by Calculated Risk on 11/10/2008 08:49:00 PM

From the Financial Times: Plunge in UK retail sales and home deals (hat tip Jonathan)

High street sales suffered their sharpest annual fall in nearly four years in October and home purchases fell to a record low ... in a further sign of the UK economy’s deepening woes.
...
The BRC report says total retail sales were 0.1 per cent below their October 2007 level ... “A fall in the value of total sales is extremely rare,” said Helen Dickinson, head of retail at the consultancy KPMG.
...
The housing picture is no better, according to the RICS. The average number of completed sales per surveyor fell to 10.9 over the past three months, the weakest sales record since the survey began in 1978.

In the U.S., the year-over-year change in nominal retail sales went negative in September. The following graph shows the year-over-year change in nominal and real U.S. retail sales since 1993.

Click on graph for larger image in new window.

The Census Bureau reported that nominal retail sales decreased 1.0% year-over-year (retail and food services decreased 1.0%) in Septebmer, and real retail sales (adjusting with PCE) declined by 4.3% on a YoY basis.

Retail sales for October will be reported on Friday, and based on retailer reports, the numbers will be ugly.

by Calculated Risk on 11/10/2008 06:56:00 PM

Fed Press Release:

The Federal Reserve Board on Monday announced its approval of the applications and notices under sections 3 and 4 of the Bank Holding Company Act by American Express Company and American Express Travel Related Services Company, Inc., both of New York, New York, to become bank holding companies on conversion of American Express Centurion Bank, Salt Lake City, Utah, to a bank, and to retain certain nonbanking subsidiaries, including American Express Bank, FSB, Salt Lake City, Utah.

American Express has approximately $127 billion in consolidated assets, and becoming a bank holding company allows access to financing from the Federal Reserve for some of these assets. More details are in the Fed Order.

by Calculated Risk on 11/10/2008 05:49:00 PM

From Bloomberg: Fannie Says $100 Billion Pledge From Treasury May Not Be Enough

Fannie Mae may need more than the $100 billion in funding pledged by the U.S. Treasury to stay afloat after reporting a record $29 billion loss and confronting more difficulty in issuing and refinancing debt.

``This commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,'' if there are further ``substantial'' losses or if the company is unable to sell unsecured debt, Washington-based Fannie said in a filing today with the U.S. Securities and Exchange Commission.

Here is the Fannie 10-Q filed with the SEC. This statement is under "Risks Relating to Our Business" and is not a prediction from Fannie, just a statement of a possible risk. The huge loss reported today was mostly because of a reduction in deferred tax assets.

Here are a few excerpts from the Fannie section on Housing and Economic Conditions:

Growth in U.S. residential mortgage debt outstanding slowed to an estimated annual rate of 2.0% based on the first six months of 2008, compared with an estimated annual rate of 8.3% based on the first six months of 2007, and is expected to continue to decline to a growth rate of about 0% in 2009.

We continue to expect that home prices will decline 7% to 9% on a national basis in 2008, and that home prices nationally will decline 15% to 19% from their peak in 2006 before they stabilize. Through September 30, 2008, home prices nationally have declined 10% from their peak in 2006. (Our estimates compare to approximately 12% to 16% for 2008, and 27% to 32% peak-to-trough, using the Case-Schiller index.) We currently expect home price declines at the top end of our estimated ranges. We also expect significant regional variation in these national home price decline percentages, with steeper declines in certain areas such as Florida, California, Nevada and Arizona. The deteriorating economic conditions and related government actions that occurred in the third quarter of 2008 have increased the uncertainty of future economic conditions, including home price movements. Therefore, while our peak-to-trough home price forecast is at the top end of the 15% to 19% range, there is increasing uncertainty about the actual amount of decline that will occur.

So Fannie is expecting house price declines of around 32% using the Case-Shiller index.

by Calculated Risk on 11/10/2008 01:32:00 PM

A daily update ... day to day there has been little progress, but overall most indicators have improved since the crisis started.

As an example, the LIBOR is down sharply from 4.82% on Oct 10th to 2.24% today. And the TED spread is at 2.0% from 4.63%. The progress is slow, but there has been progress.

LIBOR declined again today, from Bloomberg:

The London interbank offered rate, or Libor, that banks say they charge each other for such loans declined 5 basis points to 2.24 percent today, the lowest level since November 2004, the British Bankers' Association said.

The three-month LIBOR was at 2.29% on Friday. The rate peaked at 4.81875% on Oct. 10. (Better)

The yield on 3 month treasuries fell to 0.20 for 0.303%. (worse)

With the effective Fed Funds rate at 0.23% (as of Friday), this is probably somewhat in the right range. At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%).

The TED spread: 2.02, up slightly from 1.98 (slightly worse)

The TED spread is around 2.0, but still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is about 0.5.

The two year swap spread from Bloomberg: 103.75 down slightly from 107.25 (slightly better). This spread peaked at near 165 in early October, so there has been significant progress, and we are finally getting close to 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. It has been a few days without an announcement from the Treasury... (no progress).

Weekly Fed Balance Sheet. This will be update weekly.


Click on graph for larger image in new window.

The Federal Reserve assets increased $105 billion last week to $2.075 trillion. Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

So far the Federal Reserve assets are still increasing rapidly. It will be a good sign - sometime in the future - when the Fed assets start to decline.

The A2P2 spread is up to 4.23 from 4.2 on Thursday, and down from 4.72 about ten days ago week. (unchanged).

Graph from the Fed.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.82% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. But it now sounds like the Fed might intervene in other companies and just the talk of possible Fed action is probably pushing down the A2/P2 rates. If the credit crisis eases, I'd expect a significant decline in this spread.

The LIBOR is down and the TED spread is flat - so there is little progress today - and any progress is coming directly from Fed intervention and increases in the Fed balance sheet, so there is still a long way to go.

by Calculated Risk on 11/10/2008 12:34:00 PM

A couple of great quotes:

"There's a new realization that holding a gift card from a troubled retailer is like having a bank account without FDIC insurance."
Jerry Hirsch writing in the LA Times

From the LA Times: Gift card holders may be out of luck in retail bankruptcies. Gift card buyers beware ...

Note that the Circuit City bankruptcy is somewhat unusual in that most retailers file for bankruptcy after the holiday season. Bloomberg had an article about this last week: `Tis the Season for Retailer Visions of Liquidations

In the last quarter century, about a fifth of large retailers that went bankrupt, including RH Macy & Co. Inc. and FAO Schwarz, did so in January, using holiday sales cash to jump-start reorganizations or finance liquidations.
...
From 1980 to 2008, of the 105 large public retailers that filed for bankruptcy with assets of more then $100 million, only seven did so in December ... That was less than half the 18 that did so in January --the most popular filing month for large retailers ...

This bankruptcy season is different. ...

And the second quote of the day:

"Confidence has deteriorated so badly that merchants and bankers don't even believe in Santa Claus any more."
Martin Zohn, a bankruptcy lawyer in New York, from Bloomberg article.

Maybe this year is a little different than normal with more bankruptcies before the holidays, but I expect to see more retailer bankruptcies in early 2009.

by Calculated Risk on 11/10/2008 09:33:00 AM

From the Fed:

The Federal Reserve Board and the U.S. Treasury on Monday announced the restructuring of the government's financial support to the American International Group (AIG) in order to keep the company strong and facilitate its ability to complete its restructuring process successfully. These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers.

Equity Purchase
The U.S. Treasury on Monday announced that it will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York (New York Fed) on September 16, 2008.

Plus some new credit facilities from the Fed.

In one new facility, the New York Fed will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the LLC’s purchase of residential mortgage-backed securities from AIG's U.S. securities lending collateral portfolio. ... As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, will be repaid and terminated.
...
In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC's purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts.

by Calculated Risk on 11/10/2008 09:18:00 AM

From the WSJ: Circuit City Files for Bankruptcy

Troubled electronics retailer Circuit City Stores Inc. filed for Chapter 11 bankruptcy Monday in an effort to stay ahead of lenders owed $898 million.
...
The lenders have agreed to loan Circuit City $1.1 billion to keep the retailer's doors open through the holiday season.

There is a good chance that Circuit City will be gone in January - another serious blow for mall owners.

by Calculated Risk on 11/10/2008 12:28:00 AM

From the NY Times: A.I.G. May Get More in Bailout

The Treasury Department and the Federal Reserve were near a deal to abandon the initial bailout plan and invest another $40 billion in the company ... When the restructured deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise. ... The revised deal, which may be announced as early as Monday morning ...

What a mess ...

by Calculated Risk on 11/09/2008 07:24:00 PM

Charles Bagli at the NY Times provides some details for one building in New York: Market’s Collapse Echoes in a Manhattan Tower

The first sign of trouble came over the summer when iStar Financial, a real estate finance company, decided not to move into the 100,000 square feet of space ...

Several weeks later, Metropolitan Life Insurance ... quietly began shopping for tenants to sublease 100,000 square feet ...

And last month, Centerline Capital Group, a suddenly struggling commercial property finance and investment company, confirmed that it would not be moving into its 100,000 square feet ...

The companies signed leases for as much as $132 a square foot ... many brokers say they would be lucky to get $95 a square foot today.

Sublease space really hurt the NY office market in previous downturns, and it appears to be happening again.

by Calculated Risk on 11/09/2008 04:42:00 PM

Since investment in non-residential structures is slowing (especially malls, hotels, and offices), a key question is how did the commercial real estate (CRE) investment boom compare to the residential housing bubble? And how did the CRE boom compare to previous CRE booms?

The following graph shows residential investment compared to investment in non-residential structures as a percent of GDP since 1960. All data from the BEA.

Note: Residential investment is primarily single family structures, multi-family structures, commissions, and home improvement.

Click on graph for larger image in new window.

The recent housing boom and bust is very clear (in red).

Residential investment was 3.3% of GDP in Q3 2008, the lowest level since 1982 (just under 3.2%).

Non-residential investment in structures increased to almost 4% of GDP in Q3. This investment is slowing down right now (the Census Bureau has reported declines in non-residential investment for the last two months), and investment in non-residential structures will almost certainly be negative in Q4.

The current non-residential boom was greater than the late '90s boom, but much less than the non-residential boom in the '80s.

However much of the recent boom in non-residential investment is energy related. The second graph compares residential investment to non-residential investment in structures excluding Power and Petroleum exploration as a percent of GDP since 1960. With this comparison, the recent boom is less than the late '90s boom, and far less than the S&L related '80s boom.

This clearly shows that the recent boom in non-residential investment (ex power and petro) was not as excessive as the housing bubble.

Residential investment has declined by 3% of GDP so far from the peak. Non-residential investment would have to decline to about 1% of GDP (see first graph) to match the impact of GDP from the residential bust so far. And excluding power and petroleum, non-residential investment would have to be below zero to match the impact on GDP from the residential bust!

In percentage terms, residential has collapsed by about 50% (compared to GDP). Non-residential would have to decline to less than 2.0% of GDP (1.3% of GDP ex-power and petroleum) - the lowest level in history by far - to match the residential collapse in percentage terms.

Also, the recent boom for CRE was much less than the S&L related boom in the '80s, and even less than the late '90s CRE boom.

Some areas of non-residential investment have been overbuilt, and I've forecast significant declines for investment in offices, malls, and lodging. But those looking for a collapse in CRE investment comparable to the current residential investment bust are wrong.