by Calculated Risk on 11/17/2008 07:40:00 PM

From The Times: House rents fall as unsold properties flood market (hat tip James)

Rents fell for the first time in five years between July and October as home-movers flooded the rental market with properties that they could not sell.
...
It is the first time since 2003 that the gauge of rental yields has turned negative. James Scott-Lee, of RICS, said: “Many vendors have been forced to become amateur landlords, creating an inevitable downward pressure on rents.”

Usually in a recession some people double up with friends or family - and that puts downward pressure on rents. This time there is also a huge number of "amateur landlords" renting out their unsold properties, and that is additional downward pressure on rents.

This is also happening in the U.S., see: Apartment Market Weakens

by Calculated Risk on 11/17/2008 06:21:00 PM

One of the credit indicators I was tracking was the activity in the Treasury's Supplementary Financing Program (SFP). This was the Treasury program to raise cash for the Fed's liquidity initiatives.

Once the Fed started paying interest on reserves, the supplemental financing program wasn't needed any more to sterilize the expansion of the Fed's balance sheet. The Treasury announced today that the program will be unwound.

The balance in the Treasury's Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature. This action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government's financing needs.

More from MarketWatch: Unwind of special T-bill program will free up capital

The Treasury said the balance in its so-called supplementary financing account will decrease in coming weeks as bills in the program mature.
...
The special financing program was created two months ago. The Treasury said it would issue bills separate from its regular borrowing program to help the Federal Reserve manage the impact of its efforts to pump extra money into the financial system, such as by lending money to broker-dealers.

The program, which peaked at $559 billion, effectively drained cash from the financial system, offsetting some of the Fed's efforts to pump more money into markets. An offsetting mechanism was necessary for the Fed to keep its effective fed funds target rate from slipping to 0%.
...
The need for the Treasury's special financing program waned after the Fed started paying interest on bank reserves, which also took money from the financial markets, analysts said.

This is a minor but necessary step ...

by Calculated Risk on 11/17/2008 03:38:00 PM

From PricewaterhouseCoopers: PricewaterhouseCoopers Forecasts a Substantial Reduction in Hotel RevPAR in 2009

According to the PwC forecast, 2008 RevPAR will decrease by 0.8 percent, primarily due to a 3.7 percent decrease in occupancy, the highest annual decrease in occupancy since 2001. In 2009, demand is forecast to decrease by 2.0 percent, which, when coupled with a 1.6 percent increase in supply, is expected to further reduce occupancy to 58.6 percent, the lowest since 1971.
...
"The deteriorating outlook for the economy is impacting travel habits and spending, and hotels are expected to experience reduced occupancy levels, and to a lesser degree, some room rate erosion through 2009," said Scott Berman, principal and U.S. Leader of PricewaterhouseCoopers' Hospitality and Leisure practice.

Note: RevPAR is revenue per available room. The article also mentions ADR: average daily room rate.

Click on graph for larger image in new window.

This graph shows the annual occupancy rate for the last 50 years. The data is from PricewaterhouseCoopers LLP (1958 to 1986), and Smith Travel Research (1987 to 2007).

The PricewaterhouseCoopers forecast for 2008 and 2009 are in red. Note: The y-axis starts at 50% to better show the change.

Just more evidence of the coming slowdown in non-residential investment.

by Calculated Risk on 11/17/2008 02:59:00 PM

From Bloomberg: Bush Administration Said to Not Seek Remaining Bailout Funds

The Bush administration will not seek the $350 billion remaining as part of the $700 billion financial-rescue package, leaving it to the [Obama] administration to request the funds ...

by Calculated Risk on 11/17/2008 11:56:00 AM

From the USAToday: In bad economy, boat owners abandon their vessels (hat tip FFIDC)

Boats have long been a barometer of consumer confidence, disposable income and the overall state of the economy. Now, marina and harbor officials are reporting a sudden increase in the past year in the number of deserted pleasure boats and working vessels.

Talking about disposable income, I'm still waiting for my favorite restaurants to empty out a little ... although not too much because I want them to stay in business.

by Calculated Risk on 11/17/2008 10:20:00 AM

Another daily look at a few credit indicators ...

LIBOR increased half a basis point:

The London interbank offered rate, or Libor, that banks say they charge each other for such loans rose less than half a basis point to 2.24 percent today, British Bankers' Association data showed.

The three-month LIBOR was 2.23% yesterday and the rate peaked at 4.81875% on Oct. 10. (unchanged)

The yield on 3 month treasuries increased to 0.17% from 0.145%. (unchanged).

With the effective Fed Funds rate at 0.35% (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%) and the 3 month yield within 25 bps of the target rate.

But for now, the Fed is engaged in quantitative easing.

The TED spread: 2.07, down from 2.09 (unchanged)

The TED spread is above 2.0 again, and 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 around 0.5. From reader Kai using data back to 1986: "The average TED spread is 58bps, but the median TED spread is 42bps and the non-crisis (i.e. less than 100bps spread) median is 37.8bps."

The two year swap spread from Bloomberg: 108.75, down slightly from 112.75 (unchanged). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

Weekly Fed Balance Sheet (update weekly on Thursday)

The Federal Reserve assets increased $139 billion last week to $2.214 trillion.

The A2P2 spread is down to 4.05 from 4.44, and down from 4.72 two weeks ago. (better).

Click on graph for larger image in new window.

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 (0.50% 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.

Another day with no improvement ... (except the A2/P2 spread).

Note: The Fed's balance sheet is interesting and I'll try to have more on how the Fed is funding their initiatives and quantitative easing. See Bernanke's paper from 2004: Conducting Monetary Policy at Very Low Short-Term Interest Rates One thing is clear - the target Fed funds rate is pretty much meaningless right now.

by Calculated Risk on 11/17/2008 08:47:00 AM

From MarketWatch: Citi says it plans about 50,000 job cuts in the "near-term"

Citigroup said at the end of the September it employed 352,000 people, and that its near-term headcount target is about 300,000.

This might include selling off some operations, but still ... Ouch!

Click on graph for larger image in new window.

Update: From the Citigroup Presentation this morning.

This shows expenses and headcount. Citi's goal is to reduce headount by about 20% from the peak, and substantially reduce expenses to about $12.5 to $13 billion per quarter.

by Calculated Risk on 11/17/2008 08:39:00 AM

Press Release:

"We expect continued, broad-based external pressures on our industry, as rising unemployment, falling home prices, tight credit and volatile equity markets continue to erode consumer confidence and impact sales," [Robert A. Niblock, Lowe's chairman and CEO said]. "While falling energy prices and initial signs of stabilization in housing turnover should aid the consumer, we saw a decline in sales trends in the last week of October that continued into November as the overall economic outlook deteriorated. In light of the difficult environment, we remain cautious in the near term and focused on providing great service to customers, increasing market share, controlling expenses, and appropriately managing capital expenditures to drive long-term returns for shareholders."
emphasis added

by Calculated Risk on 11/17/2008 12:43:00 AM

Click on cartoon for larger image in new window. Another great cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA.

For anyone who missed it, on Saturday I posted the following graph of non-business bankruptcies by quarter (see NY Times: The Debt Trap)

This graph shows the non-business bankruptcy filings per quarter since the beginning of 1996 through Q2 2008 (Source: USCourts.gov).

The spike in 2005 was because of people filing in advance of changes to the bankruptcy law.

According to the NY Times article "Downturn Drags More People Into Bankruptcy", filings were over 100 thousand in Oct 2008 and will probably be well over 300 thousand for Q4 2008 - so the graph is still trending up sharply.

Hence the smiling BK attorney ...

by Calculated Risk on 11/16/2008 10:30:00 PM

From the WSJ: LaSalle Orders 20% Cut in Hotel Staffing

"At this time, we do not believe that we can provide a credible outlook for the remainder of the year as expected performance at our hotels continues to decline," [LaSalle Chief Financial Officer Hans Weger] said in statement ... noting the rapid deterioration was seen in more than just business cuts.

"We've seen it across the board; it's across cities, consumers, groups and corporate."

The article also mentions the "AIG effect" of companies cancelling events because they "don't want to look like AIG".

However the more important story is the rapid deterioration in all hotel segments: "across cities, consumers, groups and corporate".