by Calculated Risk on 1/22/2008 08:10:00 AM

Reuters reports: Wachovia 4th-quarter profit sinks 98 percent

Results reflected $1.7 billion of net market-related losses, virtually all of which related to structured products including collateralized debt obligations. This included losses of $1 billion related tied to subprime mortgages, $600 million for commercial mortgages, and $123 million for other consumer mortgages, Wachovia said.

Wachovia said it also set aside $1.5 billion for credit losses.

The problems aren't contained to residential mortgages, from the WSJ: Wachovia's Net Plummets As Loan-Loss Provision Rises

Commercial loans 90 days past due grew to 0.89% of loans from 0.23%, while consumer loans 90 days past due rose 1.39% of loans from 0.59%. Nonperforming assets, those loans near default, grew to 1.08% of loans from 0.32%.

Delinquencies are rising across the board.

by Calculated Risk on 1/22/2008 08:05:00 AM

From the WSJ: Bank of America Reports Sharp Drop in Earnings

Bank of America Corp.'s fourth-quarter net income fell 95% as the company recorded a higher-than-expected $5.28 billion in collateralized debt obligation write-downs and said credit costs soared.

by Calculated Risk on 1/21/2008 11:59:00 PM

From MoneyControl.com: Mkts hit lower circuit; trading stopped for an hour

Sensex and Nifty both opened with over 10% cut and hit the lower circuit and the trading got halted for one hour only fourth time in Indian history. Sensex opened down 9.75% or 1716.41 points at 15888.94 and Nifty was down 12.10% or 630.45 points at 4578.35. Sensex so far was down 25% and Nifty 28% from its all time high.

Meanwhile in Japan the Nikkei is down 651.01 or 5.5%. It is the same story throughout Asia.

by Calculated Risk on 1/21/2008 09:55:00 PM

When a bank makes a bridge loan, and then can't syndicate the debt, it is known as a "pier loan"; a bridge that goes nowhere. With all the discussion of real estate debt, it is easy to forget that Wall Street is still saddled with pier loans from the LBO frenzy of 2007.

From the WSJ: New Year, Old Problem: Buyout Debt

The banks now sit on $158 billion in leveraged loans in the U.S., which are credits with a high default risk, according to Standard & Poor's Corp. That pool includes private-equity deals valued at $88.25 billion that have been funded by the banks but not fully syndicated, according to data tracker Dealogic.

The investment banks are trying to sell the debt:

The market will get another test as a group of underwriters led by Deutsche Bank AG and Bank of America Corp. begin unloading $7.25 billion in loans related to the buyout of casino operator Harrah's Entertainment Inc. by Apollo Management LP and TPG. Last week, the banks began marketing the bonds at a discount of 96.5 cents on the dollar, for a deal widely seen as one of the most desirable credits created during the 2006 buyout boom.

It will be interesting to see if this "most desirable" of buyout debt gets sold, and at what price. Imagine the haircuts for the less desirable debt. And these pier loans also contributes to the credit crunch by limiting the amount the banks can loan to other companies.

by Calculated Risk on 1/21/2008 07:13:00 PM

Update: From Mike in Long Island here is a live DOW future (at the CBOT):

Here are a couple of places to track the futures market.

Bloomberg Futures.

Futures at 7:10 PM ET:

INDEX	VALUE	CHANGE
DJIA INDEX	11,657.00	-449.00
S&P 500	1,271.50	-53.80
NASDAQ 100	1,779.25	-70.25

Barchart.com Indices

Note: make sure you read the ones that are open. Some people sent me the Bloomberg site before they opened! At the barchart.com site, look at the time. If it shows a date, then that future is closed.

by Calculated Risk on 1/21/2008 03:45:00 PM

The O.C. Register's Jon Lansner shares an email from Pimco's Paul McCulley:

“Sometimes when you are ill, you make an appointment with your doctor; other times, you go straight to the emergency room. Now is an other time. ... Time is of the essence. What needs to be done needs to be done. Now."

Wow. Some people are really scared.

by Calculated Risk on 1/21/2008 12:48:00 PM

UPDATE: Same graph for DOW added back to Great Depression.

Here is a look back at previous recessions and bear markets.

The following graph shows the change from the three year daily high and the monthly close. Not all market declines are associated with recessions. As an example, there was a sharp market decline in 1987 and also in 1998 (the Asian financial crisis).

When looking at this graph, monthly closes within 5% of so of the three year high usually indicates the market was setting new three year highs.

Click on graph for larger image.

Note: the probable 2007/2008 recession is shown starting in December 2007.

Using the monthly close doesn't capture the entire down move - but it does capture most of it (the change is from the daily high) - but my graphics package won't handle any more data!

Here is a table of the recession related down moves:

Recession Year	Market Correction
1953	-12.5%
1957	-19.4%
1960	-12.1%
1970	-33.5%
1974	-47.8%
1980	-15.8%
1982	-24.6%
1990	-17.8%
2000	-47.4%
2008	-15.9% (through last friday)
Median (previous 9 recessions)	-19.4%
Average	-25.6%

All recessions are different, but based on the S&P futures, it appears the current decline will be close to the median decline tomorrow.


Here is the same chart for the DOW (I used four year max to capture entire Depression decline). I'd ignore the WWII period.

by Calculated Risk on 1/21/2008 10:26:00 AM

From the WSJ: Bank of China May Report Subprime-Related Write-Down

Analysts estimate that state-owned Bank of China ... may have to write off a fourth of the nearly $8 billion it holds in securities backed by U.S. subprime mortgages ...

More containment.

It looks like the stock market are in for more fun too: U.S. stock futures point to major decline on re-open

by Calculated Risk on 1/20/2008 12:45:00 PM

On Thursday, the Census Bureau reported housing starts were at the lowest level since the 1991 recession. Here are some more thoughts on starts:

Click on graph for larger image.

This graph shows total and one unit structure starts since 1968. Yes, I've marked the current probable recession on the graph!

Some people might argue that the graph isn't normalized by population or the number of households. That is correct, and it would appear with increasing population that the number of starts is pretty low right now. However, there is more to demographics than population growth; changes in household size can have a significant impact on the demand for housing. In fact, a majority of the demand in the '70s was driven by declining household size. (see this demographics and housing demand).

Here is a table from the above post that shows the number of housing units added due to population growth, and the number added due to changes in household size. In the '70s, there were more housing units added due to smaller households, than growth in the population. Conversely demand in the '90s was almost exclusively due to population growth, as household sizes stabilized.

Housing Added due to Population Growth and changes in Household Size
Decade	Due to Population Growth	Due to Change in Household Size	Total Housing Units Added
1940s	5.84 Million	2.86 Million	8.70 Million
1950s	9.11	3.08	12.19
1960s	8.10	2.27	10.37
1970s	9.05	10.65	19.70
1980s	9.13	4.77	13.90
1990s	13.47	0.13	13.60
2000s (through July '06)	7.63	2.04	9.67

Predicting population growth and changes in household size are both important in predicting the need for new housing units. With the high cost of homeownership, I wouldn't be surprised to see household sizes increase slightly over the next couple of years - lowering the demand for new housing units - at least until prices fall significantly.

Another driver for housing starts is the current housing supply. I've discussed this here: Housing Inventory and Rental Units. Currently there are about 1.6 to 1.7 million housing units in the U.S. above the normal level of inventory.

If housing units were transportable, and each unit was a perfect substitute for another, starts could fall to zero in 2008 and there would still be some excess inventory at the beginning of 2009!

Starts won't fall to zero in 2008 - units are not transportable, and they are not perfect substitutes - so we need to look at starts from a different angle to estimate how far starts will actually decline.


This graph breaks down housing starts by type and intent since 1974. This data is available quarterly at the Census Bureau. Note: this is the annual rate, not seasonally adjusted, Q4 2007 is estimated using monthly data.

We could use this data to make some estimates for 2008. First single family units built for sale is clearly dropping sharply. This was at about 550K annual rate in Q4, and has been as low as 400K in 1982 (300K quarterly). An estimate in the 400K range is probably reasonable for 2008.

Homes built for owners has been running over 300K per year for some time, although the level has fallen recently. A recession will probably cause a dip in owner built homes, however this is a housing area with favorable demographics (people in their 50s like to build their "dream home"). Perhaps 250K homes will be built for owners in 2008.

The next category is built for rent. This has been running just over 200K per year, and I expect the number to be at least that high in 2008.

The final category is condos. Condo starts are starting to decline too, but there is a fair amount of momentum in the larger projects, so a decline to 50K to 100K is probably reasonable.

This means something like 400K Built for Sale, 250K Owner built, 200K rental units, and 75K condo units will probably be started in 2008. That puts starts at 925K - higher than many other estimates.

If starts came in at 925K, this would actually be good news for the economy since residential investment wouldn't fall as far as some are forecasting, but this would mean very little of the excess inventory would be worked off in 2008 keeping pressure on housing prices and the homebuilders in 2009 and 2010.

A more pessimistic view would take starts to 800K in 2008: 350K built for sale, 200K owner built, 200K rental, 50K condos.

by Calculated Risk on 1/20/2008 12:44:00 PM

For those that participate in the comments: The blog has been loading slow, or stalling after the first post. This appears to be due to problems with Haloscan. I'm trying a few things with Haloscan, but to resolve this issue, I might have to change comment vendors.

I'm considering switching to js-kit comments. Mish is using js-kit if you'd like to check it out. Comments and suggestions are appreciated.

Best to all.