by Calculated Risk on 11/12/2008 05:17:00 PM

Press Release: Intel's Fourth-Quarter Business Below Expectations

The company now expects fourth-quarter revenue to be $9 billion, plus or minus $300 million, lower than the previous expectation of between $10.1 billion and $10.9 billion. Revenue is being affected by significantly weaker than expected demand in all geographies and market segments. In addition, the PC supply chain is aggressively reducing component inventories.

That is a huge cut in guidance.

by Calculated Risk on 11/12/2008 04:40:00 PM

Upping the ante on JPMorgan's CEO Dimon and Merrill's CEO Thain (see previous post), former Goldman Sachs chairman John Whitehead is quoted as saying the current slump will be worse than the Great Depression!

From Reuters: Whitehead sees slump worse than Depression (hat tip Rex Nutting)

The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead ...

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system. ... I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. ... I just want to get people thinking about this, and to realize this is a road to disaster. I've always been a positive person and optimistic, but I don't see a solution here."

So far most of the Great Depression discussions have been phrased in terms of "worst since". Whitehead has taken the next step - however I think "worse than" is extremely unlikely.

by Calculated Risk on 11/12/2008 04:17:00 PM

From Bloomberg: Dimon Says Recession May Be Worse Than Credit Crisis

``We think the economy could be worse than the capital- markets crisis,'' [JPMorgan Chase & Co. Chief Executive Officer Jamie] Dimon said. ``You really need to separate them because they have completely different effects on our businesses and on most businesses.''

Not to be outdone, John Thain, chairman and chief executive of Merrill Lynch compared the current contraction to the Great Depression, from the Financial Times: Merrill chief sees severe global slowdown

“Right now, the US economy is contracting very rapidly. We are looking at a per­iod of global slowdown,” [Thain] told investors. “This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slow­down we’re seeing now.”
...
"There is no such thing as decoupling. ... Each individual economy will be more or less affected, depending on reliance on global trade and commerce.”

by Calculated Risk on 11/12/2008 03:22:00 PM

Update: From the WSJ: GE Says Government Will Guarantee Debt

General Electric Co. said Wednesday the government will insure up to $139 billion of debt issued by its financing arm, GE Capital Corp., under a new program.

The conglomerate announced on its Web site that GE Capital has been approved to participate in the new Temporary Liquidity Guarantee Program operated by the Federal Deposit Insurance Corporation.

From Bloomberg: Frank's Plan Gives GM, Ford, Chrysler $25 Billion

General Motors Corp., Ford Motor Co. and Chrysler LLC would get $25 billion in additional aid from the Treasury's financial-rescue plan under a proposal by House Financial Services Committee Chairman Barney Frank.

Legislation is needed to authorize the Treasury to use part of its $700 billion rescue fund for the auto industry, Frank said today. He scheduled a hearing on the measure for Nov. 19.

``The consequences of a collapse of the American automobile industry would be particularly troublesome,'' Frank, a Massachusetts Democrat, told reporters in Washington.

It's hard to keep up ...

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.