by Calculated Risk on 6/19/2008 03:24:00 PM

From John Spence at MarketWatch: Builder execs nervous about jobs and the economy

Home-builder executives said at an industry conference Thursday that they're making progress clearing out excess inventory, but warned that a recession and spiking unemployment could stop that advance in its tracks.

"No one who's unemployed ever bought a house," said Lawrence Angelilli, senior vice president of finance at Centex Corp. "That's the wild card that everybody is waiting to see is if we get a true economic recession."

Yes, the homebuilders are finally building fewer homes than they are selling - so new home inventory is declining. But the huge overhang of existing homes on the market - especially distressed inventory - will keep housing under pressure for some time.

Also, I think a few unemployed people did buy homes during the boom. NINJA loans were one of the big jokes: No Income, No Job, No Assets.

by Calculated Risk on 6/19/2008 12:50:00 PM

From the Department of Transportation: Americans Drove 1.4 Billion Fewer Highway Miles in April of 2008 than in April 2007 While Fuel Prices and Transit Ridership Are Both on the Rise

[U.S. Transportation Secretary Mary E. Peters] said that Americans drove 1.4 billion fewer highway miles in April 2008 than at the same time a year earlier and 400 million miles less than in March of this year. She added that vehicle miles traveled (VMT) on all public roads for April 2008 fell 1.8 percent as compared with April 2007 travel. This marks a decline of nearly 20 billion miles traveled this year, and nearly 30 billion miles traveled since November.

This is the fewest miles driven in April since 2003.

by Calculated Risk on 6/19/2008 12:25:00 PM

The WSJ has the indictment here.

According to the indictment, the managers knew material information about the condition of the funds, and then provided false information to other investors. As an example, the indictment alleges the managers knew of a major investor withdrawing their entire investment, but in answering direct questions about redemptions, falsely stated that fund redemptions would be minor.

by Calculated Risk on 6/19/2008 11:57:00 AM

Here are few headlines from the Citi conference call.

Impact of CDOs in quarter will be "substantial"

CDO Marks will not be as big as last quarter.

Consumer Credit remains a challenge.

Story to follow ...

by Calculated Risk on 6/19/2008 11:35:00 AM

Here is the Philadelphia Fed Index for June activity released today: Business Outlook Survey.

Note the special question at the bottom on prices. The average expected price change this year is 5.4%!

Click on graph for larger image in new window.

This graph shows the Philly index vs. recessions for the last 40 years. There are a number of times the index was below zero without a recession - so the reading today doesn't mean the economy is in recession. However it is very likely that the economy is already in recession.

From the release, weaker conditions and higher prices :

Indicators Reflect Continued Weakening

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased slightly, from -15.6 in May to -17.1 this month. The index has now been negative for seven consecutive months.

More Manufacturers Report Higher Input Prices

A larger share of firms — 72 percent, up from 61 percent in May— reported higher input prices this month. The prices paid index jumped 16 points, to 69.3, its highest reading since November 1980. (see chart)

Outlook Is Less Optimistic

Following significant improvement in expectations over the last two months, the future general activity index retreated in June, falling from a May reading of 28.2 to 21.3. Forty percent of the firms expect growth in activity over the next six months; 18 percent expect a decline.

Special Questions (June 2008) 1. What impact are these recent cost increases having, or expected to have, on the prices of your finished products over the next three months?
We expect price decreases		14.6%
We expect steady prices		20.2%
We expect price increases		65.2%
	Less than 2.5%		4.5%
	Between 2.5-5%		28.1%
	Between 5-7.5%		13.5%
	Between 7.5-10%		11.2%
	Between 10-15%		3.3%
	Greater than 15%		2.3%
	No response		2.3%
Total		100.0%
Average expected price change		5.4%
Average reported price increase* since the beginning of the year:		3.8%
*Firms were asked what increases in prices have already occurred since January.

by Calculated Risk on 6/19/2008 10:18:00 AM

From Reuters: China to raise gasoline, diesel prices

China, the world's second largest oil consumer, will increase retail gasoline and diesel prices by 1,000 yuan ($145.50) per tonne from Friday, according to industry sources.

See the analyst comments in the story.

Meanwhile, the Shanghai cliff diving continues with the SSE Composite Index off 6.5% last night.

Click on graph for larger image in new window.

This is a spectacular sell off.

I suspect this stock sell off could be in anticipation of a slowing Chinese economy, and a combination of a Chinese slowdown and lower oil and gasoline subsidies could lead to lower world oil prices later this year.

by Anonymous on 6/19/2008 09:40:00 AM

. . . until a mortgage insurer goes down.

It's official:

WINSTON-SALEM, N.C., June 19, 2008 /PRNewswire-FirstCall via COMTEX/ -- Triad Guaranty Inc. announced today that it has ended its negotiations with Lightyear Capital LLC to form a new mortgage insurance company. Triad also reported today that Freddie Mac informed Triad that the appeal of its subsidiary's suspension as an approved mortgage insurer has been denied. As a result of these developments, Triad's subsidiary, Triad Guaranty Insurance Corporation, will cease issuing commitments for mortgage insurance effective July 15, 2008 and will work with its customers, the Illinois Division of Insurance and each of the GSEs to assure an orderly transition of its business to run-off.

by Calculated Risk on 6/19/2008 09:21:00 AM

From NPR: Bear Stearns Hedge Fund Managers Arrested

And on the indictment from the WSJ: Prosecutors in Bear Case Focus In on Email

Fund manager Matthew Tannin emailed his more senior colleague Ralph Cioffi that he feared the market for complex bond securities in which they had invested was "toast." He suggested they discuss the possibility of shutting down the funds, according to the email, which was sent from Mr. Tannin's private account.
...
Four days after the Sunday-morning email, Mr. Tannin told fund investors on a conference call that he was "quite comfortable" with their holdings. Mr. Cioffi used similar language.

This seems a little flimsy for a criminal charge - people do change their minds - and hopefully the indictment will be publicly released today with more details.

by Calculated Risk on 6/19/2008 09:02:00 AM

Here is another look at unemployment claims. According to the Department of Labor for the week ending June 14, initial unemployment claims were at 381,000, and the 4-week moving average was 375,250.

Click on graph for larger image in new window.

The first graph shows the continued claims since 1989.

Continued claims declined this week, but have been trending higher and are still above the 3 million level.

Notice that following the previous two recessions, continued claims stayed elevated for a couple of years after the official recession ended - suggesting the weakness in the labor market lingered. The same will probably be true for the current recession (probable).

The second graph shows the weekly claims and the four week moving average of weekly unemployment claims since 1989. The four week moving average has been trending upwards for the last few months, and the level is now solidly above the possible recession level (approximately 350K).

by Calculated Risk on 6/19/2008 02:00:00 AM

Eugene Garcia at the O.C. Register has a followup to his earlier photo tour of foreclosed homes in Orange County: UPDATE: Auction prices for 'The real foreclosures of Orange County'

Garcia notes:

It’s important to note that the winning bids are subject to an undisclosed reserve price set by the seller.

Here are the same two houses I featured last week with updated auction results. See Garcia's article for much more. Note: photos used with permission.

515 W. CAMILE, SANTA ANA: This Dali-inspired home (3 bed, 2 bath, 894 sq.ft.) went for $175,000 in cash. I tried to catch up with the two investor-looking guys who bought it, but they left the auction pretty quickly. I guess when you pay cash, there's not too many papers to sign. PRIOR SALES: Mar 2006: $585,000 Apr 2007: $515,198. (CR note: Starting bid was $99,000)

If the $175,000 price sticks that is 70% off the 2006 sales price. My guess is it will stick.

4 LANGFORD LANE, LADERA RANCH: This one came back to the auction block a second time after the first high bidder ($675,000) dropped out. Curiously, the bid went up to $680,000. There was frenzied bidding on this house. And many exited the auction after the 4 bed, 2.5 bath, 2600 sq. ft. home was sold. PRIOR SALES: Oct 2007: $808,120 Feb 2006: $1,000,000 (CR note: the starting bid was $299,000).

by Calculated Risk on 6/19/2008 12:02:00 AM

The WSJ is reporting that banks are changing their accounting rules to make their numbers look better. (hat tip Brian)

The article gives Astoria Financial Corp. as an example. At the end of 2007, Astoria reported $106 million in nonperforming loans, and by the end of March 2008 nonperforming loans had declined to $68 million. The reason for the improvement: Astoria redefined nonperforming loans as missing three payments, instead of two.

And another example:

Wells Fargo ... had written off home-equity loans ... once borrowers fell 120 days behind on payments. But on April 1, the bank started waiting for up to 180 days.

This is a significant change considering the size of Wells Fargo's HELOC portfolio ($83.6 billion) and heavy exposure to California.

by Calculated Risk on 6/18/2008 09:17:00 PM

Press Release from WaMu:

WaMu will discontinue all negative amortizing loan product options, and will also cease to offer its WaMu Mortgage Plus™ loan product.

The Mortgage Plus loan combined a first with a home equity line of credit.

by Calculated Risk on 6/18/2008 04:47:00 PM

From the WSJ Real Time Economics blog: 2008 Recession: That’s All, Folks?

Merrill Lynch economist David Rosenberg ... note to clients — titled “That’s all folks … Real GDP peaked in January” — uses the monthly figure to support his view that January represented the peak of the business cycle.

The monthly data from Macroeconomic Advisers shows a GDP decline of 0.5% in April and shows GDP peaked in January.

The GDP calculation for the quarterly data is the average (not the end) of one quarter to the average of the next. Here is an example, using monthly data:

month 1: 99
month 2: 100
month 3: 101

Quarter 1: 100

month 4: 102
month 5: 101
month 6: 100

Quarter 2: 101

So the quarterly calculation would show growth in quarter 2, even though GDP is declining on a monthly basis.

This is the point NBER's Martin Feldstein recently made in the Financial Times: Misleading growth statistics give false comfort

The recent government report that US gross domestic product increased 0.6 per cent in the first quarter was very misleading. It implied that economic activity was rising in January, February and March. But the increase actually refers to the rise from the average level in the fourth quarter of 2007 to the average level in the first quarter. Monthly data since January indicate that economic activity and GDP have been declining since the start of this year.

I'm not ready to say "That's all folks!", but I do think it's very likely the economy is in recession.

by Calculated Risk on 6/18/2008 03:34:00 PM

From NPR: Ex-Fund Managers at Bear Stearns Face Indictment (hat tip blogenfreude)

Officials close to a major FBI mortgage crisis investigation say two former Bear Stearns hedge fund managers will likely be indicted Wednesday on securities fraud charges.

It sounds like the indictment will be made public on Thursday. It could be an interesting read ...

by Calculated Risk on 6/18/2008 01:36:00 PM

From DataQuick: Bay Area home sales return to record low in May

After a record burst of activity between March and April, Bay Area home sales eased a bit last month to the slowest pace for a May in over 20 years. Sales were weakest in many higher-end coastal markets but rose well above year-ago levels in some inland areas where foreclosures and deep discounts lured bargain hunters.

A total of 6,216 new and resale houses and condos closed escrow in the nine-county Bay Area in May. That was down 1.5 percent from 6,310 in March, and down 23.1 percent from 8,080 in May 2007, DataQuick Information Systems reported.

Last month was the slowest May in DataQuick's statistics, which go back to 1988.
...
In May, post-foreclosure homes continued to play a big role in the market. Across the nine-county region, 25.6 percent of the homes that resold had been foreclosed on at some point in the prior 12 months, down from 26 percent in April but up from 3.3 percent a year ago.
...
The median price paid for a Bay Area home was $517,000 last month, down 0.2 percent from $518,000 in April, and down a record 21.7 percent from $660,000 in May last year. May's median was 22.3 percent lower than the peak $665,000 median in June and July last year. The last time the median was lower than last month's $517,000 was back in September 2004, when it was $510,000.
...
Foreclosure activity is at record levels ...

The pattern continues: the low end areas are seeing some pickup in sales, as foreclosures dominate. Sales are sluggish (and prices still sticky) in high end areas.

by Calculated Risk on 6/18/2008 10:45:00 AM

FedEx, and shipping in general, are considered bellwethers for the economy. And the news isn't good according to FedEx.

From the WSJ: FedEx Issues Weak Outlook, Hit by Fuel Costs, Economy

"The operating environment for fiscal 2009 is expected to be very difficult due to the weak U.S. economy and extremely high fuel prices," said Chief Financial Officer Alan B. Graf

And Chrysler is seeing sales in June "20% below expectations". From the Detriot Free Press: U.S. sales plummeting, Chrysler's chief says (hat tip John)

[I]n November ... executives were assuming Americans would buy ... only about 15.5 million [vehicles in 2008]. ... [S]o far in June ... J.D. Power and Associates and Citigroup are seeing a sales pace that is almost 20% lower -- only 12.5 million vehicles per year.

"This is the lowest sales level in 16 years and indicates a significant and continued softening of the U.S. automotive market," Nardelli wrote.
...
If J.D. Power's forecast for June -- an annualized rate of 12.5 million sales -- continues for long, Erich Merkle of IRN Inc. said, it would be "Armageddon. Doomsday."

Meanwhile from Bloomberg: Paulson & Co. Says Writedowns May Reach $1.3 Trillion

John Paulson, founder of hedge fund Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion ... ``We're only about a third of the way through the writedowns,'' Paulson, 52, told the GAIM International hedge fund conference in Monaco today.

Of course Paulson could be just talking his book, but it appears the 2nd half of 2008 will be very weak.

by Calculated Risk on 6/18/2008 10:06:00 AM

"[W]e’ve seen a dramatic contraction in design activity in recent months. ... This weakness in design activity can be expected to produce a contraction in [commercial and multifamily] construction sectors later this year and into 2009.”
AIA Chief Economist Kermit Baker, June 18, 2008

From the American Institute of Architects: Architecture Billings Index Drops Two Points

Click on graph for larger image in new window.

Following a slight rise in April, the Architecture Billings Index (ABI) fell two points in May, prolonging the downturn in design activity at architecture firms. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI rating was 43.4, down from the 45.5 mark in April (any score above 50 indicates an increase in billings). The inquiries for new projects score was 46.5.

“With the exception of the institutional sector – projects like government buildings, schools and hospitals – we’ve seen a dramatic contraction in design activity in recent months,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Right now things are especially hard in the West and in the commercial and multifamily residential sectors. This weakness in design activity can be expected to produce a contraction in these construction sectors later this year and into 2009.”

The key here is that the index fell off a cliff in early 2008, and that there is "an approximate nine to twelve month lag time between architecture billings and construction spending". We should expect weaker non-residential structure investment throughout 2008 and 2009.

by Anonymous on 6/18/2008 09:24:00 AM

Bloomberg reports:

June 18 (Bloomberg) -- Wachovia Corp., which ousted its top executive after estimating it may lose more than $4.5 billion on adjustable-rate home loans, will start calling would-be borrowers to explain the risks of such mortgages.

Wachovia is contacting applicants through independent mortgage brokers to ensure ``the customer understands the key features of the Pick-A-Payment loan product,'' according to a June 11 memo from Tim Wilson, head of loan origination at the Charlotte, North Carolina-based company. The loans let borrowers defer part of their monthly bills.

Unfortunately, we do not find out what Wachovia is going to do if it establishes that, in fact, the customer does not understand the key features of the product. Refuse to make the loan? Fire the broker? Keep explaining the difference between scheduled recast and balance cap, or uncapped rate with capped payment, until the borrower finally claims to understand you just to get you off the phone? How will success here be documented in the loan file? Does the borrower have to get at least 6 out of 10 on a Pick-A-Payment Quiz? Or will Wachovia grade on a curve?

Furthermore, how, exactly, does Wachovia intend to run a profitable wholesale mortgage business by duplicating more and more of the broker's functions? Will borrowers end up paying more fees to cover the broker's "counseling" labor and then the wholesaler's "counseling" labor on top of that? Is there some incentive for brokers to fully explain this product, or will they simply start relying on the wholesaler to cover the "mechanics of the loan" part? And who are these folks in Wachovia's back room who are talking to these borrowers? The sacred cow myth in the business is that only professional salespeople with Professional Sales People Skills can work with customers at the point of sale, which is what justifies their big commissions. You can't let back-room weenies (like me) talk to the marks prospects, because we lack "people skills." How can any wholesaler afford to have Highly Skilled People re-doing the work of other Highly Skilled People without creeping into Highly Redundant Origination Fees?

Let me guess. Wachovia is going to find out eventually that the Option ARM is valid only as a boutique product for a very highly selected group of financial sophisticates and private banking clients, all of whom are going to be found in your retail channel, not your broker channel, and that its "natural" volume is probably around 1.00% or less of your mortgage business. Funny, isn't it, that six or seven years ago we already knew that?

by Calculated Risk on 6/17/2008 07:36:00 PM

From Dennis Berman at the WSJ: Tisch Hews to the Prudent Approach

"No. 1, don't bet the company," [Loews CEO James Tisch] says. "First and foremost, everything we have is fully protected. Second, watch out for the downside. The businesses we like are ones with long-term assets, that are going to be here for a long time and aren't dependent on management. Our day will come."

That means avoiding financials, which, a year into the credit crisis, are still "like catching a falling knife," he says.

And on oil:

"Overpriced," he says. "It's a demand issue, not a supply issue." He cites a decline in the amount of driving by U.S. motorists in March. "We're seeing fast adjustment, and we're going to see that world-wide."

by Calculated Risk on 6/17/2008 06:21:00 PM

From Bloomberg: Yuan Extends Gains to 20% Since End of Peg Before Paulson Talks

The yuan extended gains to 20 percent since China ended a fixed exchange rate to the dollar in July 2005 ... The currency climbed for a fifth day, reaching 6.8909 per dollar. The yuan's advance since the peg was scrapped compares with a 29 percent gain for the euro against the dollar, 13.2 percent for the British pound and 4.7 percent for the Japanese yen.

From Professor Krugman: The world gets bigger

Many people have noticed that higher fuel prices are putting the brakes on globalization: if it costs more to ship stuff, there will be less shipping.

How big is this effect? ...

[A] very back-of-the envelope calculation using CIBC estimates of the fuel cost effect gives me a 17 percent contraction in trade if oil prices stay at current levels for a long time.

And from the NY Times: Labor Costs Rise, and Manufacturers Look Beyond China

China remains the most popular destination for foreign industrial investment in the world, attracting almost $83 billion last year. But ... [there are a] long list of concerns about China ... inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain.

Just some food for thought ...