by Calculated Risk on 7/21/2009 08:57:00 AM

Note: Federal Reserve Chairman Ben Bernanke testifies at 10AM today in front of the House Financial Services Committee. I'll post a video link ...

From Fed Chairman Ben Bernanke: The Fed’s Exit Strategy

The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.

These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.

My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.
emphasis added

There is much more, but clearly the Fed expects policy to be accommodative for some time, and when the appropriate time comes, the Fed believes they have an exit strategy to avoid inflation.

by Calculated Risk on 7/21/2009 12:06:00 AM

From the NY Times: The Rent Signs Are Sprouting

The storefront vacancy rate in Manhattan is now at its highest point since the early 1990s — an estimated 6.5 percent — and is expected to exceed 10 percent by the middle of next year ...

Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield.

In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be.

For more on retail vacancies, see: Reis: Strip Mall Vacancy Rate Hits 10%, Highest Since 1992

by Calculated Risk on 7/20/2009 10:18:00 PM

From the SacBee: Schwarzenegger, lawmakers reach state budget agreement

Gov. Arnold Schwarzenegger and legislative leaders agreed Monday to balance Californias $26 billion deficit ... The proposal includes spending cuts to programs ranging from schools to welfare-to-work to prisons. It takes money from local governments, including borrowing $2 billion that the state will repay starting in 2013 and taking gas taxes that normally go toward local road projects.

by Calculated Risk on 7/20/2009 08:23:00 PM

Press Release: CIT Announces $3 Billion Credit Facility and Initiates Recapitalization Plan (ht jb)

CIT Group Inc. ... today announced that it entered into a $3 billion loan facility provided by a group of the Company’s major bondholders. CIT further announced that it intends to commence a comprehensive restructuring of its liabilities to provide additional liquidity and further strengthen its capital position.

Today’s actions, including a $3 billion secured term loan with a 2.5 year maturity (the “Term Loan Financing”), are intended to provide CIT with liquidity necessary to ensure that its important base of small and middle market customers continues to have access to credit. Term loan proceeds of $2 billion are committed and available today, with an additional $1 billion expected to be committed and available within 10 days.
...
As the first step in a broader recapitalization plan, CIT has commenced a cash tender offer for its outstanding Floating Rate Senior Notes due August 17, 2009 ... for $825 for each $1,000 principal amount of notes tendered on or before July 31, 2009. Lenders in the Term Loan Financing have agreed to tender all of their August 17 notes. ...

Additional information regarding the financing will be available in a Form 8-K to be filed by the Company with the Securities and Exchange Commission. Further, the Company’s earnings release and conference call previously scheduled for July 23, 2009, have been cancelled. The Company will report its results for the quarter ended June 30, 2009 when it files its quarterly report on Form 10-Q.
emphasis added

Cancelling the earnings release and conference call, and proposing a 20% haircut on debt due in 30 days, does not inspire confidence.

by Calculated Risk on 7/20/2009 06:40:00 PM

Texas Instruments is seeing a pickup in orders, but is this just inventory restocking or because of a pickup in end demand?

From the conference call (ht Brian):

Analyst: You mentioned that visibility has improved markedly. And it's obvious in a way because your bookings were up and your backlog is higher. Are there -- is there anything that you're hearing or seeing from your customers that says to you what we're seeing is more sustainable than one might have thought a quarter ago?

TXN: Well, the signals that we're seeing, Glen, have to do with the rate of decline that we're seeing in their inventory levels. It has slowed substantially. Which certainly signals to us that they believe their inventories are much better aligned now with their true end demand. So that's probably one of the better signals that we're seeing. And the second, of course, is the orders. We actually saw our backlog for the current quarter increase about 27% versus where we were 90 days ago. In other words, starting the third quarter, we had 27% more backlog than we did starting the second quarter. So that's given us increased visibility and increased confidence for the third quarter.

Analyst: your guidance [for Q3 indicates] the mid-point would be up 7.8% from where you came in in Q2. I'm curious how much of that you feel is [inventory] restocking which might occur in the channel. I just note that a little more typical seasonal might be up maybe 3% to 4%.

TXN: Where we have great visibility in terms of actually knowing the specifics of inventory trends will be at distribution. When we start moving out into the OEMs and EMS , we generally will have a feel for what's going on, but it's difficult to be specific. If you just look at for example last quarter, our largest customer which did report last week announced that they reduced their inventory 14%, the other area where I said we had great visibility was at distribution where we saw inventory go down 10%. So, between those two guys alone, they represent half of our revenue, in second quarter we continued to ship below the rate at which they're shipping out. The other half of our revenue basically we think there are general trends that probably match the other half -- the first half I described. So going into third quarter, we know based upon the half of our revenue that I just described, our shipments entering the quarter are below the rate at which the customers are shipping out. So we know or we believe there's more room to go in terms of what I would call the convergence of our shipments and the rate at which our customers are [shipping]. Does it go beyond that and have those customers start to replenish inventory, that wouldn't be surprising just given the seasonality of third quarter coming into the holiday market. But I don't want to speculate on what will or will not happen other than a normal seasonal trend would indicate that.

It sounds like TI's customers are trying to match their inventory to their new lower level of shipments, but it isn't clear there is any pickup in end demand.

by Calculated Risk on 7/20/2009 05:30:00 PM

From CNBC: Roubini: Economic Recovery to Be 'Very Ugly'

"The recovery is going to be subpar," [Nouriel] Roubini said. "I see a one percent growth in the economy in the next few years. There will also be 11 percent unemployment next year and the recovery is going to be slow. It's going to feel like a recession even when it ends."
...
When asked about the economy Monday, Roubini said, "We may be out of a freefall for the financial system," said Roubini. "We have seen the worst in that sense. But in my view there is a sluggish U shaped recovery that might go into a W double dip if we don't fix the problems in the economy."
...
On a second stimulus: "I think there will be another one toward the end of the year. We need to have more shovel ready labor intensive infrastructure projects. We'll need it."

by Calculated Risk on 7/20/2009 03:09:00 PM

This is the second consecutive month were vehicles miles driven were flat, or slightly above, the comparable month in 2008 (May 2009 compared to the May 2008).

The Dept of Transportation reports on U.S. Traffic Volume Trends:

Travel on all roads and streets changed by +0.1% (0.2 billion vehicle miles) for May 2009 as compared with May 2008. Travel for the month is estimated to be 257.3 billion vehicle miles.

Click on graph for larger image in new window.

The first graph shows the rolling 12 month of U.S. vehicles miles driven. (label corrected: trillions)

By this measure (used to remove seasonality) vehicle miles declined sharply and are now moving sideways.

The second graph shows the comparison of month to the same month in the previous year as reported by the DOT.

As the DOT noted, miles driven in May 2009 were 0.1% greater than in May 2008.

Year-over-year miles driven started to decline in December 2007, and really fell off a cliff in March 2008. This makes for an easier comparison for May 2009.

by Calculated Risk on 7/20/2009 02:28:00 PM

From Bloomberg: Banks Fail to Make Adequate Loan-Loss Provisions, Moody’s Says (ht Brian, Bob_in_MA)

Banks have failed to make adequate provision for the losses on loans and securities they face before the end of next year ... U.S. banks may incur about $470 billion of losses and writedowns by the end of 2010, which may cause the banks to be unprofitable in the period ...

“Large loan losses have yet to be recognized in the banking system,” Moody’s said. “We expect to see rising provisioning needs well into 2010.”

This can't just be regional and community banks - this must include some of the stress test 19. Maybe it is time for another round of stress tests.

by Calculated Risk on 7/20/2009 01:32:00 PM

From Atlanta Fed President Dennis Lockhart: On the Economic Outlook and the Commitment to Price Stability . Here is Lockhart's economic outlook:

Often a deep recession is followed by a sharp rebound in business and overall economic activity. Unfortunately, as I look ahead, I do not foresee this trajectory. I expect real growth to resume in the second half and progress at a modest pace. I do not see a strong recovery in the medium term.

There are risks to even this rather subdued forecast. The risk I'm watching most closely is commercial real estate. There is a heavy schedule of commercial real estate financings coming due in 2009, 2010, and 2011. The CMBS (commercial real estate mortgage-backed securities) market is very weak, and banks generally have no appetite to roll over loans on properties that have lost value in the recession. Refinancing problems will not directly affect GDP—it's commercial construction that factors into GDP—but I'm concerned problems in commercial real estate finance could adversely affect the otherwise improving banking and insurance sectors.

... the healing of the banking system will take time. Working off excess housing inventory will take time. The reallocation of labor to productive and growing sectors of the economy will take time. It will take time to complete the deleveraging of American households and the restoration of consumer balance sheets.

In short, I believe the economy must undergo significant structural adjustments. We're coming out of a severe recession, and it's not too much an exaggeration to say the economy is undergoing a makeover. We must build a more solid foundation for our economy than consumer spending fueled by excessive credit—excessive household leverage—built on a house price bubble.

The surviving financial system must find a new posture of risk taking. The balance of consumption and investment must adjust, with investment being financed by greater domestic saving. The distribution of employment must adjust to match worker skills, including newly acquired skills, with jobs in growth markets. Some industrial plant and equipment must be taken offline to remove excess and higher-cost capacity.

As I said, these adjustments will take time and will suppress growth prospects in the process. I believe the economy will underperform its long-term potential for a while because of the obstacles to growth that must be removed, adjustments it must undergo.
...
Let me summarize my argument here today. The economy is stabilizing and recovery will begin in the second half. The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved. While this adjustment process is going on in the medium term, I believe inflation and deflation are roughly equal risks and require careful monitoring. Slack in the economy will suppress inflation. And inflation is unlikely to result—by direct causation—from the recent growth of the Fed's balance sheet. In any event, the Fed has a number of tools being readied to unwind the policies used to fight the recession, and it will be some time before their use is appropriate.
emphasis added

by Calculated Risk on 7/20/2009 12:21:00 PM

From Dow Jones: Moody's: Commercial Real-Estate Prices Fall 7.6% In May

Commercial real-estate prices fell 7.6% in May ... The indexes are down 29% from a year ago and 35% from their October 2007 peak.

According to Moody's, CRE prices fell in 8.6% in April (about 16% in two months).

Talk about cliff diving!