by Calculated Risk on 11/02/2007 10:44:00 AM

From The Economist: Chrysler: That shrinking feeling

WHEN private equity and America’s ailing car industry meet there is only one likely outcome. On Thursday November 1st, just days after hourly workers narrowly ratified a new contract, Chrysler announced plans to drop four slow-selling models, slash overall production and trim perhaps some 12,000 hourly and salaried jobs. The job cuts amount to as much as 15% of the carmaker's total workforce.
...
Whether the latest round of cuts is enough to stabilise Chrysler is uncertain. Not only is its market contracting but Chrysler has also failed to score any significant hits with its recent new products other than with a four-door version of the small Wrangler SUV. If anything the carmaker will have to eliminate even more products, if sales don’t pick up. That, in turn could lead to still more job cuts in the future. And so the cycle is set to continue.

Chrysler's future is clearly uncertain, but not mentioned in the article are the $10 Billion in pier loans (bridge loans that couldn't be sold) sitting on the balance sheets of Goldman Sachs, Bear Stearns, Morgan Stanley and Citigroup. If Chrysler defaults, the pain will be significant.

by Anonymous on 11/02/2007 09:44:00 AM

It has been a while since we measured distress level in the credit markets by a shallow survey of goofiness in the news. Since we have already noted solemnly the important news of the day--jobs report didn't smell bad--let us descend to news of the weird:

Mark to model? How about mark to flea market? "Prepare for the credit drama sequel" by stocking up on beaver pelts and glass beads.

Put on your blast goggles before you read this blinding flash of obvious: "Jump in foreclosure could hurt prices." Also, "contagion" is back.

But not to worry, it's not that contagious:

The soaring price of oil has yet to have a crippling effect on the economy, and inflation and unemployment figures remain in check, suggesting the economy is relatively healthy, despite the disastrous effects of the subprime collapse in the housing and lending arenas.

Bad bets on subprime mortgages have placed the financial sector in its current quagmire, not a lack of liquidity, and in the midst of sorting out the fallout from those decisions; it does not appear that Fed rate cuts are having the desired effect of propping up the flagging industry.

I don't know; what that means either, but fallout from the quagmire of the bad bets doesn't sound good.

by Calculated Risk on 11/02/2007 08:33:00 AM

From MarketWatch: October job growth strongest since May

Shaking off fears about weakness in housing and credit, the U.S. economy created 166,000 net jobs in October, the best job growth since May, the Labor Department reported Friday.
...
However, a separate survey of 60,000 households showed a loss of 250,000 workers, the third decline in the past four months. Economists say the payroll survey is more accurate, while acknowledging that it may not work as well when the economy is at a turning point.

Here is the BLS report. The unemployment rate was steady at 4.7%.

Click on graph for larger image.

Residential construction employment declined 21,500 in October, and including downward revisions to previous months, is down 221.9 thousand, or about 6.5%, from the peak in March 2006. (compare to housing starts off 30%+).

Note the scale doesn't start from zero: this is to better show the change in employment.

The initial benchmark revision shows the loss of an additional 8,000 construction jobs, but the initial report doesn't breakout residential construction.

Overall this is a stronger than expected report.

by Calculated Risk on 11/01/2007 10:00:00 PM

Based on the Q3 GDP data from the BEA, my advance estimate for Mortgage Equity Withdrawal (MEW) is approximately $520 Billion (SAAR) or 5.1% of Disposable Personal Income (DPI). This would be slightly higher than the Q2 estimates, from the Fed's Dr. Kennedy, of $494.4 Billion (SAAR), or 4.9% of Disposable Personal Income (DPI).

The actual Q3 data for MEW is released after the Flow of Funds report is available from the Fed (scheduled for December 6th for Q3).

Click on graph for larger image.

This graph compares my advance MEW estimate (as a percent of DPI) with the MEW estimate from Dr. James Kennedy at the Federal Reserve. The correlation is pretty high (0.90, R2 = 0.81) but there are differences quarter to quarter. This does suggest that MEW was at about the same level in Q3 as Q2. We will have to wait until September to know for sure.

MEW will probably decline precipitously in the Q4 2007, with a combination of tighter lending standards and falling house prices. The impact of less equity extraction on consumer spending is still being debated, but I believe a slowdown in consumption expenditures is likely.

Here are the Seasonally Adjusted Annual Rate (SAAR) Kennedy-Greenspan estimates of home equity extraction through Q2 2007, provided by James Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

For Q2 2007, Dr. Kennedy calculated Net Equity Extraction as $494.4 Billion (SAAR), or 4.9% of Disposable Personal Income (DPI).

This graph shows the MEW results, both in billions of dollars quarterly (not annual rate), and as a percent of personal disposable income.

by Calculated Risk on 11/01/2007 03:59:00 PM

Steely Dan "Black Friday" "When Black Friday comes I'll stand down by the door And catch the grey men when they Dive from the fourteenth floor When Black Friday comes I'll collect everything I'm owed And before my friends find out I'll be on the road"

by Calculated Risk on 11/01/2007 11:53:00 AM

Here is the NY AG press release: NY ATTORNEY GENERAL SUES FIRST AMERICAN AND ITS SUBSIDIARY FOR CONSPIRING WITH WASHINGTON MUTUAL TO INFLATE REAL ESTATE APPRAISALS (hat tips Londonernow, REBear)

Attorney General Andrew M. Cuomo today announced that he is suing one of the nation’s largest real estate appraisal management companies and its parent corporation for colluding with the largest savings and loan in the country to inflate the appraisal values of homes.

In a scheme detailed in numerous e-mails, eAppraiseIT (“EA”), a subsidiary of First American Corporation (NYSE: FAF), caved to pressure from Washington Mutual (“WaMu”) (NYSE: WM) to use a list of preferred “Proven Appraisers” who provided inflated appraisals on homes. The e-mails also show that executives at EA knew their behavior was illegal, but intentionally broke the law to secure future business with WaMu.

“The independence of the appraiser is essential to maintaining the integrity of the mortgage industry. First American and eAppraiseIT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike,” said Attorney General Cuomo. “The blatant actions of First American and eAppraiseIT have contributed to the growing foreclosure crisis and turmoil in the housing market. By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion.”

As First American acknowledged in its 2006 annual report, appraisal fraud can damage the entire housing market, including consumers and investors alike. Consumers are harmed because they are misled as to the value of their homes, increasing the risk of foreclosure and hindering their ability to make sound economic decisions. Investors are hurt by such fraud because it skews the value and risk of loans that are sold in financial markets.

In April 2006, EA began providing appraisal services for WaMu, which became EA’s biggest client. Within weeks, WaMu began complaining to EA that its appraisals were not high enough. WaMu pressured EA to employ exclusively a new panel of appraisers that WaMu hand-selected as “Proven Appraisers.” This set of appraisers was chosen by WaMu specifically because they inflated property appraisals. WaMu profited from these higher appraisals because they could close more home loans, at greater values. Over the course of their relationship, between April 2006 and October 2007, EA provided approximately 262,000 appraisals for WaMu.

Attorney General Cuomo’s investigation uncovered a series of e-mails between executives at EA, First American, and WaMu that show EA officials were willingly violating state and federal appraisal independence regulations to comply with WaMu’s demands:

On February 22, 2007, in response to a description of the WaMu “Proven Appraiser” program as one in which “we will now assign all Wamu’s work to Wamu’s ‘Proven Appraisers’… [and] Performance ratings to retain position as a Wamu Proven Appraiser will be based on how many come in on value,” eAppraiseIT’s president told senior executives at First American: “we have agreed to roll over and just do it...”

On April 4, 2007, eAppraiseIT’s executive vice president stated in an e-mail to First American: “we as an AMC [Appraisal Management Company] need to retain our independence from the lender or it will look like collusion… eAppraiseIT is clearly being directed who to select. The reasoning… is bogus for many reasons including the most obvious – the proven appraisers bring in the values.”

On April 17, 2007, eAppraiseIT’s president wrote an e-mail to First American explaining why its conduct was illegal: “We view this as a violation of the OCC, OTS, FDIC and USPAP influencing regulation.”

E-mail evidence also shows that WaMu pressured EA to inflate appraisals as a condition for doing future business together:

On September 27, 2006, First American’s vice chairman reported that a WaMu executive told him: “if the appraisal issues are resolved and things are working well he would welcome conversations about expanding our relationship…”

by Calculated Risk on 11/01/2007 11:14:00 AM

From Reuters: GMAC posts $1.6 bln third-quarter loss

GMAC, ... on Thursday reported a $1.6 billion third-quarter loss, hurt by mortgage losses at its home lending unit amid difficulties in the housing and credit markets.

by Calculated Risk on 10/31/2007 04:15:00 PM

Each quarter I've been estimating PCE growth based on the Two Month method. Once again, this method has provided a very close estimate for the actual PCE growth.

Some background: The BEA releases Personal Consumption Expenditures monthly (as part of the Personal Income and Outlays report) and quarterly, as part of the GDP report (also released separately quarterly).

You can use the monthly series to exactly calculate the quarterly change in PCE. The quarterly change is not calculated as the change from the last month of one quarter to the last month of the next (several people have asked me about this). Instead, you have to average all three months of a quarter, and then take the change from the average of the three months of the preceding quarter.

So, for Q3, you would average PCE for July, August and September, then divide by the average for April, May and June. Of course you need to take this to the fourth power (for the annual rate) and subtract one.

The September data isn't released until after the advance Q3 GDP report. But I used the change from April to July, and the change from May to August (the Two Month Estimate) to approximate PCE growth for Q3.

Click on graph for larger image.

This graph shows the two month estimate versus the actual change in real PCE. The correlation is high (0.92).

The two month estimate suggested real PCE growth in Q3 would be about 3.0%. The actual result (in the Advance GDP report) was also 3.0%.

Since the two month estimate was very accurate, this suggests that there was little slowdown in consumer spending in September.

As an aside, the Fed now has the results (not public yet) of the October Senior Loan Officer survey. Based on the Fed statement today, I bet the numbers are ugly.

by Calculated Risk on 10/31/2007 02:13:00 PM

Fed Statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

by Calculated Risk on 10/31/2007 12:59:00 PM

From Reuters: Moody's may cut D.R. Horton, Ryland, into junk

Moody's ... said it may cut its ratings on D.R. Horton Inc and Ryland Group Inc into junk territory ...

The builders have struggled to generate free cash flow, "in part because of their limited success to date in reducing actual inventory, in part because of continuing high cancellation rates, and in part because of the fiercely competitive environment the two companies face in most of their markets," Moody's said in a statement.

"Exacerbating the situation, especially in the case of Horton, is the elevated level of (speculative) inventory," Moody's said.