by Calculated Risk on 2/06/2008 08:33:00 PM

Just a note to subscribers, the February Newsletter was emailed today. If you haven't received your newsletter, please check your spam / bulk email folders. If there is any problem, please email me (with subject "newsletter").

If you can't read the attachment (it is PDF version 7 for some subscribers), please follow the link for a PDF version 5 file.

Here is a response I received today:

"I think you could easily double or even triple your subscription [rate] ... and not miss a beat."

Thank you! Yes, we've been told many times that we underpriced the newsletter. Please take advantage of us! If you'd like to subscribe ($60 per year), here is the sign up page. And a sample: January CR4RE Newsletter.

Best Wishes to All.

by Calculated Risk on 2/06/2008 05:17:00 PM

From MarketWatch: Cisco shares fall on disappointing revenue forecast

Cisco ... issued a lower-than-expected revenue forecast for its third fiscal quarter, citing the slowing economy. ... CEO Chambers said order-growth rates in the month of January were below expectations, leading the company to be cautious about the outlook for the next few months.

There are two categories for non-residential investment: 1) Structures, and 2) Equipment and Software. I've written extensively about the looming slowdown in non-residential structure investment, and these CISCO comments suggest a possible slowdown in Equipment and Software investment too.

Update: comments from conference call (hat tip Brian)

“While we continue to be extremely comfortable with our vision and differentiated strategy, the value that intelligent networks will bring across all of our customer segments and geographies, we also see the economic challenges that the U.S. is experiencing. Our customers in many of the emerging countries, especially in India and China and the Middle East , remain optimistic about their business momentum. However, we are seeing our U.S. and European customers become increasingly cautious. This was my key take-away from the World Economic Forum two weeks ago. While we were pleased with our revenue growth slightly above 16% in Q2, our product order growth in Q2 was in the low teens. The second quarter was unusual by month in terms of these order growth rates. December was strong, with year-over-year growth in terms of orders in the high teens. Our January growth was less than we expected, with order growth rates of approximately 10%. Again, let me repeat, with our usual caveats discussed earlier, that we continue to believe in our long-term growth guidance at 12% to 17%. While it is always possible that January's order growth rates were an aberration, given the uncertainties of the global financial markets and the cautiousness we are seeing from some of our customers and our peers, we believe that the proper approach to guidance, with our usual caveats at this point in time, is to assume that January's order growth rates may continue over the next several months…Secondly, with all of the appropriate caveats, our best estimate is that this is a relatively short-term challenge going forward… Therefore, our revenue guidance for Q3 fiscal year 2008, including our usual caveats as discussed earlier and in our financial reports, is for revenue growth of approximately 10% year-over-year..”

He later added:
-this is the first time in a long time that they have missed a Janaury forecast

-that he didn’t think things would get worse from here and that the slowdown might be a one or two quarter event

-the US financial sector actually did better than expected, retail and transportation were worse….what we are seeing on a broader basis is a confidence issue with CEOs driven by what they are reading and hearing

-in Europe and US,saw orders slip at the end of January, particularly after the stock market swoon over MLK weekend

by Calculated Risk on 2/06/2008 03:01:00 PM

From Philly Fed President Charles I. Plosser: The Economic Outlook and Challenges for Policymakers. A couple of excerpts:

On housing:

Two adjustments will continue to be needed to help work down the large number of unsold homes: further cuts in construction and declines in housing prices. I expect the decline in housing starts will bottom out in the middle of this year, but starts are likely to then be quite flat through the end of 2009 as the inventory of unsold homes is reduced gradually.

These are two key points: House prices must fall further (probably significantly further in many areas), and the current large inventory overhang will depress housing activity for some time.

On Inflation:

Unfortunately, I expect little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help.
...
There are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible. To borrow a line attributed to that famous, or perhaps infamous, Union Admiral David Farragut at the Battle of Mobile Bay, it is sort of a “damn the torpedoes, full speed ahead” approach to policy. But the Fed has a dual mandate for a reason. Price stability is a necessary component for achieving sustained economic growth. Ignoring price stability during times of economic weakness risks undermining our ability to achieve economic growth over the long run. It fuels higher inflation down the road and risks inappropriate risk taking and recurring boom/bust cycles. This would be counterproductive.

With these comments on inflation, it's important to note the Plosser is a voting member of the FOMC. Still, even with these concerns about inflation, and depending on the data, I expect a 50bps or 75bps Fed Funds rate cut at the March meeting.

by Calculated Risk on 2/06/2008 01:42:00 PM

From the WaPo: Housing Crisis Casts a Cloud Over Sun Belt (hat tip Atrios)

When residents of Maricopa, Ariz., south of Phoenix, vote in the presidential primaries Tuesday, it will be against a backdrop of vacant storefronts and sprawling, terra-cotta-roofed subdivisions that are studded with for-sale signs as far as the eye can see.

The state government is staring at a billion-dollar shortfall in its $11 billion budget. Forecasters expect a region that grew 7 percent in 2006 to contract this year. Retail sales, which rose 16 percent in 2006, are dropping. Dennis Hoffman, an economics professor at Arizona State University, said he had never seen such a sharp turnabout in 25 years studying the local economy.
...
The decline in residential activity is leading to downturns in retail and commercial construction as well. While long-planned projects in close-in communities are being built, many economists expect few to come in behind that construction for several years.
...
Many business people and economists here do not expect things to pick up until the area works through its inventory of about 37,000 unsold homes, which could take three or four years.
emphasis added

This is the normal pattern; residential investment leads non-residential investment in structures - both up and down. Builders are finishing up "long-planned projects" keeping non-residential construction spending strong, but few new projects are getting started, and, according to Richmond Fed President Jeffrey Lacker yesterday, a "dramatic change" is probably underway in commercial real estate (CRE). In other words, the expected slump is here.

by Calculated Risk on 2/06/2008 12:23:00 PM

Sorry for any problems this morning. I don't know what was causing the problem, but I've removed most of the ads. If the problem persists, please let me know.

by Calculated Risk on 2/06/2008 11:00:00 AM

BRE is an apartment REIT in the West. Here are some comments from their conference call (hat tip Brian):

“Essentially we have two distinct operational dynamics going on. Two-thirds of our operations, San Francisco, Seattle, Los Angeles, San Diego, are operating a fairly high level. Revenue growth is ranging 4.5 to 9%, occupancy levels are at or about 95%. We have a pretty tight 30-day available levels running between 6 and 7%. It is a little early in the year to start talking about rent growth, but in these markets we have pricing power and we're not being shy about exercising it where we can.

There is another slice of the operations with a single-family housing recession is playing out in full as we expected. Sacramento , inland Empire in Phoenix which represented about 21% of the same store net operating income, operations are struggling, and we expect the struggle to continue throughout the year. We seem to be able to maintain about 92, 93% occupancy but rents are flat year-over-year. We certainly are not expecting rent growth this year. There may be modest revenue growth from these markets, but it will be occupancy driven over our '06 levels.

For the moment Orange County lies somewhere in between with a stronger operating profile than we and maybe others expected at this point. Orange County represents about 14% of same store net operating income, currently 95% occupied, 30 day available stands at less than 7%. Our market rent growth in '07 was just over 3%, about half normal growth levels. Some of this was of our own making. It took almost six months to get our occupancy in a position to grow rents. The loss of jobs certainly triggered a deceleration in traffic and rent growth in the second half of the year. Orange County remains unaffordable from a housing standpoint. Median home prices for existing stock are more than 620,000, and new home prices average more than 850,000. Information on jobs that came out at the end of the year indicated a year-over-year drop of about half a point. Certainly not great, but probably not enough to shake the home prices materially. This market is holding up very well and could generate maybe 2 to 4% revenue growth in rent growth in 2008 which could be a really great performance.”

Q: My second question pertains to single-family moveouts. How is it trending and can you quantify what impact it may be having on your occupancy overall?

BRE CFO: Well, I think coastal California is really a tale of two markets. In coastal California the numbers really haven't budged. Moveouts when we look at our resident turnover and to the extent that the exit interviews or the exit data is correct, moveouts in coastal California are for purchasing a home remain very sticky around that 15 to 20% number. It is like typically 15 to 17%. When you get to an Inland Empire, Sacramento , Phoenix , that number will jump up to 25 and 30%. Look, in Phoenix right now you can rent a 2 to 3 bedroom home for $900 a month. That competes with an apartment every day of the week. We're getting a much higher level -- and that number is probably where historically hugged right around 25% is now in the 30, 35% range, and it is not just move out for home purchases. We have move outs for people going to go rent a single-family house.”
emphasis added

by Calculated Risk on 2/06/2008 10:40:00 AM

From MarketWatch: Toll's home-building revenue falls 22%

Toll Brothers Inc. doesn't see any end in sight to the U.S. housing market's woes as the luxury home builder said Wednesday that first quarter home-construction revenue fell 22% compared to the same period last year.

"The housing market remains very weak in most areas. Based on current traffic and deposits, we are not yet seeing much light at the end of the tunnel," said Robert Toll, chairman and CEO.

On cancellations:

In FY 2008's first quarter, the Company had 257 cancellations totaling approximately $198.0 million, compared to 436 cancellations totaling $318.9 million in FY 2007's first quarter, and 417 cancellations totaling $328.5 million in FY 2007's fourth quarter.

Tracking cancellations is important because the Census Bureau does not adjust new home sales (and inventory) with cancellations. Toll's cancellation rate is usually lower than the industry because historically Toll has required larger deposits than other homebuilders. Although the absolute number of cancellations declined, the Toll cancellation rate in Q1 was 28% vs. 29% in Q1 2007, or essentially unchanged.

by Tanta on 2/06/2008 10:08:00 AM

Moody's is throwing out some possibilities for changes to its rating system that would give more information to bond buyers, and is inviting comment from the investment community. Mr. Ritholtz over at Big Picture has a suggestion for a disclosure statement that has too many dirty words in it for me to post on my respectable blog, but here's the link.

Here are the proposed options, from Moodys' request for comment:

1. Move to a completely new rating scale for structured securities, for example, numerical rankings of 1-21. These would continue to contain ordinal rankings of expected credit risk and would probably map to corporate ratings.

2. Add a modifier to all structured ratings utilizing the existing rating scale, e.g., Aaa.sf. This would designate the issue as structured, but add no other additional information.

3. Add a suffix to the existing rating scale for structured ratings that contains additional information – for example, estimates of multi-notch rating transition risk. This could be Aaa.v1, Aaa.v2, etc. We would derive these gradations through an analytical process that would be disclosed to the market.

4. Use the existing rating scale for structured securities, and put additional analytical information in a separate scale that would exist in a separate data field. For example, an issue could have a “Aaa rating, with a ratings change risk indicator of v1”. The added field would be analogous to our existing ratings outlooks and watchlists.

5. Make no changes to the rating scale, but provide additional information and commentary through written research.

I personally like the idea of combining alpha ratings with a suffix code that indicates the assumptions built into the ratings models. For instance, a bond could be rated AAA.PONY, indicating that the assumptions built into the ratings were Prices always rise, Owners occupy all units, Nobody lied, and Your own analysts did all the due diligence.

Is that any more bizarre than giving a rating to a security with a "ratings change risk indicator"? Wasn't there a time when the rating given to a bond was supposed to be the one least likely to have to be changed?

by Calculated Risk on 2/06/2008 01:55:00 AM

From the WSJ: A Year of Reckoning

In a closely watched report to be released today, finance professor Edward Altman projects that high-yield, or "junk," bonds will default by a rate of 4.64% this year. That would be the highest rate since 2003 and a nine-fold increase from the 0.51% rate in 2007, which was the lowest rate since 1981. High-yield debt is typically used by lower credit-quality companies to fund operations and acquisitions.

Mr. Altman, whose so-called Altman-Z score is the market standard for predicting bankruptcy, sees as much as $53 billion in high-yield debt defaulting in 2008, up from $5.5 billion in 2007.

And in a related story from the WSJ: 'Anyone for Some Used Corporate Debt?'

The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about $28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value, according to Reuters LPC.

Loans of Freescale Semiconductor Inc., taken private by a consortium of private-equity firms in December 2006 for about $28 billion, are trading at a 15.5% discount to their original value; Tribune Co., which was taken private in April by investor Sam Zell for $8.2 billion, issued loans now trading a 26% discount.

With rising defaults, and limited demand for leveraged loans, the banks will have difficulty syndicating all the $152 billion in LBO debt still in the pipeline.

by Calculated Risk on 2/05/2008 06:55:00 PM

From Fitch: Fitch Takes Rating Actions on 172,326 MBIA-Insured Issues

Concurrent with its rating action earlier today on MBIA Insurance Corp. and its affiliates (MBIA), Fitch Ratings has taken various rating actions on 172,326 bond issues (172,168 municipal, 158 non-municipal) insured by MBIA. ...

Fitch placed MBIA's 'AAA' Insurer Financial Strength (IFS) on Rating Watch Negative following Fitch's announcement that it will be updating certain modeling assumptions in its ongoing analysis of the financial guaranty industry.

Quite a few ripples in the pond.