by Calculated Risk on 2/21/2009 06:02:00 PM

From CNBC: Regulators Will Soon Begin Bank Stress Tests

U.S. financial regulators will soon launch a series of "stress tests" to determine which of the largest U.S. banks may need additional capital cushions in the event of a deeper recession, a person familiar with Obama administration plans said Saturday.
...
Banks are expected to receive additional information about the tests in the coming week from regulators.

I'm surprised that these tests haven't already started. Hopefully Secretary Geithner will provide more details on the stress tests this week.

by Calculated Risk on 2/21/2009 04:07:00 PM

From the WaPo: Obama to Unveil an Ambitious Budget Plan

Even before Congress approved the stimulus package earlier this month, this year's deficit was projected by Congressional budget analysts to approach $1.2 trillion, or 8.3 percent of the overall economy, the highest since World War II. With the stimulus and other expenses, some analysts say the annual gap between federal spending and income could approach $2 trillion when the fiscal year ends in September.

Obama proposes to dramatically reduce those numbers by the end of his first term, cutting the deficit he inherited in half, said administration officials, speaking on condition of anonymity because the budget has yet to be released. His budget plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion in 2013 -- still high in dollar terms, but a more manageable 3 percent of the overall economy.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, ... Obama also seeks to increase tax collections, primarily by making good on his promise to eliminate the temporary tax cuts enacted in 2001 and 2003 for wealthy taxpayers ...

Obama also proposes to maintain the tax on estates worth more than $3.5 million, instead of letting it expire next year.

For several years I've complained about the Bush structural budget deficit, and the lack of fiscal flexibility once the inevitable housing bust arrived. Now that the bust is here, we are seeing the full impact of that flawed fiscal policy. Ouch.

A $2 trillion annual budget deficit is possible. And even after the U.S. economy bottoms (it will happen someday), the recovery will probably be very sluggish, keeping the deficit extremely high for years. I doubt that the the budget deficit will be cut to $533 billion in fiscal 2013.

by Calculated Risk on 2/21/2009 11:46:00 AM

From the LA Times: Gold fever sweeps suburbia

Gold is hot. The precious metal soared $25.70 an ounce Friday to $1,001.80, topping the $1,000 mark for the first time in nearly a year. South African Krugerrands, American Eagles and other gold coins are in demand as people seek safe investment havens in uncertain times.

That has people digging through their drawers and jewelry boxes looking for watchbands, cuff links, chains and bracelets that can be sold to jewelers, pawnshops and other brokers to be melted down to feed the growing demand for gold coins.

The party Geivet attended at the Aliso Viejo home of Mary-Margaret Fincher is a twist on the old suburban Tupperware party. Here, however, it's the guests who do the selling.
...
There were earrings from ex-boyfriends, ring settings with missing stones and chain bracelets from sorority sisters. One woman brought in her husband's wedding ring -- from a previous marriage.

I don't follow gold, but back in the late '70s I was long the silver market. I closed my positions when housewives started selling the family silver - and eventually shorted the market. Of course that market was being manipulated by the Hunt brothers, but this story reminded of early 1980.

Note: not intended as advice. Besides I don't follow gold. This was just a short trip down amnesia lane.

by Calculated Risk on 2/20/2009 11:01:00 PM

The Daily Show offers some stimulus ideas ...

by Calculated Risk on 2/20/2009 09:13:00 PM

From the FDIC: Citizens Bank, Corvallis, Oregon, Assumes All of the Deposits of Silver Falls Bank, Silverton, Oregon

Silver Falls Bank, Silverton, Oregon, was closed today by the Oregon Department of Consumer and Business Services, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank, Corvallis, Oregon, to assume all of the deposits of Silver Falls Bank.
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As of February 9, 2009, Silver Falls Bank had total assets of approximately $131.4 million and total deposits of $116.3 million. Citizens Bank did not pay a premium to acquire the deposits of Silver Falls Bank.
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The FDIC estimates that the cost to the Deposit Insurance Fund will be $50 million. The Citizens Bank acquisition of all the deposits of Silver Falls Bank was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Silver Falls Bank is the fourteenth bank to fail in the nation this year. The last bank to fail in Oregon was Pinnacle Bank, Beaverton, on February 13, 2009.

It is Friday!

by Calculated Risk on 2/20/2009 07:22:00 PM

Maybe the FDIC is busy in California this week ... but it just doesn't feel like Friday yet.

Next week should be interesting with the Case-Shiller house price index, New and Existing home sales, and probably delinquency rates from the Fed all being released.

Volcker's comments today ... "capitalism will survive":

by Calculated Risk on 2/20/2009 04:42:00 PM

“The dramatic deterioration in the fundamentals of the space market, especially over the last three quarters, has been especially swift and severe.”
Lloyd Lynford, chief executive officer of Reis.

From Bloomberg: U.S. Office Vacancy Rate to Climb to 16.7%, Reis Says

The vacancy rate at U.S. office buildings will rise to 16.7 percent this year and could reach an 18-year high [in 2010] as tenants cut jobs and try to sublet space, property research firm Reis Inc. said.

The net amount of space leased will fall by 47.8 million square feet this year, one of the steepest drops in occupied space on record ... Next year, the vacancy rate for U.S. office properties could rise to 17.6 percent, the highest since 18.7 percent in 1992 during the last major slump in commercial real estate following the savings and loan crisis ...

Click on graph for larger image in new window.

This graph shows the actual office vacancy rates and the Reis forecast for 2009 (assumed steady increase over four quarters for graph). The office vacancy rate was 14.5% in Q4 2008.

The office vacancy rate peaked at 17% in 2003 following the bursting of the stock market bubble, and peaked at 19.1% in 1991 following the S&L crisis (the data series starts in 1991).

by Calculated Risk on 2/20/2009 02:42:00 PM

From Bloomberg: U.S. Stocks Pare Drop on Speculation Treasury to Detail Bailout

[CNBC reported] that the Treasury Department will release some details of its plan to rescue the financial system next week.

From the WSJ: White House Says Banks Shouldn't Be Nationalized

Amid fears that Citigroup Inc. and Bank of America Corp. could be on the verge of being nationalized, the White House gave assurances that it prefers banks to remain out of the government's hands.

"This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," White House spokesman Robert Gibbs said Friday. "That's been our belief for quite some time, and we continue to have that."

The key for Geithner is to explain what "stress test" means, how the stress tests are proceeding, and when the tests will be complete.

If Geithner just talks about the Public-Private Investment Fund his speech will probably not be well received. Three words for Geithner: Stress Test. Explain.

by Calculated Risk on 2/20/2009 01:23:00 PM

From Bloomberg: Dodd Says Short-Term Bank Nationalization Might Be Necessary

Senate Banking Committee Chairman Christopher Dodd said it may be necessary to nationalize some banks for a short time ...

“I don’t welcome that at all, but I could see how it’s possible it may happen,” Dodd said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” to be broadcast later today. “I’m concerned that we may end up having to do that, at least for a short time.”

More cliff diving for the big banks.

Also, the S&P 500 is flirting with the closing low from last November 20th of 752.44. The last time the S&P 500 index was lower was in early 1997 - about 12 years ago - this doesn't include divdends, but that is a lost decade for U.S. investors.

by Calculated Risk on 2/20/2009 12:43:00 PM

From Bloomberg: Bond Trading Highest Since ‘07 as Credit Freeze Thaws

Corporate bond trading in the U.S. is rising to the highest level in two years, adding to evidence that credit markets are thawing even with stocks off to their worst start since the 1920s.

An average $17.1 billion of corporate bonds traded daily this month, following $17.7 billion in January, according to the Financial Industry Regulatory Authority. The business is up from last year’s low of $9.4 billion in August and reached the highest level since February 2007 ...

Bonds are trading but yields are very high:

Investors are betting yields are high enough to compensate for defaults that Moody’s Investors Service forecast will rise to 16.4 percent by November, the highest since the Great Depression and about three times the current rate.

The following graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

Click on table for larger image in new window.

There has been some improvement (decline in spread) in recent weeks, but the spreads are still very high, even for higher rated paper, but especially for lower rated paper with a spreads still above the high level of the early '80s recession.

There has also been improvement in the A2P2 spread. This has declined to 1.09. This is far lower than the record (for this cycle) of 5.86 after Thanksgiving, but still too high.

This is the spread between high and low quality 30 day nonfinancial commercial paper. Look at the graph - there was significant concern when the A2P2 spread spiked in 2007 and 2008 (the three little peaks). Now the spread is back to the highest level of those peaks!

It is also worth mentioning that the TED spread is below 1.0. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 4.63 on Oct 10th and a normal spread is around 0.5.