by Calculated Risk on 9/15/2013 02:01:00 PM

The FOMC meets on Tuesday and Wednesday of this week.  It seems some modest "tapering" of monthly asset purchases is possible, although not certain.  Perhaps the Fed will reduce their purchases to $75 billion per month from $85 billion per month.   If purchases are reduced, it seems likely that the Fed will continue to purchase agency mortgage-backed securities at the current rate ($40 billion per month), but reduce their purchases of longer-term Treasury securities from $45 billion to $35 billion per month.

In June, most FOMC participants (14 out of 19) judged that the first increase in the federal funds rate would occur in 2015.  Three participants judged 2014 would be appropriate, and only one in 2016.  It is possible that more participants will move out a little (maybe a few more will think 2016 is appropriate, or fewer think 2014).

In the press conference on Wednesday, I expect Fed Chairman Ben Bernanke will probably make it clear that the Fed will not raise rates for a "considerable" time after the end of QE, and it seems likely he will express concern about the low level of inflation.

On the projections, it looks like GDP will be downgraded again, and the projections for the unemployment rate might be reduced slightly.  

Note: March 2012 projections included to show the trend (TBA: To be announced).  The projections this month will be the first for 2016.

GDP increased at a 1.8% annual rate in the first half of 2013.  GDP would have to increase at a 2.8% annual rate in the 2nd half to reach the FOMC lower projection, and at a 3.3% rate to reach the higher projection.

Early forecasts for Q3 are that GDP will increase at around a 1.5% annual rate, so I expect a  decrease in the GDP projections for 2013 at this meeting.  We might see the projections revised down from the 2.3% to 2.6% range in June to 1.8% to 2.2% or so.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2013	2014	2015	2016
Sept 2013 Meeting Projections	TBA	TBA	TBA	TBA
June 2013 Meeting Projections	2.3 to 2.6	3.0 to 3.5	2.9 to 3.6
Mar 2013 Meeting Projections	2.3 to 2.8	2.9 to 3.4	2.9 to 3.7

¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 7.3% in August and the Q4 projections might be revised down a little.  This really depends on if participants think the employment participation rate will continue to decline - or if it will bounce back a little.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2013	2014	2015	2016
Sept 2013 Meeting Projections	TBA	TBA	TBA	TBA
June 2013 Meeting Projections	7.2 to 7.3	6.5 to 6.8	5.8 to 6.2
Mar 2013 Meeting Projections	7.3 to 7.5	6.7 to 7.0	6.0 to 6.5

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Projections for inflation will probably be unchanged.  Currently inflation is tracking close to the June projections (as is core inflation).  The current concern is that the inflation projection is below the Fed's target.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2013	2014	2015	2016
Sept 2013 Meeting Projections	TBA	TBA	TBA	TBA
June 2013 Meeting Projections	0.8 to 1.2	1.4 to 2.0	1.6 to 2.0
Mar 2013 Meeting Projections	1.3 to 1.7	1.5 to 2.0	1.7 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2013	2014	2015	2016
Sept 2013 Meeting Projections	TBA	TBA	TBA	TBA
June 2013 Meeting Projections	1.2 to 1.3	1.5 to 1.8	1.7 to 2.0
Mar 2013 Meeting Projections	1.5 to 1.6	1.7 to 2.0	1.8 to 2.0

Conclusion: I expect another downgrade to the GDP projections and possibly some reduction in asset purchases (but not certain).  It does seem odd that the FOMC would start reducing asset purchases while downgrading GDP, and also expressing concern about the downside risks from fiscal policy.   With the unemployment rate too high, and inflation too low, there is a strong argument to wait a few more months before starting to taper asset purchases.

by Calculated Risk on 9/15/2013 09:40:00 AM

From economists Jan Hatzius and Sven Jari Stehn of Goldman Sachs:

• Fed officials will review three key pieces of information next week: (1) economic activity and labor market indicators that have been modestly encouraging, (2) a stabilization in core inflation at levels well below the 2% target, and (3) a tightening of financial conditions since the last meeting, mainly because of higher long-term interest rates.

• We believe the news is consistent with a shift in the mix of monetary policy instruments away from asset purchases and toward forward guidance. ...

• Regarding the asset purchase program, we expect a tapering of $10bn, all in Treasuries, as well as confirmation from Chairman Bernanke that the committee still expects to end QE3 in mid-2014.

• Regarding the forward guidance, we expect a clarification that the 6.5% unemployment threshold is conditional on a return of inflation
emphasis added

From the Merrill Lynch economic team:

We expect the Fed to delay tapering at its September 17-18 meeting, but a “token taper” of $10 bn is also quite possible. More important, we expect a market-friendly message from the Fed, underscoring a slow, data-dependent exit.

by Calculated Risk on 9/14/2013 09:07:00 PM

Several years ago I started following the Sacramento market to look for changes in the mix of houses sold (conventional, REOs, and short sales).  For a long time, not much changed. But over the last 2 years we've seen some significant changes with a dramatic shift from foreclosures (REO: lender Real Estate Owned) to short sales, and the percentage of total distressed sales declining sharply.

This data suggests healing in the Sacramento market, although some of this is due to investor buying.  Other distressed markets are showing similar improvement.  Note: The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

In August 2013, 19.0% of all resales (single family homes) were distressed sales. This was down from 23.1% last month, and down from 52.0% in August 2012. This is the lowest percentage of distressed sales - and therefore the highest percentage of conventional sales - since the association started tracking the data.

The percentage of REOs was at 4.6% (the lowest since the data was tracked), and the percentage of short sales decreased to 14.4%. (the lowest percentage for short sales since Sacramento started tracking short sales in June 2009).

Here are the statistics.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales.

There has been a sharp increase in conventional sales recently (blue). 

Active Listing Inventory for single family homes increased 46.8% year-over-year in July.  This is the fourth consecutive month with a year-over-year increase in inventory - clearly inventory has bottomed in Sacramento. 

Cash buyers accounted for 25.4% of all sales, down from 25.5% last month (frequently investors).  This has been trending down, and it appears investors are becoming less of a factor in Sacramento.

Total sales were down 12% from August 2012, but conventional sales were up 48% compared to the same month last year. This is exactly what we expect to see in an improving distressed market - flat or even declining overall sales as distressed sales decline, and conventional sales increasing.

We are seeing a similar pattern in other distressed areas, with a move to more conventional sales, and a shift from REO to short sales.  

If this data is a hint at what will happen in other areas, we can expect: 1) Flat or declining overall existing home sales, 2) but increasing conventional sales. 3) Less investor buying, 4) more inventory, and 5) slower price increases.

by Calculated Risk on 9/14/2013 06:31:00 PM

Professor Krugman writes: Heads They Win, Tails We Lose

Many years ago MIT’s Andy Lo made a simple point (weirdly, I haven’t been able to track down the paper) about the distortion of incentives inherent in financial-industry compensation. Suppose you’re a hedge fund manager, getting 2 and 20 — fees of 2 percent of investors’ money, plus 20 percent of profits. What you want to do is load up on as much leverage as possible, and make high-risk, high return investments. This more or less guarantees that your fund will eventually go bust — but in the meantime you’ll have raked in huge personal earnings, and can walk away filthy rich from the wreckage.

But surely, you say, investors will see through this strategy. They can’t consistently be that stupid or naive, can they?

Hahahaha.

Andy Lo's article was published in the Financial Analysts Journal in 2001: Risk Management for Hedge Funds: Introduction and Overview. An online copy is available here.

Jim Hamilton at Econbrowser has a nice summary from 2005: Hedge fund risk

[L]et me tell you about one fund I do know about called CDP, which was described by MIT Professor Andrew Lo in an article published in Financial Analysts Journal in 2001.

1992-1999 was a good time to be in stocks-- a strategy of buying and holding the S&P 500 would have earned you a 16% annual return, with $100 million invested in 1992 growing to $367 million by 1999. As nice as this was, it pales in comparison to CDP's strategy, which would have turned $100 million into $2.7 billion, a 41% annual compounded return, with a positive return in every single year.

Of course the strategy would eventually go bust, but the managers would be rich!!!

by Calculated Risk on 9/14/2013 01:01:00 PM

The key event this week will be the FOMC statement and press conference on Wednesday. It is possible that the FOMC will start to reduce the monthly purchases of assets.  I'll post a preview soon.

There are three key housing reports that will be released this week, housing starts on Wednesday, homebuilder confidence survey on Tuesday, and existing home sales on Thursday.

For manufacturing, August Industrial Production, and the NY Fed (Empire State) and Philly Fed September surveys will be released this week.   For prices, CPI will be released on Tuesday.

----- Monday, September 16th -----
8:30 AM: NY Fed Empire Manufacturing Survey for September. The consensus is for a reading of 9.0, up from 8.2 in August (above zero is expansion).

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for August.

This graph shows industrial production since 1967.

The consensus is for a 0.5% increase in Industrial Production, and for Capacity Utilization to increase to 77.9%.

----- Tuesday, September 17th -----
8:30 AM: Consumer Price Index for August. The consensus is for a 0.1% increase in CPI in August and for core CPI to increase 0.2%.

10:00 AM ET: The September NAHB homebuilder survey. The consensus is for a reading of 59, the same as in August. Any number above 50 indicates that more builders view sales conditions as good than poor.

----- Wednesday, September 18th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM: Housing Starts for August.

Total housing starts were at 896 thousand (SAAR) in July. Single family starts were at 591 thousand SAAR in July.

The consensus is for total housing starts to increase to 915 thousand (SAAR) in August.

During the day: The AIA's Architecture Billings Index for August (a leading indicator for commercial real estate).

2:00 PM: FOMC Meeting Announcement.  It is possible the FOMC will start to reduce QE purchases following this meeting.

2:00 PM: FOMC Forecasts This will include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections.

2:30 PM: Fed Chairman Ben Bernanke holds a press briefing following the FOMC announcement.

----- Thursday, September 19th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 341 thousand from 292 thousand last week.

10:00 AM: Existing Home Sales for August from the National Association of Realtors (NAR).

The consensus is for sales of 5.25 million on seasonally adjusted annual rate (SAAR) basis. Sales in July were at a 5.39 million SAAR.

A key will be inventory and months-of-supply.

10:00 AM: the Philly Fed manufacturing survey for September. The consensus is for a reading of 10.0, up from 9.3 last month (above zero indicates expansion).

----- Friday, September 20th -----
10:00 AM: Regional and State Employment and Unemployment (Monthly) for August 2013

by Calculated Risk on 9/14/2013 08:10:00 AM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for September 13, 2013.

Changes and comments from surferdude808:

The FDIC shuttered two banks this Friday to keep things interesting. The failures and two action terminations caused the Unofficial Problem Bank List to drop to 700 institutions with assets of $246.0 billion. A year ago, the list held 866 institutions with assets of $330.5 billion.

Actions were terminated against Nextier Bank, National Association, Evans City, PA ($510 million) and Seattle Bank, Seattle, WA ($223 million). Failures this week were First National Bank, Edinburg, TX ($3.1 billion) and The Community's Bank, Bridgeport, CT ($26 million). The failure in Connecticut is only the second in FDIC's Boston Region since the onset of the financial crisis. In this region, proactive local supervision leadership contributed to the comparatively stellar failure performance as reflected by the low number of failed institutions and low volume of failed bank assets.

According to a report published by SNL Securities (Bankruptcy judge will not permit Capitol Bancorp's FDIC 'fishing expedition') on September 12th, the presiding bankruptcy judge denied the holding company's request to conduct discovery to determine if the FDIC has not acted in good faith by not approving cross-guarantee waivers. An FDIC attorney said the agency would reach a decision on the waivers "as quickly as it can." So the saga of Capitol Bancorp continues.

Next week, we anticipate the OCC will release its actions through mid-August.

CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. Less than two years later the list peaked at 1,002 institutions. Now, more than two years after the peak, the list is down to 700 (the list increased faster than it is decreasing - but it is steadily decreasing as regulators terminate actions and close a few more banks).

by Calculated Risk on 9/13/2013 07:52:00 PM

From the FDIC: PlainsCapital Bank, Dallas, Texas, Assumes All of the Deposits of First National Bank, Edinburg, Texas

As of June 30, 2013, First National Bank had approximately $3.1 billion in total assets and $2.3 billion in total deposits. In addition to assuming all of the deposits of First National Bank, PlainsCapital Bank agreed to purchase approximately $2.7 billion of First National Bank's assets. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $637.5 million. ... First National Bank is the 22nd FDIC-insured institution to fail in the nation this year, and the first in Texas. The last FDIC-insured institution closed in the state was First International Bank, Plano, on September 30, 2011.

The FDIC is still at work. First National Bank was bigger than most recent failures.

by Calculated Risk on 9/13/2013 05:28:00 PM

From the FDIC: FDIC Approves the Payout of the Insured Deposits of The Community's Bank, Bridgeport, Connecticut

The FDIC was unable to find another financial institution to take over the banking operations of The Community's Bank. The FDIC will mail checks directly to depositors of The Community's Bank for the amount of their insured money. ...

Beginning Monday, depositors of The Community's Bank with more than $250,000 at the bank may visit the FDIC's Web page "Is My Account Fully Insured?" at http://www2.fdic.gov/dip/Index.asp to determine their insurance coverage.

As of June 30, 2013, The Community's Bank had approximately $26.3 million in total assets and $25.7 million in total deposits. The amount of uninsured deposits will be determined once the FDIC obtains additional information from those customers.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $7.8 million. The Community's Bank is the 21st FDIC-insured institution to fail in the nation this year, and the first in Connecticut. The last FDIC-insured institution closed in the state was Connecticut Bank of Commerce, Stamford, on June, 26, 2002.

No one wanted this one - and it sounds like there might be some accounts over the insured limit.

by Calculated Risk on 9/13/2013 04:57:00 PM

From DataQuick: Bay Area August Home Sales Dip; Median Price Eases Back From July

A total of 8,616 new and resale houses and condos were sold in the nine-county Bay Area last month. That was down 7.7 percent from 9,339 in July and down 0.6 percent from 8,670 in August last year, according to San Diego-based DataQuick.

Last month’s sales were 10.3 percent behind the long-term August average of 9,601. August sales have ranged from 6,688 in 1992 to 13,940 in 2004. DataQuick’s statistics begin in 1988 and the Bay Area has had below-average sales every month since the fall of 2006.
...
Foreclosure resales – homes that had been foreclosed on in the prior 12 months – accounted for 4.6 percent of resales in August, the same as July’s revised percentage, and down from 14.5 percent a year ago. The July and August level is the lowest since 4.4 percent in August 2007. Foreclosure resales peaked at 52.0 percent in February 2009. The monthly average for foreclosure resales over the past 17 years is about 10 percent.

Short sales – transactions where the sale price fell short of what was owed on the property – made up an estimated 10.0 percent of Bay Area resales last month. That was down from an estimated 10.6 percent in July and down from 23.3 percent a year earlier.

The key in this report is the decline in distressed sales (foreclosures and short sales). Distressed sales are now down to 14.6% from 37.8% in August 2012.

by Calculated Risk on 9/13/2013 12:49:00 PM

NOTE: Calculated Risk blog is loading slowly for some readers. This is apparently a problem with either Google or Amazon hosting, and is currently being investigated.

Another update on hotels from HotelNewsNow.com: STR: US results for week ending 7 September

In year-over-year comparisons, occupancy fell 1.9 percent to 56.5 percent, average daily rate was down 0.4 percent to US$102.58, and revenue per available room decreased 2.3 percent to US$57.98.

"Rosh Hashanah and Labor Day had an adverse effect on hotel performance last week,” said Jan Freitag, senior VP of strategic development at STR. “RevPAR declined as both ADR and occupancy dropped from the same week last year. Of all the Chain Scales, only Economy properties reported a very slight lift in RevPAR. The last end of summer vacation rush lifted resort RevPAR by 3.9 percent, driven by a 5.8-percent increase in ADR."

The 4-week average of the occupancy rate is close to normal levels.

Note: ADR: Average Daily Rate, RevPAR: Revenue per Available Room.

The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

Click on graph for larger image.

The red line is for 2013, yellow is for 2012, blue is "normal" and black is for 2009 - the worst year since the Great Depression for hotels.

Through September 7th, the 4-week average of the occupancy rate is slightly higher than the same period last year and is tracking the pre-recession levels.  The 4-week average of the occupancy rate will decrease over the next few weeks, before increasing again in the Fall. Overall, this has been a decent year for the hotel industry.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com