by Calculated Risk on 6/10/2008 09:13:00 AM

From the WSJ: Oil Prices Push Trade Gap Wider

The U.S. deficit in international trade of goods and services increased by 7.8% to $60.90 billion from March's revised $56.49 billion, the Commerce Department said Tuesday.
...
The U.S. bill for crude oil imports in April increased. It totaled $29.34 billion, up from $25.03 billion in March. The average price per barrel increased by $6.96 to a record $96.81 from $89.85.
...
The U.S. paid $38.19 billion for all types of energy-related imports, up from $33.15 billion in March.
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The U.S. trade deficit with China expanded to $20.24 billion from March's $16.08 billion.

The average price per barrel of oil was $96.81 in April - and the current world spot price is around $136 per barrel - so oil import prices will increase over the next few months.

The following graph shows import prices vs. U.S. spot prices (shifted one month into the future).

Click on graph for larger image in new window.

Since import prices lag spot prices by about one month, import prices will probably jump to around $102 per barrel for May - and $116 per barrel in June (based on May spot prices).

Any progress on reducing the trade deficit, due to the weak dollar, is now being offset by rising oil prices.

by Calculated Risk on 6/10/2008 12:38:00 AM

Click on graph for larger image in ewn window.

The Shanghai Composite Index is off over 5% tonight to 3140.

From MarketWatch: China, Hong Kong drop in reaction to new bank rule

Asian markets traded broadly lower Tuesday, led down by Shanghai and Hong Kong, where banking and property shares fronted declines as investors fretted about the impact of the latest round of anti-inflationary measures announced over the weekend.

And also from MarketWatch: China takes aim at inflation, speculative fund flows

The People's Bank of China said over the weekend that it would require banks must put aside 17% of deposits as reserves, effective June 15. A second hike to 17.5% will go into effect June 25, for a total rise of 100 basis points above the current requirement of 16.5%.

by Calculated Risk on 6/09/2008 10:29:00 PM

From the WSJ: Lehman's Property Bets Are Coming Back to Bite

Lehman joined with Tishman Speyer Properties last year to pay $22 billion for real-estate investment trust Archstone-Smith ... And ... it teamed up with Irvine, Calif.-based land developer SunCal Cos. to develop and sell thousands of house lots to builders across Southern California. ...

In both cases, Lehman dove into already heated markets, overpaid for the properties and, the firm says, has taken big markdowns. ...

In the deal for Archstone, which owns roughly 80,000 apartments ... Lehman put up $250 million in equity and led a group of banks that brought an added $4.6 billion in so-called bridge equity that the banks planned to sell to other investors. The banks have had trouble selling the equity as real-estate values dropped about 20% since then.

This deal was announced in May 2007, but wasn't closed until October - after the credit crisis started. I bet Lehman and their partners wish they had paid the $1.5 billion break up fee!

The Archstone-Smith acquisition was a negative cash flow deal from the start. To cover the interest on the $16 billion in debt financing, there was a $500 million interest reserve created. The WSJ notes:

As of the end of 2007, three months after the purchase closed and the latest numbers available, Archstone had already tapped $72 million of the reserve.

This suggests that Archstone is burning through the interest reserve very quickly. Not mentioned in the WSJ article was that Fannie Mae and Freddie Mac acquired a total of $9 billion of the $16 billion in debt. Something to remember if this deal really goes south.

Lehman's other troubled deal was with SunCal to sell house lots to builders in California, including in the so-called Inland Empire east of Los Angeles, where land values have plummeted as much as 60% in some areas.

Land values have probably fallen closer to 80% in parts of the Inland Empire. I've heard of bids right now at 20 cents on the dollar for some of these properties.

by Calculated Risk on 6/09/2008 09:22:00 PM

From Bloomberg: Bernanke Says Risk of `Substantial Downturn' Receded

Federal Reserve Chairman Ben S. Bernanke said the economic outlook has improved from a month ago, and central bankers will ``strongly resist'' any waning of public confidence in stable prices.

``The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said today in remarks to a Boston Fed conference in Massachusetts. ``The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.''

Here is Bernanke's speech: Outstanding Issues in the Analysis of Inflation

by Calculated Risk on 6/09/2008 03:08:00 PM

I've read a number of articles and blogs on the Pending Home Sales Index (PHSI) numbers this morning. I believe most of the analysis is missing the two key points.

Let's start with the usual caveat that this is just one month of data.

As noted earlier, the NAR Pending Home sales index (PHSI) showed a 6.3% increase in April as compared to March.

These pending sales (for April) are supposed to predict actual sales about 45 days later (about half for May, half for June). The May existing home sales report will be released June 26th, and sales for June will be released on July 24th. So we have to wait to see if there is a small increase in actual sales.

The following graph from the WSJ (with pending home sales advanced one month) shows that the existing home sales do track the PHSI pretty well.

Source: WSJ Real Time Economics

This is a typical (via the WSJ):

Pending home sales [were] well above expectations and the biggest monthly increase since December 2001. This index leads existing home sales by one to two months, and as such the April figure is another sign that existing home sales are leveling out. – J.P. Morgan Chase

Yes, the PHSI does suggest existing home sales will be higher in May and June than in April, but it doesn't mean sales are "leveling out".

Here is another view from CNBC: Housing Market Is Showing Signs of a Turnaround

We are seeing an acceleration in foreclosures. As foreclosures have taken off, they put pressure on prices. Banks have become more aggressive with sales on homes they have foreclosed," said Christopher Low, chief economist at FTN Financial in New York.

Low said the pickup in pending home sales could be a sign that the housing market could soon be stabilizing.

"Sales will stabilize in the next few months and that will set the stage for inventories turning to normal sometime next year and maybe even for prices to appreciate a bit," he said. "For now, prices will continue to fall. There is still an inventory overhang that will take 18 months to work through. The end game of the housing bust is near."

The first part of Low's analysis is correct. There has been a surge in REO (lender Real Estate Owned) sales, and the banks have become much more aggressive on pricing, especially at the low end. The increase in REO sales probably more than accounts for the increase in activity in the PHSI.

But what does that mean for prices? The most recent data from Case-Shiller was for March (and Q1 2008 for the National Index). This surge in REO sales suggests that when the Case-Shiller prices are released for May and June, well, look out below for prices in these low end neighborhoods. That is what "aggressive" pricing means!

But what about the market "leveling out" or "stabilizing"? This depends on how you view sales. If we looked at existing home sales ex-REOs, we'd see that sales are still collapsing. And based on the recent MBA data, there is a flood of foreclosures coming. So maybe it will appear that sales are leveling out as the market is taken over by foreclosure sales, but that just puts more pressure on prices.

So the two key points from the Pending Home sales report are that prices are probably falling quickly, especially in the low end areas, and that sales are being propped up as REO sales start to dominate that existing home market. Neither point is good news for housing.

by Calculated Risk on 6/09/2008 01:58:00 PM

There are a number of stories this morning on the LandSource bankruptcy (hat tip El Pato, Ed, Bob, Brian and many others). It was pretty clear in April that LandSource would file bankruptcy, it was just a matter of when.

LandSource owns 15,000 acres of land in the Santa Clarita Valley approximately 30 miles north of downtown Los Angeles. (top of map)


View Larger Map

An interesting part of the story is that the California Public Employees' Retirement System (CalPers) invested at the top, and might lose most of their investment. They really should have known better in 2007!

From the WSJ: LandSource Chapter 11 May Hit Calpers

The bankruptcy filing in federal court in Delaware means Calpers could lose much of its $970 million investment in the venture, which it made through an investment vehicle in February 2007, only months before land values plunged.

Calpers has approximately $255 billion in assets, so this loss - almost $1 billion - is actually pretty minor.

Another interesting point: this is the kind of area that is being hit hard with gasoline prices over $4 per gallon. Imagine working in downtown LA with a 60 mile round trip commute each day. At 15 miles per gallon that is over $16 per day - a significant amount for lower paid workers. To say nothing about spending 1 1/2 to 2 hours per day stuck in LA traffic.

by Calculated Risk on 6/09/2008 10:42:00 AM

From the WSJ: Home Gauge Climbs Amid Bargains

The National Association of Realtors' index for pending sales of previously owned homes rose 6.3% to 88.2 from March, the industry group said Monday.
...
Lawrence Yun, NAR chief economist, said pending sales contracts picked up in areas where housing prices have dropped significantly.

"Bargain hunters have entered the market en masse, especially in areas that have experienced double-digit price declines, but it's unclear if they are investors or owner-occupants," he said.

DataQuick recently reported a similar pickup in low end areas of California - mostly from the sale of REOs (Lender Real Estate Owned):

[T]he swell in transactions mainly reflects more sales of homes under $500,000 in inland areas where depreciation and foreclosures have been greatest ...

Post-foreclosure homes continued to play a major role in the Southland market. Of all the homes that resold in April, 37.5 percent had been foreclosed on at some point in the prior 12 months, compared with a revised 35.8 percent in March and 4.6 percent a year ago. Across the six-county area, "foreclosure resales" ranged from 26.9 percent of resale activity in Orange County to 52.7 percent in Riverside County.

This minor increase in pending sales is due to the flood of foreclosures.

by Calculated Risk on 6/09/2008 09:43:00 AM

From Bloomberg: Citigroup, Merrill, UBS Face Further Writedowns, Whitney Says

Citigroup Inc., Merrill Lynch & Co. and UBS AG may post further writedowns of $10 billion on their debt holdings after the two biggest bond insurers were stripped of their AAA rankings, according to Oppenheimer & Co. analyst Meredith Whitney.

More visits to the confessional coming ...

by Calculated Risk on 6/09/2008 09:04:00 AM

Last week I mentioned that 15% of the homes in Temecula, CA were REO or in foreclosure. Temecula is a fairly isolated town (see map), and the city is very dependent on construction and/or long commutes. The combination of the housing bust, plus high oil prices, is hitting exurban towns like Temecula very hard.

From Bloomberg: Wealth Evaporates as Gas Prices Clobber McMansions, SUV Makers

``At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activity becomes uneconomical,'' says Mark Zandi, chief economist at Moody's Economy.com ...

The lifestyle of the exurban commuter may be one casualty.

Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.

``It was drive until you qualify'' for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. ``You can't do that anymore. Your cost of transportation will spike too much.''

Of course rural areas are getting hit hard too, from the NY Times: Rural U.S. Takes Worst Hit as Gas Tops $4 Average

[T]he pain [of $4 gasoline] is not being felt uniformly. Across broad swaths of the South, Southwest and the upper Great Plains, the combination of low incomes, high gas prices and heavy dependence on pickup trucks and vans is putting an even tighter squeeze on family budgets.
...
Here in the Mississippi Delta, some farm workers are borrowing money from their bosses so they can fill their tanks and get to work. Some are switching jobs for shorter commutes.

Any lifestyle dependent on low gas prices - and low gas mileage vehicles - is becoming uneconomical. For those that own a home in a remote location, work in construction, and drive a low gas mileage vehicle, this must feel like a depression.

by Calculated Risk on 6/09/2008 08:49:00 AM

"I am very disappointed in this quarter's results."
Chairman and Chief Executive Richard Fuld Jr.

From the WSJ: Lehman Plans Higher Capital Raising, Expects to Post $2.8 Billion Net Loss

Lehman Brothers Holdings Inc. unveiled plans Monday to raise $6 billion of fresh capital from an array of investors ...

The move comes as the firm said it expects a second-quarter loss of about $2.8 billion.

Lehman makes another visit to the confessional.