by Calculated Risk on 2/20/2009 07:22:00 PM

Maybe the FDIC is busy in California this week ... but it just doesn't feel like Friday yet.

Next week should be interesting with the Case-Shiller house price index, New and Existing home sales, and probably delinquency rates from the Fed all being released.

Volcker's comments today ... "capitalism will survive":

by Calculated Risk on 2/20/2009 04:42:00 PM

“The dramatic deterioration in the fundamentals of the space market, especially over the last three quarters, has been especially swift and severe.”
Lloyd Lynford, chief executive officer of Reis.

From Bloomberg: U.S. Office Vacancy Rate to Climb to 16.7%, Reis Says

The vacancy rate at U.S. office buildings will rise to 16.7 percent this year and could reach an 18-year high [in 2010] as tenants cut jobs and try to sublet space, property research firm Reis Inc. said.

The net amount of space leased will fall by 47.8 million square feet this year, one of the steepest drops in occupied space on record ... Next year, the vacancy rate for U.S. office properties could rise to 17.6 percent, the highest since 18.7 percent in 1992 during the last major slump in commercial real estate following the savings and loan crisis ...

Click on graph for larger image in new window.

This graph shows the actual office vacancy rates and the Reis forecast for 2009 (assumed steady increase over four quarters for graph). The office vacancy rate was 14.5% in Q4 2008.

The office vacancy rate peaked at 17% in 2003 following the bursting of the stock market bubble, and peaked at 19.1% in 1991 following the S&L crisis (the data series starts in 1991).

by Calculated Risk on 2/20/2009 02:42:00 PM

From Bloomberg: U.S. Stocks Pare Drop on Speculation Treasury to Detail Bailout

[CNBC reported] that the Treasury Department will release some details of its plan to rescue the financial system next week.

From the WSJ: White House Says Banks Shouldn't Be Nationalized

Amid fears that Citigroup Inc. and Bank of America Corp. could be on the verge of being nationalized, the White House gave assurances that it prefers banks to remain out of the government's hands.

"This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," White House spokesman Robert Gibbs said Friday. "That's been our belief for quite some time, and we continue to have that."

The key for Geithner is to explain what "stress test" means, how the stress tests are proceeding, and when the tests will be complete.

If Geithner just talks about the Public-Private Investment Fund his speech will probably not be well received. Three words for Geithner: Stress Test. Explain.

by Calculated Risk on 2/20/2009 01:23:00 PM

From Bloomberg: Dodd Says Short-Term Bank Nationalization Might Be Necessary

Senate Banking Committee Chairman Christopher Dodd said it may be necessary to nationalize some banks for a short time ...

“I don’t welcome that at all, but I could see how it’s possible it may happen,” Dodd said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” to be broadcast later today. “I’m concerned that we may end up having to do that, at least for a short time.”

More cliff diving for the big banks.

Also, the S&P 500 is flirting with the closing low from last November 20th of 752.44. The last time the S&P 500 index was lower was in early 1997 - about 12 years ago - this doesn't include divdends, but that is a lost decade for U.S. investors.

by Calculated Risk on 2/20/2009 12:43:00 PM

From Bloomberg: Bond Trading Highest Since ‘07 as Credit Freeze Thaws

Corporate bond trading in the U.S. is rising to the highest level in two years, adding to evidence that credit markets are thawing even with stocks off to their worst start since the 1920s.

An average $17.1 billion of corporate bonds traded daily this month, following $17.7 billion in January, according to the Financial Industry Regulatory Authority. The business is up from last year’s low of $9.4 billion in August and reached the highest level since February 2007 ...

Bonds are trading but yields are very high:

Investors are betting yields are high enough to compensate for defaults that Moody’s Investors Service forecast will rise to 16.4 percent by November, the highest since the Great Depression and about three times the current rate.

The following graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

Click on table for larger image in new window.

There has been some improvement (decline in spread) in recent weeks, but the spreads are still very high, even for higher rated paper, but especially for lower rated paper with a spreads still above the high level of the early '80s recession.

There has also been improvement in the A2P2 spread. This has declined to 1.09. This is far lower than the record (for this cycle) of 5.86 after Thanksgiving, but still too high.

This is the spread between high and low quality 30 day nonfinancial commercial paper. Look at the graph - there was significant concern when the A2P2 spread spiked in 2007 and 2008 (the three little peaks). Now the spread is back to the highest level of those peaks!

It is also worth mentioning that the TED spread is below 1.0. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 4.63 on Oct 10th and a normal spread is around 0.5.

by Calculated Risk on 2/20/2009 12:09:00 PM

More cliff diving today ...

BofA off 18%

Citi off 22%

Wells Fargo off 18%

And the phrase of the day "legacy loans" (ht Atrios)

I'm pretty sure a legacy loan is one the banks now wish they hadn't made.

by Calculated Risk on 2/20/2009 10:07:00 AM

I frequently receive questions about what happens to FDIC insured CDs when a bank fails.

Tom Petruno at the LA Times explains: If your bank is bought, your CD yields could be slashed

Late last year, struggling [Culver City-based Alliance Bank] had been offering yields of 4% or higher on one-year certificates of deposit -- well above market averages -- as it sought to pull in cash to stay alive.
...
[Alliance] was seized by the Federal Deposit Insurance Corp. on Feb. 6, and was sold to California Bank & Trust of San Diego.
...
California Bank & Trust didn’t pay those kind of yields, and won’t now: The bank has sent letters to Alliance customers telling them that the annualized yields on their CDs will be unilaterally reduced to 1.4%.

If depositors don’t like that yield they’re free to cash out, with interest earned to date and without an early-withdrawal penalty ...

The acquiring bank has the option of paying the higher yield, or they could lower the yield, and give the borrower the option of accepting the new rate or withdrawing their money without penalty. Note that the CD investor does receive the higher yield up to the day the bank is seized.

by Calculated Risk on 2/20/2009 09:07:00 AM

From the WSJ: Lowe's Profit Drops Sharply, Evaluates Expenses

Lowe's Cos.' fiscal fourth-quarter net income dropped 60% on falling sales and margins as the world's second-largest home-improvement retailer projected earnings below analysts' expectations.
...
Lowe's expects first-quarter ... same-store sales falling 6% to 10%.

Chief Executive Robert Niblock said Friday economic pressures continued to sap consumer confidence and spending, resulting in weak same-store sales.

According to the BEA data, home improvement has held up better than other areas of residential investment:

Click on graph for updated image in new window.

This graph shows home improvement investment as a percent of GDP.

Home improvement was at 1.20% of GDP in Q4 2008, off the high of 1.30% in Q4 2005 - but still well above the average of the last 50 years of 1.07%.

This would seem to suggest there remains significant downside risk to home improvement spending over the next couple of years (although some analysts disagree with the BEA numbers).

by Calculated Risk on 2/20/2009 01:40:00 AM

They are taking a different approach to help homeowners in England.

From The Times: Homeowners will get £500m in mortgage assistance to counter rise in repossessions

[T]he Homeowners Mortgage Support scheme ... will allow borrowers with mortgages up to £400,000 to take a payment holiday if they have suffered an “income shock”, such as losing their job or having their hours cut.

It is expected to announce today that the scheme will allow borrowers to defer payments on up to 70 per cent of their mortgage interest for up to two years. The repayments of a borrower in the scheme with a £150,000 mortgage at 3.5 per cent interest would fall from £437.50 to £131.

The Government will also pledge to guarantee 80 per cent of the deferred payments if borrowers fail to cover their mortgage payments and subsequently lose their homes. If the repossessed property is sold at a loss, the lender will claw back money from the Treasury.

The borrower will have to pay back the interest (with interest), so this is really a NegAM scheme. For homeowners with negative equity, this will just put them further underwater.

This scheme is intended for homeowners who have suffered an "income shock" during the recession, unlike the U.S. plan that includes homeowners who used excessive leverage during the bubble.

by Calculated Risk on 2/19/2009 09:47:00 PM

First a cartoon from reader Evan.

I think this captures the sentiment of many renters and prudent homeowners.

I have no problem with the first and third parts of the Obama housing plan, but I think part 2 does reward some borrowers who used excessive leverage, and the banks that irresponsibly loaned them money. It would have been nice to exclude all borrowers with stated income / Alt-A loans, and any loan were the original fully amortized payment was greater than 38% or so of gross income. Those buyers were speculating on appreciation.

On the markets ...

The DOW closed at 7,465.95; a six year low. The low in 2002 was 7286.27, if the market breaks that level, the DOW will be back to 1997 levels. That would mean more than a lost decade for DOW investors (not counting dividends).

As an aside, Greenspan made the "irrational exuberance" comment in a speech on December 5, 1996 with the DOW at 6,437. Not a prediction, but we are getting close to that level over 12 years later!

The S&P 500 is still a little above the low of last year, as is shown on the following graph:

Click on graph for updated image in new window.

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". (if smaller graph isn't updated, click for larger graph)

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

And for all those who think this is all doom and gloom, Paul Kasriel wrote today: SIVs Got Us into Trouble – SIVs to the Rescue?

[W]e believe that the nadir of this recession is occurring now. Moreover, we believe that the combination of the $1 trillion TALF program and the $787 billion fiscal stimulus program, assuming it is financed by the banking system and the Fed, will have a salutary effect on aggregate real activity, perhaps inducing an economic recovery by the fourth quarter of this year.

By "nadir", Kasriel doesn't mean the lowest point for GDP, but that he believes the worst percentage decline in GDP is happening this quarter - and he is forecasting a 6.4% annualized decline in real GDP for Q1.