after Reserve Bank of Australia Governor Glenn Stevens signaled interest rates may be high enough to keep inflation in check.

Australia's dollar snapped a four-day gain after Stevens told economists that the chances of ''keeping inflation low over the medium term are good,'' suggesting the RBA may have finished raising rates. The currency also declined as the yield premium on the nation's two-year debt compared with similar-maturity Treasuries narrowed 6 basis points to 4.17 percentage points....

....The RBA's outlook on inflation ''does involve a period of significantly slower growth in demand in Australia,'' Stevens said in a speech in Sydney today. ''We still expect inflation to fall back to 3% by mid-2010, and to continue declining gradually thereafter.''

As seen below the cash rate futures market certainly took notice of Stevens words, they are now pricing in 0% chance of a further rate rise in the forseeable future and are now look for a quarter percentage point cut by the end of 2009.


The RBA knows that the 2Q08 inflation number due out next week will be bad but they are looking past that to a slowing economy over the remainder of this year and into next. I think the question now becomes, how deep will this slowdown be? Not many are talking about a possible recession in Australia next year but I'm betting we will start to hear more of that kind of talk as the economy continues to slow over coming months.

US Retail Sales Fizzle Despite Rebate Checks

The jubilation over the strong US retail sales figures for May was short lived as it wa reported yesterday that sales for the month of June rose a tepid 0.1%. Not only that, the original estimate for May was revised lower by 0.4%. From the Census Bureau:

ADVANCE MONTHLY SALES FOR RETAIL TRADE AND FOOD SERVICES
JUNE 2008
The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $384.2 billion, an increase of 0.1 percent from the previous month and 3.0 percent above June 2007. Total sales for the April through June 2008 period were up 2.6 percent from the same period a year ago. The April to May 2008 percent change was revised from +1.0 percent to +0.8 percent.

Retail trade sales were up 0.1 percent from May 2008 and were 3.0 percent above last year. Gasoline station sales were up 24.5 percent from June 2007 and sales of nonstore retailers were up 8.1 percent from last year.

It's worth noting that gasoline sales were up a huge $2 billion or 24.5% in the month of June, obviously reflecting higher prices. Auto sales dropped to levels not seen for at least 2 years. It will be interesting to see the state of retail sales when the rebate checks are gone. I doubt they will be impressive.

Good Ole Fashion Bank Run, Who's Next?

Above is a picture taken outside the Laguna Woods branch of IndyMac Bancorp yesterday. Obviously plenty of retiress and others have more than the $100,000 limit of FDIC insured deposits on deposit. If you're an American and you've got more than 100k in one bank, you should be looking to spread it around.

Now to the more important question, who's next? From today's market action I'd suggest it could be Washington Mutual.

WaMu Says It's `Well Capitalized' After Share Slump

Washington Mutual Inc., after dropping the most since its initial public offering in 1983, said it is ``well capitalized'' with more than $40 billion in liquidity and $150 billion in retail deposits.

The company's tangible equity to tangible assets ratio is 7.8 percent as of June 30, Seattle-based Washington Mutual said in a Business Wire statement after the close of regular trading. Details will be provided on its July 22 earnings call, the company said.

Washington Mutual led a slide in home lenders after IndyMac Bancorp Inc. was taken over last week in the second-biggest seizure of a financial company by U.S. regulators. Lehman Brothers Holdings Inc. predicted today that Washington Mutual's cumulative losses this year will reach $26 billion as the mortgage crisis worsens.

Washington Mutual rose 10 percent to $3.54 in extended trading after tumbling 35 percent at 4 p.m. on the New York Stock Exchange. The shares have lost 76 percent of their value this year, the second-biggest decline in the 24-member KBW Bank Index. National City Corp. has dropped 77 percent.

What a relief, WM is well capitalized, So I guess that -34% decline in the stock price today was an over- reaction. But wait a minute, wasn't IndyMac well capitalized? How about Fannie Mae and Freddie Mac? As I remember it Countrywide and Bear Stearns were well capitalized too. Let's rewind to August 2nd last year and see what Countrywide had to say:

"Our mortgage company has significant short-term funding liquidity cushions and is supplemented by the ample liquidity sources of our bank," Sieracki continued. "In fact, we have almost $50 billion of highly-reliable short-term funding liquidity available as a cushion today. It is important to note that the Company has experienced no disruption in financing its ongoing daily operations, including placement of commercial paper.

"Countrywide's financial condition remains strong, as evidenced by over $14 billion of net worth, significant excess capital and our strong investment grade credit ratings," Sieracki concluded. "Two independent credit rating agencies, Moody's Investors Service and Standard & Poor's Rating Service, this week re-affirmed their ratings and stable outlook for Countrywide, its bank and its mortgage company."

As we now know, if it wasn't for Bank of America, CFC would have filed for bankruptcy months ago. The long and the short of it is that you can't believe anything that the management of these large financial institutions say. Fear is rife and a bank run on any institution could spell disaster.

The fallacy that Australia can continue riding the commodities train to untold prosperity built on leverage and cheap credit is quickly evaporating. House prices are inevitably following the same path in Australia as they have in other over inflated housing markets around the world. From the heraldsun:

Melbourne recession fear as property hit

PROPERTY values in Melbourne and every state have slumped, with more than 50 per cent of Australian homes losing value last month.

New figures obtained by the Sunday Herald Sun from property analyst Residex prompted recession warnings.

The last time all the states fell at the same time was just before the Great Depression and Residex chief executive John Edwards warned of tough times ahead.

"It looks as if we're moving into a one-in-100-year event," Mr Edwards said.

"To see an adjustment on a wholesale basis across the whole of the nation is incredibly unusual. Never in my life have I seen so many converging negative events."

Mr Edwards said the Australian property market had broken away from its normal pattern of interstate diversity that traditionally protected it from widespread downturn.

"It points to a situation where unless the Government and Reserve Bank take action, Australia could move into a recession," he said.

"The only other times this has occurred are before we've moved into severe recessions.

"I am a bit frightened by the numbers and . . . by the speed at which things are happening."

I think the speed with which the Australian economy is turning is going to surprise a lot of people including the RBA. Unlike the US, turning our economy around is not like turning the titanic, it can happen a lot faster.

The figures show negative capital growth for almost every urban and rural centre in Australia.

Houses and units, in Melbourne and country Victoria, lost value last month and in the last quarter.

The bad news is hitting the top end of the market as well as the middle and outer suburbs.

In Toorak, house values dropped 2 per cent in the three months to June compared with capital growth of almost 23 per cent last year.

In Brighton, Prahran, Mont Albert, St Kilda, Malvern and Glen Iris the data is similar, with house prices declining last month and in the past quarter.

In suburbs such as Port Melbourne and Richmond, which are strongholds for residential units, prices also have dropped over the past month and quarter, reversing the trend of last year.

Several bayside suburbs that are traditionally strong housing areas have also declined, with Mordialloc, Moorabbin, Mentone and St Kilda East and West suffering unit price falls.

Estate agents throughout Victoria said prices had fallen up to 10 per cent this year from the highs of 2007.

The market scare comes as bank interest rates continue to rise, further flattening a limp market.

Agents said the market was quieter now than during a normal winter and that buyers were sitting on their hands, even after inspecting a property that matched their needs.

Victorian property is now firmly in a buyer's market because the shortage of supply during winter is not generating competition among buyers.

The damning statistics add to a week of gloom for the economy, with figures showing housing construction has declined for the fourth consecutive month and demand for home loans fell 25 per cent in the four months to the end of May.

Soaring petrol prices, rising interest rates, the share market slump, increasing mortgagee sales, the rental vacancy crisis and housing affordability woes have been met with a drop in consumer confidence to its lowest level since 1992.

"There is no Australian family that isn't hurting," Mr Edwards said.

"If you have a mortgage, you're hurting. If you're renting, you're also hurting."

The Federal Government and the Reserve Bank had "dismally failed" Australians by focusing on inflation while failing to control credit.

"I think they need to let inflation run a little. That means adjusting interest rates down and they need to control credit," Mr Edwards said.

"It's too late to control it by interest rates.

"You control it by interest rates and you'll send us into depression."

The property market dragged its feet yesterday with an auction clearance rate of 62 per cent failing to excite vendors and estate agents.

Winter and the school holidays added to the market's woes as many buyers took a back seat at auctions.

click on the link for the full story.

IndyMac Harbinger of Things to Come

For some time I have been saying that the real concern of the current crisis in credit and financial markets is one of solvency, not liquidity. The failure of IndyMac is a harninger of many more bank failures to come in the next couple of years. From Bloomberg:

IndyMac Seized by U.S. Regulators Amid Cash Crunch

IndyMac Bancorp Inc. became the second-biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash.

The Federal Deposit Insurance Corp. will run a successor institution, IndyMac Federal Bank, starting next week, the Office of Thrift Supervision said in an e-mailed statement today. Customers will have access to funds this weekend via automated teller machines. Regulators intend to eventually sell the company.

The Pasadena, California-based lender specialized in so- called Alt-A mortgages, which didn't require borrowers to provide documentation on their incomes. IndyMac's home state, where Countrywide Financial Corp. was also located before it was bought last week, has been among the hardest hit by foreclosures.

``Given their focus on Alt-A and a heavy concentration in California, they would have suffered meaningful losses in almost any scenario,'' Brian Horey, president of Aurelian Management LLC in New York, said before the seizure was announced. Aurelian is short-selling IndyMac shares to gain from declines.

Had IndyMac ``applied some common sense and changed their approach to underwriting as the housing market peaked, they might have lived to see the next cycle,'' Horey said.

click on the link for the full story.

Aussie Employment Bounces Back in June

Despite recent evidence of a slowdown in the Australian economy, the labour market showed resiliency in June, bouncing back from the job losses in May. From the abs:

SEASONALLY ADJUSTED ESTIMATES (MONTHLY CHANGE)

EMPLOYMENT

• increased by 29,800 to 10,715,700. Full-time employment increased by 24,000 to 7,664,600 and part-time employment increased by 5,800 to 3,051,100.

UNEMPLOYMENT

• decreased by 2,800 to 473,800. The number of persons looking for full-time work decreased by 300 to 317,100 and the number of persons looking for part-time work decreased by 2,600 to 156,700.

UNEMPLOYMENT RATE

• decreased slightly to 4.2%. The male unemployment rate remained steady at 4.0%, and the female unemployment rate decreased by 0.1 percentage point to
  4.5%.

PARTICIPATION RATE

• increased by 0.1 percentage point to 65.3%.

It may seem surprising that employment continues to be strong in the face of recent contractionary service and manufacturing reports, 16 year lows in consumer sentiment and a declining real estate market.

However we should remember that employment is a lagging indicator and that firms don't really start laying people off on mass until the writing is well and truly on the wall.