by Calculated Risk on 11/12/2008 02:20:00 PM

Here is the press conference from CNN:

by Calculated Risk on 11/12/2008 12:57:00 PM

As economic activity falls off a cliff, here is the daily look at a few credit indicitors ...

LIBOR declined again today:

The 3-month Libor rate fell to 2.13% from 2.18%, according to Dow Jones, the lowest level for the rate since Oct. 27, 2004.

The three-month LIBOR was 2.18% yesterday. The rate peaked at 4.81875% on Oct. 10. (Better)

The yield on 3 month treasuries fell to 0.145% for 0.20%. (worse)

With the effective Fed Funds rate at 0.27% (as of yesterday), 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: 1.98, down slightly from 2.02 (slightly better)

The TED spread is under 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: 100.62 down slightly from 103.75 (slightly better). This spread peaked at near 165 in early October, so there has been significant progress, and we are almost 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. It has been a few days without an announcement from the Treasury... (no progress).

Weekly Fed Balance Sheet. This will be updated tomorrow.

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 4.61 from 4.23 last week, and down from 4.72 two weeks ago . (Worse).

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 (0.65% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

The LIBOR is down and the TED spread is slightly lower - so there is a little progress today, but there is still a long way to go.

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

From an 8-K SEC filing this morning:

"In recognition of the weak economy, we reduced our budget for 2009 capital expenditures from approximately $1 billion to a range of $550 million to $600 million, compared with approximately $950 million in 2008."
Terry J. Lundgren, Macy's, Nov 12, 2008

This significant reduction in 2009 capital expenditures appears widespread (many companies are announcing reduced CapEx for 2009) - and this will hit non-residential investment in both structures and equipment. This is another blow for commercial real estate.

by Calculated Risk on 11/12/2008 10:47:00 AM

How things have changed ...

Here are Paulson's prepared remarks on the progress of the TARP.

Priorities for Remaining TARP Funds

We have evaluated options for most effectively deploying the remaining TARP funds, and have identified three critical priorities. First, we must continue to reinforce the stability of the financial system, so that banks and other institutions critical to the provision of credit are able to support economic recovery and growth. Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions. Second, the important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt. Addressing these two priorities will have powerful impacts on the overall financial system, the strength of our financial institutions and the availability of consumer credit. Third, we continue to explore ways to reduce the risk of foreclosure.

Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.
emphasis added

There a couple of new wrinkles. First the Treasury is exploring ways to have private matching funds:

Any future program should maintain our principle of encouraging participation of healthy institutions while protecting taxpayers. We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments. In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program; broadening access in this way would bring both benefits and challenges.

And the Treasury is also looking at supporting some securitization:

Second, we are examining strategies to support consumer access to credit outside the banking system. ... With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment. ... While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.

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

From the Fed:

At this critical time, it is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met.
...
[The Department of the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve] expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a result of problems in financial markets, the economy will likely become increasingly reliant on banking organizations to provide credit formerly provided or facilitated by purchasers of securities. Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole.

It is essential that banking organizations provide credit in a manner consistent with prudent lending practices and continue to ensure that they consider new lending opportunities on the basis of realistic asset valuations and a balanced assessment of borrowers' repayment capacities. However, if underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential damage to the economy as well as the long-term interests and profitability of individual banking organizations. Banking organizations should strive to maintain healthy credit relationships with businesses, consumers, and other creditworthy borrowers to enhance their own financial well-being as well as to promote a sound economy.
emphasis added

by Calculated Risk on 11/12/2008 09:25:00 AM

"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen. Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year."
Brad Anderson, vice chairman and chief executive officer of Best Buy, Nov 12, 2008.

From WSJ: Sales Slump Pounds Best Buy

Best Buy Co. lowered its earnings outlook as the U.S. economic downturn has been quickly eroding sales at the consumer-electronics giant.
...
Best Buy said sales at stores open at least a year slumped 7.6% last month following a 1.3% decline in September. As such, Best Buy now expects the measurement for the year ending Feb. 28 to fall 1% to 8%, with results for the last four months of the fiscal year -- which encompass the all-important holiday-shopping season -- potentially tumbling by between 5% to 15%. Best Buy had been expecting 2% to 3% growth in same-store sales for the year.

Ouch.

by Calculated Risk on 11/11/2008 10:33:00 PM

From the National Multi Housing Council (NMHC): Weakening Economic Conditions Create Challenging Conditions For Apartment Sector, According to National Multi Housing Council Survey (hat tip Jon Lansner at the O.C. Register)

“Nine straight months of job losses have begun to cut into the demand for apartment residences,” said Mark Obrinsky, NMHC’s Vice President of Research and Chief Economist. “While favorable demographics and a lower homeownership rate will benefit the apartment industry over time, owners and managers will first have to work their way through the current economic downturn before the benefits of that increased demand are likely to show up. Until then, economic worry will cause some people to “double up” by moving in with a friend or returning to their parents’ house.”

The Market Tightness Index, which measures changes in occupancy rates and/or rents, dropped from 40 last quarter to 24. This was the fifth straight quarter in which the index has been below 50. (For all of the survey indexes, a reading above 50 indicates that, on balance, conditions are improving; a reading below 50 indicates that conditions are worsening; and a reading of 50 indicates that conditions are unchanged.)

Click on graph for larger image in new window.

This graph shows the quarterly Apartment Tightness Index.

As NMHC chief economist Obrinsky noted, it is common in a recession for apartment vacancies to rise, as households double up by moving in with a friend or family member. However an added factor in this recession is all the single family homes being offered as rentals. This is additional competition for apartments and might also be impacting demand for apartments.

by Calculated Risk on 11/11/2008 08:51:00 PM

From Bloomberg: Pelosi Calls for `Emergency' Aid to U.S. Automakers

House Speaker Nancy Pelosi said she wants ``immediate action'' to give automakers additional aid ... The failure of ``one or more of the major American automobile manufacturers'' would have a ``devastating impact on our economy,'' Pelosi said in a statement ...

She didn't specify the level of assistance she supports, but said it should come from the $700 billion Congress authorized the Treasury to use to help stabilize the financial services industry ... The three companies are seeking an additional $50 billion in federal loans

Everyone wants a piece of the TARP.

by Calculated Risk on 11/11/2008 05:01:00 PM

"In early October, we reported our third quarter earnings results and also provided observations about business for the rest of 2008 and into 2009. At that time, we expected business in late 2008 and 2009 to decline, but in just the last few weeks our business outlook has further weakened."
Bill Marriott, CEO Marriott Hotels (emphasis added)

From the USAToday: Most hotels likely to see occupancy rates fall next year

In its 2009 forecast — completed in September, but revised after the stock market collapsed in October — PKF Consulting of Atlanta expects hotels to fill an average of just 58.3% of rooms, or a 4.4% drop in the occupancy expected this year. If true, that would be the worst occupancy rate at U.S. hotels since 1988, when Smith Travel Research started tracking the data.

The current lowest occupancy rate, according to Smith Travel, was 59% in 2002 — the first full year after 9/11, the start of the Iraq war and the SARS epidemic. Separately, Smith Travel's revised forecast is for occupancy to drop 3.5% in 2009, to 59.1%.

"Toward the end of September, it was as if somebody, somewhere, hit the pause button," says Mark Woodworth, president of PKF Consulting.

Restricting travel is a common response to a sudden slowdown in business. And along with falling demand, new investment in lodging is up over 200% from just two years ago! Falling demand and rising supply; a bad combination for the lodging and hotel construction businesses.

by Calculated Risk on 11/11/2008 02:35:00 PM

Here is the press release from the FHFA. Note that this does not include principal reduction as a solution to create an affordable payment, and is limited to: "extending the term, reducing the interest rate, and forbearing interest".

This is intended to help "thousands" (a drop in the bucket unless it is several hundred thousand), and seems to encourage homeowners to stop making payments until they are 90 days late.

Here are some excerpts:

Q: What is a streamlined modification?

A: A streamlined modification is a modification that requires less documentation and less processing. In this case, the streamlined modification seeks to create a monthly mortgage payment that is sustainable for troubled borrowers by targeting a benchmark ratio of housing payment to monthly gross household income.

Q: What is the benchmark ratio?

A: This is the first time the industry has agreed on an industry standard. The benchmark ratio for calculating the affordable payment is 38 percent of monthly gross household income. Once the affordable payment is determined, there are several steps the servicer can take to create that payment – extending the term, reducing the interest rate, and forbearing interest. In the event that the affordable payment is still beyond the borrower’s means, the borrower’s situation will be reviewed on a case-by-case basis using a cash flow budget.

Q: Why is it necessary?

A: With the rise in serious delinquencies and increasing number of loans in foreclosure, this program will help borrowers who have missed three or more payments, but want to keep their homes. Because the eligibility requirements and process are streamlined and consistent, the program will allow servicers to reach more borrowers more quickly.

Q: Who is eligible?

A: The highest risk borrower, who has missed three payments or more, owns and occupies the property as a primary residence, and has not filed bankruptcy. The loan is a Freddie Mac, Fannie Mae or portfolio loan with participating investors. To qualify for the streamlined modification, the borrower must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification.

Q: Why must the borrower be 90 days delinquent? Why not earlier in the delinquency cycle?

A: This is a streamlined solution targeted to reach the most at risk borrower. For borrowers who do not qualify, other solutions are available. This in no way substitutes for the meaningful efforts by all servicers and investors that are currently in place. The 212,000 workouts reported by HOPE NOIW in September are testimony to that fact. We will continue to see those efforts produce meaningful results.

Q: How many people will this help?

A: While difficult to assess, it is clear delinquencies are predicted to continue well into 2009. Foreclosure estimates are significant. Having a streamlined approach will assist many borrowers who default and more quickly. We estimate this will ultimately help thousands of borrowers.

Q: How do borrowers apply?

A: To be considered for the program, a seriously delinquent borrower should contact his or her servicer and provide the requested information – monthly gross household income, association dues and fees, and a hardship statement.

Q: How do borrowers complete the modification process?

A: Upon receiving the Modification Agreement from the servicer, the borrower signs it and returns it with the 1st payment at the modified terms along with income verification. Once the borrower makes three payments at the modified terms and the account is current as of day 90 of the modified plan, the modification is complete.

Q: When will servicers start offering this program?

A: We expect that by December 15th, servicers will be positioned to work with eligible borrowers.