by Calculated Risk on 7/16/2009 08:59:00 AM

From RealtyTrac:

RealtyTrac ... today released its Midyear 2009 U.S. Foreclosure Market Report, which shows a total of 1,905,723 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 1,528,364 U.S. properties in the first six months of 2009, a 9 percent increase in total properties from the previous six months and a nearly 15 percent increase in total properties from the first six months of 2008. The report also shows that 1.19 percent of all U.S. housing units (one in 84) received at least one foreclosure filing in the first half of the year.

Foreclosure filings were reported on 336,173 U.S. properties in June, the fourth straight monthly total exceeding 300,000 and helping to boost the second quarter total to the highest quarterly total since RealtyTrac began issuing its report in the first quarter of 2005. Foreclosure filings were reported on 889,829 U.S. properties in the second quarter, an increase of nearly 11 percent from the previous quarter and a 20 percent increase from the second quarter of 2008.

Something to remember: questions have been raised before about the RealtyTrac numbers (see Foreclosure numbers don’t add up), and RealtyTrac has only been tracking these numbers since 2005. For California, I use the DataQuick numbers for NOD activity (released quarterly), and available since the early '90s - but that is just one state.

by Calculated Risk on 7/16/2009 08:29:00 AM

NOTE: The seasonally adjusted weekly claims numbers are being impacted by the layoffs in the automobile industry and other manufacturing sectors. Usually companies cut back production in the summer, and the numbers are adjusted for that pattern - but this year the companies cut back much earlier. This distortion is expected to last for another week or two.

The DOL reports on weekly unemployment insurance claims:

In the week ending July 11, the advance figure for seasonally adjusted initial claims was 522,000, a decrease of 47,000 from the previous week's revised figure of 569,000. The 4-week moving average was 584,500, a decrease of 22,500 from the previous week's revised average of 607,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending July 4 was 6,273,000, a decrease of 642,000 from the preceding week's revised level of 6,915,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 22,500, and is now 74,250 below the peak of 14 weeks ago. It appears that initial weekly claims have peaked for this cycle.

The level of initial claims has fallen quickly - but is still very high (over 500K), indicating significant weakness in the job market.

Following the earlier recessions (like '81), weekly claims fell quickly, but in the two most recent recessions, weekly claims fell some and then stayed elevated for some time. I expect the current recession will be more like the '90 and '01 recessions, than the '81 recession.

by Calculated Risk on 7/16/2009 12:24:00 AM

From the WSJ: U.S. Regulators to BofA: Obey or Else

Bank of America Corp. is operating under a secret regulatory sanction ... the so-called memorandum of understanding gives banks a chance to work out their problems ...

Citigroup Inc. has been operating since last year under a similar order with the Office of the Comptroller of the Currency...

In a letter that was reviewed by The Wall Street Journal, the Fed criticized Bank of America's management and directors for being "overly optimistic" about risk and capital. The bank's capital position "was vulnerable" even before the Merrill deal, the Fed concluded, citing "acquisition activity" that included last year's takeover of mortgage lender Countrywide Financial Corp.

by Calculated Risk on 7/15/2009 08:39:00 PM

From the LA Times: California Approaches a Deal on Budget Cuts (ht Rob Dawg)

California lawmakers neared a deal Wednesday with Gov. Arnold Schwarzenegger to close the state’s $26 billion budget gap ...

Details emerging from the talks suggested that the deal will require extraordinarily deep cuts to school systems and local governments, and ... substantial cuts to health care and other social services.
...
The state’s education budget of nearly $52 billion seemed destined for another large hit — likely $1.5 billion — on top of substantial reductions earlier this year, officials said. ... Public colleges and universities across the state have already prepared for millions of dollars in cutbacks by furloughing employees. Statewide furloughs of three days a month for government employees are likely to continue through the rest of the fiscal year.

The furloughs continue, and this will lead to more layoffs especially at the local level.

by Calculated Risk on 7/15/2009 06:09:00 PM

Update 2: WSJ is reporting that a Treasury official says that the U.S. expects to lose entire TARP investment in CIT ($2.3 billion). I think that means a BK is certain, probably before the market opens tomorrow.

From MarketWatch:

CIT says government support unlikely near term
CIT says board, management evaluating alternatives
CIT: Appears no likelihood of add't gov't support
CIT: Talks with government agencies have ceased

Bankruptcy is probable.

Update: CIT Press Release:

CIT Group Inc., a leading provider of financing to small businesses and middle market companies, today announced that it has been advised that there is no appreciable likelihood of additional government support being provided over the near term.

The Company’s Board of Directors and management, in consultation with its advisors, are evaluating alternatives.

by Calculated Risk on 7/15/2009 05:08:00 PM

Note: Ignore the median home price during periods of rapidly changing mix.

From DataQuick: Southland home sales highest since late ’06; median price up again

Southern California home sales rose in June to the highest level in 30 months as the number of deals above $500,000 continued to climb. ...

A total of 23,262 new and resale houses and condos closed escrow in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties last month. That was up 12.0 percent from 20,775 in May and up 29.0 percent from a revised 18,032 a year ago, according to San Diego-based MDA DataQuick.

Sales have increased year-over-year for 12 consecutive months.

June’s sales were the highest for that month since 2006, when 31,602 homes sold, but were 17.7 percent below the average June sales total since 1988, when DataQuick’s statistics begin. June sales peaked at 40,156 in 2005 and hit a low last year.

Foreclosures remained a major force in June, but their impact on the resale market eased for the third consecutive month.

Foreclosure resales – homes sold in June that had been foreclosed on in the prior 12 months – represented 45.3 percent of Southland resales last month, down from 49.7 percent in May and down from a peak 56.7 percent in February this year. Last month’s level was the lowest since foreclosure resales were 43.7 percent of resales in July 2008.
...
The recent shift toward higher-cost markets contributing more to overall sales has put upward pressure on the region’s median sale price – the point where half of the homes sold for more and half for less. The median dived sharply over the past year not just because of price depreciation but because of a shift toward an unusually large share of sales occurring in lower-cost, foreclosure-heavy areas.
...
“The rising median should still be viewed mainly as a sign the market’s moving back toward a more normal distribution of sales across the home price spectrum.” ... said John Walsh, DataQuick president.
...
Foreclosure activity remains near record levels ... Financing with multiple mortgages is low, down payment sizes and flipping rates are stable, and non-owner occupied buying is above-average in some markets, MDA DataQuick reported.

by Calculated Risk on 7/15/2009 04:00:00 PM

By popular demand ... the S&P 500 was up almost 3% today. The NASDAQ was up 3.5%.

Click on graph for larger image in new window.

The first graph shows the S&P 500 since 1990.

The dashed line is the closing price today.

The S&P 500 is up almost 38% from the bottom (256 points), and still off 40% from the peak (632 points below the max).

The second graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 7/15/2009 03:44:00 PM

From CNBC: CIT Shares Halted as Decision On US Aid for Lender Nears

Shares of CIT Group were halted late Wednesday as financial regulators neared a decision on aiding the troubled lender, CNBC has learned.

A resolution of the CIT situation is expected within the next 24 hours, sources said.

by Calculated Risk on 7/15/2009 02:33:00 PM

Back in February I pointed out that I expected to see some economic rays of sunshine this year. But I never expected an immaculate recovery forecast from the FOMC.

Although I've argued repeatedly that a "Great Depression 2" was extremely unlikely, I think the other extreme - an immaculate recovery - is also unlikely.

It is probably a good time to review the usual engines of a recovery. (see Business Cycle: Temporal Order for the order in and out of a recession)

The following table shows a simplified typical temporal order for emerging from a recession.

When Recovery Typically Starts

During Recession	Lags End of Recession	Significantly Lags End of Recession
Residential Investment	Investment, Equipment & Software	Investment, non-residential Structures
PCE	Unemployment(1)

Housing usually leads the economy both into and out of recessions (this was true for the Great Depression too). However this time, with the huge overhang of excess inventory and high levels of distressed sales, it seems unlikely that residential investment will pick up significantly any time soon.

Note: Residential investment is mostly new home construction and home improvements.

And that leaves Personal Consumption Expenditures (PCE), and as households increase their savings rate to repair their balance sheets and work down their debt, it seems unlikely that PCE will increase significantly any time soon. Maybe there will be a pickup in auto sales from the current depressed levels, but in general a strong increase in PCE seems unlikely. So even if the economy bottoms in the 2nd half of 2009, any recovery will probably be very sluggish.

Most companies are not investing in new equipment and software - other than the normal equipment replacement purchases - because they already have too much capacity. They will not need to expand until their sales pick up significantly. So it seems unlikely that investment in equipment and software would boom until consumer spending has increased. Of course increased U.S. exports would help - but export to whom? China, and a few others ... but most of the world is also hurting.

I still think the keys are Residential Investment (RI) and PCE, and therefore I think the recovery will be sluggish. The increasingly severe slump in CRE and non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.

(1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

by Calculated Risk on 7/15/2009 02:03:00 PM

Here are the June FOMC minutes. Economic outlook:

In the forecast prepared for the June meeting, the staff revised upward its outlook for economic activity during the remainder of 2009 and for 2010. Consumer spending appeared to have stabilized since the start of the year, sales and starts of new homes were flattening out, and the recent declines in capital spending did not look as severe as those that had occurred around the turn of the year. Recent declines in payroll employment and industrial production, while still sizable, were smaller than those registered earlier in 2009. Household wealth was higher, corporate bond rates had fallen, the value of the dollar was lower, the outlook for foreign activity was better, and financial stress appeared to have eased somewhat more than had been anticipated in the staff forecast prepared for the prior FOMC meeting. The projected boost to aggregate demand from these factors more than offset the negative effects of higher oil prices and mortgage rates. The staff projected that real GDP would decline at a substantially slower rate in the second quarter than it had in the first quarter and then increase in the second half of 2009, though less rapidly than potential output. The staff also revised up its projection for the increase in real GDP in 2010, to a pace above the growth rate of potential GDP. As a consequence, the staff projected that the unemployment rate would rise further in 2009 but would edge down in 2010. Meanwhile, the staff forecast for inflation was marked up. Recent readings on core consumer prices had come in a bit higher than expected; in addition, the rise in energy prices, less-favorable import prices, and the absence of any downward movement in inflation expectations led the staff to raise its medium-term inflation outlook. Nonetheless, the low level of resource utilization was projected to result in an appreciable deceleration in core consumer prices through 2010.

Looking ahead to 2011 and 2012, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core personal consumption expenditures inflation would stay low.
emphasis added

The Fed sees an immaculate recovery. That seems unlikely to me.