by Calculated Risk on 4/08/2008 10:02:00 PM

From Credit Suisse research note today on retail:

"Despite [already] low expectations, we believe March results will still be surprisingly weak, and another reminder of just how bad things are in retail."

March was terrible. It's called a recession.

by Calculated Risk on 4/08/2008 08:08:00 PM

From Financial Week: Citi may write down another $17 billion for Q1, research firm says

CreditSights estimated that Citigroup will likely report the biggest write-downs for Q1. The write-downs could range from $15.2 billion to $16.8 billion, CreditSights reckons, depending on whether valuation reserves related to financial guarantors are included in the tally....

CreditSights estimates that write-downs at Bank of America could range from $8.8 billion to $9.9 billion. At J.P. Morgan, the hit could be around $7.5 billion.

And from the WSJ: Citi Nears Sale of Leveraged Loans

Citigroup Inc. ... is close to a deal to unload about $12 billion of leveraged loans and bonds to a group of private-equity firms ...

Citigroup originally issued the debt to help finance the leveraged-buyout boom.
...
Under the planned deal, Citigroup will sell the loans and bonds to buyout firms including Apollo Management, TPG and Blackstone Group, said the people briefed on the deal. The firms are expected to pay an average price of slightly less than 90 cents on the dollar.

Just more good news.

by Calculated Risk on 4/08/2008 08:01:00 PM

Via Reuters: S&P release on four U.S. mortgage insurers (hat tip Steve)

On house prices:

[W]e believe median home prices will decline 20% from the peak in 2006. By contrast, the forecasts we used in November 2007 assumed a decline of 11%.

On unemployment:

When we resolved the CreditWatch status of several mortgage insurer ratings on Nov. 21, 2007, we stated that if unemployment rose above 6%, incurred losses for all mortgage insurers would be significantly higher than our expectations. Our most recent macroeconomic forecast shows unemployment reaching 5.8% in 2009, and there is considerable uncertainty in the job markets.

And the four insurers:

Standard & Poor's Ratings Services said today that it lowered its counterparty credit rating on MGIC Investment Corp. to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on the mortgage insurance subsidiaries (MGIC) to 'A' from 'AA-'. The ratings were removed from CreditWatch, where they were placed on Jan. 24, 2008, with negative implications. The outlook is negative.

Standard & Poor's also said that it lowered its counterparty credit rating on Old Republic International Corp. (ORI.N: Quote, Profile, Research) (ORI) to 'A' rom 'A+' and its counterparty credit and financial strength ratings on ORI's core subsidiaries to 'AA-' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 25, 2008, with negative implications. The outlook is negative.

At the same time, Standard & Poor's lowered its counterparty credit rating on PMI Group Inc. (PMI.N: Quote, Profile, Research) (PMI Group) to 'BBB+' from 'A' and its counterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. (PMI) and Europe (PMI Europe) to 'A+' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 13, 2008, with negative implications. The outlook is negative.

In addition, Standard & Poor's lowered its counterparty credit rating on Radian Group Inc. (RDN.N: Quote, Profile, Research) (Radian Group) to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries (Radian MI) to 'A' from 'AA-'. These ratings remain on CreditWatch, where they were placed on Feb. 13, 2008, with negative implications.

by Calculated Risk on 4/08/2008 05:21:00 PM

Press Release: UPS Lowers 1Q 2008 Guidance

Deteriorating U.S. Economic Conditions Restrain Domestic Volume

ATLANTA--(BUSINESS WIRE)--UPS (NYSE: UPS) today announced it had lowered its first quarter earnings expectations to $0.86 or $0.87 per diluted share from a previously anticipated range of $0.94-to-0.98.

At UPS’s investor conference on March 12, Chief Financial Officer Kurt Kuehn stated that UPS’s earnings guidance for the quarter would be difficult to achieve if lower volume trends experienced in February continued through March. The U.S. economy has continued to weaken, causing a reduction in domestic package volume and a shift away from premium products. Significantly increased fuel costs in the quarter also contributed to the lower-than-expected results.

Recession.

by Calculated Risk on 4/08/2008 05:09:00 PM

Click image for video or visit Bloomberg video. Volcker Says Fed's Bear Loan Reaches Edge of Legal Power April 8 (Bloomberg) -- Former U.S. Federal Reserve Chairman Paul Volcker speaks in New York about practices leading to the current financial market crisis, the role of the Federal Reserve in preventing and dealing with such crises and the need for changes in market regulation. Volcker speaks to the Economic Club of New York. (Source: Bloomberg)

by Calculated Risk on 4/08/2008 03:43:00 PM

Note: Hopefully Bloomberg will post a video later today.

From Bloomberg: Volcker Says Fed's Bear Loan Stretches Legal Power

``The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,'' Volcker said in a speech to the Economic Club of New York.
...
Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed ``excesses of subprime mortgages'' to spread into ``the mother of all crises.'' The Fed's Bear Stearns loan was unusual, he said.

``What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return,'' he said.
...
Volcker said the modern financial system has ``failed the test'' of the marketplace. When asked whether he predicts a ``dollar crisis,'' he said, ``you don't have to predict it, you're in it.''

by Calculated Risk on 4/08/2008 02:12:00 PM

From the WSJ: Fed Faced Difficult Decision, March Meeting Minutes Show

According to the minutes of last month's Federal Open Market Committee meeting released Tuesday, members said prospects for both economic activity and near-term inflation had deteriorated. ...

Some members ... thought it likely that U.S. economic activity would contract in the first half of 2008.

And some voiced concern that market stresses could lead to a "more severe and protracted downturn in activity" than currently anticipated, said the minutes ...

Here are the Fed minutes.

by Calculated Risk on 4/08/2008 12:45:00 PM

Click on graph for larger image.

This graph shows the loaded containers per month - inbound and outbound - for the ports of Los Angeles and Long Beach combined.

Imports have been surging for years (not exactly new news), but have slowed recently. For the last two month, imports averaged a decrease of 8.8% year-over-year.

Recently exports have picked up (because of the weak dollar), and for the last two months imports have increased an average of 24.3% year-over-year.

Although this is just two Los Angeles area ports, this fits with the declining trade deficit (see 2nd graph). For export businesses in the U.S. these are good times - and a big part of the reason the U.S. has seen less manufacturing employment weakness than in earlier recessions.

Of course this is having a negative impact on Asian exporting companies.

Here is a graph of the trade deficit (January is the most recent data).

The red line is the trade deficit excluding petroleum products. (Blue is the total deficit, and black is the petroleum deficit).

The ex-petroleum deficit is falling fairly rapidly, almost entirely because of weak imports (export growth is still strong).

And from the AP: Idle cars signal a downturn

This brings up several important topics: What will happen in China as their export economy slows? Just look at the dramatic decline in the Shanghai index. What will happen to petroleum prices as the global economy slows? Will the U.S. import inflation from China and Asia as they raise prices? And I'm sure there are more issues too.

by Calculated Risk on 4/08/2008 11:37:00 AM

From Bloomberg: IMF Says Financial Losses May Swell to $945 Billion

Falling U.S. house prices and rising delinquencies may lead to $565 billion in mortgage-market losses, the IMF said in its annual Global Financial Stability report, released today in Washington. Total losses, including the securities tied to commercial real estate and loans to consumers and companies, may reach $945 billion, the fund said.

The forecast signals the worst of the credit crunch may be yet to come ...

``The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,'' the report said. The fund warned of the risk of ``a serious funding and confidence crisis that threatens to continue for a significant period.''

The IMF has been playing catch up.

Roubini's forecast, in his recent testimony to Congress, were losses close to $1 trillion: The Current U.S. Recession and the Risks of a Systemic Financial Crisis

And Goldman Sachs is now projecting $1.2 trillion in losses:

Residential mortgage losses will represent about half the damage, with another 15%-20% coming from commercial mortgages. Credit card loans, auto loans, commercial and industrial lending, and nonfinancial corporate bonds make up the remainder.
...
The losses to leveraged US financial institutions make up only a part of total credit losses, which we expect to be $1.2 trillion.

And from the WSJ last December:

Back in the U.S., the Calculated Risk blog sidestepped the colorful language and went straight for the big number: “The losses for the lenders and investors might well be over $1 trillion.”

by Calculated Risk on 4/08/2008 10:23:00 AM

From the National Association of Realtors: Existing-Home Sales to Stablize Before Upturn in Second Half of 2008

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in February, slipped 1.9 percent to 84.6 from an upwardly revised reading of 86.2 in January, and was 21.4 percent lower than the February 2007 index of 107.6.

Contracts signed in February will result in closings in March and April (average time from signing the contract to closing is about 45 days). But if March is 21.4 percent below last year, then sales will be about 4.8 million (SAAR) in March 2008.

The press release includes another overly optimistic forecast from NAR chief economist Lawrence Yun:

Existing-home sales are likely to rise from an annual pace of 4.9 million in the first quarter to 5.9 million in the fourth quarter. With relatively weak activity in the first part of the year, existing-home sales for all of 2008 are forecast at 5.39 million, increasing 6.6 percent to 5.74 million in 2009.

Stablize? Hmmm ...