by Calculated Risk on 11/05/2008 10:07:00 AM

From the Institute for Supply Management (ISM): October 2008 Non-Manufacturing ISM Report On Business®

The report shows the service sector contracted sharply in October.

"The NMI (Non-Manufacturing Index) registered 44.4 percent in October, 5.8 percentage points lower than the 50.2 percent registered in September, indicating contraction in the non-manufacturing sector after two consecutive months of growth."
Anthony Nieves, chair of the Institute for Supply Management

There were a couple of interesting comments on discretionary spending:

"Uncertainty is having the usual effect on business. Our response is traditional — stop all discretionary spending."

"Business down significantly! Discretionary spending disappearing."

This is exactly how businesses (and consumers) react to uncertainty - halt all discretionary spending. This is usually a temporary reaction until the business can adjust to changes in economic conditions.

by Calculated Risk on 11/05/2008 08:44:00 AM

“Market conditions in the homebuilding industry deteriorated during our fourth fiscal quarter and October, characterized by rising foreclosures, high inventory levels of both new and existing homes and reduced liquidity in the mortgage markets. In addition, consumer confidence has been eroded by a weakening economy, higher unemployment and record volatility in the capital markets."
Donald R. Horton, Chairman, D.R. Horton, Nov 4, 2008

From D.R. Horton press release:

Home sales revenue for the fourth quarter of fiscal 2008 totaled $1.5 billion on 6,961 homes closed, compared to $3.0 billion in the same quarter of fiscal 2007 on 11,733 homes closed.
...
The Company’s net loss for the fourth quarter is estimated to be in the range of $800 to $900 million ...

Horton's home sales were half (in dollars), and about 40% lower in units, compared to the same quarter in 2007. Ouch.

by Calculated Risk on 11/05/2008 08:22:00 AM

From Bloomberg: GMAC Posts Quarterly Loss, ResCap Unit Faces Doubt on Survival

GMAC ... third-quarter net loss widened to a record $2.52 billion from $1.6 billion a year earlier ...

GMAC's results were crushed by slumps in the housing market, where foreclosures are running at record levels, and in auto sales, which GM labeled the worst since 1945 when it reported October results this week.

The story mentions that GMAC will only lend to car buyers with the highest credit ratings - and that contributed to the dismal sales auto sales in October.

Also GMAC is considering converting to a bank holding company to gain more access to capital. Currently GM owns 49% of GMAC, and entities (like GM) with more than 25% ownership in a bank holding company are subject to strict capital requirements and other regulations. That is why a conversion of GMAC to a bank holding company would probably be part of a GM-Chrysler merger, with Cerberus swapping Chrysler for enough of GM's stake in GMAC to lower GM's ownership below 25%.

by Calculated Risk on 11/04/2008 08:39:00 PM

Not much happening tonight (except some sort of election) ... but here are a couple of interesting articles on commercial real estate (CRE):

From Bloomberg: NYC Commercial Property Sales Plunge in Credit Freeze

New York City commercial real estate transactions plunged 61 percent in 2008 through October as the global credit crisis roiled lending and sidelined buyers.

About $17 billion of transactions have closed so far and the market is headed for its worst year since 2004 ...

From the WaPo: Financial Crisis Hits Commercial Real Estate Market

PricewaterhouseCoopers and the Urban Land Institute concluded in a recently report released that "U.S. commercial real estate faces its worst year since the wrenching 1991-1992 industry depression."

The report said that nationwide, rents are stagnant and likely to drop. Vacancy rates at offices, shopping malls and hotels are expected to rise and billions of dollars of loans are coming due next year.

by Calculated Risk on 11/04/2008 06:11:00 PM

From Bloomberg: Credit-Default Swaps Top $33 Trillion, Depository Trust Says

Credit-default swaps totaling $33.6 trillion are outstanding on companies, governments and asset- backed securities worldwide, the Depository Trust & Clearing Corp. said in a report ... released on its Web site today.

Knock yourselves out ... tons of data.

by Calculated Risk on 11/04/2008 04:46:00 PM

From Bloomberg: Fannie Mortgage-Bond Spreads Fall to Lowest in Almost Two Weeks (no link yet)

Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds tumbled to the lowest in almost two weeks relative to U.S. government notes, potentially lowering home-loan rates.

The difference between yields on Washington-based Fannie's current-coupon 30-year fixed-rate mortgage securities and 10-year Treasuries fell about 23 basis points to about 183 basis points ...

A little more progress.

by Calculated Risk on 11/04/2008 02:15:00 PM

As noted earlier, LIBOR declined again today, from Bloomberg:

The three-month rate dropped 15 basis points to 2.71 percent, the lowest level since June 9, according to BBA figures.

The rate peaked at 4.81875% on Oct. 10.

The yield on 3 month treasuries rose slightly to 0.47% from 0.44%. (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 (0.22% yesterday), so a 3 month yield of 0.47% is in the right range.

The TED spread: 2.23, down from 2.39 (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: 116.52 down slightly (slightly better). This spread peaked at near 165 in early October, so there has been significant progress, but the spread seems stuck a narrow range 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. No announcement today from the Treasury ... no progress.

NOTE: Once a week I will include the Fed balance sheet assets. If this starts to decline that would be a postive sign.

The A2P2 spread is down to 4.45 from a record 4.72 a couple days ago. 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.

NOTE: This decline in the A2/P2 spread could be related to this WSJ article: U.S. Weighs Purchasing Stakes in More Firms

The Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers, after tentative signs of the program's success, according to people familiar with the matter.

In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric Co.'s GE Capital unit, CIT Group Inc. and others, these people said.

The LIBOR is down, the TED spread is off again, the A2/P2 spread declined - so there is more progress.

by Calculated Risk on 11/04/2008 12:21:00 PM

From The Times: Job cuts rise amid record construction fall

Construction activity in the UK fell at a record rate last month as demand for new houses and commercial property continued to wane amid the global financial turmoil, according to a key industry survey.

The CIPS/Construction Purchasing Managers' Index measured construction activity at 35.1 in October — the eighth consecutive monthly fall this year.

Demand for new housing again showed the greatest decline, while commercial property also performed poorly, with activity levels declining at a series-record pace.

Synchronized cliff diving ...

by Calculated Risk on 11/04/2008 10:55:00 AM

A couple of stories ...

From the Birmingham Business Journal:

In projections for 2010, national hotel research firm Smith Travel Research predicts hotels will see a decline in occupancy rates over the next two years ... The firm expects occupancy to drop 3 percent to 61.2 percent by the end of 2008, compared to last year, and said it will slip even further to 58.7 percent by 2010.

And from SignonSanDiego.com: Hotel occupancy rates crater in Hawaii

Almost 40 percent of the state's hotel rooms languished empty in September, the highest rate since the Hawaii tourism downturn in the aftermath of the Sept. 11, 2001 terrorist attacks, a research firm said Monday.

Average statewide hotel occupancy plunged 11 percentage points to 63.2 percent from 74.2 percent the same month a year ago, research firm Hospitality Advisors said in a report.

While the weakening economy is pushing down occupancy rates, a large number of new hotel rooms are still being added.

Click on graph for larger image in new window.

This graph shows construction spending on lodging (seasonally adjusted annual rate in millions) through September - based on the details in the Census Bureau Construction Spending report released yesterday.

Lodging saw an incredible increase in investment over the last few years.

Falling demand and increasing supply - not a good environment for new hotel investment - and I expect we will see a sharp decline in investment over the next couple of years.

by Calculated Risk on 11/04/2008 09:23:00 AM

From Bloomberg: Dollar Libor Drops as Central-Bank Cash, Rate Cuts Thaw Lending

The three-month rate dropped 15 basis points to 2.71 percent, the lowest level since June 9, according to BBA figures.

This has pushed the TED spread down to 2.22 this morning (from 2.39 yesterday, and 4.63 on Oct 10th). This is still way too high, but shows more progress. More later on credit indicators ...