by Calculated Risk on 11/03/2008 05:21:00 PM

A few housekeeping notes: there is a link to related articles from Wikinvest at the bottom of most posts. Let me know what you think.

I've also enabled the full RSS feed again (I'm sure the scrapers will return). This may be temporary - sorry.

And for California readers, I've tried to disable some of the political ads, but they keep coming back ... oh well, at least the election is tomorrow and the ads should end.

Best to all.

by Calculated Risk on 11/03/2008 03:48:00 PM

We've been tracking mortgage equity withdrawal (MEW) to estimate when the "Home ATM" has closed. Fed economist Dr. James Kennedy's estimate of MEW is not available until after the Fed's Flow of Funds report is released each quarter. Note: the Q3 Flow of Funds report is scheduled to be released on December 11, 2008.

However it is possible to estimate MEW from supplemental data released with the GDP report. Based on the Q3 GDP data from the BEA, my advance estimate for Mortgage Equity Withdrawal (MEW) is 1.0% of Disposable Personal Income (DPI). This would be slightly higher than the Q2 estimates, from the Fed's Dr. Kennedy, of 0.4% of Disposable Personal Income (DPI).

Click on graph for larger image in new window.

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, but there are differences quarter to quarter. This analysis does suggest that MEW was at about the same level in Q3 2008, as in Q2 (close to zero). We will have to wait until December to know for sure.

MEW has declined precipitously since early 2006, 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 portion of the slowdown in personal consumption expenditures can be attributed to less MEW.

by Calculated Risk on 11/03/2008 02:34:00 PM

Note: some readers are being swamped with political ads - especially in California. I'm trying to block the ads ... please accept my apology.

From the Fed: The October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices

In the current survey, large net fractions of domestic institutions reported having continued to tighten their lending standards and terms on all major loan categories over the previous three months. The net percentages of respondents that reported tightening standards increased relative to the July survey for both C&I and commercial real estate loans, as did the fractions reporting tightening for all price and nonprice terms on C&I loans. Considerable net fractions of foreign institutions also tightened credit standards and terms on loans to businesses over the past three months. Large fractions of domestic banks reported tightening standards on loans to households over the same period. Demand for loans from both businesses and households at domestic institutions continued to weaken, on net, over the past three months.

Click on graph for larger image in new window.

Of particular interest is the increase in tighter lending standards for Commercial Real Estate (CRE) loans. This graph compares investment in non-residential structure with the Fed's loan survey results for lending standards (inverted) and CRE loan demand.

Note that any reading below zero for loan demand means less demand than the previous quarter. This is strong evidence of an imminent slump in CRE investment.

More charts here for residential mortgage, consumer loans and C&I.

by Calculated Risk on 11/03/2008 01:51:00 PM

From MarketWatch: GM U.S. October light vehicle sales fall 45.1%

General Motors said Monday that October U.S. light vehicle sales fell 45.1% to 168,719 units from 307,408 a year ago.

The WSJ in a headline quoted GM executive Mark LaNeve as saying October was "probably worst industry sales month in the post-WWII era."

by Calculated Risk on 11/03/2008 12:26:00 PM

From Bloomberg: Ford Motor Says October U.S. Auto Sales Declined 30 Percent (hat tip Justin)

Ford Motor Co. ... said its U.S. sales fell 30 percent in October, the 23rd decline in the past 24 months.

The total dropped to 132,838 cars and trucks, from 190,195 a year earlier ...

Meanwhile, also from Bloomberg: GM, Ford, Chrysler Shut Out of Auto-Bond Market for Fifth Month

Ford Motor Co., GMAC LLC and Chrysler LLC were shut out of the market for bonds backed by auto loans for the fifth straight month ... Sales of auto bonds slumped to $500 million last month, compared with $9 billion in October 2007, according to Merrill Lynch & Co. data. ...

The credit market seizure is forcing automakers to cut back on loans to dealers and customers, contributing to a slowdown that may shrink U.S. auto sales this year to the lowest level since 1993.

And Ford is probably in the best shape of the U.S. automakers.

by Calculated Risk on 11/03/2008 11:12:00 AM

LIBOR declined again today, from Bloomberg:

The London interbank offered rate, or Libor, that banks charge one another for three-month loans in U.S. currency slid 17 basis points to 2.86 percent today, a 16th day of declines, data from the British Bankers' Association showed. It hasn't been as low since the failure of Lehman Brothers Holdings Inc. on Sept. 15.

The rate peaked at 4.81875% on Oct. 10.

The yield on 3 month treasuries declined slightly to 0.44% from 0.42%. (unchanged)

Usually the 3 month trades below the target Fed Funds rate by around 25 bps, so this is too low with the Fed funds rate at 1.0%. However, the effective Fed Funds rate is even lower (0.30% yesterday), so a 3 month yield of 0.44% is in the right range. I'd like to see the effective funds rate closer to the target rate.

The TED spread: 2.39, down from 2.60 (Better) This is still too high, but significantly below the peak of 4.63 on Oct 10th.

I'd like to see the spread move back down to 1.0 or lower - at least below 2.0.

The two year swap spread from Bloomberg: 125.30 up slightly (slightly worse). This spread peaked at near 165 in early October, so there has been significant progress, but the spread seems stuck now. I'd like to see this under 100.

Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales. The Treasury announced another $30 billion for the Fed today ... no progress.

The A2P2 spread is down to 4.58 from a record 4.72. Slightly better.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.97% on Friday!) - and increasing the spread between AA and A2/P2 CP. So this indicator is a little misleading right now. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

The LIBOR is down and the TED spread is off again, so there is a little more progress.

by Calculated Risk on 11/03/2008 10:16:00 AM

From MarketWatch: U.S. ISM factory index plunges again in October

The Institute for Supply Management reported Monday [that the] ISM index fell to 38.9% in October from 43.5% in September. This is the lowest level since September 1982.

Ouch.

by Calculated Risk on 11/03/2008 10:00:00 AM

The Census Bureau reported this morning that private non-residential construction increased slightly in September from August, but spending is still below the peak in June 2008. I expect that non-residential investment will decline sharply over the next year or two.

From the Census Bureau: September 2008 Construction at $1,060.1 Billion Annual Rate

Spending on private construction was at a seasonally adjusted annual rate of $751.7 billion, 0.1 percent above the revised August estimate of $751.1 billion. Residential construction was at a seasonally adjusted annual rate of $336.5 billion in September, 1.3 percent below the revised August estimate of $340.8 billion.

Click on graph for larger image in new window.

The graph shows private residential and nonresidential construction spending since 1993.

Nonresidential spending had been strong as builders completed projects, but there is substantial evidence of a looming slowdown - less lending for new projects, less work for architects - and it appears the expected slowdown in non-residential spending has arrived.


The second graph shows the year-over-year change for private residential and non-residential construction spending.

The YoY change in non-residential spending is starting to slow down and will probably turn negative later this year or early in 2009.

It now looks like investment in non-residential structures will negatively impact GDP in Q4. This had been one of the few bright spots for the economy.

by Calculated Risk on 11/03/2008 08:56:00 AM

We discussed this yesterday, and here is the announcement from Circuit City: Circuit City Stores, Inc. Provides Update on Liquidity and Announces Store Closing Plan

Due in part to its deteriorating liquidity position and the continued weak macroeconomic environment, the company has decided to take certain restructuring actions immediately, including closing 155 domestic segment stores, reducing future store openings and aggressively renegotiating certain leases.

This is another blow to mall owners and will impact new commercial real estate construction. The vacancy rate at malls is already soaring as announced last month:

For strip centers and other open-air shopping venues, the vacancy rate climbed to 8.4% in the third quarter from 8.1% in the second quarter.
...
The vacancy rate at malls in the top 76 U.S. markets rose to 6.6% in the third quarter, up from 6.3% in the previous quarter, to its highest level since late 2001, according to Reis.

Here is a list of the stores being closed. The store closings are concentrated in states with serious housing and economic issues: Arizona, California, Georgia, Florida, and more.

by Calculated Risk on 11/03/2008 08:30:00 AM

Don Lee at the LA Times reports on a growing trend in China: Some owners deserting factories in China

First, Tao Shoulong burned his company's financial books. He then sold his private golf club memberships and disposed of his Mercedes S-600 sedan.

And then he was gone.

And just like that, China's biggest textile dye operation -- with four factories, a campus the size of 31 football fields, 4,000 workers and debts of at least $200 million -- was history.
...
Toy makers are among the hardest hit. More than 3,600 such factories have closed -- about half the industry's total, government figures show. Most were small operations, but last month Smart Union Group's three huge factories stopped production, leaving more than 8,700 workers jobless.

Back in March, I spoke with an executive of a U.S. company, and he told me his company was scaling back their Chinese operations because their manufacturing costs in China had increased by 30%. This was due to a combination of the new Chinese labor laws, higher currency exchange, higher material costs and other factors.

Now a global slowdown and the credit crisis has led to a contraction in the Chinese manufacturing sector. China will probably be forced to stimulate their economy - and, as I speculated this weekend, this could lead to higher intermediate and long term interest rates in the U.S.

At least 'decoupling' is officially dead.